By Thomas A. Parmalee
Carriage Services reported huge news during its recent quarterly conference call: It’s back in acquisition mode.
For the second quarter, the company reported adjusted diluted earnings per share of $1.70 compared with $1.38 in the year-ago period, with total revenue of $209.2 million compared with $205.8 million.
Carlos Quezada, CEO and vice chairman (pictured at top), noted on a conference call with Wall Street analysts that the company plans to close on multiple acquisitions in the third quarter.
“After two years of disciplined capital management and more than $100 million paid to reduce our debt, we are pleased to share that we’re back to growth mode, and we’re under contract to acquire new businesses, which we anticipate will close this quarter subject to customary regulatory approvals,” he said. “Combined, these premier locations serve more than 2,600 families and generated more than $15 million in revenue last year. We are excited to return to our long-term strategy of adding shareholder value through high quality acquisitions, and we look forward to providing more details once these transactions formally close in the coming weeks. With these new acquisitions and after accounting for the divestitures of certain non-core assets that closed in the first quarter and others expected to close in the third quarter of this year, we’re updating our full year guidance.”
The company now expects to earn $410 to $420 in revenue for the year compared with a previous forecast of $400 to $410 million; it also boosted its adjusted diluted earnings per share forecast to $3.15 to $3.35, which was previously $3.10 to $3.30.
Quezada said he’s excited about what lies ahead and pleased with the company’s transformation over the past few years.
“It was a challenging 2023,” he told FuneralVision.com, noting that the company’s co-founder and former CEO, suffered a stroke, and the company underwent a review of strategic alternatives following an overture by Park Lawn to buy the company.
When Carriage Services decided to plow ahead as an independent company and focus on paying debt, the executive team knew there would soon be a new CEO, and the company would need to pivot.
“We designed a new logo, we have new values, a new culture and a new purpose,” Quezada said.
Growth Mode
Taking a disciplined approach to deploying capital has been key to the company’s transformation, Quezada said.
With the amount of debt the company was carrying – almost 6x leverage a few years ago (now it’s all the way down to 4.2) – the company had to prove that it could grow organically.
“We call it purposeful growth, and it means more than financial growth,” Quezada said. “It’s also about team development and getting the right people in the right seats – people that focus on relentless improvement.”
The company also made a conscious decision not to engage in mergers and acquisitions, so it could focus on making its balance sheet healthy again.
With that work now largely complete, the company is looking forward to announcing the completion of multiple transactions in the third quarter, which Quezada said represent “the first of many we plan to do moving forward.”
“We want to double the size of the revenue of this company,” he said. “We have ways to do so, through organic growth of 2% to 4%, but the remaining balance of that revenue will have to be through inorganic growth. That is where we are aiming.”
That long-term goal, he believes, is achievable.
“We have financing in place, and our balance sheet is clear,” he said. “We have a refinanced credit facility to make it work.”
The company, however, will still be selective in the firms that it buys.
“We don’t want to buy to buy,” he said. “Lots of consolidation companies have done that and have shown it’s not a great idea. We have a very clear picture of what kind of assets we want to buy – we have a scorecard with certain points.”
Those points include demographics, the cremation rate, location and potential for improvement, he said.
“The business has to do 250 calls or more, and it’s more challenging to find those assets,” he said. “They are out there, but they are not necessarily waving a flag that they want to sell.”
The opportunities, however, are out there, with about 80% of funeral homes remaining in private hands, Quezada observed.
Carriage, which now owns 159 funeral homes in 25 states, is particularly interested in acquiring firms in the South and Southwest, which is seeing an increase in the over 55 population, Quezada said.
“We want to grow more in Florida and in North and South Carolina,” he said. “Also, in Arizona, Louisiana and Alabama – these are all states in which demographics are trending in the right direction. California is challenging from a tax perspective but is also a great market – and we will always want to be there.”
He singled out Utah as a state in which Carriage does not currently have a presence but where it would love to be – particularly in the Salt Lake City area.
Focusing on Costs
Carriage Services is also focusing on streamlining processes and getting costs in line, which includes its core lines of urns and caskets.
On the earnings conference call, Quezada said, “Our urn core line continues to gain traction across our businesses, and we’re in the final planning stages of rolling out our casket core line.” He added, “Both initiatives are key steps in our broader strategy to streamline operations, elevate service consistency and deliver an enhanced experience to the families we serve. We are confident the recently negotiated pricing tied to these core line strategies will drive meaningful margin expansion. But more importantly, the curated selections offer families thoughtful, high-quality options to personalize their loved one’s farewell, further advancing our commitment to creating premier experiences at every touchpoint with every family, every time.”
Before instituting the core line changes, Carriage had a model carried over from previous leadership – one in which individual location managers chose which urns and caskets to offer.
That led to inefficiency, Quezada said.
“That model led to managers choosing over 240 different urn vendors,” he said. “So, let’s say you are selling 10,000 urns per year and you buy them from 240 different vendors – that leverage of scale is nonexistent. You don’t get discounts, and your payment terms are not favorable to the company.”
With the changes, Carriage has narrowed urn purchases to five vendors and is offering a smaller selection.
“So, the percentage of savings is quite significant because now we are negotiating based on volume,” he said.
It also results in a smoother process for families, who can be overwhelmed when they have too many options, he said. “Of course, if someone comes in with a specific request, we will still get them what they need,” he said. “The reality is that this business model moves us away from being fully decentralized to right in the middle.”
As it moves on to caskets, Carriage will follow a similar process, Quezada said.
Many funeral homes now offer 300 different caskets, which he said is “way too many.”
“I think we can come down to 40 to 60 different options, he said, noting that you can offer three different types of wood with different colors, corners and features and then take a similar approach with different gauges of metal caskets.
“We won’t be exclusive to one vendor,” he said, noting that the company plans to work with both Matthews and Batesville – and with another vendor in the mix. Most caskets will come from the two major suppliers, he said, with the location of distribution centers and relationships with individual sales representatives carrying weight on how Carriage proceeds at the location level.
Another big initiative is Carriage’s “Passion for Service program,” which has become a cultural movement, igniting a passion for service delivery and wow moments across the organization.
“By certifying and celebrating team members who go above and beyond in elevated service delivery, we are creating a community of service champions driven by purpose and compassion,” Quezada said. “Passion for service will transform how we connect with each other, our work, and most importantly, with the families who trust us in their most vulnerable moments. We expect the results to be a higher standard of care, deeper team engagement and a powerful competitive edge that sets Carriage apart.”
Asked about the initiative, Quezada noted that every funeral home has a minimal standard of care it must deliver, but everyone can focus more on some little things that resonate, such as having a designated parking spot waiting for a family member when they visit the funeral home and opening the door for them upon arrival.
“And before we go into a conference room, we can give them a tour of our facilities,” he said. “Give them a vision what is possible before even talking about it.”
Carriage Services is also bullish on its implementation of Trinity, an enterprise resource planning system powered by a first-in-class family portal and front-facing engagement tool, Trinity allows funeral directors to deliver an elevated service experience, streamline processes, enhance communication and boost customer service.
“It’s where our accounting takes place and where we get our financials,” Quezada said. “But there are a tremendous number of other systems connected to the core.”
“Our family portal is provided to families – and they can go in, see payments, make payments online, ask questions and see where a loved one is in the stage of a process,” Quezada said. “They can build obituaries online and collaborate with family members and share access.”
It’s clear that Wall Street and stockholders like what they see from Quezada and his executive team, as the stock was recently closing in on $50 per share and at a 52-week high, with a market capitalization of about $770 million.
That’s particularly gratifying given that one of the reasons Carriage got into a problem with debt is because Payne used about $179 million from a credit facility to buy 3 million shares of stock at an average price of $49.06.
“Today, we surpassed that price, so what he bought is finally accretive,” he said.
Read the earnings news release from Carriage Services.
Download the second-quarter investor presentation.
