Carriage Services Inc (CSV) 2011 Q2 法說會逐字稿

Good morning and welcome to the Carriage Services second-quarter 2011 results conference call. All participants will be in listen-only mode. (Operator 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?

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 second-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 like to receive a copy of the press release, please call my 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 at telephonic replay of this call will be available and active through August 11th. 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, and Terry Sanford, Executive Vice President and Chief Financial 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, Alex. Our second-quarter and first half 2011 performance was simply outstanding. And our near-term outlook and opportunities have never been greater. In particular, our growing free cash flow is rapidly improving the credit profile and financial flexibility of our company, positioning us to be opportunistic in the market. With that, I'd like to turn it over to Terry Sanford for some of the particulars. Terry?

Thanks, Mel, and welcome to everyone on the call.

For quite some time we have published our long-term outlook which is to grow year-over-year the revenues by 6% to 7% and consolidated EBITDA by 8% to 10%, reduce a consolidated EBITDA margin of 24% to 26%, and grow earnings per share by 14% to 16%.

For the second quarter of 2011, as you see in the highlights section on page one excluding special charges, we are either within those ranges or above those ranges. And the same is true for the 6 months ended June 30th, 2011, compared to the prior year period.

Excluding the special charges, we earned $0.16 per share in the second quarter and $0.35 per share for the first half of 2011.

We're very pleased with our performance for the second quarter, which follows a strong performance in the first quarter of 2011. As you can see on the income statement, on pages 6 and 7 of the earnings release, we have meaningful increases in our funeral volumes and funeral, cemetery and financial revenues for both the quarter and year-to-date compared to the 2010 periods.

We also report higher field EBITDA margins for both the same-store and acquired funeral and cemetery portfolios for both the quarter and year-to-date, as our leaders have done a great job achieving their standards and managing the location level costs and expenses.

The growth in EBITDA equates to higher cash flow which has allowed us to continue acquiring businesses without incurring additional debt and higher interest expense over the last 5 years. For instance, we generated $12.4 million in free cash flow in the first 6 months of 2011.

The financial leverage is a very positive characteristic of Carriage and it has increased our earnings and strengthened our credit profile. The strong and consistent cash flow generation was a primary catalyst for initiating our first quarterly cash dividend on June 1st, 2011.

And with the additional $8.5 million in cash withdrawals from our excess trust fund income in the third quarter, as we reported on July 20th, and as we mention on page 2, we have additional cash to fund our acquisition pipeline. With respect to acquisitions, you never know when or if the transactions will close, but we're seeing very good opportunities in the market.

We have raised our forward four quarter EPS outlook by $0.04 to a range of $0.56 to $0.60 per share. The details of our forward outlook are on page 15. The increase is based in part on our performance of adjusted EPS of $0.35 for the first half of the year. The businesses acquired in 2010 and 2011, including the two acquisitions in the second quarter, have had a meaningful positive impact on our results and are expected to provide further growth looking forward.

For instance, the two acquisitions that we disclose on page 10, that we acquired in the second quarter, are expected to add approximately $0.02 to our annual EPS in the next four quarters, or half of the increase in our EPS outlook.

With the improving results and the additional $8.5 million trust fund withdrawal, we have also raised our forward four quarter free cash flow outlook to approximately $30 million.

With respect to our capital, we also announced on July 20th that we are in the process of entering into a new credit facility with Wells Fargo. Just as an update, that is still in process, but is expected to be finalized within the next week.

As of June 30th and today, no amounts are outstanding on our current line of credit.

With that, I'd like to turn the call back to Mel Payne. Mel?

Thank you, Terry. In an uncertain and risk averse economic and market environment both domestically and internationally, we at Carriage remain steadfast and confident that our winning teams of field operating leaders and employees will produce a strong second half performance to make 2011 a breakout performance year in celebration of Carriage's 20th year anniversary.

And to all of our people listening in to this call, and there are many, I want to thank you all for your good and hard work over the recent past. Now, let's finish the job and finish the year with not only a strong performance but a sustainable one into 2012 and beyond.

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

Thank you. We will now begin the question and answer session. (Operator Instructions). At this time, we will pause momentarily to assemble our roster.

Clint Fendley, Davenport & Company.

Thank you, good morning gentlemen. First question, I guess just on the volume trends that you saw. Obviously, I guess we're very slightly negative on the contract volume for the quarter, just any color for how that trended through the quarter by month.

I don't remember, Clint, because if you look at our trends over multi years, that's what we pay attention to. So, for the first half, I guess we're a little bit positive. And two out of the last three years we've been positive. So, that's how we look at it.

On our monthly reporting for each business, we show on the right side a rolling 3 months and on the left side a rolling 5 years of the most recent 12 months. So, we don't, honestly, pay a lot of attention to monthly variations in volumes.

Okay. I guess a question on your acquisitions. Obviously, you seem very optimistic about having a very full pipeline from where you stand today. On the Stanfill Funeral Home acquisition, you're saying that you expect it to contribute the EBITDA of roughly $400,000 upon integration completion. When do you expect the integration to be completed for that funeral home?

I don't think we're having any delay in integration of that business.

Just looking at the numbers that Stanfill is producing at this point, they are performing very well. The integration took place very quickly. We've got a new process in place that we really beefed up in the first half of 2011 and it is showing a positive impact. The results have been very strong so far for Stanfill and we expect that trend to continue.

Okay. And I guess if you guys could comment if you would please on just the way you're looking at the pricing for these potential acquisitions from where we stand in the market today and what is on the minds of some of these independent owners as they think about selling their businesses.

What's on their mind when they sell their business we find is those things that matter most in terms of having an aligned former owner. And they typically are family succession issues, age, health, family succession or lack thereof, and ownership splits and issues amongst partners, some within the family, some without. Those are the catalysts that lead to an ownership transition where Carriage provides the solution.

If all of those things are aligned with a fit towards Carriage, then the integration, the transition, becomes much easier. The money itself and the multiples we pay depend on the size of the business, the size of the market, the demographics, the barriers to entry, the 6 criteria that we've developed and fine tuned over many years.

That determines the price, not the short-term financial performance, because if we get the 6 criteria aligned the key is to be able to grow revenues in the future, not lose revenues in the future. And we can attract great talent, we've found, with our standards and all to [move] that, if you [find] the right business in the right market.

And do you feel confident that you've increased some of your competencies in regard to the integration? I know we've had a couple quarters in the past where we've had, not any long-term blips I guess in the earnings per se, but a few rough spots on the integration. Could you just speak to your increasing competencies in that area?

You want to go over that, Terry?

Yeah, I'd be happy to. We have a team both in our operations group, internal audit and financial reporting department that go out in advance of the closure of these acquisition transactions. And then stay with them for a period of time, two weeks or more, to make sure that everyone is trained, the technology is in place and that we have made the changes that we need to with respect to pricing, inventory, displays, packaging and everything that needs to take place in that regard.

So, it has improved greatly. And as you're talking about, we did some large acquisitions in the middle of 2010 and it did take a little longer to get those up to speed, but the integration has been completed on those. And we feel very comfortable and they're producing the kind of margins that we're looking for.

The Stanfill and Schooler acquisitions are not as large as those ones we did before and they were very easy to integrate. The quality of the personnel at those locations that we acquired that were already there too, were so great that it went very, very smoothly. So, we're very pleased with the way that occurred.

Okay. Great.

We didn't have our act together on an integration team across departments in the middle of 2010, Clint. But we do now.

That's good to hear. It sounds really good to me that you guys have identified the $10 million in annualized revenue that you think you can close on by the end of the year. I know, the press release that you issued about a week ago, you talked about an $8.5 million investment in capital yielding the potential for about $0.045 in earnings based upon an assumption of a 15% to 18% pre-tax return on those businesses.

Correct.

Do you think that the $10 million that you have identified that you think you can close on by the end of the year would fit within those parameters that you mentioned a week ago?

Yes, they would. And I would say the $10 million, and I want to be clear about this, there's been some confusion about this in the past. That's not a specific plan each year. It simply is an indication of what the Company believes it can do over a 5 year period. It was not meant to be an accounting plan or a plan for you say, Clint, or somebody else to model.

It is an indication, however, of the fact that the Company could grow by that amount annually and self-fund itself almost completely over a 5 year period, while improving the credit profile at the same time.

Now, what we're seeing in the market are actually greater opportunities than the $10 million of acquired annual revenue and that's one of the reasons we're putting in place this revolving credit with Wells Fargo is to be positioned to take advantage of greater opportunities if they are of the right quality and fit.

Last question here then Mel, where would you say, is your limits, obviously you've got the funding now that is in place. Where is your limit with regard to just your management's ability to integrate the acquisitions that you would do in a given year?

I mean, that's always one of the biggest challenges with these deals. And I know we've heard from you guys that you've remained very, very diligent on your pricing and what you're willing to pay for these acquisitions. But if you could just speak to the amount of attention that it takes from management in order to integrate and where your ceiling is, I guess, with regard to that capability.

Well, anybody who gets to know us well, beneath the covers, will quickly find out that what we try to do at Carriage is very different than what has occurred over the last 50 years with most consolidation companies in this industry.

And so, it's not for everybody. So, we do a very careful analysis of whether there's a fit, a cultural fit, a business fit, an owner alignment fit, a market fit. And where there is, we don't believe, except for little bumps in the road like we had in the summer of 2010 into the fall, we have come so far in the last year with our organization, both in the support side and the regional leadership, that I would say, and that's both in funeral homes and cemeteries, we are focused and we are doing things that I couldn't have dreamt about a few years ago. And I don't see any integration problems.

We're trying to find the bigger quality businesses and if we find those I don't think you're going to find big bumps in the road on the integration.

Great, thank you, guys.

(Operator Instructions).

Alan Weber, Robotti & Company.

Good morning. A few questions. One is, as you were talking about the acquisitions and you were talking about available financing, possibly larger acquisitions, I guess the question is anything in terms of how you look at the returns, is that going to change?

No, we're going to follow our model consistently.

Okay.

(multiple speakers) the change.

I just wasn't sure if [lower] acquisitions meant lower returns?

No. As Mel mentioned, we are having some opportunities to look at potentially larger acquisitions. And quite frankly, just from a standpoint from size, typically the larger businesses can generate higher margins because of the fixed cost nature of the industry and the types of businesses, the larger businesses generate higher margins. And we're seeing opportunities in those areas right now.

So, we expect those to be, quite frankly, maybe better than what we've experienced in the last 12 to 18 months.

Yeah, I meant in terms of your returns. I understand the margins might be higher, but the question is do you have to pay much higher of a multiple, that kind of thing?

No, we don't --

Alan, if it will give you some comfort, we just decided not to even make an offer on a really quality business in a good market because we didn't think the returns were there.

Okay, great. And then a question or two on the trust funds. You took money out of California, right? And I forgot what the amount of, you used to call kind of over-funded and trust-funded. Is there that same opportunity in other states? Or was there something unique about California?

The pre-need laws and the trust laws are regulated on a state by state basis. And the majority of the states that we operate in do not allow you to remove and recognize excess income in the merchandise and trust, pre-need merchandise and services trust funds.

Now, in the perpetual care trust funds, that is a little different because you are allowed to remove the income and, in some states, the capital gains on a month to month basis as those are realized. But what we're focusing on here was cemetery merchandise and service trust funds and I believe there are 3 states that we operate in, and actually they happen to be the states in which we have our largest cemeteries, that do allow us to remove the excess trust income, California being the biggest. Our biggest cemeteries and our biggest concentration of cemetery business is in the state of California.

What was the amount that (multiple speakers) talked about being over-funded or the trust funds now?

I've asked that same question that you ask and it's kind of a weird thing because all the states have their own specific regulations on trust. And unfortunately, the history of this industry, not with the public companies but with independents, is a lot of trusts haven't been managed very well and in some cases aren't even there. And so there have been issues and therefore regulation to try and make sure the money is there upon a [death].

But we are over-funded and the other trust, merchandise and service trust, other than California and Nevada, and then the funeral trust, way over-funded across the portfolio. Whether we would have any chance at all in finding some vehicle, a way to get the cash out at this point, is unknown and probably wouldn't be something we could count on. But we are going to revisit some of the larger pools of trust just to make sure there's no way.

Okay, but either way you get the money over time. Okay. And then, Terry, on your taxes, when do you become kind of a full cash paying for taxes? When does that occur?

Well, I hope we don't ever become a full cash paying tax payer, frankly. But we have, as of June 30th, I understand from our tax professionals in our department, that we have eaten through our net operating loss carry forward for federal purposes, not all of them in the states.

We will begin paying cash taxes for federal purposes during the second half of this year, 2011. And we will be a tax payer going forward. Now, what percent of that, of our tax provision that will represent, at this point, I don't feel comfortable putting that out there. But it will, just in round numbers maybe 75% of the tax provision that we have as we look forward 2012, 2013.

Okay. And then when you give the rolling four quarter projections for free cash flow, I guess you have it, that assumes $6.5 million of maintenance CapEx.

That's correct. And that also includes a little over $4 million in cash taxes during that period as well that we would pay.

Okay. I guess my final question or comment is so now you really have it financially, it's obvious financially you have the company as well-situated probably as ever. And operationally you think as well-situated as ever and you can make acquisitions from your current cash flow. You have the excess trust funds. And you can, without utilizing additional line of credit, you can grow the EBITDA organically and through acquisitions.

I guess my question is, when the stock was much lower you did buy back stock. And the economic environment wasn't as good. The stock price was lower. Why wouldn't you consider some form of a buy back just to implement what you have going on, given where the stock does trade?

The market continues to be a mystery, in particular how our company has traded as our trends have rapidly improved and our cash flow has [grown]. I realize there's some non-recurring nature to the free cash flow over the next 12 months because of these special withdrawals.

But to have over $20 million of recurring free cash flow and $30 million over the next 12 months, thereabouts, and to be trading [550] seems to be ridiculous. We all understand that and our board, which has undergone a major transition, Alan, as you've seen over the last two and a half years. We'll be [visiting] about, how to add value to shareholders. We did that with a dividend, whether it would include a stock re-purchase program at this point remains to be seen. But it's certainly on the list of things we're talking about.

Okay. Great, thank you very much.

This concludes our question and answer session. I would like to turn the conference back over management for any closing remarks.

We greatly appreciate your attention and interest in our company. We look forward to reporting the second half of the year. Thank you very much.

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