Good day, ladies and gentlemen, and welcome to the Carriage Services Second Quarter 2019 Conference Call. [Operator Instructions] I would now like to turn the call over to Viki Blinderman, Senior Vice President and Chief Accounting Officer. You may begin.

Thank you and good morning, everyone. Today, we’ll be discussing the company’s second quarter results for 2019. Our related earnings release was made public yesterday after the market close. Carriage Services has posted the press release including supplemental financial tables and information on the Investors’ page of our website. The audio conference is being recorded, and an archive will be made available on our website later today through August 6. Replay information for the call can be found in the press release distributed yesterday. On the call today from management are Mal Payne, Chairman and Chief Executive Officer and Ben Brink, Chief Financial Officer and myself. Today’s call will begin with formal remarks from management followed by a question-and-answer period. Please note that during the call, we will make forward-looking statements in accordance with the Safe Harbor provisions 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 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 expectation. Furthermore, during the course of the morning’s call, we will reference certain non-GAAP financial performance measures. Management’s opinion regarding the usefulness of such measures, together with a reconciliation of such measures to the most directly comparable GAAP measures, for historical periods, are included in the press release and the company’s filings with the SEC. Now, I’d like to turn the call over to Ben.

Thank you, Viki. Carriage Services’ comparative year-over-year financial and operational results for the second quarter were simply fantastic and showed tremendous progress from where we were a year ago. Our performance in the second quarter and year-to-date is in line with our expectations we laid out in January for improved performance, both on a relative basis and a comparative basis as we progressed through our 2019: Back To The Future-A New Beginning-Part II. And while we have much to be proud of by the improved performance of many of our funeral homes and cemetery businesses, we recognized that portions of our portfolio are below minimum standards achievement through the first six months of the year. Our teams across the company are highly focused on improving results in these businesses over the remainder of the year to ensure we exit 2019 with high performance standards achievement momentum more broadly across the company. And now, I’ll review our second quarter and year-to-date results. In our press release and in my remarks, we referred to both our trend reporting as we normally stated and pro forma results normalized for the restructuring expenses started in the fourth quarter of 2018, the loss of a large cemetery management contract in the fourth quarter of 2018 and the increase in interest costs from our balance sheet recapitalization we completed last May. I will primarily refer to the pro forma results as we believe it provides investors with the most accurate picture of the operational improvement that has taken place in the first six months of the year and also was the most accurate reflection of the current earnings potential of Carriage. So for the second quarter of 2019 compared to last year, total revenue increased $5.5 million to $67.8 million. Total field EBITDA increased 16.7% to…

Thank you. And at this time, I am very honored to announce our High Performance Hero Managing Partners for the second quarter. Dean Marnell, Covenant Funeral Home; Fredericksburg, Virginia, Victor Logiudice; Thomas F. Dalton Funeral Homes; Floral Park, New York; Jason Higginbotham, Lakeland Funeral Home; Lakeland, Florida, David Keller; Lane Funeral Home, Coulter Chapel; Chattanooga, Tennessee, Michael Redgate, Redgate Funeral Home; Trumbull, Connecticut, Bob Prindiville, Bright Funeral Home; Wake Forest, North Carolina, Courtney Charvet, North Brevard Funeral Home; Titusville; Florida; Tim Hauck, Harvey-Engelhardt Funeral & Cremation Service; Fort Myers, Florida; Brian Binion, Steen Funeral Homes; Ashland, Kentucky; Jim Pitts, Buck Ashcraft Funeral Home; Harlingen, Texas; Cyndi Hoots, Schmidt Funeral Homes; Katy, Texas; Kevin Latham, Maddux Fuqua-Hinton Funeral Homes; Hopkinsville, Kentucky; Christine Amittone, Greer Family Mortuary; Alameda, California; Larry Davis, Bunkers Mortuary and Cemeteries, Las Vegas, Nevada and Anthony Rodriguez, Higgins Chapel; Antioch, California. Congratulations to all. Now, I’m going to turn the call over to Mel.

Thank you, Viki. Thank you, Ben. I’ll start my remarks with a note I got from one of our Board Members. We had a Board Meeting yesterday, a Board Dinner, Tuesday night. And this is from James Schenck, James joined our Board in 2016. He is the CEO of PenFed, out of Washington. It’s a large credit union, started in military. He’s been consolidating the credit unions across America and he’s ex-military. He’s went to Harvard, got an MBA, West Point graduate, and it’s an honor to have him and our other Board Members here yesterday. Without exception, I heard this was the best meeting we ever had. It wasn’t just me and our Board. It was me and our leadership team and primarily focused on operations and what we’ve been doing since the beginning of year and what we intend to do in the third quarter and the fourth quarter and then after that the next four years. So, there is a lot of work to be done. There is a lot of good work to be done. There has been already a lot of work that has been done. It is in the results. James’ note says, what a difference a few quarters make, when you have the team energized and all rowing forward together. Well done. What does he mean by that? I’ll read you my take on the front page of our earnings release, on the bullet points for the second quarter and six months year-to-date. This take is the reason I got into this business in the first place. I was a financial guy. In the second quarter, we had $4.5 million of consolidated EBITDA increase, 30.3% on an 8.9% increase in revenue. If you divide the $5.5 million increase in revenue, divided that by…

[Operator Instructions] And our first question comes from the line of Alex Paris from Barrington Research. You may begin.

Good morning, Mel, Ben and Viki. This is Chris sitting in for Alex.

Hey, Chris. Good morning, Chris.

Morning. So it seems that the seeds have been planted and you’re beginning to see a harvest at Carriage. As we look at the leverage that you’re seeing across funeral and across cemetery, you mentioned the 23.8% growth in EBITDA on the 11.3% revenue growth in cemetery, as well as Mel mentioning the 81.8% conversion into consolidated EBITDA. How should we look at these metrics, and what’s the key to maintaining and growing upon this foundation that you’ve set here?

Yes. This is Mel. The 2017 year, 2018 year, we began to stumble operationally in revenue. And we get a lot of questions about cremation secular trends in our face and you can’t grow revenues in funeral business and blah, blah, blah, and that kind of thing. What we did toward the last quarter last year is we rebooted our Standards Operating Model. And it had grown outdated and some of the metrics were rigid. And very difficult to achieve, which is demoralizing to your teams in the business. That’s how they’re being judged. And so we changed it up to be oriented toward compound revenue growth over three years. And what you’re seeing is the traction by our best managing partners across the company, supported here by analytical groups and so on and then in the field by operational groups. And they’re adjusting behavior, they’re adjusting leadership, they’re adjusting key employees, so that they go after more market share. We don’t tell them how. They have to figure it out. They know what the metrics are. And so we have a whole new dynamic across the portfolio with different businesses and different markets getting traction at different times. And there’s still a lot more of that to come. And I think over the next year, certainly two years, we’ve been through this before. When you change the metric of high-performance standard to something that incentivizes and rewards revenue growth, we already know what the normalized range of earnings should be. So, what you’re seeing is more of that. And when more revenue growth over these individual businesses that have high and definable fixed cost, you’ll see a lot of that incremental revenue converted to cash EBITDA. At the field level, we control our overhead, it falls right down to the shareholder level at consolidated EBITDA. So, I think you’ll continue to see that incrementally over time. Of course, we had very weak comparison. I mean, 121% for the six months is ridiculous. What we need is more revenue and convert about 70% of it into EBITDA and have that sustain over five years. And I think that’s more like it. And I think that’s what you will see.

Thank you, Mel. That was very helpful. And Ben, you mentioned that there were portions of the portfolio that aren’t achieving the same standards as the larger portion of the portfolio. What’s their progress in achieving these standards and how impactful could this be, assuming they achieve or even outperform the standards? Or they don’t?

Yes, Chris. I think it’s a lot of what Mel just talked about, the timing of when traction takes hold and changes that we put in place at the local level and some of our key managing partner positions, have only happened in the past couple months. So, those changes and progress will continue. I think we look at the portfolio as a whole and that underachievers are folks that haven’t really seen that traction in their business and performance can be meaningful and impacts our results in a meaningful way as we move forward in getting up to that 50% minimum level of standards achievement.

Yes. This is Mel. Hey, look, yesterday’s Board Meeting, we played a one minute video. I had the entire operating team in there with the Board and all the support operations people here in the home office. In that one minute video was Nick Saban. I don’t know how many of you out there follow Alabama Football. But it was a one minute video of Nick Saban talking to a group, I think, of young people going into business or maybe they were already there. And he started off by saying, look, we’re about to get into spring training here at Alabama and our goal in spring training will be to sort out the players who should be on the team and have a seat on the team bus and then to get that person in the right seat on the team bus and to get the wrong people off the bus. And he said, look, until you do that in any organization, whether it’s football, baseball, basketball, any company, you will not have the team chemistry, you will not have the high-performance culture that will lead to a winning season and then a legacy of winning over time, so that you recruit the best talent. What we will see now at Carriage is that kind of process. And it will be the people who see the opportunities with these standards as upside rather than fearful and risk averse. There will be some turnover. This is normal over time. And when we did this, we all sat around and said, this will lead over time to pruning the low-performing businesses and the low-performing leaders. This is the natural process of how a company goes through, what we consider a good journey. And we’re back on that. And this time we’re not going to get off of it.

That’s great. And then I had one minor bookkeeping question. I noticed that maintenance capital expenditures ticked up in the quarter. How should we anticipate this line item moving forward?

Yes, Chris, that’s just really just timing of when we’re getting the stuff done. Yes, we continue to think maintenance CapEx is between $9 million and $10 million for the year. And if I were to guess one way or another, probably closer to $10 million.

All right. Thank you. That’s all I have for now.

Thank you. And our next question comes from the line of Komal Patel from Goldman Sachs. You may begin.

Hi. Thanks for the time. Maybe just a big picture. You’ve clearly shown signs of turnaround. First, what inning of the transformation would you say you are? And kind of second or maybe more importantly, heading into the back half of the year, what’s kind of left on the to-do list? Or is it more just about seeing some of these new initiatives flow through the business? Just trying to get a sense of what does management still have on its way?

This is Mel. We have a lot on our plate and we don’t call any of it initiatives. We consider the company initiative-free. But we do have simple concepts. First, to then, what, you’ve got the wrong who in a business or in the corporate office, support, whatever, get the wrong who off the bus and you get the right people in the bus. And the what, first to then, what turns into high performance? Almost when you get the right who, it’s almost like going from a dark room and turning on a light. You don’t have to wait years to see whether it’s the right who. Performance pick -- ticks up right away, that’s the process we’re going through in some of the businesses under minimum standards. You can’t see it in the second quarter results, but it’s still there. That just shows you how much opportunity is still left. And I would say, I had the team, we went through the portfolio review and I said, hey, let’s all just give an estimate of where are we in terms of the earnings capacity, the maximum potential? We were at 100% everywhere. Where are we right now with the portfolio? Realizing some places are way up there, some places are down and we got too many still down. And one of our young partners, acquisition and operations analyst said 70%. I said, I agree with that. So, I think by year end, we’ll be at 85%. That’s a lot. And that doesn’t mean we can be at 100%. You never will be at 100% with a broad portfolio of 200 businesses. But if we get to 85% and then get a steady state, sustainable 90%, and then over time prune the ones and it will be very big businesses out the back door. So, we have higher revenue profile in the company and a higher margin profile. I mean, 29.3% for six months is amazing, consolidated EBITDA margin. Our maximum was 29.7% in ‘16. And here we are in the middle of turnaround six months at 29.3%. That’s pretty impressive. Anyway, that’s where we are.

Got it. Thank you. That’s super helpful. And then maybe just a second question. Just to check in on the M&A pipeline. Given the progress that’s kind of coming through in some of the core business, has your appetite for deals changed at all? Or maybe separately, has your confidence in being able to extract even more synergies kind of increased with a recently acquired businesses, given all the work that you’ve been doing?

Great question. That’s a wonderful question. As one of my Board Members, when the axe fell in the ditch last year, that’s what he called it. And I said, yes, you’re right, and my goal is to get out of it, getting the axe out of the ditch business. We wanted to very carefully work and focus on operations. And only until we were sure and confident that the trend was our friend and there was a lot more improvement to make and that it wasn’t. If it was when we make it and it’s faster, is better than slower and that’s the process under way right now. Only then would we consider capital allocation toward something other than buying in shares because they’re so cheap, paying down debt, leverage. And as we speak now, not everybody in this industry is watching the scoreboard and the stock price crash. And your reputation, even though we might have been tarnished externally, it hasn’t been tarnished in the industry. So, there are still people as Ben mentioned out there, really quality businesses that we’re maintaining relationships with. It’s all a matter of timing. And at some point, they will need a succession plan. And we do have active relationships nearing those kinds of decision points and so we just want to pause and get our operating act together and then stay tuned.

Thanks so much. Appreciate the color.

Thanks, Komal.

Thank you. [Operator Instructions] Our next question comes from the line of Chris McGinnis from Sidoti. You may begin.

Good morning. Thanks for taking my questions and a nice quarter.

Thanks, Chris.

I guess just to follow-up maybe on one of the prior questions. Now, you’re just talking about 2016 when you hit the, obviously the industry leading numbers. But what were you operating at that versus where you’re at now? I guess, you are [indiscernible] maybe reference that a little bit at that point? Thank you.

So Chris, kind of as we look in comparison to where we were back in 2016, we still have, like we said, lot of work to do, progress still to be made in getting that, moving that 70% into that 85%, 90% range that Mel just talked about. And I think as we look back at 2016, you look at the margin performance and across our portfolio, even with our results year-to-date in the second quarter, there is still progress and work that we have to do. So, you can pretty much look back at that margin profile of our field level businesses and you can see what the goals are, what we’re trying to attain to at least next end of the year and into 2020.

Yes, Chris, Mel, I look back and chuckle because in my history of business in following various companies, including some I’ve been in, anytime a company builds a building after they get so good in this and that, they seem to hit the ditch. They get written up in good to great or built to last, then they don’t last and then they turn anything but great. And when I wrote that, there was an industry milestone never before achieved 29.7%. Then everybody wanted to know when did you get it into 30s. Well, I look back and laugh now, it was bound to go down, no matter what, because I wrote about it. But here’s where we are. I look back on that and then I look at the company as we are right now and the accelerating progress on the leadership team across the company at all levels and in a home office. I look back on that 29.7%, that’s not a standard that we were that proud of. We’re going higher. I just don’t want to promise when.

Sure. No, I appreciate that. I was just wondering of that portfolio mix and that changes, but obviously nice quarter of growth.

We have a better portfolio today. With the exception of some smaller businesses, we have some larger businesses, higher margin businesses, higher revenue growth profile. We have a better portfolio today than we did then and it’s going to be improving very rapidly, both in the performance of the existing portfolio and when we do start making acquisitions. I think there’s some really top notch businesses that will really add to the profiles. So I think, we look at things over a five-year timeframe and this was the turnaround year. You can see the fruit is beginning to show up to be picked. There’s a lot more of that. And then I think, I told the team, the next six months, a lot of work. We head in 2020, we’ll have more visibility, we’ll have more predictability. Then we’ll start to look out over four years or five years and put a game out there for people or roughly right scenario about what the company might look like over time. But we’re not ready to do that.

Great. Thanks for taking my questions. I appreciate it and good luck in Q3.

Thanks, Chris.

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back to Mel Payne for closing remarks.

Thank you very much for listening to our call. We invite you back for really nice performance meal every quarter, every year from here on. And I want to thank all those High Performance Heroes out there that didn’t get their name called today. You will be next. Thank you very much.