Earnings Call Transcript - CSV Q2 2021

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Carriage Services Second Quarter 2021 Earnings Results Conference Call. At this time all participants are in a listen-only mode. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Steve Metzger, Executive Vice President, Chief Administrative Officer, General Counsel. You may begin.

Steve Metzger, Executive Vice President, Chief Administrative Officer, General Counsel

Thank you, Julie, and good morning, everyone. Today, we'll be discussing our second 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 and Chief Executive Officer; Ben Brink, Executive Vice President and Chief Financial Officer; and Carlos Quezada, Executive Vice President and Chief Operating Officer. Today's call will begin with formal remarks from management, followed by a question-and-answer period. Before we begin, I'd like to remind everyone that during this call, we will make some forward-looking statements. Any comments made by our management team that state our plans, beliefs, expectations or projections for the future are forward-looking. These 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 on our earnings release as well as our website. Thank you for joining us this morning. And now I'd like to turn the call over to Mel.

Mel Payne, Chairman and Chief Executive Officer

Thank you, Steve. This is a very exciting time for me and all the rest of us at Carriage during this great journey. We have record high second quarter earnings to discuss today, but it's also significant as it is the first since we refinanced $400 million of 8-year unsecured senior notes at Tom Brady bond pricing of 4.25%. We are now turning our focused attention to investment in our equity by putting our money where our mouth has been. On June 1, we celebrated the 30th anniversary of our founding by me and three other cofounders. After I replaced the traditional budget and control performance management system with nontraditional and counterintuitive standards operating model at the end of 2003, the last 18 years have been akin to utilizing the scientific method in an evolutionary trial and error learning journey. Continually adapting from what wasn't working to those ideas that worked better. Never being satisfied with mediocrity and always striving for excellence in every area of the company. While there have been periods of underperformance over the last 18 years, some longer and others shorter, all of those periods, when you reflect back on them, were directly related to not having the right leaders in the right seats on the bus. There have been turning points at various times over the last 18 years, particularly in 2003 when the standards operating model was introduced effective January in '04, and in 2006 when we realized it was more a leadership model than a management model and adopted the 4E Leadership Model. At the end of '06 and '07, we returned to a growth path using a new strategic acquisition model and more transparent trend reports. In 2008 and 2009, we took over our trust fund management, and in 2011, we launched the first 5-year timeframe of our 'Good to Great' initiative. But the last 2.5 years of high-performance transformation have been a result of three significant changes: transformative strategic acquisitions; updated high-performance standards emphasizing compounded revenue growth and sustainable high EBITDA margins for both our funeral and cemetery businesses; and top-grading leadership in all areas of the company starting in October '18, which has led to leadership promotions, including Ben, Steve, and Carlos. The future leadership of Carriage will eventually emerge from this group with three leaders. Given my excellent health, passion, and energy for our business and our people, plus the fact that I've never had so much fun, now with our leadership across the company winning, it's a time for Carriage to win, and this period of winning will last for years to come. I can't imagine having a job and getting paid to be here with so many high-performance individuals and leaders. We need to celebrate our achievements. I co-dedicate this call to my outstanding team and our operations personnel who support all of our wonderful businesses and leaders. Let's take a moment to celebrate our success. Carlos?

Carlos Quezada, Executive Vice President, Chief Operating Officer

Thank you, Mel. Good morning, everyone. I hope you are as excited as we are because we have so much wonderful news to share with you. I am so glad to be here to represent all of our Carriage family today. When I joined Carriage on June 26, 2020, I knew that I was coming into a high-performance culture company, but I did not realize that being at the top is the norm every single day at Carriage. At that time, we were in the midst of the pandemic, which served as an accelerator to technology adoption across our industry. Nonetheless, Carriage had already been diligently working on our 'Good to Great' transformational high-performance journey since 2018. Our performance achievement is simply the result of our high-performance partners and teams of Carriage employees across our portfolio of businesses. We have been able to adapt, pivot, and drive significant positive change that is focused on superior service and guest experience, reflected in our market share growth and consistent high performance trends over the past 10.5 years. Now that the pandemic is receding, we are more prepared and ready than ever before. This is the primary reason why everyone at Carriage is so thrilled and passionate about the future. While our stock price continues to trade at a significant discount to intrinsic value, we will continue to work hard on our value creation platform and deliver high operating and financial performance for years to come. Our second quarter and year-to-date operational results are as follows. For our funeral portfolio, our second quarter of 2021 funeral home same-store volumes are maintaining a healthy level compared to the elevated pandemic volumes of 2020. More impressively, we have increasingly sustainable volume growth of 11.4% compared to the pre-pandemic second quarter of 2019. Of the 11.4% increase, 6.7% is market share growth, while only 4.7% is from COVID-19 related deaths. Our managing partners focus on three-year compounded net revenue growth goals. They and their excellent teams are committed to providing the best service and guest experience to families, their friends, and communities. We continue to see improvement in our commission averages returning to pre-pandemic levels. In Q2 2020, our average was $3,075, whereas in Q2 2021, it was $3,416, an increase of $341 per contract or 11%. This comes from our efforts on cremation conversions driven by partnerships between our support directors and managing partners. We also continue to grow our partnerships with our four most recent acquisitions, which increased $1 million in net revenue for the first half ended June 30, an increase of 10.1%. I have a very ambitious travel agenda for the rest of this year to visit our incredible funeral businesses and meet their teams. I've already visited many of our California funeral homes and will continue visiting other businesses in the coming months. Now moving to our transformational cemetery portfolio, we have record-breaking performance in Q2. It has been a little over a year since we started executing on our plan to create high-performance sales teams across our cemetery portfolio to drive sustainable sales. This plan has exceeded our expectations. After introducing our main sales drivers, we delivered exceptional success thanks to our Houston support center leaders and our cemetery managing partners. Today, we are excited to share that our cemetery portfolio is performing at an all-time high. Our total cemetery revenue for 2021 has significantly increased compared to previous years. In 2017, we made $42.7 million. By 2021, our revenue reached $86 million, showing a growth of an additional $43.3 million or 101% over that four-year period. I would like to thank all of our leaders and teams in the field and our Houston Support Center, who from day one supported significant changes that have reshaped our cemetery portfolio with record-breaking performance over the last few months. While we have had amazing success with our cemetery portfolio, there are still great things happening across the board. For sales quarter record cemetery performance, our same-store comparison shows that operating revenue in the second quarter of 2020 was $11.5 million, while in 2021 it is $60.5 million, demonstrating a growth of 42.8%. Our field EBITDA in 2020 was $3.7 million compared to $7.6 million in 2021, marking an increase of 106.7%. And our EBITDA margin went up to 45.9% in 2021, an increase of 1,420 basis points from the previous year. With transformational cemetery high performance, we estimate that 15% of this growth is related to COVID-19 deaths and 85% is correlated to our premium strategy and execution of our transformational cemetery plan. In closing, Carriage has unique and special qualities driven by innovative and nontraditional ideas that are not typically found in our industry. Our approach continues to emphasize a decentralized model and high-performance culture, paving a path for sustainable results over the next 5 to 10 years. Thank you, and it is an excellent time to be with Carriage as we look forward to continued success in the future.

Steve Metzger, Executive Vice President, Chief Administrative Officer, General Counsel

Thank you, Carlos. As we reflect on the past 2.5 years at Carriage, it's essential to highlight the transformative processes we've experienced. However, the real focus should be on the energy and developments across the company that drive these results. We maintain a strong commitment to continuous improvement, and there's no opportunity for growth that's too small for our team. The details matter, and discussions are happening every day. Our new balance sheet, following our refinancing earlier this year, has positioned us to take advantage of strategic capital allocation opportunities that have never been present in our 30-year history. From being prepared for large strategic acquisitions to aggressively paying down our debt and increasing our dividend, disciplined capital allocation drives our decisions. We're now actively identifying acquisitions to enhance our portfolio. In addition, we've reviewed and refined our strategic acquisition model based on the success of recent acquisitions, focusing on strategic markets with organic growth potential. We remain selective in choosing only the best independent businesses to join the Carriage family, emphasizing the quality of business over mere growth.

Ben Brink, Executive Vice President and Chief Financial Officer

Thank you, Steve. It's incredible to reflect on the high-performance transformation at Carriage over the past 2.5 years as we report record second-quarter and first-half operating and financial results. We've increased annual adjusted consolidated EBITDA by 69.9% to $119.3 million, and adjusted consolidated EBITDA margin by 700 basis points to 33.2%. For the second quarter, total revenue increased 13.9% to $88.3 million. Adjusted consolidated EBITDA rose 12.9% to $28.7 million, and adjusted diluted earnings per share increased 42.2% to $0.64 per share. For the first half of 2021, total revenue increased $29.9 million or 19.3% to $184.9 million. Our successful refinancing of $400 million of unsecured senior notes reduced our annual cash interest costs by $9.5 million. This enhancement is projected to impact our earnings positively moving forward. Furthermore, our pro forma adjusted diluted earnings per share reflects increases based on the refinancing and significant performance improvements.

Mel Payne, Chairman and Chief Executive Officer

Thank you, Ben. It's clear from this call why I'm excited about our future. I invite anyone interested, whether as a shareholder, bondholder, or a friend, to come to Houston to see our company in action. You will witness firsthand the high-performance culture we foster. Our approach is unique, and our results speak for themselves. After 30 years, we've reached a moment worth celebrating, and it's only going to get better from here. I believe our industry is primed for a remarkable run in the next 5 to 10 years. The quality of our team, our innovative approach, and our consistent performance are what set us apart in this sector. We understand the value we bring and remain focused on enhancing that value while pursuing growth opportunities.

Alex Paris, Analyst

Mel, thank you for that story. I appreciate the background on company leaders, which is vital for investing with the right people. Congratulations on the beat and raise. My takeaway is, while comps are tough and volumes are moderating as COVID deaths subside, you are overcoming that through higher funeral and cremation averages. Can you focus on what's driving these increases?

Carlos Quezada, Executive Vice President, Chief Operating Officer

Thank you, Alex. The driving factors behind our increases include the ability to conduct services that were restricted during the pandemic, leading to a higher appreciation for the value of our services. Our cremation conversion program and the dedication of our managing partners have allowed us to better educate families on value options for celebrations of life, enhancing both our funeral and cremation average.

Mel Payne, Chairman and Chief Executive Officer

The key point is that the pandemic has taught people the value of celebrating or grieving with others. In overcoming restrictions, people have come to appreciate the meaningfulness of our services as we adapt to the new normal. I am confident that our noble profession has a bright future ahead.

Liam Burke, Analyst

Regarding the uptick in cemetery sales, were there benefits from deferred sales when access was restricted during COVID?

Carlos Quezada, Executive Vice President, Chief Operating Officer

There may be minimal deferred revenue due to COVID, but our success largely stems from the focus on developing new sales strategies and driving engagement within our current teams. We have established an aggressive activity plan to generate new leads and maximize sales performance.

George Kelly, Analyst

Aside from COVID, what do you see as the biggest risks for your business regarding the outlook you provided?

Ben Brink, Executive Vice President and Chief Financial Officer

The goals we've set are conservatively realistic, and despite known unknowns about COVID, we have numerous known drivers contributing to our performance improvements. This gives us confidence in achieving our goals.

Mel Payne, Chairman and Chief Executive Officer

We have the right team in place, our financial position is robust, and we are committed to creating additional value. As we continue progressing, we appreciate your attention and commitment to Carriage. The best is yet to come.

Operator, Operator

And I'm showing no further questions at this time. I would now like to turn the conference back to Mel Payne.

Mel Payne, Chairman and Chief Executive Officer

Thank you. I've had my say.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may all disconnect.