Carriage Services Inc (CSV) 2011 Q1 法說會逐字稿

Good morning, and welcome to Carriage Services first-quarter 2011 results conference call. All participants will be in listen-only mode. (Operators instructions)

After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Alexandra Tramont. Ms. Tramont, please go ahead.

Thank you, and good morning, everyone. I would like to welcome you to the Carriage Services conference call. We are here to discuss the Company's 2011 first-quarter results, which were released after the close of the market yesterday.

Additionally, Carriage Services has posted supplemental financial tables and information on its website at www.carriageservices.com. If you would like to be on the email distribution list for future Carriage Services releases, or if you would to receive a copy of the press release, please call our offices at Financial Dynamics, at 212.850.5600 or visit Carriage Services' website.

This conference is being broadcast live over the Internet on Carriage's website, and a subsequent archive will be made available. Additionally, in a few hours, a telephonic replay of this call will be available and active through May 13th. The replay information for the call can be found in the news release distributed yesterday.

With us from management are Mel Payne, Chairman and Chief Executive Officer, Terry Sanford, Executive Vice President and Chief Financial Officer, and Jay Dodds, Executive Vice President and Chief Operating Officer. Today's call will begin with formal remarks from management, followed by a question-and-answer period.

Please note that in this morning's call, management may make forward-looking statements in accordance with the safe harbor provision of the Private Securities Litigation Reform Act of 1995. I would like to call your attention to the risks associated with these statements, which are more fully described in the Company's annual report filed on Form 10-K and other filings with the Securities and Exchange Commission. Forward-looking statement assumptions or factors stated or referred to on this conference call are based on information available to Carriage Services as of today. Carriage Services expressly disclaims any duty to provide update to these forward-looking statements, assumptions, or other factors after the date of this call to reflect the occurrence of events, circumstances, or changes in expectations.

In addition, during the course of this call, management will reference certain non-GAAP financial performance measures. Management's opinion regarding the usefulness of such measures, together with the reconciliation of such measures for the most directly comparable GAAP measures for historical periods, are included in the press release and the Company's filings with the Securities and Exchange Commission.

With these formalities out of the way, I would like to turn the call over to Mel Payne, Chairman and Chief Executive Officer. Mel, please go ahead.

Thank you, Alexandra. I want to welcome everybody to our first-quarter call. It was a good quarter, and I want to turn over this part of the presentation to Terry Sanford, our CFO.

Thanks, Mel. And I'd like to welcome everyone on the call. As many of you know, or have noticed, our long-term outlook is to annually grow revenues by 6% to 7%, consolidated EBITDA by 8% to 10%, produce a consolidated EBITDA margin of 24% to 26%, and grow EPS by 14% to 16%. In the first quarter, we actually exceeded those benchmark expectations, except for the consolidated EBITDA margin, and for that metric, we hit the top of the range.

The first quarter is typically our strongest quarter from a revenue standpoint because of the seasonally higher number of deaths. So our results were positively impacted by a gain of 1.8% in the same-store funeral volumes and strong performance from our cemetery portfolio. As you may have noticed, we have raised our forward four-quarter outlook by $0.02 per share to a range of $0.52 to $0.56 per share.

The increase is in part attributable to the performance of our acquired portfolio and continued strong performance of our trust funds. Specifically, the Fuller acquisition in Florida and the Heritage Dilday acquisitions in California that we did in the mid to second half of 2010 added a little less than $800,000 in EBITDA and approximately $750,000 in pre-tax earnings for the quarter, which works out to be about $0.025 a share in EPS. We've also closed two acquisitions in April that will be immediately accretive. The ability of Carriage to acquire businesses with the cash flow that we generate is a real positive. We had nothing outstanding on our bank line of credit at March 31st, and we do not have anything outstanding today.

Next, I'd like to talk about some costs and expenses. Our businesses in the field have done a very good job managing their expenses. We've experienced a higher level of healthcare costs than we have ever experienced. Overhead costs also rose year over year in part because of a higher provision for incentive compensation, which is due to the almost 12% increase in the total field EBITDA. We have also recently hired talented and well-known industry professionals who will enhance our training, corporate development, and operations departments. These are leadership and people investments that we expect to produce higher levels of revenue and profits in the future.

We've disclosed several special charges in the current-year quarter, of which the largest is labeled Securities Transaction Expenses. That's related to the shelf registration that we filed with the SEC in January. The primary purpose of the shelf is in anticipation of refinancing our senior notes due in 2015, but only when the timing and the terms are right for us.

With that, I'd like to turn the call over to Jay Dodds, our Chief Operating Officer, to add some color on our operations.

Thanks, Terry, and good morning. Our standards operating model defined by the three major areas of a strong funeral and cemetery business, which our market share, right quality of people, and operating and financial metrics, was well executed and produced strong results in the first quarter. We were especially pleased with our same-store funeral volumes, cemetery cost management, and field EBITDA margin growth. Our focus heading into the second quarter was on increasing cemetery pre-need property sales, and better service execution in our funeral homes to improve our revenue averages.

We have added strong new operating leadership in most of our largest cemeteries and combination operations over the last 18 months and have recently started to work closely with select vendor partners to leverage their sales and product-knowledge talent to help us design and execute a more results-driven pre-need sales methodology and system. We are moving to a more centralized sales system that will be complimentary to our decentralized operating management philosophy which should produce higher and sustainable results with our pre-need cemetery property sales. I look forward to updating you as we move forward with this cemetery performance-improvement initiative.

We continue to see the burial rate trend lower, although the rate of decline has slowed from the last couple of years to a more normal historical trend. As more families choose cremation services, our managing partners at each business require their arrangers to present the value of service options to every family every time, which will be a continuing focus.

We continue to invest in training and the development of more service option tools, so our arrangers can skillfully and confidently present and then deliver a high-value experience which will correspond to higher average revenue on cremation contracts. In addition, we are examining the cost structure at each business to make sure we react timely to the trends of both positive market share growth and predictable burial rate decline; thereby aligning the cost structure of each business to achieve and sustain its gross margin, salary and benefits as a percentage of revenue, and field EBITDA margin consistent with our standards operating model.

As mentioned on the last conference call, we committed to transitioning our 2010 acquired businesses to 80% of the underwriting goal by the end of the first quarter, and I am pleased to report that this goal was achieved. We are also pleased with the performance of our new integration process that was developed and is now being executed by a new transition team. The two recent announced acquisitions were transitioned into the Company seamlessly. So we anticipate performance to fall within our expectations in both time frame and underwriting.

In conclusion, we are excited with our standards operating model progress and remain focused on performing better those elements of our business that we control. We are looking forward to a strong performance year with continuing modest revenue growth and improving field EBITDA margins.

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

Thank you, Jay. Brad Green would normally speak, but Brad is not here today. He heads our corporate development group and is traveling today for a good reason. He is meeting with a business that a keen interest in joining our company. We know about this business, and I told him that should be his priority. So I am speaking for him, and these are his comments.

We acquired two businesses in the first quarter, the first of which was Schooler Funeral Group in Amarillo, Texas. Carriage already owned two funeral homes and a cemetery in the Amarillo market for quite a while. These businesses have been under the recent leadership of the LaGrone family who are very well-respected community leaders. With the addition of the Schooler Funeral Group and the continued involvement of the Schooler family, also highly respected community leaders, Carriage is now positioned in the Amarillo market to become the leading local funeral service provider.

The second funeral business we acquired was Stanfill Funeral Home, located in Miami, Florida, which represents Carriage's entry into the Miami-Dade County market. Bill Martinez, Jr., the President and General Manager of Stanfill, is a 35-year employee and will continue as the managing partner for Carriage. This acquisition is a prime example of Carriage's long-term acquisition strategy of affiliating with the best remaining independent funeral and cemetery businesses in mostly large, strategic markets, with a high density population and positive demographic trends.

As Brad has stated in the past, it is our continued expectation that we will meet, if not exceed, a goal of adding $10.0 million in acquired annual revenue during 2011. Those are his comments, and now I'd like to finish this call with a few comments of my own.

This is the first quarter, and it was a good quarter. But we want to let everyone know on this call -- and especially the people on this call who are within Carriage, either in an operating role or an employee role -- we declared at the beginning of this year, and I stated so in my annual shareholder letter, that this will be the 20th year anniversary of the founding of Carriage in three weeks -- June 1st, 1991. It was about three months later -- and we hadn't bought anything, we didn't own anything -- that we wrote down the mission statement and the guiding principles that would guide our company.

We have shortened the mission statement to being the best, because we think anybody worth their salt would like to be the best at whatever they do. We have five guiding principles, and if you haven't read them -- and I'm not talking about our employees and leaders -- I would call your attention to page 3 of the recent shareholder letter. At the top of that page, we lay out the guiding principles, and I want to briefly cover them with you.

The first one, and the most important one, is honesty, integrity, and quality in all that we do. The second one is hard work, pride of accomplishment, and shared success through employee ownership. The third one is belief in the power of people, their individual initiative, and teamwork. The fourth one is outstanding service and profitability go hand in hand. And the fifth one is the growth of the Company is driven by decentralization and partnership.

When you read these principles and focus on the mission statement, it fits the nature of a people business. 100%, we focus on leadership people and work on getting that right. Our standards operating model has allowed us a framework in which to build a company that is focused on sustainable organic growth over time, no shortcuts, no detours.

I would like to read the last three paragraphs of my shareholder letter in my closing remarks.

During 2011, we will celebrate the 20th anniversary of Carriage's founding in June '91. As we are of the belief that Carriage has evolved into a company that approaches the consolidation and the operation of funeral homes and cemetery businesses in a way very different from the way this industry has been consolidated, we now must prove that the Carriage culture and models produce higher and sustainable results for the benefit or our employees, the operating leaders, out debt holders, our shareholders, and our client families.

Accordingly, I have challenged our operating leaders and employees to make this year not only the third straight year of record performance, but also the first year of what we will look back on as the beginning of a five-year breakout operating and financial performance. As we like to say internally, winners like to play on winning teams. So it is time for all of Carriage's leaders and employees to perform at a championship level over a long period of time. Such a sustained high performance is the definition of our mission of being the best.

We have greatly appreciated the patience of our shareholder base over the past eight years as we steadfastly transformed our company and positioned it for success. We have a strong conviction that the next five years will be a winning period for Carriage shareholders versus other investment benchmarks. A breakout performance in our stock price should follow a breakout performance in the Company's operating and financial metrics. And speaking personally, after 20 years of building Carriage into a company with the right models and the right leaders at the right time, nothing less will be acceptable.

Signed by me.

The last thing I want to say is, over the last -- a little over two years, we have transformed our Board of Directors. Two years ago, Bill Heiligbrodt, with a long history and reputation in this industry, joined our board. He was joined by Richard Scott, with a long history of financing the death care industry at the highest level in the country. And more recently, we were joined by Dave DeCarlo, who will be voted on at our annual meeting on May 17th. Dave has a reputation second to none and will add tremendous wisdom, experience, and judgment to our board.

I believe, together with Vince Foster, who's been on our board since '99, we have the right management team, we have the right models, we have the right leadership, and we have the right board to make this company the best it can be in the next five years, and we intend to do just that.

With that, I'd like to open it up for questions.

We will now begin the question-and-answer session. (Operator instructions.) Clint Fendley of Davenport. Please go ahead.

Thank you. Good morning, guys.

Hi, Clint.

Nice quarter. I wondered, last quarter we did have a few small blips -- they were very short term -- from recent acquisitions. I just wondered if it was possible that we could see any kind of short-term transition issues from these two homes in Amarillo and Miami?

Clint, this is Jay. The two new acquisitions are smaller businesses that are less complicated. The other ones were multiple roof tops, high-cremation businesses that took us a while to sort through some of the people issues and just some of the operating issues, although we were able to transition them within 9 months. We're not seeing near any of those issues going with these 2 smaller businesses, plus we spent a considerable amount of time with the new transition team figuring out that transition, and they were very smooth. So, as I said in my comments, our time frame and underwriting should come to our expectation.

Okay, great. And I guess some providers have seen some spikes in cremation in the last few months or so. Have you guys seen anything like that at your homes?

No. Actually, we've seen it return to more of that normal trend.

Okay. And I guess, finally here, nice move on the dividend. It's very good to see that. No chance that this means you guys have less of an appetite for M&A, right?

Clint, when you get the board I've got, you don't slow down on making smart acquisitions. We're producing more free cash flow than ever. It's growing, and we're getting more people wanting to join our company with good businesses. So we think this is our five years to make hay, and we intend to do so.

Great. Thank you.

We won't have any problem with the capital markets, having the cash to do it.

Thank you all. Nice quarter.

Thank you.

Alan Weber of Robotti & Company. Please go ahead.

Good morning.

Hi, Alan.

First question. Jay, you made a comment about -- if I understood it correctly -- that the pre-need, kind of making it centralized in a decentralized company. Can you just explain that? I missed part of that.

Just the pre-need sales function. In a decentralized company, we were relying heavily upon sales manager talent to come in with their own programs. And we found that that was too disjointed to be able to produce the results we desired. So we've been working with some vendor partners to have more of a procedure. Now, we will stay true to the decentralized management of those businesses, but within the sales arena the businesses will be more aligned with a program instead of multiple programs.

Let me add to that, Alan. On the funeral side, and also on the cemetery side, you know, we have these standards, different ones on the funeral side versus the cemetery side. Each month, we publish [lead] tables that show performance of standards achieved from top to bottom, and everybody in the Company knows where they stand when they see that. If you're under 50%, you're under minimum standards, and then our incentives are designed so the top performers get rewarded very well, and so do the employees.

On the cemetery side -- and that's an annual incentive, but it's published monthly, and it's updated on the people standard quarterly. So it's very motivational, very motivational for our full-time and part-time funeral people. On the cemetery side, it's a different deal, because it's a sales business 60%, two-thirds of our revenue. And we've learned the hard way that a sales culture that delivers results needs to be more active. Your system needs to be more motivational on a daily and weekly basis, and, therefore, we're going to try to design something that fits with decentralized operating leadership, but have more centralized programs and activity and communication on a day and weekly basis with targets and, you know, really revving it up. That, I think, will work well for us.

Okay, great. You know, Terry, this may be a little more complicated. But when you show like last year and this year the EBITDA margins for the acquired -- on the funerals, the acquired EBITDA margins are lower than main-store, you know, from the existing EBITDA margins?

Right. That's correct.

Is that the norm? Or eventually it gets to -- I mean eventually -- is that the norm, or should [we] incrementally make the overall margins higher?

Well, we do expect the acquired funeral field EBITDA margin to increase over time. Now, a large part of what we acquired in 2010 were high-cremation businesses. And as Jay talked about the transition of those --

Right.

-- is taking a little longer than probably the average business that we do. I don't know if we want to actually put a target out there for those businesses.

That's the rents. We've got big rents in that acquired portfolio, Alan. It's a percentage of the total portfolio. We have much bigger rents, because we bought businesses that had high-priced real estate.

Okay.

And rather than buy the high-priced real estate, we rented it. That's going to keep their EBITDA margins lower. If you looked at the EBITR, which is what the standard is, that's before rent. That's how we measure their performance.

Okay. And then actually on the cemetery side, it was the opposite. The acquired EBITDA margins were actually higher than the Company EBITDA margins.

Yes. Alan, those were in the acquired cemetery businesses. It's a much smaller number. It's just a couple of cemeteries, and they are very, very good cemeteries for us.

Okay.

That's a little different.

That relates to three significant combination businesses we bought in '07, all of which -- each of which should have a higher margin than the old portfolio, which had a mixture of large and small.

Okay. And then I guess my last question or comment -- Mel, first, it was an excellent letter in the annual report. And when you make the comment about $250.0 million of revenues by 2015, I'm just wondering, what are you assuming there for, you know, kind of death rates or kind of that macro trend?

We don't try to predict death rates, interest rates, or anything else like that. What we assume, Alan, is that we can grow our same-store revenue, funeral and cemetery combined, by 2% a year. Regardless of the death rate, regardless of the cremation rate, 2% a year is our assumption on same-store revenue growth. And then we would add an acquired $10.0 million of revenue each year.

And we do put out a plan or at least a forecast consistent with our long-term goals. That's not an accounting forecast. It's just a general way of communicating that we can self-finance that much growth, while improving the credit profile of the Company over time, because we finance about 75% of that much growth internally. That's not to say that that's the way it will actually happen. That's what we believe certainly will happen. We're well positioned. Consolidation is accelerating. You don't know what's going to turn up. We're prepared if it's more. We're operating well if it's less. But I don't think it will be less. I think it will be that or more.

Okay. But I guess it's -- you're really assuming flat death rates, which others will look at the demographics and think that that's likely at some point to turn up.

We're assuming that what we'll see in the next 5 years is no different than the last 5 years. If it turns up, we'll be happy when that happens from a financial point of view, but we can't forecast that.

Right. Okay. Great. Thank you very much.

You bet.

Chris Weems of Raymond James. Please go ahead.

Good morning. I'm filling in for John Ransom this morning. I just wanted to start with the volumes. It looks like they were pretty good in 1Q. Any color on what you guys are seeing in April? And did the weather that kind of stormed across the Southeast and Mid Atlantic, did that have any impact on your operations?

Well, we had a little outage in Chattanooga briefly. We got back in operation fast.

And on the death rate, you know, we've been doing this a long time, and we used to live in anxiety about the death rate and all that. What we've learned is, if you have a strong first quarter, which we did -- and we especially had a strong January -- because we look at every business, and we have data for 10 years in every market by competitor. So we know where we have market share issues, and we know where we have market-share growth, and we know where there's stability.

What we can't do is, like Alan said, predict the death rate. It is seasonal. Sometimes it's higher in April or May, and sometimes it's higher in June, and sometimes it's higher in October, or it's lower in September. So we don't look at a month as having any meaning whatsoever. What we do is look at annual volumes over a long period of time, and two out of the last three years, we were either flat on our same-store volumes or up. We only went down one year, which was because of the death rate in '09. April is April. We don't know what May will be or June will be, and so it's hard to predict and model the second quarter. I wish I could help you there, but I can't.

All right. Next, on the cemetery side, you mentioned in the press release that bad debt was significantly lower for the quarter. Exactly what kind of impact did that have, and what are the dynamics behind that? And do you expect that continuing to go forward, or that was more of a one-time thing this past quarter?

Well, we got some new cemetery operating talent over the last 18 months, and these are real pros. And to the extent they're stronger than what we used to have -- and they're a lot stronger. You know, they know how to manage their receivable portfolio better, and it's showing up. I don't know that it would be incrementally different that much every month -- every quarter. I doubt it. Because once you get your days outstanding under control and everything new you book as a receivable, you continue to manage it within a small range of days outstanding.

Got it. That helps. Well, that's all I have. Thanks for taking my questions.

(Operator instructions.) Having no further questions at this time, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

The only thing I have to say in closing is we had a good first quarter. Now we need to have a second good quarter, and then we'll worry about the third quarter after that. We appreciate everybody supporting us and listening in. Thank you very much.

This concludes today's event. Thank you for attending the presentation. You may now disconnect.