Q3 2022 Carriage Services Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Good day, Thank you for standing by welcome to the carriage services third quarter 2022 earnings conference call and webcast. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press star one.
One on your telephone you will then hear an automated message advising your hand is Reyes. Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Steve Metzger Executive Vice President Chief administrative Officer and General Counsel. Please go ahead Sir.
Thank you Norma good morning, everyone today, we'll be discussing our third quarter results. Our related earnings release was made public yesterday. After the market closed and we have posted the release, including supplemental financial information on the investors page of our website.
This audio conference is being recorded and an archive will be made available on our website later today.
In addition to myself on the call. This morning from management are Mel Payne Chairman of the Board and Chief Executive Officer, Carlos Casado, President and Chief operating Officer, and Ben Brink, Executive Vice President and Chief Financial Officer.
Today's call will begin with formal remarks from now Carlos Dan and myself will be followed by a question and answer period before we begin I'd like to remind everyone that during this call we'll make some forward looking statements.
Any comments made by our management team at state, our plans beliefs expectations or projections for the future forward looking.
Forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such statements.
These risks and uncertainties include but are not limited to both factors identified in our earnings release and in our filings with the SEC both of which are available on our website.
During this call. We'll also discuss certain non-GAAP financial measures a reconciliation of these non-GAAP measures to the appropriate GAAP measures can also be found in our earnings release as well as on our website.
Thank you all for joining us this morning, and now I'd like to turn the call over to Mel Thank you Steve.
As a young boy growing up in a rural farming community.
I love going to the annual County Fair.
Well my favorite ride was a roller coaster.
By far the most thrilling part of the ride was after slowly climbing to the peak and then flying down steep descent I loved it.
Building carriage over the last 31 years, especially as a public company after our IPO in August of 96.
It's been a canter riding a much bigger and steeper rollercoaster.
With one hugely profound difference.
Over the last 20 years, we have evolved a new business model and framework.
For operating and consolidating still highly fragmented funeral and cemetery industry. It has a unique business model and framework.
And throughout this period through ups and downs in our performance.
We adapted the model at.
And improved it.
Together with various severe adverse economic environments.
That together produce wild peaks and valleys in our share price twice hitting a dollar.
We have continuously gotten better as a company and executing our standards operating model and strategic acquisition model.
Especially over the last four years, we have accelerated our progress toward our mission and vision a bit.
And the best at what we do.
We are currently in the midst of a transition.
From peak performance in 'twenty one.
For various reasons that have been well documented.
Into a post peak COVID-19 normalization of death rates at some point likely in the near future.
Yes, even with negative performance comparisons currently do.
During this transition period.
We have never had a company anywhere close to this good in our history.
Populated by the best leadership talent.
And a stellar reputation as a succession planning solution for the best remaining independent businesses in the best T J markets.
My advice to those listening on this call is to hang in there this too shall pass.
With that introduction I will turn the call over to Carlos Casado.
Who is president and C O L and together with his teams of eight players are one of the main reasons that the best is yet to come Carlos.
Thank you Bill good morning, everyone and thank you for joining our call today.
Before we start I want to thank our carriage family in the field and our Houston support Center.
Your commitment to our being diverse mission envision actually the heartbeat of carriage. Thank you for all that you do.
For today's call I will review, our total field operational performance for the third quarter of 2022.
And then we will cover our financial performance in more detail later on this call.
I will also provide a quick update on overall operations.
For the third quarter of 2022, our results are as follows.
Total revenue of $87 5 million a decrease of seven five.
$5 million or seven 9%.
Total field EBITDA of $35 3 million, a decrease of $9 4 million or 21%.
Total field EBITDA margin of 43% a decrease of 670 basis points.
Adjusted consolidated EBITDA of $22 9 million, a decrease of $9 5 million or 29, 4% and.
And adjusted consolidated EBITDA margin of 26, 1% a decrease of 800 basis points.
The performance variance in the third quarter of 2022 compared to the same period last year is a direct result of our historically abnormal seasonal peak and their record pandemic volumes experienced only in the third quarter of 2021.
Which on a comparison basis impacted our revenues.
Furthermore, the inflationary costs and lower revenues over a high fixed cost.
<unk> stayed in a negative operating leverage in many of our businesses.
The good news is that our same store average revenue per contract was up by $132 or two 5% <unk>.
Equivalent to 232 contracts and making up for $1 3 million.
Additionally, our overhead in the third quarter of 2022 was down 258000 or one 7%.
While these performance in no way shape or form represents carriages high performance culture to put some perspective.
On our funeral home portfolio performance for the nine months ending September of 2022.
We identify 76 businesses that were down in field EBITDA.
Including bringing feeling interest earnings.
For these 76 businesses 34 are still about 40% field EBITDA, which we consider a high performance margin.
These 34 businesses for the nine months ending September of 2022, while averaging a high 46, 2% margin were down by $5 6 million in EBITDA dollars versus 'twenty, 'twenty, one, but up by $3 1 million when compared to the same period last year.
Volumes were expected to normalize at some point and here we are now.
We believe that that rates will normalize over the next year above 2019 levels and we also expect satellite volumes moving forward.
The really great news is that carriage is a much better company than it was at the beginning of the pandemic.
Our nimble and agile and we adapt quickly on their uncertain environment, just as we adapted amazingly fast in March of 2020 at the onset of the pandemic. We are now adapting through this transition in a post pandemic environment.
Also through this inflationary period.
Here are some of the actions, we're taking to adjust and get back on track to higher margins.
Number one we are continuously reviewing our pricing strategy and net absorbing the inflationary costs, we have seen on salary and wages utility gas insurance and merchandise.
Two we're helping businesses that are below our standards operating performance thresholds.
Through coaching and mentoring, we help them navigate back to high performance.
Number three we're looking at process improvement and a plan that will help us improve broadly while keeping the nature of the centralized model intact.
And before we have identified specific businesses by business needs. So that they can have performance improvement and we're in the process of executing.
Number five we continue to bring top talent in all company areas to help us improve collectively and in alignment with our <unk> mission and vision.
Number six our operations leadership team will have a weekly meeting to evaluate progress made on the post COVID-19 transition strategies.
These are some of the specific actions, we're taking and we're confident that we will reach our goal of long term sustainable ranges of total field EBITDA margins between 43% and 44%.
Overhead expense around 13%.
And adjusted consolidated EBITDA margins between 30% and 31% by 2024.
If there is one takeaway I like you to take from me today is this.
The third quarter of 2022 is not the new normal.
We will execute our plans and strategies and reinsure toy and returned to a high performance normal sooner rather than later.
Now for operations update I always start with it.
Ralph French our CIO has focus over the past months on building a solid foundational technology platform across critical infrastructure and security services, and specifically cyber security connectivity and compliance.
Our biggest game changer opportunity you think how we engage and collaborate with families. For example, automation AI will help us streamline business processes and operations. In addition to opening our new revenue channels with digital marketing and E Commerce.
Our Keystone project project Trinity will aim to deliver next generation technology capitalizing on all of these opportunities.
So you're spending carriage services is an advanced digital provider of death care services in the years to come.
Regarding our marketing overhead investments made earlier this year, we're seeing significant progress way above our own expectations.
Alfred and his marketing team have accelerated field marketing adoption and are now effectively supporting marketing projects for 80% of our businesses.
Some of these projects our website redesign a new cold tracking system that improves performance and new digital marketing dashboard for each business regarding eight digital advertising men and their return on investment.
And a significant improvement in social media presence as well as an increase in Google reviews through the innovative ideas that the marketing team in partnership with our managing partners are coming up with to improve each business and their digital profile impresses.
Our marketing team is now gaining momentum and generating savings from marketing investments, while delivering a seamless customer experience. So the families we serve and our field teams.
We have restructured our regional portfolios and provide a balance between our west central and east regions.
These new portfolio distribution will enable our regional partners to optimize each region effectively.
Moreover to optimize even further we are excited to announce that Ravi Bob <unk> joined carriage good to great journey on September 26, 2022.
<unk>, our new senior Vice President of operations and regional partners for the Eastern region.
Robbie has 30 years of industry experience, including positions in funeral and cemetery operations Finance sales systems process improvement and not at <unk>.
<unk> is a certified public accountant with a marketing and information systems degree from Baylor University in Waco, Texas.
She serves as the president elect for the International Cemetery formation in funeral Association.
Ravi you saw also active in Cana.
<unk> Association of North America, and served and served as a board member until the fall of 2021.
Ravi is vast knowledge and leadership style will be transformational for the east region.
Joining Robbie are Jeremy Weaver and chat Fry.
He joined carriage as directors of operations for the East region on May 20, <unk> and Douglas first of 2022, respectively.
Combined have over 50 years of funeral and cemetery experience.
We welcome Ravi, Jeremy and chat to the carriage family.
In closing.
Inventory mission and vision of being diverse operator, consolidator and value creator is a.
Solid and real as ever.
We have the talent the businesses and our company getting better every day.
Our focus on extreme execution will allow us to deliver high performance as we transitioned to a normalize and since analyzed that freight environment.
Thank you and I will now pass it onto Steve.
Thank you Carlos.
As it relates to our growth through acquisition outlook, we were excited to announce our acquisition of a premier funeral and cemetery business in Charlotte North Carolina earlier this week.
Heritage funeral and cremation service enforced Lonnie Cemetery is one of the leaders in the Charlotte area with a greater than 25% share of the market.
We often tell acquisition candidates, we meet that fit in our relationship with critical as our reputation will become theirs and their reputation will become ours in the case of heritage. We couldnt be more excited to join the reputation of this fantastic business and team.
Heritage served more than 200 families last year with multiple funeral homes cemetery and a dedicated cremation business, we are well positioned for broad growth and one of the more attractive markets in the country.
We want to thank Harris Hive, and Carolyn Williams for selecting carriage to continue to lead the wonderful business that day, along with Carolyn his father built over the years.
And we want to extend a warm welcome to the entire heritage team.
We're also pleased to announce that we're currently under a letter of intent to acquire an impressive business that serves as the leader in another large strategic market, we're particularly.
Really excited about this opportunity and it's one that reached out to us directly explore a carriage maybe the right succession option for their business.
For more than 31 years carriage has worked hard at building and protecting our reputation we talk often internally about the importance of ensuring all aspects of an acquisition or successful from the initial conversations with owners to the manner in which the actual transaction is handled.
The integration has led.
As our reputation continues to grow and spread within the industry. We take it as a compliment and are humbled when a premier business reaches out to us directly to explore a partnership based simply on what.
Yeah.
We look forward to sharing more details on this particular business on our next call and believe the history and reputation that have led to this unique opportunity will continue to lead to others.
Our recent heritage in San Juan acquisitions, along with the large business. We currently have under letter of intent will combine to add approximately 4500 funeral calls and <unk> hundred and <unk> to our annual company wide totals.
To put the impact of these three acquisitions in perspective, those combined numbers will represent a greater than 10% increase to annual company wide totals for funeral calls and a greater than 15% increase to our total annual impairments as significant growth in a short period of time and we look forward to discussing the contributions these businesses make.
Our performance moving forward.
We're fortunate to have the opportunity to look at dozens of potential deals every year and as we shared with our board yesterday, we determined most of these opportunities are simply not the right fit for our company, we remain highly selective and patient focusing on three key criteria when evaluating an acquisition.
First we're looking for strong growing markets and this usually means a larger market with positive demographic trends and forecast.
We're looking for businesses that have a leading reputation and serve as a top brand in the market.
And third there must be a clear and strong path to future growth and expansion.
We believe our business even the good business has peaked and is.
Not going to be the right fit for us.
Also worth noting with our most recent acquisition and our current letter of intent. These two opportunities allow us to enter new large markets. We have not previously had a presence.
Entering a new strategic market is important but equally as important for us is doing it with a leading business that has a significant footprint, which is the case with both of these opportunities that footprint and reputation facilitates our longer term growth and expansion strategy within the market.
I'll wrap up my remarks by noting that in 2019 and 2020, we took advantage of some unique growth opportunities in a very short period of time as we closed several large deals that have proven not only to be highly accretive but contributed greatly to our focus on increasing our operating leverage.
Following those large acquisitions, we pay down debt aggressively and quickly.
While these current acquisitions don't rise to the level of that investment we will once again turn our focus to reducing our leverage as we integrate these fantastic businesses and closing our current letter of intent.
But that said we are a growth company and as we increasingly become the option of choice for more and more of the best remaining independent funeral homes and cemeteries in the country. We know it is important to ensure we remain financially flexible to act with a unique opportunity presents itself.
With that I will turn it over to Ben to provide additional color on the quarter.
Thank you, Steve and thank you to everyone, who has joined US on the call today for the third quarter total revenue decreased seven 9% to $87 $5 million adjusted consolidated EBITDA decreased 29, 4% to $22 9 million adjusted consolidated EBITDA margin decreased 800 basis points to 26, 1% and adjusted diluted earnings.
<unk> per share decreased 45, 1% to 45.
Year to date, our total revenue has decreased one 3% to $276 $3 million adjusted consolidated EBITDA has decreased 15, 8% to 50.
Just the Consol EBITDA margin decreased 500 basis points to 29, 2% and adjusted diluted earnings per share decreased 13, 7% to $1 96 per share our earnings per share decrease for the quarter and year to date is due to lower total field EBITDA due to the continued normalization of seasonal death rate trends.
Higher fixed overhead expenses from our investments in our operating support platform offset by lower variable overhead expenses due to a reduction of incentive compensation accruals and an increase in interest expense from the continued rise in interest rates our year to date GAAP effective tax rate was 27, 8% at the end of the third quarter.
An increase of 30 basis points from the second quarter due to lower expected pre tax book income for this year.
Adjusted free cash flow for the third quarter declined 36, 3% to $16 $5 million and the <unk>.
Adjusted free cash flow margin declined 840 basis points to 18, 9%, while down year over year to $16 $5 million of adjusted free cash flow, an 18, 9% of adjusted free cash flow margin represented our highest reported free cash flow and four quarters allowed us to incrementally pay down our debt, while completing the acquisition of <unk>.
Another area of San Juan during the quarter year.
Year to date, our adjusted free cash flow has decreased 37, 5%.
$49 million, while our adjusted free cash flow margin has declined 860 basis points to 14, 8%.
And free cash flow declined year over year due to lower operating results as well as higher cash incentive payments in the first quarter, including approximately $4 million for our five year good to great incentive award, which will be a lower amounts over the next three years to five years due to a lower number of managing partners and each five year group year to date adjusted free cash flow was also negatively.
Impacted by the unusual timing due to COVID-19 restrictions of our five incentive award or managing partner forums in the first six months of the year, we expect less expenses related to these important company events over the next few years.
Year to date, we've invested $26 million back into our businesses through capital expenditures split almost evenly between maintenance and growth Capex.
$2 $2 million of that Capex spend was related to damage caused by hurricane Ida in New Orleans of last year and it was funded by insurance proceeds.
Our covenant our bank covenant compliance debt to adjusted consolidate EBITDA ratio increased to five four times in the quarter from $4 87 times at the end of the second quarter going forward, we expect to allocate our available free cash flow towards completing the announced acquisitions, then pivot towards paying down our debt outstanding which when.
Combined with our improving operating performance in the future will allow carriers to delever similar to what happened after the four large transformative acquisitions. We made at the end of 2019 and early 2020, when pro forma leverage ratio fell from a high of six times to a low of three eight times over the span of 15 months.
Through the first nine months of the year are discretionary Preneed Trust funds continued to significantly outperform the broader market with a negative total return of eight 5% compared to a decline of 23, 9% for the S&P 500, and a decline of 32% for the NASDAQ composite index, and a volatile and uncertain market environment, where we are dealing with a.
Heightened geopolitical risks across the world persistently high inflation and rapidly rising interest rates. Our outperformance has been led by our equity portfolio that consists of companies that have high in recurring free cash flow. That's primarily returned to shareholders in the form of high and sustainable dividends.
These companies have proven to be attractive investments in an otherwise tough market environment and provide our portfolio with the resiliency shown in our returns we are booked almost $43 million in long term capital gains in the portfolio over the last 24 months, including $10 $4 million. So far this year. We've also increased our reoccurring annual income Jenny.
<unk> by our discretionary Trust fund portfolio to $19 2 million compared to $9 $4 million on March six 2020 prior to the execution of our repositioning strategy during the coronavirus market crisis the.
The increase in our reoccurring income in the portfolio will primarily benefit our financial revenue and EBITDA from increased earnings from our cemetery perpetual care trusts in the current period, while the realized long term capital gains will accrue to the underlying preneed funeral and cemetery contracts and be recognizes earnings over the next 10 years to 15 years as those contracts mature.
The increase recurring annual income plus the realized capital gains will allow for a financial revenue and EBITDA to continue to incrementally increase earnings from financial revenue and EBITDA, regardless of the market environment for the foreseeable future year to date, our financial revenue and EBITDA have increased three 4% and 3% respectively Odisha.
Additional trust funds from acquisitions, we have closed or expect to close will also provide an uplift to future financial revenue and EBITDA reported earnings.
We've made the decision not to publish an updated rolling four quarter outlook with this release, we believe it is prudent to have more time to insert the current normalization of death rates are improvements in our own margin trends and to incorporate the full impact of what is currently a very dynamic acquisition environment before we publish an updated rolling four quarter outlook.
By the time, we report our full year results early next year is.
It is important to note that we expect year over year quarterly comparisons from an organic perspective to be the most difficult for this past third quarter. The current fourth quarter and the first quarter of next year. We also expect to continue return of historically seasonality to our earnings with third quarter typically the weakest, while the first quarter typically our strongest quarter the.
The addition of accretive earnings and cash flow from the acquisitions, we have recently closed and the business. We have under letter of intent now will provide an additional tailwind to our future results. We look forward to providing an updated rolling four quarter outlook with our year end results early next year.
And with that I'm happy to open it up for questions.
As a reminder to ask a question you will need to press star one on your telephone. Please wait for your name to be announced please standby, while we compile the Q&A roster.
One moment for your first question.
Our first question comes from Alex Paris, with Barrington Research. Your line is now open.
Hi, guys. Thanks for taking my questions I have a few.
Let me start off with accelerated acquisition activity, which is exciting there. Your first acquisition since those poor transformative acquisitions that you spoke about in late 2019 and early 2020.
With that said what does your pipeline look like at this place at this point, particularly given your plan for a balanced approach to capital allocation investing in organic growth M&A and debt reduction.
Hey, Good morning, Alex This is Steve the pipeline as we've mentioned before is robust and one of the things. We tried to highlight this morning, which we're we're excited about is we're seeing more businesses that are coming to us directly just based on reputation and word in the industry.
As we've said before we are.
Happy to see all of these businesses come in we're taking a look at all of them, but the reality is we are highly selective and highly disciplined right now so as we look to Delever, we're going to continue to look at growing but it's going to have to be a special business for us, but one that we just talked about under letter of intent fits that criteria, it's a unique special business and.
We're going to prioritize that but at the same time, we're going to be able to manage and balance that with de levering.
Yeah, Alex this is Mel.
When we when we I was in the process of turning the company around.
And 19 from.
Not a major decline in performance trends, but some amount.
The amount of decline and performance trend, so I had to jump back in and lead operations. So 19 was.
A turnaround year it turned around to some degree but there was just a lot of work all through the year and into 'twenty and then the last quarter.
19, you had these succession of four businesses show up Bang Bang Bang Bang.
And.
Except for the one in Buffalo I knew them all.
And I Couldnt believe.
That we had a shot at these and so we did.
It took a lot of leverage at the same time, we were still turning the company around.
From lower performance in 18, and when we when we issued the news about all this you know our stock went way down.
The leverage and the perception at the time that we.
We couldn't integrate so much so fast.
And then cover it shows up so.
The roller coaster continued.
Real fast downtrend, after that and too big and too big slices.
And here we are we've prospered.
During COVID-19 and the integrated acquisitions went from being I was accused of overpaying and being reckless to.
How do you get more of those you still alone we're not trying to steal anybody's business, we want to buy a great business that's already a franchise.
That's a great market and then have it get better under us and that's what's happened with each of those four.
Yeah.
Has really been out.
And we saw post COVID-19 normalization, there would be more activity when people.
Start thinking about succession plan than what they had to go through being an independent through the worst of the crisis and so we are seeing a lot more interest.
And because of how we conducted our first through Covid and support of our businesses and our reputation.
Getting more.
More ability.
To negotiate a fair deal.
Without an auction.
And this has always been my vision I wanted to become like Berkshire Hathaway.
It's been a long term vision, but it's coming true now and I think that COVID-19.
Tightened everybody's.
Heightened everybody's.
Awareness of what it means to be in a group that can provide incredible support surface services, even in the most adverse.
And unknowing dangerous environment, and so we see more of this but we need to do we need to close the deals.
And then we need to slam down the debt.
I know thats scary to a lot of people, especially going into a recession, but I've been through these before two.
2009, we had our best.
Six months at the time first half of O nine during the great recession. So the industry is an incredibly.
Resilient and wonderful industry to be in an environment like this we don't have all those risk of currencies.
Things like that and the rest of that we do have we can manage them and.
And we are managing them, but I appreciate very much your question.
Sure. Thanks.
And I appreciate that and these acquisitions look very much like those acquisitions in late 2019 once in a lifetime sort of acquisitions that you have that you really have to make two of the three businesses or combo businesses and together theyre going to really drive inorganic growth I would think next year.
With that said your debt ratio was five one times at September 30th it'll probably be a little higher at December 31, just my guess I realize.
The acquisitions also contribute EBITDA to that ratio, but you.
You had at one point targeted a four five times ratio by the end of 2023, I'm wondering does that get pushed off a bit and then your long term goal of sustainably growing the company at about four times whats the timeline on that debt reduction as best as you can tell at this point.
I think this mill I think.
<unk>.
I made a mistake.
And.
And humbling.
At the time it didnt seem like a mistake, we bought in too many shares post October 27th of last year.
At increasingly high prices.
Which ramped up our leverage ratio.
And then everything changed this year.
To a different market different world nobody knows exactly what's going to happen and so all of these things show up.
Frankly, I didn't expect to happen again. This this series of acquisitions.
Maybe there is one more smaller one but a fabulous business represented about 55% to 60% of what we did at the end of 19 early 'twenty.
So there is a material thing and once integrated they'll have very high margins.
Like the ones, we bought and so it will we'll be able to delever.
But.
We did.
Get too Levered on the stock buybacks this will push us up to.
A level that is not close to our policy of four times and we are right now working on plans to work on bringing down that leverage.
I think Ben mentioned that capital capacity.
Plants.
That will be.
The company in a position to weather any any storms that might show up at right now are not on the horizon.
Okay. Thanks for that I appreciate the additional color and my last question is.
Really about the rolling four quarter outlook.
Given the elevated level of acquisition activity, which.
I estimate will add over 25 million to revenues on an annual basis and easing comps once you get past Q4 and Q1.
It sounds to me like you are in for a big year.
After Q4 and Q1 in 2023 am I wrong there because.
Because pulling guidance and I realize youre going to give it to us next quarter, but by pulling guidance you might be sending the wrong message.
And look I thought about that.
A lot.
That was my decision no one else's.
Rather than.
Put guidance out there.
Normalization.
Just like we were very surprised.
At at how death rate stayed elevated.
Even after the Covid deaths.
We're greatly diminished.
And why death rates for all of the reasons stayed elevated.
They're coming out with stuff now is in a lot of other reasons for death Covid Lockdowns in health maintenance wasn't there.
And and the baby boomers are older and Theyre not healthier so.
We do think the normalization.
It didn't really start to happen at the revenue level and the volume level until.
A major way until September .
And and we're seeing that offset especially in October .
By much higher averages, whereas the mix cremation, Russia traditional is about flat.
So.
It's a transition period that is right now.
Not exactly predictable.
What the normalized environment will look like.
And rather than guess at it and then have to say we were wrong and.
And we got the acquisitions coming onboard.
I said look let's just explain that we're all the way that you're totally right about <unk> added to the fourth quarter and first quarters top after that we ought to be up up and away.
And.
And I think it's wise to wait.
Made that mistake before.
I don't want to do it again.
It's wise to wait if somebody thinks.
Which we're not.
We're being honest about the unpredictability of what normalization looks light.
Carlos went through a lot of things will get the best talent.
If you are in the company beneath the covers and you don't look at the stock price.
I've never been more excited than you are right now that's what's going on.
And that's that's the nature of being a public company is it frustrating yes.
<unk>.
They interpreted the wrong way yes.
But.
You hit the nail on the head post first quarter, we ought to have positive comps with our existing operations.
With all the actions that Carlos and his teams are doing and then you have the acquisitions coming on them.
Very excited about the trust funds involved we know what to do with them.
And we ought to have an up.
An upswing in our performance that.
Should continue for a long time in the future.
Great.
I appreciate that additional color and I agree with you. So I will get back into the queue. At this point. Thank you. Thank you very much Alex.
One moment for our next question please.
And our next question comes from Liam Burke with B Riley financial your line is now open.
Thank you and good morning.
Carlos you mentioned in your prepared statements about process improvements that youre going to.
Throughout the organization could you be a little more specific on what <unk> been doing to improve the initiatives and how it's different than the way you're operating the business right now.
Yes, absolutely.
Regarding the approach as to how we are trying to tackle price increases business by business as you know where the centralized.
But on the other centralized organization when you could take a longer turnaround to get all of that.
Effectively.
Change and so we're trying to change a few things in that aspect to move a little weaker but theres also other aspects that will allow us to gain some momentum from a from a process perspective, where there is manual work babies now being executed without even.
Rolling out the new system that Ravi is working on is Theyre just simple long.
Low hanging fruit items that I believe that by providing some consistency in the strategy on executing on that we'll definitely give us some some benefit in the short term.
Just real quickly on pricing criticize so obviously you've had both.
Margin pressure, both on the product and on the service side.
Would you be able to get enough pricing power to offset these input costs.
While we are definitely going to do our best Youll see the thing is that the business owner the amount of new partner knows what's best for that community and sometimes it takes a finding out where the pricing is around.
The competition landscape to define what is the best the balance between competitiveness and of course you know.
Cost.
Improvements and so we're trying to find that balance based so in that case by case scenario a business by business, that's probably the best way I can describe it.
But I do believe that in many cases, we should be able to overcome the.
No and not absorb the cost increases, but there may be an instance, where just from a competitive advantage. It may not be best because he could be at the cost of declining volumes and thats something we never wanted to do so so loomis Mel.
Okay.
We didn't see the inflationary impact.
Until we got into the towards the end of the.
And of the.
Maybe the second quarter very end and the beginning of third quarter.
And really show itself and then current losses and his team.
To work.
And.
I know you mentioned in this release.
<unk>.
The average.
September .
The average was up well.
That's where the end of the full quarter for the fourth quarter, yes, So we've seen a trend.
Through the quarter as volumes really began to normalize downward.
September .
That's the averages began to trend up now, they're making a lot of.
Moose.
Our managing partners.
They each have an analyst financial their own financial consultant.
Theyre doing various scenario.
Price increases this and this and this and this and that.
So what has happened is.
The volume continues to be normalized more like September and October and I don't want to say to that.
This will continue but it's it's.
It's very encouraging what we're seeing in October means that a lot of the things all those process things that Carlos is talking about price increases more options for.
Terminations and whatever our people are very tuned in because their incentives there.
There are incentives are based on being within our range.
Field, EBITDA margins and if theyre not within that range, regardless of what happens to the rest of their standards.
Their incentive bonus goes in half.
And if they are below 50% nothing and so you don't want to be one of those.
We call them Underperformers that moved back to Paris.
And so what we're seeing in October is very encouraging on the on the average revenue.
How much of that is price how much of that is just more service options, but it's both in traditional burial and cremation and I'm talking big percentage increases double digits. Okay fair enough just real quickly after looking at and reviewing the business are there any more properties you think.
We need to be solved.
Yes. This is Steve we're always looking at the team and there may be one or two here or there that are just not going to fit with the strategic growth model that we've talked about already but right now nothing that we're working on but.
But we're always looking.
Yes.
Carlos and his team know that he's fully got a full complement of original partner doses.
They are doing.
A continuous assessment on both the talent succession planning top grading and the nature of the business itself in the market in which it operates and as we bring in these bigger better businesses.
Which is where the trend has become a big trend.
We'll continuously look at pruning off.
Those that really can't keep up with a higher growth portfolio.
We're building.
And there may be two or three right now on the radar.
But too early to make the call.
Okay. Thank you.
Thank you.
As a reminder, ladies and gentlemen that star one to ask a question one moment for our next question.
And our next question comes from George Kelly with Ross. Your line is now open.
Hi, everybody. Thanks for taking my question.
So first to revisit something you were just saying.
About October just wanted to make sure that I understand you right.
You said it encouraged I wasn't sure if it was just based on the pricing.
Changes that you've implemented or if youre starting to see volumes rebound from from what you saw in September .
I guess, what im really trying to understand is just do you.
Feel like Youre getting closer to seasonality looking more normalized or is it still like it could take until sometime middle of next year for seasonality to truly normalize yes.
I'm going to turn this over to Carlos but I don't want to.
Declare victory.
Yeah.
But too early over over a over a process has been unpredictable.
March of 'twenty.
And I'm not smart enough right now to predict when we will get to normalization and whatever that will look like I'm almost 100% sure.
Whenever we do get there and then and then it sort of normalizes in a steady way it will be materially higher than it was pre COVID-19.
And to answer your question George.
<unk> was referring to specifically to what we have been observing so far in the month of October as it relates to our sales average and.
It's very encouraging it is it has grown.
For this for this month up double digits.
And that.
I guess the question is is that coming just from pure pricing increases or maybe we have more offerings on services and items for the families that will still need to get to the detail. Once we close on the month and that's very very encouraging it's taken an impact that's replacing.
Volume from a revenue perspective on the volume perspective.
It's too early to say however.
If we would use the third quarter a signal it would seem as if we will get more assistant alive.
<unk> performance for 2023.
Yes.
George I smell I don't know.
Whether we will have.
Our flu season, and what degree I've.
I've seen predictions of a strong we haven't had a flu season in the last two winters.
All COVID-19.
And then you've got this new thing I've never even heard what it was RSVP right.
Rvs or something like that plus other variance of COVID-19. So it still.
It's still not quite.
Clear.
How the pace of normalization of death rates will occur.
But I will say that I make this point on these are double digit.
Mineral revenue averages, we're seeing so far in October and that's when we had eight more days to go and we were experiencing that.
We made a decision.
A business strategy decision.
Not to aggressively sell.
Pre need funeral.
<unk> Standalone funeral homes.
Three years ago, I made that decision.
And my thinking was.
I don't know.
Because I can't.
With data.
On a stand alone channel not a combination business, where you have a funeral home on a cemetery totally different.
We'll have data.
That prove.
You can grow your market share your revenue and your margins over time by aggressively selling preneed.
Preneed funeral and fixing your prices.
And a lot of that being covered by preneed insurance, where the growth rates are one or 2% at best.
And then.
And I experienced a lot of this in the nineties.
I bought into that and I never could see the evidence.
It was a good concept.
Instead.
My my thinking was and this is how we built the company.
We want to be the best at.
At providing service.
And each market and.
And if you are the best.
You can grow market share.
By being better than everybody else and you retain your pricing power.
And especially that it becomes relevant in an inflationary environment like the one we're in now.
So we have pricing power on 87%.
Of our funeral deaths.
87%, we have pricing power.
And thats unique in the industry.
And that will lead to that if I may Joe just to give you. Some color George is that Q3 2022 compared to 2019, we are greater by 14, 3% on volume.
From pre Covid levels in 2019, so that's that's a good number that's a good trend.
Okay. That's helpful. And then couple of other questions for you first.
Carlos you mentioned that digital revenue opportunity and I, just I didn't quite catch that can you give us any more details about that.
So project 280, which is not the name of the solution. We are we are creating through.
Integration of third party solutions in our own.
I guess customization of what we need we will end up having a.
Let's call it point of sale for lack of different words at point of sale system that will allow enable families to engage more on the offerings that we have.
That should include.
As the law offerings and.
It enabled us to increase sales average, but also capture more calls than we have right now by advancing that ability to make.
Make arrangements from home and things of that nature of that that's really what it would mean on that on that line.
So kind of central tech platform that interacts with consumers.
And you would charge funeral homes.
<unk> piece of that.
No, we're not going to charge our businesses for it.
Is the creative revenue will gain from.
Providing a solution that families going straight into their browser and go through our different businesses webpage them from there.
I will too.
<unk>.
Many many selections and things that they want to choose on.
Digitally without having to go to the funeral homes things of that nature.
Also another option is you know on.
The arrangement conference you've they decide and choose to go to the funeral home.
Which is typically the case there.
Then they will be presented digitally all the offerings that makes a much better presentations of the families.
We believe we will.
Ended up having significant greater average than the one we have today.
Okay. Okay, and then last question for me just on the balance sheet. So you have about I think it's a $400 million those senior notes at four in a quarter fixed rate and then the remaining debt is under the facility.
Is that so I guess the question is is the remaining debt I believe youre getting pretty close to the Max leverage.
Ratio allowed under that and so is that when you talk about youre working with your banking partners I am assuming that you are trying to.
Expand that that Max allowable and also what is the rate or would you anticipate that to kind of <unk>.
<unk>.
When youre done with.
This.
A discussion with your banking partners and Thats all I had thank you.
Well this is Mel.
On the floating rate.
Mark.
I don't know where it will wind up because I don't know what the fed will do.
Yeah.
And how long they will do it.
I got a feeling that.
I'm one of the few people that there is still around.
We're involved in business.
Lived through.
The <unk> and <unk>.
Seventies Ware.
We had runaway inflation.
And then you had Reagan and Volker I mean, I was a banker.
In Texas, when prime rate was 20%.
And we have to be created if not to be used areas and making loans to good customer I don't know where rates will wind up but our rates will go up and.
And Thats one of the reasons once we close these acquisitions.
We will have more debt.
The rate will go up.
But then when we start paying it down and it'll be a whole lot more accretive to earnings and free cash flow than it was even in 2020 one.
When rates were very low.
So.
We will get the acquisitions will have to pay more interest to do it.
And then we will.
We will get the increased accretive performance from the acquisitions and the lowering of our debt and our interest cost over the next two years.
Where we wind up with our banks right now is what we're working on.
Say for sure, but we're working very actively with bank of America on this and with our other bank banks and so we expect to report more news on that.
And the <unk>.
Next couple of months.
Okay. Thanks.
No I was in George I was just going to say just for just for context.
We're borrowing at about on the on the facility about five and a quarter all in today and it's obviously variables are very tied to movements in short term rates.
So that's where we are today.
Okay. Thank you.
We're in a corner, Georgia is looking okay.
Okay.
Sure.
[laughter]. Thank you.
One moment for our next question.
And our next question comes from Robert Longnecker with Husky.
Your line is now open.
Hey, guys couple of questions I think Mel you said something about the M&A activity being some percentage of what you did in 19 and 20.
Which I believe is maybe $170 million or so.
Can you kind of private by a little more data or color around that comment you made.
And I was talking really about the revenue.
Alex mentioned earlier.
You mentioned $25 million.
There is another nice business, we've been looking at is thought of this year.
Our.
It's really a great business has all the bells and whistles, we look for.
So.
Im assuming that between now and the middle of next year, we'll get to about $30 million.
And it will be the same profile.
Businesses and high margin potential and revenue growth compounded over years that we did at the end of the 19 early 'twenty.
It should wind up being about 60% of that we spent $170 million to get that.
About $50 million of high margin revenue.
It won't be exactly proportionate to that in terms of the purchase price.
But but the businesses themselves should be about 55% without the other 160% with the other one once we get them integrated.
Gotcha Okay.
And then can you talk about.
Pro forma for these acquisitions and pro forma obviously for EBITDA. This income with them. What do you think your current leverage ratio is.
Once you've closed the acquisition of what you think the leverage ratio is going to be.
For Robert.
Robert for what we've what we've already what we've closed is what I'm comfortable in saying, we're right just above that five two right now.
Given cash we've accumulated and what we've just just paid for the business here in Charlotte.
What is going to look like again, what's going to look like when we the timing and when this next acquisition will come in as kind of to be determined.
We would expect it to be a little higher from where we are today exactly where that is not sure.
And where is the covenant.
So that's the piece, where we're focusing on now right. So it's five and our quarters are Max on our credit facility.
So that's part of our discussions we're having with bank of America and the rest of the group now.
Okay. Thank you.
Thank you Rob.
I'm currently showing no further questions at this time I'd like to hand, the conference back to Mr. Mel Payne for any closing comments.
Look we had some great questions and hopefully we.
We answered those questions to your satisfaction.
Have a great company.
Getting better in a very uncertain and my own view geopolitically dangerous world.
I can't do anything about all of that all we can do is keep our keep our focus on our talent in our businesses and execute.
Like like I know we will.
Despite what happens in the economy in the world. So it's a great place to be.
If your partner carriage youre suffering some near term.
Unrealized loss, that's not how I view it doing is 31 years five years from now seven years from now we're going to be a much bigger and better company than we are today and we hope you are in there with us. Thank you very much.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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The conference will begin shortly.
As Johan during Q&A, you can dial star one one.
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