Carriage Services, Inc.

Good morning, ladies and gentlemen, and welcome to Carriage Services' third quarter earnings call. At this time, all participants are in the listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. Thank you. As a reminder, this conference call may be recorded. I would now like to turn the conference over to your host, the Carriage Services Leadership Team.

Thank you, and good morning, everyone. This is Vicki Blinderman, the Chief Accounting Officer. Today we'll be discussing the company's third quarter results for 2020. A related earnings release was made public yesterday after the market closed. Carriage Services has posted the press release, including supplemental financial tables and information on the investor's page of our website. This audio conference is being recorded, and an archive will be made available on our website later today through November 2nd. Replay information for the call can be found in the press release distributed yesterday. On the call today for management are Mel Payne, Chairman and Chief Executive Officer, Ben Brink, Chief Financial Officer, Peggy Chapeau, Vice President of Operations and Acquisitions Analysis, and Steve Metzger, General Counsel. Today's call will begin with formal remarks for management followed by a question and answer period. Before we begin, I would like to remind everyone that during this call, we will make forward-looking statements. Certain statements on this call, including financial estimates, assumptions, or statements about our plans, future results, expectations, or beliefs, may constitute forward-looking statements under applicable securities laws. We make these statements on the basis of our reviews and assumptions regarding future events, business performance, and other factors at the time we make them, and do not undertake any obligation to provide updates or revise any of these forward-looking statements after the date of this call, whether to reflect the occurrence of events, circumstances, or changes in expectations, except as required by law. These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from the results expressed or implied in light of a variety of factors, including factors contained in our annual report on Form 10-K, quarterly reports on Form 10-Q, and in our other filings with the SEC. Please note that a reconciliation of non-GAAP measures that may be referred to on this call to equivalent GAAP measures can be found in our earnings press release that was issued yesterday and on the company's website. And with that, I'd like to turn it over to Mel.

Thank you, Vicki. Today I won't say a whole lot. There's a lot of information in our earnings release for this quarter. And the earnings release is anything other than another quarter release. It's all about a company. And I wanted to simply state that we do a lot of communications beneath the covers of what is reported to the public. I would like to share. a little of that with everybody on this call. So this went out to every managing partner, every sales manager, every field support leader, directors of support, and every employee and leader in our Houston Support Center. This went out about 5.24 p.m. yesterday with our quarterly nine-month release. And I quote, I have never in my life been more honored and inspired by anyone or any group of people than I have been by the amazing leadership and performance of our managing partners and sales managers and our funeral and cemetery portfolio businesses over the last nine months and especially the last six months after the coronavirus pandemic shocked a country with both a continuing health and economic crisis. The same is true for all the support leadership and teams who enabled all of our frontline coronavirus battle warriors and their courageous teams of employees to remain in the battle of serving their client families and communities when it counted most. On behalf of Carriage's executive team and board of directors, thank you for your heroic service and for making Carriage a very special place for very special people to unite in a common cause on noble work for so many client families and communities. Attached is our third quarter and nine months earnings press release. It was truly humbling to write about what you have achieved this year, a year of record performance by a company full of high performance heroes. Let's finish the year strong, all the best, Mel. Now when this goes out, it generates a lot of attention. We do a lot of communication and recognition in the company. So we'll have so many people from Carriage across the country on this call. So I know I'm speaking to them as they hear this. And now they're hearing it, not just reading it. And I often get many responses. to these kinds of communications, but I'll just read you one. It's from Lauren Forresteri this morning at 5.23 a.m. Mel, thank you for your words of encouragement and enthusiasm. We have been working hard and keep pushing for revenue enhancement while serving the families with higher flexibility and awareness to each need related to the pandemic. It has been wonderful to have the support of all members within Carriage Services. We truly are united. I am looking forward to the call. Lauren is the daughter of Frank Forresteri. I'm sure they're on the call. The Forresteri family business is the business in Springfield, Massachusetts. They joined Carriage and became our partners in October of 98. Frank was one of the original Standards Council members And he had to rotate off a couple of years ago when he passed the leadership managing partner role to his daughter, Lauren. Every Thursday, Lauren, we hear about what you and your team is doing. Not always on a Thursday, but the main subject over the last weeks getting ready for this call is where are we gaining market share? How much of this is COVID only and how much of it is market share? And I will tell you, Lauren and Frank, we know who you're growing the business, how you're growing the business, and even when the outbreak slowed, you didn't. We know where the business is coming from. And I'm not going to mention their name. It's a big business, but it's getting smaller by the month. So thank you and your team for what you do, because this is the exact example of what's going on broadly across Carriage. With that, I'd like to turn it over to Ben. put a little meat on the bone of what transformative really looks like.

Thank you, Mel, and thank you to everyone who has joined us on the call today. Our extraordinary third quarter performance is a reflection of a company that is completely aligned at all levels to our 2020 theme of transformative high performance, and the continued momentum we see in all areas of the company is the carriage high performance flywheel in full effect. These results also demonstrate the strength of our decentralized entrepreneurial standards operating model the quality of our managing partners and their teams, and our ability to rapidly innovate and adapt in the face of unprecedented challenges brought on by the coronavirus crisis. We are excited to share these results with you today. For the third quarter and year-to-date results, all of our reported operating and financial performance metrics were records. As I review our results, it is important to recognize the full impact of the operating and value creation leverage dynamics that allow Carriage to leverage organic revenue growth into higher growth rates in total field EBITDA, adjusted consolidated EBITDA, and adjusted diluted earnings per share. For the third quarter, we earned $84.4 million of total revenue, an increase of 27.6%, $37.3 million of total field EBITDA, an increase of 45%, with total field EBITDA margins improving 530 basis points to 44.2%. Adjusted consolidated EBITDA improved 10.4 million, or 60.1%, to 27.7 million, and our industry-leading adjusted consolidated EBITDA margin improved 670 basis points to 32.8%. Adjusted diluted earnings per share increased an impressive 82.1% to 51 cents in the quarter. Year-to-date, total revenue has increased 17.9% to 239.4 million, Total field EBITDAs increased 24% to $100.6 million. Total field EBITDA margin increased 200 basis points to 42%. Adjusted consolidated EBITDA increased 32.3% to $75.9 million. Adjusted consolidated EBITDA margin increased 340 basis points to 31.7%. And our adjusted diluted EPS increased 34% to $1.30 for the first nine months of the year. At this point, I will turn the call over to Peggy Chappelle, Vice President of Operations and Acquisition Analysis for a review of our operational performance. Peggy.

Thank you, Ben, and good morning, everyone. It is truly an honor and a privilege to have the opportunity to share the insight on the hard work, creativity, and pure grit of our managing partners, sales managers, and their teams. When COVID started to hit our country, we wanted to first and foremost ensure the safety of our people, and give them peace of mind so that they were still able to provide outstanding service to our families. Sean Phillips, regional partner, led the charge and centrally gathered an abundance of PPE here in Houston to disperse to our funeral homes and cemeteries across the country. This gave our managing partners and their teams one less thing to be concerned about and more time to focus on serving every family while still maintaining CDC guidelines. Because our managing partners are true owners of their businesses, they remain focused on high performance as it pertains to not only revenue growth, but also EBITDA margins. In 2019, some adjustments were made to our being the best incentives as it relates to margins, further motivating our managing partners to produce higher margins. So when the uncertainty of COVID hit, there was immediately an acceleration of expense management from our intuitive managing partners. Funeral home same-store net revenue was up 3.3% September year-to-date, while same-store field EBITDA was up 9.6%, propelling the September year-to-date funeral home same-store margin from 38.4% to 40.7%, an increase of 230 basis points. Our managing partners and sales managers also made great strides in Quarter 3 on cemetery sales. After finishing quarter two behind $1.9 million in cemetery same-store operating net revenue, largely due to the cancellation of our annual Ching Ming event, we were able to close the gap in quarter three to within $250,000 operating net revenue and bring our same-store margins from being behind $1.6 million in quarter two to being flat on a year-to-date basis. In quarter three, we continued to see an increase in sales at our three new cemetery acquisitions increasing operating net revenue 28.7% from Q2, improving margin of 35.4% in Q2 to 44.7% in Q3, bringing the year-to-date margin to 38.1%. We continue to see accelerated integration of our four large acquisitions that were made at the end of 2019 and in January of 2020, even amongst a pandemic, which has proved to make our partnership with these businesses even stronger. The improving results since the first quarter reflects the great work that is being done by the managing partners and their teams at each of these businesses with the continued support from our operational leadership team. This is just the beginning of the higher performance at these four large strategic acquisitions, which will continue to grow and translate into even higher margins into next year and many years to come. And the most important thing to note is the power of our decentralized model, which gives our managing partners the ability and freedom to make decisions locally as it relates to each of their markets. So as guidelines and restrictions were put in place, they were able to quickly adapt and make the necessary adjustments to serve our families in safe and creative ways. At the beginning of 2019, we rebooted our standards and added two key components, an intense focus on compounded net revenue growth and we introduced a new standard, the Service Guest Experience. The Service Guest Experience standard was something new to everyone, but the goal was to truly differentiate ourselves and create even more value and personalization for each of our families. The creative juices began in 2019, but the level of creativity that has been stimulated during this pandemic with the CDC guidelines and restrictions in place has been simply remarkable and amazing to witness. our people have found more unique ways to give families what they need, a service to honor the life of their loved one and the important time to grieve with their family and friends. Even if that meant doing visitations in small groups or having people RSVP for a service or conducting drive-thru visitations or holding services outdoors. In addition, we increased our number of funeral homes that offer live streaming from only 30 to now 125 in an effort to overcome restrictions and give our families that don't feel safe attending a service in person an opportunity to participate in the service virtually. We believe that these creative ideas won't go away, but have become the new way we show value to our families. We knew that our managing partners were true entrepreneurs, but that spirit has really shined through during this pandemic. They continue to grow market share above the lift we have seen from COVID cases. A vast majority of our same-store funeral homes had market share growth on a year-to-date basis, and approximately 75% of those businesses had market share growth beyond COVID. Due to early local restrictions on gatherings, we did see a dip in our funeral home averages starting at the end of March, the lowest point being in April. But with the inspiring and innovative ideas at our businesses, both our burial and cremation averages have been ticking up ever since. On a same-store basis, we saw an increase in our burial average of 3% in the third quarter versus the second quarter and an increase in cremation average of 6.4%. We believe this upward trend in average will continue the rest of this year and into next year. And when talking about cremation average specifically, we saw an increase in our cremation calls with the reboot of standards in 2019, which put more emphasis on net revenue growth. At the end of 19, we put more focus on converting those cremations into a cremation with some type of service. We remain dedicated on taking time with each of our families to educate them on what is possible when choosing cremation as a disposition. And cremation is just that. It's a type of disposition. It does not mean there is no service or celebration of life. We have heard so many great stories of how our funeral directors take the time to connect with each family and simply listen as the families share stories and interests about their loved ones. This allows us to provide unique and creative ways to honor them and share that with everyone that attends the service, transforming a sad occasion into a lasting memory. I would like to share just a few examples of how our people incorporate unique touches to every service. One of our businesses organized a parade for someone down Main Street because they always wanted to have a parade in their honor. We had another business create replica tickets of their favorite sports teams to hand out at the service. And another business that made laminated miniature vinyl records for a former music producer for all who knew him to have a reminder of the life he was so proud of. and another business that had the unique idea to give a grieving husband the opportunity to apply the insignia of their family brand on a wooden casket that would be the final resting place for the love of his life. These things may seem small to someone looking in, but they are a touching moment for the family that has just lost someone very close to them. This is how our people make such an impact and touch not only the family that is grieving, but anyone attending the service. leaving a lasting memory so that when they are in the unfortunate position of losing someone close to them, they know who they can rely on to create that customized memorable service. And with that, I'll turn it back over to Ben.

Thank you, Peggy. Great job. The third quarter marked the first period of time where the full effect of the successful execution of our trust fund portfolio repositioning strategy was reflected in our reported financial revenue in EBITDA. As detailed in our press release, the work we did at the depths of the coronavirus market crisis positioned our trust fund portfolio for further upside capital appreciation and a significant increase in the amount of reoccurring annual income generated from the portfolio. The reoccurring annual income generated from our trust fund portfolio is currently $15.7 million, up from approximately $9.4 million prior to the execution of our strategy. Initially, this 67% increase in reoccurring annual income will primarily benefit our recognized revenue through our cemetery perpetual care trust, while increasing the value of pre-need funeral and cemetery trust contracts to be recognized over the long term. For the third quarter, financial revenue increased 44.5% to $5.6 million, driven by a 111% increase in cemetery trust earnings. Financial EBITDA increased 51.6% to $5.2 million, and financial EBITDA margin increased 440 basis points to 93.8% compared to the third quarter of last year. Next year, we expect financial revenue to be between $22 and $23 million and financial EBITDA of approximately $21.5 million, an almost 50% increase from our financial EBITDA prior to the execution of our repositioning strategy. Going forward, this higher level of reoccurring financial revenue and EBITDA will be significantly accretive to our adjusted consolidated EBITDA and adjusted free cash flow margins that are reflected in our updated three-year milestone scenario. Overhead increased 1.1 million. While overhead is a percentage of revenue, the measure of our ability to leverage our overhead and support platform fell to 11.8 percent in the third quarter. All of the increase in our overhead for the quarter was due to an increase in the incentive compensation accruals, primarily for our funeral home and cemetery being the best annual incentive awards. We are now fully accrued for a higher field incentive compensation at the end of the quarter. As Peggy mentioned, an important turning point for Carriage was the update to our standards operating model in late 2018 to focus on three-year annual compound local revenue growth driven by market share gains as we deliver a high-value personal service and sales experience to every family we have the opportunity to serve. Our managing partners and their teams are able to share in the local profits of their business with no overhead allocations when they achieve at least 50% of their annual standards through our Being the Best incentive program. I'm looking forward to continued growth in our field incentive compensation accruals in the future. Our strong operating performance led to an extraordinary free cash flow generation and debt reduction in the third quarter. For the quarter, our adjusted free cash flow increased 120.3% to $27.6 million, and our adjusted free cash flow margin expanded 1,370 basis points to 32.7%. The continued expansion of our adjusted free cash flow margin represents a greater percentage of revenue generated as cash capital that is available to responsibly grow the intrinsic value of carriage. We were able to pay down $37.5 million in debt during the third quarter, equal to 7.4% of our debt outstanding at the beginning of the quarter. This included the repurchase of $3.6 million of our 2.75% subordinated convertible notes and privately negotiated transactions. For the year, we have paid down $63 million of debt, which is equal to 11.8% of our total debt outstanding post the close of Oakmont Memorial Park and Mortuary on January 3rd. We are currently well ahead of our previous expectations for debt reduction, and we now expect our total debt outstanding to be approximately $460 million by the end of the year. Our net debt to pro forma adjusted consolidated EBITDA fell to 4.8 times at the end of the quarter due to the accelerating growth in our adjusted consolidated EBITDA combined with a large amount of debt reduction through the quarter. We were able to reduce our leverage on an absolute basis by over one full turn during the third quarter. The rapid and substantial decrease of our leverage ratio demonstrates not only our ability but our commitment to operate carriage at a lower leverage profile now and into the future. We expect our leverage ratio to be approximately 4.5 times by year-end and below four times by year-end 2021. During the third quarter, we divested six businesses for total proceeds of $7.3 million. We currently expect to sell approximately 20 businesses or excess real estate for total proceeds of around $17 million and be substantially complete by the time we look to execute a refinancing transaction in the second quarter of next year. These transactions will be accretive to our leverage profile and will incrementally improve the organic growth rates and field margin profile of our same-store funeral home segment. Our debt repayment in the quarter was also helped by the receipt of a $7 million federal tax refund related to tax law changes made in the recently passed CARES Act. We expect to receive an additional $1 million refund prior to the end of the year and will be a full cash taxpayer again in 2021. As we have previously stated, our primary focus for capital allocation over the next three quarters will be the continuation of the significant progress we have made to reduce total debt outstanding and reduce our debt to EBITDA leverage ratio. Our rapidly improving credit profile positions CARES to execute a refinancing transaction of our existing 6.625% unsecured high-yield notes when they become callable on June 1st of next year. We expect this transaction to reduce our interest costs by a minimum of 200 basis points, reduce our cash interest costs by a minimum of $8 million, and add a minimum of 29 cents of earnings per share on an annual basis. This transaction will also lead to a material improvement in our cost of capital. These assumptions are conservatively included in our updated three-year milestone scenario and in our updated rolling four-quarter outlook. After the completion of this refinancing transaction, Carriage will have the maximum financial flexibility to pursue a range of value creation capital allocation opportunities including partnering and acquiring the best remaining funeral home and cemetery businesses in the country who will look to Carriage as the succession planning solution of choice within our industry, invest in strategic growth projects throughout our portfolio, opportunistically repurchase our shares, all while remaining at a more modest leverage profile as the vast majority of these will be funded by our growing and reoccurring free cash flow. The final piece of our capital allocation strategy will be to steadily increase our dividend over time. We are pleased and excited to announce the decision by our Board of Directors to increase our annual dividend by 5 cents to 40 cents per share. This increase marks the second 5-cent increase in our dividend since the onset of the coronavirus crisis and should be viewed as an additional sign of confidence in our future performance. At 40 cents per share, our annual dividend payments will be $7.2 million per year and represent approximately 10% of our projected 2022 adjusted free cash flow. Beyond 2022, we will target a dividend policy of approximately 10% of our adjusted free cash flow and a 1% dividend yield on the market price of carried shares. We are also pleased to announce an updated rolling four-quarter outlook and updated three-year milestone roughly right scenario that both show a significant increase in our performance expectations through 2022 and beyond. We expect to achieve important company performance milestones in of over $100 million in adjusted consolidated EBITDA, an industry-leading 32% adjusted consolidated EBITDA margin, and earn over $60 million of adjusted free cash flow this year, whereas we previously expected those milestones to be met in 2021 and 2022. We also now expect to earn between $1.80 and $1.85 in adjusted diluted earnings per share this year, growing to between $2.15 and $2.25 in 2021, and growing further to $2.48 to $2.60 in 2022 when we have the full-year effect of a lower-cost capital structure. We have increased our performance expectations in all major categories as we see continued growth in local market share in both our funeral home and cemetery segments at higher and sustainable margins, improved pre-need cemetery property sales, continued performance improvement from our four recent strategic acquisitions, and the full impact of the increase in financial revenue and EBITDA from our pre-need trust fund portfolio repositioning strategy. We view these performance expectations as readily attainable through 2022 and believe we have multiple opportunities to exceed these expectations through continued improvement of our existing portfolio and through savvy and disciplined capital allocation post a refinancing transaction. And finally, I'd like to take this opportunity to echo the sentiments of our entire leadership team While the coronavirus crisis impacted our results in a variety of ways, our third quarter and year-to-date results are the byproduct of the tremendous work by dedicated leaders and teams across our entire company over the past two years. We cannot thank them or recognize them enough for their efforts. We look forward to a strong finish to this year and achieving the goals we've set out before us in the future.