Q1 2024 Carriage Services Inc Earnings Call

Participants

Carlos R. Quezada; CEO & Vice Chairman; Carriage Services, Inc.

L. Kian Granmayeh; Executive VP, CFO & Treasurer; Carriage Services, Inc.

Steven D. Metzger; President & Secretary; Carriage Services, Inc.

Alexander Peter Paris; Director of Research and Education & Business Services Analyst; Barrington Research Associates, Inc., Research Division

George Arthur Kelly; MD & Senior Research Analyst; ROTH MKM Partners, LLC, Research Division

Liam Dalton Burke; MD; B. Riley Securities, Inc., Research Division

Presentation

Operator

Good day, and thank you for standing by. Welcome to the Carriage Services First Quarter 2024 Earnings Conference Call. 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, President. Please go ahead, sir.

Steven D. Metzger

Good morning, everyone, and thank you for joining us to discuss our first quarter results. In addition to myself, on the call this morning for management are Carlos Quezada, Chief Executive Officer and Vice Chairman of the Board of Directors; and Kian Granmayeh, Executive Vice President and Chief Financial Officer. On the Carriage Services website, you can find our earnings press release, which was issued yesterday after the market closed. Our press release is intended to supplement our remarks this morning and include supplemental financial information, including the reconciliation of differences between GAAP and non-GAAP financial measures. Today's call will begin with formal remarks from Carlos and Kian 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, including comments about our business, projections and plans. Forward-looking statements inherently involve risks and uncertainties and only reflect our views as of today. These risks and uncertainties include, but are not limited to, factors identified in our earnings release as well as in our SEC filings, all of which can be found on our website. Thank you all for joining us this morning. And now I'd like to turn the call over to Carlos.

Carlos R. Quezada

Thank you, Steve, and thank you all for joining our first quarter earnings call. We are excited to share our outstanding performance. But before we do, I want to express our heart fell gratitude to the entire Carriage family, whether in the field or our support center, each of you has played a crucial role in driving these results. Your wavering dedication and relentless passion for delivering an elevated service to all families have an instrumental in our success. We deeply appreciate your continued support and commitment to our shared goals. Before we start, I hope you had an opportunity to read our 2023 shareholder letter and proxy statement. Both are reaching information related to our 5-year strategic objectives and our core initiatives for 2024, setting the stage for a transformative vision of the Carriage of the future.

Now let's dive into our financial highlights. We are proud to report that our strategic objective plan is well underway and the progress in executing the individual initiatives to grow revenue and reduce cost is starting to produce positive results. For the first quarter, our total revenue was $103.5 million, a substantial increase of $8 million or 8.4%. This is a significant milestone for Carriage history as it marks the first time we have surpassed the $100 million mark in a single quarter. This remarkable performance was primarily driven by the exceptional results of our preneed cemetery team and the successful integration of Greenland, our most recent acquisition. These achievements underscore our strong financial position and ability to deliver on our strategic objectives. Looking at each of our revenue segments, we see that total funeral home operating revenue increased to $66.6 million, an increase of $1.2 million or 1.8%. Despite the expected decrease in total funeral operating volume of 1.9% as part of the post-pandemic normalization, our targeted improvements to our pricing strategy have made a significant positive impact. We have seen an increase in total funeral operating average per contract of $219 per contract or 4% compared to the same quarter last year. This result of our pricing strategy is a testament to our confidence in its effectiveness, and we believe we will continue to make additional progress throughout the year.

Regarding our cemetery operating revenue, we ended the quarter at $27.6 million, an increase of $6.3 million or 29.4% compared to the same quarter last year. This is another significant milestone for Carriage, achieving a record first quarter in preneed cemetery sales. The preneed cemetery team delivered an impressive 38.4% growth compared to the same period last year. We couldn't be prouder of this achievement, which is a direct result of our entire sales organization hard work and dedication towards sales excellence. For total financial revenue, we ended the first quarter at $6.9 million, an increase of $868,000 or 14.3%, driven primarily by the impressive growth in preneed funeral commission income, which increased by $570,000 or 177% compared to the same quarter last year. Our preneed funeral strategy continues to produce positive results, and we continue to be very excited about our potential future performance through our exclusive strategic partnership with Pricoa and the National Guardian Life Insurance Company. We remain committed to our growth strategy, and we will continue to explore opportunities to enhance our financial performance.

Regarding adjusted consolidated EBITDA for the first quarter, we finished with $33.6 million, an increase of $5.8 million or 20.9%. The combination of a higher average revenue per contract and the continued execution of our cost management initiatives delivered great success, demonstrated by our total funeral field EBITDA margin of 41.3%, an increase of 100 basis points and total cemetery field EBITDA margin of 43.3%, an increase of 430 basis points, while our corporate overhead experienced an increase of $6.1 million during the first quarter, 90% of it was nonrecurring and related to Mel separation agreement. Adjusted diluted EPS in the first quarter grew to $0.75 per share, an increase of $0.19 or 33.9%. While interest rates remain high, we are now at a comparable level to previous quarters. And even though we're paying high interest rates, we continue to be focused on committing most of our free cash flow towards debt payments as evidenced by the $25 million of debt that we paid down this quarter. Kian will share more on this later in this call. We are very proud of these results as this makes 5 out of the last 6 quarters of outperforming expectations.

While we had a solid first quarter, we remain diligent about capital allocation and continuing to execute our strategic initiatives, while being mindful of how seasonality and normalization post panic may impact our volumes in the near term. March had the greater decline in volume in the first 3 months of the year. So we will closely monitor those levels going forward. Therefore, we reconfirm our 2024 outlook. As we gather more information leading into the end of the second quarter, we should have more insight to share. Kian will also cover more on this in this call. In closing, we are very excited about the future at Carriage. With our strategic initiatives well underway and the hard work and dedication invested over the past year, we are well positioned for sustained innovation and financial progress. What we're building is not just about near-term achievements. It's about establishing a foundation to deliver lasting value to our shareholders for years to come. Thank you for your interest and support. With that, I will now turn things over to Kian.

L. Kian Granmayeh

Thank you, Carlos, and good morning to everyone on the call. Before I dive into a review of our financials, I wanted to reinforce Carlos' earlier comments regarding the recent disclosure of our new purpose statement and the relentless focus and alignment to our 5-year strategic objectives. This is important to mention since every decision we make, whether large or small, is aligned with our strategic vision and objectives in mind. This discipline and focus on achieving our outlined goals and executing on our vision is the foundation to generating long-term shareholder value.

Now turning to our financials. Since Carlos provided an overview of our key financial metrics for this quarter, I will review a few additional financial highlights around overhead, cash flow and leverage, and I'll also provide some color on completing our recent noncore divestitures and an update on our 2024 outlook.

First, I will start off with corporate overhead, where we continue to be laser-focused on spending and cost-saving opportunities. This quarter, when adjusting our special items related to the review of strategic alternatives, which concluded in late February, along with the accounting treatment of Metals transition agreement, our overhead costs totaled approximately $12.7 million or approximately 12.3% of revenue, which continues to track lower than our previously stated 13% target for the full year 2024.

Next, let's discuss cash flow for the quarter. When normalizing cash flow from operations for onetime items, our cash flow from operations increased 17.1% to $22.1 million, up from $18.9 million in the same quarter last year. This solid cash flow from operations translated into robust adjusted free cash flow. As a reminder, we are transitioning our adjusted free cash flow calculation to a traditional calculation, which will include all capital expenditures. We have provided a reconciliation table at the end of our press release that provides a bridge between our historical reporting methodology that includes maintenance capital expenditures only and the more traditional methodology that includes all capital expenditures. We will continue reporting both methodologies for the remainder of 2024 before converting exclusively to the traditional methodology in 2025 and beyond.

For the quarter, with maintenance capital expenditures lower than the prior year quarter, our historical calculation for adjusted free cash flow increased by $3.9 million and increased by approximately $4.7 million when including all capital expenditures over the same period. As you may notice from these numbers, capital expenditures are tracking down 29% relative to the same period last year, which again highlights our focus on disciplined capital allocation without compromising our organic growth initiatives. This strong cash flow generation, along with our well-defined capital allocation strategy brings me to my third highlight, the reduction in outstanding borrowings under our variable rate credit facility.

This quarter, we were able to pay down an additional $25 million on our credit facility, reducing the outstanding borrowings to $154.1 million by quarter end. Of note, included in the $25 million pay down this quarter was approximately $10.9 million in gross proceeds from 2 noncore divestitures that were directly fueled towards paying down our credit facility. We are especially proud of the fact that our capital discipline and capital allocation strategy has allowed us to pay down approximately $62 million on our credit facility since we closed the Greenlawn acquisition at the end of the first quarter last year. The combination of decreasing leverage and increasing our EBITDA has resulted in a decrease in our leverage ratio slightly below the 5x threshold, ending at 4.99x net debt-to-EBITDA as defined by our bank covenant compliance ratio. I would like to note here that our bank leverage ratio does not allow us to add back the entirety of our special item expenses, in particular, expenses related to our review of strategic alternatives. And as a result, our leverage ratio may seem higher than a normal leverage ratio calculation. Despite the pay down, interest rates continue to hover on the same weighted average interest rate of 8.9% on our credit facility for the quarter as compared to 7.9% in the same quarter last year. However, we will receive a 25 basis point relief on our interest rate spread now that our leverage ratio has landed below 5x.

Lastly, I will turn to our full year 2024 outlook, which remains unchanged despite this quarter's outperformance in our 2 noncore divestitures closed in the quarter. As a reminder, our 2024 outlook already included our 2 noncore divestitures since we already had line of sight into these transactions at the time of our last earnings call in late February. Our 2024 outlook includes for total revenue, the range is $380 million to $390 million for adjusted consolidated EBITDA, the range is $112 million to $118 million for adjusted diluted earnings per share, the range is $2.20 to $2.30. And lastly, for adjusted free cash flow, which is aligned with our historical methodology of maintenance capital expenditures only, the range is $55 million to $65 million. Though our first quarter financial performance is a solid start to the year, we are remaining prudent in reaffirming our 2024 guidance range due to the unpredictable COVID pull-forward effect that Carlos mentioned earlier, which may be combined with historically lower seasonality in the second and third quarters. We will reevaluate our performance in observed macro trends versus our guidance ranges on our next earnings call.

I will conclude my remarks by reiterating my earlier point that as a management team, we are pleased with our disciplined approach around capital allocation and executing on our strategic objectives has translated into continued momentum in our first quarter 2024 results. The results speak for themselves with increased revenue, EBITDA and cash flow paired with reduced overhead and leverage with the distraction of the review of strategic alternatives behind us and an emphasis on enhancing our finance and accounting organization with key additions, especially Kathy Shanley, our new Superstar Chief Accounting Officer, who brings more than 30 years of industry experience and best practices, 2024 is a transformational year for Carriage with critical initiatives to execute on as we position the company to return to his focus on opportunistic growth through acquisition in 2025 and execute on our 5-year strategic and financial objectives. With that, I'll pass it back to the operator for questions.

Question and Answer Session

Operator

Thank you. (Operator Instructions). We'll go first to Alex Paris with Barrington Research.

Alexander Peter Paris

Congratulate on the strong start to the year.

L. Kian Granmayeh

Thank you, Alex.

Alexander Peter Paris

I got a few clarifying questions here. Starting first with the funeral segment. Revenue is up 1.8%, driven by according to the press release, a 2.6% decline in contract volume and a 4.1% increase in the average revenue per funeral contract. I think Carlos just said, just the total funeral volume was down 1.9% press release said down 2.6%. First of all, what's the difference between the 2 figures you're quoting?

Carlos R. Quezada

Yes. So one of those numbers include a consolidated view and the other one is post divestitures. So it's kind of what we call an operating revenue perspective, so that's on a go-forward basis.

Alexander Peter Paris

So the $1.9 million excludes the impact of divestitures.

Carlos R. Quezada

That is correct. That's current operating volume. It's more reflective of our current activities.

Alexander Peter Paris

Got you. Helpful. And then the increase in average revenue per funeral contract, how does that break out between traditional funeral and cremation?

Carlos R. Quezada

Yes, absolutely. We had, for the first quarter, an increase on barrel contract of 3.2% and on cremation contract of 4.5%, totaling 4% for total contract improvement on our pricing.

Alexander Peter Paris

Good. That's helpful. And then, again, just to dig into that comment that you made, Carlos, that March was the most significant decline year-over-year in volume year-to-date. And I know we're still dealing with the headwind of the COVID pull-forward effect. And you had previously said that's going to kind of be present for the full year. Do you expect that, that will diminish in the coming quarters? And then for the full year, do you expect volumes to be comparable to last year's volumes?

Carlos R. Quezada

Yes. So great question, Alex. So what we experienced is January and February had a little elevated death rate potentially from some flu seasons or something related to more debt than we were expecting because we're expecting a little bit more of a decline on our volume year-over-year perspective or basis. However, March came a little slower than we thought on volume. And so that's why we wanted to just be mindful. Our projection is to continue to have a slow decline on volume throughout the rest of the year, progressively down through the first fourth quarter. So we are around 1.9% by now. We believe by December, we should be just maybe 50 basis points around those lines. That's our hope in projections. We'll see margin between 1% to 2%, but we are continuing to work through market share gains to continue to make up if we can and where we can for whatever volume we lose from post COVID-19 normalization.

Alexander Peter Paris

Got you. And then related to the divestitures completed in the first quarter. I think you had previously said the impact is $5.5 million to revenue and $1.5 million to EBITDA. And then you got proceeds of roughly $11 million for those. Are those all pretty much in line where you had expected them to be. And I realize that, that's already included in the full year guidance.

L. Kian Granmayeh

That's correct, Alex. This is Kian. So what we did is when we were looking at the upcoming year and our 24 guidance, we had already eliminated, as you mentioned, the $5.5 million of revenue and $1.5 million of EBITDA. So our '22 guidance is already reflective of that adjustment out.

Alexander Peter Paris

Okay. And then are there others that you think might represent similar characteristics in terms of being a noncore asset ripe for divestiture in 2024.

Steven D. Metzger

Yes. So Alex, this is Steve. We've got a couple of things we're working on now that are real estate transactions solely. So nothing big on the business front. We'll continue to take a look at opportunities. When we do that, we weigh everything, including potential impact to our effective tax rate. So as those things come through the door, we'll take a look at them, but nothing right now of substance to report.

Alexander Peter Paris

Got you. And then the last question I have for now is on debt. You paid down $25 million on the credit line. You're at roughly $153 million. Now your leverage ratio is 4.99. I think you had a year-end target of 4.75. Are all those still in line with your thinking?

L. Kian Granmayeh

Yes. So we feel comfortable landing within that kind of 4.75 to 5x range. We've kind of done our model analysis and kind of looked at the scenarios. And just based on various factors on performance, and Steve mentioned the potential divestitures of noncore assets, we're going to land comfortably within that 4.75 to 5x range.

Alexander Peter Paris

And then I think a longer-term target is 3.5% to 4%. When do you expect to kind of fall within that range at the end of 2025 or do you have a target?

L. Kian Granmayeh

Yes. So as we just kind of look at our next milestones, as we look at kind of year-end '25, the next milestone for us is getting to 4.5x, where interest rate spread decreased significantly by 125 basis points and then getting down to 4.25x where we can kind of get back into acquisition mode. And we kind of anticipate getting into that level by the back half of 2025. And then getting kind of below that 4x is probably as we turn the corner going into 2026 is when we kind of realistically expect to kind of get to that level.

Alexander Peter Paris

Great. That's all great color. I'll get back into the queue.

Operator

We'll go next to Liam Burke with B. Riley.

Liam Dalton Burke

Carlos, Steve and Kian. I just need a clarification on an earlier question. On Funeral Home, you had contract revenue for burial up 3.5% and contract revenue for cremation up 4.5%?

Carlos R. Quezada

3.2% on burial, 4.5% on cremation.

Liam Dalton Burke

And that's on a year-over-year basis, okay?

Carlos R. Quezada

Yes.

Liam Dalton Burke

Okay. Hopping over to your momentum in preneed sales, have you fully staffed the sales force? Or can we expect further build out an additional momentum here?

Carlos R. Quezada

I believe we'll continue to experience sustainable momentum throughout the year. You have higher months than others. As you know, Qingming, which is a huge Asian celebration, starts in March, continues through April, and then you have summer, which are a little bit more difficult due to the summer vacation time, a lot of families are not home. But over on a year-over-year basis, we should be able to continue to experience significant growth on bringing cemetery sales, including property and merchandise services. They have done an incredible job. We saw a little bit of momentum middle year last year, mainly because we upgraded a few of our sales leadership in the cemeteries that took place last year, the development of those leaders, the activity leading up to the level of activity we need to deliver this type of sales have been in place since then. And the strategy and plan to continue this momentum is in place. So we feel very encouraged that between the leadership team we have in place, led by Shane Putin, in addition to our CRM and marketing efforts for regeneration will continue to grow over the next few quarters.

Liam Dalton Burke

Great. And going back to acquisitions. I know you stated that where your leverage level would be where you'd be comfortable to ramp up acquisitions. But is there anything that you would see over the transom between now and then?

L. Kian Granmayeh

That's a good question, Lee. I mean actually timely. So we just spent some time last week with a business that we're interested in partnering with when the time is right. And so just keeping those relationships active, is important to us and a key focus that we continue to look at while we continue to pay down our debt. So we keep those conversations flowing and make sure that people are up to date on where carriage is, and we'll continue to do that until we get to 4.25.

Operator

We'll go next to George Kelly with ROTH MKM.

George Arthur Kelly

I'll start with just a quick follow-up to the comments in the prepared remarks. And then I think there was a question earlier, but just a follow-up on the trend you saw in volume through the quarter. I'm curious if you could comment on what you've seen so far in April? And then secondly, same topic is, if you were to compare the January and February volume growth that you saw with March, I think you said it turned negative in March. I'm just curious how great that difference was between sort of where you started and where you ended the quarter?

Carlos R. Quezada

Yes. It was about 200 basis point variance between January, February and then compare that to March, which is within the range, and it just that March happens to be a very large month for us, typically coming from preneed cemetry sells. So we made up some of it through it, but from a funeral volume perspective, it was enough for us to kind of like pay attention. As it relates to your question on April, it remains on the same line. The really good news is that our efforts on enhancement to our pricing strategy continues to deliver great momentum, and we continue to have that ability to make up, if not all, a significant amount of that decline in volume. That, in addition to our continued integration of our most recent acquisition, which is Greenlawn, which, as you know, have 3 funeral homes that are continuing to perform better and better as we continue to integrate them into our company.

George Arthur Kelly

Okay. And then next question is on the 4-wall the pricing and cost efficiency measures that you're sort of working through the system. I'm curious with respect to each one, if you were to take pricing on one side and cost efficiencies on the 4-wall and the funeral side, like what inning are you in, in each of those initiatives?

Carlos R. Quezada

Yes. So even though we had a very significant bump on pricing in December and then now reflected on our first quarter of this year. We just launched in last month really, what it is our new strategic pricing review, which is going to be reviewed by business on a quarterly basis. And the intention of this review is not to increase price just for the sake of increasing price. It is to have a conversation with our leaders in the field who know best the communities, the competition, the right pricing for the businesses and, of course, what type of merchandise they need to be selling. However, the review does have a significant amount of information that in reflection to the performance of the previous month or quarter should be able to lead them to best decisions. And also, it's not just about price increase. It's about strategies to continue to present better to families, presenting all options to every single family so that I can have a very comprehensive and customized life of celebration to each one of their loans. And so it's a combination of the 2, right, strategic review process, through a very thoughtful data analytic process, plus how can we become better at presenting the families to elevate our average revenue per contract. That's on the pricing side. Yes.

As it relates to cost, which was the second part of your question, we have been able to do a lot of good work in getting our costs down. We have mentioned in the past that some of the things we want to do with Carriage is find that fine balance between the Empower partnership as per our purpose statement and decentralization and our ability to maximize our scale. And so we are continuing to centralize some of the items that are not influencing the market leader ability to grow market share, to continue to establish relationships in the community and continue to grow their brand locally. And we're continuing to think about those things in terms of whether it's utilities, whether it's IT decisions, whether it's HR-related centralization options. But what we are very encouraged by right now, we have started a full-blown process to review our supply chain and procurement practices that will lead to some significant benefit as soon as we finish that process. That will include negotiation with vendors, how we elect vendors moving forward, our payment terms with each one of them. And of course, discounts and rebates that may benefit and will benefit the company moving forward. So very, very excited about where we are on a stage on cost initiatives, but even more excited about what's to come from that perspective.

George Arthur Kelly

And would you anticipate seeing the benefits of that exercise you're going through right now in the next maybe by year-end? Or when would that start to hit?

Carlos R. Quezada

I believe some will be realized before the end of the year and some will take a little bit more time. They're more comprehensive, larger scope and most likely will be realized in 2025. But there will be some low-hanging fruit that we have already identified and are starting to quantify. Most likely we should be able to share some of that on our Q2 release that will be realized during 2024.

George Arthur Kelly

Okay. And then just one last quick one for me. Steve, you mentioned that there's potentially some real estate that you guys are considering monetizing. Can you share a little more detail on what that could look like. And I'm assuming that there's no revenue tied to that or maybe that's an unfair assumption. Any more? And I guess, the magnitude of could that be larger or smaller than the divestitures that you've already completed so far this year?

Steven D. Metzger

That's a great question, George. So on the real estate front, from time to time, we will recognize that we've got a business that, quite frankly, sits on very valuable real estate that is more valuable than what that business is. And so once we run the numbers on that to see if there's any way to kind of bridge the gap between that value, we'll make a determination if it makes sense to try and market that real estate. It's not often we don't have a lot of these opportunities. But we do have a few, and we're working on one right now that it's going to be a 7-figure proceeds transaction for us whenever we're able to finalize it. So again, not something I would say is frequent for us, but we do take a look at that from time to time to make sure we're aware of what those real estate values look like. Generally, when we're looking at those opportunities, it is in a market where we can then funnel those calls to a nearby business. So we're not losing out on any of the business when we sell the real estate.

Operator

(Operator Instructions) This does conclude the question-and-answer portion of today's call. At this time, I would like to turn the call over to Carlos for any closing remarks.

Carlos R. Quezada

Thank you for joining. As we conclude our call today, I want to express our gratitude for your continued support and believe in our vision and purpose statements. Our strong performance this quarter is a clear indication that our strategic initiatives and 5-year objectives are right on track. We're confident that these efforts will continue to enhance performance in the future, driving sustained growth and creating added shareholder value. Thank you, and have a great day.

Operator

This does conclude today's conference call. You may now disconnect.