Carriage Services Announces Third Quarter 2017 Results And Raises Rolling Four Quarter Outlook

HOUSTON, Oct. 25, 2017 /PRNewswire/ -- Carriage Services, Inc. (NYSE: CSV) today announced results for the third quarter ended September 30, 2017.

Mel Payne, Chief Executive Officer, stated, "The third quarter marked a challenging time for our company and many of the communities we serve as Hurricanes Harvey and Irma swept across southern Texas and Florida. What we witnessed over the past few months was the remarkable and inspiring CAN DO SPIRIT of the affected communities whose leadership at all levels including federal, state and local showed the country strength and resilience at its best under difficult circumstances. I want to especially express my heartfelt appreciation and gratitude to all the employees in our home office support center and operating businesses that were affected, some of whom suffered personal devastation in their homes, but all of whom demonstrated what Carriage'sHigh Performance Culture is all about during the storms and historic floods by continuing to serve their client families and local communities.

Remarkably, our home office support teams and systems continued to remain online serving our businesses throughout the crisis, a qualitative testimonial to our Mission of Being The Best. I want to take this opportunity on behalf of our senior leadership and Board to publicly thank all of the members of the Carriage Family of businesses and the many friends of our Carriage Family who reached out with their thoughts, prayers, sympathies and offers of support.

Third quarter highlights are shown below:

Three Months Ended September 30, 2017 compared to Three Months Ended September 30, 2016

• Record Total Revenue of $61.1 million, an increase of 1.5%;
• Net Income of $3.0 million, a decrease of 46.5%;
• GAAP Diluted Earnings Per Share of $0.17, a decrease of 48.5%;
  
  
• Total Field EBITDA of $23.0 million, a decrease of 5.9%;
• Total Field EBITDA Margin down 300 basis points to 37.7%;
• Adjusted Consolidated EBITDA of $14.1 million, a decrease of 17.4%;
• Adjusted Consolidated EBITDA Margin down 540 basis points to 23.1%;
• Adjusted Net Income of $4.4 million, a decrease of 41.1%; and
• Adjusted Diluted Earnings Per Share of $0.25, a decrease of 41.9%.

Nine Months Ended September 30, 2017 compared to Nine Months Ended September 30, 2016

• Record Total Revenue of $193.1 million, an increase of 4.2%;
• Net Income of $14.5 million, a decrease of 6.0%;
• GAAP Diluted Earnings Per Share of $0.81, a decrease of 11.0%;
  
  
• Record Total Field EBITDA of $77.8 million, an increase of .7%;
• Total Field EBITDA Margin down 140 basis points to 40.3%;
• Adjusted Consolidated EBITDA of $51.2 million, a decrease of 6.5%;
• Adjusted Consolidated EBITDA Margin down 310 basis points to 26.5%;
• Adjusted Net Income of $18.0 million, a decrease of 17.2%; and
• Adjusted Diluted Earnings Per Share of $1.00, a decrease of 21.9%.

Our third quarter and year to date operating and financial results have been disappointing as year to date Adjusted Diluted Earnings Per Share declined 21.9% to $1.00, Adjusted Consolidated EBITDA declined 6.5% to $51.2 million and Adjusted Consolidated EBITDA Margin declined 310 basis points to 26.5% from the historically high company and industry milestone levels in 2016. The decline in our results can be attributed to weak cemetery preneed sales, lower Field EBITDA Margins of funeral home acquisitions made in 2016 not yet integrated under our Standards Operating Model, and a decrease in Non-GAAP add backs due to our simplified reporting that aligns more closely with GAAP. Additionally, a favorable tax benefit in 2016 and an increase in diluted share count in 2017 (varies by quarter based on average share price for each period) from our outstanding Convertible Notes negatively impacted our year to date Diluted EPS by $0.13 compared to last year.

Beginning with my 2015 shareholder letter, continuing with our four quarterly earnings press releases from 2016 and concluding with my 2016 shareholder letter, I provided a comprehensive amount of in-depth data that was supported by explanations of Carriage's High Performance CultureFramework whose effective execution drives long-term value creation. In particular, I described the operational discipline related to our innovative Standards Operating Model that since 2011 has successfully driven and sustained both short and long-term revenue growth at sustainable Field EBITDA Margins. Moreover, I explained the importance of leadership versus management (First Who!) in our decentralized organizational structure, the goal of which is to grow revenue from gradual increases over time in our same store funeral contracts and preneed cemetery property sales. My efforts to explain and educate for a deeper understanding of our company by shareholders will continue selectively when it seems necessary or appropriate including in this release.

We have been encouraged year to date by the 0.9% growth in Same Store Funeral contract volume and 1.9% growth in Same Store Funeral revenue as there is broad evidence across our portfolio of local market share gains driven by our Managing Partners and their teams. On a comparative basis, adjusting for two small divestitures we made last year and the decision to end an unprofitable contract providing removal services for a local coroner in a major metropolitan market, our year to date Same Store Funeral contract volume and revenue have both increased 3.1% versus 2016, an enviable achievement within the industry given current secular trends in death rates and cremations.

The Funeral Market Share Standard in a new year compares the rolling twelve month number of funerals performed to the past three full calendar year average number of funerals performed. Standard Achievement is simply serving more families in the current year than the average of the last three. We have learned from experience that market share growth (volume without distinction between burial and cremation) is the key to achieving high and sustainable operating and financial results over a long period of time. Therefore, the Market Share Standard is the largest weighting in our Standards Operating Model at 30% of 100%. We have learned from mistakes and material market share losses within our funeral home portfolio in the past that focusing too heavily on maximizing short term profitability more often than not leads inevitably to losses in market share that are extremely difficult to reverse (refer to Ten Truths Of A Service Business on page 17 of my 2016 Shareholder Letter).

Revenue in our Acquisition Funeral portfolio increased 42.9% to $24.7 million, Acquisition Funeral Field EBITDA grew 30.5% to $9.5 million and Acquisition Funeral Field EBITDA Margin declined by 360 basis points to 38.5%, reversing an upward margin trend in our Acquisition Funeral Portfolio since 2011. The decline in Acquisition Funeral Field EBITDA Margin was due to the slower than expected integration of some of our 2016 acquisitions and a seasonally weak quarter this year. The remaining funeral home businesses that were acquired between 2013-2015 have grown year to date revenue by 2% and EBITDA by 4% because of an increase in Field EBITDA Margin of 80 basis points to 43.2%, consistent with the positive impact of the financial dynamic of operating leverage in a high fixed cost funeral home business. We fully expect to see improved margin performance of our high quality recent funeral business acquisitions in 2018 and thereafter.

The almost $1 million quarter over quarter decline in cemetery revenue performance was a result of a continuation of weak operating trends from the first half of the year, a $300,000 decline in preneed property sales at our cemeteries in Corpus Christi, TX and Ft. Lauderdale, FL due to Hurricanes Harvey and Irma, and the absence this year of approximately $400,000 of large private estate sales we had in the third quarter of last year.

Throughout the past two quarters, our operating teams have focused on making the necessary changes in our sales leadership and examining the preneed property sales programs at our underperforming cemetery businesses to ensure sales and margin performance return to our previous standard. While future operating performance will be the true test of success of these changes, we have seen progress across our cemetery portfolio and believe we will have positive operating momentum in our cemetery portfolio as we move into 2018.

Capital Allocation

I am pleased to announce we executed four signed letters of intent in the third quarter and plan to close all four businesses within the next 90 days. None of these businesses were among the three letters of intent mentioned on our second quarter conference call. Three of these businesses will be in large new strategic markets for Carriage including a new state and all of these markets have other high quality acquisition candidates. The four businesses under letters of intent will collectively add over 3000 funerals to our portfolio and each has a strong competitive standing and market share growth opportunity in its respective market.

We are excited by the level of relationship building activity with the top remaining independent businesses by the Corporate Development Team as evidenced by the fact that the four letters of intent recently executed are the most we ever executed in a quarter. The continued effectiveness of our Corporate Development Team in building a larger pipeline of high quality acquisition candidates reaffirms our favorable relative assessment of Carriage's competitive positioning in the current industry landscape and confidence in our ability to execute our Strategic Acquisition Model at a high level over the course of the next several years.

We repurchased approximately 675,000 shares at an average purchase price of $24.28 in the third quarter and have now repurchased 2.6 million shares or approximately 14% of our shares outstanding since the end of the second quarter of 2015. Today our Board of Directors authorized an additional $15 million share repurchase program in addition to the $11 million still available under a previous authorization.

Additionally, our Board of Directors approved an increase of our annual dividend to $0.30 per share, an increase of 50% over our prior dividend, that will be payable on December 1st.

High Performance Heroes

The following are High Performance Hero Managing Partners leading us during the third quarter on our Good To Great Journey that never ends.

Our country, the communities we serve and too many of our amazing employees have had to endure and persevere through tremendously difficult circumstances related to natural disasters and other tragedies this past quarter. We couldn't be more proud of the resiliency and grit that has been shown by our employee teams throughout this challenging period, and for that reason, I would like to acknowledge all our Carriage employees at the following businesses as Carriage's Super High Performance Heroes for the third quarter.

Ten Year Vision, Five Year Strategy, One Year Plan

Despite our disappointing performance thus far in 2017, there is nothing but optimism among our leadership at all levels of the company about the bright prospects for the future related to our Ten Year Vision and Five Year Strategy. We are only in the first year of the second five year timeframe of Carriage'sGood To Great Journey that never ends, a year that brought challenges but also creative and dynamic change to our company that has seeded continuous improvement in areas that will be engines of growth and profitability over the next five years. Like night follows day, long-term value creation produced by effective execution of all elements of Carriage's High Performance Culture Framework will continue over time to benefit our shareholders," concluded Mr. Payne.

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.

For the nine months ended September 30, 2017, Carriage's discretionary trust funds returned 8.6% versus 9.2% for the 70/30 index benchmark. The performance of our preneed trust fund portfolio during the year has been in line with our expectations and has reflected no significant change in our overall portfolio strategy.

ADJUSTED FREE CASH FLOW

We produced Adjusted Free Cash Flow from operations for the three and nine months ended September 30, 2017 of $9.4 million and $24.9 million, respectively, compared to Adjusted Free Cash Flow from operations of $9.3 million and $34.7 million for the corresponding periods in 2016. The year over year decrease in Adjusted Free Cash Flow was due to weak operating performance, the reduction of Non-GAAP "cash items" and timing and amount of certain severance, incentive and federal tax payments during the first half of 2017.

A reconciliation of Cash Flow Provided by Operations to Adjusted Free Cash Flow for the three and nine months ended September 30, 2017 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 September 30, 2018 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.

In light of current operating trends and acquisitions expected to close in the next 90 days, we are raising our Rolling Four Quarter Outlook of Adjusted Diluted Earnings Per Share by $0.08 to a range of $1.73 - $1.77 for the period ending September 30, 2018.

ROLLING FOUR QUARTER OUTLOOK – Period Ending September 30, 2018

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 September 30, 2018 are expected to improve relative to the trailing four quarter period ended September 30, 2017 due to increases in our existing Funeral Home and Cemetery operating portfolio.

CONFERENCE CALL AND INVESTOR RELATIONS CONTACT

Carriage Services has scheduled a conference call for tomorrow, October 26, 2017 at 9:30 a.m. central time. To participate in the call, please dial 866-516-3867 (ID-99303249) and ask for the Carriage Services conference call.  A replay of the conference call will be available through October 30, 2017 and may be accessed by dialing 855-859-2056 (ID-99303249). 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.