Carriage Services Inc (CSV) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Carriage Services second-quarter 2013 earnings webcast. At this time, all participants are in a listen-only mode. After our prepared remarks, we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

And as a reminder, this call is being recorded. I would now like to turn the conference over to Chris Jones with Carriage Services. Please go ahead.

Thank you, and good morning, everyone. We are glad you could join us. We like to welcome you to the Carriage Services conference call. Today, we will be discussing the Company's 2013 second-quarter results, which were released yesterday after the market closed. Carriage Services has posted the press release, including supplemental financial tables and information on its website at carriageservices.com. This audio conference is being recorded, and an archive will be made available on Carriage's website. Additionally, later today, a telephone replay of this call will be made available and active through August 14. Replay information for the call can be found in the press release distributed yesterday.

Speaking on the call today from management are Mel Payne, Chairman and Chief Executive Officer; and Bill Heilibrodt, Vice Chairman. Today's call will begin with formal remarks from management, followed by a question and answer period. Please note that during the call, management will 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 the statements, which are more fully described in the Company's report filed on Form 10-Q, 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 updates to those 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 morning's call, management will make reference to certain non-GAAP financial performance measures. Management's opinion regarding the usefulness of such measures, together with the reconciliation of such measures to the most directly comparable GAAP measures for historical period are included in the press release and the Company's filings with the Securities and Exchange Commission. Now, I would like to turn the call over to Mel Payne, Chairman and Chief Executive Officer.

Thank you, Chris. In our press releases, I get the honor of being quoted. And, in the second quarter press release, the quotes were fairly close to the first quarter, just a change in the numbers. And the reason that is so easy is that the numbers are so good. Bill is going to offer you more detail on the financial performance and the quantitative performance. I will not spend time on that. My comments are in the press release. It was a great quarter. Just another great quarter.

And, as tradition, I want to call out the performance heroes -- high-performance heroes in the second quarter. In the West region -- Justin Luyben, Evans-Brown Mortuaries, Sun City, California; Doug Reinke, Dakan Funeral Chapels, Caldwell, Idaho; Ken Summers, PL Fry and Son Funeral Home, Manteca, California; Ken Pearce, Grant Miller and Greer Mortuary, Oakland, California; and Anthony Gloschat, Johnson-Gloschat Funeral Home, Kalispell, Montana. That is the West region.

In the East -- Ken Duffy, Sidun Group, Red Bank, New Jersey and John E. Day Funeral Home; Chris Duhaime, Funk Funeral Home, Bristol, Connecticut; Dan Simons, Hubbard Funeral Home, Baltimore, Maryland; James Bass, Emerald Coast McLaughlin Mortuary, Fort Walton Beach, Florida; Robert Maclary, Kent Forest Lawn Memorial Park and Funeral Home, Panama City, Florida; and Cyndi Hoots, Schmidt Funeral Home, Katy, Texas.

And in the Central, we have more high performers in the Central in the second quarter than any other region, and that will vary region by region -- Bob Thomas, Malone Funeral Home, Grayson, Kentucky; Johnny Garcia, Ceballos-Diaz Funeral Home, Edinburg,Texas; Michael Page, Allison Funeral Home, Liberty, Texas; Randy Valentine, Hirsch and Lain-Sullivan Funeral Homes and Crematory in South Chicago; Carolyn Cardano, Hilliard Funeral Home, Bryan, Texas; Patty Drake, Drake-Whaley-McCarty Funeral Home, Cynthiana, Kentucky; Joe Raiborn, Sterling Funeral Homes, Dayton, Texas; Andy Shimwell, Maxwell Fuqua Hinton Funeral Homes, Hopkinsville, Kentucky; Mark Cooper, Seaside Memorial Park and Funeral Home, Corpus Christi Funeral Home and Rose Hill Memorial Park, all in Corpus Christi, Texas; and, finally Phil Simms and Jim Sheridan, Dwayne Spence Funeral Homes in Canal Winchester and Pickerton, Ohio.

Those were our real high-performance heroes in the second quarter. But I want to end by focusing on one particular performance hero who is here in the home office. I want to recognize Ben Brink, who joined Carriage in January 2009 as Assistant Treasurer in the middle of the 2008-2009 market panic and meltdown, at a time when I had asked our Board for a battlefield promotion to assume control and management of our trust funds, and then began executing a complete transformation and repositioning of our trust fund investment strategy. The results of a new investment strategies and repositioning, active management of our discretionary trust funds, including security selections and asset allocations, has been nothing short of phenomenal since January 1999, returning 119.4% in the four years ending December 31, 2012.

Moreover, our recurring income on this portfolio has tripled during this period to almost $12 million annually. And we have realized almost $100 million in gains, mostly from buying fixed-income securities at substantial discounts to par during periods of severe market distress. Ben has been instrumental in the execution of these strategies and deserves the lion's share of the credit. To provide some numerical perspective on this achievement over multiple years, which Carriage has been reaping the benefits from the excess -- substantial excess funding, which is the reason we separated the reporting of financial revenue and EBITDA from operations in 2011, the only company in our industry to do so. For example, our total GAAP-recognized financial EBITDA from funeral and cemetery operations in 2009 was $8 million. And in only 3.5 years has more than doubled to $17.4 million in the 12 months ending June 30, 2013, adding more than $0.30 of recurring GAAP EPS to the high and sustainable earning power of Carriage. That is in addition to the non-GAAP EPS that is also coming to Carriage at a rate of about $0.04 to $0.05 a year in withdrawable trust income.

In late 2011, Ben led a complete overhaul of the legal structure of our three types of trust funds, consolidating them into a [pool] partnership, with more flexibility to allocate gains and recurring incomes to fit the nature of the three types of funds and how we account for them. He also led the formation of an SEC-registered subsidiary company, Carriage Services Investment Advisors. So that we now get paid currently for the substantial value that is being created for the shareholders over time. Ben, we all thank you for the job you and your team have done. With that, I will turn it over to Bill

Good, Mel. Good morning, everyone. It is a real pleasure for Mel and me to report and review record results and record performance for Carriage Services in the second quarter ended June 30, 2013. Our second-quarter and year-to-date 2013 results represent a continuation of a trend of record performance that began at the start of the fourth quarter in 2011. At that time, Mel and I reported to you that we expected significant improvement in our businesses and more value creation for our shareholders. We expected to accomplish this with continued emphasis on our standard operational model.

We reviewed and improved our standard acquisition model, with the goal of linking and coordinating this model and its value to the standard operational model. All this is continuing today, with an ongoing emphasis on improving leadership all the time, in all areas within our Company. This is why, every quarter, I emphasize that our results represent the efforts and diligence of all the employees of Carriage Services. For those of you listening, who might have further interest in what I have just discussed, I suggest you look at our annual report for Carriage Services 2012 -- A New Beginning -- and, at the inside page, high-performance culture framework.

Now, let's take a look at our performance in the quarter. Adjusted earnings per share for the second quarter were a record $0.25. This is a 67% increase over the second quarter of 2012. These results were accomplished with revenue expansion of 11.3%, to $54 million, and continued margin expansion in almost all our business segments. Included in our revenue growth is a strong performance gain of 1.7% in same-store funeral volume, ahead of our expectations. Every quarter we have reported to you that around 8% of revenue growth at Carriage, we should produce high-performance numbers. Therefore, at 11.3% revenue growth in the quarter, we have well exceeded 8%, and strong earnings per share growth has followed.

Likewise, accompanying the earnings-per-share growth, revenue growth, and margin improvement was a 39% increase of free cash flow for the quarter. This performance is the result of strong field operations and, as Mel has previously discussed, financial results, as well as continued revenue benefit from acquisitions completed in 2012. Our six months reported numbers followed suit, with adjusted record earnings per share of $0.56, an increase of 33% versus the same period in 2012. Revenue was up more, at 12.3%, to $112 million for the first half of the year, well ahead of the aforementioned 8%. Very important in our revenue growth year to date is large same-store funeral operation improvement of 3.6%. Also, again, ahead of expectation. In conclusion, and noteworthy for you, the shareholder, as well, free cash flow was up a record 90% so far this year.

Next, I would like to discuss with you acquisitions. In 2011, we said we hoped to add six to eight businesses on a continuing annual basis, with $16 million to $18 million of new annual revenue. We accomplished that goal in 2012, and approximately $11 million of revenue from those acquisitions will roll into our numbers in 2013. We have not yet reported an acquisition in 2013. During the first six months of this year, we have probably looked at 50 potential acquisitions, and pursued only 2 for purchase. We have continued to stay with the discipline of our standard acquisition model. However, currently, we have the most acquisitions under consideration since we began our revised acquisition program in 2011.

I am looking for new quality acquisitions and businesses to be added in the second half of 2013. In the meantime, since we have had no acquisitions this year, in 2013, some other important events have occurred. First -- and I am really excited about this -- we are building two new locations in really strong economic areas. Second, because of our 90% growth in year-to-date cash flow, as well as no new acquisitions in the same period, we reduced debt by $15 million in the first six months of 2013. Going back to the beginning of the fourth quarter of 2012, you will remember we negotiated a new bank credit which paid off high-yield debt, added availability of a new revolving credit, and significantly reduced our borrowing costs.

We amended this same agreement in the second quarter of 2013. The amendment added an additional $20 million to the revolving credit. Because of improved operating performance at Carriage, which resulted in a better credit profile, we were able to reduce our interest pricing grid by 0.5% across all the ranges. This will initially provide about $0.05 per share on an annual basis, plus still retain the possible benefit of further interest rate reductions from moving down the pricing grid with future credit improvement at Carriage. Today, we have approximately $100 million availability on our revolving credit at very attractive financing rates. With our strong operating performance, I believe we can further increase our revolving credit, if necessary, without affecting credit terms.

The reduction in debt in 2013 and improved credit terms were reflected in the 31% reduction in interest expense year to date in the trend report financial statements. So with, first, strong operational results across all segments of our business; second, exceptionally strong [cash] flow generation; third, favorable outlook for acquisitions in the second half of this year; and, finally, fourth, favorable financing parameters, we are projecting $1.18 to $1.20, looking out four quarters from the second quarter of 2013. Thank you. Mel, I will turn it back to you.

Wit that, we'll open it up for questions.

Thank you.

(Operator Instructions).

Our first question in queue is from Jamie Clement of Sidoti. Your line is open. Please go ahead.

Gentlemen, the morning.

Hi, Jamie

I am curious, Mel and Bill, since the SEI and Stuart deal has been announced, has your phone been ringing more from independents out there, that many maybe had been considering selling their businesses at some point over the next couple of years, and see the possibility of a huge slug of properties that are all of a sudden going to hit the market, and are potentially looking to get in front of that?

Well, Jamie, I really don't think so. I mean I think our, as I mentioned to you, we looked at probably 50 transactions in the first half of this year. I think what I said was that our deal flows have been good all year. And that was certainly before that announcement. I think what has happened is, that we have seen an improvement in the quality of businesses that we are looking at today. I can't really say there has been an increase in possibility of transactions, because of the Stuart SEI.

Okay. And then, Bill -- sorry, Mel, go ahead.

Certainly, anytime you have a major change in the industry landscape where the two largest consolidator's are joining, it creates a lot of discussion. But I don't know that it leads to someone making the decision to do something --

Right.

Where they didn't already have good reasons for thinking about succession planning in the first place. It might just stimulate conversation that lead to a serious discussion. We have been too several conferences. And certainly, anytime you have that kind of event creates a lot of discussion amongst the participants. But I agree with Bill, without the underlying motivating factors, it is not going to cause somebody to do something that otherwise wouldn't have good reason to do it.

Sure.

I would like -- Jamie, let me add one thing to this. I just have been out on a major trip, talking to people in the field that are potentially looking to do something with their businesses. As far as Carriage is concerned, and this is a fact, the reason that they are talking to us, is because they like are operating management and our style. That is why at the first of our remarks, I made mention of these operating models and how we operate. And I think that is really what has been our attraction with potential acquisitions, much more so than something that is happening somewhere else.

And so I think anybody you ask at Carriage will tell you that, especially from my team that is actually dealing with potential acquisition candidates. We have probably more opportunity than ever because of that. As I have mentioned, we have to stay with our financial discipline and with our models that -- so that we are trying to align with the best of the remaining independents that we can that fit what we are doing. I can guarantee you, the reason they are coming to us is because of our decentralized method of operation and the way we look at operating models and how we run this business.

And Bill, just a quick follow-up there, is your substantially stronger financial performance over the last couple of years, and your success with acquisitions, do you think those are the two main reasons why you are seeing, I think you said, higher quality properties at this point? Do you think those would be two of the major regions reasons?

I think performance always attracts people somewhat, because people like to be with winners. Okay?

Right, exactly.

But I think what -- if I say that though, I have to say that, basically, these people in this industry are more interested in what happens with the name on their business, and how that business is going to operate after becomes part of another organization. That becomes more important in how you operate what you do, and what your record is. Fortunately, I think we have an attractive situation for most people that are -- that might be looking to do a estate planning or something else. There is nothing else, that strikes them more than protecting their business and the way they have operated, and aligning with somebody that is very respectful of that.

Just to add what Bill said, the reason -- I mean, certainly, when you perform the way we have the last 18 months, the stock goes up by three times more, people notice that and wonder why. But really, until you meet them and show them underneath the covers, and talk about how the model works, how these high performance standards our like principles and they don't change over time. They get very interested in a high performance franchise, with first quality competitive positioning, and their market growing, beating their competition. And they get very intrigued at the fact, that we have such broad performance at the field level, and why people are so motivated to achieve these high performance standards and sustain them, they recognized for them and rewarded for them. And supported, supported functionally, where we take all of the administrative, legal, HR, all the information systems, all that, we provide real support for them to grow their business.

And that is a partnership. It is unlike anything anybody else has ever done. They like it because it is not a huge leap off of a mountain into a foreign alien place. It is where they can continue to be proud of their business, and grow it in their local community as a partner. So that is why we are getting such interest, and that is why we are winning deals. In a lot of cases, there is no competition.

Got it. Got it. Take you all very much for your time.

(Operator Instructions)

At the moment, I am showing no further questions in queue. I would like to turn it back to Mel Payne for any closing comments.

Well, that was short and sweet. We thank you for tuning in, and we will report our next quarter pretty soon. Thank you much.

Thank you. And again, thank you ladies and gentlemen for joining today's conference. You may now disconnect.