Ladies and gentlemen, thank you for standing by, and welcome to the Carriage Services’ Third Quarter 2019 Earnings Webcast Conference Call. I would now like to turn the conference over to your speaker today, Viki Blinderman. Please go ahead, ma’am.

Thank you and good morning, everyone. Today, we will be discussing the company’s third quarter results for 2019. Our related earnings release was made public yesterday after the market closed. 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 November 3. Replay information for the call can be found in the press release distributed yesterday. On the call today from management are Mel Payne, Chairman, and Chief Executive Officer; Ben Brink, Chief Financial Officer; and myself, and our special guest today, Dewayne Cain, founder of Rest Haven Funeral Home and Cemetery. 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 provision of the Private Securities Litigation Reform Act of 1995. I’d like to call your attention to the risk 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 expectations. 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 the 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 Mel.

Thank you, Viki. After a full year of dramatic operational changes that have renewed, revitalized and reenergized our company at all levels, especially in our wonderful Funeral Home and Cemetery businesses, we have returned to execution of our 10-year growth strategy and vision of affiliating with only the best remaining independent businesses in the best remaining strategic markets in the country. On October 9, we partnered with Lombardo Funeral Homes, and Buffalo, New York, whose founding by Joseph Lombardo Sr., dates to 1907. Under the visionary leadership of Joseph P. Lombardo since 1984, Lombardo Funeral Homes has grown from a single funeral home serving about 40 families annually to four funeral chapels, serving approximately 2,000 families this year, and is currently the largest funeral service provider in Western New York. Joe, welcome to the Carriage family of elite funeral and cemetery businesses. Institutional investors, those of you on this call, often ask us about the competitive dynamics in our industry, related to why the very best independent family business owners, which use Carriage other than other consolidation companies with deep financial pockets. I’m not sure that our answers to investors are often any better than 50/50, it cleaning up this mystifying matter. So today, on this earnings call, in a historical first for our company, I’m extremely honored to introduce Dewayne Cain, founder and Visionary Leader of Rest Haven Funeral Home and Cemetery, in Rockwall, Texas, which has grown into a premier funeral home and cemetery combination business, serving the Dallas-Fort Worth Metroplex. From its primary Rockwall location, Rest Haven over the years expanded to full-service funeral homes in nearby Rowlett and Royse City, and includes its own on-site Northeast Texas cemetery, The Flower-Box, Pet Memories, and Care Center. The entire portfolio of Rest Haven businesses currently provides the same attentive personal service to over 3,000 families statewide each year. We closed our partnership affiliation with Dewayne in Rest Haven, yesterday and last night, my wife, Karen and I, and a large contingent of the Carriage senior leadership team, hosted Dewayne and his wife Anne, and his Rest Haven leadership and advisory team at a celebratory closing dinner. Dewayne called me recently to let me know that he wanted to help our company grow by explaining to other high-quality funeral and cemetery business owners why he chose Carriage as a succession plan solution over the large number of other consolidation companies that wanted to acquire Rest Haven. I immediately accepted Dewayne’s offer and suggested he could begin this important new role for our company by explaining his reasons for choosing Carriage to all of you listening on this call. Dewayne, my friend, and new partner, the floor is yours.

Thank you very much, Mr. Payne. I first met Mel Payne in my offices several years ago, and it was during that time that I’ve learned what his philosophy was for acquiring funeral homes and improving the performance of those funeral homes. And I can tell you, Mr. Payne, that I was impressed then, I’m still impressed now. Approximately 12 months ago when I decided that it was time for my wife and I had to consider a successor, we made that aware to the market and we had approximately five firms that showed an interest and submitted the bid. After much thought and consideration and prayer, we chose Carriage to be the company that would build upon the reputation that we had spent 50 years establishing. In concluding, I would like to say something sincerely from my heart and that is that I feel blessed and honored to have Mel Payne as my friend and Carriage as my partner.

Thank you, Dewayne. That message and those words mean a lot to us, partially and as a company, and they were clearly from the heart. Last but not least, in my formal comments, I would like to wish my dream-girl wife and dream business partner, Karen, a happy 36-year anniversary, another Carriage historical first. Karen literally did the heavy lifting of raising our son and daughter for the first 15 years of Carriage, while I was under feel learning the business from our best funeral home and cemetery operators, who were the gift just keeps some giving. Thank you, sweety girl for being my partner and for being the mother of our children, when I could not be there. I love you. Thank you.

All right. We’re going to continue on a high note. I am really honored right now to announce the High Performance Hero Managing Partners for the third quarter of 2019. Ben Friberg, Heritage Funeral Home, and Crematory, in Fort Oglethorpe, Georgia; David DeRubeis in Cody-White Funeral Home in Milford, Connecticut; Courtney Charvet, North Brevard Funeral Home in Titusville, Florida; John Appel, Garden of Memories Cemetery in Metairie Louisiana; Brian Binion of Steen Funeral Homes, Ashland, Kentucky; Deanna Kelly, Havenbrook Funeral Home, Norman, Oklahoma; Brian Sisson, Jay Chapel Funeral Directors, Madera, California; Jenny Chen, Grant Miller Chapel, Oakland, California; Alan Kerrick, Dakan Funeral Chapels, Caldwell, Idaho; Trent Nielson, Hennessey Valley Funeral Home and Crematory in Spokane, Washington; and Nicholas Welzenbach, for two businesses; Darling & Fischer Funeral Homes in Los Gatos, California and Los Gatos Memorial Park in San Jose, California. Congratulations to you all. I’m going to turn the call over to Ben.

All right. Thank you, Mel, thank you, Dewayne, and thank you, Viki. Our third quarter operating and financial results demonstrated tremendous progress and gathering momentum as we finished Carriage Services 2019 back to the future, a new beginning part two. At the beginning of the year, we communicated to investors at the following milestones will be the most important keys in determining whether the rapid and evolutionary changes made in the fourth quarter of last year are being executed across our entire company. They were a return to organic revenue growth, significant progress in field and consolidated EBITDA margins towards what we achieved in the 2015 and 2016 timeframe, and a return to our growth strategy by partnering with the best remaining independent businesses in large strategic markets. Our results in the third quarter and our recent acquisition announcements demonstrate the incredible progress we have made in all of those areas in just one year. Consistent with how we presented our previous quarterly results, in our press release and then my remarks for our third quarter and year-to-date performance, we refer to both our churn reporting and pro forma results normalized for the restructuring expenses that began in the fourth quarter of 2018, the loss of a large cemetery contract at the end of the third quarter of last year, the increase in interest cost from our balance sheet recapitalization completed last May, and the effects of two smaller divestitures that occurred during the most recent quarter. I will primarily refer to the pro forma results as we believe it provides investors with the most accurate picture of the significant operational and financial improvements that have taken place in the first nine months of the year and is the most accurate reflection of the true earnings power of Carriage. In…

[Operator Instructions] And our first question comes from Alex Paris of Barrington Research. Your line is now open.

Good morning, everyone. Congratulations on a great quarter, a great rolling four-quarter outlook. I wanted to say welcome aboard to Dewayne, and thanks for being on the call. And a happy anniversary to Mel and Karen.

Thank you, Alex and thank you for all of your support.

Thank you. So also, I’m very happy to see the activity on the M&A front for a couple of reasons. First, it signals that what you’ve done operationally is largely complete or at a point at which you’re comfortable on restarting M&A. And then with the M&A specifically focusing on these best remaining businesses that are large in the best-remaining markets with the potential to grow, and I wanted to dig a little bit more into Dewayne’s business, Rest Haven, if you don’t mind. I see that Rest Haven through its three funeral homes, cemetery, and ancillary businesses served 3,000 families last year. My question is just to get sort of an idea in terms of size, what it is his pricing versus the corporate average at Carriage Services price revenue per call is what I’m asking?

I’ll answer that. Dewayne is one of the great innovators in our industry. He is in a couple of lines of business that we are not in, a bit intrigued by these lines of businesses. And I guess Dewayne follows when it gets intrigued by something, he goes and experiments and tries it out and studies it and does a lot of trial and era until he gets it right. So, he is in the Pet Memories business. We’ve looked at that around the country. We haven’t found many people, who have successfully figured it out the emotional connection between a pet that is dearly loved by a family and the family itself when they have a family member die. Dewayne has that figured out and he has put in place a large Pet Memories business that has been growing very rapidly in the Dallas-Fort Worth area, beyond the Rockwall area. He also is an innovator in software. He is into – he created his own proprietary software for online cremations and has spread that business into three or four locations. If we get, Dewayne, is it three or four now? And that’s quite a growing business. The average is very – as you would imagine, smaller. And so we’ve decided on a reporting methodology, which I haven’t seen any example of, but we’ve all talked about it, because these are two new lines of business for Carriage. The overall revenue right now in those two lines of business are not the greatest share of revenue and the average revenue per unit of volume is small. So, we’re going to break that out in our normal reporting. So, it doesn’t get co-mingled with our normal funeral and cemetery business, including normal cremation business, which Dewayne has a great cemetery business in the Rockwall area that is separate and distinct. And so we will be putting more clarity on the various businesses, Alex, as we report and integrate. And you will get to see that and probably could ask us questions when we have more clarity on our answers in one or two quarters. But the great majority of the revenue here is his core, funeral, and cemetery combination business and the two funeral homes, and the cremation business that he has got in the local area.

Good. Well, thank you. I appreciate that additional color and I’ll be patient for the rest of the detail. Next question in related, I’ve already had conversations with Ben and Lombardo, which is also an awesome acquisition in my opinion. I wanted to ask you a little bit about the LOI. Is this a big one as well in keeping with recent activity Lombardo and Rest Haven?

Yes, this is a big one. It’s a primo combination business in the midst of our best portfolio of cemeteries in Northern California. We’ve known about this business for 25 years. When we first went into California in 1997, Mark Wilson, who owned our largest cemetery and then later acquired our second largest cemetery in San Jose. These are our two biggest and best cemeteries. This one is right there in the middle of that is just the prime. When I ask our people about it and check it out, and we have some people, who were there, it’s a – I guess I can say this, it’s part of the StoneMor portfolio and their divesting and under the control of a new chairman and – Executive Chairman and he is restructuring that company, shrinking it. We think he is doing a great job. So, we went through the possible divestitures and out of everything in that company, this was the premier business. And our people are just gaga, overheading it in our portfolio. And it will close in very early January to a large cemetery first-class funeral home operation. And it will fit into our Northern California portfolio. It won’t miss a beat.

Great. Well, thank you for that. So last question, I think right now for Ben. I guess. Ben, you’re providing the year-over-year comps, because it’s more relevant on a pro forma basis. Are you making available the pro forma quarters from last year and this year? Is it available on the website or anything just for forecasting?

It’s a question related to the acquisitions?

No, more of the...

No. Not – yes.

It’s more of the pro forma lookbacks. Alex, we currently don’t have them posted on the website. We do list them the results in the press release. We will go ahead and post those on the website. Thank you for that suggestion this afternoon.

Good. That’s very helpful. Thank you. And then last question, when can we expect – given your progress on the operational restructuring and the restarting of your M&A activity as we had hoped, when should we expect a new long-term roughly right scenario outlook from Carriage Services?

That is a great question, Alex, and thank you for asking it. We’ve discussed that internally, and with all this recent activity and what’s to come, we will put out a roughly right scenario at least through 2023, maybe through 2024, either at the beginning of the year or after the first quarter. It won’t be later than the first quarter when we have the fourth quarter, because the fourth quarter, we still – we’re making a lot of operational moves in the third quarter, and everybody in the company is totally focused on trying to achieve a normalized sustainable performance. Even though the third quarter and the second quarter were huge improvements, it’s not good enough for company and the people in the businesses and home office, who want to be the best fits and want to return to our prior level of performance in 2015 and 2016. We want to try and get real close to that normalized level in the fourth quarter. And then if we need to tweak anything, we’ll do that, including some de minimis divestitures has been pointed out. But we want to really go forward in 2020 with a clean, very high broadly, deeply performing portfolio of funeral homes and cemeteries, and really make this next five years the sweet spot for value creation for this company after 28 – 29 years. We want the next five years to be the time when an investor really will look back and say, I should have bought the shares, and I’m sorry, I didn’t, because they did what they said they would do. And I think we’re very close to being – having that vision laid out for you.

Well, that’s great. Thank you so much. I’ll be looking forward to it and thank you.

Thank you, Alex.

Thank you. [Operator Instructions] And our next question comes from Chris McGinnis with Sidoti and Company. Your line is now open.

Hi. Good morning. Thanks for taking my questions and congratulations on the quarter, and all the other accomplishments that you were talked about prior. I just wanted to ask about the guidance or the rolling four quarter, the uplift. How much of that is maybe operational improvement versus the acquired assets over the last week and a half?

I think – I don’t – I can’t really break down the percentage on my head, Chris. I can get back to you on that. But it does include some operational improvement from where we’ve been this year, and we do expect that momentum to continue. And I think it’s a conservative look at bringing these three acquisitions into the Carriage family. On taking into account the integration process that we know we have to go through with these businesses and ensuring that we have – we’re putting out outlooks that we know we can hit.

Okay.

I’ll add a little bit more on the land then, Ben. I think if you look through the fourth quarter and what’s going on in our portfolio business by business, case by case, and you – because we get a lot of feedback on a real-time basis from across the portfolio of business by business. And there are things going on, there are people really want to do better. They really want to contribute to this idea that Carriage can perform at a level that historically has never been achieved in this industry, and that would be a 30% consolidated EBITDA margin. And that’s really, our goal and milestone is to get to that point and beyond. And I think Ben mentioned it at the end of the first quarter of 2019, because of the prior flu season and things we couldn’t control push the prior-year performance a way up. But for the last two quarters, we’ve made up that deficit. And in the fourth quarter, we expect to make a lot more of it up. So, if you were to look out it up, it’s the existing portfolio that it – at the end of the first quarter at a trailing four quarters of $68 million EBITDA. And you would to look at that same portfolio for all of 2020, not the fourth quarter – for all of 2020; I think you could probably get up close to $78 million in EBITDA. So that’s $10 million increase on our existing portfolio. And then you begin to add on the fabulous new businesses that have joined our company to get to the $80 million, what – $85 million to $88 million, or whatever it was Ben gave you is a range. And by the way, that range is not pie in the sky, and we’re done with being overly optimistic.

Yes, that’s a great EBITDA contribution in the quarter two, so the improvement there was pretty significant. Just to touch on the Rest Haven acquisition and some of the other services that offers, does that open up expansion for you as well? I mean, I know, look, the focus is likely on just traditional funeral, but it sounds like they have some other innovations that maybe, you haven’t had in your portfolio prior to this and does that open up options for you as well?

Yes, absolutely. Dewayne and I’ve talked about that as recently as this morning. We’re going to learn a lot from studying these new lines of business. I mean I had other people a pitch me on this, and that over the years, but none of them had the credibility and the track record that Dewayne Cain has. And so we’re going to look a long time ago, I had this idea that we couldn’t be the biggest and we just wanted to be the best. But I had no idea what that meant. And it’s only been a surprise to me over time what it meant was, you have to affiliate with the best and learn from them. And that’s what we just did with Dewayne and his businesses. But we’ll learn about the pet business, we’ll learn about the online cremation business, but we’ll also – this is a big new strategic market for us as is Buffalo. And so when you come into a market like that we’ve never been in before, you assume the reputation of the business and the owner and the people you affiliated with. This truly is the kind of industry, where you’re known by the company you keep, and if you only keep the best company, that’s who you become in that new market. And we fully expect this to lead to other opportunities to grow with other businesses, and to really lead to some possibilities that we can expand upon Dewayne’s pet business and the online business as well.

Great. And then just one last question. It sounds like maybe, the Rest Haven and Lombardo there have been a little bit more – took a long time to close the deal or you worked with them for a long time, where the LOI sounds a little bit different. Can you maybe just talk – I don’t know if it’s too early for you guys to talk about just how that came to – came about on the LOI? Thank you.

Yes. I would rather delay that I will only say that we worked very closely with Andrew Axelrod, Chairman of StoneMor and we think he is doing a great job to clean up that situation.

Yes. I appreciate.

And Chris, I think, we’ll just – as we close that business and announce that acquisition, we’ll speak more to that then.

Sounds good. Thank you very much for the time today and good luck in Q4.

Thanks, Chris. Appreciate it.

Thank you. And our next question comes from Duncan Brown of Wells Fargo. Your line is now open.

Hey, good morning, and thanks for taking the question. I had to hop on a little late, so I apologize if this has already been addressed. But it sounds like certainly back doing more M&A in the pipeline, sounds relatively robust. I was wondering if you can help us think about, remind us sort of leverage targets, where you want to be and then also sort of plans for funding, if you get to – continue to clip more deals.

Yes. What we communicated in the process of the balance sheet recapitalization was that our target was to operate the company between four times and 4.5 times leverage. I think given our current outlook and the plans we have, both in closing these great acquisitions and the one we have under the LOI, I think that 4.5 times is still a realistic target. Over the next 12 months, that will come both through operational improvements and through internally generated free cash flow. I think if you – Duncan, if you look at just the progress we’ve made around leverage this year, at the end of the first quarter on a pro forma basis, we were at 5.2 times, and in two quarters, we’re almost down a 0.5 turn. We’re at 4.8 times. So, I think that’s just right there encapsulates how quickly we’re able to pay down debt and delever. And then that’s how we look at it so far. I think going forward; our primary method of funding acquisitions will be through our revolver and line of credit. The rates there are fairly attractive, but we’re going to balance that depending on what comes our way if anything.

Yes. This is Mel. I’ll just add to that. We’ve had an interesting year. It’s been challenging and it’s been – it’s been inspirational to see our people respond to all those challenges. And we’re going to come out of this better than ever and performing higher than ever. And so I think we’re going to be highly selective. We do want to make sure equity investors are very comfortable with what we’re doing and are not wary of the leverage that the company has. But there is a point here that – and I think with 28.3% adjusted consolidated EBITDA margin through nine months, we expect that to go up between now and year-end based on the fourth quarter. Our goal at the beginning of the year, which we did not make public was to hit a 29% consolidated EBITDA margin on an adjusted basis. I think we’ll come close to that. And so when you have the approximate cash generation per dollar revenue 29%, 30%, you can run the company on a sustainable basis with a little more leverage, but we don’t want to be considered high leverage or high risk. So, we want to get back down closer to four, and yet the kinds of businesses that we’re seeing here, don’t come along very often in this business. These are unique, one of a kind, and you just don’t find them. And so when you do find them and you do have alignment of motivations, you want to – you find a – you want to find a way to do it, because these are investments that will earn for decades great returns. And I think the returns will increase over time and not diminish. And so these are very unique to find and what is typically a rather mature business. And so when we find those, we’re going to know who they are and we’re going to try to get them in our company. And then we’ll get the leverage down after that through free cash flow.

Okay. Thank you very much.

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the conference back over to Mel Payne, for any closing remarks.

Thank you. These were great questions today. Thank you, Dewayne, for honoring us with your presence and comments. Thank you, Karen for putting up with me all these years. I’m surrounded by a great team at Carriage. Believe me, they’ve been stress-tested and they’re ready to go. So, bring it on out there, we’re ready for game time, and we look forward to reporting our full year early in the year. Thank you very much.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.