Earnings Call Transcript - CSV Q2 2022

Operator, Operator

Thank you for joining us, and welcome to the Carriage Services Second Quarter 2022 Earnings Call. It is now my pleasure to turn the conference over to Steve Metzger, Executive Vice President, General Counsel and Chief Administrative Officer. Mr. Metzger, please proceed.

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

Thank you, Jack, 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 posted the release, including supplemental financial information on the Investors page of our website. This audio conference is being recorded, and the 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 Quezada, President and Chief Operating Officer; and Ben Brink, Executive Vice President and Chief Financial Officer. Today's call will begin with formal remarks from Mel, Carlos, Ben, and myself, and 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 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 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.

Melvin Payne, Chairman of the Board and Chief Executive Officer

Thank you, Steve. Yesterday, we had our best Board meeting ever prior to our second quarter earnings release yesterday afternoon. This morning, we're experiencing the largest decline in our share price, which was about $8 a share last time I looked, or 18% in the history of our Company as a public Company since August of '96, 26 years ago. Why this disconnect? Not sure; you never can be with the market, but I would like to provide my personal perspective as a Co-Founder, Chairman, and only CEO Carriage has ever had. My family and I also now own 12% of the Company, and we own nothing else. It has been an incredible journey of ups and downs since founding Carriage in 1991 with a mission/vision of being the best operating and consolidation Company in our industry. I started at 48 with no history, no knowledge, but only some money and an idea. The money was borrowed, so it had to be paid back with interest and upside equity. It was only in the last decade that the Company reached a third element of being the best, which was a good-to-great journey, where we would become the best value creation Company, as well through operations and consolidation and capital allocation, always guided in this journey by five guiding principles that have never changed. This journey starting when I was 48 was never a short-term idea, and it was never equivalent to a race to some made-up finish line right in front of us. It has always been more akin to a marathon, where we get better in different areas at different times, sometimes over long periods, sometimes over short periods, always focused on the high-performance culture concept highlighted in Jim Collins' book Good to Great of First Who, Then What. We no doubt accelerated our long-term good-to-great journey over the last 2.5 years by optimizing our historical performance in 2021 throughout our portfolio. However, given the changes in the world and our domestic economy and markets since the beginning of the year, everything seems to have gone upside down with world and domestic uncertainties that I have never seen in my time in public markets and in finance, and as an investor. Every company, regardless of the industry they're in, is facing these uncertainties and revising their outlooks; many have foggy outlooks and really don't know what the future brings in the near to intermediate term, much less in the long term. Given all these uncertainties as we began this year, we made a decision early in the year, which has only grown in conviction over the last few months since Russia invaded Ukraine, that rather than continuing to optimize short to intermediate-term performance, we would instead use this environment to get better faster in the specific areas that were highlighted in our release, which brings me back to our Board meeting yesterday. Historically, since I founded the company in January of '91, I have chaired every meeting, I've run every meeting. I created the agenda for every meeting. I've decided who presents, what they present, and how long they present throughout the history of the Company, for better or worse. However, a little over a year ago, I created the Strategic Vision and Principles Group comprised of Carlos Quezada, who is now our President and COO; Ben Brink, Chief Financial Officer and many other things; Steve Metzger, General Counsel and many other things, including Head of acquisitions, now as the Strategic Vision and Principles Group, and out of this Group, the succession plan of Carriage has emerged. And my biggest job, my best job ever was to allocate my time among other things, acquisitions, the trust fund portfolio with two others mentoring them to be better executive leaders, the best they could possibly be in the future for the benefit of Carriage when I'm not here. And that led to me rotating the Chairmanship. I opened the meeting yesterday. Carlos ran the meeting. The agenda was made up by these three leaders, not me. I didn't change one thing. I didn't pick anybody who presented, and yesterday, thank goodness, I sat back and watched, along with our other Board members, as all of this unfolded, and it was a beautiful thing to witness. We opened with an operations update by Carlos, and he and Shawn Phillips, our Central and Eastern region partner; then, Paul Elliott, our Western region partner, Peggy Schappaugh, our operation support and analysis and planning, and then, Shane Pudenz, Vice President of Sales and Marketing. And then we had two new people since the beginning of the year, Alfred White, otherwise known as A.J., who has created the marketing department, followed by Rob Franch, our new Chief Investment and Technology Officer on our IT strategy and update. Now I have never seen in 26 years as a public Company, so much talent focused so much in a short amount of time on doing all the right things in their areas of responsibility and how it all fit together; the puzzle came together as a beautiful thing, and I talked about this in the shareholder letter of '21, as Carriage being like the Sistine Chapel. And other people outside the company come along and say, use a little red here, use a green there. Let me tell you, the people in our Board meeting yesterday are painting away, and they're painting away at a time when most people don't have the financial flexibility to do it. It might look like an accounting expense, but I will tell you, as a 12% owner, I'm looking out 2.5 years, 7.5 years to where we will be then, and I would like to own more of the Company, not less. And with that, I would like to turn it over to Carlos.

Carlos Quezada, President and Chief Operating Officer

Thank you very much, Mel. Good morning, everybody. We are very glad to be here this morning to share our second quarter performance for 2022. First, I would like to express my gratitude to all of our Carriage family in the field and our Houston support center; your dedication and commitment to being the best regardless of the challenges that you face each day, pandemic or not, is the reason why Carriage is a high-performance culture Company. From the bottom of our heart, thank you very much. For today's call, we will provide an operations update, marketing, IT, and sales. After my remarks, Steve will provide an update on acquisitions, and then we will follow with financial updates. After that, Mel will close with his remarks. As Mel mentioned in his commentary on our earnings release, over the last two years, Carriage has been working very hard on what we call a high-performance culture transformation. We started a year before the pandemic even began. By the time COVID-19 hit, the team was ready to serve. The outcome of this transformation has continued to impact our operations and financial performance in alignment with our vision and mission of being the best, which simply put, it means a never-ending journey of always striving to be better than we were before. Now to the results and highlights for our second quarter of 2022. For the second quarter, we had total revenue of $19.6 million, an increase of $2.3 million or 2.6%. Total field EBITDA of $38.6 million, a decrease of $1.4 million or 3.4%. Total field EBITDA margin of 42.6%, a decrease of 270 basis points. Adjusted consolidated EBITDA of $25.3 million, a decrease of $3.4 million or 11.8%. Adjusted consolidated EBITDA margin of 27.9%, a decrease of 460 basis points and adjusted diluted EPS of $0.58, a decrease of $0.06 or 9.4%. Our revenue growth shows that even after a huge COVID impact in Q2 2021, we're able to grow revenues, mainly coming from funeral, which was up our volume by 217 contracts or 2%, and our funeral sales average was also up by $366 or 6.6%. Achieving this growth on our funeral volume sales average is a significant milestone after having such a huge comparable. While we still have some of our highest margins in the industry, a decrease of 270 basis points in total field EBITDA margin is related to two main factors. One is increased pay to full-time and part-time hourly employees, which after 2.5 years of pandemic stress and overwork, we believe the right thing to do is to recognize the commitment of our employees and support them with some relief related to record inflation levels around the country. Number two is an increase in merchandise costs, transportation costs, and ancillary. What we have done to get our field EBITDA margins back to performance standards ranges are the following. As a decentralized organization, we believe that having the right leaders as managing partners and making them the best decision they can for their community, their businesses, and employees, it is key. However, we did send a letter asking them for their support to take a look at what those increases and how they may be impacting their businesses, but not only that, we were able to rally all of the margin partner ranks in addition to the Standards Council members, who came very strong with some great ideas about how to improve overall. We believe that peer-to-peer support from our Standards Council members, who are the best of the best at Carriage and aligning them with those that may be struggling, will help them come up with the best value creation ideas and decisions to really improve their performances and get those performance standards back into the right ranges. We are also going to create some webinars led by the Standards Council members, for which we thank them for their support, where they're going to be able to teach some best practices and great ideas that have worked for them, showcasing the potential for each business across our portfolio at Carriage. As it relates to the decrease in adjusted consolidated EBITDA margin, which is not a surprise, this is actually a plan we announced back in February of this year, where we shared our plans to increase Carriage services through investments in marketing and IT that will result in an increase in revenue, productivity, and other efficiencies, but also an increase in overhead expenses in the short term. We at Carriage believe that savvy capital allocation and value creation in all that we do is critical. Mel just mentioned that we don’t take this as a one-mile sprint, but as a marathon. We think in five to ten-year intervals, and we believe long-term investment and value creation ideas are what's right to do at the right time. We think this is the right time, and at the end of these uncertain times that we see based on the global environment, we will come out very strong ahead of everybody else within this industry. With that in mind, here are some of the benefits of these investments we're making in marketing: improving branding and digital guest experience, modernizing online presence, and engaging families through social media, improving organic growth in search engines, maximizing marketing best practices, gaining market share through marketing campaigns, and tracking the return on investment in all marketing expenses. From an information technology perspective, we're focusing on improving our infrastructure, cybersecurity, business intelligence, and creating a new end-to-end customer-centric system that will cover the customer journey and provide an incredible guest experience. Our current system, which is owned by Carriage and created by Carriage, is almost 20 years old; it is not built to current standards, and its expansion capacity is nearly zero. To become a value creation company, we need to upgrade with best-in-class systems that enable value creation and can accelerate it. This new technology, led by Rob Franch, will capitalize on opportunities like we never had before. Decreasing manual work, also paper; we aim to streamline operations through automation, improving efficiencies. Also, if we are funeral directors and in many hours, we want them to focus on delivering excellent service to the families that they serve, genuinely differentiating us from anyone else. We'll customize the unique needs that each business has, simplify operational and financial support, and reduce human error. Our value creation investments in marketing and IT will accelerate our capacity to integrate new businesses into our ecosystem. At the same time, we will gain market share by delivering our customer-centric service excellence journey like we never had before and probably, no comparison to anyone else out there right now. Now moving into sales, Shane Pudenz and his team continue to show that organic growth is very possible, having achieved a record growth in the past 1.5 years. To put things in perspective, since the beginning of the cemetery transformation, we went from $9.2 million to $19.3 million or 109.7%. On top of that growth in Q2 2022, our sales team was still able to grow by $1.2 million in preneed production for cemetery services or 6.5% in Q2. Our teams are now fully benefiting from our CRM and continue to focus on the three areas that deliver success: number one, the selection of the best leaders; number two, the development of their sales skill set; and number three, creating preneed engagement opportunities throughout our cemetery portfolio. Cemetery sales continue to be an opportunity for Carriage, and we will continue to work hard to maximize our cemetery portfolio to the best of our ability. In closing, everyone at Carriage is excited about our future. We are all working towards being the best. Investing in our future is the right decision at the right moment. The death care industry has historically been a very resilient business, and we believe that because of all of the work we've done over the past few years, in addition to our current efforts, we will emerge ahead after all uncertainties are settled. If you were able to experience what it is like to be at Carriage in the field or at the Houston Support Center, you would understand why we continue to proclaim that it is a great time to be with Carriage and that the best is yet to come. Thank you. And I will pass it to Steve.

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

Thank you, Carlos. As it relates to our growth through acquisition outlook, we continue to be encouraged by the activity we see involving high-quality businesses looking for succession plans. During our last call, we mentioned that we expected the back half of the year to feature some new additions to the Carriage family, and we're pleased to report that continues to be the case. We previously highlighted a letter of intent with a business located near the growing Orlando market, and we're now under a definitive agreement with that business and expect that acquisition to close in the next couple of weeks. This business consists of two funeral homes that served more than 800 families last year. We had the chance to spend some time with the team last week, as the owner announced the decision to partner with Carriage. As we were able to visit with the employees, we were taken by the passion they all have for their business and the families and the community that they serve. We're excited to welcome them to the Carriage family and support and build upon the great foundation they've created. We're also excited to announce we're under a letter of intent with a fantastic business in a large, high-growth market where we previously did not have a presence. This business served more than 1,200 families last year and has built a first-class reputation and demonstrated a thoughtful growth plan featuring funeral homes in desirable areas, a cemetery, and a crematory. We look forward to providing more detail about this acquisition next quarter. These two pending acquisitions represent more than 2,000 additional funeral calls each year. So to put that in perspective as it relates to overall impact, these two acquisitions alone will represent approximately 4% of the total number of funeral home calls we currently serve annually. These businesses are great examples of our selective and patient approach to growth and represent the types of businesses we believe fit well within the Carriage high-performance portfolio. Specifically, they both possess strong reputations, a history of growth, and are all well positioned in large growing markets. As importantly, they present strong future expansion opportunities within their respective markets, as well as revenue growth potential. In other words, as good as these businesses are today, they also present very intriguing upside. As we mentioned before, we're not interested in growing just for the sake of getting bigger, but rather we view Carriage as an elite club of the very best businesses, where top performers don't have to subsidize low performers. And with that mentality and objective, we recognize that we must remain disciplined and patient as we continue to wait for the no-brainers we described in our last call. We also recognize that if we believe a business is a no-brainer, it's very likely that others will feel the same way. So we have to ensure that the Carriage story, which we know to be differentiated and compelling, is well-told. To that end, we continue to find ways to highlight those distinctions, one of which is simply put, our people. So I'd like to wrap up my remarks by reading two brief e-mails that I received in the past couple of weeks regarding members of our HR team. The first is from Lesli Johnson, who is a long-time employee of a business we acquired in 2019 and who now leads that business as the managing partner. Lesli wrote, 'Steve, I want to let you know that I love Abby Durham and Oludare Awotesu. They make my job so much easier. They're quick to respond, which is extremely helpful in this crazy and quick hiring world. They keep everything organized, too. Their customer service is A+++++. Lesli, if you're listening, I think I got all the pluses there, but there are a few. Please share this with anyone who needs to know how great they are. Thank you.' And then also recently, Adam Zalesny, the sales manager for our Las Vegas location, wrote, 'I just wanted to reach out and give my compliments on the outstanding service that Jason Buchbinder and Christine Ngo have given over these past couple of months, as I've been recruiting for a new position and dealt with a few employee issues. Both have been excellent at follow-up, follow-through, and fantastic professionalism, as they've assisted me with these items that have needed to be accomplished here in the Las Vegas market. We all work in stressful times, and I know that not everyone has the opportunity to be acknowledged when they excel. So I felt it was important to reach out and do so, while it's fresh in my mind.' Now these two e-mails are certainly not exceptions, but they're particularly timely, as I was preparing my remarks for our release and as we continue to share our story with acquisition candidates. Carlos just highlighted our strategic investments in top talent, particularly talent geared towards making sure our managing partners and their businesses have the best and most current tools, as well as top-notch support to help them continue to serve families at the highest level, which ultimately leads to gains in market share and creates more value for our shareholders. At the end of the day, we have great conviction that our most important competitive advantage is our people. And as we continue to identify premier businesses to invite to join the Carriage family, we want to make sure they understand that they will have equally passionate and talented people waiting to welcome and support them with the goal of growing and reaching new heights together. With that, I'll turn it over to Ben to provide some more color on the quarter.

Carl Brink, Executive Vice President and Chief Financial Officer

Thank you, Steve. Year-to-date, our total revenue has increased 2.1% to $188.8 million. Our adjusted consolidated EBITDA has decreased 8.8% to $57.8 million. The adjusted consolidated EBITDA margin decreased 370 basis points to 30.6%, and our adjusted diluted earnings per share have increased 4.1% or $0.06 to $1.51. Our discretionary preneed trust fund portfolio continued to outperform the major indices during the second quarter. Year-to-date, our discretionary preneed trust fund portfolio had a total return of negative 5.9% compared to a negative 20% return for the S&P 500 and a negative 29.2% return for the NASDAQ Index. We have positioned the portfolio to outperform in the current market environment that has many different crosscurrents of inflation, rising interest rates, a strong dollar, the risk of recession, and a rapidly changing geopolitical landscape. We took the opportunity in the second quarter to lock in an additional $9.7 million of long-term capital gains, which brought our total realized capital gain since March of 2020 to $42 million in the portfolio. These capital gains will increase the value of our maturing preneed contracts and will be additive to financial revenue and EBITDA for the foreseeable future. We currently have approximately $30 million of cash in the portfolio as we look to redeploy that capital into better relative value opportunities. We plan to focus on increasing the recurring annual income in the portfolio by adding to existing positions of dividend-paying stocks and by selectively adding to our high-yield fixed income portfolio with good credits that have the ability to pay their principal and interest when due. The additional recurring income we add to the portfolio will add approximately $1 million annually to our earnings from our perpetual care trust accounts and will be accretive to financial revenue and EBITDA. Our adjusted free cash flow declined by $300,000 to $12 million in the second quarter, and our adjusted free cash flow margin declined 60 basis points to 13.3%. For the first half of 2022, our adjusted free cash flow declined by $15.1 million, and our adjusted free cash flow margin declined 840 basis points to 12.9%. The first half decline in our adjusted free cash flow was the result of lower adjusted consolidated EBITDA, higher cash incentive payments in the first quarter, and higher maintenance CapEx as we continue to invest in our businesses. Our total debt to adjusted consolidated EBITDA ratio increased to 4.85x at the end of the second quarter compared to 4.71x at the end of the first quarter. In the second quarter, we repurchased approximately 205,000 shares for an average purchase price of $40.02. Since we began to execute our share repurchase program in the second quarter of last year, we have invested $176.7 million to repurchase approximately 3.6 million shares for an average purchase price of $49.05. The 3.6 million shares repurchased represent a reduction of approximately 20% of our diluted shares outstanding as of the end of the first quarter last year. As we outlined in our second quarter earnings release, we intend to prioritize our capital allocation over the next 18 months, first towards closing the two high-quality acquisitions in the next 90 days, as Steve mentioned, and then towards continued development of our differentiated cemetery inventory and debt repayment with the goal of reducing our pro forma debt to adjusted consolidated EBITDA ratio to approximately 4.5x by the end of next year. Our lower leverage profile closer to 4x over the long term will provide us with the necessary financial flexibility to pursue the best possible capital allocation decisions to grow the intrinsic value per share of Carriage. As Steve mentioned, the acquisition landscape remains active and highly favorable to Carriage, as independent owners look for the best succession planning solution for their business. We also view our lower leverage profile over time as enhancing the valuation multiples of our equity, as investors view Carriage as a less risky investment that can self-finance the majority of value creation, capital allocation through internally generated free cash flow. Given our changing capital allocation priorities over the next 18 months, we have made the decision to no longer update our roughly right three-year performance scenario or our opinion of the range of intrinsic value per share. We will continue to provide an updated rolling four-quarter outlook, which is our best view of the next 12 months of performance. This updated rolling four-quarter outlook includes the full impact of the overhead investments we have outlined in marketing, technology, and corporate development, a small increase in our effective tax rate to 27.5%, the increase in short-term interest rates, and the pro forma performance of the two acquisitions we expect to close in the next 90 days. The outlook is as follows: revenue $380 million to $390 million, adjusted consolidated EBITDA $115 million to $119 million, adjusted consolidated EBITDA margin 30% to 31%, adjusted diluted earnings per share of $2.85 to $3; adjusted free cash flow of $68 million to $72 million; and adjusted free cash flow margin of 18% to 19%. And with that, I would like to open the call up for questions.

Operator, Operator

Our first question comes from Alex Paris with Barrington Research.

Alexander Paris, Analyst, Barrington Research

I have a couple. Starting first with the P&L. In the quarter just reported, revenues were roughly in line with expectations, maybe slightly below, and earnings were significantly below estimates. Again, that's due primarily to deliberate increases in your fixed overhead to fuel future growth and profitability. Can you expand a little bit on those investments? So you have higher overhead investments, which include marketing, technology, and people? Are you done now, so to speak? Is it a matter of just anniversary-ing the higher cost level as we go forward? Or are there more step change function changes to come?

Carlos Quezada, President and Chief Operating Officer

Great question. This is Carlos. So at the beginning of the year, we hired Alfred White on January 3rd. The idea was we never had a marketing department at Carriage ever, not one member of a marketing team before. As a public company, and given the size of the business we have right now and the volume of businesses we have, we thought it was the right time to start building and somewhat centralize the marketing function within Carriage. Before, our managing partner would go out and hire a third party for design, video, social media management, Google AdWords management, and anything related to marketing for that matter. We believe that through the function of our new marketing team, which is new and we have about six people in it right now, we will be able to consolidate a lot of those expenses, and over time, we'll start to see some significant efficiencies from that perspective because now we have the resources in-house. We are focusing significantly on Google reviews, social media platforms, online presence, and of course, all related to digital marketing, creating opportunities for market share gains, and building value as it relates to the guest experience online in each business. We believe the number of people we have right now is the right amount for the plan we have. I believe that over the next few months, we'll be able to replace some of those costs that we currently see at the field level, which will not be additive to our overhead right now. As we continue to execute our strategy from a marketing perspective, we feel pretty certain that we'll show the efficiencies, productivity, and growth from a market gain perspective, as we planned. We feel very excited about it because we never had this before. We believe it is the right time. Even though some people think about uncertainty, we believe long-term, and we believe we will come out ahead of everybody else because of our strategies that we're executing right now. I hope that answers your question, Alex.

Melvin Payne, Chairman of the Board and Chief Executive Officer

So Alex, this is Mel. The Company has grown, and I needed to come up with a new business model that turned the old one upside down, as the traditional method of consolidating and operating in a fragmented industry was no longer sufficient. This process took time and involved a lot of trial and error, which I've documented extensively. The core idea remained strong, but there were periods where I experimented with different approaches, and it always felt challenging to balance growth through acquisitions and the rapid growth we experienced at the end of 2019 and early 2020. We struggled to keep pace with the necessary support services, technology, and leadership. While I thought we could continue with our existing model without centralized marketing, several issues arose during COVID, and our Standards Council, which includes some highly innovative members, pointed out our deficiencies in crucial areas. Although our performance appeared optimal and we were gaining market share during COVID, the pandemic's death rate didn't decline as expected. When Carlos shared his ideas at the beginning of this year, especially regarding marketing, I was uncertain about their necessity. However, I recognized the need for technology, which was clear. I was pleasantly surprised to find someone like Rob Franch to help implement these ideas. Carlos’s concepts, backed by the Standards Council, evolved significantly. We could have pursued a slower implementation to potentially make investors more comfortable, but as a major stakeholder, I embraced Carlos's vision, which differed from my own ideas. Initially, I questioned the pace of these changes, but I can confidently say our team's response has been overwhelmingly positive. Many of them, some of whom I've known for decades, are telling me this is the best thing that's ever happened to our Company. The fresh marketing initiatives and our employees' enthusiasm for social media, despite my own lack of engagement with it, indicate we are moving in the right direction. I recognize that the scale of these changes might be surprising, and I apologize for that. However, I'm convinced that the capital allocation to our existing businesses in these areas will pay off in the long run. Looking back in five years, we'll likely wonder why we didn't implement these changes sooner. We weren't prepared then, but we are now, and I hope everyone understands this message.

Alexander Paris, Analyst, Barrington Research

I certainly understand and agree with everything you said; we're long-term focused in our investment. But as you said, it was kind of a shock and sudden in terms of the variance on earnings as a result of these deliberate investments.

Melvin Payne, Chairman of the Board and Chief Executive Officer

Yes, Alex, it's interesting for those who are new to our story to understand that historically, no company has achieved an adjusted consolidated EBITDA margin of 30%. I highlighted this back in 2016 when we reached 29.7%. We aimed to get close to 30% in 2019 but fell short. Then in 2020, following our acquisitions, we exceeded 30%, reaching around 33%. Newcomers to our story often ask when we’ll hit 35%. It’s challenging as a CEO and major stakeholder to balance short-term performance with long-term growth and value creation. Regarding my position, it's a privilege to be where I am today, starting from nothing but an idea and taking on debt. I am now mentoring Carlos, Ben, and Steve on a lifelong learning journey. I have a collection of books in my office, and if anyone visits, I’d be happy to share some. Four of them are essential: 'Poor Charlie's Almanack' by Charlie Munger, which he's updated several times and offers incredible insights; 'Seeking Wisdom: From Darwin to Munger' by Peter Bevelin, my all-time favorite on human nature and investing; 'A Few Lessons for Investors and Managers' by Warren Buffett, a concise yet insightful read; and three volumes of 'The Great Mental Models' by Shane Parrish, which distill the thinking of Munger and Buffett. These volumes emphasize that the quality of our thinking is based on our mental models. My role at Carriage is the best I've ever had, focusing on enhancing the mental models of Carlos, Ben, Steve, and my children. That's all I want to share, Alex.

Alexander Paris, Analyst, Barrington Research

Well, thank you, Mel. I'll definitely check out those books.

Melvin Payne, Chairman of the Board and Chief Executive Officer

Come then soon, you can get a copy free.

Alexander Paris, Analyst, Barrington Research

All right. We'll do. I'm due for a visit down there anyway. So the last question I'll ask is probably for Ben, with regard to the rolling four-quarter outlook. While I'm on board with a longer-term orientation to running the company, investors are looking at the next quarter and the next year. And just to be clear, Ben, does it include all the strategic overhead investments that you've made to date? It includes the performance assumption of the two pending acquisitions. With all that said, the revenue outlook is essentially the same as it was when you provided it for the rolling four quarters last quarter comments.

Carl Brink, Executive Vice President and Chief Financial Officer

No. I think each time we put those out, Alex, right, we go back and kind of look at where we are, look at how the operations and everything has been trending. I think that was what we felt most comfortable with that range to give for this next four quarters, right, even including when these acquisitions come in and reacquire them over the next couple of months.

Alexander Paris, Analyst, Barrington Research

And then, in orders of magnitude, just as a rule of thumb, in terms of projecting what sort of revenue impact these acquisitions would have? Is it the appropriate methodology to take 800 families and multiply it by a $5,500 average revenue per call, a little less than that, or a little more than that?

Carl Brink, Executive Vice President and Chief Financial Officer

I don't think we're ready to provide that level of detail because we haven't finalized these yet. However, we recognize that these are strong businesses with numerous opportunities, particularly in terms of continuing to grow the brands in those markets. It’s very exciting for us.

Alexander Paris, Analyst, Barrington Research

And then in your rolling four-quarter outlook, obviously reflecting these increased levels of overhead expenses, that's where we see the variance between your last four-quarter outlook and your current four-quarter outlook in adjusted EBITDA and adjusted EPS midpoint to midpoint. All right. I'll leave it there. I'll have a few follow-up questions for you offline, but thank you very much.

Operator, Operator

Our next question comes from the line of Liam Burke with B. Riley.

Liam Burke, Analyst, B. Riley

I guess, Carlos, I wanted to ask you, you do have purchase agreements with a lot of your vendors. How much did that help offset the higher merchandise costs in either funeral home or cemetery?

Carlos Quezada, President and Chief Operating Officer

It provides us with some added certainty. Nonetheless, I've mentioned that several vendors issued surcharge letters where they didn't follow the agreed-upon price increases, instead imposing surcharges due to high inflation and supply chain issues. Many of these vendors source their products or materials from outside the United States, leading to higher transportation costs and other expenses. We anticipate that some of these charges will be eliminated soon. If they persist, we are taking steps to ensure that we do not absorb these costs and pass on some of the increases. Our priority is to do what’s right for families; however, maintaining a balance between not losing market share while appropriately managing cost transfers is crucial. We are currently focused on making the right choices, and I am confident that we will get back on track with our field EBITDA margins thanks to our ongoing efforts.

Liam Burke, Analyst, B. Riley

I understand your concerns. I realize that the pricing aspect of the business is challenging, particularly when it comes to families. I'm curious if you've considered any relief related to the merchandise costs, or if you believe that these charges will remain until we see a decrease in prices or lower input costs from our vendors.

Carlos Quezada, President and Chief Operating Officer

It's really specific to the business. I would say that probably in most cases, not all cases, but in most cases, we were able to pass on the surcharge to the family. But some misunderstandings arise because costs fluctuate. Gas is going up, surcharges from vendors are going up, and we've been able to capture that. We were watching it a little bit just to see if that was going to be permanent. But in May, we noticed that was more here to stay than not, and then we started to make some significant changes.

Liam Burke, Analyst, B. Riley

On the marketing side, Mel mentioned that you have been gaining market share. With the conclusion of COVID, you encountered some challenges. Do you think there's a need to completely revamp your marketing strategy? Does this relate to the specific properties, and what changes would be necessary? Is it focused at the property level, or is it more about the overall branding strategy? Could you provide some insights on that?

Melvin Payne, Chairman of the Board and Chief Executive Officer

Yes, I'll start there. We had many people wanting to centralize marketing at the Houston Support Center. However, on the funeral side, the standalone funeral idea involved decentralized decision-making, which made it challenging to align with centralized performance standards set by our Standards Council. Marketing was managed locally, allowing decisions to be made as long as performance standards were met, including growing volumes and revenue over time, which have been impressive in the last 2.5 years. We believe in not changing something that isn’t broken, but we began noticing issues after 2019, resulting in fragmentation and inconsistent quality in local practices. A strong acquisition candidate expressed concern about our online presence compared to theirs, which was a significant concern for us. Our website design and digital marketing were decentralized, and Carlos had a different perspective on addressing these issues. The Standards Council also voiced their concerns and wanted to help improve the online presence and reviews for those struggling. Carlos discussed these innovations in the creative committee, emphasizing the need for forward-thinking approaches. We recognize that if we don't adapt, we risk being disrupted. Carlos proposed centralizing these efforts, and although it would be costly, the response has exceeded our expectations. I was thrilled to see how much our customers are reaching out for help from A.J. and his team. After his presentation yesterday, I felt proud to be a significant owner of Carriage, as I believe these changes will lead to substantial improvements. Our focus on supporting local leaders with the best resources and tools has yielded amazing responses, and this will enhance our market share on top of our existing efforts. By leveraging marketing and IT through our support services, we are expanding the competitive advantage for each business in every market.

Carlos Quezada, President and Chief Operating Officer

And Liam, this is Carlos. To provide some specifics related to marketing, Alfred White, our Marketing Director, who started on January 3rd, has successfully built a full marketing team in just over six months. We are currently managing 39 business social media accounts and collaborating with 86 businesses on projects and online guest experiences. We have also designed two new websites that will serve as the foundation for all future websites across our portfolio. A significant amount of video and content is being produced for social media platforms. Currently, we manage 125 accounts, with strong collaboration among different departments, including marketing, benefits, investor relations, business development, wellness groups, and internal projects. We are very excited about this as it is just the beginning, and his impressive execution in such a short time makes us hopeful about improving efficiencies, productivity, and generating additional revenue.

Operator, Operator

Your next question comes from the line of George Kelly with ROTH Capital Partners.

George Kelly, Analyst, ROTH Capital Partners

Just a couple left for you. So the first one, I understand the discussion around the corporate investments, marketing, and IT, but a different sort of corporate function is your maintenance and growth CapEx spend. I'm just curious if you feel like you're in a good place or any sort of change of thought as far as boosting either of those as you look out over the medium term?

Carlos Quezada, President and Chief Operating Officer

No, no expectation that it will be significantly higher than what we thought it would be, right? We're thinking it's probably in around $20 million, $22 million split evenly between growth and maintenance, and that's kind of on the pace that we're on through the second quarter. We're executing more at a higher level on cemetery inventory development on the growth side, which is great to see.

George Kelly, Analyst, ROTH Capital Partners

The next question is about the pricing environment. You've mentioned a slight dip in field-level EBITDA margin, and I understand it's a fluid situation with your suppliers. I'm wondering how challenging it is to adjust pricing competitively. I know you want to maintain good relationships, but how quickly can you adjust prices, and what does the competitive landscape look like for that?

Carlos Quezada, President and Chief Operating Officer

Making price changes is straightforward in terms of execution and doesn't require much time. The more time-consuming aspect is the analysis to ensure that it's the right decision for the specific business and community. Each business is unique, as are the communities and demographics they serve. The price increases they have experienced differ as well. Our analysts, led by the managing partners, engage in one-on-one discussions to understand how much prices can be raised without harming relationships with families. We've built a strong legacy through serving families well, which has earned their trust and encourages them to return to us. However, pricing can significantly impact this trust, so we are cautious about how much we increase prices. While we have successfully raised some prices, it’s important not to do so excessively to the point that families seek services elsewhere. Striking the right balance is crucial, and sometimes we need to test different pricing strategies, adjusting them as necessary. We are capable of responding quickly to changes in our pricing structure.

George Kelly, Analyst, ROTH Capital Partners

And George, this is Mel. Look, I was just reading again, the psychology of human misjudgment, by Charlie Munger last night for a couple of hours. It's pretty long. And it covers about 20-something different psychological tendencies that lead to misbehavior. The first one was, by far, the longest, and it was the superpower of incentives. I was laughing or smiling. My wife thought I was in there laughing by myself and had gone crazy. In reading this, he's a very witty writer, very in-depth guy. But the first one was like three pages long, and it was on the superpower of incentives. All I could think about was our incentives and how they changed over the last four years starting at the end of '18 and how we changed them again at the beginning of '20 so that our managing partners are incentivized to manage their margin. We don't tell them how to manage individual costs or how to price individual products and services. We have Peggy and her team like financial analysts and consultants who go around to the businesses, helping those that are not as good at this as others. They know that if they get the revenue, which so far, you're seeing consolidated revenue stay above, like Carlos mentioned because of increased market share, not COVID. They know that if costs are increasing, they have to manage their revenue to fall within a standard range. This is what's going on right now. Business by business, they are looking at what items, where we need price increases; absolutely, that's on the table and #1 on the list. You have to increase prices if your prices are being increased as long as you stay competitive and you offer the value to keep getting market share. This is going on right now. But it's those superpower of the incentives that I think most people miss because we don't have top-down cost initiatives to control cost. We have bottoms-up managing partners, who are incentivized to keep revenues growing through market share gains if there's no other way to do it; price increases and to manage that revenue to a margin range, which is the same with every other business in their grouping across the portfolio. Very simple; they have all the support they need. You get the right talent in place, and they will deliver the value, and they can raise their prices. We want to keep the pricing power. That's why most of our funerals, 85% of them have not been pre-need. Therefore, we have the pricing power that comes into play during times like this. That's really helpful. And then last one for me, just a quick model question. Ben, what was the share count at quarter end?

Carl Brink, Executive Vice President and Chief Financial Officer

Great question. So basic shares outstanding of just a little over 15 million; total diluted shares outstanding are 16.33 million.

Operator, Operator

Our next question comes from Barry Mendel with Mendon Money Management.

Barry Mendel, Analyst, Mendon Money Management

I have a couple of questions. First, I'm surprised by the more than 20% decline in your forward outlook over the next four quarters. I understand the long-term outlook, but could you explain why these expenses weren't anticipated three months ago when you hired the new marketing person on January 3rd? I would have expected some of this to be included in your guidance from last quarter. Secondly, could you specify the exact costs associated with this unexpected increase in marketing expenses?

Carlos Quezada, President and Chief Operating Officer

Yes. So when we heard from Alfred; if you go back to our February release for the full year of 2021, we announced that we were going to put these initiatives into place. Of course, at the time, we were bringing somebody new to build a marketing team, and we don't know with 100% certainty what that’s going to look like, what level of costs that’s going to cost. Also, we had a plan to start executing, which we have done over the last six months. What we have not seen just yet, and we should be pretty close to start seeing, is the savings at the field level where we're going to stop spending on those third-party companies helping marketing and then have those become the overhead expenses that you're seeing right now. As we continue to see those efficiencies, these will be diluted because we'll grow revenue organically through our digital presence and campaigns. But we saw the benefit from the centralized marketing, as we continue to see that dilution of expenses over our growth in revenue. So we did foresee some of these expenses. We ended up assembling a team a little broader than we initially thought, but it is a pretty strong team, and we believe this is the right type of investment to do right now. This is the kind of investment you never want to make when things are very tough. Nothing is really tough happening at Carriage. While there is some global uncertainty, we feel pretty strong about the resiliency of the industry, and that's why we thought it was the right thing to do and the right time to take this action for the future and long-term benefit for shareholders of Carriage.

Melvin Payne, Chairman of the Board and Chief Executive Officer

So Barry, this is Mel. Look, looking back, I acknowledge that I made a mistake. I never said I haven't done it. I did it the first time; I put out a three-year scenario at the beginning of '20, everybody freaked out; the stock went down. We were over-leveraged. All kinds of negative things happened, even with bankruptcy. That was at the beginning of '20, and then COVID hit; that was before COVID. We went from high 20s or whatever to 14 or so, maybe a little low at one point. Then we beat the three-year scenario through '20 and '21 by a lot. Coming into this year, the mistake I made was putting out another three-year scenario and then putting some price ranges on it and multiples based on the environment pre-inflation, pre-Fed, pre-Russia, and all that. And then the world changed. So I made a mistake; I shouldn't have done that. I'm reading a lot of the Charlie Munger stuff, Warren Buffett, and I'm sure if they saw what I did, they would tell me to my face like I think you want to right now. But I own the mistake. I think this is the right thing for the Company to be doing. I'm a much bigger shareholder than anybody else out there. I'm not selling in the short term. I think this is a great buying opportunity for people who see the world the way we do.

Barry Mendel, Analyst, Mendon Money Management

Mel, I appreciate that. Can you outline, though, you've got six people there in marketing, as you pointed out. What is the annual expense for those six people?

Carlos Quezada, President and Chief Operating Officer

You're talking about their salary? What's the total expense on that from the overhead?

Barry Mendel, Analyst, Mendon Money Management

Yes, it's both. The total cost of the P&L is important because the head of marketing was a known factor. However, it seems that you hired more people than anticipated or their costs were higher than you expected three months ago when you provided guidance.

Carlos Quezada, President and Chief Operating Officer

Yes. So the main expense on the overhead piece, even though it is somewhat related to their salary, we have three SEO experts by region to make sure that they're focusing on really transforming our digital presence and Google AdWords reviews and strategy. The main expense is that we're consolidating the expenses here at the overhead level, not at the field level. In doing so, we will see those margins grow at the field level while we see increased overhead expenses at the overhead level. So it's not just the salaries; it's really the whole marketing strategy and the execution of the strategy and plan over the last six months that you see reflected on our overhead line increases.

Barry Mendel, Analyst, Mendon Money Management

Are you assuming any benefit over the next 12 months in your 12-month outlook?

Carlos Quezada, President and Chief Operating Officer

It's not about getting into the details, Barry. However, we do have some assumptions that we expect to see benefits moving forward. We don't have the exact figures yet. The same applies to our technology team. Rob joined us on April 1st, and it has taken some time for him and his team to define what this will look like for us. Three months ago, we lacked clarity and specifics about this, but now we have a clearer picture and we're ready to share that information.

Melvin Payne, Chairman of the Board and Chief Executive Officer

Yes. From my perspective, 31 years ago, I didn't know much; now I have significantly more knowledge, but it's still not enough and not everything. The value of the Company, especially when looking back to the end of 2011, has changed. Back then, we finished at $5.60, and today we're down by 36% to 37%. We did rise to over 60% at one point. I believe in the progress we're making, and while it may seem surprising in the short term, Carlos is at the helm. If you had attended the meeting yesterday or spent some time at the home office, I highly recommend it. Looking ahead, over the next two and a half years and extending to 2029, I plan to hold and even increase my ownership. The next few years are crucial as we mature our senior notes. I'm uncertain about the costs involved in this process, but I foresee significant expenditures. During this span, the Company will improve, our free cash flow will increase, and our capital allocation decisions will become more strategic. Recently, I allocated a considerable amount under Carlos' leadership that is now recorded as an accounting expense. However, this allocation will enhance the value of future capital decisions. We are genuinely excited about our potential in the next two and a half years, ending in 2024. All of us are driven to achieve performance that could drive the stock price to $77.34 by the end of 2024. While I'm not guaranteeing this outcome, it's our aim. We won't prioritize managing the stock price; instead, we will focus on doing what’s right for the Company in the long term, even if it appears as an accounting expense. This approach will lead to increased organic revenue and margins, ultimately amplifying our metrics. I envision that the Company's valuation will rise gradually as we continue to enhance our operations.

Barry Mendel, Analyst, Mendon Money Management

I understand it and I cannot disagree with that. I think there should have been some guidance to minimize today's shock.

Melvin Payne, Chairman of the Board and Chief Executive Officer

Yes. I understand that; I take responsibility for that.

Barry Mendel, Analyst, Mendon Money Management

And I think the other question I had, Mel, but maybe Ben can answer this is, I mean, it’s great you're doing these two acquisitions. They sound exciting. That's how you've done a great job growing the Company. But in the forward guidance, are these companies dilutive to margins over the next 12 months? And is there an opportunity to improve those margins towards the full year margins or better?

Melvin Payne, Chairman of the Board and Chief Executive Officer

Certainly. I can address that. There are several points to consider. This is an area where I feel confident. My experiences from the '90s taught me valuable lessons. We resumed growth on January 1, 2007, based on strategic criteria that are not easily measurable, which I previously mentioned from a shareholder letter by Warren Buffett. Both acquisitions are in high-growth strategic markets where we previously had no presence. We've learned a lot, and Ben is working on a project to review our track record and return on invested capital for all acquisitions since we began growing again with these new criteria. Over the past 15 years, we've made very few major mistakes in our acquisitions. While we've had a few small ones, we've gained valuable insights from them. I'm particularly excited about these two acquisitions since we had not been in the Orlando market before, and I've long sought a significant presence there. This brand has a great potential for growth. We also have not operated in another market, which has immense potential and has long been on my radar. In the first year following our acquisitions, after integration, which takes time, our model requires the right managing partners and employee alignment. I am confident that, similar to our acquisitions in 2019, which many thought were overpriced but ultimately became highly successful, these two will also prove to be excellent investments. I believe that within five years, their margins will eventually surpass those of our current portfolio, though that won't happen in the first year.

Barry Mendel, Analyst, Mendon Money Management

So initially, they'll be dilutive to your margins, but long-term, do you expect them to be above your average margin?

Melvin Payne, Chairman of the Board and Chief Executive Officer

Absolutely, and that’s what makes them a no-brainer. The revenues in these will compound over five years or ten years at a much higher rate, and therefore take advantage of the inherent high fixed-cost operating leverage available in these individual businesses. The brands are really fantastic. There's a fantastic cemetery and the second one, which we don't want to mention in the market yet; Carlos is salivating over it and what he can do with it with his team, and I don't disagree with that.

Operator, Operator

Your next question comes from the line of Chris McDonald with Kennedy Capital.

Chris McDonald, Analyst, Kennedy Capital

Can you share an estimate of what the total marketing spend is in the field today, just so we have an idea around the business case tied to the corporate-level marketing investment?

Melvin Payne, Chairman of the Board and Chief Executive Officer

I don't know if Carlos is going to answer that, but I can tell you right now, I don't know. We've never tracked that. Again, the standards are related to margin management of all the costs, marketing, and all kinds of other costs we used to budget before we created this model; we used to know that number. When I was first brainstorming this on a whiteboard offsite in August of '03, I invited 17 former owners of the best managers down, and we entertained all ideas related to performance standards. Some of those were pretty funny. I remember one managing partner, and then we have a regional Standards Council that said, 'I think we need a marketing standard, an advertising standard.' Now, he said that because he was losing market share, and he didn't know how to get it. So, he was going to say that that should be a standard. We never made that a standard; we made getting the right talent and doing the right things locally the focus. To be honest, we don't have a clue what the consolidated market spend is locally. I know it must be material, but I don't know how much offset we will get over time, as that centralization takes place business by business.

Chris McDonald, Analyst, Kennedy Capital

And then just from a very high level, if I compare overhead spend to the pre-COVID period, so just rolling back to 2019, the same quarter in 2019, corporate as a percent of overhead is up about 280 basis points, growing twice as fast as revenue. At what point would you expect to get leverage on these overhead costs? Are we there at this point? Are there other places you can tighten the belt a little bit, attempt to balance this a little more? I mean typically, overhead is something we leverage with growth, and just haven't seen that here.

Carlos Quezada, President and Chief Operating Officer

Yes. Thank you, Chris. This is Carlos. I feel pretty comfortable saying that our overhead, as it relates to marketing and the efforts we're doing to maximize that opportunity as a new somewhat centralized function at Carriage is pretty much where it should be. I don't see adding more. What I do see is adding more businesses to our portfolio services at the marketing level. I mentioned in one of the answers how many businesses we're serving right now in different areas, and ultimately, we're somewhere around 40% of the services we can provide to all of them. The added value and value creation that will come from that and the efficiencies and savings will be significant. I don't have the detail right now to tell you how much of that will be offset or not, but I tend to believe that it will be based on my estimation, but we'll get those numbers ready for the next release so that you can see it.

Melvin Payne, Chairman of the Board and Chief Executive Officer

Let me share my vision with you. That's a great question, and I've been reflecting on it a lot, especially as we look ahead to the next 2.5 years, which is our timeframe. Our typical planning horizon is five years. It's a long-term journey, and we have specific benchmarks we aim to hit. So, considering this new timeframe of 2.5 years extending into another five, I'm thinking about how to address overhead as a percentage of revenue over time. This is how I approach it. Whether it’s right or wrong, as someone with a vested interest, this is how I see it. Moreover, it has been shaped over the past 18 to 19 years: we don’t allocate overhead from our trend reports that would normally, in the SEC segment format, go to our field businesses. We avoid doing that because there's significant overhead that we absorb, such as incentive compensation; they don't manage accounting allocations or the expenses that support them. They utilize these resources, and we cover the costs to help them scale their businesses more quickly and profitably over time. This is essential for fostering their commitment to take charge of their own success and hitting performance targets that, broadly speaking, would seem unimaginable for a diverse portfolio of businesses. If you compare the portfolio's performance today with that of ten or 15 years ago, the difference is staggering; our margins have significantly increased. While they may not continue to rise at the same rate, I do expect them to keep improving. As we grow organically, field levels will gradually increase, and local fixed costs will be leveraged. The strategy regarding overhead is to incorporate more businesses with higher growth potential over time and to leverage overhead rather than allow it to grow in proportion to revenue. This increase in overhead should settle down over time to approximately 12% to 13% of total overhead. If we achieve 13% and apply it to the field EBITDA margin, we would see a consolidated EBITDA margin around 30%. Currently, we’re a bit over 30%, though lower for this quarter. Looking ahead, I believe this is how things will trend, with field EBITDA gradually rising again and overhead decreasing over time.

Operator, Operator

It is now my pleasure to turn the call back over to Mel Payne for closing remarks.

Melvin Payne, Chairman of the Board and Chief Executive Officer

Well, it's been a great call. We've had some great questions. We appreciate everyone's support. We have a great Company getting better fast. We look forward to reporting our progress each quarter, remainder of this year and into next year. Stay safe. Thank you.

Operator, Operator

This concludes the Carriage Services second quarter 2022 earnings call. We thank you for your participation. You may now disconnect.