By Thomas A. Parmalee
On Nov. 8, Carriage Services reported adjusted third-quarter earnings of 33 cents per share compared with 45 cents a year ago. Quarterly revenue went up, with the company bringing in $90.5 million versus $87.5 million.
Quarterly highlights included:
- 15.5% growth in cemetery operating revenue helped drive an increase of $3 million in total revenue over the prior year quarter.
- Adjusted consolidated EBITDA increased $1.4 million over the prior year quarter, or 6.1%, and adjusted consolidated EBITDA margin increased 70 basis points to 26.8%.
- Reported adjusted free cash flow of $21.4 million, a 30% increase over the third quarter of 2022.
- The company paid down $16.7 million of debt on the credit facility during the quarter.
- The company has updated its full-year 2023 outlook to $375-$380 million in total revenue, adjusted consolidated EBITDA of $105-$110 million, adjusted diluted earnings per share of $1.90-$2.00; free cash flow of $50-$60 million remains unchanged.
Carlos Quezada, vice chairman and CEO, stated, “Despite facing inflationary cost pressures and macroeconomic and pull-forward headwinds, we successfully maintained a 39.9% total field EBITDA margin. Moreover, we increased our adjusted consolidated EBITDA by 6.1%, and grew our adjusted consolidated EBITDA margin by 70 basis points.”
He continued, “Our strong operating results translated into robust free cash flow generation of $21.4 million for the quarter, allowing us to reduce our variable rate credit facility by $16.7 million. Nevertheless, despite this paydown, we experienced a significant increase in interest expense compared to last year’s quarter. After accounting for the approximately 12 cent increase in interest expense, our adjusted diluted earnings per share aligns closely with last year’s quarter.”
Moving forward, the company remains focused on navigating the current macroeconomic environment, which includes continued cost inflation and higher variable interest rates, along with death rate normalization, as the pull-forward effect of COVID continues to impact volume, Quezada said. “We remain focused on our revenue growth strategies, managing our cost structure and maintaining strong margins, and executing our capital allocation plan to accelerate debt payment. We are confident our team will continue to sustain high performance and create long-term value for our shareholders,” he said.
Executives Provide More Insights on Conference Call
On a conference call with Wall Street analysts and investors, Quezada and other members of his team took a deep dive into the quarterly results and what’s ahead for Carriage Services.
Listen to a webcast of the call.
In regard to its review of strategic alternatives, Quezada said the process continues, and the company will not provide additional details until its board completes a review. “Until that time, we will have no further comment on the process,” he said.
He also provided an update on the company’s pact with National Guardian Life Insurance Co. and Precoa, stating, “Our partnership with the National Guardian Life Insurance Company and Precoa preneed has been deployed and fully integrated throughout Western region. We are in the final stages of integrating the Central region and the Eastern region is scheduled to be completed by January 2024. While we are still in the early innings of the integration process, we have already started to see the benefits of this strategy.”
Commenting on Carriage Services’ digital transformation journey known as Trinity, he said, “We have completed the data collection and the gap analysis, and we’re in full-time programming mode with a pilot set to be launched at the end of first quarter of next year. Once deployed, Trinity will increase efficiency and insights related to finance, accounting, data analytics, pricing and other operational functions.”
Another topic he focused on, which has been the subject of much discussion, is the “pull forward” effect that funeral homes have seen as a result of the COVID-19 pandemic, with death rates going down as the pandemic has eased (as many people who would have died later ended up dying earlier than normal).
So, while Carriage Services saw its funeral volumes in the quarter decline about 5% in it’s same-location portfolio on an at-need basis, Quezada observed that CDC data shows that the death rate in the states it operates in went down 9%, signaling the company is actually doing a stellar job in maintaining and boosting market share.
He said, “As it relates to our funeral home portfolio, while we have seen a 5% decline in at-need volume as a consequence of the expected COVID-19 pull-forward effect on our same-store portfolio, our acquisition portfolio and increase in sales average more than made up for it, resulting in total funeral operating revenue of $59.4 million which is $478,000 more than the same period last year.”
Commenting further on the “pull-forward effect,” Quezada said, “We believe it’s going to take probably another full year … — or maybe even two — for the full effect of the pull-forward impact to wash off and to come back to a normalized level. However, we do expect a more seasonalized year in 2024. We have some seasonality now back in 2023, which is something we haven’t experienced over the last three years since COVID started. But with the seasonality coming back and with an expected decline, we do believe revenue growth is going to be achieved, but not on a same-store basis. It will be because of the accretive acquisitions we have done over the past few years.
And the work that all of the managing partners are doing to increase sales average and to add services and merchandises to the families that they’re serving. So yes, we do believe there will be growth on a year-over-year basis. But we will be making that up from acquisitions and sales average perspective.”
Elevated interest rates and debt continues to keep Carriage’s results in check, however.
Robust free cash flow generated $21.4 million for the quarter, allowing the company to reduce its variable rate credit facility by $16.7 million. “However, despite this paydown, we experienced an increase of $2.6 million in interest expense compared to last year’s quarter, significantly impacting our adjusted earnings per share, which ended at 33 cents against 45 cents,” Quezada said. “After accounting for approximately 12 cents increase in interest expense, our adjusted diluted earnings per share are flat compared to the prior year. We will continue to execute our capital allocation strategy with a primary focus on accelerated debt repayment and reducing interest expense.”
L. Kian Granmayeh, executive vice president, chief financial officer and treasurer, said, “Considering this new reality in interest rates, we will continue to be laser-focused on capital allocation and paying down the variable interest debt. Fortunately, the credit facility only accounts for a little over 30% of our financial borrowings. The remaining $400 million has been locked in at 4.25% through May 2029 via our senior notes. As we continue to pay down outstanding borrowings on the credit facility, this should vastly improve our credit profile and reduce our interest rate burden.”
The cemetery segment performed particularly well for Carriage Services during the quarter.
“Our cemetery portfolio delivered impressive growth of 15.5% of total cemetery operating revenue compared to last year’s third quarter,” Quezada said. “Our preneed sales team did an outstanding job delivering growth of 27.2% in total preneed property production and an increase of 8.4% of our same-store portfolio. Total cemetery field EBITDA grew to $9 million or 14.4% over the prior year. These results are primarily driven by the execution of our high-performance cemetery sales plan through increased activity, marketing lead generation efforts and the optimization of Sales Edge, our in-house customer relationship management platform.”
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