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Executives

Melvin C. Payne - Founder, Executive Chairman, Chief Executive Officer and Member of Executive Committee

L. William Heiligbrodt - Vice Chairman of The Board, Principal Financial Officer, Executive Vice President, Secretary, Director and Chairman of Executive Committee

Analysts

Alexander P. Paris - Barrington Research Associates, Inc., Research Division

Clint D. Fendley - Davenport & Company, LLC, Research Division

Carriage Services (CSV) Q4 2012 Earnings Call February 26, 2013 10:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Carriage Services Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today, Mr. Chris Jones, representing Carriage Services. Sir, please go ahead.

Unknown Executive

Thank you, and good morning, everyone. We're glad you could join us. We would like to welcome you to the Carriage Services conference call. Today, we will be discussing the company's 2012 fourth quarter and full year results, which were released yesterday after the market closed. Carriage Services has posted the press release, including supplemental financial tables and information on its website at www.carriageservices.com.

This audio conference is being recorded and an archive will be made available on the company's website. Additionally, later today, a telephonic replay of this call will be made available and active through March 8. Replay information for the call can be found in the press release, which was distributed yesterday.

Speaking on the call today from management are Mel Payne, Chairman and Chief Executive Officer; and Bill Heiligbrodt, Vice Chairman. Today's call will begin with formal remarks from management, followed by a question-and-answer period.

Please note that during the call, management will make forward-looking statements in accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. I'd like to call your attention to the risks associated with these statements, which are more fully described in the company's annual report filed on Form 10-K and other filings with the Securities and Exchange Commission. Forward-looking statements, assumptions or factors stated or referenced to on this call are based on information available to Carriage Services as of today. Carriage Services expressly disclaims any duty to provide updates to these forward-looking statements, assumptions or other factors after the date of this call to reflect the occurrence of events, circumstances or changes in expectations.

In addition, during the course of this morning's call, management will reference certain non-GAAP financial performance measures. Management's opinion regarding the usefulness of such measures, together with the reconciliation of such measures to the most directly comparable GAAP measures for historical periods, are included in the press release and the company's filings with the Securities and Exchange Commission.

Now I'd like to turn the call over to Mel Payne, Chairman and Chief Executive Officer.

Melvin C. Payne

Thank you, Chris. Bill and I are honored to report the extraordinary performance during Carriage's 2012 fourth quarter and full year period by our extraordinary operating leaders and employees in all of our funeral and cemetery businesses. We achieved a fourth straight year of record results, the details of which Bill will cover in a moment.

While our record performance was a complete team effort both at the field and corporate level, there were a significant number of what we call performance heroes in the fourth quarter and for the full year.

I am delighted to now call them out by name. In our Western region, Ken Pearce, Almeda Group, Oakland, California; Jim Asper, Hennessey Funeral Homes, Spokane, Washington; Dorn Rademacher, Cremation Society of Idaho & Relyea Funeral Chapel, Boise, Idaho; Nicholas Welzenbach, Higgins Mortuary and Oak View Memorial Park, Antioch California; Matt Simpson, Deegan Funeral Chapels, Ripon, California; Steve Mora, Conejo Mountain Funeral Home and Cemetery, Camarillo California.

In our Central region: Mark Cooper, Seaside Funeral Home and Cemetery, Rose Hill Cemetery in Corpus Christi Funeral Home, Corpus Christi, Texas; Kyndall Hale, Grantham Velma Funeral Home, Duncan, Oklahoma; Jim Sheridan, Dwayne Spence Funeral Homes, Pickerington, Ohio; Patty Drake, Drake-Whaley-McCarty Funeral Home, Cynthiana, Kentucky; and Brian Binion, Steen Funeral Homes, Ashland, Kentucky.

And in our Eastern region; James Bass, Emerald Coast Funeral Home and McLaughlin Mortuary, Fort Walton Beach, Florida; Jim Terry, James J. Terry Funeral Home, Downingtown, Pennsylvania; Fred Bryant, Bryant Funeral Home, East Setauket, New York; Frank Forastiere, Central Springfield Group, Springfield, Massachusetts; Robert Maclary, Kent Forest Lawn Funeral Home and Cemeteries, Panama City, Florida; Scott Griffith, Bergin Alliance Funeral Home, Waterbury, Connecticut; David Feeney, Feeney Funeral Home, Ridgewood, New Jersey; Jim Geeslin, Fuller Funeral Cremation Services, Naples, Florida; Ken Duffy, John E. Day and Sidun Group Funeral Homes, Red Bank, New Jersey; and finally, John Banas; Fort Lauderdale Cemeteries, Fort Lauderdale, Florida.

However, there are 2 more performance heroes that I would like to recognize in my initial comments. They are Bill Heiligbrodt and Robert Prescott, [ph] who during 2012 began to explain to a new audience of institutional investors why and how Carriage's high-performance cultural framework has unleashed a previously unknown level of sustainable earning power, and why the next few years of consolidation in our industry should be Carriage's time in the sun.

Now I'll turn the call over to Bill to talk about our results.

L. William Heiligbrodt

Good. Thank you, Mel. Appreciate those comments. I know Robert does as well. As you said, it is truly a pleasure to report these numbers today, that is a culmination of what we call a journey from good to geat that was started in 2011. I'm sure Mel will touch on this a little later. But these results represent a team effort achieved and attained by all parties in Carriage, and for this quarter and year 2012 reported today exceeded our business plans and objectives.

I'd like to talk first about the fourth quarter. Looking at the fourth quarter, we always start with the key driver of our performance, revenue. Total revenue was up 13%-plus. Same-store revenue was up almost 3%. With a strong performing group of acquisitions coming in and adding to the same-store revenue, our total Funeral revenue in the quarter was up 10%. Revenue growth with performance improvement in Cemetery and our usual good results in financial pushed Field EBITDA up almost 26% for the quarter. Field EBITDA margin was 41.5% versus 37.1% in 2011.

This demonstrated the value of revenue growth in a funeral service company like Carriage. At the same time, total overhead was flat, and as a percent of revenue, actually decreased. Final results adjusted earnings per share of $0.24 for the quarter versus $0.10 last year, a very, very large percentage growth.

Now let's take a look quickly at 2012. Including these great fourth quarter numbers into our full year results for 2012, we see total revenue growth of 8.8%. All year, on these calls, we have said that revenue in excess of 8% would produce outstanding earnings per share performance. That truly has been the case with adjusted earnings per share for 2012 of $0.85 versus $0.65 in 2011, an increase of over 31%. All of this was accomplished with good performance numbers. Total overhead was up about 5%, but as a percentage of revenue, again, was down compared to 2011 and represented 14.8% of revenue. Likewise with revenues up 8.8%, total Field EBITDA was up over 16%, a doubling with a margin of 39.6%. I think our trend accounting reports in the press release will give everyone sufficient information in all categories of our financial report in both the quarter and year 2012 for proper evaluation of all our performance measurements.

Acquisitions. We completed 8 acquisitions in 2012. One was closed in December 2011. The other 7 were closed throughout 2012, with 3 of the 7 closing in the fourth quarter of 2012. Expected revenue from these acquisitions is $18 million. All of these acquisitions are accretive to earnings immediately. Reviewed analysis and evaluations indicate these new businesses are exceeding our purchase pro formas. Remember, since the acquisitions we're acquired throughout 2012, they will still be producing new results for us in 2013. The amount of revenue added from new acquisitions in 2012 was approximately $7 million.

In addition to the acquisition program, we are doing something a little different for us by expanding our present positions in new locations in 2 markets. We currently have strong businesses in both of these markets, where demographics and growth opportunities are really, really good. We are hoping to do approximately the same number of acquisitions in 2013 as we did in 2012. The key is to acquire businesses that offer good returns and can perform for Carriage day 1.

Funding for these acquisitions and our planned new locations comes from our new bank revolving credit. We have sufficient capacity for the immediate future, and as reported in 2012, with the attainment of this new credit facility, our financing costs for 2013 will be lower.

Now let me talk just a couple of seconds here about a couple of performance ratios that we follow very closely for ourselves. The first of the 2 we look at internally needs mentioning is return on revenue, or defined, adjusted net income divided by total revenue. This number increased from 2011 to 2012 from 6.3% to 7.6%. Secondly is return on assets, or adjusted net income divided by total assets. That ratio was 1.77 for 2011 versus 2.09 in 2012. This represents a growth of 18% year-over-year.

Lastly, touching on our outlook for 2013. Our rolling 4 quarters outlook is available for you on Page 6 of our press release. As shown in terms of adjusted earnings per share, we are looking currently for a range of $1.11 to $1.14 per share for 2013. This would be a continuation of the 30%-plus growth accomplished in 2012.

Okay, Mel, I turn it back over to you.

Melvin C. Payne

Thank you, Bill. As Bill mentioned earlier, at the beginning of 2012, we launched a 5-year good-to-great journey theme with our company starting with 2012, which was themed Carriage Services 2012 - A NEW BEGINNING! Our leaders and employees across the company have been energized around this 5-year vision and have committed to making this year an even better performance year than 2012. Under the theme, Carriage Services 2013- Raising the Standard — All In!

Bill and I are not only all in, we are excited and honored to be leading our respective teams on this journey and want to thank those of you, including our shareholders, bankers, suppliers, board members and most of all, our families who are taking this journey with us.

This concludes our formal comments.

Unknown Executive

Okay. We'll now be happy to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Alex Paris from Barrington Research.

Alexander P. Paris - Barrington Research Associates, Inc., Research Division

I have a few questions, I guess I'll start with acquisitions. You did 7 or 8, depending on how you count them in 2012. You say a similar number in 2013. My question lies in the integration of these acquisitions. What do you do post-acquisition? Is it simply a matter of putting them on a common computer system? Is there central purchasing? Are there other efficiencies to be gained post-acquisition?

L. William Heiligbrodt

Alex, this is Bill. We have a planned program that involves every department in Carriage, itself, from human resources to data processing to accounting to all the normal functions. They all operate, obviously, on common systems, but we operate everything on a decentralized basis. So we want to maintain the entrepreneurship that was created in creating these great businesses that we're buying. So it only makes sense that we depend on decisions from the field. We offer selection or opportunities to help, if so desired. So even down to purchasing, even though we try to obtain the best rates we can from various suppliers, the decision on what is bought is done at the field level. All of this retains the entrepreneurship of that acquisition, in which is a key factor in making these things successful day 1. I think of the 7 that we closed during 2012 and even the first acquisition that we finished -- we had planned for 2012, but just happened to be lucky enough to get it closed in 2011, have gone very smoothly. We've had no problems and actually, have been doing funerals the first day we acquired them very successfully. And I think that's a key to any program. Everybody understood what the plan was on both sides. We worked on it very carefully. Our acquisition team actually coordinates getting all that started, and then it passed over to our wonderful operational team to continue after the business is acquired. But the other key point is to close them as quickly as we can. We closed some of them as fast as 30 days. When you identify good business, you want it doing funerals and business for you from day 1. That's what our goal has been. We've accomplished all of that in this acquisition program, and that's a key part of what we do and one of the most important components of making these things accretive to earnings day 1.

Melvin C. Payne

This is Mel, Alex. Just to put a little more color on that. We have defined Carriage as having 2 core businesses. One is operations, funeral homes and cemeteries under our Standards Operating Model; the other is consolidation of the best remaining independent businesses in America and then to support them in a way that makes them even better. Now that's a high hurdle when you're buying the best remaining independents to make them even better. We don't snooker ourselves to believe that we can make them better locally in servicing their client families and community. But what we can do is offer them the best support in IT, legal, HR, training, anything that is a support function, regulatory, we try to lift off of their shoulders and give that service to them as if they were our customer. And I think by doing that more on the front end as much as possible before the closing so that they get familiar with our people, their names, who they can call for help, it speeds up the integration and makes them feel very much part of Carriage. And our goal is to have them feel a member of the Carriage family, loved and supported as soon as possible, and that's how they will then be able to focus on growing their business. So that's the other side of your question.

Alexander P. Paris - Barrington Research Associates, Inc., Research Division

Okay, absolutely. And then...

Melvin C. Payne

We don't come in with all these things that they have to do, where they buy cars or make them do this or that on purchasing. That's the last thing we would do. That's not who we are.

L. William Heiligbrodt

Well, I'm going to -- that's a great question, so I going to add one point to what Mel said. By lifting some of these responsibilities that are non -- I'm not going to say they're non-income producing, but they are certainly in that category. It allows our management at these funeral homes that we acquire to devote full time to growing their businesses and serving their client families. There's a proven fact when we look at these analysis in our pro formas of what we have bought that every one of these have improved their EBITDAs by coming into this system where some of this burden is lifted from them to allow them to direct full attention to what their business really is. And we could show all of you that with our -- with the analysis of the acquisitions that we acquired. But I just wanted to answer that because these are all things that are very, very important and make a real difference in a company like ours.

Alexander P. Paris - Barrington Research Associates, Inc., Research Division

Great. And then I had a question about the guidance. If you take a look at the guidance from the midpoint, it looks like you expect a $0.28 pickup year-over-year in earnings per share. Now you said you only captured $7 million of the $18 million in revenues that you acquired during 2012, so you still got another $11 million to go. What does that work out to be in earnings per share? So of that $0.28, how much comes from acquisition-related earnings not yet realized on a year-over-year basis? And then what comes from the new debt structure, because you're obviously getting a pickup there?

L. William Heiligbrodt

Well, we know that we took the debt structure in, in the fourth quarter and we thought -- and these are estimates based on where the debt levels were at the time we established the new credit. We were looking for about, to what, Robert? $0.28 pretax for the year. Some of that, approximately a portion of one quarter was used in 2012, so we still have substantial benefits coming through on the loan agreement, the new loan agreement for 2013. The other question's very hard to answer because we've looked at that on a pro forma basis, but I will tell you that the first acquisition that we closed was projected to add like $1.09 [ph] per share. The reevaluation based on actual numbers, that acquisition added $2.09 [ph] per share. So it's a little difficult to put those numbers down exactly like you're talking about. However, I can say that I think that $11 million in revenue, $10 million to $11 million you're talking about is going to come through probably substantially higher than what we have in our revised -- in this forecast because it was done based on pro forma numbers. And so where we -- it's a plus for us, and we think -- there's 2 points to this forecast: one is the acquisitions, which you brought up; the other is our same-store volumes. Our same-store volumes in the forecast are about 1%, while -- in revenue, 1% and that, as you saw in the third -- in the fourth quarter this year, we were running at about 4%. Now those are extraordinary numbers and should even up over time, but I still think we're realistic really on this forecast for 2013.

Melvin C. Payne

I think the bank for the 3 quarters that we didn't get benefit last year is $0.09, $0.10 after tax somewhere in there, and then you got the acquisitions and operations on top of that, Cemetery in particular, we ought to see some upside during 2013. We got some great talent in the company.

Alexander P. Paris - Barrington Research Associates, Inc., Research Division

Well, if you add that altogether, it looks like the forecast for 2013 is conservative as it should be, so we'll look forward to meeting and beating as the year unfolds.

L. William Heiligbrodt

I think the key to future growth in 2013 as it was in 2012 is the addition of new acquisitions this year even beyond what we've already acquired. Currently, we have 4 businesses that we're looking at right now. And so we're looking forward to getting off this year to a good start as well.

Melvin C. Payne

Yes, it's a really good time to be in the company with all the talent that's been unleashed and to see what they're doing, Alex. Operations now are off to the races. I might even get Bill's permission to go elephant hunting this year, maybe deer hunting something. We'll find some nice acquisitions. So it's looking really good for our company.

Operator

[Operator Instructions] Our next question comes from the line of Clint Fendley from Davenport.

Clint D. Fendley - Davenport & Company, LLC, Research Division

I'm wondering, we saw a very busy quarter of M&A just across the industry. I'm wondering if you guys think that represents just a final year-end push for tax reasons? Or are you seeing any sustained increases in multiples as we move on further here into 2013?

L. William Heiligbrodt

Well, I think, number one, what we've been seeing so far this year has been continuous from what we saw in 2012 in terms of our own development of prospects and what had come to us from various sources, so that's the case. We've not changed anything we're doing, so I don't know what you mean by that.

Melvin C. Payne

We're not getting these deals because we're paying a higher multiple.

L. William Heiligbrodt

So I think the numbers that we've been -- the multiples, whatever, however you want to look at what we're paying, they're still based on the same system that we've done. We're dedicated to staying on that system. And so far, it's a proven fact that it has built value for this company, so that's what we'll continue to do.

Clint D. Fendley - Davenport & Company, LLC, Research Division

I wondered, you mentioned that you don't have any letters of intent at this time. I mean, does that represent kind of a lull in the activity, or is it really just merely a timing?

L. William Heiligbrodt

No, we've had -- actually we've passed on some transactions earlier in this quarter that we could have done. We have some very good businesses that we're looking at right now. And frankly, we had -- I mean, we closed 3 in the month in the fourth quarter right towards the end of the year that were very significant acquisitions, so we're going just about as fast as we can.

Melvin C. Payne

Well, I know it must be hard to model out on a quarterly basis what you think the acquisitions will be. We're not worried about it.

L. William Heiligbrodt

We have some really nice prospects that we're looking at right now all over the country and not in any one particular location, from coast-to-coast to be honest with you, and some of those will fall into place on a basis that we feel comfortable with.

Clint D. Fendley - Davenport & Company, LLC, Research Division

Got it. And last question here, I wondered if we could switch gears a minute. Obviously, Mel, you touched on it a minute ago, but you've kind of updated and revised your Cemetery Standards Model beginning in here in January. I'm wondering what we should be expecting and thinking about for that segment as we move forward here?

Melvin C. Payne

That's a very good question, and I'll tell you there's some bad news and there's some good news. The bad news is, I can't define for you exactly what to expect because I don't know. The good news is that whatever you want to think about expecting, it will be better -- the actual will be better than that because we've got some talent in this company now that we've never had before, and they're going to -- they're working now. It's going to be -- just like on the Funeral side, it's just about a year. It's funny because I made a funny -- we try to have a little humor in what we do here and putting together our plan and getting our people all on the same page, I said, "Hey, our Cemetery business, we have 33 of them, they had a delayed new beginning by 1 year." No problem. We're having our new beginning in the Cemetery business this year, and as the year unfolds, I don't expect it to be any different in performance than what you saw on the Funeral side, maybe better.

L. William Heiligbrodt

Clint, I mean, I think you might want to look at the trend report for the fourth quarter. Our Cemetery revenues were up 9% in the fourth quarter and our margins increased from 23% to 27% and our actual Cemetery EBITDA was up 28%. Now those numbers far exceed what's in the projections in the outlook that we've given you. So -- but we are seeing some small improvement, and I will point out that small improvement is big percentages in the Cemetery area. So I agree with Mel. I think we're poised to do better in Cemetery and I think that is something that was kind of missing throughout 2012, so it should be a real benefit to our shareholders now. I'm trying to interpret what Mel said just a little bit.

Operator

Thank you. And we have no further questions. This concludes our conference -- go ahead, sir.

Melvin C. Payne

Then that concludes our call.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.

Unknown Executive

Thank you.

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