Q3 2020 Carriage Services Inc Earnings Call
The conference. Please press Star then zero on your Touchtone telephone. Thank you as a reminder, this conference call may be recorded I would now like to turn the conference over to your host the carriage services leadership team.
Thank you and good morning, everyone. This is Vicky Blender man, the Chief Accounting officer today, we'll be discussing the company's third quarter results for 2020.
<unk> earnings release with my public yesterday after the market close.
Carriage services has posted the press release, including supplemental financial tables and information on the Investor page of our website.
Audio conference is being recorded an archive will be made available on our website later today through November 2nd replay information for the call can be found in the press release distributed yesterday.
On the call today from management are Mel Payne, Chairman and Chief Executive Officer, Ben Brink, Chief Financial Officer, Peggy Chappelle, Vice President of operations and acquisitions analysis, and Steve Metsker General Counsel.
This call will begin with formal remarks from management, followed by a question and answer period.
Before we begin I would like to remind everyone that during this call. We will make forward looking statements certain statements on this call, including financial estimates assumptions or statements about our plans future results expectations or beliefs may constitute forward looking statements under applicable securities laws.
We make these statements on the basis of our views and assumptions regarding future events business performance and other factors at the time, we make them and do not undertake any obligation to provide updates or revise any of these forward looking statements. After the date of this call whether to reflect the occurrence of events circumstances or changes in expectations, except as required by law.
These forward looking statements are subject to a number of risks and uncertainties actual results may differ materially from the results expressed or implied in light of a variety of factors, including factors contained in our annual report on form 10-K quarterly reports on form 10-Q, and our other filings with the FCC.
Please note that a reconciliation of non-GAAP measures that may be referred to on this call to equivalent GAAP measures can be found in our earnings press release that was issued yesterday and on the company's website.
And with that I'd like to turn it over to Mel Thank you Becky.
Today, I won't say a whole lot.
There's a lot of information in our earnings release.
This quarter.
And the earnings release is anything other than another quarter release.
It's all about a company [noise].
And I wanted to simply state.
So we do a lot of communications beneath the covers what is reported to the public.
I would like to share.
Well with that.
With everybody on this call.
So this one out to every managing partner.
Every sales manager.
Every field support leader writers of sport and every.
Employee and leader in our Houston support Center.
This one out.
About 24 pm.
Yesterday with our quarterly nine month wrigley's.
And I quote.
I have never in my life, then more honored.
And inspired by anyone or any group of people.
Then I have them by the amazing leadership and performance.
Our managing partners and sales managers.
In our payroll and cemetery portfolio businesses.
Over the last nine months.
And especially the last six months.
After they've grown rebars pandemic shot a country.
With both a continuing health and economic crisis.
The same is true for all the support leadership and teams.
We're unable to all of our frontline Corona flowers Battle Warriors, and they're courageous teams of employees to remain in the Battle Oh.
Oh, serving their client families and communities when it counted most.
On behalf of carriages executive team and board of directors. Thank you.
Are your he ROIC service and for making carries a very special place for very special people.
To your night in a common cause a noble work for so many client families and communities.
Attached as our third quarter and nine months.
<unk> earnings press release, it was truly humbling to write about what you have achieved this year.
A year a record performance by company full.
High performance heroes.
Let's finish the year strong all the best smell.
Now when this goes out.
It generates a lot of attention.
We do a lot of communication and recognition in the company.
So we'll have so many people from kerridge across the country on this call.
So I know I'm speaking to them as they hear this and now they're hearing it not just reading it.
And I often get many responses. So these kinds of communications.
But I'll just read you won.
It's from Lauren for its theory this.
This morning about 23 I am.
Well thank.
Thank you for your words of encouragement and enthusiasm.
We have been working hard.
And keep pushing or revenue enhancement, while serving the families with higher flexibility and awareness to each need related to the pandemic.
It has been wonderful to have the support of all members within carriage services.
We truly are United I.
Hi, I'm looking forward to the call.
Lauren is the daughter, Frank Forrest Steri I'm sure they're on the call.
The bar Steri family business is the business and Springfield, Massachusetts.
Joined carriage and Kmart partners in October of 98.
Frank was one of the original standards Council members.
To rotate off a couple of years ago when he passed.
The leadership managing partner role to his daughter Lauren.
Every Thursday Lauren.
We hear about what you and your team is doing or not.
Not.
Always on a Thursday, but the main subject over the last weeks getting ready for this call is where are we getting market share.
How much of this is co but only on how much of it is market share.
And I will tell you learned and Frank I, we know who you're growing the business.
How are you growing the business and even when the outbreak slowed you didn't we know where the business is coming from and I'm not going to mention their name, it's a big business, but it's getting smaller by the month. So thank you and your team for what you do because this is the exact example.
What's going on broadly across carriage.
With that I'd like to turn it over to Ben but a little meat on the bone of what transformer did really looks like thanks.
Thank you Michelle and thank you to everyone, who has joined US on the call today are extraordinary third quarter performance is a reflection of a company that is completely aligned at all levels to our 2020 theme of transformative high performance and the continued momentum we see in all areas of the company is the carriage high performance flywheel in full effect.
These results also demonstrate the strength of our decentralized entrepreneurial standards operating model the quality of our managing partners and their teams and our ability to rapidly innovate and adapt in the face of unprecedented challenges brought on by the crowd of Irish crisis. We.
We are excited to share these results with you today.
For the third quarter and year to date results all of our reported operating and financial performance metrics were records as.
As I review our results, it's important to recognize the full impact of the operating and financial and value creation leveraged dynamics that allow carriage to leverage organic revenue growth into higher growth rates in total field EBITDA adjusted consolidated EBITDA and adjusted diluted earnings per share.
For the third quarter, we earned 84.4 million of total revenue an increase of 27.6% 37.3 million of total field EBITDA, an increase of 45% with total field EBITDA margins, improving 530 basis points to 44.2%.
Adjusted consolidated EBITDA improved $10.4 million or 60.1% to 27.7 million and our industry, leading adjusted consolidated EBITDA margin improved 670 basis points to 32.8% adjusted diluted earnings per share increased an impressive 82.1% to 51.
Sense in the quarter.
Year to date total revenues increased 17.9% to 239.4 million total.
Total field EBITDA increased 24% to 100.6 million total field EBITDA margin increased 200 basis points to 42% adjusted consolidated EBITDA increased 32.3% to 75.9 million adjusted consolidated EBITDA margin increased 340 basis points to 31.7%.
And our adjusted diluted EPS increased 34% to $1.30 for the first nine months of the year.
At this point I will turn the call over to Peggy Suppo, Vice President of operations and acquisition analysis for review of our operational performance.
Thank you Ben and good morning, everyone.
It's truly an honor and privilege to have the opportunity.
Sure the insight on the hard work creativity and pure grid of our managing partners sales managers and their teams.
When Covance started to hit our country wanted to first and foremost ensure the safety of our people and give them peace of mind. So they were still able to provide outstanding service to our family.
Shawn Phillips regional partner led the charge and essentially gathered an abundance of pp here in Houston to disbursed to our funeral homes and cemeteries across the country.
This gave our managing partners and their team one less thing to be concerned about and more time to focus on serving every family while still maintaining CDC guideline.
Because our managing partners are true owners of their business as they remain focused on high performance as it pertains to not only revenue growth, but also EBITDA margin.
And 2019, some adjustments were made to our being the best incentive as it relates to margin further motivating our managing partners to produce higher margin.
When the uncertainty of Kobin hit there was immediately and acceleration of expense management from our intuitive managing partners.
Funeral home same store net revenue was up 3.3% September year to date, while same store field EBITDA was up 9.6% propelling the September year to date funeral home same store margin from 38.4% to 40.7% an increase of 230 basis points.
Our managing partners and sales managers also made great strides in quarter three on cemetery sales.
After finishing quarter two behind 1.9 million and cemetery same store operating net revenue largely due to the cancellation of our annual Ching Ming event, we were able to close the gap in quarter three two within 250000 operating that revenue and bring our same store margins from being behind 1.6 million a quarter two to be.
<unk> flat on a year to date basis.
In quarter, three we continued to see an increase in sales at our three new cemetery acquisition, increasing operating net revenue, 28.7% from quarter to improving margin of 35.4% in quarter, 2% to 44.7% in quarter, three bringing the year to date margin to 38.1%.
Yes.
We continue to see accelerated integration of our four large acquisition that were made at the end of 2019 and in January of 2020, even amongst a pandemic, which has proved to make our partnership with these businesses even stronger.
Improving results since the first quarter reflects the great work that is being done by the managing partners and their teams at each of these businesses with the continued support from our operational leadership team.
This is just the beginning of the higher performance at these four large strategic acquisition, which will continue to grow and translate into even higher margin into next year and many years to come.
And the most important thing to note is the power of our decentralized model, which gives our managing partners the ability and freedom to make decisions locally as it relates to each of their markets.
So as guidelines and restrictions were put in place they were able to quickly adapt and make the necessary adjustments to serve our families in sales and creative ways.
At the beginning of 2019, we rebid at our standard and added two key components.
Intense focus on compound in net revenue growth and we introduced a new standard the service guest experience.
The service guest experience standard with something new to everyone, but the goal was to truly differentiate ourselves and create even more value and personalization for each of our family.
The creative juices began in 2019, but the level of creativity that has been stimulated during this pandemic with the CDC guidelines or restrictions in place Hasbeen simply remarkable an amazing to witness.
Our people have found more unique ways to give families what they need a service to honor the life of their loved ones and the important time degreed with their family and friends.
Even if that meant doing visitations and small group or having people RSVP for our service for conducting drive thru visitation for holding services outdoors.
In addition, we increased our number of funeral homes at all for live streaming from only 30 to now 125 in an effort to overcome restriction and give our families that don't feel safe attending a surface some person an opportunity to participate in the service virtually.
We believe that these creative ideas won't go away, but have become the new way, we show value to our family.
We knew that our managing partners were true entrepreneurs, but that spirit has really shine through during this pandemic. They continue to grow market share above the lift we have seen from Cove in cases of.
Vast majority of our same store funeral homes had market share growth on a year to date basis, and approximately 75% of those businesses had market share growth beyond cobot.
Due to early local restrictions on gatherings, we did see a deep a dip in our funeral home averages starting at the end of March the lowest point being in April, but with the inspiring and innovative ideas that our businesses. Both our barilla cremation averages have been ticking up ever since.
On a same store basis, we saw an increase in our barrel average of 3% in the third quarter versus the second quarter and an increase in cremation average of 6.4%.
We believe this upward trend in average will continue the rest of this year and into next year.
And we're talking about cremation average specifically, we saw an increase in our conversation calls with the rebid of standards in 2019, which put more emphasis on net revenue growth.
At the end of 19, we put more focus on converting those cremation into a cremation was some type of service.
We remain dedicated on taking time with each of our families to educate them on what is possible when choosing cremation as a disposition and cremation is just that it's a type of disposition. It does not mean, there is no service our celebration of life.
We have heard so many great stories of how our funeral directors take the time to connect with each family and simply listen as the family share stories and interest about their loved ones.
This allows us to provide unique and creative ways to honor them and share that with everyone that attends the service transforming OSAT occasion into a lasting memory.
I would like to share just a few examples of how our people incorporate unique touches every service.
One of our businesses organized parade for someone down main street, because they always wanted to have a parade and their honor.
We had another business create replica tickets of their favorite sports team to hand out at the service.
At another business that made laminated miniature vinyl record for a former music producer for all who knew him to have a reminder of the life. He was so proud of.
And another business that had a unique idea to give a grieving husband the opportunity to apply the insignia of their family brand on a wooden caskets that would be the final resting place for the love of his life.
These things may seem small to someone looking in but they are a touching moment for the family that has just lost someone very close to them.
That's how our people make such an impact and touch not only the family that is grieving, but anyone attending the service, leaving a lasting memory. So that when they are in the unfortunate position of losing someone close to them. They know who they can rely on to create that customize memorable service.
And with that I'll turn it back over to Ben.
Oh, Thank you for the great job, but.
The third quarter marked a first period of time, where the full effect of the successful execution of our trust fund portfolio repositioning strategy was reflected in our reported financial revenue and EBITDA as detailed in our press release. The work we did at the depth of the Corona virus market crisis positioned our trust fund portfolio for further upside capital appreciation.
And a significant increase in the amount of recurring annual in income generated from the portfolio.
The recurring annual income generated from our Trust fund portfolio is currently 15.7 million up from approximately 9.4 million prior to the execution of our strategy.
Initially the 67% increase in recurring annual income primarily benefit our recognize revenue through our cemetery perpetual care trust, while increasing the value of pre need funeral and cemetery trust contracts to be recognized over the long term for the third.
Third quarter financial revenue increased 44.5% to 5.6 million driven by 111% increase in Cemetery Trust earnings financial EBITDA increased 51.6% to 5.2 million and financial EBITDA margin increased 440 basis points to 93.8% compared to the.
Third quarter of last year.
Next year, we expect financial revenue to be between 22, and 23 million and financial EBITDA of approximately 21.5 million and almost 50% increase from our financial EBITDA prior to the execution of our repositioning strategy going.
Going forward this higher level of recurring financial revenue and EBITDA will be significantly accretive to our adjusted consolidated EBITDA and just the consolidated adjusted free cash flow margins that are reflected in our updated three year milestone scenario.
Overhead increased 1.1 million, while overhead as a percentage of revenue the measure of our ability to leverage our overhead and support platform fell to 11.8% in the third quarter all of the increase in our overhead for the quarter was due to an increase in incentive compensation accruals, primarily for our funeral home and cemetery being the best.
Annual incentive awards, we're now fully accrued for a higher field incentive compensation at the end of at the end of the quarter.
As Peggy mentioned, an important turning point for carriage with the update to our standards operating model in late 2018 to focus on three year annual compound local revenue growth driven by market share gains as we deliver a high value personal service and sales experience every family we have the opportunity to serve our managing partners and their teams are able to share in the.
Local profits of their business with no overhead allocations when they achieve at least 50% of their annual standards for a bit.
Being the best incentive program.
Looking forward to continued growth in our field incentive compensation accruals in the future.
Our strong operating performance led to an extraordinary free cash flow generation and debt reduction in the third quarter for the quarter, our adjusted free cash flow increased 120.3% to 27.6 million and our adjusted free cash flow margin expanded 1300 70 basis points to 32.7% the continued expansion.
Our adjusted free cash flow margin represents a greater percentage of revenue generated as cash capital that's available to responsibly grow the intrinsic value of carriage.
Were able to pay down $37.5 million in debt during the third quarter equal to 7.4% of our debt outstanding at the beginning of the quarter. This included the repurchase of 3.6 million or 2.75% subordinated convertible notes privately negotiated transactions for the year, we have paid down 63 million of debt.
Which is equal to 11.8% of our total debt outstanding post the close of Oak Memorial Park and mortuary on January 3rd. We're currently well ahead of our previous expectations for debt reduction and we now expect our total debt outstanding to be approximately 460 million by the end of the year.
Our net debt to pro forma adjusted consolidated EBITDA fell to 4.8 times at the end of the quarter due to the accelerating growth in our adjusted consolidated EBITDA combined with a large amount of debt reduction through the quarter.
We were able to reduce our leverage on an absolute basis by over one full turn during the third quarter, the rapid and substantial decrease of our leverage ratio demonstrates not only our ability, but our commitment to operate carries a lower leverage profile now and into the future. We expect our leverage ratio to be approximately 4.5 times.
By year end and below four times by year end 2021.
During the third quarter, we divested six businesses for total proceeds of $7.3 million. We currently expect to sell approximately 20 businesses or excess real estate for total proceeds of around $17 million and be substantially complete by the time, we look to reef to execute a refinancing transaction in the second quarter of next year. These.
These transactions will be accretive to our leverage profile and will incrementally improve the organic growth rates in field. The margin profile of our same store funeral home segment.
Our debt repayment in the quarter was also helped by the receipt of a $7 million federal tax refund related to tax law changes made in the recently passed care that we expect to receive an additional $1 million refund prior to the end of the year and will be a full cash tax payer again in 2021.
As we have previously stated our primary focus for capital allocation over the next three quarters will be the continuation of the significant progress we have made to reduce total debt outstanding and reduce our debt to EBITDA leverage ratio a rapidly improving credit profile positions cares execute a refinancing transaction of our existing 6.625% unsecured.
Hi, you'll notes when they become callable on June 1st of next year. We expect this transaction to reduce our interest cost by a minimum of 200 basis points reduced our cash interest cost by a minimum of $8 million and add a minimum of 29 cents of earnings per share on an annual basis.
This transaction will also lead to a material improvement in our cost of capital. These assumptions are conservatively included in our updated three year milestone scenario and in our updated rolling four quarter outlook.
After the completion of this refinancing transaction carries will have a maximum financial flexibility to pursue a range of value creation capital allocation opportunities, including partnering and acquiring the best remaining funeral home and cemetery businesses in the country, we will look to carriage as the succession planning solution of choice within our industry invest in strategic growth projects.
Our portfolio opportunities to Opportunistically repurchase our shares all while remaining at a more modest leverage profile as the vast majority of these will be funded by our growing and recurring free cash flow.
The final piece of our capital allocation strategy will be to steadily increase our dividend over time, we're pleased and excited to announce the decision by our board of directors to increase our annual dividend by five cents to 40 cents per share.
This increase marks the second five cent increase in our dividend since the onset of the krona virus crisis and should be viewed as an additional sign of confidence in our future performance.
At 40 cents per share annual dividend payments will be $7.2 million per year and represent approximately 10% of our projected 2022 adjusted free cash flow.
Beyond 2022, we will target a dividend dividend policy of approximately 10% of our adjusted free cash flow and a 1% dividend yield on the market price of care chairs.
We're also pleased to announce an updated a rolling four quarter outlook and updated three year milestone roughly right scenario that both show a significant increase in our performance expectations through 2022 and beyond we expect to achieve important company milestones company performance milestones of over $100 million and adjusted consolidated EBITDA.
An industry, leading 32% adjusted consolidated EBITDA margin and earn over $60 million of adjusted free cash flow this year.
Whereas we previously expected those milestone C met in 2020 to 21 and 2022.
We also now expect to earn between $1.80 $1.85 and adjusted diluted earnings per share. This year growing to between $2.15 until August 25 cents in 2021 and growing further to two $2.48 to 60 cents in 2022, when we have a full year effect of a lower cost capital structure.
We have increased our performance expectations in all major categories as we see continued growth in local market share in both our funeral home and cemetery segments at higher and sustainable margins improved pre need cemetery property sales continued performance improvement from our four recent strategic acquisitions, the full impact of the increase in financial revenue and EBITDA from our.
Pre need Trust fund portfolio repositioning strategy, we view these performance expectations as readily attainable through 2022, and believe we have multiple opportunities to exceed these expectations through continued improvement of our existing portfolio and through savvy and disciplined capital allocation post a refinancing transaction.
And finally I'd like to take this opportunity to echo the sentiments of our entire leadership team. So while the current virus crisis impacted our results in a variety of ways, our third quarter and year to date results are the byproduct of the tremendous work by dedicated leaders and teams across our entire company over the past two years, we cannot thank them or recognize them.
Enough for their efforts, we look forward to a strong finish to this year and achieving the goals we have set out before us in the future for.
For those investors, who are new to carriage, who are reading one of our earnings call transcripts for the first time and have fear. It further curiosity about us I encourage you to visit our web site and study our investor materials, beginning with Mel's 2015 shareholder letter and subsequent years press releases and our five annual and five quarter trend.
Apparent trend reports these materials will will detail carriage is almost 30 year evolutionary journey and the key concepts that drive our high performance culture, then give us a call or better yet come for a visit in Houston for a deeper dive into the fastest growing highest margin and second longest tenured funeral home and cemetery consolidator based in the U.S.
We are happy to host socially distance of course.
And with that I will turn the call over to General Counsel and senior Vice President Steve Metzger.
Thank you Ben and good morning, everyone.
Mel first asked me to participate in todays earnings call Admittedly I was a bit surprised isn't exactly standard practice for your general counsel to actively participate in these calls however, I know that with mill. There is always a longer term goal to an idea that at the time may seem a bit unorthodox. So the more thought about the request the more I came to appreciate the value in being able to share with our.
Dusters, a little more about the different teams who are behind the scenes everyday collaborating with one another as well as with our managing partners and their teams to help drive the performance that mill, then and Peggy if shared with all of you. This morning, so with that in mind. It is a real privilege for me to have the opportunity to talk about our support center teams generally and our legal team more specifically now.
Preparing my remarks, I asked mill, there's anything in particular that you'd like me to cover those of you listening who routinely follow carriage will not be surprised by mills direct response. He said, Steve I only have three things for you to consider first talk about anything at all as long as it has to do with the company and then he simply said say, what you mean and maybe what you say.
That response as short indirect as it is pretty well exemplifies the mindset that I believe is at the heart of our performance. There are no pre package playbooks or one size fits all scripts to follow but rather trust in our people to generate good ideas and then go outperform.
The results from that approach are often viewed in terms of financial metrics like EBITDA and EPS, however, behind those numbers and trends the team of uniquely talented individuals.
Managing partners and their team. So we reference often absolutely lead that performance and whatever they are and what they do in the non pandemic environment special to watch, but as Peggy mentioned to see how they have adapted their leadership skills to continually find new creative and responsible ways to serve each and every family during a time, where the environment and the rules governing that.
Environment are continuously changing likely even as we have a call. This morning, well, it's nothing short of inspiring and motivating.
Now behind the scenes supporting those managing partners and their teams is an equally impressive group who have also risen to numerous challenges this year.
Whether it's our it team quickly rolling out live streaming tools and remote document execution options to help keep our families employee safe.
For our field operation support team jumping into assist our businesses with a round the clock administrative support when those businesses become short handed.
For our HR risk management, and legal professionals partnering together to oversee and manage a 24 hour hotline to ensure any question. Our front line professionals have had during this pandemic is answered immediately.
The collaboration Selflessness and problem solving demonstrated by these teams have put the work at each one of these behind the scenes professionals front and center within carriage.
Now most public companies have some version of a support center, whether its referred to as headquarters or simply corporate the idea of a single location, where traditional back office functions take place is certainly not another one.
That said what makes carriages support team stand out is the fact that the same philosophy of entrepreneurship and autonomy that drives our decentralized model and the approach and success of our managing partners extends to our support center teams to.
The formulas simple find the very best talent, and then put them in a position to do what they do best this includes allowing leaders at all levels to act quickly with authority and without the need for time consuming meetings and layers of approvals, which at best delay and at worst destroy progress improvement in growth.
As it relates to our legal team I have the privilege to work with professionals, who bring much more than impressive and diverse legal backgrounds to the table.
I, often tell mail that our in house attorneys take great pride in being consulted on business matters, not just legal issues.
We intentionally provide our attorneys with financials weekly performance updates by business week, we cast that balance activity and other critical financial metrics. The goal behind providing all this data that some may believe is reserved for operations finance and accounting teams. So our attorneys can continuously dig deeper into learning more about our businesses and understand what ultimate.
Really drives the results, we released each quarter and then apply that knowledge to how they provide guidance and make decisions.
That purposeful financial focus and ownership mindset truly result in our attorney serving much more as business partners. We just happen to have a legal background than simply as lawyers.
We frequently have discussions about big picture strategic objectives, and capital deployment and their feedback and thinking not only contribute to ultimate decision, making but just as importantly, further enhancing guide to support they provide each day.
Our legal team and many of their support center colleagues invest a significant amount of time and proactive continuous learning about not only the business, but the financial drivers.
And as a result, they have great awareness and ownership in the financial health and growth of their company for.
For example in explaining the financial impact of a proactive matter one of our attorneys has been working on for some time. He recently brief me by saying.
That recovery is going to come in around a penny a share his reference to our EPS metric was not unusual it's a language in a perspective that is use often and it's a great example of the work they do to understand our financials in the mindset applied to spending and decision making throughout our company.
No sure all of this regarding the carriage entrepreneurial philosophy and ownership mindset extending to our support teams to tie back to the incredible work performed during the pandemic for a couple of reasons first when things initially became uncertain and the challenges unprecedented back in March our teams in the field and here the support center, we're already well CRIP.
Well equipped prepared and most importantly, empowered to act quickly responsibly and wisely and.
And second the ownership mindset shared by leaders here in the support center creates an environment, where they are encouraged to not just fill a function, but to ask questions think strategically and that confidently when a time sensitive pivot may be called for.
This pandemic has required the full complement of collective talent within our team and they have exceeded the already high expectations that they set for themselves as a company. We talk a lot about the entrepreneurial spirit that drives our business and I had the good fortune to see an action every day not only in the work performed by our front line professionals, but also by our support center team.
So again I know its not customary to have the general counsel actively participate in these calls, but I want to thank mill for providing a platform for us to share a little more with our investors about some of the less talked about but equally important drivers of performance I know I speak for our legal team as well as our support center colleagues when I say it is an absolute privilege for all of us to have the opportunity.
To work with and support our managing partners in each of the frontline leaders, who serve our families. Every day during the most challenging of circumstances into those behind the scenes professionals here at the Houston support center. Thank you for all that you do with that I will turn it over to Mel Thanks.
Thank you Steve.
So if anybody out there thats been up on his own invitation to come and visit will introduce you to some Steve Dragons layers.
And you'll see exactly what we mean by that.
So two days ago, Shaun Phillips and I got an email.
We got that email from Duane Kane.
One is the founder breast Ivan.
And in Dallas.
And.
Yeah.
It reads as follows.
Wednesday October 28 marked our one year anniversary.
So he is referencing one year ago today.
When we closed the day before.
The acquisition of Resthaven, which was founded.
50 years ago, but Duane.
The email.
Set as follows.
My decision to form a partnership with carriage.
Was the third best decision I ever made.
The two that preceded that were one.
King Jesus into my life.
And to asking in to marry me.
Last October no one could have predicted what 2020 would bring.
But I can truly say than in these last 12 months I believe you encourage.
As well as my admiration and respect.
For you and Sean.
Has grown.
Hi, guys continue to bless our great country, our wonderful families are successful company.
And our continued friendship.
So I emailed Duane back.
Yesterday.
Now for those of you who've been around a while and might have been on that call a year ago.
Blaine was my Guinea pig.
I wanted him to do a testimonial the first one that would have ever been done.
Former owner.
12 hour period after he wasn't.
The owner, but we made it clear to Duane that he never will not be the owner and.
And he still uses the same parking spot maybe doesnt pay me any rent it's okay what are pretty good.
This is what I said to widen back.
Your way in.
Partner to your career.
I continue to bless our great country are wonderful families.
Our successful company and our continued friendship.
Happy one year anniversary.
I haven't touched our third quarter earnings release, just went out this afternoon.
Which is not about just a quarter, but is all about a company built a wonderful businesses with wonderful people.
Doing amazingly noble work in the midst of a corona virus Pandemics crisis.
My only regret is that you won't be here tomorrow warning on our conference call.
To express your thoughts and feelings.
On quote the third best decision you ever made unquote.
So my Dear friend and partner in Oman.
I'd take the Liberty of reading your email instead.
Okay safe and healthy.
And the wine Emailed me back last night I.
21 pm.
You definitely have my permission.
Because it's so very true.
Now what we Couldnt have known one year ago, when we've invited wanting to do is testimonial.
Is that my Doherty.
The bounce the third generation member Fairfax Memorial Park, and funeral home Fairfax, Virginia.
Was on that call.
And listening carefully to what Duane had to say about carriage.
Being.
And lease succession solution.
Which fairfax was looking forward at the time.
He later called Duane.
Personally so ask him about carriage.
That led to carriage.
Being the winner.
For Fairfax, which I'd known about a long time.
And it put this big business and carriage.
It was founded 52 years ago by Mike's grandfather.
And we have promise Mike.
And when we win and presented to Mike and the other members of the board Dave Doldrums.
Was a big owner had come into help the family and Dave and Mike. If you are listening. Thank you for your trust in us.
So you have you never know in this business.
Who's listening and and they are paying attention to what is said by.
By not those of us in the company always but by those of Us who.
To those of you who.
Joining the company.
Especially owners of great businesses.
You are known by the company you keep and the reputation they have.
We'll also build your own reputation.
This is who we are the best years of our company or in front of us we.
We will get through this corona bars as a country I hope soon but I have never been more proud of our people than I am now and.
And our future has never looked so Brian So we look forward to reporting that future performance to you as it occurs thank you very much.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone.
If your question has been answered or you wish to remove yourself from the queue you May press the pound key.
We have a request first question coming from the line of Alex Paris from Barrington Research. Your line is open.
Alex if you're on mute. Please UN mute your line is now Dan.
Sorry, I was on mute can you hear me.
Yes, it really.
Great I just wanted to start off by saying congratulations on just an outstanding quarter, another beat and raise and in fact the range suggests that this momentum is going to continue into the fourth quarter.
I also appreciate the three year milestone outlook I know mills never looked at this company on a quarter by quarter basis, It's really the long term story and I think.
From everything that I see this year, you're really setting up for a good next several years.
Covering the company for.
Eight years now I just looked at it.
32 quarters, and I've never seen such a strong and broadly based outperformance for carriage services. So again congratulations.
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I just thought at this point it yet a lot of information was covered I might just dive a little deeper into a couple of the things you mentioned on the on the call I think Peggy touched on a few of these shot.
Starting off with funeral services, obviously contracts were up sharply.
You attribute that to taking market share my question is.
Where is that market share coming from.
Uh huh.
How are you picking up this market share and and are these market share gains sustainable beyond coal that.
So Alex the Marketshare, we are like I say, we rebid in our standards at the end of 2018, where we put an extreme focus on net revenue growth and so our managing partners, where before we had an average standard where we.
There were some cremation calls that maybe weren't being start now we take every call and we've been working hard on that with our cremation converting those into some type of service.
At least I spoke about some of the unique things were doing out there you know even during co bid win win other.
Other funeral Hall may have been turning families away out of fear are people just stepped up and continue to serve those families.
We see broad growth path to cope with cases, and it's not just in the areas you talked about New York, which is a heavy with the heavy in the second quarter, that's not even the businesses that we're talking about it.
It's not just the hot spots, it's everywhere that we've just continued to take market.
Market share from our competition and it being unique we talked about the outdoor services, we had managing partner share that people were driving from 40 miles away because they heard about the outdoor services that we're providing as Justin you need touches that our people are putting on services out in the field and the people in attendance.
No who they can turn to have a personalized service of their own so allied smell of each Thursday.
I mentioned this in the press release.
We get an operational update call Mike.
I assume.
With.
The directors support and these are all people located in the regions.
Each have their own portfolio may be 15 businesses.
They support we have peg his team of soaps.
There was a sharp is people like to be around.
They know what's going on and so on those update meetings each each person has a chance to give.
Some some some amount of time to talk about what's going on in their area and then their portfolio and then there were specific businesses.
We've heard over and over.
Since since we knew this would come up as an issue okay.
Over and over about market share gains because of this reason that reason. This reason that reason and in every case. These stories, which are very specific by business even families.
Our our inspiration and creativity and I know this is hard to for someone outside the industry to get there.
Their brain around wrap around but it it is entrepreneurial and it's having ideas about what can be done I mean, we had I mean, we've done a great business in the inland Empire Justin Luyben.
We also have conference calls with our standards Council.
And they give us updates about what's going on in their markets.
And just I said, Justin how are you how are you doing what you're doing.
And I know is competition, which used to be a big big competition. I think is a lot smaller is a mountain it's amazing.
This.
When when the state of California, which is pretty pretty tough.
Says you can't do this then our everybody who loses a loved one that's what they want to do.
He said I wish I had thought of this five years ago.
And I said look just in whatever you're doing I'm, just glad I'm not your competitor because I know who that is.
And and you're doing things that are just really off the beaten path of ideas. This is why.
We're broadly growing as we empower them.
To do what is possible they decide what that is and sometimes it's you never come up with these things.
Having Christmas in July.
Or this or that and already they are making plans for Christmas now across the country and how that's going to be executed the word gets around our group because they do share so.
So it's been a.
It has been very inspirational full as we can ever we're going to have a brand interest of the brightest minds in the universe and not come up with these ideas down locally.
They executed and and I said this in the press release the bandwidth is because they are told what they can't do or seeing more value in what what is possible.
But we don't know what is possible here, but they definitely have figured out what is possible there and they're taking market share and we hear this across the country specific stories every week.
That's good I appreciate that I appreciate that additional color.
Early on in the crisis.
Okay and then the crisis there was the thought that.
People may.
Do kind of the bare bones minimum whether it's a direct cremation or or some other.
Dairy, although other disposal up and then there was a thought that maybe the this wasn't lost revenue that might be deferred that there was the opportunity to have these people back at some future date to.
Before memorial service and that sort of thing.
Member talking about that back in April I am just wondering have we seen that.
At all in Q2 and Q3.
No.
That's not what we're seeing we're seeing real time can do now.
What is possible now.
No that was a thought then and you know I even gave an interview to Forbes.
I wanted to find a business that must have been booming so they reached out.
To us.
In April had an interview.
And their editors wanted to find a business that was booming and I totally get it at the time.
Maybe we were booming in the northeast and a few hotspot, but generally it was pretty slow.
In fact in most.
Most of the country well he went back and his editors didn't buy that so were you editors that must be in New York City is that they are.
So then you get outside of the country. So it's a big country a lot of things possible out here. So we came back and interviewed again and.
And I know he was trying to find a catchy little little.
A little of things so.
People to look at their website or whatever so finally put be put out an article corona viruses, killing the funeral business well you know if he called me back for another interview I wouldn't take it.
Because he would this is a terrible reporting you get.
But compared to the actual reality.
Of getting down and really knowing what's going on with our people.
And getting dominate the reported numbers and finding out just like Steve said and Peg you said and Ben said what is this company all about and why is it different.
It's different because it's small it's dynamic it's entrepreneurial and it it hires great people, but the great people.
And the spot where they can be greatly successful and turn them loose and support them. That's how simple this is but people get all caught up in this and that is the way it's supposed to be in the funeral business, it's not it's not true.
When we say this is a high performance culture company that happens to be in the funeral and cemetery industry, we actually made it.
And now the numbers support that idea.
Great.
And then just.
Just moving on to some I got lots of little questions I can follow up offline, but cemetery.
Pre need sales were hit early on.
Yeah, I think I believe you've been seeing sequential sales improved since.
Any update there and then I wanted to talk a little bit about.
Carlos Macedo.
What he's doing differently, what he hopes to accomplish and obviously there is a lag impact from when somebody like the starts when will we see start to see the fruits of his initiatives the piano.
So yeah, you're very pricing.
Then tell you to ask that question.
All right so.
The next person that will be featured.
As a guest on a call.
On February 21st when we announce year end and or an update and our outlook.
We'll be Carlos.
And by then he will have he.
We'll have developed.
His plans.
To basically build within carriage, which we never have had.
High performance organization with the talent in place along.
Along with the systems the incentive plans.
Hey Cemetery sales model, there will be integrated into our operating model.
So it will be all all it'll be a perfect fit.
And I don't want to two.
I don't want to spoil, what Carlos will say about the future and the performance that we expect but.
But we have long been known in this industry is a funeral.
Operations company more than a cemetery sales and operations company that was true.
And that will change and I think in Ben are joined at the hip developing.
I'm pleased.
That.
Along with the rest of our operations.
Three three Rps, Paul Elliott Shawn Phillips, Chris.
Chris Man, so and Peggy and her team.
I will just leave it like this we're all excited about what that will look like and what that will produce in terms of additional performance over what we put out there we're going to roll all that out on February 20 Onest.
Well, that's great I'll look forward to that now I appreciate it.
And then last thing so more stock market related.
By the way you're one of the very few green shops on my screen today, just on markets down a little bit you know why do we have to pick today doesn't have a form as well.
I'll get that wrong.
Exactly.
So you know I've been saying for a while now that.
Carriage services is the fastest growing and most profitable company it within the funeral services industry and its been the cheapest versus its peers and it's become just a little bit cheaper today, given the increase in guidance and while the stocks recovered nicely from your mid mid April low.
What pushback that you get from investors if any in terms of investing in carriage services because again the valuation.
Yep.
Is too large it needs to close over time, what's the typical pushback you get from potential investors.
Yeah right.
Yes, Alex you know I think from from where I sit there.
Two things that we hear we've heard the most here over these past couple of quarters is about the consistency in our results.
And about and about leverage and I think you know we are addressing those loud and clear I certainly here in the third quarter I mean, we paid down a lot of debt in the quarter and our leverage ratio is screaming lower and.
And we intend to be around that four and a half times levered by year end well positioned to do a incredibly important refinancing transaction the second quarter of last year.
Believe strongly what you're seeing in the third quarter is indicative of results to come.
And where we will have consistent high performance from all areas across carriage for many years to come.
Alex I look.
The carriages all my own.
And I'll be 78 in January maybe that's why people.
Hello.
I have a problem with my age I don't know.
But I don't have a problem with it.
If they want to come to work out with me at the gym again.
Would like to have a little bit on that.
There are some very fit I'm very blessed to have good health.
And yes, and just coming here listening to this team and there are many more that are going to be on this call.
Over the next year, including couple of board members.
I want to everybody in the company to be able to say, what they think about the company and we talked about the valuation yesterday at our board meeting is dirt cheap.
I mean I haven't seen many.
I know investing in.
I've been doing this for a very long time and valuation methodologies.
So it's very cheap.
The upside is tremendous we put out something on dividend equity yield.
If you look at our free cash flow and the sustainability of it in the free cash flow equity yield.
That based on the price were at right now its 14, 15% free cash flow equity deal, which is ridiculous.
That's real and sustainable.
And once we do the refinancing next year he won't stay that way.
Well, that's great I think it's it sounds like you're addressing those outstanding issues and that obviously, the quickest way to close the valuation gap. So yeah, I mean as far as we're concerned Alex there are no outstanding issues.
It's other people not buying the stock because they think their outstanding issues were.
Okay with that just keep it where it is.
Then over time, we'll own more of it.
I hear you alright, well keep up the great work carriage services team appreciate it congrats on the quarter.
Yes.
Thank you. Your next question comes from the line of school multiple from Goldman Sachs. Your line is open.
Hi, good morning, I want to echo the congratulations and thank you for all the insight into the business and so far on the call as well.
Maybe just a follow up for me on some of the leverage.
And capitalization.
Then I think you kind of touched on this little bit, but if you were to achieve the three point need to 4.2 times. How do you think about potential M&A. What does the pipeline look like right. Now are you seeing any uptick of candidates, possibly just given everything going on or should we think of.
Yeah, maybe you're staying away from M&A, a little bit until the plan Wi Fi how do you think about M&A.
Uh huh.
Targets and time.
I call I I appreciate and I appreciate you.
Collyn and great question.
Really clearly our focus over the next three quarters is to continue to improve our credit profile. It's improving rapidly again, we think that sets us up to execute.
The refinancing transaction, which will be the best.
The biggest bang for our capital allocation, but we can do here the next year.
Post that refinancing transaction, we feel we'll have the maximum financial flexibility to pursue all all of our capital allocation opportunities, including acquisitions no nothing no comment on the pipeline today.
But we know that you know as we emerge and are ready to allocate capital towards acquisitions, there will be great businesses owners, a funeral homes and cemeteries, they're looking to carriage as their succession planning solution.
So this is Mel look im going to disagree with them a little bit we had one big acquisition on our radar.
It will cost $20 million cash.
We're going to acquire $400 million of high yield bonds at a very low rate.
Hopefully in June of 21.
And that's going to be the best acquisition, we could make in the history of mankind.
Because if you could you a prepayment penalty of 20 million in.
And we can save nine or 10 million in interest cost every year.
I mean come on that's a great acquisition, so were focused 100% on bagging that baby.
And I think what's what's important to recognize going forward from a from a leverage and a capital allocation standpoint is that the.
The majority of our of our capital allocation and acquisitions will be funded through growing and recurring internally generated free cash flow.
So leverage as a whole will continue to remain modest in that four times range going forward.
The the days of us levering up and going above five and a half times are frankly over we are just at a different point.
As a company and.
And the interesting thing about this.
Is.
Post that refinancing, but I mean, you can even see it now.
I mean, what in the world to accompany our size pay down so much debt in one quarter.
And in reduce.
Leverage, but full term, 20% of our debt ratio we reduced.
Does the EBITDA went right way up in the free cash flow went way up in the debt went way down we kind of like the dynamic.
And this is how we always thought maybe we could get to where you can leverage the overhead.
And you get operating leverage going for you in all these various sectors because the operating leverage at the local level is so strong when revenues are growing up your margins are going up your free cash flow is going up.
You leverage the additional revenue over the fixed cost now we have the happening broadly in every sector and we have these new acquisitions, which gave us the critical mass.
Yeah, I declare victory too early.
Because I thought I could see the concept of the leveraging dynamics all all lot working at the same time simultaneously and becoming an incredible cash flow value creation platform, that's where carriage is today.
We will not go back to some other version of carriage when we get this free cash flow and the balance sheet.
Refinanced, we will have a very much lower cost of capital.
So then we can put that capital to work.
And in and capture that spread on the high return to what we do with it and the low cost of our capital that will create a lot of value lot of intrinsic value over the next 510 years, if the market doesn't agree with that we can we can we can.
You know help Mr market.
Get rid of this depression, but buying new shares, but we don't want to do it and get back leveraged again, so we're going to do it at no more than four about four times leverage and the reason that's not high.
It's because we produce so much cash for every dollar of revenue compared to the company.
Who doesn't have that advantage. So we don't view our size is a disadvantage on the credit profile just the opposite.
Perfect. That's incredibly helpful. And then maybe just one other question from me.
Calling out you think on the cost savings side sales will help drive EBITDA margin.
Anything on the labor side that you want to highlight or other spending that you think is more permanent.
Permanent for the business in terms of cost structure going forward.
Sure this is Peggy.
So we have you know Mel mentioned the weekly calls we have with the directors port.
They are just constantly.
Jumping the managing partners again, the managing partners are very good about knowing you know what revenue they have how to affect our margins and cut on certain costs. We saw a lot of savings on our part time employees, which we know was in the beginning because of having less services I believe all.
So seeing them manage those expenses over the last two quarters as well as promotional expenses just expenses in general again with the incentive changing a little bit at the end of 19, putting more focus on making sure when we grow that revenue and we bring it to the bottom and then there's the reward at the end of that.
For our managing partners and their team.
Perfect. Thanks, so much I appreciate all the color.
Thank you.
Thank you. Your next question comes from the line of Chris Mcginnis from Sidoti and company. Your line is open.
Hi, good morning, Thanks for taking my questions nice quarter.
Just one quick question I know the call going away here.
Just around the commentary around the acquisition that you.
Made at the end of 19, and the expectation of greater growth greater profitability kind of going forward and it sounds like a lot of confidence in the statement in the release last night and then today on the call.
Can you just talk a little bit about what's driving that kind of confidence behind the comments that those.
Operating.
Profit.
Yes.
Thank you.
You know it takes time.
Two usually we say six to 12, maybe nine to 12 months for an acquisition to truly.
Be integrated and build that partnership with with Cove, It and everything that's happened you know we had comments from some of our acquisition, saying, we don't know what we would have done without the support if we weren't partner with carriage before the pandemic.
So it's just the continued support from our regional leadership, our directors and support our regional partners My team and across the company just everybody, helping them become that partner and truly understanding what carriage is about and you know also we talk about the sharing of these ideas we have a partnership portal out there.
Were you know when you're an independent you don't have that.
Extra ideas to feed also from your fellow partners and we see a lot of that and we've seen a lot of that over the last six months.
So it's just a working on all of the things that.
Yeah, just learning the carriage culture, and seeing where they can get ideas spread from their partners here carriage.
This also are with Carlos here, we were taking a fresh look.
Yeah, maybe.
Maybe 13 to 15 sizable cemeteries.
And.
Taking a fresh look at what is called a master plan for development of product.
Over 10, 2025 30 years [laughter].
Oh Wow.
Those master plans.
You know the more that.
They're looked at fresh.
With what is possible with a high performance sales organization.
Gets us all really juiced up here and the opportunity.
To do more state sales.
Things like that which we've never been really very good at.
Is going to be broadly something we pursue it.
In places where that market except products like that.
You can sell it.
And I think you will see.
In particular, the three acquisitions, we made will have huge upside on the cemetery side, not but not just on the cemetery side, but especially on the cemetery side over the next five years.
And youre in but that will also apply to maybe 13 of our existing cemeteries, which have always been more hit and Miss.
And now there will be a high performance and sustainable sales pre need property sales at <unk>.
High margin so that's a that's.
That's in the works Master plans and building an organization to them to sell the product and then allocating the capital necessary to do it will be a very high return.
Sure.
Great I really appreciate that thanks.
Thanks again for taking my question and good luck in Q4.
Thanks, Chris.
Thanks, Chris your net.
Your next question comes from the line of Justin Ho Hum.
John Your line is open.
Hi, I just wanted to follow up on an earlier question that I'm, sorry, if I missed the answer but the question was basically asking about how your cemetery preneed sales were hit.
During the peak of Cove, It and wanted to get an update on how that has trended since then.
Yes, just seen absolutely certainly early on during the current about as crisis, particularly at the end of March and early April we did have some difficulty in making those sales people coming into the park, having tours in what is very much a face to face sales process.
But credit to our entire cemetery sales organization, we have seen sequential improvement in our cemetery preneed property sales since April and we are back to and above kind of normal normal trends are where we expected to be as what we said you know spoke about earlier really excited about Carlos Criado joining our team.
Jim.
And the work that him and the rest of us are going to do to build a world class Cemetery sales organization moving forward.
Okay. Thank you and on D. I also mentioned that you know early on people were thinking that.
People would not.
Just either defer or service and memorial service or if you know services.
Or just do that their minimum cremation and you I think you were saying that that's that ended up not being too people actually ended up real time doing the services. So I just wanted to double check does that mean that except for the month of probably March or April where there were much more restrictions.
Restrictions have those restrictions all been lifted in terms of.
Good good gathering.
Yes, so just in terms of restrictions that's kind of a moving target I think as many people. Unfortunately are getting accustomed to so the short answer is no. They have not all been lifted and often times, we will see them lifted temporarily and then put back in place and so it continues to be a moving target, but there is a lot of communication and collaboration between our field leaders.
And then again the support center leaders here to make sure that we've got creative solutions to address those in real time.
Just to add to that April was that month that I look at is where where everybody was figuring it out so even if more restrictions get in place any at any time and this year. We have figured out these creative ways to to work around that as you know we talked about smaller gathering having people RSVP doing outdoor serve.
Those have been really popular so April was it really that much to figure it out and we we do not foresee going back to that level of average again.
Okay.
Smell look you know, California was the first.
But.
What I, what I said were direct KONI and restrictions in place and we have some unbelievable businesses in California.
And and some and some incredibly creative managing partners and sales managers.
In some of our biggest parks.
And what they've been able to do.
With these restrictions which are still in place.
This is nothing short of a I mean it.
It's just amazing it's just so creative in.
And the collaboration between our managing partners and sales managers.
I mean, it's a high performance club.
And.
So corona viruses.
Forced them to even be more creative than they normally are and believe me. They were created before the grown of ours, but.
But it's been it's been.
It's been something to witness where the restrictions were first.
Mandated and haven't really been lifted to see their performance sequentially over this period of time.
I mean, you just find it hard to believe that they can get done what they are getting done and I have no idea, how they're doing it but I know it's legal.
Thank you speakers I'm showing no further questions at this time I would like to turn the conference back to Mel for closing remarks.
Thank you all for listening to our call I Hope you enjoyed it.
And the performance that we expressed in our press release as.
As much as we did writing about it and talking about it today, it's a lot of fun here to be at carriage right now and we look forward to your continued.
Following our progress thank you very much.
Thank you everyone, ladies and gentlemen. This concludes today's conference call. Thank you all for joining you may now disconnect.
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