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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

Joseph D. Janssen - Barrington Research Associates, Inc., Research Division

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

Dan Baldini

Carriage Services (CSV) Q1 2013 Earnings Call May 8, 2013 10:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Carriage Services First Quarter 2013 Earnings Webcast. [Operator Instructions] Today's conference is being recorded. I would now like to turn the call over to Chris Jones.

Unknown Executive

Thank you, and good morning, everyone. We're glad you could join us and we'd like to welcome you to the Carriage Services conference call.

Today, we will be discussing the company's 2013 first quarter 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 carriageservices.com.

This audio conference is being recorded and an archive will be made available on Carriage's website. Additionally, later today, a telephonic replay of this call will be made available and active through May 17. Replay information for the call can be found in the press release 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 report filed on Form 10-K and other filings with the Securities and Exchange Commission. Forward-looking statements, assumptions or factors stated or referred on the call are based on the 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 very much. Consistent with our company theme for 2013, which is Carriage Services 2013 Raising the Standard — All In!, the field performance across our portfolio of funeral homes and cemeteries was outstanding in the first quarter. Last year, we began a tradition of recognizing on our quarterly conference calls those managing partners and their employee teams and businesses that deserve special recognition for their outperformance across our portfolio of businesses. I am honored to now call them out by name. In the West: Ken Pearce, Alameda Group, Oakland California; Matt Simpson, Deegan Funeral Chapels in Ripon, California; Ken Summers, P.L. Fry and Son, Manteca, California; Bob Finley, Darling & Fischer Funeral Homes, San Jose; and John Banas, Rolling Hills Memorial Park, Richmond, California. In the Central: Mark Cooper, Seaside Funeral Home and Memorial Park and Rose Hill Memorial Park in Corpus; Patty Drake, Drake-Whaley-McCarty Funeral Home in Cynthiana, Kentucky; Pam Parramore, Baker-Stevens-Parramore Funeral Home in Ohio; Randy Valentine, Diterle Funeral Home and Hirsch and Lain-Sullivan in Chicago; and Joe Raiborn, Sterling Funeral Home in Dayton, Texas. And in the East: Jim Terry, James J. Terry Funeral Home in Pennsylvania; Bill Martinez, Stanfill Funeral Home near Miami; Michael Kelly, North Brevard Funeral Home in Florida; Jason Higginbotham, Lakeland Funeral Home & Memorial Gardens in Lakeland, Florida; James Bass, Emerald Coast McLaughlin Group in Florida; Wayne Lovelace, Lotz Funeral Home, Vinton, Virginia; Bob Pollard, Lotz Funeral Home, Salem, Virginia; Brian Hafey, Hafey Funeral Home in Springfield, Massachusetts; Scott Griffith, Bergin and Lyons Funeral Homes in Connecticut; and last but not least, Frank Forastiere, Forastiere Group, Central Springfield in Massachusetts.

With that, Bill will now provide some more specific color on our performance in the first quarter and our new 4-quarter outlook.

L. William Heiligbrodt

Thank you, Mel. The first quarter 2013 was an outstanding quarter for Carriage, with great operating results accomplished by all in our company and a confident team effort. Together, Mel and I recognize the dedication of all our employees in attaining these results. Putting this performance into perspective and despite record performance in the first quarter of 2012, our record revenue of over $58 million produced 13.2% growth versus the first quarter of 2012.

As we have continued to comment on these calls, when Carriage exceeds 8% in revenue growth, we should be in a position to produce strong earnings per share growth for you, our shareholders. That was certainly the case this quarter, with GAAP basic earnings per share up almost 41% to $0.31 per share. Likewise, adjusted basic earnings per share, or non-GAAP earnings, increased 21.4% to $0.34 a share. These numbers are before the dilution effect of the Convertible Subordinated Debentures, TIDES. As the first quarter represents the first time this dilution has affected our financial statement, the accounting standard used for this calculation is the if-converted method, which assumes full conversion of these securities even though they're not converted. The effect of this accounting treatment is $0.02 per share on adjusted non-GAAP EPS, and $0.04 per share in GAAP EPS for the quarter.

The trend reports beginning on Page 6 of our press release will detail all our operating and financial metrics in detail. There are 2 categories which I would like to draw special attention. First, over the past 2 quarters, Mel has commented that we expect better performance from our cemeteries. And we are pleased to see these properties moving forward with improving revenue and profit trends.

Second, I must point out that we achieved record free cash flow of $9 million in the quarter, a 314% increase over last year.

Commenting on our acquisition program, we discussed with you last quarter that during 2012, we completed 7 acquisitions representing an anticipated revenue of $18 million. Three of these acquisitions were completed in the fourth quarter of 2012. During 2012, we recognized $7 million of revenue, leaving $11 million for recognition in 2013. Even though we did not close the new acquisition in the first quarter of 2013, our Funeral revenue continues to be significantly affected by growth in our acquisition revenue. One thing we have not reported on, however, is the fact that we have now been able to analyze annual operating results on those acquisitions completed early in 2012. All these acquisitions have been enhanced by our standard operating model, and all appear to be exceeding our initial acquisition projections. We continue to have numerous businesses under consideration. Expect the company to complete a similar number of acquisitions in 2013.

Next, our rolling 4 quarters outlook to 3/31/14 remains strong and reflects adjusted non-GAAP EPS before TIDES dilution in the range of $1.16 to $1.18. We're also pleased to report that we have negotiated an amendment to our bank loan agreement in April of this year. That amendment gives us $20 million additional availability on our line of credit, improving that number to $125 million. And that credit is used primarily, again, for acquisition financing. In this amendment, we also achieved new pricing grids reflecting 50 basis point reductions across the board.

Remember, we significantly changed our financial structure for Carriage with the new bank credit agreement in late 2012. We commented -- we have commented before that we expected favorable EPS enhancements from that agreement. Those effects financially have so far only been reflected in the fourth quarter of 2012 and this quarter. The amendment just negotiated will further increase those financial enhancements, plus provide for more flexibility in our financial leads.

Concluding, Mel and I look forward to reporting to you as we move through 2013. Mel?

Melvin C. Payne

Thank you, Bill. In closing, I want to say that over the last 18 months, our company has dramatically improved its operational, financial and organizational ability and capacity to execute our Funeral and Cemetery Standards Operating Models and our strategic acquisition model, which is reflected in higher rates of revenue and profit growth, as Bill mentioned, in each of our 4 major profit segments, which are Same Store Funeral, Acquisition Funeral, Cemetery and Financial. Our leadership talent and our employee teams have never been stronger, are more aligned with our high-performance standards, both in our field operating organization and support departments in Houston.

We are positioned and committed to continuing these high-performance trends well into the future as we affiliate with many of the best remaining independent firms in strategic markets across the country. If you are a shareholder, you will have already received our 2012 annual report, which is themed Carriage Services 2012 - A NEW BEGINNING!

I call your attention to the high-performance cultural framework, visual schematic on the first inside page, opposite the cover page. This schematic visually describes all the linkages between our mission statement, our 5 guiding principles and the application of good-to-great leadership and people concepts that flow through our 3 models to create high and sustainable financial performance, which in turn drives the value-creation dynamics that make Carriage a great investment vehicle for our shareholders and our employee owners.

Carriage's high performance culture framework is designed to match the nature of our business, which is a local, entrepreneurial, high-value personal service business. When combined with the relatively small size of our company where every business and every employee can make a difference, we are currently in an earning power and value-creation sweet spot as consolidation of our still highly fragmented industry continues.

While our stock price has risen dramatically over the last 18 months, Bill and I and the rest of our senior team and our Board believe that we are in the early stages of our journey to take Carriage from a good company to one considered great, and therefore, believe the best is yet to come.

With that, I'd like to open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Alex Paris from Barrington Research.

Joseph D. Janssen - Barrington Research Associates, Inc., Research Division

This is Joe Janssen filling in for Alex Paris. Mel, optically, the dilutive impact from the $90 million converts impacted EPS by about $0.02. Any sense of timing when you think you'll be able to possibly refinance that? And what rates are we looking at and then what would that do potentially to EPS once that's done?

Melvin C. Payne

Bill has been looking at that, so I'm going to let him answer the question.

L. William Heiligbrodt

Well, we actually have not agreed upon any kind of transaction. We're exploring all of our alternatives in that regard. I think we realized that we must address that issue, and I think we're ahead of the game there, but we haven't made any final decisions in that regard at this particular time.

Melvin C. Payne

It's a low rate environment so whatever we do will be good for the company.

L. William Heiligbrodt

You guys probably know the rates better on -- that are out there in the public market than we do.

Melvin C. Payne

We're going to be smart on the timing and do it right. So it will be good.

Joseph D. Janssen - Barrington Research Associates, Inc., Research Division

Fair enough. In your prepared remarks, I appreciate the commentary, you mentioned the 7 acquisitions in 2012, which you thought, on a full year basis, would generate about $18 million of which you're expecting to get about another $11 million this year in 2013. And I also heard the comments that they've been brought into the Carriage Service family, that they've been exceeding projections. Any way you can quantify that $11 million? Are we looking maybe more like $12 million, $13 million now based on those comments?

L. William Heiligbrodt

Well, I don't like to do projections, but I will. If you remember, one of the plans that Mel and I presented to you was, in our new acquisitions, that we were going to be specific. Mel mentioned the standard -- the acquisition -- standard acquisition operating model and the other models that we're using. But in the acquisition model, we're trying to buy special firms in special markets. And the only reason I made those comments was because I think we have proven that. And a lot of the view, the analysts and so forth have asked us those questions, and we're more than pleased to share those results with you. So yes, they are exceeding our expectations and they're not only adding more revenue but they're adding more cents per share to Carriage.

Melvin C. Payne

This is Mel. It's fun to watch when you buy a really good business and then it gets to be part of our company and the connection is made. It takes a little time, but I would tell you that across the company, whether we have new businesses or whether they've been around for a while, the morale has never been better. Next week, for example, we will have every managing partner of every business, funeral home and cemetery and combination businesses, here for 3 full days. And I will tell you, by the time they leave, they won't even have to take a plane home. The excitement in the portfolio amongst our leaders and employees has never been higher. So I think you'll see, over the next while, really good performance out of our entire portfolio. And it will -- whatever the revenues are, the earnings and the margins will be there. And that includes Cemetery portfolio, our Cemetery portfolio is really looking good. It is really looking good and I'm very excited for the talent and for the people that are making that happen.

Joseph D. Janssen - Barrington Research Associates, Inc., Research Division

Okay. Just drilling down on funeral home segments. Same-store sales volumes continue to increase at a pretty healthy rate. Could you kind of peel back the onion, so to speak, and give us a sense of how much is attributed -- we know that death rates in the last couple of months, or quarter here, have been increasing versus maybe possible market share gains in local markets? And maybe a little peak into the second quarter and how that trend has continued?

Melvin C. Payne

This is Mel. We track every business and the competition on a monthly basis, and we have 10 years of history for businesses that we've owned for a long time. And it used to be, I was very constantly focused on seeing how much of the increase or decrease in volume was related to death rates and how much of it was related to market share. I quit doing that and started focusing on leadership that would perform well whether the death rate was up or down. And they were the kind of leaders who were competitive and wanted to win the market share battle in their market. So I think what you see and is continuing is how well this model recognizes and rewards the right kind of leadership and the right kind of teams heavily involved, heavily knowledgeable about their local market dynamic and what they can do to create more market share through their business. And I think it's a combination of those 2 things that's underway across the portfolio, and it will continue.

Joseph D. Janssen - Barrington Research Associates, Inc., Research Division

Okay. In the same way, with death rates kind of being a tailwind, in the context of acquisitions, are mom-and-pops, are they starting to feel a little better given this tailwind? And then are they becoming a little bit more bold in terms of maybe potentially the price they're looking for in terms of acquisitions? Or too early to tell?

L. William Heiligbrodt

This is Bill Heiligbrodt. I don't know what you mean by being bold, they're all -- any entrepreneur owner of a business is bold. But I will say that we're willing to pay fair prices for companies that meet our model, our acquisition model. And when Mel talked about, and you asked questions about the death rate, that's one of the main criteria that's in our acquisition model. We're looking for businesses that haven't been affected as much as other businesses by the death rate. That's part of the standards operating model, the philosophy, and that's why I emphasized that in my comments. If that's the case, we didn't have a great funeral market all of 2012, and yet we outperformed our acquisition projections. And I think that's the important thing. So what I'm trying to point out to you is that with facts, I think, if any of you are interested, Robert Prescott or myself will be happy to discuss this with you, but we can show you what happened. And when you get 6 extra funerals, or you increase your average funeral or you change your margin by managing better, it really affects the bottom line. And all of these businesses under our acquisition model that we've analyzed so far, that we completed, for the first time when we started -- Mel and I started this program together and, really, in November of 2011, have proven that to be the case. And I'm astonished, personally, after all the years I've been in this business, that these acquisitions are performing better in our system than I projected them to be because I'm not known as a nonaggressive person. So that -- I think that's one of the important things. And again, I think that's going to be continuing. And if you have that kind of operation and we're small enough to still be able to influence the overall by the decisions we make in the companies that do come into this company, and they do fit into this schematic and system that Mel pointed out in the annual report, I think that only spells real success for the future. And that's the whole key, is that you can have a great company if you have great operating systems and you have great tools to work with. And that's what Mel and I are dedicating to giving our shareholders.

Melvin C. Payne

I will only say that from a personal point of view, to see Bill Heiligbrodt excited about what we're doing in this company is a beautiful thing to behold.

Operator

Your next question comes from Clint Fendley from Davenport.

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

I wondered if you could explain the accounting on the convertible, please. I'm wondering, if your stock stays around $17 per share for the duration of the second quarter here, should we expect to see the additional 4.4 million shares from the convert in the denominator for the second quarter?

L. William Heiligbrodt

We can't totally answer that question until we see how the numbers come out for the quarter, Clint. But as you know, the calculations are kind of funny on this as-if converted method. You take your -- and I talk only about adjusted net income here, because you take adjusted net income and we add back the expense -- the interest expense from the TIDES, net of the tax, and then we divide it by the number of shares on a fully diluted basis including full conversion on the TIDES. But it does -- if you look back in our history and you made this same calculation before the first quarter, it would be actually additive, not dilutive, so you don't do it. So it really doesn't depend on stock price. It depends on earnings and it depends on the interest expense level on those TIDES as to what happens there. I will point out that if decisions were made or if we can come up with a solution that we're satisfied with, the dilution goes away. So that is the real answer to the question. So that's why we're rapidly looking and considering all our options. And unfortunately, the good performance that we've had in the first quarter has caused some of the problem. So we're happy to have that problem.

Melvin C. Payne

Clint, this is Mel. I think that issue, it's a mathematical calculation, will resolve itself and it's in our control. We just keep doing what we're doing, performing the way we're doing, growing the way we're growing, it will resolve itself to the benefit of all of our shareholders.

L. William Heiligbrodt

Right. Clint, let me give this out because my phone has been ringing off the wall this morning about this. So our adjusted net income in the first quarter was $6,154,000. You add back the interest expense from the TIDES, net of 34% federal income tax, that is $1,036,844, for a total of $7,190,844. And you divide that by 22,728,000, which is our current outstanding shares, plus the converted value of the debenture. That comes out to $0.32. On basic earnings per share, we're at $0.34. So that's how you get to diluted. When we've run this calculation in the past, it's actually been above our basic earnings per share, so it's never mattered until now. So I think this technical explanation might help you understand it a little better.

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

Yes, that was my next question then. I mean, because I know on Page 8 of your release, there are $0.05 worth of special items, which obviously reconcile from the $0.27 GAAP number to your $0.32 adjusted EPS. So all of those items that you just gave to me, I would take it, represents the $0.05?

L. William Heiligbrodt

Represent what now, Clint?

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

The $0.05?

L. William Heiligbrodt

Well, the $0.05 dilution is in GAAP. And in GAAP, the difference is, instead of getting the full allocation of the interest expense from the TIDES, net of the taxes, which is $1,036,000, the corresponding technical number for GAAP is only about $400,000. So probably -- Robert or I would be happy to go over that in more detail with you, if you'd like, but I think the easy way to think is we run this company off adjusted net income. And what the concept is, is that you take your adjusted net income and you add back the interest expense from the convertible issue, net of taxes, and you divide it by fully diluted earnings -- fully diluted shares outstanding. It's a very simple calculation, that's what it is, and that's the as-if converted analysis. To be quite frank with you, I'm learning about it pretty good myself.

Melvin C. Payne

It's purely technical, Clint.

L. William Heiligbrodt

But that's how it's accomplished.

Melvin C. Payne

We have many options in front of the company, none of them are bad.

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

And I guess stepping back from it then, I think it's pretty clear you guys have sort of, to a certain extent, kind of been a victim of your own success here. So is the share count assumption that you're using -- what is the share count assumption that you're using for your fully diluted adjusted guidance of $1.11 to $1.13? And I guess, if we looked at the other guidance, the rolling 4 quarter guidance that you provided on a basic level, that basically -- or I guess that essentially ignores the convertible altogether. And is that your way of saying we're just going to try to address this as soon as possible, hopefully sometime in the second quarter here, such that it will go away?

L. William Heiligbrodt

Well, we're cognizant of that but there's many moving parts to this and I don't want to commit to anything because I don't have a plan yet, Clint. But let me say that what we do is we stick with our basic shares outstanding, which is 18,336,000. So in the calculations on the rolling 4 quarters going forward, we add to that the shares that would be available under the convertible debenture to make the projections. And the rolling 4 quarters does have the diluted numbers based on our best calculation of that. And we run those numbers very technically. I may comment on, in my remarks, that those rolling 4 quarters numbers, we're expecting $1.16 to $1.18. So the fully diluted numbers are about $0.05 less than that, using the same calculation that I just gave you. Both sets are provided in the rolling 4 quarters.

Melvin C. Payne

To give you a little color, Clint, on how to view that. Personally, I don't view our success as being a victim. I view this being a purely technical calculation that the company will resolve, given continued performance, but not based on some kind of short-term time pressure in the second quarter. We'll do it when it's smart. We'll do it when it's strategic, and we'll do it when it benefits the shareholders of which Bill and I are large ones. So it matters a lot to us how we do this and it will be done right.

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

Okay. Well, I still have a few more follow-up questions, but most of them, I guess, are technical, I guess, as it pertains to the model and just take that offline.

L. William Heiligbrodt

Clint, we want you to have all those numbers. As you know, we technically really model these numbers out very professionally on every category of numbers. So we'd be happy to visit with you in detail in that regard.

Operator

[Operator Instructions] The next question comes from Daniel Baldini from Oberon.

Dan Baldini

My question was about the rising same-store volume increases and you've answered it completely.

Operator

And I am showing no further questions. I would now like to turn the call back over to the presenters.

Melvin C. Payne

We really appreciate everybody who dialed in and who will dial in later on the delayed call. And we look forward to reporting our results over the year. Thank you very much.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.

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