Carriage Services Inc (CSV) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Carriage Services first-quarter 2015 earnings webcast. (Operator Instructions). As a reminder, today's conference call is being recorded. I would now like to turn the conference over to [Chris Jones], representing Carriage Services. Please go ahead, sir.

Thank you, Candace, and good morning, everyone, we are glad you could join us. We would like to welcome you to the Carriage Services conference call. Today we will be discussing the Company's 2015 first-quarter results which were released yesterday after the market closed.

Carriage Services has posted a 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 May 10. Replay information for the call can be found in the press release which was distributed yesterday.

On the call today from management are Mel Payne, Bill Heiligbrodt and Dave DeCarlo. 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 these statements which are more fully described in the Company's financial 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 call are based on information available to Carriage Services as of today. Carriage Services expressly disclaims any duty to provide updates 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 morning's 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 to the most directly comparable GAAP measures for historical periods, are included in the press release and the Company's filings with the SEC. Now I would like to turn the call over to Mel Payne, Chairman and Chief Executive Officer.

Thank you, Chris. After co-founding Carriage in 1991 I wrote down five guiding principles that would guide the growth and development of our Company. The second one was work hard, have fun and share the success. I later had to take the have fun out because our people started hanging these guiding principles in our funeral homes and cemeteries and I didn't think that was a good idea for grieving families.

But I will tell you -- right now I should have the title of Chief Fun Officer; talking about this quarter and our people is a lot of fun. It was one quarter that I will never forget. We have had good ones before; we have had some really good ones before. But this one was gooder than any of them. And with that I would like to turn it over to Bill to give you some color on the quarter.

Thank you, Mel. And thank all of you for joining us on the call today. We are pleased to report a solid start for 2015 in this first quarter. Carriage achieved outstanding first-quarter adjusted diluted earnings per share of $0.42, an increase of almost 36% over 2014. Likewise, our adjusted free cash flow followed our earnings and increased over four times from $2.3 million in 2014 to $10.8 million in 2015.

Looking behind these numbers, let's look first at revenue. Total revenue increased just under 14% in the quarter. All segments of our business reported strong revenue growth. Total funeral operating revenue increased 14.7% with same-store funeral revenue up 6.4%. Cemetery operating revenue increased 13.5%. Financial revenue followed with a good 4% increase.

We have long said that if Carriage produces high-single-digit revenue growth or higher, we will produce solid earnings per share growth and that in summary again is the case in the first quarter. 13.7% growth in revenue, 35.5% growth in adjusted diluted earnings per share.

Second, even better were our operating results with total field EBITDA up 20.7% for the quarter at a margin of 43.5%. Comprising these numbers, both funeral and cemetery field EBITDA growth was well in excess of their revenue growth and field margins of 41% for funeral and almost 35% for cemetery.

Third point, with our previously discussed performance increases we continue to control our expenses. Total overhead for the quarter was down $1.6 million at $8.6 million, almost a 16% decrease, and as a percentage of revenue is now at 13.5%.

Summarizing, quality results such as these we are reporting to you today are not easy to accomplish and represent the combined effort of all the employees of Carriage. For you the shareholders of our Company, you can see the high-performance culture and our team approach working in collaboration using our operating models to produce real results.

We are off to a very good start in 2015 and we look forward to reporting to you as we move throughout this year. Mel.

Thank you, Bill. After we finalized a major Board and senior management reorganization on November 1 of 2011, we then launched what we have called a five-year Carriage Good to Great Journey. Starting in 2012 was the theme Carriage Services 2012; a New Beginning.

We then challenged all of our field and home office leaders and employees to boldly seize the moment with high and sustainable operating and financial performance over the entire five-year period. We explained to each of our people that the market value of Carriage, i.e., our stock price, would follow their sustained high-performance over this five-year period complemented by acquisitions of the best remaining independents and the best strategic markets in the country.

We also explained how each business and each employee in each business and each employee in each home office support the partner, was important to the success of our Good to Great Journey as it only took $314,000 of incremental field EBITDA to equal $0.01 per Carriage share.

Now that we have finished the first quarter of the fourth year of our five-year Good to Great Journey, I am extraordinarily proud and genuinely humbled to report that all of our leaders and employees across the Company have responded to the challenge at the end of 2011, with high and sustainable performance that has led to our stock price rising from $5.60 per share at 12-31-11 to over $24 as we now speak.

I want to emphasize the major components of our earning power growth over the last 3.25 years have been broad and continuing throughout the 3.25 years, not just this most recently unbelievable first quarter.

We publish a five-year trend report that will be updated after this quarter in what we call our Company and investment profile. That will be included on our website. I encourage each one of you, if you are a long-term shareholder in Carriage, to go there and to get this document. Because it shows the same-store funeral, the margins, the acquisition funeral, the same-store cemetery, the acquisition cemetery, the financial side and the overhead and the capital structure items below.

So we have grown the Company over this 3.25 year by 28% on total revenue. But we have more than doubled the adjusted net income and our adjusted diluted EPS has gone from $0.64 in the base year of 2011, prior to the Good to Great Journey beginning in 2012, $0.64 to the most recent for rolling quarters just finished of $1.45.

That is an amazing improvement over time that we expect to continue over the next year and three quarters. And after we finish this five-year theme at the end of 2016 we will have another one start so that the journey of Good to Great never ends and we never get there.

It is a good time to not only have a lot of fun if you're in the Company. So a lot of satisfaction to be a shareholder and to see others, especially those in the Company, and those of you out there who believed in what we were doing. With that I would like to turn it over to questions.

(Operator Instructions). James Fronda, Sidoti & Company.

I guess could you just talk a little bit about the gross margin improvement and I guess if you think that expansion is sustainable going forward? What caused it, was it the --?

I don't look at the SEC format. So I can't even comment on that. I look at our trend format.

Right. But in general the answer to the question is, James, that once our revenues go up we get a leveraging effect. I made a comment of that in my comments. So you would expect that our margins are going to go up as our revenues expand. So I think that is really the answer to the question.

It is better reflected, as Mel said, if you kind of look through the trend report. For example, like I reported that funeral operating revenue was up 14.7%. But then when you look at funeral EBITDA, it was up 23%. So we get a tremendous leveraging off of that.

Also for the Company as a whole, and again I will emphasize that like we were 13.7% growth in revenue and 35.5% growth in adjusted diluted earnings per share. The combination of that and other expense control in operating your business just create good margins when you run your business correctly.

Let a comment, is it, James? Okay. So you're talking about the SEC reporting format. I don't follow that. We went away from that. I personally don't think that's the thing to be looking at, that is why we created the kind of transparent reporting in our trend reports. That is what we look at. Now that is what I look at. But it does translate into a gross margin.

Now this is a seasonal business, this is for -- of the year. It doesn't mean every quarter will be this good either on the field margin level. But I will point out, Bill didn't mention this but for the first time in history the acquisition portfolio, which is businesses we've owned since January 1 of 2011, had a higher field EBITDA margin than our same-store portfolio.

What that says is over time we are buying bigger businesses in bigger markets. And those will by definition have more margins to them and more leverage of the revenue that you get through the business.

Right, okay.

Over the next five years you are going to see more of that. So that translates into a higher gross margin on the funeral side. On the cemetery side, I mean we have been getting better for four years. But we continue to get better at pre-need property sales and that translates into higher margins. So the good news is we are keeping our costs down at the overhead level, although we have gotten better in every support department, better.

Right, okay. All right, thanks, guys.

(Operator Instructions). Joe Janssen, Barrington Research.

Just on the rolling four quarter guidance, the adjusted EPS of $1.55 to $1.59 -- excuse me, outlook, not guidance. I am just curious at this point given the operational efficiencies that you're getting out of the business, the new properties that are coming online, as well as some of recently acquired businesses, is there any embedded assumption in there for additional acquisitions through the end of the year?

Yes, there is.

And then -- okay.

For sure (laughter).

I guess that leads me to the next question. In your prepared remarks you didn't talk much about this in terms of the pipeline and the acquisition. And your general comments are it is usually robust and solid and the pipeline is full.

Are you -- anything near maybe in the finish line -- and I know a lot can change between now and then -- but maybe in terms of announcement on the acquisition front maybe in the next three to six months.

Look, this is Mel. And I have been out there; I just got back from hunting big deer and maybe an elephant or two, that's what we call the big business. Dave DeCarlo and I are involved in hunting elephants and big deer and Dave has finished his team, which is an awesome team and they are doing awesome work.

We are very focused on the right areas of the country that will be -- I can just give you a few examples, Texas, Carolinas, in and around New York City, down through there. Other places, Pittsburgh, other major markets. And I have never felt better about the quality of the activity. I have never felt better about over the next few years what that will mean to the Company.

But by definition, when you start the romancing the best of the remaining independents in the country, it takes a while to fall in love and then get engaged and then to have a happy marriage. And it is not the kind of thing you can easily -- easily plan by quarter. I know that creates challenges for our analysts. I feel your pain. But I am 100% confident about where we are headed with our acquisitions. Dave is here and he can comment on his own.

Yes, I feel the same way. I am very comfortable with the pipeline and the relationships that we are developing, especially in these major markets.

I am spending more and more of my time there because, look, it's the operations, how am I going to help there? I will just mess it up.

I am just curious -- I mean your average transaction in terms of sales has been between $2 million to $3 million. You use the term elephant. I am just curious; maybe quantify what an elephant would look like in terms of sales.

It is a multiple of that -- many.

Hi, guys, it is Alex. I am standing here over Joe's shoulder. I just have a question or two also about the rolling fourth-quarter outlook. A lot of commentary in the press release about what you are doing on the operations side, which is great.

You are improving the profitability within cemetery, improving the profitability within funeral homes. You're green fielding funeral homes and you are looking to add cemeteries where you already have strong funeral home operations.

So all those things act together to improve internal growth above what the industry grows, and we all know the industry is a slow growth industry. We also know that embedded in your guidance is some assumption for acquisitions not yet announced to get there.

I am just wondering with the outperformance of the organic operation, does that sort of -- because you didn't change your guidance, is that sort of by definition then say that you have a lower assumption from the number of -- on the number of acquisitions within that rolling four quarters or the dollars -- the sales dollars you bring in through acquisition?

No, it does not mean that.

Okay.

The thing, Alex, is this -- in going back and looking at the Company from January 1 of 2012 -- and I have all these numbers, I just don't have time to go over them on a call. But we looked hard at this. And we have grown the earning power of the Company about half -- about half from internal.

Businesses, both funeral homes and cemeteries and the financial side, we have grown revenue $10 million over this 3.25 year period and we have grown the EBITDA by $10 million, 1 for 1. That is a lot of EPS, over $0.30 a share from (inaudible).

If you look at the acquisition side, it is about the same. So it is about a 50-50 contribution roughly over that period of time. We are 100% confident that we can grow at 8% a year on revenue including acquisitions. But to quantify it on a quarterly basis, it is in our view -- I don't know how to help you with that. But it is going to be there.

It is going to be there. My goal (multiple speakers) and Dave's goal is that that should be on the low side. But why go promise it on the front end, why not just go do it?

Got you. So -- and I don't doubt that. And you are right, it is a challenge to model quarters in this business (multiple speakers).

(Multiple speakers), Alex, and you start looking at deals and it makes you think differently and I don't think it is the wise thing to do.

No, I hear you. My point was simply not that -- there's thousands of targets out there for you, not that you are going to take it down over the long-term. I am just saying I used to always assume that you had to make six to eight acquisitions a year (multiple speakers).

[That is not true].

You are right. So my assumption is wrong.

Yes, it is wrong.

Okay, so (multiple speakers).

If we get a big order we might make one a year that is even better than the eight.

There is no doubt about it, that reduces the risk for the investor if we are less reliant on acquisitions because the timing and magnitude is difficult to predict --.

Let me mention a thing here. I am a big student of Warren Buffett. Huge. And I have learned that patience is a virtue. And when you are patient and you are working on identifying the very best remaining businesses in America and they tend to be bigger and bigger markets.

When you get one of those it allows you not only to have huge earning power from what you bought, but to deploy additional capital in that business to grow it over time.

I mentioned that in this press release for a reason. That is what we want to do with this Company is have the allocation of our capital go to businesses that we can grow in a more rapid pace than our existing portfolio of businesses, most of which was acquired in the 1990s.

That is not thousands of candidates. It might be 100 candidates. And those 100 candidates are really good ones, we know who they are, we are talking to them as we speak, there will be others that are what I call bread-and-butter that make up the six to eight.

But it is going to be a combination over time and in my view it will be more than what you could think or more than what we have said we will do. So patience (multiple speakers) is a huge asset.

No, I hear you once again. I think this is a productive conversation because we do have a revision in the acquisition methodology -- your words in the press release. And I think it is great -- you have always gone after the best of the best. But it sounds like you are even going bester.

No, I am sorry, we haven't explained this. The methodology has been changed so we don't waste time on deals that don't qualify and should not ever even get to the stage of financial analysis and return on invested capital. We kick those out early and don't waste our valuable time on them. So the methodology of the selection, the ones that make it through, has not changed. But there is a lot of stuff you get thrown at you here that's junk.

Good. Well, that is very helpful. That answers my question. Thank you very much and good luck.

Nicholas Jansen, Raymond James.

Two questions from me. First, regarding the convertible note instrument. I don't believe your share count assumption for your EPS guidance reflects the potential dilution there. And with the stock where it is today, looks like we might -- starting to get into that phase of where there could be dilution.

And considering you are having pretty strong free cash flow and maybe the cadence of M&A is going to be more selective, is there anything that you can do to maybe minimize the level of dilution that could be coming if the stock continues to rise? Thanks.

Yes, net, obviously we are looking at that. We have two forms of dilution and they are about even. One is from the convert; another is from the options that we issue to obtain this -- our result from this performance to our employees. It is about even. So I think it was a little over $600,000 in this quarter and it is split pretty much even.

So we will be looking at that. Obviously the way the convert works, this convert, obviously the only dilution we have is after we reach and go into the premium phase of that security. So it will only go up if the stock price goes up. The other -- we are looking at this point and I ask and have talked to Mel personally about this within the last week. So, yes, is the answer.

Yes, we are looking at that seriously. We don't want the share count to go up.

Great, thanks, that is helpful. And then secondly regarding one of your major areas of focus for 2015 on cemetery, pre-need property sales. Historically you haven't really necessarily talked about pre-need as a large part of your strategy.

And maybe just want to get a little bit more color on kind of your views on property sales and kind of where we are today and where they could be two to three years from now? Thanks.

Right. Well, I think number one, in cemetery that is part of this capital allocation that Mel has been talking about. I really believe that what we have done and what we are going to be doing over the next few years is making sure that we have enough property and the right property to sell. So we are reinvesting back into our cemetery to get in that particular basis.

And we are also looking at how this revenue -- how you would set it up as far as that -- so that the resulting sales do benefit the Company the most. So when you look at a cemetery company, and I look at the first quarter. And having been in this business I guess since the inception of this business, in this first quarter our cemeteries as a whole did 36.5% margins. I mean, that is almost phenomenal, that is really unreal.

And when we look at same-store -- I am just going to put this out. Actually our same-store EBITDA growth exceeded our same-store revenue growth. And that is because we were able to have better products to sell in our good cemeteries. And I think that is something that we haven't done before simply because we were a different size Company in a different financial phase than we are today.

So I think that cemetery -- and I will say this, our people are getting very good at running cemeteries. And I am proud to be here working with them in that regard. So I think you are going to see some continuation in that. I don't know whether we can hold the margins exactly where they are today. But I promise you, I think we will be a good performer in cemetery.

Thanks for the color, guys. Nice job.

Thank you. And I am showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.

Whoa, whoa, whoa, wait a minute, that's not true. Are you there?

Yes sir, everybody is connected.

All right, look, we never end a call. If I am asked every year when we do self appraisals with all our leaders and all our -- across the Company what one thing do they want from me. They want me to keep calling out the high-performance heroes on our conference calls because they all anticipate whether they made it or not. We have learned recognition is the greatest human motivator of all. And I am very proud to announce our first-quarter performance heroes for 2015.

In the East Region: Jason Higginbotham, Lakeland Funeral Home, Lakeland, Florida; Curtis Ottinger, Heritage Funeral Home and Crematory, Chattanooga, Tennessee; Chris Chetsas, Cataudella Funeral Home, Methuen, Massachusetts; Deana Kelly, North Brevard, Titusville, Florida; Patrick Shane, Jacob Shane & Son, New Orleans, Louisiana, that is a new business we acquired from SEI; Bill Martinez, Stanfill Funeral Home, Miami, Florida.

In the Central Region: Jeff Hardwick, Bryan & Hardwick Funeral Homes, Zanesville, Ohio; Andy Shemwell, Maddux-Fuqua Funeral Home, Hopkinsville, Kentucky; Mark Ratliff, Carman & Robinson Funeral Home, Flatwoods, Kentucky; Kyle Incardona, Hillier Funeral Home, Bryan, Texas, he opens a fabulous new place two days from now, or not -- today, today; Mark Cooper, Rose Hill Cemetery, Corpus Christi, Texas.

In the West: Nathan Stifler, Bunkers Mortuaries, Las Vegas, Nevada; Matthew Simpson, Fry Memorial Chapel, Tracy, California; Scott Dahl, Hennessy Funeral Home, Spokane Washington; Steven Mora, Conejo Mountain Funeral Memorial Park, Camarillo, California; Nicholas Welzenbach, Darling & Fischer Funeral Home, San Jose, California; Teri Shotkoski, Cloverdale Funeral Home, Boise, Idaho; Alan Kerrick, Dakan Funeral Home Chapel, Caldwell, Idaho; and Valerie [Hodgkin] Silva, who was also a high-performance hero we did not call out in the fourth quarter but also repeated in the first quarter, Los Gatos Memorial Park, San Jose, California.

Thank you all for listening and we look forward to reporting and -- our second quarter. Thank you.