Carriage Services Inc (CSV) 2011 Q3 法說會逐字稿

Good morning and welcome to Carriage Services third quarter 2011 results conference call. All participants will been 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 Mr. Matt Steinberg of FTI Consulting. Mr. Steinberg, the floor is yours please.

Thank you, and good morning, everyone. I would like to welcome you to Carriage Services conference call. We are here to discuss the Company's 2011 third 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 e-mail 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 FTI Consulting 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 November 11. The replay information for the call can be found in the news release distribution yesterday.

With us from management are Mel Payne, Chairman and Chief Executive Officer; Bill Heiligbrodt, Vice Chairman; 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 statements, 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 a reconciliation of such measures with 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, Matt. Welcome to the third quarter conference call of Carriage Services. This will be the first call in a few years I have had no script. Because, I don't need one. This is not about the third quarter, this call and my comments. The quarter was a weak quarter, one of the weakest we have had in years, if you look beneath the surface of the numbers, even though the financial revenues supported the quarter strongly. This was symptomatic of what we have been observing for the last two to three years in operations. From time to time, it would get better. From time to time it would get worse. But there was no consistent material up trend as the models we had put in place in '04 were designed to produce.

About six months ago, the Company's future began to change when Dave DeCarlo joined our board. After he joined our board, I began to talk to Bill Heiligbrodt about joining our Company full time. I was not happy with some of the way our models were being executed. And the results were not consistent over time. And as a result, we were not getting the credit in the public equity markets that I thought we deserved if we had executed well all the time. Bill joined the board full-time two months ago. And, when he did, Dave DeCarlo became the lead director. The three of us began to assess the future of Carriage. We began to look at the strategy, the vision, and the models, and we began to look at the leadership we had in place.

As of yesterday, at a board meeting we had, I will tell you, that Carriage began the next phase of its life as a public company. We are calling it internally a new beginning. It is not about the past, it is about the future. The future is very bright. And, what we are planning right now, we wrote a little bit about it at a 30,000 foot level on the press release, is capturing that bright future very soon, not later. We are not asking anyone to take a leap of faith. You'll have to wait to see what the results are. But you will see very soon. And by very soon, I mean by January 1, 2012. And this time 2012 we plan on being a breakout year.

With that, I'll turn it over to Bill Heiligbrodt.

Good, Mel. It's a pleasure to be hear and I want to thank you, Mel. And certainly good morning to everyone. First, let me say, we all here hope this new presentation of GAAP earnings per share and non-GAAP earnings per share will help you better value and understand Carriage itself. The differences between GAAP and non-GAAP are reconciled in special charges beginning on page 5 of our press release. And I want to mention also, these are all cash items.

Now, if we can turn briefly to our new format and look at our three-month results and our nine-month results, which we are showing both here on the first page of our press release, you can see that, for the quarter on a GAAP basis, we were down $0.01 a share from $0.05 in 2010 to $0.04 in 2011. On a non-GAAP basis for the quarter we were flat, at $0.10. I think when you look over at the nine-month statement, you'll see that our earnings per share were up on a GAAP basis $0.03 or about 9% to $0.36. I think the real revealing factor on our non-GAAP basis, however, we were up 31% year to date, some $0.13. And moved our earnings per share for the first nine months of this year to $0.55 on a non-GAAP basis.

Our free cash flow is strong. And I would like to discuss that with you now. As shown on page 8. Cash provided from operations, on a comparable basis, for nine months, from 2010 to 2011 increased $8.8 million, or over 50%. Our free cash flow after maintenance CapEx for 2011 stands at $19.9 million through 9/30/11. And is up by $8.4 million. Again, that is a continued sizable increase.

Now, I would like you to look and see how we invested that $19.9 million. We bought and acquired $10.3 million in new acquisitions so far this year. I'll talk about that a little bit later as we move through this presentation. We spent $2.2 million for the purchase of our convertible subordinated debentures at a substantial discount. We spent $2.4 million in our existing business projects for both funeral and cemetery. Finally, we paid a dividend, and repaid the remainder of our bank facility, some $900,000. We have no outstandings under our bank facility as of the end of the quarter. And I think that is currently true today.

In addition, with all of that, we still built cash by $3 million. Based on our cash flow estimates for the fourth quarter, and our other capital projects that we expect to complete in the fourth quarter, and acquisitions that we have pending, we think we will still end the year on a free cash flow positive basis.

Now, I want to talk about acquisitions because I think this is part of the new plan, and some of the things new that we are doing. Mel and I have discussed this in detail, and we realized that when the standards operating models that we are running our company on that basis, in 2004 it began. However, the businesses that were in place at that time really hadn't been bought with these standards operating model under consideration and on that basis. Therefore, for the last two months, three months, we have been working very hard to look at acquisitions. And the businesses that we acquire in the future will be pre-qualified on that basis to make certain that we can operate those businesses. And that they will operate on our business model. I think we have a very detailed system in that regard. And I'm really looking forward to seeing the results come from that system.

So, if we look at acquisitions as we exist today, we closed two acquisitions in the third quarter. One in California and one in Kentucky. These businesses have expected revenue of approximately $3 million. Our acquisitions year-to-date that we've closed so far, number five transactions, and total over $8 million in projected revenue. We have one other transaction this year that we are working very close, very hard, to see if we can get it closed. It is under contract. It is in New York. And it is expected to close before year end. And that should bring our acquisition revenue that we acquired in 2011 to a number over $10 million in expected revenue.

That's really good news, but the really other good news is that our pipeline on acquisitions is very active. We have three other transactions moving toward letter of intent right now. And we have a very large number, for us, of potential other acquisitions that are in the analytical stage. The outlook for good companies, good strong companies joining Carriage has never been better for 2012.

In conclusion, as a result of this potential acquisition activity, changes to be discussed by Mel on operations, we will give you a fresh outlook on a new five-year forecast beginning in 2012 with our next quarterly report. Thank you, and I will turn it back to Mel.

Thank you, Bill. When Bill joined the Company, we began to look at the various parts of the Company. As I said earlier, at the start of the call, wasn't happy with the execution of our standards operating model since, let's say, 2007, more or less sometimes, and less recently. So I began to look at what was the reasons for that. And, I'm leading a drive that will be concluded by the end of this November. That's the end of this month. We've already initiated much of what I am going to talk about. But the final part of this is yet to be done and rolled out.

When we rolled out the standards operating model at the beginning of '04, it was a very exciting time for our Company. A lot of communication. A lot of bottoms-up buy-in. We didn't quite know what to expect. But from 2004, '05, and '06, and through '07, each year our same-store revenue went up. And our margin and profit went up. Regardless of the death rate, regardless of the cremation exchange. There were no reasons. It just went up. That is what the model was designed to achieve.

So, what we are doing now, is leading a drive, I'm leading a drive, to freshen up the standards operating model, which had not been done since late '03. So we're taking every business in Carriage and looking at the profile of that business, the average revenue, the size of the business, the number of facilities. So on and so on. The mix of the business. To make sure we put it in a grouping of like profile businesses where our standards of performance are the same. And, without going into the various standards over time, people find it very hard to get their heads around some of these standards because it is so different than budgets. But it's going to make a lot of sense to our people.

I have a meeting on the 17th of November with the Standards Council where we will present to the Council across the country the new groupings and the new margin standards. Gross margin standard, which is a 3 point range. SMB standard, the biggest expense in this business, which is a 3 point range depending on the grouping. And the EBITDA standard which is a 4 point range. So we will look at all the businesses, put them in the right group, the relevant group, and then we're going to roll this out.

We are going to re-market the standards operating model and this time we're going to put in an added element. The standards operating model is designed to achieve same-store revenue growth of 3% a year at sustainable margins. That is the goal. We have found that goal is achievable if you get the right leadership in place. We took our eye off that ball. This model is not a management model. It is a leadership model. It has not been led and inspired to really get the people excited about achieving the standards and then holding everybody accountable for that result. That is the new program. It will happen. And, the people in the field, from every sign I get, are completely excited about it.

What will be new, and I'm not going to announce the details on this call because I want them to be surprised, and they are listening to the call, is that we are going to add a permanent value creation element. That if they can achieve these standards over a long period of time, let's say five years, and create a lot of value, they get paid bonuses in the meantime, quite a bit if they achieve a high level of standards. But if they do it consistently over five years, there will be a permanent value creation payment. And then we will re-boot for another five years, and then another five years.

As Bill is adding businesses that can achieve a high level of these standards, primarily volume increases over long periods of time, and average revenue increases, you don't need a lot of revenue growth in this industry to produce compounding amounts of profit. That's what we are going to work on, and we're not going to take our eye off that ball until it's finished. But I think we are going to get off to an incredibly strong start. All of this is supposed to be in place across the portfolio by November 30. There is no grass growing under anybody's feet here. People are moving and things are happening.

On the cemetery side, we are reaching out to real pros in this industry, and we are bringing in some partners. We have found out that we are not that good at the cemetery business. It's time we admit it and bring in some people as our partners who are. That's being put in place as we speak, and will be in place by January 1. I do not expect the cemetery performance to look anything like 2011 after January 1, 2012. Am I certain about what it will look like compared to what I will be able to tell you about the funeral business when we report our next result? No. All I know is that there's a lot of earning power in our cemetery portfolio and we haven't scratched the surface.

Which brings me to the last point. We have made some wonderful moves in our trust funds. That, before the crisis, represented only 7% to 8% of the Company's revenue. On the funeral homes side, that is not going away. It is not a one-time deal. We've made a lot of wonderful moves in the last three months. We took an incredible amount of equity gains. And that's why you see some of the financial income be what it is. But we took those gains in '10 and we took them in the early part of this year, particularly in May and June and July. Before August when the world fell apart, fell off a cliff with all these crises. Since then, we have taken a lot of equity, cost basis, incurred a little over $2 million in losses, and built our fixed income portfolio huge.

Today, we'll probably exceed $100 million face amount for the first time. And that's going to produce $10 million of annualized income off of our discretionary portfolio. On August 8, that annualized amount was $7.9 million, so we will have gone up $2.1 million. That's going to produce a lot of income over time that will be attached to the underlying contracts on the funeral and cemetery trust. It will also produce much higher recurring recognized income in the perpetual care trust. We will also book huge gains on the fixed income positions we took over the last three months because we found similarities in the market where price distortions were being made on the securities of companies where the credits were good. So, we were buying things much like we did in the middle of the crisis, late '08 and early '09 at discounts to par that made no sense. The reason for that, there were no other bidders. There were only sellers.

So we expect to see huge gains and huge amounts of income continue in the future. Can we predict it on a quarter to quarter basis? No. But now, if we get the operations going, which I'm telling you we will, and we get the acquisitions like Bill is leading them today, you will have strength upon strength upon strength. And what we hope to show you in 2012 is that the earning power that is sustainable out of this Company is much greater than anything you've seen in the past. We don't expect you to just take a leap of faith, as I started off, but we do expect you to watch and stay tuned. I think you'll be glad that you did.

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

(Operator Instructions) Nick Halen from Sidoti & Company.

The first question I had is, with the new system you have in place for the acquisitions, do you expect to be making less going forward, now that there's going to be a little more restrictions on what you're looking at? Going forward, do you expect to make fewer than what you previously estimated? Or numbers-wise it will still look the same going forward?

This is Bill Heiligbrodt. The acquisition pipeline is full. We have 3 full-time analysts and a supervisory analyst that are working on acquisitions. Based on what I've seen in this Company, we have a lot more opportunities. We are being very selective, but as you can see, I'm pretty bullish looking into 2012 on what we can do in terms of additional earnings per share. And again, we will be putting that together, as I mentioned to you, forward with some presentation and plan as it relates to a five-year plan with our next earnings release.

But our acquisitions are good. And just because you have a model and you are being selective, we're finding that we're identifying businesses that are already qualifying on the standards operating model before we've added our ability to fine-tune those businesses. So I think, what we are saying is that we're hoping by doing what we are doing, we're going to get a much quicker benefit and a much more sustainable benefit long-term, and improve the overall quality of our businesses by what we do in acquisitions. That's our goal.

Just to add to that, Nick. We were down at an industry conference in Naples in September. Bill and his wife, me and my wife, and Dave and his wife. Dave had been very active in this particular conference during his 23-year career at Matthews. At we met with independents that I didn't even know existed. And these are not small. Typically they were a combination of funeral homes and cemeteries. And they were top-notch. The highest of quality. And I really sensed that in the industry landscape, there is a need for the best remaining independents to find a solution to family succession issues.

And we are really not that well-known across the industry because it is still very fragmented and very local. And so I think, when you start bringing in these quality businesses that already, as Bill points out, have been pre-qualified and they fit, they like this kind of environment and the size of it. They are important. Their business just fits what we're doing and the way we are doing it. So it attracts more like-minded and like quality opportunities. That's what we're seeing. Not less.

And, let me add one point to Mel's comments from a financial standpoint. You have to remember that when we're doing the incremental income, that we are adding, with these acquisitions, incremental earnings per share. And so all of this information is readily available in our financial statements. And you'll be able to follow our progress and what they're adding to the Company.

And also, just, I know, Mel, you mentioned that you are making some changes on the Cemetery side. But I was just wondering, was there anything material in the quarter that would cause such a significant decline in revenue in the quarter?

There's always something significant. And it's like I say here, there's nothing fundamental. It is first who, then what. We didn't have the who right, so this is the what we got. We're moving quickly to get the who right. And when you get the who right, the what gets right real fast.

I hate to tell you, that's the truth of this business. And what I'm seeing is a response in the field to the challenges that I am putting out there and the goals we are setting. And I'm not finding any pushback. But it does require the who being right. And then you quickly know when that who is not right. And you've got to move quickly and that's what we're doing.

I don't expect to be talking about cemetery and funeral stuff as we approach the new year. You won't find that in my language when I explained our results. Not at all. You're going to be finding us talking about growing the business, growing the market share, growing the revenue, leadership, and execution, and things like that. But I won't be talking about excuses, death rates, cremation rates. All of that goes away when you get the who right.

Clint Fendley of Davenport.

My first question is on the trust. I just wondered how should investors view the risk from your portfolio going forward. Especially as it pertains to your earnings. Should we expect a major asset reallocation when we see extreme market volatility?

Did you ask about the trust funds?

About the trust funds, yes.

No, we did make a major asset reallocation after August 8. That's over today. We now have, in terms of cost, we'll probably have about 37% of our discretionary portfolio in equities. But these are all -- Apple is our largest position, for example. The Caterpillars, the Prudentials, the Dow Chemicals, Apple as I said, Qualcomms. These are the names of companies, all of which have come out of the crisis and the recession stronger than ever, either through transformative transactions or product cycles or whatever. None of these are iffy situations on the equities. We only have 19.

And then on the fixed income, which now is about 60% of our discretionary portfolio, it's a very high income portfolio bought opportunistically. We work with our outside money manager, but we have our own team in-house that does the credit work and the analysis. And they follow every company all the time, 100% of the time. But I think what we have now reached is a wonderful situation where we've booked all of these gains. We repositioned the portfolio in late '08, '09. And over time, we had to do it over time, otherwise we would've had to put money in the trust, we took $40 million of net losses from the old positions.

We've now taken close to $80 million of net gains. We pushed the net $40 million down to the contract levels, so those are attached to the contracts. Some of that you've seen coming out in financial revenue and recognized when deaths occur. But this recent move, after we booked all of the gains, has produced now a large stream of recurring income and we're going to sit here on what we've got. We don't intend to make any other major asset allocations because we're very happy with the fact that we have close to $40 million of net gains down in there. And on top of that we have $10 million of recurring income.

So I think that will produce continuing strong financial revenue and earnings in the future. Some of it will be recognized, some of it will not be recognized. Because we will wind up having big gains on the new fixed income positions. I can already see that. I hope that answers your question.

Do you think you'll be in a position to withdraw some of the funds like you did earlier?

At some point, yes. If spreads come back down, absolutely.

This is Bill Heiligbrodt. Again, that's one of the reasons why we wanted you to have the non-GAAP numbers, because those are actually the quarterly withdrawal trust funds in the nine months withdrawal. We are working very hard to complete those withdrawals within the quarter, and most of those have been obtained. But those were all cash. And so the only financial revenue that is coming through on the cash flow basis you need to have, because that is free cash flow to us coming out of the trust. We don't have to get give it back, and that will be reinvested somewhere in the Company. Hopefully, in high returns on acquisitions. That's what our hopes are.

That's why wanted to go to full disclosure. So all of this financial revenue is fully disclosed. The amount that is coming to us from withdrawable trust funds is now totally presented to you. It is going to be what it is. You'll be able to see it completely.

But here's the deal on the strategy point of view, Clint. We made most of our gains, we made at least half of our gains in '10 and '11 on fixed income that we bought in the middle of the crisis because of a lack of price discovery. Liquidity was sucked out of the market. We did the same thing over the last three months when we rotated out of equities. Today, our net unrealized loss is just a little over $10 million. It was much higher than that at the end of September, which is the numbers we had in our press release. But it's come back a lot as we've made this rotation, and the equity market bounced back a little bit.

But we don't expect there to be anything other than uncertainty and a slow-growth economy, world-wide, for any foreseeable future. Maybe after the elections things will get better. But this is how we're looking at it. The equities we have, most of their problem is they have too much cash and cash flow. So they don't know what to do with it. We're not going to lose any money on these companies over the three- to five-year period. There's going to be more gains.

But on the fixed income, if there's any settling down of spreads, we're going to be booking some more big gains while we get paid all this rent to wait. So I do expect that to happen over the next year as Europe plays out, and the US plays out. Either it will end in some kind of disaster, but we won't lose any money. We still have the income. And so I think we're in a wonderful position to keep producing financial revenue and earnings.

My next question is on the M&A. I know when I look at the reconciliation that you guys have provided here from the GAAP to the non-GAAP, one of the largest reconciling items here is for acquisition expenses. It's a fairly large number. Is that for these acquisitions that have closed to-date? And if not, how should investors view that number as we move to non-GAAP reporting here? Is this the level of M&A spend and due diligence for bigger deals that we should expect going forward?

Let me speak to that. This is Bill Heiligbrodt. Most of the acquisition expense, the majority of it, was spent on reviewing a potential very large transaction for which we have not moved forward on. The remaining acquisition expenses are much smaller related to the $10-plus million in revenue that we expect to close this year. So that is a one-time situation, for which, all I can say is that we'll see what happens. But right now, we're not moving forward on any large transaction. And we have incurred and paid all of our expenses with regard to that one acquisition. But most of that will not be recurring.

So that acquisition is not in your rolling four quarter guidance.

No, not at all.

And just a question, why, if I'm reading it right, you have included one acquisition that's expected to close in January in your guidance Is that correct?

No, we have one acquisition that we do expect to close in January and that transaction is in the process of negotiating a letter of intent. That's where we stand on the acquisition in January. That's a very good transaction. So that will be continued and we'll report to you back in the fourth quarter. We do have one acquisition, again, to close in December, that also is a very good transaction, that represents over $2 million in revenue, we hope. And again, we'll take our expected revenues from acquisition for 2011, to some number above $10 million on an annualized basis.

And to be clear, based on the way I'm reading your press release here, both that December acquisition and the January 1, are already in this rolling four quarter outlook. Correct?

No. I'm not going to say that. We're considering that, but actually, I think that -- we have a conservative number in that rolling four quarters in that we have the potential of more than that, of what we have in that fourth quarter, in our actual numbers.

Here's my take on that, Clint. We don't know yet, truly, what the number for 2012 will be. We will know when we report the next quarter. What we put out there for the rolling four-quarter outlook we believe is conservative. No one's going to believe us until we do it And what Bill is saying, it doesn't have to include the January acquisition for us to do that. That's just a four-quarter outlook that shouldn't depend on one acquisition. It's what we believe we can do whether or not that acquisition closes are not.

And frankly, we don't have that at the letter of intent stage, even though we have a very high probability and think we will be moving forward. We are referring basically to the $10 million in revenue that we are doing and we already have signed up on.

So just to be clear, then, relative to my guidance that I had in my model, the revenues are increasing about $4 million to $8 million and that increase is really due to what you already own, existing, despite the verbiage in the press release here. So the potential acquisitions, I take it, would be more than $4 million to $8 million in revenue.

Correct.

Alan Weber, Robotti & Co.

First question is, when you talk about acquisitions and looking to acquire companies that fit into your standard operating model, so they'll be better companies, do you have to pay a higher multiple? Or what are you seeing in terms of valuations of the deals you are looking at?

We think we've paid the value that we should pay for these businesses. Alan, we've spent a lot of time putting together what we are doing. If you're asking if we're having to pay up, we are not paying up. We're paying what we should be paying for these businesses based on their value. Enough to have a very high feeling and high percentage feeling that we are doing this correctly. When I say we're acquiring $10 million in revenues, I think we mentioned we've spent this year so far $10.3 million. The transaction is a significant one, but we're expecting to probably spend this year somewhere in the range of slightly in excess of $15 million right now.

What I would say about that, Alan, is, before Bill got hold of these ranking criteria, and then got a lot of sophistication and more detailed, and more history on volumes and the demographics, and put together a ranking system, now it's a much more advanced system than the rather elementary. Although we had a good system, it had too much subjective opinion that could be made on a business. And, what I would say is that Bill has advanced this thing by a factor of 10 on the due diligence and the history. So that you are more likely, much more likely, to predict the future revenue trends. If you can get the revenue trends in this business over the fixed cost, then you will get the margin trends right too, given a certain size of the business.

What we're doing now, what he's done, is put together a system that differentiates on the value and the pricing much better than what we ever had in the past. So you might say we're paying fair value for a growth business versus the past when we might have paid the same value for a business that didn't grow like we thought it should grow. We've taken the uncertainty out of it -- he has. And I think you will get much greater returns that are consistent and sooner achieved than before.

And Alan, I think rather than saying we're paying up, we're trying to pay the right price for good businesses and eliminate the businesses that won't work for us.

We've turned down businesses that we would have bought last year.

Yes, we've turned down some very large businesses within the last 30 days.

And Bill, you made a comment about spending $15 million. Are you talking about including the acquisition that hasn't closed in 2011 or are you looking out to 2012?

Yes, I'm anticipating, for the year, I can say that, I'm anticipating that hopefully if everything goes right, and we're able to complete a legal transaction now, that we should spend in excess of $15 million this year. And I think that's important for all of you guys because you see our free cash flows through nine months is $19 million. I made the statement that we are expecting to end the year with free cash flow, we're going to add the cash in the Company after everything, including the acquisitions. And we want to, if we can, buy as many good businesses as we can that fit this operating model because that helps operations by trying to put the right business on top of our existing portfolio, which gives us a better certainty of what the future might bring overall if we can do that.

And at our size, we are able to gain some difference by what we do on the acquisition side. That's why this is so important. And what Mel and I have talked about so much is being certain that we buy the right businesses for our operating strategies and plans, if you want to say it that way. And we're finding that we think we are doing that. Now, we are in the infancy on this, but we are checking and being very careful and spending a lot of time making decisions on this, and being very selective. So I do think it's going to make a difference in the future and certainly beginning in 2012. And these are significant numbers for us. But I would like for them to be larger, to be honest with you.

What I think will happen, Alan, is -- and I mentioned this in the press release -- with Bill driving the growth with his team and with this sophisticated system, I can't tell you how excited I am to see what he's done. He's got a lot of members on his team really excited with new ideas and the activity has been nothing short of amazing. It's like it feeds on itself. People join, and they're known, and it's a very clubby industry at the top and so you begin to attract more quality, the more quality that joins you, and that includes talent, as well.

But what I see happening with our operations side is that we bought a lot of businesses in the '90s that, as Bill pointed out, weren't prequalified. We weren't looking necessarily at the long-term demographics, the volume growth. We were trying to get bigger and we weren't as smart as we should have been. What we're doing now is putting out this new standards grouping with the goal of 3% revenue growth, same-store, at sustainable margins. The margins will be approved for each group on November 17. We're putting out an incentive plan to create permanent value if they can do that over five years.

For those who can't, and even though they might try, then if the profile of the portfolio through acquisitions is getting more positive, more growth in revenue and profit, then we will dispose of those that are holding the portfolio back where we can't grow revenue or we have declining revenue. Or it's just too much trouble and it's not strategic in its markets. So we will reinvigorate the portfolio over time and change the growth profile of our portfolio. And our thinking on this, is that we do this and just keep it all really working good on both sides -- operations and acquisitions -- that over time, if we produce this sustainable performance, we should get credit for that in the equity value of the Company.

Let me add one thing to Mel's point. And that is that if we are doing the work right that I think we are doing, we should get more immediate reaction on our financial statements. Because if we buy a business that is already operating close to where we want it to be -- which we're finding, we were very surprised on some of these transactions -- we should be able to integrate those into our Company and get better results than you've seen this Company obtain in the past. And on a much quicker basis. That's all part of the overall plan and we really expect acquisitions to add incremental earnings per share to this Company. We'd like it to be more than we see right now, but we still have opportunity for substantial movement in that regard.

And Alan, we want to thank you for all of your support and your ideas. I hope you did notice, you didn't mention, the stock repurchase plan.

I did see that, it's great.

(Operator Instructions) Jim Dudnick of Caywood-Scholl Capital Management.

I was just wondering if you could give me a little more color on what your definition of bringing in partners for the Cemetery business is. Is this going to be something system-wide for the 33 cemeteries or on an ad hoc basis? And also, is this more to monetize those businesses and create more capital for future funeral home acquisitions?

It is more ad hoc. It is specific to certain businesses where we found, with our analysis, underperformance because of a lack of weakness in certain areas. It could be pre-need sales, it could be maintenance costs in certain areas. So it primarily will be ad hoc and specific to individual properties that we think have been underperforming and it will be a partnership-type arrangement with some win-win elements to it on both sides.

Let me add to that. We're hoping to increase revenue and increase the returns on those properties, and increase earnings per share by these transactions. They are not designed to create money for acquisitions in any way. And, as I mentioned before, we have additional free cash flow that we haven't spent, probably are not going to spend this year. So we do have the ability, if we can push acquisitions up, we have plenty of financing to finance what we want to do in the future.

So these partnerships aren't intended to bring revenue below the line in a joint venture or anything.

No.

Okay. Thank you.

Nicholas Jansen of Raymond James.

Just one quick question. Mel, when you talked about the changing of the standards model and you said you've been frustrated since '07 with the starts and fits. What made you take so long to adjust it? And what was the tipping point this quarter to make those adjustments? Thanks.

It wasn't broken. And there were periods of time, we actually had a record year in '09. Again in '10. And we will have another one this year. But, overall, there were some underlying trends that I didn't care for. There was a lot of progress made over the last 3 years in the field itself in terms of bringing in better talent, and I just had the sense that the talent in the field was a little under-led and over-managed. And so I decided to change that with Bill onboard. I didn't think we were realizing anything close to the sustainable earning power of the operating portfolio. Gave some people the chance to do that. A lot of coaching, including a year ago I started trying to do that. I thought I could do it through them, but it just didn't work out that well.

Sometimes you just have to go ahead and make your move. So we're making quick moves. It's re-energized the entire Company, I will tell you that. Both Bill's side and the operating side. You won't find anybody here dwelling on the past or complaining about this or that. There's a sense of excitement going on in this Company that I haven't seen in years.

We're going to have a lot of fun with 2012 internally with a lot of different contests and side bets, that we can do better than you over here in the West, in the East, and we're going to do this and that. So there's a lot of energy underneath the numbers. And it's hard for someone to look at a quarter, a year, and see what's going on. But the whole idea of these changes was to reinvigorate what we tried to get going, and it went off track, which is a high performance culture. Where you field winning leaders and they field winning teams, whether it's in support department or in operations. I think that's what you're going to see in 2012.

Thanks for the color.

[Steve Crystal] of the Clark Estates.

I was wondering if you could talk about how much overlap there is between customers between the Funeral and the Cemetery businesses?

75%, 80% of our business Is Funeral. We do have some combos that are significant. Seven or eight, I would say, but I don't think there's any huge overlap.

The reason I ask is because you mentioned specifically that the Cemetery has underperformed and that you didn't, apparently, have the internal talent to manage it. And it also requires, it seems, a lot more capital as a business in general. It would seem the Funeral business would have a much higher return on invested capital. So I was wondering if there is potentially something that you could separate.

I wish I could answer that clearly but the truth of the matter is, I don't think we've reached anywhere close to the performance in our cemeteries that we will in 2012. If not 2012, 2013. It might take us a little while to get there, but not long. We feel, if you just look at the numbers, you'd reach some pretty dire conclusions. It's better to be in the Funeral business than the Cemetery business. Couldn't agree with you more so far. We'll find out.

We own them and we're not going to sell them until we find out what their sustainable earning power is. And we're going to try to get there real soon by reaching out. And Dave DeCarlo has made all the difference in the world when he joined our board and got engaged, and started looking at these cemeteries So, I would say, stay tuned.

The follow-up question, I have a different question. But I was wondering if the changes that you announced today, were there any significant management changes on the Funeral side?

What do you consider significant?

Were there changes of personnel that needed to be made at a high level that you felt -- you mentioned that the performance across the board wasn't exactly where you wanted it.

Yes. What we've done, with Bill being here, and Dave engaged, we took a look. This is not being critical of anybody. Sometimes you need to make a change and sometimes it's better for someone to go seek the next phase of their life and success. And Jay Dodds will be leaving the Company at year end. He is our COO. Jay is very happy about the next phase of his life. He's been here 17 years. He's made huge contributions. He's well-liked in the Company. He remains a friend and will always remain a friend. But he's going to seek the next phase of his career somewhere else.

And that is also true of Brad Green, our General Counsel and Head of the Corporate Development. Now Bill is heading all that. And Brad is very excited, as well. He's more entrepreneurial, he's going to go try to do something on his own. I told him if he reaches a fork in the road and he doesn't know which one to take, come back and we'll see if we can help him. So we've got two good guys leaving the Company, and we won't replace them. We've got everything going now and everybody's happy. And those are the things that we changed recently.

Thank you.

And this will conclude our question-and-answer session. I would like to turn the conference back over to Management for any closing remarks.

I would say stay tuned. We appreciate the interest and all the questions. We'll clarify the outlook for the immediate future on our next call. But there's a lot of work going on here, and I think it's going to pay off. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.