Ladies and gentlemen, thank you for standing by. And welcome to the Carriage Services Second Quarter 2020 Earnings Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instruction] As a reminder this conference is being recorded. I would now like to hand the conference over to Carriage Services Management. Thank you. You may begin.

Thank you, and good morning everyone. This is Viki Blinderman, Chief Accounting Officer at Carriage Services. Today we will be discussing the company's record second quarter results for 2020. A related earnings release was made public yesterday after the market closed. Carriage Services has posted a press release, including supplemental financial tables and information on the investors page of our website. This audio conference is being recorded and a archive will be made available on our website later today through August 3rd. Replay information for the call can be found in the press release distributed yesterday. On the call today from the management are Melvin Payne, Chairman and Chief Executive Officer; and Benjamin Brink, Chief Financial Officer. Today's call will begin with formal remarks from management followed by a question-and-answer period. Before we begin, I would like to remind everyone that during this call we will make Forward-Looking Statements. Certain statements on this call, including financial estimates, assumptions or statements about our plans, future results, expectations or beliefs, may constitute forward-looking statements under applicable securities laws. We make these statements on the basis of our reviews and assumptions regarding future events, business performance and other factors at the time we make them and do not undertake any obligation to provide updates or revise any of these forward-looking statements after the date of this call, whether to reflect the occurrence of events, circumstances or changes in expectations except as required by law. These forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from the results expressed or implied in light of a variety of factors, including factors contained in our annual report on Form 10-K, quarterly reports on Form 10-Q and in our other filings with the SEC. Please note that a reconciliation of non-GAAP measures that may be referred to on this call to equivalent GAAP measures can be found in our earnings press release that was issued yesterday and on the company's website. And with that, I would like to turn the call over to Mel.

Thank you, Viki. The great blessing of my life is that I have found my way into the [funeral] (Ph) and cemetery business at age 48 when I cofounded Carriage. It has been an incredible life journey, career journey, and indeed a labor of love, a love affair with our wonderful people ever since that has involved my entire family, my wife, my son, and my daughter who are big shareholders. The work our people do is more than meaningful, it is noble and it is necessary beyond description. It is therefore only appropriate, at this earnings release, this call and this transformative year of high performance we dedicated to all of our wonderful leaders and employees in the portfolio of businesses of Carriage who have risen to the challenge of two once in a lifetime crises over the last four and counting months. Our managing partners, sales managers, and their teams of employees dealing with the fear and uncertainty of the corona virus pandemic and the constantly changing mandated behavioral and social restrictions, family-by-family on the front lines of this battle against an invisible enemy have been, and are continuing to do no less courageous even heroic work than the front line army of doctors, nurses and first responders across America. Speaking for all of us, including our Board who are honored and privileged to serve you, our people. We thank you and salute you. The second quarter earnings release published yesterday after the market was not about a record quarterly and first half performance. The release is full of substantive content about our company, and represents no less than a statement about the evolution of a radical idea we call our standards operating model, which when well-led, executed and supported, which is obvious in the second quarter and the first half has this capacity to unleash human performance potential, beyond what would normally be thought possible. When the current environment normalizes, we welcome all of you who have a curiosity and an interest to learn more about us and this idea. To visit our home office as our special guests or even better arrange a visit to one or more of our businesses to witness up close in personal, the uniqueness and what our company is all about, where it matters most in our local businesses. With that, I will turn it over to Ben.

Thank you Mel, and thank you to everyone for joining us on the call today. Today, we will discuss a record-setting performance for Carriage in the midst of an unprecedented operating conditions brought on by the CORONA virus crisis and the stay-at-home and other social distancing measures put in place to curb the spread. Over the past four months, our teams across the company have moved quickly to creatively adapt and embrace change in order to continue to serve their families and their communities no matter of the circumstances. We have remained vigilant in putting the safety of our employees and clients, families first while providing the high-value personal service that they have always been known for. To deliver the type of operational and financial results in the face of these challenges is a testament to the leadership and professionalism we have across our company and demonstrates the commitment from everyone here at Carriage to make 2020 a year of transformative high performance. While we hope you take away from our comprehensive press release, and this call is that our results in the second quarter are not a one-time occurrence in the middle of a pandemic, but rather they are indicative of the growing earnings and cash flow generation potential of our portfolio of funeral homes and cemeteries. The foundation for these results and for our transformative high-performance expectations have been laid over the course of the last 21-months through a series of difficult leadership decisions and evolutionary update to our funeral home and cemetery standards operating model that prioritize compound revenue growth, improved alignment of our incentive compensation structure throughout the entire company, and the successful acquisition and integration of four high-quality funeral home and cemetery operation late last year that allowed Carriage to reach an important stage of…

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

Hey guys congratulations on the Q2 beat and raise what a difference three months makes?

Thank you, Alex. It is a big difference.

Yes. I want to dive a little deeper into the two metrics that have been seen to be most influenced by COVID recently. Funeral averages and pre-need cemetery sales, you have put up a lot of information in your prepared comments, but I believe you said funeral averages in the same-store bases were down 7% in the quarter, improved throughout the quarter, but were still down 4% to 5% in July. Did I hear that correctly?

Yes Alex that was correct.

Okay, good. And I'm wondering what impact COVID had on that, and maybe it starts with COVID volumes, have you disclosed or will disclose orders of magnitude you know how many COVID cases you handled at Carriage Services. It sounds like their choice of disposition was direct cremation. Obviously that in and of itself would have an impact on the averages, but it you know maybe it a little bit more color there please.

Yes so Alex I would definitely say, the volume increases we saw early in the quarter were really primarily related to the increase in deaths from COVID. Like I said in the hotspots, in the Northeast and New Orleans, a lot of that increase in April and the early part of May was due to those COVID related deaths. While we track that number, we don't feel as appropriate to release the exact number of COVID families we served. As we went into May and into June, we continue to see that high level of volume increase, contracts volume increase on our same-store portfolio and I guess that was really driven by local market share gains. So, we believe we have been gaining over these past couple of years.

Alex, it is Mel. We did all kinds of breakdowns of the portfolio. We had 22 businesses and hotspots. Those were in the five states Massachusetts, Connecticut, New Jersey, New York and Pennsylvania and they had a big quarter starting in April, that is 22 businesses. But if you looked at how much revenue those businesses increased as a group, it was a very substantial and they brought 107% of the additional revenue mostly, all from additional volume, because their averages were down over a thousand on average per funeral. About all the additional revenue 107% to the EBITDA so the margins went way up like a thousand points. But, then we had a large group of non-hotspots that had volume increases and their averages were down, but down maybe 20% of the COVID places. And they, they brought 117% of the additional revenue into field EBITDA. And we saw other businesses, large groups that didn't have revenue increases from volumes and some of them had revenue decline. So, it is just a natural thing for a large portfolio. Some places were slow. But we had the expense management. And so, we actually had a group that had a revenue decline, a meaningful amount, and they increased their margin 500 basis points. So what we saw was very broad improvement, and we did see normalization in the total average of close to 98%, 99% at one point. But then COVID is spreading, the taxes and other places and other restrictions, and so now the average is back down as a group. But we don't expect the outcome to be any different. We see broad performance and lots of feedback across the portfolio from a managing partners are directors. Our support that this is a different kind of company that it was 18-months ago, 21-months ago and that COVID is not the reason. We are outperforming. It is all these other things and we are outperforming in spite of COVID is the best way I can describe it.

That is all. Thanks for that additional color. So, just to be clear, you said you were back up to 98% or 99% said another way, average were down 1% to 2%. But resurgence in some of the states in the month of July, it was down 4% to 5%.

Yes. It is gone back down, but we don't expect the outcomes to be any different.

Got you.

We will see volume increases broadly and we don't think it is all - we know it is not all COVID related. We have done a lot of things here to improve our competitive position. And our people realize, these standards, drives behavior and incentives and disincentives drive behavior. And over the last 21-months, we have got a lot of great behaviors in place, compared to what we had at that time. And so when you get a lot of great who's employees with the right incentives and disincentives good things happen.

And then I would assume, in March, we are all taken by surprise by COVID. Here in June and July, really July the resurgence of COVID, and some of these states, is that new to these funeral directors, and that they are a little bit better prepared for it. So, I would think intuitively that they should be able to weather that storm of increased social gathering restrictions, better this time than he did last time, the last time worked out pretty well?

You hit the nail on the head, we had a conference call with the Standards Council on Monday to go over the press release, because there's a whole page dedicated to them. And we have four or five in California, then four in California, because they were the first ones to deal with this. And then we get three in Northern California, one in Southern California. And this is exactly what they said. You could have been articulating their firm conviction that look, we have been here before we learned a lot now we are more prepared than ever. Let's go back to work and get it done. And so I think you will find that same attitude throughout our portfolio.

That is great. Alright, so that helps me with regard to funeral averages. Same for cemetery was down 12% same-store field EBITDA in cemetery was down to 24% that just to be clear, did you say June? Same-store revenues in June, same-store field EBITDA was up year-over-year?

Yes, so Alex, all that decline really happened in April, we saw the performance really come back strong in, in May, it was out even where we were in last year. And then June, we were up about half a million dollars in revenue and EBITDA in our theme store, cemetery.

So, I'm looking at here, Alex and in April, we were down 2.1 million. Same for revenue in the cemetery. In May, we were just up a little bit. Call it flat and then in June, we were we were ahead $600,000, so that is the trend we see.

Got you.

When Carlos gets here, that trend will become our big time friend.

Yes, absolutely. Carlos, he has an impressive background, having been most recently at service corps in this area?

So, he has got very impressive background and when you meet him and talk to him, you will see why he is going to be a perfect fit here. And why we are all excited about every single one of us.

Great. I look forward to it. And then that within cemetery pre-need cemetery sales, obviously impacted by potential customers inability to come out to the cemeteries, and this was exacerbated by a really, really tough comp I guess the chimney holiday last year. Is that right?

Yes.

And has that been improving in May and June and July?

Yes, that is what I was coming. On April we were 2.1 million in the whole, May was about flat same-store center revenue. And then June we are actually up 600,000, which is 15%. So we don't expect to go back to April deficit. We expect to dig out of the hole and get it head by the end of the year.

Alright. And then couples of my questions were answered in the overview comments. I guess I got one little book keeping sort of question for Ben. As roughly write range for 2020, with regard to the gap numbers that are in the back of the press release pre-tax income net income, tax expense include or exclude that $14.7 million impairment on good will in the first quarter and its corresponding impact on tax expense in the first quarter, which is actually a tax credit in the first quarter.

I have multiple people motioning. Alex I will follow-up with you on that question.

That is fine. But thank you so much for this information. Thanks for the additional color.

You want to know for about technical accounting you should call me. I'm just kidding.

Alright, guys. Thanks again. Congratulations on the quarter and the guidance choice.

Thank you Alex.

Thanks Alex.

[Operator Instructions] Your next question comes from the line of Chris McGinnis from Sidoti and Company. Your line is open.

Good morning. Thanks for taking my questions and echo obviously great result and so congrats on that. Can you guys just talk, some of the questions was that, you mentioned the market share gains we're seeing that is really kind of driving some changes, fundamentally what you talk about, what you know maybe the changes in those markets that you made around, the ability to drive those markets gains.

Chris really pointing back to the changes we made. The update we made to the standards operating model in late 2018 and implemented at the beginning of 2019 to focus on three year compound, average revenue growth, eliminating a very rigid standard of average revenue per contract. There in 2019, allow people the freedom and the flexibility to continue to grow their, their local market share. And again, talking about a long-term change in behaviors that we have witnessed in Carriage that's certainly one of them.

So Chris Mel. So I mean, you would have to go back and read the 2018 shareholder letter that talks about the diagnosis of all the low performance and the declining trends and what were some of the obstacles and how the standards council - we went through an updating and rebooting of all the standards. And what we did was we eliminated a standard call, average revenue per contract that was causing a lot of our funeral homes, managing partners to not seek or even to take lower average business like cremations, where they at least had an opportunity to turn it into something better. So they were not, there were living a lot of market share in the market, when we eliminated that. And then we changed the incentives earlier this year about the margin, and then in the meantime, we have made a lot of changes in the managing partner ranks over the last 21 months as well as the directors of support who support them. So, we had a lot of talent come into this company that are high performance, and then a lot of changes in incentives and in performance standards. And when you combine all that, you've got a lot of entrepreneurs out there figuring out what to do. So, we don't have to go figure out what to do. When we figure it out, you don't get buy in and you don't get the result that you're seeing right now.

Sure, sure. Okay. No, that makes a lot of sense. And I do remember the 2018 letter, that is when my daughter was born in. I think it was the same week so.

Yes I mean this is not - this didn’t happen overnight and we got an incredible group of talented entrepreneurial people in charge of these businesses. And I think, probably Wall Street doesn't have a great understanding of just how entrepreneurial this business can be at the local level. And they are coming up with ideas of how to grow market share that we couldn't dream up in a million years. I mean, I heard about one business up in Kentucky blew away their community because the family - his favorite holiday was Christmas. So, we had Christmas in June. All place was decorated with Christmas decorations blew away the community. Well, you can't come up with ideas like this up here in Pentagon and push it down. But, when they come up with ideas like that world gets around.

Sure. And I guess in the same vein, just on the expense side, obviously it is very helpful for driving the margin improvement. Can you just talk about maybe some of the things that they are - where they are saving the money at the local level to drive the setup?

So, here is what we have noticed. We have noticed. I mean, the business is a very social people business in a local communities. And for that reason, you have a lot of older people, maybe retired police chief or school principal as part-timers. And a lot of these mandated restrictions did not allow people over 65 because they were in vulnerable groups for example in California. And so, they were mandated not to work. And so, a lot of our people were able to get the service done beyond expectations without the same amount of SMB and also our directors support, we are able to support our analytical group without travel and entertainment. So, you had a lot of performance happening without the same degree of cost. And we believe that will lead to - plus you had all the focus on cost management. We believe that will lead to a higher level of total portfolio margin performance in the future.

Okay. And I guess those restrictions, not everything is going to be brought back online is what I guess is kind of what -.

Well when your managing partner owns a business and actually what they can do. They are going to do what is best for the business.

Sure. And then just one last question around the acquisition improvement needed on there. And I think it is kind of you said it was ahead of your expectations, what is driving the performance of those acquired assets and maybe performing as well as they are just, something changed from your kind of guidance, or wisdom?

How about everything changes? We take a great family franchise. And we put our framework on it and support and, and a lot of things change and what doesn't change is the local people. But the performance, I mean, we have all these support services we heard from every single business. I don't know how they would have endured this crisis without being part of Carriage . And so being part of us turned out to be a blessing and I have heard that over and over from the former owners, from the managing partners. This has been a blessing for some and at the same time, they are turning into great partners they want to contribute. They see what the standards are. And they don't want to be a weak partner, they want to be a strong partner. So it is sort of win, win.

And Chris my follow-up is when we talk about these acquisitions, because they will happen to want to kind of four combined, but really Fairfax, stands out in the size and scale of that business. And we are starting to see, end of the first quarter and here into second quarter, you really started to see the emergence of the earning power of that business. And that has a real big effect on the margins and our acquisition portfolio.

Yes [indiscernible] in Dallas area is really kicking in Lombardo and Buffalo is kicking in. The one that has been the slowest is the one we expected to be because of all the restrictions in Northern California. But it will come around as well.

And I guess, just given the increased cash generations, the ability to kind of reduce your leverage. I know it is early still, but just expectations about maybe when you would step back in the market on the M&A side again. Thanks.

I think it is very important that you do what you say you are going to do. We are going to deliver, next year we are going to pay our debt down fast. And that is what we said we were going to do. So as we pay it down and refinance, we will have moderate leverage. I have no problem maintaining moderate leverage, but I don't really see us being back in the market before we do what we said we were going to do.

Great. Thanks for taking my questions and good luck in Q2.

Presenters, I'm showing no further questions at this time. I would now like to turn the conference back to Melvin Payne.

Thank you very much. There is one last piece of business I would like to attend to. We want to wish our very best to Bill Goetz. He was here six months. He made a difference. He made a lot of friends. He is a great guy. He was the first one that reached out to me yesterday by fax to congratulated me Carriage on our quarter. And, and I really appreciated that. And I texted him back Bill, whatever you do, don't sell your Carriage shares. He texted me back. Don't worry Mel, I won't. With that. We will let it go and look forward to reporting our third quarter. Thank you.