This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good day. Thank you for standing by. Welcome to the Carriage Services third quarter 2022 earnings conference call and webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. 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, Executive Vice President, Chief Administrative Officer, and General Counsel. Please go ahead, sir.
spk06: Thank you, Norma. Good morning, everyone. Today we'll be discussing our third quarter results. Our related earnings release was made public yesterday after the market closed, and we have posted the 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 for management are Mel Payne, Chairman of the Board and Chief Executive Officer, Carlos Quesada, President and Chief Operating Officer, and Ben Brink, Executive Vice President and Chief Financial Officer. Today's call will begin with formal remarks from Mel, Carlos, Ben, and myself, and will be followed by a question and answer period. Before we begin, I'd like to remind everyone that during this call, we'll 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 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 release, as well as on our website. Thank you all for joining us this morning, and now I'd like to turn the call over to Mel. Thank you, Steve.
spk09: As a young boy growing up in a rural farming community, I loved going to the annual county fair, where my favorite ride was the roller coaster. By far the most thrilling part of the ride was after slowly climbing to the peak and then flying down the steep descent. I loved it. Building Carriage over the last 31 years, especially as a public company after our IPO in August of 96, has been akin to riding a much bigger and steeper roller coaster, with one hugely profound difference. Over the last 20 years, we have evolved a new business model and framework for operating and consolidating the still highly fragmented funeral and cemetery industry. It is a unique business model and framework. And throughout this period, through ups and downs in our performance, as we adapted the model and improved it, together with various severe adverse economic environments that together produce wild peaks and valleys in our share price, twice hitting a dollar, We have continuously gotten better as a company at executing our standards operating model and strategic acquisition model. Especially over the last four years, we have accelerated our progress toward our mission and vision of being the best at what we do. We are currently in the midst of a transition from peak performance in 21 for various reasons that have been well documented. into a post-peak COVID normalization of death rates at some point likely in the near future. Yet even with negative performance comparisons currently during this transition period, we have never had a company anywhere close to this good in our history, populated by the best leadership talent and a stellar reputation as a succession plan solution for the best remaining independent businesses and the best strategic markets. My advice to those listening on this call is to hang in there. This too shall pass. With that introduction, I will turn the call over to Carlos Quesada, who as president and COO and together with his teams of eight players are one of the main reasons that the best is yet to come. Carlos.
spk03: Thank you, Mel. Good morning, everyone, and thank you for joining our call today. Before we start, I want to thank our Carriage family in the field and our Houston Support Center for your commitment to our Being the Best mission and vision, as it is the heartbeat of Carriage. Thank you for all that you do. For today's call, I will review our total field operational performance for the third quarter of 2022, and then we'll cover financial performance in more detail later on this call. I will also provide a quick update on overall operations. For the third quarter of 2022, our results are as follows. Total revenue of $87.5 million, a decrease of $7.5 million or 7.9%. Total field EBITDA of $35.3 million, a decrease of $9.4 million or 21%. Total field EBITDA margin of 40.3%, a decrease of 670 basis points. Adjusted consolidated EBITDA of 22.9 million, a decrease of 9.5 million or 29.4%. And adjusted consolidated EBITDA margin of 26.1%, a decrease of 800 basis points. The performance variance in the third quarter of 2022 compared to the same period last year is a direct result of our historically abnormal seasonal peak and a record pandemic volume experienced only in the third quarter of 2021, which on a comparison basis impacted our revenues. Furthermore, the inflationary cost and lower revenues over high fixed costs resulted in a negative operating leverage in many of our businesses. The good news is that our same store average revenue per contract was up by $132 or 2.5%, equivalent to 232 contracts and making up for $1.3 million. Additionally, our overhead in the third quarter of 2022 was down $258,000 or 1.7%. While this performance in no way, shape, or form represents Carriage's high-performance culture, to put some perspective, On our funeral home portfolio performance for the nine months ending September of 2022, we identified 76 businesses that were down in field EBITDA, including pre-need fuel and interest earnings. For these 76 businesses, 34 are still above 40% field EBITDA, which we consider a high performance margin. These 34 businesses for the nine months ending September of 2022 while averaging a high 46.2% margin, were down by 5.6 million in EBITDA dollars versus 2021, but up by 3.1 million when compared to the same period last year. Volumes were expected to normalize at some point, and here we are now. However, we believe that debt rates were normalized over the next year above 2019 levels. and we also expect seasonalized volumes moving forward. The really great news is that Carriage is a much better company than it was at the beginning of the pandemic. We are nimble and agile, and we adapt quickly under uncertain environments, just as we adapted amazingly fast in March of 2020 at the onset of the pandemic. We are now adapting to this transition in a post-COVID pandemic environment. Also, through this inflationary period, Here are some of the actions we're taking to adjust and get back on track to higher margins. Number one, we are continuously reviewing our pricing strategy and not absorbing the inflationary cost we have seen on salary and wages, utility, gas, insurance, and merchandise. Number two, we're helping businesses that are below our standard supporting performance threshold, and through coaching and mentoring, we help them navigate back to high performance. Number three, We're looking at process improvement and a plan that will help us improve broadly while keeping the nature of our decentralized model intact. Number four, we have identified specific businesses by business needs so that they can have performance improvement and we're in the process of executing. Number five, we continue to bring top talent in all company areas to help us improve collectively and in alignment with our being the best mission and vision. Number six, Our operational leadership team will have a weekly meeting to evaluate progress made on the post-COVID transition strategies. These are some of the specific actions we're taking, and we are confident that we will reach our goal of long-term sustainable ranges of total field EBITDA margins between 43% and 44%, overhead expense around 13%, and adjusted consolidated EBITDA margins between 30% and 31% by 2024. If there is one takeaway I'd like you to take from me today, it is this. The third quarter of 2022 is not the new normal. We will execute our plans and strategies and return to a high-performance normal sooner rather than later. Now, for operations update, I will start with IT. Rob Franch, our CIO, has focused over the past six months on building a solid foundational technology platform across critical infrastructure and security services, specifically cybersecurity, connectivity, and compliance. Our biggest game-changer opportunity is in how we engage and collaborate with families. For example, automation, AI, will help us streamline business process and operations in addition to opening a new revenue channel through digital marketing and e-commerce. Our Keystone project, Project Trinity, will aim to deliver next-generation technology capitalizing on all of these opportunities, positioning Carriage Services as an advanced digital provider of death care services in the years to come. Regarding our marketing overhead investments made earlier this year, we are seeing significant progress way above our own expectations. Alfred and his marketing team have accelerated field marketing adoption, and are now effectively supporting marketing projects for 80% of our businesses. Some of these projects are website redesign, a new call tracking system that improves performance, a new digital marketing dashboard for each business regarding paid digital advertisement and their return on investment, and a significant improvement in social media presence, as well as an increase in Google reviews through the innovative ideas that the marketing team, in partnership with our managing partners, are coming up with to improve each business and their digital profile and presence. Our marketing team is now gaining momentum and generating savings from marketing investments while delivering a seamless customer experience to the families we serve and our field teams. We have restructured our regional portfolios and provide a balance between our west, central, and east regions. This new portfolio distribution will enable our regional partners to optimize each region effectively. Moreover, to optimize even further, we are excited to announce that Robbie Pappi joined Carriage Good or Great Journey on September 26 of 2022, and she is our new Senior Vice President of Operations and Regional Partner for the Eastern Region. Robbie has 30 years of industry experience, including positions in funeral, cemetery operations, finance, sales, systems, process improvement, and audit. She's a certified public accountant with a marketing and information systems degree from Baylor University in Waco, Texas. She serves as the president-elect for the International Cemetery Cremation and Funeral Association. Robbie is also active in CANA, Cremation Association of North America, and served as a board member until the fall of 2021. Robbie's vast knowledge and leadership style will be transformational for the East Region. Joining Robbie are Jeremy Weaver and Chad Fry, who joined Carriage as Directors of Operations for the East Region on May 23rd and August 1st of 2022, respectively, and combined have over 50 years of funeral and cemetery experience. We welcome Robbie, Jeremy, and Chad to the Carriage family. In closing, Our commitment to our mission and vision of being the best operator, consolidator, and value creator is as solid and real as ever. We have the talent, the businesses, and a company getting better every day. Our focus on extreme execution will allow us to deliver high performance as we transition to a normalized and systemized death rate environment. Thank you, and I will now pass it on to Steve. Thank you, Carlos.
spk06: As it relates to our growth through acquisition outlook, we were excited to announce our acquisition of a premier funeral and cemetery business in Charlotte, North Carolina earlier this week. Heritage Funeral and Cremation Service in Forest Lawn East Cemetery is one of the leaders in the Charlotte area with a greater than 25% share of the market. We often tell acquisition candidates we meet that fit and relationship are critical, as our reputation will become theirs and their reputation will become ours. In the case of Heritage, we couldn't be more excited to join the reputation of this fantastic business and team. Heritage served more than 1,200 families last year, and with multiple funeral homes, a cemetery, and a dedicated cremation business, we are well positioned for broad growth in one of the more attractive markets in the country. We want to thank Harris High and Carolyn Williams for selecting Carriage to continue to lead the wonderful business that they, along with Carolyn's father, have built over the years. And we want to extend a warm welcome to the entire Heritage team. We're also pleased to announce that we're currently under a letter of intent to acquire an impressive business that serves as the leader in another large strategic market. We're particularly excited about this opportunity as it's one that reached out to us directly to explore if Carriage may be the right succession option for their business. For more than 31 years, Carriage has worked hard at building and protecting our reputation. We talk often internally about the importance of ensuring all aspects of an acquisition are successful, from the initial conversations with owners, to the manner in which the actual transaction is handled, to how the integration is led. As our reputation continues to grow and spread within the industry, we take it as a compliment and are humbled when a premier business reaches out to us directly to explore a partnership based simply on what . We look forward to sharing more details on this particular business on our next call and believe the history and reputation that have led to this unique opportunity will continue to lead to others. Our recent heritage and San Juan acquisitions, along with the large business we currently have under letter of intent, will combine to add approximately 4,500 funeral calls and 1,500 internments to our annual company-wide totals. To put the impact of these three acquisitions in perspective, those combined numbers will represent a greater than 10% increase to annual company-wide totals for funeral calls. and a greater than 15% increase to our total annual internments. That's significant growth in a short period of time, and we look forward to discussing the contributions these businesses make to our performance moving forward. You know, we're fortunate to have the opportunity to look at dozens of potential deals every year, and as we shared with our board yesterday, we determined most of these opportunities are simply not the right fit for our company. We remain highly selective and patient focusing on three key criteria when evaluating an acquisition. First, we're looking for strong, growing markets, and this usually means a larger market with positive demographic trends and forecasts. Second, we're looking for businesses that have a leading reputation and serve as a top brand in the market. And third, there must be a clear and strong path to future growth and expansion. If we believe a business, even a good business, has peaked, then it's not going to be the right fit for us. Also worth noting, with our most recent acquisition and our current letter of intent, these two opportunities allow us to enter new, large markets where we've not previously had a presence. Entering a new strategic market is important, but equally as important for us is doing it with a leading business that has a significant footprint, which is the case with both of these opportunities. That footprint and reputation facilitates our longer-term growth and expansion strategy within the market. I'll wrap up my remarks by noting that in 2019 and 2020, we took advantage of some unique growth opportunities in a very short period of time, as we closed several large deals that have proven not only to be highly accretive, but contributed greatly to our focus on increasing our operating leverage. Following those large acquisitions, we paid down debt aggressively and quickly. While these current acquisitions don't rise to the level of that investment, we will once again turn our focus to reducing our leverage as we integrate these fantastic businesses and close on our current letter of intent. With that said, we're a growth company, And as we increasingly become the option of choice for more and more of the best remaining independent funeral homes and cemeteries in the country, we know it's important to ensure we remain financially flexible to act when a unique opportunity presents itself. With that, I'll turn it over to Ben to provide additional color on the quarter.
spk07: Thank you, Steve, and thank you to everyone who has joined us on the call today. For the third quarter, total revenue decreased 7.9% to $87.5 million. Adjusted consolidated EBITDA decreased 29.4% to $22.9 million. Adjusted consolidated EBITDA margin decreased 800 basis points to 26.1%, and adjusted diluted earnings per share decreased 45.1% to 45 cents. Year-to-date, our total revenue has decreased 1.3% to $276.3 million. Adjusted consolidated EBITDA has decreased 15.8% to 15... Adjusted consolidated EBITDA margin decreased 500 basis points to 29.2%, and adjusted diluted earnings per share has decreased 13.7% to $1.96 per share. Our earnings per share decrease for the quarter and year-to-date is due to lower total field EBITDA due to the continued normalization of seasonal death rate trends, higher fixed overhead expenses from our investments in our operating support platform offset by lower variable overhead expenses due to a reduction of incentive compensation accruals, and an increase in interest expense from the continued rise in interest rates. Our year-to-date GAAP effective tax rate was 27.8% at the end of the third quarter, an increase of 30 basis points from the second quarter due to lower expected pre-tax book income for this year. Adjusted free cash flow for the third quarter declined 36.3% to $16.5 million, and the adjusted free cash flow margin declined 840 basis points to 18.9%. While down year over year, the $16.5 million of adjusted free cash flow and 18.9% of adjusted free cash flow margin represented our highest reported free cash flow in four quarters, allowed us to incrementally pay down our debt while completing the acquisition of Funeral Area San Juan during the quarter. Year-to-date, our adjusted free cash flow has decreased 37.5% to $40.9 million, while our adjusted free cash flow margin has declined 860 basis points to 14.8%. Adjusted free cash flow declined year-over-year due to lower operating results as well as higher cash incentive payments in the first quarter, including approximately $4 million for our five-year good-to-great incentive award, which will be a lower amount over the next three to five years due to a lower number of managing partners in each five-year group. Year-to-date adjusted free cash flow was also negatively impacted by the unusual timing due to COVID restrictions of our five incentive award or managing partner forums in the first six months of the year. We expect less expenses related to these important company events over the next few years. Year-to-date, we've invested $20.6 million back into our businesses through capital expenditures, split almost evenly between maintenance and growth CapEx. $2.2 million of that CapEx spend was related to damage caused by Hurricane Ida in New Orleans of last year and was funded by insurance proceeds. Our bank covenant compliance debt to adjusted consolidated EBITDA ratio increased to 5.14 times in the quarter from 4.87 times at the end of the second quarter. Going forward, we expect to allocate our available free cash flow towards completing the announced acquisitions, then pivot towards paying down our debt outstanding, which, when combined with our improving operating performance in the future, will allow Caris to de-lever. Similar to what happened after the four large transformative acquisitions we made at the end of 2019 and early 2020, when pro forma leverage ratio fell from a high of six times to a low of 3.8 times over the span of 15 months. Through the first nine months of the year, our discretionary pre-need trust funds continue to significantly outperform the broader market with a negative total return of 8.5% compared to a decline of 23.9% for the S&P 500 and a decline of 32% for the NASDAQ Composite Index. In a volatile and uncertain market environment where we are dealing with a heightened geopolitical risk across the world, persistently high inflation, and rapidly rising interest rates, our outperformance has been led by our equity portfolio that consists of companies that have high and recurring free cash flow that has primarily returned to shareholders in the form of high and sustainable dividends. These companies have proven to be attractive investments in an otherwise tough market environment and have provided our portfolio with the resiliency shown in our returns. We have booked almost $43 million in long-term capital gains in the portfolio over the last 24 months, including $10.4 million so far this year. We've also increased our reoccurring annual income generated by our discretionary trust fund portfolio to $19.2 million compared to $9.4 million on March 6th of 2020 prior to the execution of our repositioning strategy during the coronavirus market crisis. The increase in our reoccurring income in the portfolio will primarily benefit our financial revenue and EBITDA from increased earnings from our cemetery perpetual care trusts in the current period while the realized long-term capital gains will accrue to the underlying pre-need funeral and cemetery contracts and be recognized as earnings over the next 10 to 15 years as those contracts mature. The increased recurring annual income plus the realized capital gains will allow for our financial revenue and EBITDA to continue to incrementally increase earnings from financial revenue and EBITDA regardless of the market environment for the foreseeable future. Year-to-date, our financial revenue and EBITDA have increased 3.4% and 3% respectively, Additional trust funds from acquisitions we have closed or expect to close will also provide an uplift of future financial revenue and EBITDA reported earnings. We have made the decision not to publish an updated rolling quarter outlook with this release. We believe it is prudent to have more time to assess the current normalization of death rates, our improvement in our own margin trends, and to incorporate the full impact of what is currently a very dynamic acquisition environment before we publish an updated rolling four-quarter outlook by the time we report our full-year results early next year. It is important to note that we expect year-over-year quarterly comparisons from an organic perspective to be the most difficult for this past third quarter, the current fourth quarter, and the first quarter of next year. We also expect the continued return of historically seasonality to our earnings, with third quarter typically the weakest, while the first quarter typically our strongest quarter. The addition of accretive earnings and cash flow from the acquisitions we have recently closed and the business we have in our letter of intent now will provide an additional tailwind to our future results. We look forward to providing an updated rolling four-quarter outlook with our year-end results early next year. And with that, I'm happy to open it up for questions.
spk01: Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from Alex Paris with Barrington Research. Your line is now open.
spk04: Hi, guys. Thanks for taking my questions. I have a few. Let me start off with accelerated acquisition activity, which is exciting. They're your first acquisition since those four transformative acquisitions that you spoke about in late 2019 and early 2020. With that said, what does your pipeline look like at this point, particularly given your plan for a balanced approach to capital allocation, investing in organic growth, M&A, and debt reduction?
spk06: Good morning, Alex. This is Steve. The pipeline, as we've mentioned before, is robust. And one of the things we tried to highlight this morning, which we're excited about, is we're seeing more businesses that are coming to us directly just based on reputation and word in the industry. So, you know, as we've said before, we're happy to see all these businesses come in. We're taking a look at all of them. But the reality is we are highly selective and highly disciplined right now. So as we look to de-lever, we're going to continue to look at growing, but it's going to have to be a special business for us. The one that we just talked about under letter of intent fits that criteria. It's a unique, special business and a And we're going to prioritize that, but at the same time, we're going to be able to manage and balance that with de-levering.
spk09: Yeah, Alex, this is Mel. Look, when we – I was in the process of turning the company around in 19 from not a major decline in performance trends, but some amount of decline in performance trends. So I had to jump back in and lead operations. So 19 was, you know, a turnaround year. It turned around to some degree, but there was just a lot of work all through the year and into the 20. And in the last quarter of 19, you know, you had these succession of four businesses show up, bang, bang, bang, bang. And except for the one in Buffalo, I knew them all. And I couldn't believe, you know, that we had a shot at these. And so we did. It took a lot of leverage. At the same time, we were still turning the company around. from lower performance in 18. And when we issued the news about all this, you know, our stock went way down because of the leverage and the perception at the time that we couldn't integrate so much so fast. And then COVID shows up. So, you know, the roller coaster continued, real fast downtrend after that in two big slices. And here we are, we prospered during COVID and the integrated acquisitions went from being, I was accused of overpaying and being reckless to, you know, how do you get more of those? You stole them. We're not trying to steal anybody's business. We want to buy a great business that's already a franchise that's in a great market and then have it get better under us. And that's what's happened with each of those four. And that has really been out. And we thought post-COVID normalization, there would be more activity when people, you know, start thinking about succession plan and what they had to go through being an independent through the worst of the crisis. And so we are seeing a lot more interest. And because of how we conducted our affairs through COVID in support of our businesses and our reputation, We're getting more, more ability to negotiate a fair deal without an auction. And this has always been my vision. You know, I wanted to become like Berkshire Hathaway. It's been a long-term vision, but it's coming true now. And I think that COVID heightened everybody's awareness of what it means to be in a group that can provide incredible support services, even in the most adverse and unknowing dangerous environment. And so we see more of this, but we need to close the deals, and then we need to slam down the debt. I know that's scary to a lot of people, especially going into a recession, but I've been through these before. You know, 2000, 08, 09, we had our best six months at the time, first half of 09 during the Great Recession. So the industry is an incredibly resilient and wonderful industry to be in in an environment like this. We don't have all those risks of currencies and things like that. And the risks we do have, we can manage them. And we are managing them. But I appreciate very much your questions.
spk04: Sure, thanks. And I appreciate that. And these acquisitions look very much like those acquisitions in late 2019, once-in-a-lifetime sort of acquisitions that you really have to make two of the three businesses or combo businesses, and together they're going to really drive inorganic growth, I would think, next year. With that said, your debt ratio was 5.1 times at September 30th. It'll probably be a little higher at December 31st. Just my guess. I realize the acquisitions also contribute EBITDA to that ratio. But you had at one point targeted a 4.5 times ratio by the end of 2023. I'm wondering, does that get pushed off a bit? And then your long-term goal of sustainably growing the company at about four times. What's the timeline on that debt reduction, as best as you can tell at this point?
spk09: I think this, Mel, I think... I made a mistake, and it's been humbling. At the time, it didn't seem like a mistake. We bought in too many shares post-October 27th of last year at increasingly high prices, which ran up our leverage ratio. And then everything changed this year to a different market, different world. Nobody knows exactly what's going to happen. And so then all these things show up, which, frankly, I didn't expect to happen again. These series of acquisitions, and maybe there's one more smaller one, but a fabulous business, represent about 55%, 60% of what we did at the end of 19, early 20. So it's a material thing. And once integrated, they'll have very high margins, like the ones we bought. And so we'll be able to de-lever. but we did get too levered on the stock buybacks. This will push us up to a level that is not close to our policy of four times, and we are right now working on plans to work on bringing down that leverage. And I think Ben mentioned that capital capacity plans that will be, you know, put the company in a position to whether any any storms that might show up that right now are not on the horizon.
spk04: Okay. Thanks for that. I appreciate the additional color. My last question is really about the rolling four-quarter outlook. Given the elevated level of acquisition activity, which I estimate will add over $25 million to revenues on an annual basis, And easing comps once you get past Q4 and Q1. It sounds to me like you're in for a big year after Q4 and Q1 in 2023. Am I wrong there? Because pulling guidance, and I realize you're going to give it to us next quarter, but by pulling guidance, you might be sending the wrong message.
spk09: Well, and look, I thought about that a lot. That was my decision. No one else's. And rather than put guidance out there, the normalization, just like we were very surprised at how death rates stayed elevated even after the COVID deaths were greatly diminished, and why death rates, for all other reasons, stayed elevated. You know, they're coming out with stuff now. There's a lot of other reasons for death, the COVID lockdowns and health maintenance wasn't there. And the baby boomers are older and they're not healthier. So we do think the normalization, it didn't really start to happen at the revenue level and the volume level in a major way until September. And we're seeing that offset. especially in October, by much higher averages, whereas the mixed cremation versus traditional is about flat. So, you know, it's a transition period that is right now not exactly predictable of what the normalized environment will look like. And rather than guess at it and then have to say we were wrong, and we got the acquisitions coming on board, I said, look, let's just explain that we're only waiting. You're totally right about, and Ben said it too, the fourth quarter and first quarter is tough. After that, we ought to be up, up and away. And I think it's wise to wait. I made that mistake before. I don't want to do it again. It's wise to wait. If somebody thinks we're still in the message, We're not. We're being honest about the unpredictability of what normalization looks like. Carlos went through a lot of things. We get the best talent. If you're in the company beneath the covers and you don't look at the stock price, you've never been more excited than you are right now. That's what's going on. And that's the nature of being a public company. Is it frustrating? Yes. Can a message... be interpreted the wrong way? Yes. But you hit the nail on the head. Post-first quarter, we ought to have positive comps with our existing operations, with all the actions that Carlos and his teams are doing, and then you have the acquisitions coming on. I'm very excited about the trust funds involved. We know what to do with them. And we ought to have an up an upswing in our performance that should continue for a long time in the future.
spk04: Great. I do appreciate that additional color, and I agree with you. So I'll get back into the queue at this point. Thank you.
spk09: Thank you very much, Alex.
spk01: Thank you. One moment for our next question, please. And the next question comes from Liam Burke with B Reilly Financial. Your line is now open.
spk05: Thank you. Good morning. Carlos, you mentioned in your prepared statements about process improvements that you're going to implement throughout the organization. Could you be a little more specific at what you'd be doing to improve the initiatives and how it's different than the way you're operating the business right now?
spk03: Yeah, absolutely. Just really in the approach as to how we are trying to tackle price increases business by business, as you know, we're decentralized. But on a decentralized organization, it could take a longer turnaround to get all that effectively changed. And so we're trying to change a few things in that aspect to move a little quicker. But there's also other aspects that will allow us to gain some momentum from a process perspective, whether it's manual work that is now being executed without even rolling out the new system that Rob is working on. These are just simple, long-hanging fruit items that I believe that by providing some consistency in the strategy on executing on that will definitely give us some benefit in the short term.
spk05: Just real quickly on price increases, obviously you've had both, you know, margin pressure both on the product and on the service side. Would you be able to get enough pricing power to offset these input costs?
spk03: Well, we're definitely going to do our best. You see, the thing is that the business owner, the managing partner, knows what's best for that community. And sometimes it takes finding out what the pricing is around the competition landscape to define what is the best balance between competitiveness and, of course, cost improvements. And so we're trying to find that balance based on a case-by-case scenario, business-by-business. That's probably the best way I can describe it. But I do believe that in many cases we should be able to overcome the, you know, and not absorb the cost increases. But there may be an instance where just from a competitive advantage, it may not be best because it could be at the cost of declining volumes. And that's something we never want to do. So, William, this is Mel.
spk09: Hey, Mel. You know, we didn't see the inflationary impact until we got into the, toward the end of the into maybe the second quarter, very end, and the beginning of the third quarter, beginning to really show itself. And then Carlos and his team went to work. And I know he mentions in this release that the average was in September. The average was up. Well, that's for the full quarter. For the full quarter. Yeah, so we've seen a trend. through the quarter as volumes really began to normalize downward in September, that the averages began to trend up. Now, they're making a lot of moves. Our managing partners, they each have, you know, an analyst, like a financial, their own financial consultant, and they're doing various scenario price increases, this and this and this and this and that. And so what has happened is the volume continues to be normalized more like September in October. And I don't want to say that this will continue, but it's very encouraging. What we're seeing in October means that a lot of the things, all those process things that Carlos is talking about, Price increases, more options for accriminations, and whatever. Our people are very tuned in because their incentives are based on being within a range of field EBITDA margins. And if they're not within that range, regardless of what happens to the rest of their standards, their incentive bonus goes in half. And if they're below 50%, they get nothing. And so you don't want to be one of those... We call them underperformers that move back to Paris. And so what we're seeing in October is very encouraging on the average revenue. How much of that is price? How much of that is just more service options? But it's both in traditional burial and cremations. And I'm talking big percentage increases, double digits. Fair enough.
spk05: Just real quickly, after looking at reviewing the business, are there any more properties you think need to be sold?
spk06: Yeah, William, this is Steve. You know, we're always looking at the team. And, you know, there may be one or two here or there that are just not going to fit with the strategic growth model that we've talked about already. But right now, nothing that we're working on. But we're always looking.
spk09: Yeah, I think... Carlos and his team, now that he's got a full complement of regional partners, DOSs, they're doing a continuous assessment on both the talent, succession planning, top grading, and the nature of the business itself and the market in which it operates. And as we bring in these bigger, better businesses, which is where the trend has become our big friend, you know, we will continuously look at pruning off those that really can't keep up with a higher growth portfolio that we're building. And there may be two or three right now on the radar, but too early to make the call.
spk05: Okay.
spk09: Thank you.
spk01: Thank you. As a reminder, ladies and gentlemen, that's star one to ask your question. One moment for our next question. And our next question comes from George Kelly with Roth. Your line is now open.
spk08: Hi, everybody. Thanks for taking my question. So first, to revisit something you were just saying, Mel, about October, just wanted to make sure that I understand you right. You said it encouraged. I wasn't sure if it was just based on the pricing changes that you've implemented or if you're starting to see volumes rebound from what you saw in September. And I guess what I'm really trying to understand is just do you feel like you're getting closer to seasonality looking more normalized, or is it still like it could take until sometime middle of next year for seasonality to truly normalize?
spk09: Yeah, I'm going to turn this over to Carlos, but I don't want to, you know, declare victory. But too early over a process that has been unpredictable since March of 2020. And I'm not smart enough right now to predict when we will get to normalization and whatever that will look like. I'm almost 100% sure whenever we do get there and then it sort of normalizes in a steady way, it will be materially higher than it was pre-COVID.
spk03: Yeah. And to answer your question, George, Mel was referring specifically to what we have been observing so far in the month of October as it relates to our sales average. And it's very encouraging. It has grown, you know, for this month up to double digits. And that, you know, I guess the question is, is that coming just from pure pricing increases, or maybe we have more offerings on services and items for the families? That will still need to get to the detail once we close on the month. That's very, very encouraging. It's taking an impact that's replacing volume from a revenue perspective. On the volume perspective, you know, it's too early to say, however, if we would use a third quarter signal, it would seem as if we will get more systemized, you know, performance for 2023. Yeah, I mean, George, this is Mel.
spk09: I don't know, you know, whether we'll have a flu season and what degree. You know, I've seen predictions of a strong. We haven't had a flu season in the last two winters. It's been all COVID. And then you've got this new thing. I never even heard what it was, RSV, right? RVS. RVS or something like that, plus other variants of COVID. So it's still not quite clear. how the pace of normalization of death rates will occur. But I will say that I make this point on these double digit funeral revenue averages we're seeing so far in October, and that's, you know, we only had eight more days to go and we were experiencing that. We made a decision, a business strategy decision, not to aggressively sell pre-need funeral on stand-alone funeral homes. Twenty years ago I made that decision. And my thinking was, I don't know, because I can't prove it with data, on a stand-alone funeral home, not a combination business where you have a funeral home on a cemetery, totally different. I don't have data that prove you can grow your market share, your revenue, and your margins over time by aggressively selling pre-need funeral and fixing your prices. And a lot of that being covered by pre-need insurance, where the growth rates are 1% or 2% at best. And I experienced a lot of this in the 90s. I bought into that, and I never could see the evidence that it was a good concept. Instead, my thinking was, and this is how we built the company, we want to be the best at providing service in each market. And if you are the best, you can grow a market share by being better than everybody else, and you retain your pricing power. And especially that becomes relevant in an inflationary environment like the one we're in now. And so we have pricing power on 87% of our funeral deaths. 87% we have pricing power. And that's unique in the industry.
spk03: And I will let that out, Millie, if I may. Just to give you some color, George, is that Q3 2022 compared to 2019, we are greater by 14.3% on volume from pre-COVID levels, you know, in 2019. So that's a good number. That's a good trend.
spk08: Yeah. Okay. That's helpful. And then a couple other questions for you. First, Carlos, you mentioned a digital revenue opportunity, and I didn't quite catch that. Can you give us any more detail about that?
spk03: Yeah, so Project Trinity, which is not the name of the solution we are creating through integration of third-party solutions and our own, you know, I guess customization of what we need, will end up having a, let's call it point of sale, for lack of different words, a point of sale system that would allow and enable families to engage more on the offerings that we have that should include digital offerings and enable us to increase self-average, but also capture more calls than we have right now by advancing that ability to make arrangements from home and things of that nature. That's really what we mean on that line.
spk08: So it's some kind of central tech platform that interacts with consumers and you would charge funeral homes for some piece of that.
spk03: No, we're not going to charge our businesses for it. It's the accretive revenue we will gain from providing a solution that families can go straight into their browser, go to our different businesses' web page, and from there, being able to do many, many selections and things that they want to choose on digitally without having to go to the funeral home. Things of that nature. Also, another option is you know, in the arrangement conference, if they decide and choose to go to the funeral home, which is typically the case, then they will be presented digitally all the offerings that makes a much better presentation to the families that we believe will, you know, end up having significant greater average than the one we have today.
spk08: Okay, okay. And then last question for me just on the balance sheet. So you have about, I think it's a $400 million of those senior notes at $4.25 million. fixed rate, and then the remaining debt is under the facility. Is that, so I guess the question is, is the remaining debt, I believe you're getting pretty close to the max leverage ratio allowed under that, and so is that, when you talk about, you know, you're working with your banking partners, I'm assuming that you're trying to expand that max allowable And also, what is the rate and where would you anticipate that to kind of end up when you're done with this discussion with your banking partners? And that's all I had. Thank you.
spk09: Well, this is Mel. On the floating rate part, I don't know where it will wind up because I don't know what the Fed will do and how long they will do it. I got a feeling that You know, I'm one of the few people that's still around, very involved in business that lived through, you know, the 60s and 80s, 70s, where, you know, we had runaway inflation. And then you had Reagan and Volcker. I mean, I was a banker in Texas when primary was 20%. And we had to be creative not to be usurious in making loans to a good customer. I don't know where rates will wind up, but our rates will go up. And that's one of the reasons once we close these acquisitions, you know, we will have more debt. The rate will go up, but then when we start paying it down, it'll be a whole lot more accretive to earnings and free cash flow than it was even in 20 and 21 when rates were very low. So we'll get the acquisitions. We'll have to pay more interest to do it. And then we'll get the accretive performance from the acquisitions and the lowering of our debt and our interest costs over the next two years. Where we wind up with our banks right now is what we're working on. I can't say for sure, but we're working very actively with Bank of America on this and with our other banks. And so we expect to report more news on that in the next couple of months.
spk07: Okay, thanks. Ben? Ben? No, George, I was just going to say, just for context, like, you know, we're borrowing about on the facility about five and a quarter all in today, and it's obviously variable, so very tied to movements and short-term rates. So that's where we are today. Okay, thank you.
spk09: Yeah, the four and a quarter, George, is looking okay.
spk08: Sure is, Mel.
spk01: Thank you. One moment for our next question. And our next question comes from Robert Longnecker with Hope Tree. Your line is now open.
spk02: Hey, guys, a couple questions. I think, Mel, you said something about the M&A activity being some percentage of what you did in 19 and 20, which I believe was maybe 170 million or so. Can you kind of provide a little more data or color around that comment you made?
spk09: Yeah, and I was talking really about the revenue. Alex mentioned earlier, you know, he mentioned $25 million. There's another nice business we've been looking at. It started this year. It's really a great business. It has all the bells and whistles we look for. So, you know, I'm assuming that between now and the middle of next year, we'll get to about $30 million. And it will be the same profile of businesses and high margin potential and revenue growth compounded over years that we did at the end of 19, early 20. So it should wind up being about 60% of that. We spent $170 million to get that, you know, about $50 million of high margin revenue. It won't be exactly proportionate to that in terms of the purchase price, but the businesses themselves should be about 55% without the other one, 60% with the other one once we get them integrated.
spk02: Gotcha. Okay. And then can you talk about pro forma for these acquisitions and pro forma, obviously, for the EBITDA that's going to come with them? What do you think your current leverage ratio is? Once you've closed the acquisitions, what do you think the leverage ratio is going to be?
spk07: Robert, for what we've already closed is what I'm comfortable in saying. We're right just above that 5.2 right now, given cash we've accumulated and what we've just paid for the business here in Charlotte. What it's going to look like, again, what it's going to look like when the timing and when this next acquisition will come in is kind of to be determined. We would expect it to be a little higher from where we are today. Exactly where that is, not sure.
spk02: And where's the covenant?
spk07: So that's the piece we're focusing on now, right? So it's five and a quarter is our max on our credit facility. So that's part of our discussions we're having with Bank of America and the rest of the group now.
spk09: Gotcha. Okay. Thank you. Thank you, Rob.
spk01: Thank you. I'm currently showing no further questions at this time. I'd like to hand the conference back to Mr. Mel Payne for any closing comments.
spk09: Look, we had some great questions, and hopefully we answered those questions to your satisfaction. We have a great company getting better in a very uncertain, in my own view, geopolitically dangerous world. I can't do anything about all that. All we can do is keep our focus on our talent and our businesses and execute like I know we will, despite what happens in the economy and in the world. So it's a great place to be. If you're over a carriage, you're suffering some near-term unrealized loss. That's not how I view it. Doing this 31 years, five years from now, seven years from now, We're going to be a much bigger and better company than we are in our business. Thank you very much.
spk01: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
Disclaimer