Carriage Services, Inc.

Good day, and thank you for standing by. Welcome to the Carriage Services first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steve Metzger, Senior Vice President and General Counsel. Please go ahead.

Thank you, operator, and good morning, everyone. Today we'll be discussing our first quarter results. Our related earnings release was made public yesterday after the market closed, and we have posted this release, including supplemental financial information, on the investors' page of our website. This audio conference is being recorded, and an archive will be made available on our website later today. In addition to myself, on the call this morning from management are Mel Payne, Chairman and Chief Executive Officer, Ben Brink, Senior Vice President and Chief Financial Officer, Sean Phillips, Senior Vice President and Regional Partner, Peggy Chapeau, Vice President of Operations and Acquisitions Analysis, Paul Elliott, Senior Vice President and Regional Partner, Chris Manso, Senior Vice President and Regional Partner, and Carlos Quesada, Senior Vice President of Sales and Marketing. Today's call will begin with formal remarks from management followed by a question and answer period. Before we begin, I'd like to remind everyone that during this call we will make some forward-looking statements. Any comments made by our management team that state our plans, beliefs, expectations, or projections for the future are forward-looking. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such statements. These risks and uncertainties include but are not limited to both factors identified in our earnings release and those in our filings with the SEC, both of which are available on our website. During this call, we'll also discuss certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to the appropriate GAAP measures can also be found in our earnings press release as well as on our website. Thank you for joining us this morning, and now I'd like to turn the call over to Mel.

Thank you, Steve. This is the first time in the history of Carriage that we have had all eight executive team members in a room available for questions. It's been almost 30 years, a 30-year anniversary will be June 1, since I co-founded Carriage. And if you have not taken the time to read my shareholder letter from 2020 titled A Tale of High-Performance Transformation, I highly recommend that you do so. It's a long shareholder letter, but it's not full of fluff. It's full of content. and it's full of substantive data, history, and if you don't get a sense by the end of it and after reading our first quarter why I constantly say at 78, my kids and I own 10% of the company, and I wish I owned more, and I don't own anything else. If you're interested in an investment in our company, whether in the bonds, or in the equity, you really should read the shareholder letter. It'll lead you to ask a lot better questions when you talk to us the next time. And if you ask better questions, you can get more informed and build greater knowledge about why this is a great investment. And it will be for the next five or 10 years. Today, we'll have formal remarks by Ben first, followed by Sean Phillips. Sean, as I mentioned in the Chevrolet letter, I cover the entire organizational structure, all the way down from the board, the executive team, regional partners, the director of support, operations, sales, managing partners, sales managers, Peggy's team of brilliant soaps. Everything is covered in there, all of our Houston Support Center. So you get a real good sense of how Carriage is organized. So, Sean... is regional partner for the Central, but he's also the point person for any new candidates that are thinking about succession planning and joining carriage. So if you have questions about acquisitions today, those questions will first go to him, and then maybe I'll elaborate on something additional. And then Sean will turn it over to Carlos. There's a lot in here about momentum in our cemetery sales. There's a whole lot in the shareholder letter about that. In particular, the four new acquisitions we made at the end of 19. So there's just a lot of substance. We are a whole lot more than a funeral home and cemetery company with almost 350 in sales over the last 12 months. If you want to understand why I refer to us as a high-performance culture company that just happens to be in that industry, there is a lot of reading and material for you to get to that point of understanding, and we look forward to discussing that with you. So I'll just, from this point, turn it over to Ben.

Thank you, Mel, and thank you for everyone for joining us on the call today. Our first quarter operating and financial results were simply phenomenal and demonstrate that our teams across CARES are accelerating the high-performance flywheel consistent with our 2021 annual theme. We view these results as proof of concept for the high-performance ideas we have here at Carriage and are indicative of the incredible earnings power potential of our business. The continued performance by our managing partners and their teams validates our strong belief in the concept of first who, then what for every role here at Carriage. I join the rest of our leadership team in thanking them for all of their tremendous work and dedication to their businesses and their communities over the course of the past year and I remain incredibly excited to see them accelerate our high-performance flywheel even faster in the years to come. Now, on to the record-setting first quarter results. For the first quarter, our total revenue increased 24.7% to $96.6 million. Total field EBITDA increased 52.1% to $45.8 million, and field EBITDA margin increased 860 basis points to 47.4%. Adjusted consolidated EBITDA margin increased 51.7% to $34.7 million. Adjusted consolidated EBITDA margin increased 640% to an industry-leading 35.9% margin for the quarter. And our adjusted diluted earnings per share increased an incredible 131.4% to 81 cents per share. Our results for the quarter were driven by higher funeral home volumes in January and February, continued increases in our average revenue per contract in our funeral home segment. Like Mel mentioned, the strong momentum in our cemetery pre-need sales programs, margin management by our managing partners and their teams across all of our businesses, the continued successful integration of the four acquisitions we made at the end of 2019 and 2020, and an increase in financial revenue from our trust fund repositioning strategy executed almost a year ago. I will let Sean and Carlos expand on the individual drivers of high performance in their respective funeral home and cemetery segments in their comments. Beginning with our 2020 third quarter earnings release, we have published a detailed five-quarter operating and financial trend reports to provide greater transparency into the transformative high performance dynamics happening in real time across our entire company. In subsequent press releases and in Mel's shareholder letter, we have included additional performance data in order to provide investors greater insight into the drivers of our record operating and financial results. In our most recent release, the five-quarter trend report included additional granularity into the incredible performance and momentum we are experiencing with our entire cemetery segment by highlighting the actual number of pre-need property contracts sold and the amount of pre-need revenue. As evidenced in the five-quarter trend, transformative high performance is accelerating in all areas here at Carriage. We hope this additional level of transparency, not normally seen from a publicly traded company, will help investors not only better understand the drivers of our recent performance, but more importantly recognize the true earning power of Carriage and share in our excitement about the future earnings potential that we have. In the first quarter, our total overhead increased $5.7 million to $13.6 million compared to last year. Total overhead included approximately $2.5 million of severance and retirement expenses and expenses related to supporting our businesses during the coronavirus pandemic. The large increase in overhead in the quarter is entirely attributable to an increase in incentive compensation. With the uncertainties a year ago brought on by the emerging pandemic, we made the decision to significantly reduce incentive compensation accruals in the first quarter. In the following three quarters in 2020, we had to increasingly increase these incentive accruals, particularly for our field good-to-great annual incentive awards, as the performance within our businesses continued to improve rapidly. Our incentives for our managing partners and their teams are the best in our industry, and we believe strongly in the concept of pay for high performance. In 2020, we paid out approximately $5 million in additional incentive compensation compared to 2019, with $3.8 million, or 75% of that increase, being paid to our managing partners and their teams. The increase in the first quarter incentive compensation accruals mirror the increases we saw in 2020, with the majority of additional incentive compensation being accrued to our field businesses. To put it another way, the increase in incentive compensation accruals equaled approximately 16 cents for the first quarter, with 12 of those cents being accrued for our field compensation, and yet EPS still grew 131.4%. That is the kind of high performance we are happy to increase accruals for. Our discretionary pre-need trust funds had a total return of 8.3% in the first quarter compared to 6.2% for the S&P 500, and 2.4% for our 70-30 high-yield bond S&P 500 benchmark. The investment outperformance of our trust fund portfolio in the first quarter is a continuation of a very long-term trend that has translated into a 14.4% annual return since the beginning of 2009. The performance of our trust funds over the past 12 months is directly correlated to the execution of our trust fund repositioning strategy that began almost 14 months ago. As a result of our strategy, the annual income in our discretionary trust fund portfolio has increased 112% to $16.3 million and has generated significant realized yet primarily unrealized capital gains within our trust fund portfolio. The benefit of the increases in reoccurring annual income and long-term capital gains in our trust funds are recognized through our reported financial revenue and EBITDA, from the increase in earned income through our Cemetery Perpetual Care Trust in the current period, and from higher values of maturing pre-need funeral and cemetery merchandise and service contracts that we recognized at the time of death. In the first quarter, our financial revenue increased 34.1% to $5.7 million, while our financial EBITDA increased 38.2% to $5.3 million, primarily driven by the increase in earnings recognized from our Cemetery Perpetual Care Trust. These results were consistent with our stated expectation for financial revenue to be between $22 and $23 million for the year and financial EBITDA of a margin of approximately 94%. What is important for investors to recognize is that our trust fund performance and correlated increases in financial revenue and EBITDA are not one-time occurrences, but rather they are part of a 12-and-a-half-year track record of successful management of our pre-need trust fund assets. and that this higher plateau of financial revenue and EBITDA is sustainable for the foreseeable future. Our adjusted free cash flow in the quarter increased 115.3% to $27.1 million, and our adjusted free cash flow margin increased an incredible 1,180 basis points to 28.1%. For the last 12 months, our adjusted free cash flow totaled $84.5 million, and our adjusted free cash flow margin expanded to 24.2%. Last year, we introduced the adjusted free cash flow margin metric in order to demonstrate the amount of cash produced for every dollar of revenue that is available for shareholder value creation capital allocation. The strong operating performance we have experienced over the past 15 months has allowed us to pay down approximately $94 million of total debt and reduce our total debt to adjust the consolidated leverage ratio by 2.2 times to 3.8 times from a peak of six times post an acquisition of Oakmont on January 3rd, 2020. This incredible and rapid improvement in our credit profile demonstrates the tremendous cash earning power of our business and positions carriers to have the necessary financial flexibility to pursue all capital allocation opportunities after refinancing of our currency notes at a lower interest rate. The majority of our future capital allocation will be self-financed through our growing and recurring free cash flow, which will allow us to maintain a normalized leverage ratio of four times or below as a matter of policy moving forward. We are excited to once again provide an updated roughly right two-year scenario for 2021 and 2022 with increased ranges of financial performance across all metrics, We use the term roughly right here at Carriage because like all good forecasts, they are sure to be 100% wrong at some point. Importantly, though, our continued operating performance and the momentum we see across our portfolio gives us the confidence to increase our 2021 ranges for adjusted consolidated EBITDA to $112 to $118 million, increase our expectation for adjusted consolidated EBITDA margin to approximately 32.5%, and increase the range of adjusted diluted earnings per share to to $2.45 to $2.55. For 2022, we have increased the performance ranges for adjusted consolidated EBITDA to $116 million to $122 million, adjusted consolidated EBITDA margin of approximately 33%, and adjusted diluted earnings per share of between $2.60 and $2.80 a share. We expect normalized pro forma adjusted free cash flow to be $75 million in 2022 and grow from there. While there remains much uncertainty regarding the coronavirus and the ongoing vaccination campaign and the impacts it will have on the death rate and, in particular, our funeral home volumes, we believe we have a number of drivers within our control to achieve the ranges outlined in the updated scenario. These drivers include the increased cemetery pre-need sales that will lead to higher cemetery revenue growth rates at higher sustained cemetery field EBITDA margins, a continuation of local market share gains across our funeral home and cemetery portfolio, growth in the average revenue per funeral contract as we continue to offer more value to our families choosing cremation, and a sustained higher plateau of financial revenue and EBITDA. Our increased two-year performance scenario does not include any potential capital allocation in the form of acquisitions or share repurchases. Therefore, an additional driver of future earnings growth will come from higher returns on invested capital from continued discipline, capital allocation that is not included in these performance ranges, coupled with our anticipated lower cost of capital. Again, I thank everybody for joining us on the call today. To reiterate what Mel said, we publish a lot of information. It is available on our investor relations website, Mel's shareholder letter, Our recent 2020 and our most recent earnings release tell an incredible story of transformative high performance here at Carriage and lays out a clear vision for our future. I encourage everybody that is interested in our company to take the time to review, read, understand those documents. And with that, I will turn the call over to Sean. Thanks.

Thank you, Ben. As we look back on our 2020 and first quarter 2021 performance, I reflect on all the leadership changes that occurred to ensure we had the right who, managing partners, to drive our high performance bus. Since September of 2018, we've made 29 leadership changes in our businesses with our managing partners, which transformed the performance of the entire company and moved several underperforming businesses from Paris, low performance, to London, high performance. In the first quarter of 2021, Our funeral same-store revenue was up $10 million, or 21.4%, versus first quarter 2020. The primary driver of our huge increase in same-store funeral revenue in January and February was from the spike in COVID deaths. Some of the volume increased during this period, and last year has been market share gains throughout our funeral portfolio. In March, we started to see volume settle down to more normal levels, while our averages have continued to increase with a favorable variance of $259 or 5.2% increase in March this year versus last year. With this favorable variance, we see a shift in our revenue increase in March coming from improved averages. This trend has continued into April, which will yield a more favorable variance compared to last year, as we experienced our lowest averages in April and May of 2020. Funeral acquisition revenue was up $1.3 million, or 14.1%, in the first quarter 2021 versus first quarter 2020, while funeral acquisition EBITDA was up $1.2 million, or 37.6%, which reflects an impressive conversion rate of 92% of the revenue growth in the field EBITDA. This performance is a reflection of our tremendous progress and successfully integrating these businesses into our portfolio, which includes our four newest large strategic acquisitions. As to Ben's earlier comments regarding growth in field incentive compensation, what makes Carriage unique is how we reward outstanding performance in sharing the success of the business with the managing partner and their teams. Businesses that achieve above 50% of standards are eligible to participate in the annual Being the Best incentive program. As businesses achieve higher levels of performance, they are generously rewarded with this annual incentive. In 2019, 36% of our businesses were below 50% standards achievement. In 2020, with improved business performance, only 18% of our funeral homes were below 50% standards achievement. We saw similar trends continuing into the first quarter of 2021. Managing partners also have the opportunity to earn a five-year good-to-great long-term incentive. The first good-to-great journey class started in 2012 had 12 managing partners that earned this incentive. With the high performance in 2020 and into 2021, we have 30-plus managing partners that are on track to achieve a good-to-great incentive at the end of this year. In addition to these generous incentive programs, Managing partners also have the opportunity to earn Pinnacle of Service awards by achieving an average of 70% of standards over a three-year period or by achieving 100% of standards in a single year, which neither is easy to accomplish. On page 50 of the 2020 shareholder letter, you will see a list of 41 businesses that earned their 2020 Pinnacle of Service award. What you don't see are all the other businesses that stepped up their performance big time and accelerated their good to great journey, which has contributed to the flywheel momentum in a huge way. There are 22 businesses that would have earned Pinnacle but lacked a three-year tenure as managing partner because of all the leadership changes that were made across the portfolio in all three regions since September of 2018. I can personally attest After almost 14 years with Carriage, for the right person in the right seat on the high-performance bus, this culture will change your life both personally and professionally. It takes time to understand the uniqueness of Carriage. What you've seen over the last several quarters is the high-performance culture in action at its best during some of the worst times. When the pandemic started, we had no idea what to expect. What we did know is we worked hard in the months prior to COVID ensuring we have the right entrepreneurial leaders in place to drive this unique culture company that just happens to be in the funeral and cemetery business. In order to understand how unique Carriage is, you have to be curious. You have to want to discover more, have the ability to listen, learn, and just as important, have the ability and willingness to unlearn, observe, and ask thoughtful questions only after the proper time has been invested, in doing the research. At Carriage, we call it getting to the other side. The worst thing anyone can do is to think we are just like everyone else. The recent 50 page letter of love that Mel wrote truly outlines the dynamics of our people and our businesses. It's truly a proof of concept when leadership and high performance transformation dynamics are married together and create the flywheel effect. I will now turn it over to Carlos.

Thank you, Sean, and thank you all for being with us today. I introduced our transformational high-performance plan and our six sales drivers on February 17th when we had our 2020 earnings release. Today, I'm excited to present to you our cemetery portfolio performance update, where we have been able to sustain premium cemetery sales growth above the highest quarter in carriage history, which was in Q2 2019. This sustainable pre-need sales high performance is consistent in both same store and acquisitions. For example, during the period ending Q1 2021, our same store pre-need cemetery sales performance was 34% over Q1 2020, and a combined growth in same store and acquisitions of 58% over the same period. The sales success comes from both a focus on higher-end inventory sales and an activity-based approach that led to writing an additional 513 contracts, or 52% more than we did in Q1 2020. And while cemetery ad need revenues are starting to normalize, our pre-need sales performance is contributing to our very impressive total cemetery fuel EBITDA margin of 45.3%, which is at an all-time high. Our total cemetery operating revenue growth trend over the past five periods starting the first quarter of 2020 are as follows. Q1, 13.7 million. Q2, 15.6 million. Q3, 19.6 million. Q4, 20.2 million. And Q1, 2021, 21.6 million, which represents a compounded growth of 12% over these last five quarters. This amazing growth, combined with our unique operational leverage advantage, allowed us to convert 68.5% of cemetery same-store revenue growth into same-store cemetery-filled EBITDA and 78.3% of cemetery acquisition revenue growth into acquisition cemetery-filled EBITDA, making our total cemetery revenue growth to total cemetery-filled EBITDA conversion rate of 73.7%. Moreover, While these numbers are quite impressive, our transformational high-performance journey has just begun, and we are at the early stages of our plan. I have been traveling and visiting more locations where I have met amazing partners and found tremendous opportunity for our sales program and sales growth. Therefore, to give you a vision of the future and the reason why we know we're creating sustainable high-performance that is above anything else we ever had before, I will go over our main six sales drivers. followed by an update on the execution of our transformational high-performance plan. Our sales drivers are, number one, leverage technologies that enable our sales acceleration. Number two, introduction of performance-based rewards and incentives. Number three, a strategic capital allocation to high-yield cemetery products and offerings. Number four, sales growth through advanced planning strategies and robust marketing. Number five, deployment of lead generation programs while improving conversion ratios, and number six, a standardization of cemetery sales processes, policies, and systems. This is our progress on our sales drivers. Our CRM is now underway and we have a tentative pilot program launching to early adopters in August 2021. We have come to an agreement with Microsoft to provide tablets to our sales counselors that will accelerate sales success with fast, simple, and readily available information. We have implemented our new performance-based compensation plan in April 1st across the cemetery portfolio, aligning compensation with performance to target. And the feedback from the field, as well as our sales trend, has been very positive. We have designed new reports that highlight performance expectations that aligns to our new sales compensation program and provide sales counselors and sales leaders in where they stand to their target at any given day during the month. We have started the deployment of capital to projects that have been reviewed and approved by the executive team, where the return on investment accelerates while creating beautiful inventory that is appealing to the local community and their target audience at each of our cemeteries. With some markets starting to soften COVID-19 restrictions, we have launched our advanced planning strategy with a full focus in selling Queenie Cemetery through five new teams we created during the first quarter of this year, and with five more teams coming before year-end. This will result in additional sales production above the growth we will achieve from our legacy teams in family services, which are both included in our updated two-year roughly right scenario. We developed the process through a third party to deploy direct mailing campaigns in a fast, simple, and effective way, generating new opportunities to our sales teams. We launched our grassroots events program and created a standardized toolkit that enables sales leaders and sales counselors to attend community events and have a professional look that appeals to the consumer and engage with them while creating value in the significance of pre-planning. We have a standardized selling compensation, sales policies, incentive methodology, and we're in the process of standardizing park tours, giving families a different experience focused on service when they are looking at buying at one of our premier locations. We have launched Carriage Academy, which includes live classes. This is a full-week, eight-hour-a-day program for new sales counselors where they learn the foundation of cemetery printing sales and leave the class with tools and resources that will help them achieve their goals and dreams. From this program, we have successfully graduated our second class with a third one starting this Monday. Carriage Academy also offers a core program for existing sales counselors where we focus in the culture and skills that lead to sales success at Carriage Services. We have created a new sales presentation as well as our new version of our planning guide which we now call Caring Decisions Planner, and all the training that supports its success. We believe this new professional and systematic approach to sales will allow Caring Sales Counselors to engage families in a way that generates interest, builds trust, and mutual benefits. As we continue on our transformational high-performance journey and goal of creating sustainable opinion cemetery sales over time, we have achieved so much in just nine months, and there is much more to come. But for now, I can say that the sky is blue, our future is brighter than ever before, and that there has never been a better time to be with Carriage, and the best is yet to come. Thank you, and I will now pass it to Mel.

Thank you, Carlos. I will end the formal remarks just by going over a few things. In the shareholder letter and in Ben's earlier remarks, we are planning a refinancing. Whenever that is done, and it will be done. I think our cost of capital, according to Ben's recent work, will get down to as low as about 6.5%. Am I right, Ben? Yes. 6.5% cost of capital. So I've been teaching the 47 people, now 50. We put three more into the good to great two, five-year program. shareholder value incentive plan. I've been teaching them, as Ben has been doing, how to think about their jobs, individually and in teams, as we execute our three core models, standards operating, employee leadership, and strategic acquisition. And I've been teaching them how to calculate various price ranges of our shares based on performance metrics that, as we've explained, you should expect to trend up over time, notwithstanding the external environment. And if you look at the two-year scenario, 19 actual, 20 actual, the 12 months ending March 31, the 12 months going forward to March 22, all of 21, all of 22, it's not hard to see the transformation in these numbers. At the end of 21, I don't know what the COVID environment will be or not be, but at the beginning of 22, we will put out another scenario, even though we haven't finished the 22-year, but a total transformation. We will put out a five-year scenario, In this scenario, we will now be allocating our capital in different ways to create more intrinsic value per share. We'll put several scenarios in there, more acquisitions, less acquisitions, buying in shares, more dividends, keeping our debt right there at four or less. And we'll have the free cash flow to do it. And so the fun part of my job and Ben's job now is to just Educate our own people. Now, if in the process somebody out there in your world gets educated too, that's great, but that's not my primary motive. My motive is to get our own people educated about how they create value. I figure somebody out there will figure it out sooner or later by reading the materials Ben pointed to, because it's real and it's only going to get better from here. But even if you just look right now, And what Ben just said, you know, we got 70 million in there for free cash flow after the refinancing, but I just heard him say 70 to 75. Let's just take the midpoint, 72.5, and divide it by 18.2 million shares. That's free cash flow per share of $4. One of the reasons I love this industry, and it's Started this company at 48 years old. I mean, this is what I knew. I knew about all that stuff before I started Carriage. $4 in free cash flow per share with a share price of $37? I mean, I can do the math in my brain. That's the 10.8% free cash flow equity yield. Compare that to what we will have as a 6.5% cost of capital. Now, in a normal valuation of free cash flow equity yield, you would divide the free cash flow per share by your cost of capital or somewhere close to it. That would get you a current price or maybe a price a year from now of about 60 or 61. If you put a 20 times multiple on the EPS, you come up with 50. So somewhere between 50 and 60 is where I think we will get to. But this is what I'm teaching our own people. And why should I hold back by telling you the same? Because they all believe it. They all know we can execute it. And that's without even having done anything new with the capital we will have post-refinancing. And we're going to do new things that will add even more value. So the team here, and we've had very little input. I've had some. on the good to great two five-year shareholder value incentive plan. That's what everybody should be focused on. And you should be focused on why everybody here is excited about it. And as Ben said, read the material, get under cover. Come to see us. Come to see us. Go see our places. If you want to go find out, go see a place run by a standards council member. They're in on the plan. They're one of the 10 in the 50. You will learn so much about this company. We're an open book. There ain't nothing to hide because it's real and it's only going to get better. Now then, by telling you a funny story. I was almost late for this call. They were calling me, where are you, where are you, where are you? Well, if you read the shareholder letter, you get to the end and I acknowledge my wife for the first time. And my kids were home for Easter and And our son's 35, our daughter's 27. I'm an older dad. They keep me young, believe me. And my daughter read it first. You know, she got to the part about her mother, and she said, oh, Dad, that's wonderful. And then she said something else. She said, you know, Dad, if I had been you back then, and I'd spent three weeks in Paris restructuring a company's debt with a government French bank, wow, I would have flown home on Saturday, got dressed, and gone to that same club and just sat there all night myself. That's what I would have done. And you know what? I know she's right. She's really bright. All right, so as is my son. He called me this morning. Daddy, are you ready for the call? Are you ready for the call? I'm going, oh, I'm more than ready. Because when you've got a company like this, you don't have to prepare a whole lot. And so my daughter texted me. I was not even in the shower yet. Oh, my God, Dad. I read the release. It is so powerful. It is unbelievable. I don't know why anyone wouldn't want to own this whole company or at least a lot of shares. And that's why I'm not selling any of my 127,000.6 shares. You told me not to. I get it. I'm never selling. In fact, I might buy some more. Now, that's my kids. Kids. I don't think they're biased. I think they're just getting savvy about what is a good investment. And with that, I'll open it up for questions.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Our first question comes from Alex Paris with Barrington Research. Your line is open.

Good morning, everyone. Thanks for taking my questions and making time this morning, and congratulations on another great quarter. Thank you, Alex. What's this? I think it's the fourth consecutive quarter of beat and raise, and Carriage Services' performance is now becoming as certain as death. something that investors have been looking for for a long time in carriage services, the so-called desert island stock. The financial results of carriage services match the certainty that we all know that death has in life. So congratulations again. I have a few questions for the team, if I may. Starting on the funeral side of the business, As you alluded to on the call, and this is not just funeral, it also applies to at-need cemetery, as volume growth moderates or normalizes due to the pandemic subsiding, we've seen the average revenue per contract increase both in the months of March and April, given the more significant transparency that you put in the quarterly reports. and this is the first time in over a year, to what do you attribute the improvement in averages? Obviously, the comps are easy because they were impacted at the onset of COVID, but what are you doing to increase funeral averages, both burial and cremation?

Hi, Alex. It's Peggy. I'll answer that question. From the funeral home perspective, we actually started to see some improvements Average improvements really after May, more because our managing partners were getting very creative in their teams and holding outdoor services. But we saw even more growth in our averages really in October and November. Saw a little bit of a dip as the COVID cases went up in December, January, and February. But what we're really seeing in March, and the comparisons are great because we saw that dip happen March of last year, and really we hit the bottom in April of last year. But It's a combination of the creativity that our managing partners had starting in May and June, but then now as more people are becoming vaccinated, more states are opening up, restrictions are being lifted, people can have small gatherings, they're more comfortable with it, and then also we continue to have a focus on our cremation conversion and educating families on what's possible with cremation. We don't run away from it. We You know, we work on just educating the families on what's possible for them and how they can celebrate the life of their loved ones.

Yeah, Alex, you know, just to add to what Peggy said, you know, early on, you know, I mentioned this in the Cheryl Wetter, the Forbes article, you know, implied that this would be a catalyst for permanent behavioral change. people choosing direct cremations, fewer services all around on cremations, burials, and so on. You know, it was a bunch of malarkey. It got a little clever headline for a second or two, but it was total BS and it was misleading. So what we're seeing is the people who are told what they can't do by government mandate and so on, or fear, now that this thing is loosening up, even though COVID hasn't gone away, the fear is subsiding. And this thing called a death that you allude to has been going on for thousands of years. It's inevitable. And there's a lot of research on how do you kickstart grief. Well, you don't kickstart grief by being told you can't do anything and you have to stay by yourself. Just get over it. And so now people are wanting more than ever. And so the COVID environment over the last year has been a catalyst for people to want more, more service, more creativity, more value, more friends, more family, grieve, celebrate. And our people saw that. Now they've been unleashed, and they're making it happen broadly. We're seeing some amazing average increases. In California, we're just hammered. But the averages now are back, and the volumes are still up there. That's the one place in the country where the volume is still up and the averages are way up. So, you know, even when they normalize, you saw April. It's pretty extraordinary what's going on in April, and it's broad. And so what we're seeing is the initial outbreaks, you know, in Long Island and Massachusetts, Connecticut, New Jersey... Pennsylvania and New Orleans because of Mardi Gras back then, their volumes are down. But more broadly, we think this thing is going to normalize with higher revenues for carriage. And then we're off to the races because we just got better. We got better than we were before. We're not going to get worse again, and we already are. So this is the nature of an adaptive company. That's why we call it a company that just happens to be in the funeral and death carriages. or you could start talking about those things and you get lost in the wilderness, uh, because you're too close to a tree. You don't recognize the nature of the actual company. And this is the difference.

Well, thank you for that. That makes perfect sense. You know, as volumes spiked through the COVID and averages came down as COVID recedes and volumes normalize, averages go back up again. It's kind of a, you know, an offsetting function. Uh, And then you have all these other levers to grow the company, like cemetery. And Carlos did a good job outlining that. So I don't have any further questions for Carlos at this point, except to say, I remember last year, the Qingming holiday was severely impacted in the early days of COVID. I was just wondering, anecdotally, how did the Qingming festivities go this year versus last year, particularly in California?

Good morning, Alex. This is Paul Elliott. Very successful. It wasn't the same turnout as 2019. However, we were able to have the event and some good success in our trends in April are looking very favorable.

I wouldn't tell you, Alex, who that who is, but I don't want to. I was told I can't do that because the talent we got in this company is like, you know, A players everywhere, and I don't want somebody coming after our A players. But, you know, the other driver, and this is another thing I hear all the time, I'm sick of it. Oh, cremations of cremations, cremations, cremations. Well, where were they back when I started the company when cremations were less than 20%? Now they're 56, 57, and we're growing revenue like crazy. So I did want to be a little proactive and say, thanks for asking me that question. Chris, why don't you answer it?

Yeah, so we've been working very hard with these cremation families who initially are choosing no service, and we're sitting down, having conversations, learning about the life lived, journey through life, all the accomplishments, and then continuing that conversation by providing options based on what we've learned from the family and the accomplishments of the family, and putting it together with service options that allow all the participants through life to come in and celebrate with the family and share their stories of the loved one, whether it's a small gathering or a large gathering. And what we're seeing is when we're slowing down and having these conversations with families, they haven't really thought about it. So our take-up rate is starting to improve each period, where families, instead of choosing no service, they're starting to have small gatherings or celebrations.

Yeah, I mean, cremation, value, I mean, I explained this in the Chevrolet letter. Most families don't choose cremation because of price. It's because of the method of disposition. And that secular change will continue. But, you know, in spite of the cremation going from the teens when I started the company 30 years ago to 57%, 6% now, And one of the greatest upsides is higher averages on all the cremations. And we're taking a lot of market share in the cremation area. And that's a huge opportunity over the next five or ten years, as opposed to a huge negative. It's a huge positive.

Great. Thank you. And then the last question for me for now is probably for Sean, since he leads the point on M&A. While guidance does not include any future M&A, activity. What are your plans for M&A post-refi going forward? You haven't closed one since January 3rd of 2020. Obviously, that was a record number of acquisitions, I think $170 million in cash outlay. You've been integrating those, integrating those successfully. I'm presuming that you're going to get back in the M&A consolidation game post-refi? What should we expect there? And what are you looking for?

So, Alex, I've had a lot of conversations even during this time with a lot of our acquisition candidates that we've targeted that we would like to be partners with, so we've never stopped that communication with them. We're going to start picking that back up. What I'm currently doing is sending the shareholder letter out with personal communication from myself and Mel about the shareholder letter and getting back in front of it. But I can tell you the activity has picked up. The last probably 45 days, I've had probably 12, 15 calls. But again, our acquisition model is very strategic on what we look at, and we'll continue that path as well. But the activity has picked up.

And one other point on what you said. Since Carlos joined us on June 26th and then brought his eight-player team in and has done everything he's outlined. It's made a huge difference on how we view acquisition candidates. You know, we want more cemeteries that are high-quality cemeteries, combination businesses. But there's another way to think about it. We acquired our own existing cemetery portfolio of 32 cemeteries. They were sitting right here and we owned them all. It was like we bought 32 of them And now we're going to have acquired all the performance out of those own cemeteries that we never could get before abroad. That's a way to think about that.

That's great. Thanks. And then one more sneak in question. Ben, you didn't say anything about GAPEX plans for the year. I think last quarter you said 18 to 20 million. Is that still a good number?

Yeah. Alex, I'd probably say we're probably around that $20 million range for the full year. We were just over... $4 million in total CapEx for the quarter, split almost evenly between, you know, maintenance and growth CapEx. Really big focus, you know, throughout the year in cemetery inventory development. We will be making more investments in that than we have historically. So very excited about that and the projects that we are evaluating and getting started right now.

And then for the full year, 50-50 growth cap back? Yeah, that's what I'm saying.

Probably 10 and 10 is going to be the number. Thank you.

Great. Great. Thanks so much. I'll go back to the queue.

Thanks, Alex.

Thank you. Our next question comes from Chris McGinnis with Sedodian Company. Your line is open.

Yeah, good morning. Thanks for taking my questions and a nice quarter. Also, you know, just reading each other's letter, You know, I thought reading prior ones, you learned a lot about the business, but obviously a ton of information and insight. So thanks for sharing that, you know, and congrats again on the numbers. I wanted to just ask a quick question, I guess, just around the competitive landscape. You've taken a lot of share. Can you just talk about what's happening with the more fragmented component of the market? Are they starting to come back, and are you seeing them maybe open up Or are they still having a harder time operating in the environment? And then how does that play into the M&A strategy? You know, is that opening up more opportunities for you? I know you just commented a little bit about M&A. But just, I guess, how is just that fragmented market, you know, operating in the opportunity that presents for you? Thank you.

Yeah, this is Sean. I can tell you that with our IT strategy, we were able to get out to our businesses quickly. We were able to do things that a lot of our competitors were not. The other interesting thing, Chris, is a lot of competitors were not doing services. They were only offering direct burials and direct cremations where our managing partners were like, let's bring it in and celebrate the life lived. So I don't know if that's really going to translate into M&A activity, but, again, as people hear our story, they see what we're doing out in the market. I do see it ramping up over the next probably six to 12 months.

Sean, explain to Chris. how this might spread in terms of how Carriage, if you were part of Carriage, including some of the ones who joined us like West Haven and so on, Oakmont, others, Fairfax, you heard them tell you, thank goodness we joined Carriage before this happened. And how do we get that out there in the industry?

Yeah, so there's a lot of... I've heard a lot from directly from our managing partners, especially a couple of our businesses that we've partnered with in the last four we did. I mean, they said if we were an independent, we couldn't do that, Chris, because we were able from here to provide all the support necessary they needed, whether it be PPE, refrigerated trailers, whatever it was, so it wouldn't distract them to have to go to try to find those supplies or that support. They were able to focus on serving the families. So that resonates out in the community. Our competitors see that happening, and the bigger, better businesses see that level of support that we can provide.

Great, great. And I guess just are they starting to get back to normal, or are they still operating kind of, you know, in a tougher capacity at this point?

Our businesses?

No, I guess the competitive landscape I was asking about.

You know, it's hard for us to know here. We're back at the Pentagon. We don't pay attention to what competitors are doing against our local managing partners, but our managing partners know. And that's why we follow their data, and they're incentivized to grow volumes and compound revenues. And so based on what we're seeing our own people do, I wouldn't want to be the competition.

Yeah, clearly. Clearly. Um, and then, uh, just a question for Carlos in, in going to market with the pre need, can you just talk about how you're, how you're approaching that now in the COVID environment, how it was different, I guess, prior to that. And, and do you see that maybe normalizing as well, uh, as the economy starts to open? Thanks.

Uh, thank you, Chris. Uh, great question. So yes, um, With restrictions starting earlier last year, it's really difficult to be in front of families, knock on doors, get appointments at family homes, which is the main driver of pre-need sales through community grassroots efforts. But there's two pieces to pre-need, right? You have the family services pre-need opportunities, which is families that we're seeing on a daily basis, whether they're currently owners of a pre-need contract that they want to expand for family members, as well as those that, you know, may have already passed and we want to, you know, reach out to their family members and see if they would be interested to be, you know, right there, you know, right next to their loved ones. And so between these two approaches, we were able to still continue the V-NIT efforts, even in despite of the COVID restrictions. As those restrictions are starting to slow down and a lot of cities and markets and counties are opening up, it allows and enables us to be more aggressive into that approach. Some example of that, we have been able to secure some grocery stores in California where we can actually set up a booth, a table, where we can provide information to those shopping and engage in a face-to-face environment, of course, respecting social distancing and wearing all the protection that's needed, but we're still able to get that done. As that continues, we will be able to then expand on seminars, in-house appointments, and other type of items as families, you know, get vaccinations and feel the, you know, drop the fear of this pandemic. So all we see, honestly, after this performance moving forward is more and more opportunity as restrictions, you know, open up and they get dropped.

Great. I really appreciate that insight. Thanks for taking my questions. Congrats on the quarter, and good luck to you, too.

Thank you. Again, as a reminder, if you would like to ask a question, press the star, then the one key on your touchtone telephone. Our next question comes from Andrew Board with Fenimore. Your line is open.

Hey, good morning, guys. Hey, Andrew. Hey, it's great to talk to you guys. First thing, I just want to say thank you to everybody at Carriage. I mean, I knew things were going to get better a couple years ago, but even excluding COVID, I mean, I knew things were going to get better, but this is a lot better. You guys have really just done a fantastic job, and my only complaint is you didn't hire Carlos when he was coming out of high school. So you've just done a great job. Thank you. You know, some people are a little slow on the uptick, and that's my fault. I'm going to spy you that one. A couple questions. One's really a follow-up, and maybe this isn't, I'm expressing my own ignorance, but I have never planned a funeral, thank God. I'm sure I'll get to. What does it really look like when one's doing a cremation? Like what are those services you can cross-sell? to bring up the average revenue per cremation over time? And I'm not worried about the COVID influence on that number, but like long-term, five, ten years, like what are those services you can cross-sell and how does that really work kind of at the ground level?

Yeah, Andrew, this is Chris. It's really all about, you know, whether it's a religious service or gathering, just some way to assemble people. family and friends to share, you know, information or stories, rather, than information. And when we host these services, whether it's at our venue or another, it allows us to pick up that revenue to host, to provide our team to guide this family through, you know, a very difficult time of their life. Most of these families are not seeking a service when death initially occurs. So we help guide them through this process. Okay.

So, Andrew, let me embellish that a little bit. You get a call. They come in, and, you know, we want mom cremated. And I cover this in a section called Entrepreneurialism, Innovation, and the Adaptation in the Shareholder Letter. That's opposed to them coming in and saying, you know, well, mom died and we're going to bury her. So that's a decision about disposition. And when I was growing up and my mother-in-law, I'd hear her say, you know, I don't want to be burned. The thought of being burned is not something I want. And so she wanted to be buried. And then other people will come along now and say, okay, the thought of, you know, a body lying in there and, you know, whatever happens over years, I don't want that thought. And that's really the choice. Now, but because of that, and the child's cremation is newer than traditional burials. Burials go back to the Egyptians, remember? And so they think there are rules and protocols about what you can't do. There are none, as long as it's legal. You can do anything. You can have any kind of service anywhere with the body or without the body. You can embalm the body and have a visitation with a casket. You could have the casket open where people can see the person and blah, blah, blah. But the final disposition is still going to be cremation. You can cremate the body even after the embalming, even after visitation, all kinds of services with the casket. And there absolutely are no rules to what you can and cannot do as long as it's legal. And that means just about anything. But, see, people don't know that. So unless you engage them, and start giving them all kinds of options after you find out about that life and what was unique about it and what was really of importance to them. Then you can start recommending various options of services, products, and all kinds of things, still with the final disposition being cremation. And then even then, there are lots of options about what you do with the cremains. And having a final place for people to come and visit in a beautiful cemetery and all kinds of things you can do with that. So it is such a creative process. And if you don't have creative people doing it, just like what I said, you wind up with something that's more like a commodity. And that's why this is the greatest opportunity we have. And the way to do it is get the people right who interface with the families.

if that helps. That's outstanding. I really appreciate it. Yeah, I hadn't even thought about some of those variables, so that's great. The only other question I have, and, you know, there were some great questions before me. I appreciate those. But you mentioned 6.5% is your cost of capital. Did you mean that is likely the cost of the new debt, or are you talking about a, you know, higher math, you know, whack, you know, finance MBA type cost of capital?

Yeah, Andrew, that's what we believe our weighted average cost of capital will end up post the refinancing transaction. Okay. Highly accretive and really is going to be a meaningful impact to our return on invested capital moving forward. Excellent.

Yeah, that's great. We're getting pretty close to that time period you can call that debt. I think it was a June 1st maybe. Yeah. I can't remember. I promise I read that letter, but it took me three days. I may have forgotten a few details. But when should we expect some news on that?

That's the 30-year anniversary of Carriage. How cool is that? June 1st.

Oh, that's good. There you go.

Yeah, Andrew, you're correct. June 1st is the call date. We're focused on refinancing those notes, and we'll provide detail as it comes. Absolutely.

Okay, I look forward to that. That's great. Outstanding. Well, guys, that's really all the questions I have, but I do want to say thank you again to everybody, and I really enjoy those letters. I've read them all, so thank you for keeping those coming.

Thank you, Andrew. Look, I just want to thank my sixth grade teacher, Maude Hunter. You know, we had a really smart class, and she moved through the grammar real fast and said, okay, now, I'm going to hit you sixth graders with creative writing. And I'll never forget it. I wrote a story about the day in the life of an ant. But I didn't say it was an ant. And you didn't know it until the end. And my class to this day remembers that. How relevant that is to carriage, I have no idea.

Thank you, and I'm showing no further questions at this time. I'd like to turn the call back to Mel Payne for any closing remarks.

Well, you heard from all of our A players on the executive team today, and if you want to know why I never plan to retire, it's them and everybody else in this company. You come to work. You have a lot of fun. You work really hard. You work really smart. You work together. and you take a journey, and we hope you take it with us. Thank you very much for your support.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.