Carriage Services Inc (CSV) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Carriage Services first-quarter earnings conference call.

During today's presentation all parties will be placed in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) As a reminder this conference is being recorded today, Thursday, May 6, 2010.

Now I would like to turn the conference over to Mr. Kip Rupp with DRG&E.

Great. Thank you, Josh, and good morning, everyone. We appreciate you joining us for Carriage Services conference call to discuss first-quarter 2010 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 for future Carriage Services releases or if you have had any technical difficulties and didn't 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 would like to listen to a replay of today's call, one will be available via webcast by going to Carriage Services 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 reply 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 6, 2010, 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 the call to today by management are based on current assumptions the Company believes are reasonable.

However, many factors that are discussed under the forward-looking statements and cautionary statements in the Company's annual report on Form 10-K for the year ended the December 31, 2009, 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 would like to turn the call over to Mel Payne, Chairman of Carriage and Chief Executive Officer. Mel?

Thank you, Kip. Terry and Jay will review the first-quarter details of our performance and then I will end the call with a little strategic commentary. Terry?

Thanks, Mel. Good morning, everybody. Before I go through my prepared remarks I just wanted to let you know that I am going to present my comments on a quarter in a slightly different format than I have done on past calls.

We provide a great deal of transparency and data regarding our quarterly results in both our press release and on our website. Rather than go through the financial and operating metrics in great detail, I have done that quite a bit in the past, my remarks today will focus more on the highlights of our most recent results and some other key financial data points.

First, I would like for you to notice that we have broken out the components of our financial revenue in much greater detail to highlight the positive and improving impact that financial revenue is having on our results which we hope you find useful. That is in the center section of our income statement on the third page.

Second, we have presented the fourth quarter 2009 within our income statement to provide another comparison. We encourage you to review the financial information in our release which we believe provides a level of detail and granularity really unmatched by most.

In short, we are very pleased with the higher results for the first quarter of 2010. The key financial data points in our results improved as compared to the same quarter in 2009 as follows. Total revenue was up 2.3%, our field EBITDA was up 4.2%, and field EBITDA margin increased 70 basis points. Consolidated EBITDA was up 3.1% as well as our consolidated EBITDA margin increased 20 basis points. Net income was up 17.8% and diluted EPS was up 23.1%.

Each of these data points -- the revenue, EBITDA, margins, net income, and EPS -- are each the highest compared to those in each of the previous four quarters going back to the first quarter of 2009.

In the funeral segment we experienced relatively flat volumes in this quarter at our same-store funeral volumes were down a mere 18 contracts. But the addition of two acquired funeral operations we acquired in the fourth quarter of 2009 resulted in an increase of 1.9% in our total funeral volume compared to a year ago in this quarter. We also experienced increases in our average revenue for both cremation and burial contracts.

Our cremation rate in the first quarter was a 41.8% compared to 41.4% in the first quarter of last year and 42.5% in the fourth quarter of 2009, the preceding quarter. This represents a year-over-year increase of only 40 basis points and an actual decline of 70 basis points from the prior quarter. I will tell you this is a pleasant comparison considering we experienced an increase in our cremation rate of 230 basis points for the full year 2009.

On the cemetery side we experienced an 11% decline in the number of preneed property sales in the quarter but we did realize a 2.2% increase in the average revenue per sale. From a volume perspective the first quarter is always one of the weakest, if not the weakest, period for us for sales of preneed property. The second quarter is typically the strongest and we are seeing the growth in volumes now.

Our cemetery operations did do an excellent job in managing the cost side of the business which contributed to the strong field EBITDA and EBITDA margins in the first quarter of this year.

Our financial revenue performance in this year's first quarter was very strong increasing 31.8%. This is primarily the direct result of the trust fund repositioning we have done and have talked about on our previous conference calls. We are very pleased with the performance of the trust portfolios and we believe we will continue to experience increasingly strong financial revenue going forward as a result of those repositioning efforts.

Our total overhead did increase a little, 6.6% to $5.5 million in this year's first quarter, and that was mostly due to expenses associated with a more active development, corporate development effort. Also had some higher cash and stock compensation expenses for our directors, most of which will occur annually on the day that our compensation committee meets in late January each year. However, we did continue to produce solid growth in consolidated EBITDA and expanded our consolidated EBITDA margins year-over-year in the first quarter.

In taking all of this into account the net result was substantive increases in both our net income and diluted earnings per share in this year's first quarter. As a result we have modestly increased our forward fourth-quarter outlook as we disclosed in the press release and the reasons were really the higher financial revenue, the operational integration of those recent acquisitions.

We expect higher cemetery property revenue over the balance of the year compared to the first quarter and higher revenue averages on both sides of the business. We are pleased with the consistent positive performance of our operations.

Now for some operational color I will turn the call over to Jay Dodds, our Chief Operating Officer. Jay?

Thanks, Terry. Good morning, everyone. As you can see from the data in our press release and from Terry's comments, Carriage posted another strong quarter of financial results. In fact, all of the key financial data points that Terri highlighted are the best results experienced during the last five quarters.

A key point that I think our results demonstrate in addition to the financial results we have achieved over the last five quarters is that Carriage's business has matured into a business with greater stability and predictability compared to what we have had for many of the previous years. For the past several quarters we have discussed in fairly good detail the strategies we have been implementing in our three focus areas of cremation, cost control, and cemetery sales to effect positive change in our business and have reported our progress in doing that.

Other areas that have received ongoing attention are market share, better service execution, and our technology strategy. As we alluded to in our last earnings conference call, the three key focus areas have now become ingrained in the everyday aspects of running our business and are largely responsible for the stability of our financial results over the past five quarters.

The death rate in the first quarter of 2010 was flat with the first quarter of 2009. Growing our business organically has always been a focus of Carriage but we have faced challenges over the past few years with the lower death rates. Despite these challenges and as discussed in our previous earnings conference calls, our funeral and cemetery businesses have improved and are stable. And we have experienced very little erosion of market share as a result of the success from our strategy implementation.

Preneed funeral sales have not been a strong focus of Carriage in the past and will not be overly emphasized but we will continue to use this tool to selectively build funeral market share. Our operating strategies are based upon our standards operating model which rewards organic growth and, as with most aspects of our business, the right managing partner is critical for our success.

An important aspect of our continued growth and success is our training and practice modules which focus on our ability to create more and better services for our client families. The service training programs that we have been developing and implementing creates value for both the burial and cremation families. These programs are advancing across our organization and our people are continuing to grow in their skills to present and deliver higher-quality services that will be reflected in our averages over time.

In the fall of 2009 we rolled out a new and innovative technology strategy called Carriage One. Carriage One is a multifaceted software program that gives us the ability to leverage technology to improve our client families experience. We have the ability to create DVD presentations of a person's life, webcast the service for family and friends over the Internet, create personalized stationery packages, create a memorial website for the deceased, and have an online grief resource. This program is in the first half of the rollout and is producing a much higher quality product for client families.

In addition to providing a better experience, our innovative technology options opens up a new venue of revenue opportunities for carriage. I will update you on this initiative as the year goes on.

Looking at the balance of 2010 we believe we are well positioned to experience some good growth opportunities. With the leadership of Brad Green Carriage has increased our corporate development activities over the past few quarters and we are gaining good traction in these efforts. We are building relationships with leading, high-quality private funeral home operators in the parts of the country that fit our strategic portfolio model.

As a result, we believe we are well positioned to acquire several high-quality businesses over the balance of this year that will generate revenue and EBITDA growth and increase shareholder value over time.

To conclude we are excited about the remainder of 2010 for Carriage. We expect our financial results to continue to demonstrate stability and predictability. As Terry and Mel mentioned, our trust funds have greatly benefited from the portfolio asset allocation changes we have made and will continue to generate strong financial results.

Coupling those elements of our business with our expectations of closing several high-quality acquisitions through the course of the year we think our results will produce higher financial results going forward.

With that I would like to turn the call back to Mel.

Thank you, Jay. Our first-quarter EPS performance of $0.16 was impressive and gets our 2010 year off to a strong start after our record results in 2009. We are very optimistic that our operating and financial performance will trend higher over the balance of 2010 and that we will close a few quality acquisitions during the second half of the year that will further increase our earnings power.

The reason for our optimism is simple yet compelling. The operating and financial performance of each one of our managing partners, our sales managers who lead a Carriage business, is critically important to the growth in Carriage's total financial performance as it only takes $300,000 of incremental field EBITDA to equal $0.01 a share.

The opportunity for a leader or any one of our operating businesses to make that kind of difference in our total company performance and to be recognized and rewarded for that success and contribution is why Carriage has become an attractive home for what we call Four E leadership entrepreneurial talent.

We emerged from the financial and economic crisis of 2008/2009 in the strongest competitive position in our company's history and believe that Carriage is now the right size with the right models at the right time to capitalize on a fresh round of consolidation in our industry. Consequently, we are highly confident that our five-year revenue and earnings goals are achievable.

To understand more fully why Carriage is so well positioned for the future and why our leaders and employees are energized around our vision of being the best, I recommend that you read my shareholder letter in our recently published annual report.

With that I would like to open it up to Q&A.

(Operator Instructions) Clint Fendley, Davenport.

Good morning, gentlemen. Wondered if you guys could help us. Obviously it's very nice to see the long-term outlook through 2014 on the EPS growth of 14% to 16%. Given what appears to be you guys being on the cusp of some very heightened acquisition activity, how should we think about that growth rate in the nearer term of that outlook period?

We don't try to predict quarterly growth. We got on that treadmill back in the '90s and paid for it dearly. What we show is the addition of $10 million in annualized acquisition revenue each year being added to the Company. That won't be in a way that you can just model.

I mean you can but whatever is modeled will be wrong. It will come in fits and spurts and yet we see a lot of acquisition activity out there today. We believe a lot of it is going to wind up in Carriage because of all the reasons we have articulated, but we are being very selective. So we are not wanting to grow just to hit a revenue growth target. We are wanting to growth strategically where something makes a lot of sense in a strategic market.

So it's hard to say, Clint. I don't want to get on that kind of predictive treadmill but we will add some businesses this year and we are talking to quite a few others. But we turn a lot down too. So we are excited about where we are.

Mel, are there any of the former Keystone properties that SCI may be divesting that could be in your pipeline here?

We made an offer of a few of those but I don't think our offer won the day and so we weren't really counting on those. What we are talking about are independents, quality independents.

Good deal. Thank you, Mel. Terry, I guess in looking at the model it looks like we have just a little bit lower depreciation outlook for the rolling four quarters. I wondered what was behind that.

Really nothing more than just an updated forecast for the next five years of the depreciation we have on our properties. Just a little tweak there.

Okay. So nothing changed as far as the period of amortization or anything?

No, just a little tweak based on the actual. When we closed out the year and started in the first quarter we reran the forecast for the next five years and found it to be just a little bit lower than what we had expected going forward.

Thank you, guys.

(Operator Instructions) Alan Weber, Robotti & Co.

Good morning. First question, Mel, was your comment in the earnings release about Carriage long-term prospects never been better is that really just kind of a continuation of what you talked about in the letter to shareholders and more of it is kind of what you are doing internally as opposed to the macro environment?

I would say so. I think -- I tried -- I started out trying to explain in the shareholder letter why we had record results in such a bad economic climate. And it was really hard to explain it unless you went back to the beginning of how the Company transformed over the last six years around a new operating model.

So I think notwithstanding, whatever happens in the overall economy and with secular trends in our industry we expect Carriage to do well. We like to think of our company now as a high-performance culture company that happens to be in death care. We expect to perform and achieve those five-year goals come hell or high water.

And this is kind of a continuation, as you continue to kind of -- you were talking about earlier adding this new technology and I guess regarding that any way to even guess or quantify what you think that could mean in terms of revenues down the road? Or is it just too early for that?

Alan, I think it's probably just a little too early for that. It is something that is adding a lot of value, we believe, to our customers. We have rolled it out in a number of locations, not all of them yet. It's going to take a little while us working with that before I think we can give any kind of forecast on the results from it.

It's like anything else, Alan, the client families are ahead of our people and so we have to train and show our people why there is so much value in these technology tools to their client families. Once they get that it will get traction broadly and deeply but that does take some time. So we don't want to get out ahead of ourselves and start predicting.

Right, okay. And then, Terry, kind of a financial question I am not clear on. When you talk about realizing a portion of the unrealized equity gains in some of the trust, as you realize those gains is that cash actually come into Carriage or is stays in those trusts? I am not really clear as just -- can you explain that?

Yes, to the extent that they are realized in certain perpetual care trust funds in certain states, certain states allow us to withdraw capital gains from the perpetual care trust funds and some do not. So it varies by state law. So as we realize those, now for instance, a portion of those, for instance, the state of Texas is one of those in which we can withdraw the capital gains from.

Now to the extent that those occur in the preneed funeral and the cemetery merchandise and service trust funds those gains are allocated to the underlying preneed contracts and we get to withdraw the cash at the time that we provide the service or deliver the product. So that will be at the date related to the maturity of the contract. But it will come out; it's just a matter of when.

That essentially -- I guess maybe an easy way to describe that is that these preneed contracts kind of mature over a 10-year period of time on average. So you will see those starting to build and the income will accumulate in each one of these contracts.

And as they mature over that 10-year period of time the amount of income will continue to grow so that at the end of 10 years or near the end, the ninth year, the tenth year, those are going to be some pretty substantial dollars in those. But it will come out roughly over the next 10 years in those two trusts.

We are beginning, Alan, on that, as we mentioned in the press release, to harvest some of the substantial gains in both the equity and the fixed income portfolios. And to push the gain down to the individual contracts so that you could begin to see the trends.

It's hard to predict -- if we can give you an average maturity but it's hard to predict the actual contracts that will mature on any given quarter or month. But you should see that trend up substantially over the next few years starting this year.

Right. And just maybe Terry, I don't know if this is a relevant question, theoretically if you realize the gains today in the states that allow you to withdraw the gains what would that mean in dollar terms today in terms of cash that you could then use for an acquisition say?

Well, for example maybe talking about the first quarter is a good example, and Mel mentioned this in his comments. It only takes $300,000 of pretax income to generate $0.01 share difference in our diluted EPS. And in the first quarter we had right at $300,000 in additional gains in our PC trust funds that we took in the first quarter. Now $300,000 is just a very tiny, tiny percentage of the gains that we had but we did take that and pulled it out and it's in our cash flow.

There are three states, Alan, where you can pull out the gains versus income in the perpetual care trust. That is Texas, Oklahoma, and Idaho. And I think in those three states, and we have some sizable perpetual care trusts, our total unrealized gains probably are $4 million to $5 million.

Okay. And, Mel, I guess my last question is in terms of the acquisitions what are you seeing in terms of a change in terms of the multiple that you have to pay or willing to pay or like that?

We haven't seen -- we are talking to only the best in our market and so our six criteria are each ranked A, B, C, plus or minus, and then there is an overall ranking. That tells us what we can pay. We pay more for an A because we know that is a business where you can grow numerous ways -- market share, pricing power, demographics. So in five years whatever we pay today we will have paid a lot less.

That is what the -- that is how we came up with this model in the first place. We don't look at short-term performance; we look at strategic reasons why we want that business. If we are going to pay a low multiple you were going to get what you pay for.

Right. When you look at it, as you keep kind of refining the model are there even deals that you looked at a year ago or two years ago that actually kind of say to yourself you are glad you didn't do because it's not really what you -- you have improved so much that you would not even want those companies anymore?

We turn down deals that I had jokingly said I would have cut my right arm off for 10 years ago. We turn them down; we don't even want them anymore. We know what we can do well, we know where we can do it well, and we are very disciplined about that process.

Great. Thank you very much.

(Operator Instructions) Mitch Almy, McAdams Wright Ragen.

During the last year when the bond market was all over the place there was some discussion about possibly the repurchase of some of your debt at a material discount. Can you address whether that is on the table and whether the Company still views that as maybe a good source of some expenditure?

Mitch, actually our bonds have been trading almost at par recently. I think when I looked the other day we were trading at about 96 something so, no, that is really not on the table at all right now. If circumstances change I am sure -- our Board of Directors always considers opportunities but, no, there is not anything right now.

Mitch, we looked at the best use of our capital starting in 2008 when the market started to sour. We continued to look at the alternative uses of our capital throughout the crisis that included acquisitions, that included repurchase of debt, preferred stock, and common stock.

We don't know who sold us 3.1 million shares, all we know is we thank them because we were able to buy our company that was getting better throughout the entire time and our cash flows were getting stronger not weaker. And I think that positions our company really well for the future.

We love our capital structure. We don't have any maturities any time soon for five years so we want to take the free cash flow and do something smart for shareholders and make the bondholders stronger by adding businesses that we can grow.

Super. Thank you very much.

(Operator Instructions) At this time I am showing no further questions in the queue. I will turn it back to management for any further remarks.

Thank you very much. We appreciate the attention to our call and we look forward to reporting the next time.

Ladies and gentlemen, that does conclude the Carriage Services first-quarter conference call. If you are interested in listening to a replay of today's conference you may dial 303-590-3030 and enter the access code of 428-5663. Thank you for your participation. You may now disconnect.