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spk07: good day and thank you for standing by welcome to the carriage services second quarter 2023 earnings conference 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 the session you'll need to press star 1 1 on your telephone you will then hear an automated message advising your hand is raised to withdraw your question please press star 1 1 again please be advised that today's conference is being recorded I would now like to hand the conference over to your speaker today, Steve Metger, President.
spk04: Please go ahead. Good morning, everyone, and thank you for joining us to discuss our second quarter results. In addition to myself, on the call this morning from management are Mel Payne, Executive Chairman of the Board of Directors, Carlos Quesada, Chief Executive Officer and Vice Chairman of the Board of Directors, and Kian Gramaya, Executive Vice President and Chief Financial Officer. On the Carriage Services website, you can find our earnings press release, which was issued yesterday after the market closed. Our press release is intended to supplement our remarks this morning and include supplemental financial information, including the reconciliation of differences between GAAP and non-GAAP financial measures. Today's call will begin with formal remarks from Mel, Carlos, Kion, and me, 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, including comments about our business and plans, Forward-looking statements inherently involve risks and uncertainties and only reflect our views of today. These risks and uncertainties include, but are not limited to, factors identified in our earnings release as well as in our SEC filings, all of which can be found on our website. Thank you all for joining us this morning, and now I'd like to turn the call over to Mel.
spk03: Good morning, everyone. I'm excited to be with you this morning as we kick off our first earnings call since the announcement of our succession plan on June 22nd. As most of you know, we've been working on this CEO succession plan for more than two years, and the thoughtful investment of time and preparation is paying off, which is evidenced by the seamless transition that has occurred since our announcement. I have also been hard at work on my continued rehabilitation following my stroke and continue to be encouraged by my progress. I recently graduated at the top of my class, which is all about being the best, from an intense 12-week program that has me more motivated, energized, and passionate about what we are doing and where we're going than ever before. While I meet with our strategic vision and principles group leadership team regularly, I look forward to spending even more time with them and focusing on the job I enjoy the most, which is serving as a mentor to Carlos, Steve, and Kian. As a co-founder and largest shareholder of Carriage, I'm pleased to report that Carlos and Steve continue to exceed my exceedingly high expectations as they focus on their new roles. Together with Keon, this executive leadership dream team has been working closely together to lead the continued evolution and maturation of Carriage, which the three of them will talk more about in detail this morning. The alignment of this team together with their talent has never been stronger. and the execution of our clearly defined strategic vision has never been more compelling. We appreciate your interest and courage and for taking the time to listen this morning. I will now turn this call over to Carlos for more color on a really good quarter of performance.
spk02: Carlos. Thank you, Mel, and good morning, everyone. Thank you for joining. Before I start with our report, I'd like to thank Mel and the Board of Directors our executive team, and everyone at Carriage for their support as I take on the new CEO role. It has been a thoughtful and well-planned process for over two years, where Mel, through countless hours of mentoring and coaching, has prepared me to lead Carriage and continue the legacy of what he created for years to come. I am grateful for this opportunity and committed to continuing our good or great journey and pursuing our mission and vision of being the best every day. So thank you. Now moving to our second quarter high performance. For today's call, I will report on our financial performance with some operational color. Steve will provide an update on the composition of our new board of directors. He will share the integration process of our most recent acquisitions and other M&A activities. And Kian will provide detailed financial information. Now onto the results. We're very excited to share that our financial performance in the second quarter has exceeded our expectations. As previously communicated, we have diligently focused on delivering high performance for execution excellence. Here are the consolidated financial results for the second quarter. Total revenue reached $97.7 million, an impressive increase of $7 million or 7.8% compared to last year. These outstanding results were primarily driven by the exceptional work of our high-performance printing cemetery sales teams and the recent acquisition in Bakersfield, California. I will give more color on this point later on this call. Total field EBITDA was 40.8 million, showing an increase of 2.1 million or 5.6 percent, and field EBITDA margin of 41.7 percent, experiencing a slight decrease of 879,090 basis points. This decrease is primarily attributed to higher costs in salary and benefits and general and administration. The incremental expenses in these two areas totaled $2.3 million during the second quarter. However, thanks to the dedicated efforts of our managing partners at each business, we managed to offset $1.4 million through other cost savings opportunities. Overhead expenses amounted to $12.1 million or 12.4% of total revenue. reflecting a significant reduction of $1.4 million compared to the same quarter last year and under our previously communicated goal of reaching 13% in overhead costs by the end of 2024. GAAP income in the second quarter was $8.3 million, indicating a decrease of $2.6 million or 24% compared to last year. This decline can be attributed to a notable increase of 3.4 million or 56.9% in interest expense over what we paid the previous year, resulting in GAAP diluted earnings per share of 53 cents. The decrease in interest expense approximately equates to 22 cents of GAAP diluted earnings per share. And as we continue executing every item of our high-performance credit profile restoration plan, we will reduce our interest expense. For our adjusted numbers, adjusted consolidated EBITDA for the second quarter was $28.7 million, showing an impressive increase of $3.4 million, or 13.3%. Adjusted consolidated EBITDA margin was 29.4%, an increase of 150 basis points, and adjusted diluted earnings per share of 53 cents, outperforming consensus. We are immensely proud of these results as they reflect our efforts and progress in executing our strategic plan to consistently and sustainably enhance our financial performance over time. These efforts have allowed us to make up for most of the decrease we experienced in the first quarter of this year due to the record high first quarter of 2022 at the peak of COVID-19. Now, let's move to our funeral portfolio. Funeral home total revenue reached $60.8 million, an increase of $2.7 million or 4.6%. Our newest acquisitions primarily drove this growth, with comparable revenues decreasing by only $308,000 or 0.6%. Total funeral field EBITDA remained steady at $21.9 million compared to the previous year, with a slight decrease of only $108,000 or 0.5%. and total funeral field EBITDA margin was 36%, showing a reduction of 190 basis points from last year. However, thanks to the dedicated efforts of our managing partners in the field and at the Houston Support Center, the inflationary cost margin decrease has been significantly curved. Their work in revenue growth, pricing strategy, and efficient management of their controllable costs has contributed to this financial performance, and we extend our gratitude for the determination and commitment to have been the best mission and vision. Now switching to our cemetery portfolio. We are thrilled to report that our total cemetery revenue hit an all-time high, reaching $29.1 million in the second quarter, reflecting an increase of $4 million, or 16.1%. Moreover, total cemetery filibuster saw significant growth, reaching $12.9 million, a $1.8 million growth, or 16.2%, compared to the same quarter last year. Total cemetery field EBITDA margin remained very strong at 44.4%, maintaining the exact performance level achieved in the previous year. These record high revenue and EBITDA margin results were mainly due to the outstanding performance of our pre-need cemetery teams. Establishing our pre-need sales organization over the last three years has been a true game changer, coupled with the strategic acquisitions of premier cemeteries since 2019 in our existing cemetery portfolio, in addition to the impact that the execution of our pre-need cemetery strategy is making. Sales Edge, as our customer relationship system and lead generation marketing, provides us with multiple growth opportunities. That is why we're confident that we can continue maximizing these opportunities as we execute and create additional high performance in the years ahead. Regarding our prearranged Funeral Sales Strategic National Partnership, we are delighted to announce that the integration strategy between PRECOA, the National Guardian Life Insurance Company, and Carriage has been officially launched after two months of planning. This strategic move will revolutionize how we add value to families by offering pre-arrangement options for their funerals, securing future market share for each of our businesses, and generating additional recurring revenue like we never had before. We will integrate our funeral home portfolio into the new program in a phased approach, and we anticipate that pre-need funeral cells will experience substantial growth in the range of 40 to 60 percent within a year of integration. This exciting venture holds incredible potential for Carriage, our partners, and the communities we serve, while generating added value for our shareholders. We want to express our heartfelt gratitude to our entire team for their unwavering dedication and hard work, without whom none of this would be possible. Witnessing the tangible results of our strategic plan during the second quarter filled us with much excitement. and we're thrilled about the prospects for the future as we firmly believe that for Carriage, the best is yet to come. Thank you, and I will now pass it over to Steve.
spk04: Thank you, Carlos. As most of you are probably aware, the past couple of months have seen us welcome three new directors to our board, fulfilling the commitment we made earlier this year to add new talent and diversity to our board of directors. We began working with a national search firm in the first quarter and our board management team have spent the past several months meeting with a number of impressive candidates. From that group, we were able to identify three individuals who bring diverse experience and thought that will help drive our focus on continuous growth and improvement throughout Carriage. The newest member of our board, Julie Sanders, currently serves as Senior Vice President and a Chief Audit Executive for Dell Technologies, one of the world's leading technology companies, where she's held a variety of leadership positions over the past 20 years. Julie has served as a CFO for two other companies and has extensive experience with everything from M&A to financial planning and analysis. She also serves on Dell's ESG and Disclosure Committee and will be a tremendous resource as we continue to identify opportunities to enhance our focus on corporate responsibility. We've also recently welcomed Summer Webb to the board. Summer currently serves as the Chief Financial Officer for a publicly traded direct-to-consumer platform company focused on outdoor and lifestyle brands. Summer has worked for some of the top consumer-focused companies in the world, including Amazon and Southwest Airlines, and she brings valuable experience to Carriage, particularly as it relates to growing companies through acquisitions. Finally, Chad Fargason joined our board in late June. After receiving his PhD in mathematics from Duke University, Chad spent 10 years with KKR and has spent the last 10 years as a senior portfolio manager for an investment firm with approximately $15 billion under management. Chad's experience identifying and analyzing capital allocation strategies for various companies, coupled with his deep valuation expertise and knowledge of the markets, will serve Carriage and our shareholders well as we execute on the 10-year growth-focused vision laid out in this year's shareholder letter. Since the beginning of this year, there's been an immense amount of time and thoughtful effort dedicated to identifying and recruiting new leadership to join our board of directors. We're proud of that focus and confident that the experience and talent that Julie, Summer, and Chad bring to our board will be of great value to our shareholders, and we look forward to their contributions in helping drive Carriage forward in the years to come. As it relates to our focus on growth, we continue to be encouraged by the opportunities presented by our three most recent acquisitions. In particular, since we put a top sales team in place to support our Charlotte business, The production from the cemetery segment of that business continues to highlight why we were initially so excited to partner with Heritage and Forest Lawn East. Similarly, our most recent acquisition in Bakersfield, our largest acquisition by revenue in the history of Carriage, is only entering month five of our integration, and we're excited about the potential that will be realized in the months and years ahead as we continue to optimize the strong foundation of this great business. As we dedicate our time and resources to supporting these new additions to the Carriage portfolio, we also continue to build relationships with owners of other premier businesses throughout the country. In fact, this past quarter, we had several visits and conversations with owners of businesses that we believe will be great future partners for Carriage. These owners are aware that our current focus is integration of our newest acquisitions and paying down our debt, and many of them are willing to wait given their belief that Carriage is the right choice for their business. We look forward to continuing these conversations and building these relationships as we learn more about their succession plans and timelines. Finally, as we announced on June 29th, our Board has initiated a process to explore potential strategic alternatives, possibly including a merger, sale, or other potential strategic or financial transaction to maximize shareholder value. As we noted at the time, there can be no assurance that this process will result in a transaction. While the Board continues this review process with the support of outside advisors, we don't have further updates at this time, and we'll have no further comment on the topic. We will, however, provide an update when we have more news to share. With that, I'll pass it over to Keyon to provide more color on our second quarter performance.
spk05: Thank you, Steve. In the second quarter of 2023, under generally accepted accounting principles, CARES reported total revenue of $97.7 million and net income of $8.3 million or $0.53 per diluted share. This compares to total revenue of $90.6 million and net income of $10.9 million, or $0.69 per diluted share in the same period in 2022. Now looking at our adjusted financials, which are reconciled in the appendix tables of our press release, this quarter we reported adjusted consolidated EBITDA of $28.7 million, adjusted consolidated EBITDA margin of 29.4%, and adjusted free cash flow of 3.8 million. This compares to adjusted consolidated EBITDA of 25.3 million, adjusted consolidated EBITDA margin of 27.9%, and adjusted free cash flow of 12 million in the second quarter of 2022. We are very pleased with our financial results and operational performance, with considerable growth in both adjusted consolidated EBITDA and margin this quarter as compared to the same quarter last year. Now that we are able to compare and examine operational performance to prior periods that are minimally affected by COVID, this further highlights all the improvement, efficiencies, and growth related to our operational decisions from the Houston Support Center down to the field level that translate into our financial results. This is a perfect example of the resiliency of our unique business model and strategy and how we are able to successfully navigate the near-term choppy waters of a post-COVID world. Now, turning to this quarter's income statement, I will highlight some of the expenses down to net income. First, I'll start off by circling back to Carlos' comment on total overhead, which excludes stock-based compensation and other minor overhead costs. On the income statement, the combination of total G&A and other, along with regional and unallocated funeral and cemetery costs, decreased by $800,000 primarily related to our continued effort and discipline to meet our 2024 overhead target. Second, as Carlos mentioned, interest expense increased nearly $3.4 million, mainly driven by the average interest rate for a credit facility, increasing from 2.9% in the second quarter of 2022 to 8.6% this quarter. Lastly, income tax expense decreased $800,000 in the second quarter as a result of a lower taxable income applied to a similar tax rate for the quarter. Turning to the cash flow statement, cash flow from operations this quarter decreased approximately $1 million to $13.3 million as compared to the same quarter last year, despite net income decreasing nearly $2.6 million during the same period. When expanding the comparison period to the first six months of the year, cash flow from operations and free cash flow have increased $9 million and $11 million, respectively. As you can see, cash flow continues to remain strong, and we continue to strictly adhere to our capital allocation plan as outlined in the high performance credit profile restoration plan back in December. Similarly, we continue to delever methodically from a peak leverage ratio in the first quarter of this year after closing on the green lawn acquisition. Using our bank covenant compliance ratio as defined by our credit agreement, we ended the second quarter with 5.37 times leverage. We expect the leverage ratio to steadily decrease throughout the year. Turning to our annual guidance, we are pleased with how we are tracking operationally in the first half of the year relative to our annual guidance. Nonetheless, we would like to take a prudent approach to our guidance and gain more visibility into the seasonality of our business in a post-COVID world before revising our guidance ranges. As a result, we are reaffirming 2023 guidance of $375 million to $385 million in total revenue adjusted consolidated EBITDA of $110 million to $115 million, adjusted diluted earnings per share of $2.25 to $2.40, and adjusted free cash flow of $50 million to $60 million. Next quarter, we will look to tighten and or update our guidance ranges for the year. Again, with that, we will open it to questions.
spk07: Thank you. We will now conduct a question and answer session. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
spk01: Please stand by while we compile the Q&A roster. Our first question comes from the line of Alex Paris at Barrington Research.
spk07: Your line is open.
spk00: Thank you, and congratulations on the better than expected second quarter results, everyone. I have a few follow-up questions. First off, I'd like to start with the impact of inflation, both on your P&L and on consumer behavior. Your service corp announced earnings earlier this week, and this was a big topic on their call, so I thought I'd ask you some of the same questions. In the second quarter, your field EBITDA was better than expected, driven by cemetery. Your overhead expense was less than expectations. But within funeral, while revenues were up 4.6%, the field EBITDA was down 0.5%, suggesting some margin compression. So my first question is, based on your decentralized structure, how do your funeral managing partners evaluate price increases in the context of the funeral standards incentive comp structure?
spk02: Good morning, Alex. This is Carlos. And let me just break in a couple of components first. You know, if you compare the compression of margins between first quarter and second quarter, it's a significant difference from where we are today. And that's because of the effort and focus on pricing and cost-saving strategies at the business level. Managing partners have full freedom to go and decide what the pricing should be for their business based on their competition. We highly believe as a decentralized organization that the decision-making power on things that truly matter should be and remain in the field. They know their competition better than us. We're 2,000 miles away from many of them. and they know what's really going on between families that are asking questions, making calls, and shopping. And so we do leave that pricing power to them, and we're working really hard in showing where the opportunity is so it can lead to the right decision based on the financial performance expected for each business. We feel very confident with the efforts we have done that we're catching up to inflationary costs, not fully as you highlighted on our EBITDA, but it is a significant improvement compared to where we were last quarter. We believe that as we continue to move forward, that compression should be even less because we have not experiencing, you know, increase over increase over increase quarter after quarter. It has been somewhat steady, a little increase here and there, but nothing too dramatic. So we are very, very, very with high expectations that we should be able to have this pretty much in control.
spk00: That's helpful. So while there's compression year over year, there's improvement sequentially from the first quarter during this period in which you're trying to pass along those costs.
spk05: Yes, sir.
spk00: Great. Second and related question is Service Corp noted on their last conference call that within their cemetery business, they noted more price sensitivity with their lower-tier property sales, less so on their mid- and premium-level property sales. Did you see similar behavior in your cemetery business?
spk02: Contrary to that, Alex, you know, we had a phenomenal, phenomenal quarter for premium cemetery sales. Shane Putins and the whole team of director of sales support and every sales manager in the business did an exceedingly well job We did 116% over prior year on pre-need property alone, and pretty much same thing, 116% on pre-need merchandise and services. This is the result of two companies at different stages as it relates to pre-need properties. You know, before, let's say three years ago, Keres didn't really have the structure to sustain, you know, growth on the pre-need side through a very structured approach on compensation, you know, lead generation, CRM, things of that nature. So we are very young, really on the early stages of symmetry growth over time. Early stages, maybe not an infant, but certainly a toddler. One of the executives pointed out to me today. And I believe SEI, they have done an incredible job for many, many years. And so they're a more mature organization. And I believe because of that, because the past history of carriage of not having that type of organization, we just have way more opportunity. And because of that reason, we have not found any significant pushback as it relates to low-income families and this concern spending.
spk00: That's good to hear. Just to be clear, though, you had 116% increase in pre-need property sales in the quarter.
spk02: Correct. Now, remember that that includes unrecognized revenue, right? So they're just pure pre-need sales.
spk03: So, Alice, this is Mel. Good to be back and talking to you again. Yeah, same here. I've been so impressed at what Carlos has built over the last three years. When he got promoted, he turned over the organization to Shane Puditz. And I've been equally impressed at what Shane has done and his growth and development as a really senior leader. We had our first board meeting with all three new members yesterday and And I was blown away by Shane and his presentation of a game plan to keep the momentum going in pre-need property sales. He didn't bring up one time the consumer being an obstacle in the third and fourth quarter of this year. So I'm assuming the momentum that he has going, which continued into July, will also continue in the third quarter and the fourth quarter and next year and years after that. I agree with Carlos. I never could get the pre-need organization to be a high-performance cultural organization. Carlos knew how to do that. It took time and effort and a lot of sophistication, and now he's got it in place. We have strategic plans on all of our largest properties. We never had those before. We can allocate precious capital to a very high return on investment in these developments, and now we have the organization who can sell it at very high margins, it will be sustainable into the future. So I'm excited about it. We never had this engine to push. We were always too relied on death rates. Now we're not.
spk00: Great. Super helpful. And then just a point of clarification. And I think I know the answer to this, but pre-property sales were up 116%. But in the press release, you talk about a 3.4% decrease in the number of pre-need internment rights sold. Am I thinking about apples and oranges here? Could you explain the difference in terminology there?
spk02: Absolutely. I apologize for that. So when you think about it, there's a few components on the cemetery side, pre-need specifically, right? One could be the number of internments. which is just the actual number of burials that will take place over time. But that doesn't really correlate directly to the revenue per one of those internments. The other piece is the unrecognized revenue. That's where you'll see a difference between the 116% on printed property and the revenue we had recognized from those printed properties. Even though we have a phenomenal printed recognition rate, You still have a tiny little difference between the 16, almost 17% and the 16.2% that you can see on total cemetery field EBITDA.
spk03: Is that because we don't get the down payment for what?
spk02: No, so that could be because, well, yes, down payment is one, and maybe the development has not been delivered, and we need to wait for the delivery to take place in order to be able to recognize that revenue.
spk00: Gotcha. So it's a rubbing of recognition difference. Yes, it does. Thank you very much. And then I guess that's it for me. I'll go back into the queue. Thank you very much. And, again, congrats on the quarter.
spk07: Thank you, Alex. Thank you. One moment for our next question. As a reminder, to ask a question, please press star 1-1 on your phone. Our next question comes from John Fransbe of Sidati and Company. John, your line's open.
spk06: Good morning, guys, and thanks for taking the questions. I guess I would like to start with the guidance expectations. I guess you threw out a cautionary note that you revised on next quarter, but I'm wondering what's the status of the December 2022 outlook for 2024?
spk01: Any thoughts about that midterm guidance outlook and maybe an update there? Hey, John. Yeah, this is Keon speaking.
spk05: Focusing on 2023, so the revision that we kind of signaled is more just tightening things up for 2024. When we look at, I'm sorry, for 2023. Now, when we look at 2024, you kind of want to see how things play out, but nothing has really changed in terms of our guidance and expectations that we've laid out as a result of You know, the December 2022 kind of forecast we had and the goals we put out there. So we feel comfortable with that guidance as of now. But, you know, as we get more visibility, as we get closer into next year, we will make sure to update the market appropriately.
spk03: John, this is Bill. And I know Carlos is going to come in too. You know, we did that. And it's always dangerous when you try to predict what will happen two years out. So we did it at a very high level. Now what we're seeing so far is that we're on track to do that, but we don't want to change anything right now. We'd rather see a little more progress. But post-COVID, with that, we're actually seeing pretty good volumes in our funeral business, better than we actually thought we would, and even more success in our pre-need property and cemetery portfolio. So if things keep tracking the way they are and we get more updates... We'll have a tighter range for you. That's what Keyon is alluding to. But it will be based on more data and more precise success, I think, where we wind up at the end of 24. Our main thing here now is not to disappoint. We would rather under-promise and over-deliver rather than over-promise and under-deliver, which is something we did in the past.
spk02: As far as I'm concerned, that whole concept of burial. I'll add a little bit more color, too. You know, when you think about seasonality, this has always been a seasonalized business. We've talked about this in the past, Q1 being typically the number one quarter for a year. Then Q4 being the second quarter for the year. Second quarter would be the third, and I'm sorry, third quarter will be the third, and third quarter, I'm sorry, third quarter will be the last one. I apologize for that. So we're going into the third quarter. And last third quarter, we experienced something interesting, you know, coming off COVID-19. We had a great, you know, Q1, phenomenal, record-breaking, phenomenal Q2. And then we had a great July, great August, and suddenly dropped about 20% in September, mainly due to COVID-19 that's not showing anymore, right? And so we believe there should be some seasonality into 2023. or how to encourage how the normalization is setting way above, you know, the pre-COVID-19 levels. To give an example, you know, 2019 into 2020, the cremation rate dropped by 3% in just one year, mainly due to restrictions and families not being able to gather. Then as it's moving to 2021 and 2022, went somewhere around 1.2 to 1.3%. What we have seen in a quarterly basis between 2022 and 2023 in the second quarter, is a variation of only 0.9%. So it seems like even the cremation mix is going back to what it was, which was about a rate of 1% every year. And that's highly encouraging as we continue to move forward. And so we just want to be thoughtful, prudent, and get more insight into the next couple of months. And then we should be able to give you more guidance, especially coming off third quarter in a row outperforming
spk01: Fair enough.
spk06: And just when you're looking at the properties, are you seeing any meaningful regional differences in pricing or the willingness to accept pricing?
spk01: Please remain on the line. One moment for a technical difficulty. We shall be right back. Thank you for holding one moment while we work on the technical difficulty. Thank you for standing by. We're working on the technical difficulty and will resume shortly.
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