Carriage Services, Inc.

Melvin C. Payne - Founder, Executive Chairman, Chief Executive Officer and Member of Executive Committee L.

William Heiligbrodt - Vice Chairman of The Board, Principal Financial Officer, Executive Vice President, Secretary, Director and Chairman of Executive Committee

James Clement - Sidoti & Company, LLC

Thank you, and good morning, everyone. We're glad you could join us.

We'd like to welcome you to the Carriage Services conference call. Today, we will be discussing the company's 2013 second quarter results, which were released yesterday after the market closed.

Carriage Services has posted the press release, including supplemental financial tables and information on its website at carriageservices.com. This audio conference is being recorded and an archive will be made available on Carriage's website.

Additionally, later today, a telephone replay of this call will be made available and active through August 14. Replay information for the call can be found in the press release distributed yesterday.

Speaking on the call today from management are Mel Payne, Chairman and Chief Executive Officer; and Bill Heiligbrodt, Vice Chairman. Today's call will begin with formal remarks from management, followed by a question-and-answer period.

Please note that during the call, management will make forward-looking statements in accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. I'd like to call your attention to the risk associated with the statements, which are more fully described in the company's report filed on Form 10-Q and other filings with the Securities and Exchange Commission.

Forward-looking statements, assumptions or factors stated or referred to on this conference call are based on information available to Carriage Services as of today. Carriage Services expressly disclaims any duty to provide updates to those forward-looking statements, assumptions or other factors after the date of this call to reflect the occurrence of events, circumstances or changes in expectations.

In addition, during the course of this morning's call, management will make reference to certain non-GAAP financial performance measures. Management's opinion regarding the usefulness of such measures, together with the reconciliation of such measures to the most directly comparable GAAP measures for historical periods, are included in the press release and the company's filings with the Securities and Exchange Commission.

Now I'd like to turn the call over to Mel Payne, Chairman and Chief Executive Officer.

Thank you, Chris. In our press releases, I get the honor of being quoted.

And in the second quarter press release, the quotes were fairly close to the first quarter, just a change in the numbers. And the reason that is so easy is that numbers are so good.

Bill is going to offer you more detail on the financial performance and the quantitative performance. I will not spend time on that.

My comments are in the press release. It was a great quarter, just another great quarter.

And as tradition, I want to call out the high-performance heroes in the second quarter. In the West region, Justin Luyben, Evans-Brown Mortuaries, Sun City, California; Doug Reinke, Dakan Funeral Chapels, Caldwell, Idaho; Ken Summers, P.L.

Fry & Son Funeral Home, Manteca, California; Ken Pearce, Grant Miller and Greer Mortuaries, Oakland California; and Anthony Gloschat, Johnson-Gloschat Funeral Home, Kalispell, Montana. That's the West region.

In the East, Ken Duffy, Sidun Group, Red Bank, New Jersey, and John E. Day Funeral Home; Chris Duhaime, Funk Funeral Home, Bristol, Connecticut; Dan Simons, Hubbard Funeral Home, Baltimore, Maryland; James Bass, Emerald Coast/McLaughlin Mortuary, Fort Walton Beach, Florida; Robert Maclary, Kent-Forest Lawn Memorial Park and Funeral Home, Panama City, Florida; and Cyndi Hoots, Schmidt Funeral Home, Katy, Texas.

And in the Central, we have more high performers in the Central in the second quarter than any other region. And that will vary region-by-region.

Bob Thomas, Malone Funeral Home, Grayson, Kentucky; Johnny Garcia, Ceballos-Diaz Funeral Home, Edinburg, Texas; Michael Page, Allison Funeral Home, Liberty, Texas; Randy Valentine, Hirsch and Lain-Sullivan Funeral Homes & Crematory in South Chicago; Kyle Incardona, Hillier Funeral Home, Bryan, Texas; Patty Drake, Drake-Whaley-McCarty Funeral Home, Cynthiana, Kentucky; Joe Raiborn, Sterling Funeral Homes, Dayton, Texas; Andy Shemwell, Maddux-Fuqua-Hinton Funeral Homes, Hopkinsville, Kentucky; Mark Cooper, Seaside Memorial Park and Funeral Home, Corpus Christi Funeral Home and Rose Hill Memorial Park, all in Corpus Christi, Texas; and finally, Phil Zehms and Jim Sheridan, Dwayne Spence Funeral Homes in Canal Winchester and Pickerington, Ohio. Those were our real high-performance heroes in the second quarter.

But I want to end by focusing on one particular performance hero, who's here in the home office. I want to recognize Ben Brink, who joined Carriage in January 2009, as Assistant Treasurer in the middle of the 2008-2009 market panic and meltdown at a time when I had asked our board for a battlefield promotion to assume control of management of our trust funds.

And then began executing a complete transformation and repositioning of our trust fund investment strategy. The results of the new investment strategies and repositioning, active management of our discretionary trust funds, including securities selections and asset allocations, has been nothing short of phenomenal since January '99, returning 119.4% in the 4 years ending December 31, 2012.

Moreover, our recurring income on this portfolio has tripled during this period to almost $12 million annually. And we have realized almost $100 million in gains, mostly from buying fixed income securities at substantial discounts to par during periods of severe market distress.

Ben has been instrumental in the execution of these strategies and deserves the lion's share of the credit. To provide some numerical perspective on this achievement over multiple years, which Carriage has been reaping the benefits from the substantial excess funding, which is the reason we separated the reporting of financial revenue and EBITDA from operations in 2011, the only company in our industry to do so.

For example, our total GAAP recognized financial EBITDA from Funeral and Cemetery operations in 2009 was $8 million, and in only 3.5 years has more than doubled to $17.4 million in the 12 months ending June 30, 2013, adding more than $0.30 of recurring GAAP EPS to the high and sustainable earning power of Carriage. That's in addition to the non-GAAP EPS that is also coming to Carriage at a rate of about $0.04 to $0.05 a year in withdrawable trust income.

In late 2011, Ben led a complete overhaul of the legal structure of our 3 types of trust funds, consolidating them into a full partnership with more flexibility to allocate gains in recurring incomes to fit the nature of the 3 types of funds and how we account for them. He also lead the formation of an SEC-registered subsidiary company, Carriage Services Investment Advisors, so that we now get paid currently for the substantial value that is being created for the shareholders over time.

Ben, we all thank you for the job you and your team have done. With that, I'll turn it over to Bill.

Good, Mel. Well, good morning, everyone.

It's a real pleasure for Mel and me to report and review record results and record performance for Carriage Services in the second quarter ended June 30, 2013. Our second quarter and year-to-date 2013 results represent a continuation of a trend of record performance that began at the start of the fourth quarter in 2011.

At that time, Mel and I reported to you that we expected significant improvement in our businesses and more value creation for our shareholders. We expected to accomplish this with continued emphasis on our standard operational model.

We reviewed and improved our standard acquisition model with the goal of linking and coordinating this model and its value to the standard operational model. All this is continuing today with an ongoing emphasis on improving leadership all the time in all areas within our company.

This is why every quarter, I emphasize that our results represent the efforts and diligence of all the employees of Carriage Services. For those of you listening, who might have further interest in what I have just discussed, I suggest you look at our annual report for Carriage Services 2012, A New Beginning, and at the inside page, High-Performance Culture Framework.

Now let's take a look at our performance in the quarter. Adjusted earnings per share for the second quarter were a record $0.25.

This is a 67% increase over the second quarter of 2012. These results were accomplished with revenue expansion of 11.3% to $54 million and continued margin expansion in almost all our business segments.

Included in our revenue growth is a strong performance gain of 1.7% in same-store Funeral volume, ahead of our expectations. Every quarter, we have reported to you that around 8% revenue growth at Carriage, we should produce high-performance numbers.

Therefore, at 11.3% revenue growth in the quarter, we have well exceeded 8% and strong earnings per share growth has followed. Likewise, accompanying the earnings per share growth, revenue growth and margin improvement was a 39% increase of free cash flow for the quarter.

This performance is a result of strong field operations, and as Mel had previously discussed, financial results, as well as continued revenue benefit from acquisitions completed in 2012. Our 6 months reported numbers followed suit with adjusted record earnings per share of $0.56, an increase of 33% versus the same period in 2012.

Revenue was up more at 12.3% to $112 million for the first half of the year, well ahead of the aforementioned 8%. Very important in our revenue growth year-to-date is large Same Store Funeral operation improvement of 3.6%, also again ahead of expectations.

In conclusion, and noteworthy for you, the shareholder, as well, free cash flow was up a record 90% so far this year. Next, I would like to discuss with you acquisitions.

In 2011, we said we hoped to add 6 to 8 businesses on a continuing annual basis with $16 million to $18 million of new annual revenue. We accomplished that goal in 2012.

And approximately $11 million of revenue from those acquisitions will roll into our numbers in 2013. We have not yet reported an acquisition in 2013.

During the first 6 months of this year, we have probably looked at 50 potential acquisitions and pursued only 2 for purchase. We have continued to stay with the discipline of our standard acquisition model.

However, currently, we have the most acquisitions under consideration since we began our revised acquisition program in 2011. I'm looking for new, quality acquisitions in businesses to be added in the second half of 2013.

In the meantime, since we've had no acquisitions this year in 2013, some other important events have occurred. First, and I'm really excited about this, we are building 2 new locations in really strong economic areas.

Second, because of our strong 90% growth in year-to-date cash flow, as well as no new acquisitions in the same period, we reduced debt by $15 million in the first 6 months of 2013. Going back to the beginning of the fourth quarter of 2012, you will remember we negotiated a new bank credit, which paid off high-yield debt, added availability of a new revolving credit and significantly reduced our borrowing costs.

We amended this same agreement in the second quarter of 2013. The amendment added an additional $20 million to the revolving credit.

Because of improved operating performance at Carriage, which resulted in a better credit profile, we were able to reduce our interest pricing grid by 0.5% across all ranges. This will initially provide about $0.05 per share on an annual basis plus still retain the possible benefit of further interest rate reductions from moving down the pricing grid with future credit improvement at Carriage.

Today, we have approximately $100 million availability on our revolving credit at very attractive financing rates. With our strong operating performance, I believe we can further increase our revolving credit, if necessary, without affecting credit terms.

The reduction in debt in 2013 and improved credit terms were reflected in the 31% reduction in interest expense year-to-date in the trend report financial statements. So with, first, strong operational results across all segments of our business; second, exceptionally strong cash flow generation; third, favorable outlook for acquisitions in the second half of this year; and finally, fourth, favorable financing parameters, we are projecting $1.18 to $1.20, looking out 4 quarters from the second quarter of 2013.

Thank you. Mel, I'll turn it back to you.

With that, we'll open it up for questions.

I was curious, Mel and Bill, since the SCI and Stewart deal has been announced, has your phone been ringing more from independents out there that maybe had been considering selling their businesses at some point over the next couple of years and see the possibility of a huge slug of properties that are all of a sudden going to hit the market and are potentially looking to get in front of that?

Well, Jamie, I don't really -- I really don't think so. I mean, I think, our -- as I mentioned to you, we looked at probably 50 transactions in the first half of this year.

I think what I said was that our deal flows have been very good all year. And that was certainly before that announcement.

I think what's happened is that we've seen an improvement in the quality of businesses that we're looking at today. But I can't really say that there's been an increase in possibility of transactions because of the Stewart-SCI transaction.

I mean, certainly, any time you have a major change in the industry landscape, where the 2 largest consolidators are joining, it creates a lot of discussion. But I don't know that it leads to someone making a decision to do something, where they didn't already have good reasons for thinking about succession planning in the first place.

It might just stimulate conversation that could lead to a serious discussion. We've been to several conferences.

And certainly, any time you have that kind of event, it creates a lot of discussion amongst the participants. But I agree with Bill.

Without the underlying motivating factors, it's not going to cause somebody to do something that otherwise wouldn't have good reasons to do it.

I'd like -- Jamie, let me add one thing to this. Let me say I've just been out on a major trip, talking to people in the field that are potentially looking to do something with their businesses.

And as far as Carriage is concerned, and this is a fact, the reason that they're talking to us is because they like our operating management and our style. That's why at the first of my remarks, I made mention of these operating models and how we operate.

And I think that is really what has been our attraction with potential acquisitions, much more so than something that's happening somewhere else. And so -- and I think anybody you ask at Carriage would tell you that, especially from my team that is actually dealing with potential acquisition candidates.

We have probably more opportunity than ever because of that. And as I mentioned, we have to stay with our financial disciplines and with our models so that we are trying to align with the best of the remaining independents that we can that fit what we're doing.

But I can guarantee you the reason they're coming to us is because our decentralized method of operation and the way we look at our operating models and how we run this business.

And Bill, just a quick follow-up there, is your substantially stronger financial performance over the last couple of years and your success with acquisitions, do you think those are the 2 main reasons why you're seeing, I think you said, higher-quality properties at this point? I mean, do you think those would be the 2 of the major reasons?

I think the performance always attracts people somewhat because people like to be with the winners, okay? But I think what -- I think if I say that though, I have to say that, basically, the people in this industry are more interested in what happens with the name on their business and how that business is going to operate after it becomes part of another organization.

And that becomes more important and how you operate and what you do and what your record is. Fortunately, I think we have an attractive situation for most people that are -- that might be looking to do estate planning or something else.

And there's no -- nothing else that strikes them more than protecting their business and the way they have operated and aligning with somebody that is very respectful of that.

Just to add to what Bill said. The reason -- I mean, certainly, when you perform the way we have the last 18 months, the stock goes up by 3x more, people notice that and wonder why.

But really until you meet them and show them underneath the covers and talk about how the model works, how these high-performance standards are like principles and they don't change over time, they get very interested if they are a high-performance franchise with first quality competitive positionings in their market, growing, beating their competition. And they get very intrigued at the fact that we have such broad performance at the field level and why people are so motivated to achieve these high-performance standards, and sustain them, be recognized for them and rewarded for them, and supported functionally, where we take all the administrative, legal, HR, all the information systems, all that we provide real support for them to grow their business.

And that is a partnership. And it's unlike anything anybody else has ever done.

And so they like it because it's not a huge leap off a mountain into a foreign alien place. It's where they can continue to be proud of their business and grow it in their local community as a partner.

So that's why we're getting such interest. And that's why we're winning deals.

In a lot of cases, there's no competition.

Well, that was short and sweet. We thank you for tuning in, and we'll report our next quarter pretty soon.

Thank you much.