Oct 31, 2014
Executives
Mel Payne - Chairman and CEO Bill Heiligbrodt - Executive Vice Chairman
Analysts
Joe Janssen - Barrington Research Alan Weber - Robotti & Company
Operator
Good day, ladies and gentlemen. And welcome to the Carriage Services Third Quarter 2014 Earnings Conference Call.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time.
(Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, [Mr.
Chris Jones] (ph), representing Carriage Services. Mr.
Jones, you may begin.
Chris Jones
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 2014 third quarter results, which were released yesterday after the market closed.
Carriage Services has posted a 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 November 3rd. Replay information for the call can be found in a press release distributed yesterday.
Speaking on the call today from management are Bill -- are Mel Payne, Chairman and Chief Executive Officer; and Bill Heiligbrodt, Executive 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 risks 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 these 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 reference 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, or 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.
Mel Payne
Thank you, Chris. Welcome to our third quarter call.
I’m going to turn the call over to Bill Heiligbrodt to go over the details of our performance.
Bill Heiligbrodt
Thank you, Mel, and good morning, everyone. As always, there’s a great deal of information in our third quarter press release, to the extent that anyone has questions on this release, we can address them after our comments today or for that matter personally after the call, welcome that opportunity.
Now let’s go to some of the important details of this record third quarter. First, I have to mention adjusted diluted earnings per share.
These record adjusted diluted earnings per share were $0.31 for the third quarter of 2014, an increase of just under 100%. Year-to-date adjusted diluted earnings per share for September 30, 2014 were $0.94, an increase of a little less than 30%.
Let me remind you, adjusted diluted earnings per share for the full year 2013 were $0.98. Next, I would to address adjusted free cash flow for Carriage Services.
For the first six months of 2014, adjusted free cash flow was down 26%, fueled by 70% growth in adjusted free cash flow in the third quarter 2014, we finish the quarter up 2%, so we move from the -- the second quarter being down 26%, to the third quarter being up 22 -- being up 2% and ended the quarter with $27 million in adjusted free cash flow. Therefore, there is a good chance that we can end the year 2014 with a record adjusted free cash flow in excess of $40 million.
Finally, I would like to look to the future, again, including the remainder of 2014 using and evaluating the eight key factors I discussed with you on this conference call at the inclusion of the second quarter. First point, we should see better comparisons in same-store volumes in the third and fourth quarters of 2014.
For the third quarter of 2014 same-store Funeral revenue was up 2.6%, while year-to-date same-store Funeral was down 2.1%. Remember, we began this year in the first quarter of 2014 with same-store Funeral revenues down 6.5%.
Since then we have seen steady improvement in same-store Funeral comparisons, which we think, will continue into the fourth quarter. This is exactly opposite of 2013, where we began the year up 5% in same-store Funeral revenue and saw declines for the remainder of the year, ending up 0.7% for the full year.
This is truly reflective of Funeral trends, which have been exactly opposite for 2013, compared to 2014, and again, emphasizes that Funeral cycle tend to run randomly and in periods longer than one quarter. Again, we believe, same-store Funeral revenue will improve in the fourth quarter, allowing us to possibly so positive growth for same-store Funeral revenue for the whole of 2014.
Second point, during the second quarter of 2014, we replaced $90 million of junior subordinated convertible securities compared to 7% interest rate. With the new 7% -- new seven year convertible note of $143.8 million at 2.75%.
The annual cash interest savings along this refinancing is $2,350,000. It is reflected in reduced the interest expense in our third quarter 2014 statement and we’ll carry forward into the fourth quarter of 2014 and into 2015 on a comparable basis.
Third point, we have a new $325 million credit facility completed in the second quarter of 2014, comprised of $125 million term loan and a $200 million revolving credit. Currently, we have almost $160 million available under this revolving credit plus our free cash flow of possibly $40 million or more per year, the finance Carriages growth problem.
Floating interest rates on this revolving credit are currently under 3%. Fourth point, in May of the second quarter, we completed the purchase of six businesses with Service Corporation International for approximately $54 million.
After reviewing our third quarter financial, those acquisitions are doing slightly better than reported in the second quarter and should now add $0.23 on an annual basis. This can be seen in the rising performance number for Funeral acquisitions, both in terms of revenue and field EBITDA.
For the third quarter 2014, Funeral acquisition revenue was up 50% and field EBITDA was up 72%. These numbers exceed comparable growth number shown in the second quarter of 2014.
Fifth point, the third quarter now reflects both the full benefit of the new financing and the new acquisitions. This -- that will be the case in the fourth quarter and into 2015.
Sixth point, responsible Carriage management has been reviewing all overhead expense numbers. To be certain, there is added value in all these expenses.
Total regional and corporate fixed overhead expenses were down over $900,000 for the third quarter 2014. Some future reduction in these expenses should occur in the fourth quarter of 2014.
Seventh point, comparisons of adjusted diluted earnings per share continued to be easier as we move through the fourth quarter and the first half of 2015. Eighth point, in the second quarter earnings call, we reported a new calculation of our cost of capital is been slightly under 8.5%.
That number has been recalculated at the end of the third quarter with nominal improvement and remained slightly under 8.5%, which continues to put Carriage in a very competitive position for company our size deliver real value for our shareholders. In summary, the combination of these eight points allows us to increase our rolling fourth quarter outlook from a range of $1.42 to $1.48 from June 2015 to $1.49 to $1.54 range for the period ended 9/30/2014.
This concludes my remarks and we look forward to reporting our results as we move forward to remainder of 2014. I will turn it back over to you Mel.
Mel Payne
Thank you, Mel. As I’ve stated in our press release, Carriage, as a funeral and cemetery business consolidation and operating platform, has never had such a high quality of operating and corporate leadership broadly at all levels, who are more aligned with our guiding principles and the high-performance operating and financial standards.
Nor have we ever had an industry landscape of high quality industry acquisition candidates, more favorable towards Carriage as the preferred choice as a family succession solution. And on that point, I’d like to make a few more comments.
Since Dave DeCarlo joined the company in March, He and I, because we had time and the company was doing well in most of the areas, spent a considerable amount of time relooking at our 10-year vision, our strategic focus on what was a strategic market, large, medium, small, how we would allocate our free cash flow and capital over the next five or 10 years. And then we rewrote and refocused the acquisition in corporate development group and rebuild that group.
Over the last three months in particular, we have made enormous progress in identifying that we want spend our time to build a portfolio of businesses that are really perfect fits for our standards operating model and will be higher growth revenue, costs and profit businesses compared to our existing portfolio as we execute the strategic acquisition model. Dave and I, in particular spent a lot of time in various markets.
And so now we have come up with a plan. It's highly focused.
The pipeline of quality acquisitions within this framework and within these markets is growing. We will make acquisitions of high-quality businesses in the next six months and I expect that to continue well into the future.
So this will be a real focus over the next two years. And I should -- it should add a lot of earning power to the company as we do it as Bill mentioned, finance with a low cost of capital and a lot of free cash flow.
Therefore, we're confident that effective execution of our three models will produce high and sustainable operating and financial performance through the two and quarter year remaining on our defined five year good-to-great journey. So that by the end of 2016, we will have annualized earning power, roughly equal to approximately $2 per share of adjusted diluted earnings per share.
This is not a forecast, this is a goal but we take our goal seriously. And if we achieve that goal when we achieve that goal, by then we will have developed goals for another five-year timeframe to continue the never ending carriage what we call good-to-great journey.
Finally, after a quadruple of our stock price from about $5 per share at the end of ‘11 to briefly over $20 per share in April 2013, short amount of time, our stock price has been consolidating. I call it the pause that refreshes, mostly in the $16 to $20 per share range for the last 18 months.
However, as the largest single individual shareholder was about 8% of fully diluted shares, I long ago learnt that the stock price is not the company. And while the stock price paused in the $16 to $20 per share range, the company itself has continued to rapidly improve its sustainable earning power and prospects for the future.
In other words, it is a good period to be an owner of Carriage, which includes all of our senior leaders and many of our employees who take great pride in contributing toward our success individually and in teams who make a measurable difference. We are extraordinarily well-positioned therefore to create substantial shareholder value in the future for those who take the good-to-great journey with us.
I’d like to end this call by customarily calling out our third quarter high-performance heroes because these are the people who produce the performance that we all own. In the Eastern region and a repeat performer form the second quarter.
John Fitzpatrick, Donohue-Cecere Funeral Home Westbury, New York. Jason Higginbotham, Lakeland Funeral Home, Lakeland, Florida.
Scott Griffith, Woodtick Bergin Funeral Home Wolcott, Connecticut. Charlie Eagan, Greenwood Funeral Home, New Orleans, Louisiana.
This is in the SCI package. Charlie is on fire, entrepreneurially and what he is doing in New Orleans with the other team players over there is nothing short of a minor miracle that we expect over time to turn into a major miracle.
Thank You, Charlie. Ben Friberg, Heritage Funeral Home, Fort Oglethorpe, also a relatively new acquisition from December of last year, Way to go Ben, a repeat high-performance award winner from the second quarter.
Fred Bryant, Bryant Funeral Home, East Setauket, New York, in the Central region; Brad Shemwell, Latham Funeral Home, Elkton, Kentucky and Andy Shemwell, his brother; Maddux-Fuqua-Hinton Funeral Home, Hopkinsville Kentucky; Kyndall Hale, Don Grantham Funeral Home, Duncan, Oklahoma; [Collin Cordona] (ph), Hillier Funeral Home, Bryan, Texas, that’s Texas A&M where we’re building a fantastic new facility; Jeremy Sparks, Resthaven Funeral Home, Oklahoma City, Oklahoma; Jeff Moore Sterling-White Funeral Home, Crosby, Texas. Western regions, Steve Mora, Conejo Mountain Cemetery, Camarillo California Funeral Home; Nicholas Welzenbach, Oak View Memorial Park Cemetery, Antioch, California.
Kent Summers, Phil Bryant, Strunk Funeral Home, Antioch, California and finally but not least, Adam Mills, Johnson-Gloschat Funeral Home, Kalispell, Montana. These are operating businesses.
These businesses are supported by teams here in our home office and one of the most important teams that are critically important to the support of this model and framework of the operational analyst here in the home office. And I would like to call out our higher performance winner from that group, Peggy Schappaugh, Peggy is the analyst for our Western Region.
She has been here a long time. She has seen a lot of evolution in this progress.
And she is a complete homerun winner. Thank you, Peggy.
With that I’d like to close the call. And open it up for question.
Operator
Thank you. (Operator Instructions) Our first question is from Alex Paris with Barrington Research.
Your line is open.
Joe Janssen - Barrington Research
Good morning. This is actually Joe Janssen form Alex.
So let me -- you kind of listed off 8 points and I was taking note and trying to get it all. So, I apologize if I don’t have all the details.
But first let me -- let's talk about the SCI properties. In your comments, it sounds like they are performing better than they did on a sequential basis.
I'm just curious maybe how that compare to what your expectations were. And then also maybe -- what you are hearing on the field level, as you've integrating these new fleet, how they’re operating under the kind of Carriage umbrella.
I know you guys are the consolidator of choice. I'm just curious what message and what are you hearing from them.
Bill Heiligbrodt
Well, let me answer a part of that and I will let, Mel answer a part of it. As far as the operations themselves, as far as the numbers are concerned, if you look at the second quarter you will see acquisition revenue up 30% and you’ll see field EBITDA up 50%.
And then I commented in my point, if you take that forward one quarter, you’ll see acquisition revenue up 50% and field EBITDA up 70%. So translating that into the numbers on a very, very conservative basis, ROA is very good, already increased number of $0.22 per share to $0.23 are based on those numbers alone.
So what we have right now, looking at my estimations, which are always somewhat conservative. But I think, based on where we are today with the New Orleans acquisition, basically put into a real perspective is we are at our 2015 numbers already.
So it is really performing quite well and we are very, very happy with everything. So, I think that kind of gives you a basis of how we feel about it, okay.
Mel Payne
This is Mel, Joe. We picked these two markets and the packages in these markets for reason.
In particular, New Orleans was the home office of Stewart, their home base and so that market had been highly consolidated by various consolidators over 30 years, 40 years. Stewart was only one of them.
Bowen came in. They no longer exist.
They turned into Alderwoods, SCI bought them and then they about Stewart. So you had SCI Alderwoods, Bowen and then you had another big independent from Louisiana that was a big consolidator, then you had Stewart.
So you really had huge consolidation and a lot of stuff moving around over 30, 40 years and a lot of market share moved around. And then in the middle, towards the end of that you had Katrina, which moved around some stuff.
So we really had a market -- there is no other market that I don’t like, let me put it that way. All they knew was the model of market management.
Our model is the opposite of overall market management. We don't have market managers.
What we did is take these four businesses and in three of them, we've inserted entrepreneurial leadership. We converted the other one who already was there into an entrepreneur.
And then we started moving over people who could bring business, market share because they had followings with the other companies. What we have accomplished in a short amount of time like six months has been shocking to those who know the market and live in the market and who have been in the business for all these years.
But if you really want to know what's going on over there, you ought to get the names of our managing partners and their telephone numbers. Call them and ask them because we have nothing to hide.
And I will tell you the future based on what we modeled out is going to look a lot better than that over the next two, three, four, five years. We are investing another $4 million in these facilities to fix them up and we fully expect the performance to be driven by a combination of market share moving from wherever it is now over where we are now.
Following the people we brought over there now. And as they bring in more volume on the high fixed cost facility, you are going to see the profit margins go up.
In our view, these four businesses had been over managed for short-term profit. We won’t earn quite as higher margin over the time like they were earning before.
It will be totally within the framework of what we find high and sustainable. But what you'll find that it would be very difficult to model out the success we expect over the next five years.
It's going be better than you could model and that's why it's exciting. We went through this yesterday and I wanted Bill to take notes, he did.
Our people gave report on every business, what's going on because over the next six months, a year, two years, he is going to have that to show investors how this works when you do it right. And to say we're excited about these two markets will be an understatement.
It’s going to be fantastic.
Joe Janssen - Barrington Research
Okay.
Mel Payne
But if you want those numbers and column, we will give them to you.
Joe Janssen - Barrington Research
I might take you up on that. I appreciate it, Mel.
I’ll do that offline.
Mel Payne
That’s where you are going to learn the most. You are not going to learn it from me or Bill.
Joe Janssen - Barrington Research
And then….
Mel Payne
Maybe more from him.
Joe Janssen - Barrington Research
You talked about last three months, you and Dave. Corporate development and things like that.
I’m just curios, are you changing assumptions in your strategic acquisition model in terms of overall funnel. We know that it’s a fragmented market.
We know of that. You kind of have your targets.
Is that restricted to targets or is that kind of directed you into a different direction? I’m just curios when -- your comments what you made kind of what that entailed?
Mel Payne
What I will give you example. We are profiling strategic markets that we identify is having a lot of targets, remaining independence, high quality independence, large markets.
So if you got in and buy a really good one, a number one or number two, it gives you attention of all the other players in and around the market. Let’s say in and around New York City, Long Island, New Jersey, South Jersey, up in the Connecticut and around Hartford, Pittsburgh, there's not much consolidation in Pittsburgh.
There are some really good businesses in Pittsburgh. And so we’ve got a profile of the whole market, profile every business in the market that doesn’t mean they are all sellers.
We will build relationships with them over time. And when we go in, we will do it with the top-notch business and the industry is very clubby, known by the company you keep.
So when you affiliate with the top one, it gets everybody else’s attention. So we'll do that in Pittsburgh, we will do it in and around New York where we already have a high presence, in and around Boston, down the East Coast or in and around Washington, Virginia, North Carolina where the averages are good, the cremations are still relatively on the low side.
So you get high revenue and you get high margins. And we are going to stay away mostly from the commodity markets.
But in some of those markets, you can find individual really good businesses like the Florida Panhandle. We like parts of California and in and around LA.
We want to grow some more. So at least we want to focus, focus, focus, focus, we are not out to buy something just because it might be an individual good business in the middle of nowhere.
Joe Janssen - Barrington Research
Okay. Let me ask one more question.
I will jump back in queue. I know this is in guidance, this is your goal.
You mentioned $1.90 to $2 per share in your prepared remarks as well as on the press release. Just clarification, is that the 2016 earnings per share or is that at the end?
Mel Payne
No, that’s the annualized.
Joe Janssen - Barrington Research
Rolling four quarter forward, right?
Mel Payne
At the end of 2016, that ought to be the four quarter outlook roughly in and around roughly range.
Joe Janssen - Barrington Research
Okay.
Mel Payne
That’s our goal.
Joe Janssen - Barrington Research
Right.
Mel Payne
I would be saying it publicly we didn’t take it seriously however.
Joe Janssen - Barrington Research
Okay. Good job, guys.
Thanks.
Operator
Thank you. Our next question is from Alan Weber with Robotti & Company.
Your line is open.
Alan Weber - Robotti & Company
Good morning.
Mel Payne
Alan, where have you been?
Alan Weber - Robotti & Company
I have been around. I have been here.
So a quick question on the rolling four quarter outlook. When you include in that consolidated EBITDA, how much of that -- I have forgotten now, how much of that is from acquisitions for that you’re going to complete as opposed what’s already been completed?
Bill Heiligbrodt
It’s very, very small, Alan. And really I mean technically, we're looking that now.
There's some acquisition benefit in the third quarter of 2015. So pretty much up until then we don't have very much.
As you know and we talked to you before, generally as we talk about what we're going to do we have some very, very low numbers that we've included before in that numbers, something in the range of maybe spending as much as $40 million a year. So when we look at this particular one since we have already spent $54 million and we have the benefit of new acquisitions coming in through June of next year, there's very, very small amount in that number.
Mel Payne
Let me comment on that, Alan. A long time ago I got on the treadmill of quarterly estimates and annual estimates and I learned to regret it.
So we don’t do that. So the third rolling four quarter outlook is a rough range that we expect to be.
And because when you include acquisitions, you don’t know when they are going to close. You can’t make the decision for them when they want to exactly sell.
We’re totally satisfied that we will achieve the acquisitions that Bill talked about, but when they close and how much performance they contribute within that period is very difficult to predict. And that's why we went to rolling four quarters that are roughly right ranges.
The concept here is that the company is executing operating and strategic growth models that are creating earning power, more earning power as we grow, leveraging the overhead, leveraging the capital structure, getting businesses that can grow organically, so you got the operating leverage. So over time, I am totally confident that the earning power within a range of being roughly right will be what we put out there, but it's not an estimate.
Alan Weber - Robotti & Company
Okay, great. Now understand.
I actually was asking because if you look at the growth of EBITDA, well it gets kind of -- look at the growth of EBITDA relative to the acquisitions and capital spending, it shows obviously the acquisitions are accretive and you are getting the returns, which actually seems like the only way as an outsider to really measure that.
Mel Payne
The acquisitions that we will be doing -- we've improved our methodologies, we're doing more due diligence upfront. When we close an acquisition, this will include the next one.
We will have before we close it a specific integration plan, that’s what we call it. And that specific integration plan will be all the changes that are necessary to be made in that business which ought to be a good business to begin with.
So that it will be operating at a high level of standards achievement within three months. So these businesses that we’re buying will turn accretive if they are not already accretive day one very fast.
Alan Weber - Robotti & Company
Okay, great. Just an aside question, you talked earlier about the refinancing and the rate on the new convertible.
And in hindsight Mel since you talk about the stock price in a general way now, in that respect would you have been better off just having a slightly higher yield and not having that future dilution for the number of shares?
Bill Heiligbrodt
No. It’s Bill.
Because of the way the dilution comes in on that convertible and cost of the convertible versus and what we could raise in that market versus the acquisition of the SCI properties, probably that’s a little bit longer discussion than we got here, but I’d be happy to go -- Robert now would be happy to go over there with you, I think you will understand it completely.
Alan Weber - Robotti & Company
Okay.
Mel Payne
On that point, Alan, that’s a huge point because I don't know whether that's been a concern, that’s hanging over the stock price right now not. But the way that thing works is very unusual, because there's a feature in there that Bill and Robert negotiated, so that you don't get all of that dilution, you can actually settle that convert whenever the holders want to with mostly cash and they can’t force you into stock.
So the dilution is not exactly the huge dilution that simple math would lead you to believe it might be.
Alan Weber - Robotti & Company
Okay, great. I have to look at the intention.
Thank you.
Mel Payne
We’ll call you back and discuss that with you in detail.
Alan Weber - Robotti & Company
Okay, great.
Mel Payne
I think that’s an excellent point, Alan, and I think we need to do a better job of explaining that.
Alan Weber - Robotti & Company
Okay, great. Thank you very much.
Mel Payne
Thank you for your support all these years.
Operator
Thank you. And I am not showing any further questions.
Mr. Payne, please proceed with any closing comments.
Mel Payne
I think we covered it all. We appreciate everybody who called in.
We appreciate your interest. We have a great company and its getting better, that’s the best part.
We look forward to reporting our full year results sometime in late January. Thank you very much.
Operator
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.