Hello, and welcome to the Carriage Services First Quarter 2012 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. Now I would like to turn the conference over to Mr. Matt Steinberg of FTI Consulting. Please go ahead, sir.

Thank you, and good morning, everyone. I would like to welcome you to the Carriage Services conference call. We are here to discuss the company's 2012 first quarter results, which were released after the close of the market yesterday. Additionally, Carriage Services has posted supplemental financial tables and information on its website at www.carriageservices.com. If you would like to be on the e-mail distribution list for future Carriage Services releases or if you'd like to receive a copy of the press release, please call my offices at FTI Consulting at (212) 850-5600 or visit the Carriage Services website. This conference is being recorded live over the Internet on Carriage’s website, and a subsequent archive will be made available. Additionally, in a few hours, a telephonic replay of this call will be made available and active through May 16. The replay information for the call can be found in the news release distributed yesterday. With us 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 in this morning’s call, management may 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 these statements, which are more fully described in the company’s annual report filed on Form 10-K 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 for the most useful -- for 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. With these formalities out of the way, I'd like to turn the call over to Mel Payne, Chairman and Chief Executive Officer. Mel, please go ahead.

Thank you, Matt. I'd like to welcome everyone on the call to our first quarter earnings release and conference call. I want to first hit on some highlights of the quarter and there were so many that we only could list the main ones. We had total record revenue of $52.3 million, which was an increase of 3.2%. The acquisition Funeral Field EBITDA was $2.5 million, another record, an increase of 208%. These are businesses that we've owned since the end of 2007; in other words, we acquired in 2008, '09, '10, '11 and the first quarter of '11. We do it that way for long-term trends. But that same group increased their profit by triple year-over-year. Part of that was the revenue from acquisitions, but a lot of it was total acquisition. Funeral Field EBITDA margin was 38.9%, an increase of 1,260 basis points. We've never come close to that performance with our acquisition portfolio in the history of the company. In fact, quite a few of the businesses we bought and are in that portfolio have higher rents. EBITDA shown here is after rent. On an apples-to-apples basis, looking at the same-store portfolio and the acquisition portfolio for the first time in the history of the company, the actual -- acquisition Funeral Field EBITDAR before rent margin was higher than the same-store, 45% and change versus 44% and change. The total Funeral Field EBITDA, which includes the acquisition and the same-store was $15.5 million, another record, an increase of 19%. Our total funeral revenue increase was only 4.5%. The total Funeral Field EBITDA margin of 39.9% was an increase of 480 basis points, another record. Total field EBITDA -- total field EBITDA, this includes both cemetery and financial, was $21.4 million, an increase of 11.2%. Total field EBITDA…

Thank you, Mel, and in keeping with what Mel mentioned as the highlights of the first quarter today, I'd like to take you through a progression of categories of our income statement for the first quarter of 2012. Total revenue was up $52,286,000. That is what it was, that is up $1,617,000 or 3.2%. Total Field EBITDA was $21,436,000, up $2 million or 11% and again at a 41% margin. Overhead was $7,174,000, up slightly under $800,000 or 12%. The largest component of overhead was our variable expenses reflecting accrued incentive compensation for operating performance in this quarter. This leaves EBITDA from continuing operations of $14,200,000 up almost $1.4 million or 11% adjusting for nonrecurring expenses shown as special items and adding slightly over $0.02 per share or $694,000 from withdrawable trust income leaves adjusted EBITDA of $15,951,000, just under $16 million. That would be non-GAAP, an increase of approximately $1.4 million or 10%, the resulting margin, 31%. Okay. Our report card at that performance. GAAP earnings per share $0.23 per share versus $0.18 last year, a 28% increase. Non-GAAP earnings per share, again, after adjustments for nonrecurring expenses and special items and adding withdrawable trust income was $0.29 versus $0.23 last year, up 26% [ph]. The resulting non-GAAP net income margin is 10%. One comment that Mel forgot to put in there. Let's look at a -- at some of the components of our income statement. Our funeral operations were exemplary in the first quarter. Despite a low volume environment or unusual market for our industry in the first quarter, we grew same-store Funeral EBITDA on increasing margins by almost $800,000, 7% same-store EBITDA. This allowed us to completely benefit from the over 100% increase in funeral acquisition revenue. Acquisition Funeral Field EBITDA margins increased from 26% in 2011…

With that, we'd like to open it up for questions.

[Operator Instructions] And our first question will come from Nick Halen of Sidoti & Company.

So the first question I had was just how should we look at acquisition spending going forward? I know you mentioned in the past, you're looking to spend roughly $20 million a year but the pipeline looks particularly strong right now and I guess you guys already spent $11.5 million in the first quarter and obviously, will be spending more in the second. So I guess, just going forward, I mean, how should we look at that on an annual basis?

Well, I think we don't set targets. We look for the right businesses that fit our model. Based on where we are today, we could easily do $30 million in acquisitions provided, again, that we're able to negotiate transactions that complement what we've already done and we would be willing to do more than that. I think it's a factor of what businesses are available and how soon we can get these accomplished. But certainly more than $20 million and probably, certainly more than $30 million.

Yes, Nick, this is Mel. I think that number you're using is kind of the one we used over the last couple of years. But with Bill coming and revising everything and looking at what we've done with the standards operating model, we're seeing a lot of interest in our company and we're seeing a lot of owners thinking taxes are not going down, probably will go up, how much, not quite clear. So we've seen a real increase in the amount of interest, not just in the transition of succession planning transaction but in our company, specifically in our company. Words getting out where different people who join us like it. They like once they get under the covers what they see and the value that can be added to local businesses. So I would -- I think we've grown into a bigger opportunity to grow without being stupid about it.

Okay. Now, I guess, as that pipeline grows and like you said word does get out, I guess, more and more opportunities present themselves, if you guys don't have the free cash flow available to fund these acquisitions, I guess how would -- I mean, have you thought about how you would approach funding these?

Well, we do have probably enough to fund on a free cash basis as much as $20 million. We have adequate financing that would -- that is in place to more than adequately take care of the numbers that we've mentioned today for at least 2 years to 3 years, okay?

And the capital markets are -- they keep calling us for some reason. We just keep being patient about it. They're calling us. Come now and we say, wait, wait, wait. So I don't -- I think we've got plenty of opportunity to change the capital structure a little bit to get more capacity if we need it and not adding a lot of additional costs.

And one point I'd like to add to that, every time we make an acquisition on the basis that we've been doing these transactions, our credit gets better and our cash flow gets better. So the whole plan is designed about making Carriage better both from a credit standpoint and an earnings standpoint.

Okay. Great. And then just lastly, I know you guys mentioned on the last call that you launched a few new programs in the Cemetery business. And I know you mentioned that January and February this year kind of struggled in March, things seem to pick up on that side, and I was kind of wondering what was different in March from, I guess, the first 2 months of the year.

Well, when you change everything which we did at year end -- in November, when I say everything, we changed everything. I suspended the Cemetery Standards Operating Model and we're going to re-create that in the third quarter and roll it back out just like we quickly did the Funeral one in -- and had it approved November 17, rolled it out by the end of November. And you'd think we had rolled it out 5 months before because December looked completely different than any other month of last year and volumes were way down, profits were up. So that's when we knew this was going to be a good quarter from a funeral point of view. On the Cemetery, it's a little difficult because we're building sales strategies, sales teams, sales leaders and we planted a lot of seeds on how we did this systematically and activity wise and monitored. We also rolled out a proprietary cemetery system, February 1. No one else in the industry has anything like it. We're working through the bugs on that. So I think you'll see trends. There are a lot of reasons March was the month things really began to show some fruit, where the seeds were growing into fruit and I see more of that in April. I expect to see more of that throughout the remainder of the year as we rebuild a broader performance portfolio in our cemeteries. And we're adding some talent recently and we'll add some key people, too early to talk about it, I'd rather wait until the fruit gets a little more clearer and then we'll talk about it the next call. But just know it's -- the cemetery business is not going to hold us back.

And our next question will come from Clint Fendley of Davenport.

On this -- first question on the Field EBITDA, obviously some great results there. I mean, how should we think about the sustainability of this going forward throughout the year?

Let me -- one of the things I've learned doing this now for 21 years is that the Funeral business is kind of a weird business. I went back and looked at the first quarter over the last 12 years, and I had our people and they're all in this room, if you want to know who the real stars of this quarter, they're sitting around this table in this room, supporting our Field operations with analysis and planning. But I said look, let's -- this is really unbelievable almost, down 6.2% on volumes. How did we do this? Well, we went back and looked at first quarter in correlated volume to the margin, EBITDAR margin, and we did it on the businesses we only owned on December 31, '99, so that you had apples-to-apples-to-apples-to-apples through a 12-year cycle and it was very interesting, fascinating. For the first 10 years, the correlation was perfect, the volumes went down. And we did have 3 years, 6 years we're up, 6 years we're down. But there were 3 years where the volume was down between 8% and 9% on that group of businesses. Now 10 years, the volume went down, the margin went down, the volume went up, the margin went up. The only 2 exceptions to the correlation, which you would think is logical, have been the last 2 years. Last year, the volume went up and the margin went down. This year, the volume went down a lot, and we hit an all-time margin record. Now there's some reasons for that, specifically reasons. First of all, the new standards operating model incentive programs were rolled out and communicated not only to the managing partners but to all employees of every business, hadn't been done before. Everybody has a stake in this in their standards achievement, all employees. And they came through like champions. You can see a difference in December but we got a couple of other things working...

I mean, when you say every employee, I mean is that at every level of the company that you had not done before? I mean...

We had rolled it out at the end of last year, effective 2011 but it wasn't fully understood or communicated to all employees. A fact, that's not true anymore. Now the things that improved year-over-year were some things that came with the volume decline turned out to be good things. We didn't have snow removal, we didn't have utility bills in the Midwest, in the Northeast like we had in prior years. That was a $450,000 savings. But the other thing that speaks to sustainability is anytime I see a volume decline like this, and we talked to our suppliers and we hear others, what I found is that oftentimes, it's highly concentrated. So we just started thinking where -- is there a concentration of the volume decline? There was. It turns out that less than 1/3 of our businesses, 32 out of 98 same-store businesses is where all the volume decline occurred, less than 1/3. And if you look at the total contracts, same-store contracts in that third, it's only 28% of our businesses suffered the entire loss on the volumes. Everybody up -- else, 72% we're actually up. Our West was up. All the decline occurred in the Midwest, Kentucky, North and the mid-Atlantic and Northeast, where there was no winter, no flu season and that's where our businesses suffered. Everybody else didn't have that wind in their face. So my conclusion on that is I don't know if we can repeat this margin. It's -- it was so good. It was also aided by a huge decline in medical claims. We rolled out a new medical program, and I have to give some kudos here to Lorie Parmeter and her team of HR people, they rolled out a new program that made our people more accountable for their spending, given all that's going on in health care, and it made a huge difference, a huge difference. So we had less medical claims and less utilities and less extra expense related to the strong traditional winters that offset, to a large degree, the volume decline in only 28% of our businesses. So I do think you're going to see a sustained high-performance. Will it be this good compared to the year before? I can't promise you that, Clint, but you can put it in the bank that we're not going to be volatile like we were before.

Clint, this is Bill. Again, part of our Funeral Field EBITDA, our acquisitions, the last 3 acquisitions we made were not part of our operations for the full quarter. In fact, one of them only joined us late in March, the other one late in -- and one other one late in February. We were still up 207% in Field EBITDA in acquisitions. So those businesses will be with us for the full quarter. We have one additional acquisition for sure that we will close in the second quarter as well. And we did see some unusual trends relative to same-store volumes in those new acquisitions as well. So we have a lot going for us in that particular category. So I'm looking for our Funeral Field EBITDA to be very strong moving forward. And as mentioned...

Yes, I guess, when you say unusual trends in same-store, you mean they were much better than...

Favorable. Favorable. Right. They were favorable. And as you know, we have conditioned some of these acquisitions and looked at them in that regard so we're looking for that.

Should we expect the deal that you're -- that you are anticipating closing in the second quarter to contribute about on a comparable basis to the Georgia deal that you recently completed?

It won't be quite as much as the Georgia deal, but it is a very good acquisition and it's not that much smaller.

Okay. And I guess the second quarter is also -- it's always a big quarter for the Cemetery. Mel, I know you spoke to that just a second ago. But I'm just wondering as you sort of rebuild your business there, I mean, how do you expect that to impact your results in this upcoming quarter?

Well, April was pretty good on our Cemetery sales, pre-need sales, best so far this year. May of course, Memorial Day, I would expect to be a good month. And we got a lot of momentum going in the cemeteries and the seeds have been planted and teams put together, it takes a little time along with product. But I'm encouraged, very encouraged by what I see there. And I think -- I don't think we'll back up in the second quarter a little bit like we did in the first quarter, but I think it'll be additive by the time we get through the end of the year and it will get better during the year.

Clint, it's Bill again. The second quarter offers some tough comparisons. We've got to perform and stay on our game in the second quarter. When we reached the third and fourth quarter, the comparisons become very much easier and we're highly confident as we look out for the whole year.

Okay. Good deal. And last question here, I know the run rate for your withdrawable trust income appears as if it would be a bit higher than the $1.5 million to $2 million that you projected in your guidance. I mean, are you all expecting it to be less in the next few quarters?

What we've done there, Clint, is we made this rotation starting August 8 of last year and we had to realize $7 million or $8 million of losses in the equity to get them over to fixed income. Now I will tell you we've more than made up that -- those losses by gains in what we bought in the fixed income, now we have the income -- recurring income plus the gains. Because we bought them so cheaply at that time. We've done some more rotation here in April. We're doing a little bit more in early May, getting out of our remaining cyclicals, and it's not much but they do have some losses. So that might temporarily show a slight decline in the withdrawable trust income but it won't stay that way and then it will normalize and be very predictable. And we're still growing the fixed income portfolio, it's -- we're about 80% now, 17% equities, I think at quarter end we were 19% equity. So in the equities we have our -- we have 7 core equities and we have a small but a substantial portfolio at these long-term bank warrants, TARP warrants, just in a couple of banks, the best banks. So they are already in the black. So we think our portfolio is uniquely designed to benefit our company and our Field operations going forward, no matter what happens in Europe or anywhere else to be honest, because our credits are good. We've never had a default.

And our next question will come from Nicholas Jansen of Raymond James.

Just 2 quick questions. First on cash flow. You obviously had a very good consolidated EBITDA performance in the quarter, but cash flow was perhaps a little bit lighter than what we were looking for. So maybe any commentary on cash flow. And then secondly as you guys have updated the standards model in the Funeral side, what's kind of the one thing that you think has really made the biggest change under the new standards model versus the other?

Let me take your last question first. What we did, that it had not been updated really since '07. And it had been gunked up a little bit, I'd been out of operations since then. And there've been a few little things thrown in there, wrinkles here and there, conditions on that standard on this one. And I think -- I just think over time, it became a little bit too complicated, and people were focusing on 1 or 2 and not looking at the big picture. And so what we did was take a step back. And your portfolio changes over that period of time too, and the way this works is the standards of certain businesses are the same across the country no matter what geography. But the 2 criteria that -- now we changed the groupings. So we put everybody in the group depending on their size, that's the number of funerals a year, only the funerals they perform, not pre-need sales or anything like that. And then the other criteria is the average revenue per contract. Those 2 things really define the profile of a Funeral business. And so the standards are -- we have 4 groupings depending on the size and the average revenue. The standards are different for each grouping and the main ones that are different are the gross margin, or the SMB [ph] as a percent of revenue. For example, if you have a high Cremation business, the SMB [ph] as a percent of revenue is going to be less. Have a high Service -- Traditional Service business, the SMB [ph] will be higher, requires more people, more service. So those are the kinds of things that we look at so that everybody is in a group they can relate to, and…

Nick, this is Bill. Looking at cash flow, number one, our cash flow numbers were up slightly for the month. And I think they will continue to improve throughout the year. But our free cash flow in the first quarter was up 24%. We may be a hair bit conservative on our cash flow projections that we have in our outlook but the reason -- some of the reasons for the difference obviously is the fact that the withdrawable trust income was projected slightly down this year and compared to last year where we had a huge amount of withdrawable income from our trust. So that's the only difference, but our cash flow remains exceedingly strong. And we've taken a fresh look at what is free cash flow and so I'm pretty confident that you'll be happy with our cash flow numbers.

That's [indiscernible] maybe just one last one in terms of guidance for the next rolling 4 quarters. It doesn't -- going through your comments it doesn't look like you've assumed that the, kind of, the strength of the margin in the first quarter continues so there could perhaps be upside, if some of that does weaken through on the next 4 quarters. Is that correct?

We have opportunity for improvement. On this outlook, we're trying to present something that's realistic. Those are huge increases when you look at them. And hopefully we'll be looking at that on a quarterly basis as we move forward so that you'll be getting a fresh look all the time. So we're pretty excited.

[Operator Instructions] Our next question will come from Duncan Brown of Wells Fargo.

Just wanted to go back to the M&A pipeline. I think you said maybe you're looking at $30 million worth of opportunities now. Can you give us the timeframe on that? Is that something you guys think you can close on this year or is that over the next maybe 2 to 3 years?

No. We're looking at -- if we could do every acquisition, we have in-house today, it would be well in excess of $50 million. But, I mean, we have to make certain that we do meet our criteria on these acquisitions. They're the lifeblood of our funeral operation in terms of additions to our Field EBITDA numbers. We're looking for unusual situations that did -- a model that I would be happy to discuss with any of you, if you'd like to learn about it. I know some of you know what we're doing. But what I said was I thought we could easily do $30 million this year and we're not going to have a budget for how many acquisitions we can do nor will we make foolish acts -- give some kind of foolish guidance to you that says what we're going to do because it depends on the businesses, the opportunity and our ability to close. In the last quarter we did mention that the kind of Westbury acquisition in Georgia. We closed that transaction in 31 days. We're concentrating not only in acquiring them, but we have to integrate them into our system and we have to keep performance going. Otherwise, you don't get 40% margins in your acquisition businesses. That's hard to do when you're bringing a new business online and again, as Mel pointed, a test of the people in the businesses that we did acquire and that's what we're looking for. But we are looking for acquisitions, we're -- that's part of our business plan and models and we will -- we're actively soliciting and we do have a lot of opportunities right now to make selections in that regard.

What we find, and I have to tell you, when Bill joined the company in September put together -- and went to work on revising and updating this strategic acquisition model, I had no idea that what he would come out of that with in a very short amount of time was the most advanced statistically 10 years of data, demographics, a ranking system of 1 to 10 and the 3 deals that he put through that system all ranked very high. And what that means is that not only do they have a history of growth, organic growth but volumes average, they dominate their market. There's upside and it's very predictive of what will happen over the next 5 years. And the best part of all is these are owners who are primo, primo quality people in their communities with reputations to match. And they've been running their businesses much like we have designed in the standards operating models. So when they look at this model, even though they didn't know about it specifically, they totally comprehend it and fall in love with it. And say, this is where we belong. And so they are already operating like that. So there's really no challenge with changes. And I think this model, and Bill's team now has been very selective, and though we have all this activity in here, it's now easy to screen what really doesn't work, what -- there's no guessing. So what that does is you're known by the company you keep and it attracts even more quality. Quality of like kind want to join quality of like kind. So we're finding, the word is getting out in the industry and we're getting a lot of calls. Capital-structure wise, I mean, we don't have a spending budget. We could spend $100 million if we wanted to but then we'd be just stupid again, so we're not going to do that.

Okay. All of that's very helpful. I guess following on to that, obviously the focus is finding the right acquisitions but can you give us a flavor of where purchase multiple stand today?

When you say purchase multiple?

Like multiple to EBITDA?

Oh, well, EBIT -- that's just one criteria. We really don't -- we don't buy on any kind of EBITDA multiple. We buy based on cash return on funds invested, on the discounted cash flow model and an earnings-per-share contribution model, as well as criteria that relates to revenue growth, numbers of funerals and control of expenses and quality of assets that we're acquiring. So there's a lot of criteria going but the financial model is the discounted cash flow model, it's not a price times EBITDA multiple. They all -- they come out all kinds of numbers when it relates to EBITDA so...

Let me try to answer your question a different way. With what Bill and his team have created and are now soliciting in certain areas of the country and they do focus because what they're finding is the profile that fits this model is not everywhere in the country. There are places in the country where it's more concentrated. I don't want to go into where that is, that's proprietary. But whatever the price, let's say that comes out of the model and it is a valuation model as well, you could say there's an EBITDA multiple there but that's not the important part. Whatever that multiple looks like today, in 5 years, it will be a lot less with more certainty than what we used to do before. That's how you create value over time.

Right. We're looking most of the acquisitions we're getting our purchase price back in 5 years. And the businesses continue to get better every year that we own them, with the first year probably being the worst performance year, even though it is a very good performance year.

So maybe the way we should think about it is a 5-year cash on cash? Is that the right way to think about it?

That's close to it.

Right. 5 to 6 years, closer to 5.

Take out the 6, that was me.

We'd be happy to go over that with you -- with any of you that wants to sit down with us and talk about it, we're -- we'd be happy to show it to you.

It's much better if you see it and applied -- see him apply it to a specific businesses because then you will totally get it.

Sure, that'd be good, I'll take you up on that. And then the last one for me, I think, you bought back some stock in the quarter. Can you remind us what your authority is from the board. And then your outlook on share repurchases going forward for the rest of the year?

We're -- we have been buying our stock through the first quarter and we have not rescinded any programs in that regard so we're continuing to buy. We bought slightly under 600,000 so far this year, probably somewhere below average price of $6.50. We still have some room on our $5 million approved amount from our board. We'll be discussing that later in the year as we move forward and that price and what we do there will obviously be dependent on what we think the value of our company is.

We think our stock is cheap but we're biased.

And that'll conclude our question-and-answer session. I would like to turn the conference back over to Mr. Payne for any closing remarks.

Bill and I appreciate, as well as everybody in our company, the interest in what we're doing. And I would say our new beginning is off to a great start. It is only a beginning of the new beginning and there's a lot more to come and a lot more celebration to occur. I can promise you that. Thank you for calling.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.