Carriage Services Announces Record 2016 Annual Results, Increases Rolling Four Quarter Outlook

HOUSTON, Feb. 15, 2017 /PRNewswire/ -- Carriage Services, Inc. (NYSE: CSV) today announced record results for the year ending December 31, 2016, as highlighted below:

Mel Payne, Chief Executive Officer, stated, "Consistent with our annual Good To Great theme of 'Carriage Services 2016: We Choose To Be Great!', our 2016 performance was our eighth straight record annual performance with Total Revenue growth of 2.3% to $248.2 million, Adjusted Consolidated EBITDA growth of 3.6% to $73.7 million, Adjusted Diluted EPS growth of 9.5% to $1.62 and Adjusted Free Cash Flow growth of 7.8% to $47.0 million. Since we launched the Carriage Good To Great Journey at the end of 2011, our initial five year timeframe performance trends have been extraordinary and have produced a Total Shareholder Return of 417% including dividends.

In mid-November of 2011 after a major management reorganization on November 4, 2011, which we now refer to as our Good To Great Transition Date, we convened a large group of senior leaders and field operating and Houston support personnel to discuss whether the high performance ideas and concepts related to our Standards Operating Model had evolved over the prior eight years to a degree that could define Carriage as a "Good Company" if led and executed well by our operating leadership at all levels.  In preparation for this strategic meeting on Carriage's Ten Year Vision, we all had to read the bestselling business book Good To Great by Jim Collins which was published in 2001.

There was a unanimous and exciting view at this meeting that we had indeed reached an early phase of  "Good Company" and that our Managing Partners, Sales Managers and employees across our portfolio of businesses would be inspired to achieve higher levels of sustained operating and financial performance by the launching of a five year Good To Great Journey beginning in 2012 in combination with a new long term (five year) Good To Great value creation incentive program to complement our annual Being The Best Pinnacle Award. Accordingly, we established and then communicated companywide extraordinarily challenging goals over the five year timeframe beginning in 2012 and ending with 2016 consistent with the five year theme of taking Carriage from a Good company in 2012 to one considered Great by 2016 based on total equity market value growth and total shareholder returns over time.

Despite the dynamic and transformational changes in all areas of our company over the past five years, including the turnover, shrinkage and improved alignment of our senior leadership team and Board of Directors, a much lower cost capital structure, and the huge growth in our earning power and equity market value, we nevertheless realized over the last two years that the Good To Great Journey should not cross some artificial finish line at the end of 2016. Instead, we concluded that such a special journey of learning among likeminded individuals in a quest for excellence should never end because there are still so many ways we can get better in every operational and support function area of our company.  Our thinking now is that every time we might cross a high performance threshold of "goodness" and be approaching "great," we will redefine what greatness means for our industry and company and simply continue our Good To Great Journey that never ends.

Our year to date and fourth quarter comparative highlights are shown below:

Year Ended December 31, 2016 compared to Year Ended December 31, 2015

• Record Total Revenue of $248.2 million, an increase of 2.3%;
• Net Income of $19.6 million, a decrease of 6.1%;
• GAAP Diluted Earnings Per Share remained flat at $1.12;
  
  
• Record Total Field EBITDA of $104.4 million, an increase of 2.8%;
• Record Total Field EBITDA Margin up 20 basis points to 42.1%;
• Record Adjusted Consolidated EBITDA of $73.7 million, an increase of 3.6%;
• Record Adjusted Consolidated EBITDA Margin up 40 basis points to 29.7%;
• Record Adjusted Diluted Earnings Per Share of $1.62, an increase of 9.5%; and
• Record Adjusted Free Cash Flow of $47.0 million, an increase of 7.8%.

Three Months Ended December 31, 2016 compared to Three Months Ended December 31, 2015

• Record Total Revenue of $62.9 million, an increase of 2.0%;
• Net Income of $4.1 million, a decrease of 24.1%;
• GAAP Diluted Earnings Per Share of $0.22, a decrease of 29.0%;
  
  
• Total Field EBITDA remained flat at $27.2 million;
• Total Field EBITDA Margin down 90 basis points to 43.2%;
• Record Adjusted Consolidated EBITDA of $18.9 million, an increase of 5.9%;
• Record Adjusted Consolidated EBITDA Margin up 110 basis points to 30.1%;
• Adjusted Diluted Earnings Per Share of $0.36, a decrease of 7.7%; and
• Record Adjusted Free Cash Flow of $12.9 million, an increase of 166.0%.

STANDARDS OPERATING MODEL/CONSOLIDATION PLATFORM CASH EARNING POWER

During the 2008/2009 financial and market crisis, we took control of our preneed trust fund management and initiated an investment repositioning strategy that was enormously successful and led to huge capital gains and much higher levels of recurring income, resulting in substantial overfunding of our trusts compared to regulatory and economic requirements. So in 2011 we made the decision to report Withdrawable Trust Income in our Non-GAAP Trend Reporting as it was not recognizable as GAAP because no death had occurred.  After seeking and receiving feedback from institutional investors during 2015 about the complexity and confusion related to our Non-GAAP reporting, we ended beginning in 2016 the practice of reporting Withdrawable Trust Income as well as the adding back of other items to our Non-GAAP results so that our GAAP and Non-GAAP performance would converge as much as possible.

We believe the achievement of an Adjusted Consolidated EBITDA Margin of 29.7% in 2016 is a level that has never been reached in the history of deathcare consolidation by any mature, public company using current accounting methodology. This company and industry milestone confirms our conviction that Carriage has evolved into a superior consolidation, operating and value creation platform for the funeral and cemetery industry.

Yet it turns out that the reflection of Withdrawable Trust Income in our Non-GAAP performance beginning in 2011 also masked the remarkable degree of Carriage's cash earning power transformation as shown below in our five year Good To Great performance trends without the inclusion of Withdrawable Trust Income.

Over the first five year Good To Great timeframe we have demonstrated the ability to convert approximately 45% of incremental revenue into Proforma Adjusted Consolidated EBITDA (Revenue up $65.9 million equal to 36.1%, and Proforma Adjusted Consolidated EBITDA up $29.6 million equal to 67.1%) and other value creation metrics (Adjusted EPS and Free Cash Flow) because of a 550 basis point increase from 24.2% to 29.7% in our Proforma Adjusted Consolidated EBITDA Margin equal to a remarkable increase of 22.7%.  So what does the five year cash earning power trend that culminated in 2016 with the milestone achievement of a Consolidation Platform EBITDA Margin of 29.7% mean for current and prospective long term shareholders of Carriage?

Key five year investment merit takeaways include the following:

• Increased by almost 23% our debt leverage capacity on the same revenue base;
• Increased by 111% our ability to self-finance from Free Cash Flow a more rapid pace of acquisitions;
• Substantially increased returns on invested capital of both our existing Same Store and Acquisition Funeral and Cemetery Portfolios;
• Increasing margin trends will materially benefit long term investment returns on future acquisitions that rank high using our Strategic Methodology whose criteria are predictive of future revenue growth; and
• Substantially increased our financial flexibility to pursue additional opportunistic value creation capital allocation decisions.

Key Adjusted Free Cash Flow Equity Yield takeaways:

• While our Equity Market Value increased 362% and Proforma Adjusted Consolidated EBITDA Margin improved by 550 basis points, Proforma Adjusted Free Cash Flow Equity Yield averaged 10.1% in a relatively flat range over the past five years;
• Cash earning power Adjusted Consolidated EBITDA Margin of 29.7% is more than 300 basis points higher than our much larger benchmark competitor; and
• Carriage's superior and higher growth consolidation platform, as of year-end, produces FCF Equity Yield that is over 400 basis points higher than our much larger benchmark competitor, implying a substantial valuation discount.

Our ability to increase the cash earning power on each dollar of revenue is directly correlated to the improved execution of our three core models across our consolidation and operating platform by our 4E High Performance Leaders over the last five years. The company and industry milestone of our increasing cash earning power margin is not due to any top-down corporate initiatives to cut costs, under investment in earning power maintenance capital expenditures at our local businesses, or our decision to eliminate a broadly aggressive preneed funeral selling program when we initiated the Standards Operating Model in 2004.

While it is generally accepted within our industry and much of the investment community as "a matter of faith" that an aggressive preneed funeral selling program has positive long term performance benefits, we have seen no specific business data evidence that aggressive preneed funeral selling programs in stand-alone funeral homes (as apposed to funeral and cemetery combination businesses or stand-alone cemeteries) grow funeral market share volumes, revenues and Field EBITDA Margins over the long term. We believe that the sustained high level of execution by our stand-alone funeral business Managing Partners and the increasing funeral field operational and financial performance that has been achieved over the past five years only further validates our business strategy.

A much more comprehensive understanding of the superior cash earning power of Carriage's Consolidation and Operating Platform will best be achieved by a visit to our offices in Houston and/or to some of our wonderful operating businesses for personal engagement with our Managing Partners and employees. But in an attempt to make a breakthrough in investor understanding of Carriage using my 2015 shareholder letter and 2016 quarterly earnings releases, I wrote extensively for the first time this past year about the evolution since 2003 of our highly innovative Standards Operating Model (Second and Third Quarter Earnings Releases) and the conceptual research on "a coherent yet radically decentralized model" begun in the late 1990's by Jeremy Hope, Robin Fraser and Peter Bunce in the United Kingdom whose work was published in the book Beyond Budgeting co-authored by Mr. Fraser and Mr. Hope in 2003 which is continued today by the Beyond Budgeting Round Table.

CARRIAGE GOOD TO GREAT JOURNEY BECOMES BUILT TO LAST COMPANY

During the last quarter of 2016 we reorganized our senior leadership team to capitalize on what we believe will be the greatest strategic opportunity for value creation in our industry over the next five and ten years.  There has not been rapid consolidation of our still highly fragmented industry since the mania of the 1990's except for SCI's consolidation of primarily other large consolidators (Alderwoods, Stewart Enterprises, etc.) over the last ten years.  Yet we sense that across the country the industry secular revenue challenges caused by people living longer and increasingly choosing cremations compared to traditional burials will lead to an acceleration of consolidation over the next ten years by owners needing a succession plan solution.

We believe that Carriage offers a unique consolidation and operating framework as a succession plan solution - one so different from any company during the past sixty years of consolidation in our industry that many high quality owners and top industry talent think its "Too Good To Be True!"

So at the end of 2016 we reorganized the Strategic and Corporate Development function to achieve highly focused execution of our Strategic Acquisition Model by promoting Shawn Phillips, one of our top operating leaders who is able to credibly explain our unique Standards Operating Model to "best in class" independent business owners across the country using our high performance culture operating language.  Shawn joined Carriage ten years ago, has served as Regional Partner of both our Western and Central Regions, and is now leading and building a first class corporate development team and a pipeline of quality acquisition candidates that fit our higher future revenue profile strategic criteria and also align with our Mission and Vision of Being The Best and Five Guiding Principles.  As industry consolidation accelerates over the next ten years, we are extraordinarily well positioned to affiliate with more than our fair share of the best remaining independents in the best markets across the country.

As we successfully execute our three core models over the next five to ten years, we fully expect that our share price and equity valuation will reflect our achievements over time as a superior value creation platform in our industry. Our Being The BestMission and Vision is for "Mr. Market" to increasingly put a premium valuation on our "Compounder Company" shares so that we get recognized publicly by investors as a Built To LastCompany.

So I am honored to announce that our next five year Good To Great Journey timeframe theme is Carriage Services 2017 - 2021: From Good To GreattoBuilt To Last.

Lastly and importantly for our company leadership and employees, I am extremely proud to publicly announce our Good To Great annual theme for this year, "Carriage Services 2017: Owning the Future, Accelerating the Good To Great Journey!", concluded Mr. Payne.

CARRIAGE "ROUGHLY RIGHT" SCENARIO 2017 - 2021

Shown below using 2016 full year performance as our new base year is our updated five year financial performance scenario from 2017 through 2021. This scenario is not intended to be a formal management estimate or forecast of future performance because of the large number of unpredictable variables involved in the prediction of just about anything in the future, including uncontrollable and/or unknowable external events. Rather, the intent and goal of this scenario is to reflect the midpoint of a "roughly right" range of future performance as we execute our Standards Operating, 4E Leadership and Strategic Acquisition Models. Consistent with our performance over the first five years of our Good To Great Journey, the 2017 - 2021 scenario clearly demonstrates the future value creation dynamics of the Carriage Operating and Consolidation Platform, i.e, the "trend has been our friend but the best is yet to come!"

The Carriage "Roughly Right" Financial Performance Scenario over the five year timeframe 2017 - 2021 shown above reflects a continuation of the high performance trends of our Good To GreatJourney from 2012 - 2016. We believe these High and Sustainable Quantitative Performance Trends are driven by the Qualitative Elements of our company, i.e. the ideas and concepts of Carriage's High Performance Culture Framework highlighted in the next three sections of this release.  The Qualitative Elements of Carriage are the "center of the universe" reasons we have evolved over the last thirteen years into a high performance culture company that "just happens to be in the funeral and cemetery business!"

CARRIAGE FRAMEWORK OF HIGH PERFORMANCE IDEAS AND CONCEPTS

Carriage's High Performance Culture Framework is designed around a few simple high performance concepts related to our view that over the last fifty plus years the consolidation and operation of family owned funeral homes and cemeteries by public companies has been over managed for short term yet unsustainable maximum profit and under led for long term and sustainable market share and profitability growth.  Our three core models, comprised of our Standards Operating, 4E Leadership, and Strategic Acquisition Models, are premised on the following passionate convictions about our company, business and industry:

• High Performance Ideas and Concepts of Carriage are 100% aligned with our Mission ofBeing The Best and Five Guiding Principles, which are the Qualitative Elements that drive our High and Sustainable Quantitative Performance;
• Words in the form of ideas, concepts, high performance standards, recognition, Mission, Vision and Guiding Principles matter greatly to people with exceptional talent, especially those who are part of high performance teams - so over time we have developed a unique Carriage High Performance Culture Language;
• Nature of each of our businesses is high value personal service and sales delivered locally through highly motivated, skilled and culturally aligned leaders and employees fully involved in their communities;
• Nature of each market in which we operate is highly competitive for market share with each market and Carriage business being unique as to its competitive opportunities and challenges that are not prone to centralized solutions or top down initiatives;
• Weak leadership locally will make a healthy and/or dominant business weaker in competitive standing (market share) over time, whereas strong 4E Leadership and the "Right Quality of Staff" in a Carriage business will produce high and sustainable performance from a good business almost overnight, consistent with the high performance concept of First Who, Then What;
• A few simple high operating performance standards that do not change over time weighted heavily toward long term growth in funeral volumes and preneed cemetery property sales, which are the primary drivers of locally produced economic value creation through the financial dynamic of operating leverage, attracts the top entrepreneurial and competitive talent to Carriage businesses that do not need to be managed - just supported, recognized and rewarded like a partner; and
• Nature of our industry is akin to "birds of a feather flock together", as we have found that making Carriage highly selective on acquisitions and talent is attractive to the best remaining independent businesses and top entrepreneurial talent who want to join an elite club of "Only The Best" Carriage businesses and Managing Partners.

CARRIAGE GOOD TO GREAT HIGH PERFORMANCE HEROES

At the beginning of 2012 we created a new five year incentive award with the name Good To Great Award that was directly linked to our annual Being The BestPinnacle Award which itself is linked to High Funeral Standards Achievement over a full year, i.e. our Good To GreatAwards require high and sustained Being The Best Standards Achievement over a full five years. We have had many wonderful performances over the last five years by High Performance Hero Funeral and Cemetery Managing Partners and Sales Managers and their teams of winning employees, so I am more than honored on behalf of our Standards Council members, senior leadership team and Board of Directors to announce our first Good To Great Award winners for the five year timeframe that began in 2012 and ended at year-end 2016, as listed below:

The above group of Good To Great Award winners along with spouses/significant others or a guest will be hosted by our senior leadership team and spouses on our first Good To Great Awards trip on Wednesday, March 1, 2017 to Sunday, March 5, 2017 to the world class and unique (built into the tree tops of a tropical rain forest next to the active Arenal Volcano) Nayara Springs Villas in Arenal Nayara, Costa Rica. Congratulations to all, as you deserve to be treated as the Kings and Queens of sustained high Being The Best Standards Achievement that you are!  You have led us as high performance role models over the past five years and have truly set the Performance Standard for what the Carriage Good To Great Journey is all about.

CARRIAGE 2016 PINNACLE OF SERVICE AWARD WINNERS

As an important part of our High Performance Culture tradition and language, and because we have a passionate conviction that RECOGNITION is the highest form of motivation, listed below are 35 Carriage Being The BestPinnacle Of Service Award winners for 2016:

The above group of Pinnacle Of Service Award winners along with spouses/significant others or a guest will be hosted by our senior leadership team and spouses on a trip on Thursday, May 4, 2017 to Sunday, May 7, 2017 to Playa del Carmen, Mexico. Congratulations to all, as you deserve to be treated as the Kings and Queens of Being The Best Standards Achievement that you are!  You have led us as high performance role models during 2016 and have truly set the Performance Standard for what the Carriage Good To Great Journey is all about.

TRUST FUND PERFORMANCE

Shown below are consolidated performance metrics for the combined trust fund portfolios (preneed funeral, cemetery merchandise and services and cemetery perpetual care) at key dates.

The performance of our preneed trust fund portfolio in 2016 marked the successful completion of our portfolio repositioning strategy that we implemented at the beginning of the year.  Our strategy of selecting individual securities for a long-term investment horizon was the primary driver of our performance for the year.  Our long-term holdings in regional bank and insurance company TARP warrants and energy infrastructure companies significantly outperformed in 2016, particularly after the election.

Our trust fund portfolio repositioning strategy enabled us to accomplish our goals to improve the credit quality and liquidity of our fixed income portfolio, while increasing the amount of recurring current income in the portfolio.  Recurring annual income increased by 15% or roughly $1.5 million in our discretionary trust fund portfolio in 2016.  The majority of our repositioning strategy within our fixed income portfolio was executed in the first half of the year and proved to be successful with an average total return of 22% for new fixed income purchases during 2016.

2016 also marked the eighth full year that Carriage has directly managed our discretionary trust fund portfolio and the sixth year we outperformed our reported benchmark. The performance of our discretionary trust fund portfolio has exceeded our 70/30 High Yield/S&P 500 benchmark by 33% for the eight year period. Given our successful long term relative investment returns, we believe we have developed an investment process that will benefit Carriage into the future.

ADJUSTED FREE CASH FLOW

We produced Adjusted Free Cash Flow from operations for the three months and years ended December 31, 2016 of $12.9 million and $47.0 million, respectively, compared to Adjusted Free Cash Flow from operations of $4.9 million and $43.7 million for the corresponding periods in 2015. A reconciliation of Cash Flow Provided by Operations to Adjusted Free Cash Flow for the three months and years ended December 31, 2015 and 2016 is as follows (in thousands):

ROLLING FOUR QUARTER OUTLOOK

The Rolling Four Quarter Outlook ("Outlook") reflects management's opinion on the performance of the portfolio of existing businesses, including performance of existing trusts, and excludes size and timing of acquisitions for the Rolling Four Quarter Outlook period ending December 31, 2017 unless we have a signed Letter of Intent and high likelihood of a closing within 90 days. This Outlook is not intended to be management estimates or forecasts of our future performance, as we believe precise estimates will be precisely wrong all the time. Rather our intent and goal is to reflect a "roughly right range" most of the time of future Rolling Four Quarter Outlook performance as we execute our Standards Operating, Strategic Acquisition and 4E Leadership Models over time. Similarly, we self-publish a Company and Investment Profile, available on our website, that includes a Five Year "Roughly Right Scenario" of our future performance which together with our Five Year Trend Report provides investors a ten year past and future profile of our financial value creation dynamics and condition, making it easier to judge whether our "trends will continue to be the friend" of long term investors.

ROLLING FOUR QUARTER OUTLOOK – Period Ending December 31, 2017

Factors affecting our analysis include, among others, funeral contract volumes, average revenue per funeral service, cemetery interment volumes, preneed cemetery sales, capital expenditures, execution of our funeral and cemetery Standards Operating Model, market volatility and changes in Federal Reserve monetary policy. Revenues, Adjusted Consolidated EBITDA, Adjusted Net Income, Adjusted Basic Earnings Per Share and Adjusted Diluted Earnings Per Share for the four quarter period ending December 31, 2017 are expected to improve relative to the trailing four quarter period ended December 31, 2016 due to increases in our existing Funeral Home and Cemetery portfolio and modest decreases in overhead as a percentage of revenue.

CONFERENCE CALL AND INVESTOR RELATIONS CONTACT

Carriage Services has scheduled a conference call for tomorrow, February 16, 2017 at 9:30 a.m. central time. To participate in the call, please dial 866-516-3867 (ID-64210285) and ask for the Carriage Services conference call.  A replay of the conference call will be available through February 20, 2017 and may be accessed by dialing 855-859-2056 (ID-64210285). The conference call will also be available at www.carriageservices.com. For any investor relations questions, please contact Viki Blinderman at 713-332-8568 or Ben Brink at 713-332-8441 or email InvestorRelations@carriageservices.com.