Good day. Thank you for standing by. Welcome to the Carriage Services Third Quarter 2022 Earnings Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Steve Metzger, Executive Vice President, Chief Administrative Officer and General Counsel. Please go ahead, sir.

Thank you, Norma, and good morning, everyone. Today, we'll be discussing our third quarter results. Our related earnings release was made public yesterday after the market closed, and we posted the release, including supplemental financial information on the Investors page of our website. This audio conference is being recorded, and archive will be made available on our website later today. In addition to myself, on the call this morning from management are Mel Payne, Chairman of the Board and Chief Executive Officer; Carlos Quezada, President and Chief Operating Officer; and Ben Brink, Executive Vice President and Chief Financial Officer. Today's call will begin with formal remarks from Mel, Carlos, Ben, and myself, and will be followed by a question-and-answer period. Before we begin, I'd like to remind everyone that during this call, we'll make some forward-looking statements. Any comments made by our management team that state our plans, beliefs, expectations or projections for the future are forward-looking. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such statements. These risks and uncertainties include, but are not limited to, both factors identified in our earnings release and in our filings with the SEC, both of which are available on our website. During this call, we'll also discuss certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to the appropriate GAAP measures can also be found in our earnings release, as well as on our website. Thank you all for joining us this morning. And now I'd like to turn the call over to Mel.

Thank you, Steve. As a young boy growing up in a rural farming community. I love going to the Annual County Fair where my favorite ride was the roller coaster. By far the most thrilling part of the ride was after slowly climbing to the peak, and then flying down steep descent. I loved it. Building Carriage over the last 31 years, especially as a public company after IPO and August of '96 has been akin to riding a much bigger and steeper roller coaster. With one hugely profound difference. Over the last 20 years, we have evolved a new business model and framework for operating and consolidating still highly fragmented funeral and cemetery industry. It is a unique business model in framework. And throughout this period through ups and downs in our performance as we adapted the model and improved it. Together with various severe adverse economic environments that together produce wild peaks and valleys in our share price twice hitting the dollar. We have continuously gotten better as a company at executing our standards operating model and strategic acquisition model. Especially over the last four years, we have accelerated our progress toward our Mission and Vision and Being The Best at what we do. We are currently in the midst of a transition from peak performance in '21 for various reasons that have been well documented into a post peak COVID normalization of death rates, at some point, likely in the near future. Yet even with negative performance comparisons. Currently, during this transition period. We have never had a company anywhere close to this good in our history, populated by the best leadership talent and a stellar reputation as a succession planning solution for the best remaining independent businesses and the best strategic markets. My advice to those listening on this call is to hang in there. This too shall pass. Without introduction, I will turn the call over to Carlos Quezada, who is President and COO and together with his teams of eight players are one of the main reasons that the best is yet to come. Carlos?

Thank you, Mel. Good morning, everyone. And thank you for joining our call today. Before we start, I want to thank our Carriage family in the field in our Houston Support Center for your commitment to our being diverse, mission envision asset is the heartbeat of carriage. Thank you for all that you do. For today's call, I will review our total field operational performance for the third quarter of 2022. And then we'll go over financial performance in more detail later on this call. I will also provide a quick update on overall operations. For the third quarter of 2022, our results are as follows. Total revenue of $87.5 million, a decrease of $7.5 million or 7.9%. Total field EBITDA of $35.3 million, a decrease of $9.4 million or 21%. Total field EBITDA margin of 40.3%, a decrease of 670 basis points, adjusted consolidated EBITDA of $22.9 million, a decrease of $9.5 million or 29.4% and adjusted consolidated EBITDA margin of 26.1%, a decrease of 800 basis points. The performance variance in the third quarter of 2022, compared to the same period last year, is a direct result of historically abnormal seasonal peak, in a record pandemic volume experienced only in the third quarter of 2021, which on a comparison basis impacted our revenues. Furthermore, the inflationary costs and lower revenues over high fixed cost resulted in a negative operating leverage in many of our businesses. The good news is that our same store average revenue per contract was up by $132, or 2.5%, equivalent to 232 contracts and making up for $1.3 million. Additionally, our overhead in the third quarter of 2022 was down $258,000, or 1.7%. While this performance in no way shape or form represents Carriage's high-performance culture, to put some perspective on our funeral home…

Thank you, Carlos. As it relates to our growth through acquisition outlook, we were excited to announce our acquisition of a premier funeral and cemetery business in Charlotte, North Carolina earlier this week. Heritage Funeral and Cremation Service and Forest Lawn East Cemetery is one of the leaders in the Charlotte area with a greater than 25% share of the market. We often tell acquisition candidates we meet that fit and relationships are critical as our reputation will become theirs, and their reputation will become ours. In the case of Heritage, we couldn't be more excited to join the reputation of this fantastic business and team. Heritage served more than 1200 families last year, with multiple funeral homes, a cemetery and a dedicated cremation business. We are well positioned for broad growth and one of the more attractive markets in the country. We want to thank Harris High and Carolyn Williams for selecting Carriage to continue to lead the wonderful business that they, along with Carolyn's father have built over the years. And we want to extend a warm welcome to the entire Heritage team. We're also pleased to announce that we're currently under a letter of intent to acquire an impressive business that serves as the leader in another large strategic market. We're particularly excited about this opportunity, and it's one that reached out to us directly to explore if Carriage may be the right succession option for their business. For more than 31 years, Carriage has worked hard at building and protecting our reputation. We talk often internally about the importance of ensuring all aspects of an acquisition are successful, from the initial conversations with owners to the manner in which the actual transaction is handled, and how the integration has led. As our reputation continues to grow…

Thank you, Steve, and thank you to everyone who has joined us on the call today. So the third quarter total revenue decreased 7.9% to $87.5 million. Adjusted consolidated EBITDA decreased 29.4% to $22.9 million. Adjusted consolidated EBITDA margin decreased 800 basis points to 26.1% and adjusted diluted earnings per share decreased 45.1% to $0.45. Year-to-date, our total revenue has decreased 1.3% to $276.3 million. Adjusted consolidated EBITDA has decreased 15.8%. Adjusted consolidated EBITDA margin decreased 500 basis points to 29.2% and adjusted diluted earnings per share is decreased 13.7% to $1.96 per share. Earnings per share decrease for the quarter and year-to-date is due to lower total field EBITDA, due to the continued normalization of seasonal death rate trends. Higher fixed overhead expenses from our investments in our operating support platform offset by lower variable overhead expenses due to reduction of incentive compensation accruals. An increase in interest expense from the continued rise in interest rates. Our year-to-date GAAP effective tax rate was 27.8% at the end of the third quarter, an increase of 30 basis points from the second quarter due to lower expected pretax book income for this year. Adjusted free cash flow for the third quarter declined 36.3% to $16.5 million and the adjusted free cash flow margin declined 840 basis points to 18.9%. While down year-over-year, the $16.5 million of adjusted free cash flow and 18.9% of adjusted free cash flow margin represented our highest reported free cash flow in four quarters allowed us to incrementally pay down our debt while completing the acquisition of Funeraria San Juan during the quarter. Year-to-date, our adjusted free cash flow has decreased 37.5% to $40.9 million. While our adjusted free cash flow margin has declined 860 basis points to 14.8%. Adjusted free cash flow decline year-over-year due to…

[Operator Instructions] Our first question comes from Alex Paris with Barrington Research.

Hi, guys, thanks for taking my questions. I have a few. Let me start off with accelerated acquisition activity, which is exciting. They're your first acquisition since those four transformative acquisitions that you spoke about in late 2019 and early 2020. With that said, what does your pipeline look like at this place at this point, particularly given your plan for a balanced approach to capital allocation, investing in organic growth, M&A and debt reduction?

Good morning, Alex. This is Steve, so the pipeline, as we've mentioned before, is robust. And one of the things we tried to highlight this morning, which we're excited about is we're seeing more businesses that are coming to us directly, just based on reputation and word in the industry. So as we've said before, we're happy to see all these businesses come in, we're taking a look at all of them. But the reality is we are highly selective and highly disciplined right now. So as we look to de-lever, we're going to continue to look at growing, but it's going to have to be a special business for us. The one that we just talked about under Letter of Intent fits those criteria. It's a unique special business and that we're going to prioritize that. But at the same time, we're going to be able to manage and balance that with de-levering.

Yes, Alex, this is Mel. Look, when we, I was in the process of turning the company around, in '19, from not a major decline in performance trends, but some amount of decline in performance trends, so I had to jump back in and lead operations. So '19 was a turnaround year, it turned around to some degree, but there was just a lot of work all through the year and into '20. And in the last quarter, '19 you had this succession of, or businesses show up, bang, bang, bang, bang. And, except for the one in Buffalo, I knew them all. And I couldn't believe that, that we had a shot at these. And so we did, it took a lot of leverage. At the same time, we were still turning the company around from lower performance in '18. And when we issued the news about all this our stock went way down, because of the leverage and the perception that the time that we couldn't integrate so much, so fast. And then COVID shows up. So the roller coaster continued, real fast downtrend. After that in two big slices. And here we are, we prospered during COVID. And the integrated acquisitions went from being I was accused of overpaying and being reckless to how do you get more of those, you stole alone, we're not trying to steal anybody's business, we want to buy a great business, it's already a franchise that's on a great market, and then how to get better under us. And that's what's happened with each of those four. And that is really been out. And we thought post COVID normalization, there would be more activity when people start thinking about succession plan and what they had to go through being an independent…

Sure, thanks. And I appreciate that. And these acquisitions look very much like those acquisitions in late 2019. Once in a lifetime sort of acquisitions that you have, that you really have to make two of the three businesses or combo businesses and together, they're going to really drive inorganic growth, I would think next year. With that said, your debt ratio was 5.1x at September 30, it'll probably be a little higher at December 31. Just my guess I realized the acquisitions also contributed EBITDA to that ratio. But you had at one point targeted a 4.5x ratio by the end of 2023. I'm wondering, does that get pushed off a bit? And then your long-term goal of sustainably growing the company at about 4x? So what's the timeline on debt reduction, as best as you can tell, at this point.

I think, this is Mel. I think I made a mistake. And humbling. At the time, it didn't seem like a mistake, we bought in too many shares post, October 27 of last year, at increasingly high prices, which ran up our leverage ratio. And then everything changed this year, into a different market, different world. Nobody knows exactly what's going to happen. And so then all these things show up, which frankly, I didn't expect to happen again, these series of acquisitions. And maybe there's one more smaller one, but a fabulous business represents about 55%, 60%, of what we did at the end of '19, early '20. So there, it's a material thing. And once integrated, they'll have very high margins, like the ones we bought, and so we'll be able to de-lever. But we did get too levered on the stock buybacks. This will push us up to a level that is not close to our policy of 4x. And we are right now working on plans to work on bringing down that leverage. And I think Ben mentioned that capital capacity plans. That will be, put the company in a position to weather any storms that might show up that right now are not on the horizon.

Okay, thanks for that. I appreciate the additional color. My last question is really about the rolling four quarter outlook. Given the elevated level of acquisition activity, which I estimate will add over $25 million to revenues on an annual basis. And easing comps once you get past Q4 and Q1. It sounds to me like you're in for a big year after Q4 and Q1 in 2020 3. Am I wrong there because pulling guidance and I realize you're going to give it to us next quarter but by pulling guidance, you might be sending the wrong message.

Well, and look, I thought about that a lot. That was my decision no one else's. And rather than put guidance out there, the normalization just like we were very surprised at it how death rate stayed elevated. Even after the COVID deaths were greatly diminished. And why death rates for all other reasons stayed elevated. They're coming out with stuff now there's a lot of other reasons for death and COVID lockdowns and health maintenance wasn't there. And the baby boomers are older and they're not healthier. So we do think the normalization, it didn't really start to happen on at the revenue level and the volume level until in a major way until September. And we're seeing that offset, especially in October, by much our averages, whereas the mix, cremation versus traditional is about flat. So it's a transition period that is right now, not exactly predictable of what the normalized environment will look like. And in rather than guess at it, and then have to, say where we're wrong. And we got the acquisitions coming on board. I said, look, let's just explain that we're only way to, you're totally right about Ben's added too, the fourth quarter and first quarter is tough. After that, we ought to be up, up in a way. And I think it's wise to wait, I made that mistake before. I don't want to do it again. It's wise to wait, if somebody thinks a message, we're not. We're being honest about the unpredictability of what normalization looks like. Carlos went through a lot of things; we get the best talent. If you're in the company, beneath the covers and you don't look at stock price. You've never been more excited than you are right now. That's what's going on. And that's the nature of being a public company. Is it frustrating? Yes. Can a message be interpreted the wrong way? Yes. But you hit the nail on the head, post first quarter, we ought to have positive comps, with our existing operations with all the actions that Carlos and his teams are doing, and then you have the acquisitions coming on. I'm very excited about the trust funds involved. We know what to do with them. And we ought to have an up -- an upswing in our performance that should continue for a long time in the future.

And our next question comes from Liam Burke with B. Riley.

Thank you. Good morning. Carlos, you mentioned in your prepared statements about process improvements that you're going to implement throughout the organization. Could you be a little more specific at what you'd be doing to improve the initiatives and how it's different than the way you're operating the business right now?

Yes, absolutely. It's just really in the approach as to how we are trying to tackle price increases business by business. As you know, we're decentralized. But on a decentralized organization, it could take a longer turnaround to get all of that effectively change. And so we're trying to change a few things in that aspect to move a little quicker. But there's also other aspects that would allow us to gain some momentum from a process perspective where there is manual work that it is now being executed without even rolling out the new system that Rob is working on. These are just simple low-hanging fruit items that I believe that by providing some consistency and a strategy on executing on that, will definitely give us some benefit in the short term.

Just real, quickly on price increases, obviously you've had both -- margin pressure both on the product and on the service side. Would you be able to get enough pricing power to offset these input costs?

Well, we're definitely going to do our best. You see, the thing is that the business owner, the managing partner knows what's best for that community. And sometimes it takes funding out where the pricing is around the competition landscape to define what is the best balance between competitiveness and of course cost improvements. And so we'll try to find that balance based on a case-by-case scenario, business-by-business. That's probably the best way I can describe it. But I do believe that in many cases we should be able to overcome the, and not absorb the cost increases. But there may be an instance where just from a competitive advantage, it may not be best because it could be at the cost of declining volumes. And that's something we never want to do.

So, Liam, it's Mel. We didn't see the inflationary impact until we got into the, toward the end of the -- maybe the second quarter, very end, and beginning of third quarter, began to really show itself. And then Carlos and his team went to work. And I know he mentions in this release that the average -- was it in September? The average was up.

Well, that's for the full quarter.

For the full quarter. Yes, so we've seen a trend through the quarter as volumes really began to normalize downward in September that the averages began to trend up. Now they're making a lot of moves, our managing partners. They each have an analyst, like a financial -- their own financial consultant, and they're doing various scenario, price increases, this, and this, and this, and this and that. And so what has happened is, the volume continues to be normalized more like September and October. And I don't want to say that this will continue, but it's very encouraging what we're seeing in October, means that a lot of the things, all those process things that Carlos is talking about, price increases, more options for cremations and whatever, our people are very tuned in because their incentives are based on being within a range of field EBITDA margins. And if they're not within that range, regardless of what happens to the rest of their standards, their incentive bonus goes in half. And if they're below 50%, they get nothing. And so you don't want to be one of those, we call them under-performers that moved back to Paris. And so what we're seeing in October is very encouraging on the average revenue. How much of that is price? How much of that is just more service options? But it's both in traditional burial and cremations. And I'm talking big percentage increases, double digits.

Fair enough. Just real, quickly, after looking at, reviewing the business, are there any more properties you think need to be sold?

Yes, Liam, this is Steve. We're always looking as a team. And there may be one or two here there that are just not going to fit with the strategic growth model that we've talked about already. But right now, nothing that we're working on. But we're always looking.

Yes, I think Carlos and his team, now that he's fully -- got a full compliment of regional partners, DOSs, they're doing a continuous assessment on both the talent, succession planning, top grading and the nature of the business itself and the market in which it operates. And as we bring in these bigger, better businesses, which is where the trend has become our big friend, we will continuously look at pruning off those that really can't keep up with the higher growth portfolio that we're building. And there may be two or three right now on the radar, but too early to make the call.

[Operator Instructions] And our next question comes from George Kelly with ROTH.

Hi, everybody. Thanks for takin my question. So first to revisit something you were just saying, Mel, about October. Just wanted to make sure that I understand you right. You said it encouraged -- I wasn't sure if it was just based on the pricing changes that you've implemented or if you're starting to see volumes rebound from what you saw in September. And I guess what I'm really trying to understand is just do you feel like you're getting closer to seasonality, looking more normalized, or is it still like it could take until sometime middle of next year for seasonality to truly normalize?

Yes, I'm going to turn this over to Carlos, but I don't want to declare victory too early over a process that has been unpredictable since March of '20. And I'm not smart enough right now to predict when we will get to normalization and whatever that will look like. I'm almost 100% sure, whenever we do get there and then it sort of normalizes in a steady way, it will be materially higher than it was pre-COVID. Yes.

And to answer your question, George, Mel was referring specifically to what we have been observing so far in the month of October as it relates to our sales average. And it's very encouraging. It has grown for this month up to double digits. I guess the question is, is that coming just from pure pricing increases or maybe we have more offerings on services and items for the families. That we'll still need to get to the details once we close on the month. That's very, very encouraging. It's taken an impact. That's replacing volume from a revenue perspective. On the volume perspective, it's too early to say, however, if we would use the third quarter signal, it would seem as if we will get more seasonalized performance for 2023.

Yes, I mean -- George, this is Mel. I don't know whether we'll have a flu season, in what degree. I've seen predictions of a strong -- we haven't had a flu season in the last two winters. It's been all COVID. And then you got this new thing, I never even heard what it was, RSV or RVS or something like that, plus other variants of COVID. So it's still not quite clear how the pace of normalization of death rates will occur. But I will say that -- I'll make this point on these double-digit funeral revenue averages we're seeing so far in October. And that's -- we only had eight more days to go and we were experiencing that. We made a decision, a business strategy decision not to aggressively sell preneed funeral on standalone funeral homes. 20 years ago I made that decision. And my thinking was, I don't know because I can't prove it with data on a standalone funeral home. Not a combination business where you have a funeral home on a cemetery, totally different. I don't have data that prove you can grow your market share, your revenue and your margins over time by aggressively selling preneed funeral and fixing your prices. And a lot of that being covered by preneed insurance where the growth rates are1% or 2% at best. And then when -- and I experienced a lot of this in the 90s, I bought into that, and I never could see the evidence that it was a good concept. Instead, my thinking was, and this is how we built the company, we want to be the best at providing service in each market. And if you are the best, you can grow a market share by being better than everybody else and you retain your pricing power. And especially that becomes relevant in an inflationary environment like the one we're in now. And so we have pricing power on 87% of our funeral deaths, 87% we have pricing power, and that's unique in the industry.

And I will add to that, Mel, if I may just, just to give you some color, George, is that Q3 2022 compared to 2019, we are greater by 14.3% on volume from pre-COVID levels in 2019. So that a good number. That's a good trend.

Yes. Okay. That's helpful. And then couple other questions for you. First Carlos, you mentioned a digital revenue opportunity. And I just -- I didn't quite catch that. Can you give us any more detail about that?

Yes, so Project Trinity, which is not the name of the solution we are creating through integration of third-party solutions and our own, I guess customization of what we need. We'll end up having a, let's call it point of sale for lack of different words, a point-of-sale system that would allow and enable families to engage more on the offerings that we have. That should include digital offerings and enable us to increase sales average, but also capture more calls than we have right now by advancing that ability to make arrangements from home and things to that nature. That's really what we mean on that line.

So it's some kind of central tech platform that interacts with consumers and you would charge funeral homes for some piece of that?

No, we're not going to charge our businesses for it. It's the accretive revenue what we'll gain from providing a solution that families keep going straight into their browser, go to our different businesses' webpage, and from there being able to do many, many selections and things that they want to choose on digitally without having to go to the funeral home, things of that nature. Also another option is in the arrangement conference, if they decide and choose to go to the funeral home which is typically the case, then they will be presented digitally, all the offerings that makes a much better presentation to the families that we believe will end up having significant greater average than the one we have today.

Okay. And then last question for me just on the balance sheet. So you have about, I think it's a $400 million, those senior notes at 4.25 fixed rate. And then the remaining debt is under the facility. Is that -- so I guess the question is, is the remaining debt, I believe you're getting pretty close to the max leverage ratio allowed under that. And so is that -- when you talk about, you're working with your banking partners, I'm assuming that you're trying to expand that max allowable. And also what is the rate and where would you anticipate that to kind of end up when you're done with this discussion with your banking partners? And that's all I had. Thank you.

Well, this is Mel. Look, on the floating rate part, I don't know where it will wind up because I don't know what the Fed will do and how long they will do it. I got a feeling that, I'm one of the few people that's still around very involved in business that lived through the '60s and '80s -- '70s where we had runaway inflation and then you had Reagan and Volcker. I mean, I was a banker in Texas when primary was 20%. And we had to be creative not to be usurious in making loans to a good customer. I don't know where rates will wind up, but our rates will go up. And that's one of the reasons once we close these acquisitions, we will have more debt, the rate will go up. But then when we start paying it down, it'll be a whole lot more accretive to earnings and free cash flow than it was even in '20 and '21 when rates were very low. So we'll get the acquisitions, we'll have to pay more interest to do it, and then we'll be -- we'll get the accretive performance from the acquisitions and the lowering of our debt and our interest cost over the next two years. Where we wind up with our banks right now is what we're working on. I can't say for sure, but we're working very actively with Bank America on this, and with our other banks. And so we expect to report more news on that in the next couple of months. Ben?

No, I was -- and George, I was just going to say just for context, like we're borrowing at about -- on the facility about 5.25 all in today, and it's obviously variable, so very tied movements and short-term rates. So that's where we are today, so.

Yes, the 4.25, George, is looking okay.

And our next question comes from Robert Longnecker with Hope Tree.

Hey, guys. Couple of questions. I think, Mel, you said something about the M&A activity being some percentage of what you did in '19 and '20, which I believe is maybe $170 million or so. Can you kind of provide a little more data or color around that comment you made?

Yes, and I was talking really about the revenue. Alex mentioned earlier, he mentioned $25 million. There's another nice business we've been looking at. It's not at this year or it's really a great business, has all the bells and whistles we look for. So I'm assuming that between now and the middle of next year, we get to about $30 million, and it will be the same profile of businesses and the high margin potential and revenue growth compounded over years that we did at the end of '19, early '20. So it should wind up being about 60% of that. We spent $170 million to get that, about $50 million of high-margin revenue. It won't be exactly proportionate to that in terms of the purchase price. But the businesses themselves should be about 55% without the other one, 60% with the other one once we get them integrated.

Got you. Okay. And then can you talk about pro forma for these acquisitions and pro forma obviously for the EBITDA that's going to come with them, what do you think your current leverage ratio is, once you've closed the acquisitions, what you think the leverage ratio is going to be?

So, Robert, for what we've already -- what we've closed is what I'm comfortable in saying. We're right just above that 5.2 right now. Given cash we've accumulated and what we've just paid for, the business here in Charlotte. What it's going to look like, again what it's going to look like when we, the timing and when this next acquisition will come in is kind of to be determined. We would expect it to be a little higher from where we are today. Exactly where that is, not sure.

And where's the covenant?

So that's the piece where we're focusing on now, right? So it's 5.25 is our max on our credit facility. So that's part of our discussions we're having with Bank of America and the rest of the group now. I'm currently showing no further questions. At this time, I'd like to hand the conference back to Mr. Mel Payne for any closing comments.

Look, we had some great questions, and hopefully we answered those questions to your satisfaction. We have a great company, getting better in a very uncertain, in my own view, geopolitically dangerous world. I can't do anything about all that, all we can do is keep our focus on our talent and our businesses and execute like I know we will, despite what happens in the economy and in the world. So it's a great place to be. If you're part of Carriage, you're suffering some near-term unrealized loss. That's not how I view it. I'm doing these 31 years. Five years from now, seven years from now, we're going to be a much bigger and better company than we are in our business. Thank you very much.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.