Carriage Services Announces Record Fourth Quarter, 2020 Full Year Results

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Carriage Services, Inc.
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  • Increases Two Year Roughly Right Scenario;

  • Record Monthly January Performance / First Quarter 2021 Will Reflect Elevated Spike in COVID-19 Deaths;

  • Preparations Begun for Balance Sheet Refinancing After June 1, 2021; and

  • Carriage Services 2021 Theme: Accelerating High Performance Flywheel Effect!

Conference call on Thursday, February 18, 2021 at 9:30 a.m. central time.

HOUSTON, Feb. 17, 2021 (GLOBE NEWSWIRE) -- Carriage Services, Inc. (NYSE: CSV) today announced record results for the fourth quarter and full year ended December 31, 2020 as shown below:

  • Record Fourth Quarter and Full Year Revenue of $90.1 million and $329.4 million, respectively;

  • Record Adjusted Consolidated EBITDA of $28.3 million and $104.3 million, respectively;

  • Record Full Year Adjusted Consolidated EBITDA Margin of 31.6%;

  • Record Full Year Adjusted Free Cash Flow of $70.0 million;

  • Record Adjusted Diluted EPS of $0.57 and $1.86, respectively;

  • Record EBITDA increase/debt reduction decrease of $72.9 million drove decline in leverage ratio from 6.0 to 4.4 times and;

  • Recent recognition by FORBES as one of America’s Top 100 small companies.

Mel Payne, Chairman and CEO, stated, “On February 19, 2020, we announced our annual theme for 2020 as TRANSFORMATIVE HIGH PERFORMANCE and the beginning of the five year timeframe of Carriage’s Good To Great Journey Part II. We also introduced our MILESTONE THREE YEAR SCENARIO reflecting Carriage’s performance transformation by year through 2022. At the top of page two in the February 19th release I summarized the three year transformation process achievements ending 2022 as follows: ‘Reflecting back …. on (performance and balance sheet achievements 2019 through 2022), our company will have executed what we believe in hindsight will be viewed as a complete Carriage Leadership, Portfolio High Performance, Balance Sheet, Earnings and Free Cash Flow Transformation as a Value Creation Platform.’

Then the Coronavirus Pandemic came to America and spread across our portfolio with accompanying government lockdown restrictions about how we conduct our business, severely impacting the very social nature of our work. None of us could have imagined during the last two weeks of March and first two weeks of April that our leadership and employees, both in our funeral home and cemetery operating businesses as well as on our support teams in the field and Houston Support Center, would quickly adapt to the COVID Crisis environment and produce courageous, even heroic, service to their client families and communities, becoming role models for what Being The Best leadership in times of crisis is all about. The last two sections of this release beginning on Page 15 is the last paragraph of my annual theme letter at the beginning of 2020 followed on Page 16 by my year end message to all our employees, “must reads” for any investor or high quality independent business owner in our industry, as they express clearly and profoundly “who and what really matters” in our company culture.

Moreover, our courageous “warrior leaders” and their winning teams of employees on the front lines of the COVID-19 battlefield were able to achieve almost all of the high performance financial milestones in 2020 that had been forecast on February 19th, 2020 for full year 2022. Application to $1.86 of Adjusted Diluted EPS in 2020 of proforma additions of 10ȼ from a full year of trust fund Financial Revenue and EBITDA as a result of outstanding execution of our trust fund repositioning strategy during and after the Coronavirus market crash in late February/March (incremental 24ȼ EPS annually), as well as between 34ȼ - 38ȼ for full year cash interest savings from our anticipated senior notes refinancing, would produce proforma full year 2020 Adjusted Diluted EPS of $2.30 - $2.34, within the range of $2.25 - $2.40 Adjusted Diluted EPS in our original forecast for full year 2022.

The only three year milestone achievement exception was leverage ratio, as our actual Total Debt to Adjusted Consolidated EBITDA Ratio was 4.4 times at December 31, 2020 versus 3.8 - 4.0 times originally forecast for the year ending December 31, 2022. We expect to achieve the balance sheet transformation to a moderate leverage policy of about 4 times within the next few months from a combination of a strong first quarter 2021 performance with Free Cash Flow and divestiture proceeds applied to a meaningful reduction in debt, at which time we plan to refinance $400 million of 6⅝% senior unsecured notes at a much lower interest rate in the current historically low rate environment.

Shown below and on the following pages are comparative 2020 and 2019 financial performance highlights for the fourth quarter and full year, comparative January 2021 performance highlights, the Five Quarter Trend Report ending December 31, 2020 and our updated and increased Two Year Roughly Right Scenario ending December 31, 2022.

Fourth Quarter Ended December 31, 2020 versus Fourth Quarter Ended December 31, 2019

  • Record Total Revenue of $90.1 million compared to $71.1 million, an increase of 26.6%;

  • Record Total Field EBITDA of $41.3 million compared to $28.6 million, an increase of 44.4%;

  • Record Total Field EBITDA Margin of 45.9% compared to 40.2%, an increase of 570 basis points;

  • Record Adjusted Consolidated EBITDA of $28.3 million compared to $19.2 million, an increase of 47.5%;

  • Adjusted Consolidated EBITDA Margin of 31.4% compared to 27.0%, an increase of 440 basis points;

  • Record Adjusted Diluted EPS of $0.57 compared to $0.28, an increase of 103.6%;

  • Adjusted Free Cash Flow of $11.9 million compared to $7.2 million, an increase of 64.5%;

  • Adjusted Free Cash Flow Margin of 13.2% compared to 10.1%, an increase of 310 basis points;

  • Total Debt reduction during the fourth quarter of $9.9 million to $461.1 million;

  • Net Income of $8.4 million, an increase of $5.8 million equal to 225.6%; and

  • GAAP Diluted EPS of $0.46, an increase of $0.32 per share equal to 228.6%.

Year Ended December 31, 2020 versus Year Ended December 31, 2019

  • Record Total Revenue of $329.4 million compared to $274.1 million, an increase of 20.2%;

  • Record Total Field EBITDA of $141.9 million compared to $109.8 million, an increase of 29.3%;

  • Record Total Field EBITDA Margin of 43.1% compared to 40.0%, an increase of 310 basis points;

  • Record Adjusted Consolidated EBITDA of $104.3 million compared to $76.6 million, an increase of 36.1%;

  • Record Adjusted Consolidated EBITDA Margin of 31.6% compared to 27.9%, an increase of 370 basis points;

  • Record Adjusted Diluted EPS of $1.86 compared to $1.25, an increase of 48.8%;

  • Record Adjusted Free Cash Flow of $70.0 million compared to $38.8 million, an increase of 80.3%;

  • Record Adjusted Free Cash Flow Margin of 21.2% compared to 14.2%, an increase of 700 basis points;

  • Record Total Debt reduction of $72.9 million equal to 13.7% from $534 million on January 3, 2020 (peak debt after Oakmont acquisition) to $461.1 million on December 31, 2020.

  • Total Debt of $461.1 million at December 31 to 2020 Adjusted Consolidated EBITDA of $104.3 million equal to 4.4 times compared to Total Peak Debt of $534 million at January 3rd, 2020 to Trailing Four Quarter EBITDA (proforma for three acquisitions in fourth quarter 2019 and one on January 3, 2020) of $89.0 million at December 31, 2019 equal to 6.0 times, a decline of 1.6 turns of leverage during 2020;

  • Net Income of $16.1 million, an increase of $1.6 million equal to 10.7%; and

  • GAAP Diluted EPS of $0.89, an increase of $0.09 per share equal to 11.3%.

We previously presented extensive explanations in our first, second and third quarter earnings releases as to why our High Performance Teams have been able to perform at such an extraordinary level in the face of the Coronavirus Pandemic, which are incorporated by reference herein and will not be repeated in this release. The primary takeaways from our 2020 Full Year TRANSFORMATIVE HIGH PERFORMANCE that will also explain the primary drivers of the continuation of high and sustainable performance in the future are as follows:

  • Leadership Teams at all levels are aligned and incentivized for outstanding execution of Carriage’s Three Core Models to produce a sustainable and powerful performance “FLYWHEEL EFFECT”;

  • Coronavirus accelerated adaptation, entrepreneurialism and innovation across our portfolio by our Managing Partners and Sales Managers, who created high value uniquely customized personal services and sales in hugely adverse local environments;

  • Innovation in business practices and rapid and broad acceptance of technological and digital tools to meet and communicate with client families served as an accelerator of Transformative High Performance;

  • COVID performance lift in volumes, revenues and margins was material, especially so beginning in December 2020 and continuing to spike thus far into 2021, yet we are confident that the combined performance from our five core operating and financial profit centers will sustain the high performance trend in 2021 and thereafter;

  • Strong Same Store Funeral Performance reflects broad market share gains and substantial revenue growth in line with 2019 updated performance standards and 2020 updated incentives for Managing Partners related to achieving three-year Being The Best Compounded Revenue Growth Standards with strong financial incentives for also achieving Being The Best Field EBITDA Margin Range Standards;

  • Acquisition integration of the four large acquisitions (three in fourth quarter of 2019, one on January 3, 2020) is accelerating with much more upside in both the funeral and cemetery segments through 2022 and thereafter;

  • Same Store and Acquisition Cemetery portfolio contributed record revenue at record high Field EBITDA Margins during our record performance in the third and fourth quarters of 2020, yet has substantial preneed property sales and margin upside through 2022 and thereafter, which is covered in a separate cemetery portfolio “High Performance Culture Sales Organization” section in this release;

  • High Performance Talent Acquisition Program has led to much broader and deeper topgrading of Managing Partners, Sales Managers and Directors of Support with A Player Leadership Talent over the last two and one half years, which comprise the three field leadership roles that are sustaining our high operating and financial performance in all areas and is covered in a separate section of this release on “First Who, Then What”;

  • Prepared for and executed a major trust fund repositioning strategy during and after the Coronavirus market crash, substantially increasing recognized and reported Financial Revenue, EBITDA, Free Cash Flow and EPS, thereby raising Consolidated EBITDA Margins to a milestone plateau above 30% and Free Cash Flow Margins to a milestone plateau above 20% after our expected senior notes refinancing in mid-2021;

  • Deleveraging the balance sheet is accelerating from higher Free Cash Flow and divestiture proceeds ahead of planned senior notes refinancing after first call date of June 1, 2021; and

  • Carriage Consolidation, Operating and Value Creation Platform Financial Leveraging Dynamics are positioned for superior long term value creation and compounded shareholder returns through flexible, savvy and disciplined capital allocation in the second half of 2021 and thereafter. Our conviction on becoming a superior long term value creation platform is covered in the section on Page 13 related to the Five Year Good To Great II Shareholder Value Creation Incentive Plan.

January 2021 Comparative Results

  • Record Same Store Funeral Contracts of 4,195, an increase of 33.8%;

  • Record Total Revenue of $34.7 million, an increase of 30.4%;

  • Record Total Field EBITDA of $17.3 million, an increase of 74.4%;

  • Record Total Field EBITDA Margin of 49.8%, an increase of 1,260 basis points;

  • Record Adjusted Consolidated EBITDA of $13.6 million, an increase of 99.1%;

  • Record Adjusted Consolidated EBITDA Margin of 39.2%, an increase of 1,350 basis points;

  • Record Adjusted Net Income of $6.5 million, an increase of 297.9%;

  • Record Adjusted Diluted Earnings Per Share of $0.35, an increase of 288.9%;

  • Estimated Adjusted Free Cash Flow of $12.3 million, an increase of 118.7%; and

  • Estimated Adjusted Free Cash Flow Margin of 35.4%, an increase of 1,430 basis points.

Never in my wildest imagination could I have imagined that we would ever achieve a month of comparative performance from our existing portfolio of operating businesses (no new acquisitions) during which record milestone performances included Total Revenue up 30.4%, Total Field EBITDA up 74.4%, Adjusted Consolidated EBITDA up 99.1%, Estimated Adjusted Free Cash Flow up 118.7%, and Adjusted Diluted EPS up 288.9% to $0.35, equal to the $0.35 Adjusted Diluted EPS for the entire pre-COVID first quarter of 2020 and immediately ahead of our planned senior notes refinancing that should add another 3ȼ of EPS per month.

Beginning in December 2020 we experienced a spike in deaths broadly across our portfolio of funeral homes and cemeteries in 26 states, but the epicenter of the much higher COVID-19 outbreak of infections and deaths has been and continues to be in California, as has been reported by the national media. Given our large portfolio of first class businesses in both Northern and Southern California, the tragic outbreak of COVID-19 deaths in California is producing a material increase in our overall performance. But while the California impact is extreme, our Central and Eastern Region businesses are also experiencing substantially and broadly higher volumes, revenues and margins as reflected in the incredulous 49.8% Total Field EBITDA Margin for January (ALMOST HALF of Record Revenue), up 1,260 basis points from last year.

Our peak seasonal period for deaths has historically been the December to March flu season with varying degrees of severity depending on the strain of flu and effectiveness of the flu vaccine created and modified annually as a health defense to that year’s flu strain. We have no reports of flu impacting the current spike in deaths, and at this point in the COVID-19 Pandemic, it is difficult to know how the various vaccines will impact the much higher death rates we are experiencing across most of our portfolio. We also don’t yet know how effective the MODERNA, PFIZER, JOHNSON & JOHNSON, etc., vaccines will be against the highly contagious and potentially more deadly Coronavirus variants from the U.K., South Africa and Brazil which are now spreading rapidly in the U.S., and when or whether death rates will return to normal seasonal patterns and long term trends during 2021 and thereafter.

Our updated and increased Roughly Right Two Year Scenario section on Page 7 that includes 2021 and 2022 is therefore a little wider in Roughly Right Ranges of Performance compared to our normal ranges to accommodate for the short and long term unknowns related to the COVID-19 Pandemic that at this point are simply unknowable. But our company has enough known drivers of high performance in 2021 and thereafter that we can control to make us confident in our ability to achieve and sustain record high financial performance through the five year Good To Great II timeframe ending on December 31, 2024.

Five Quarter Trend Report

We report our performance results publicly using the same highly transparent Non-GAAP “Trend Reports” that we use internally and which have been explained in previous shareholder letters, including Five Year and Five Quarter Trend Reports that reflect long and short term trends in our core operating, financial and overhead sectors over time. Shown on the next page are highlights from our Five Quarter Trend Report that clearly reflect the accelerating transformative performance process that has occurred at Carriage from September 30, 2019 to December 31, 2020. Never before in our history, prior to our record third quarter 2020 performance, have all five operating and financial segments achieved Field EBITDA Margins of over 40% in the same quarter, which has now been achieved in both the third and fourth quarters of 2020.

FIVE QUARTER OPERATING AND FINANCIAL TREND REPORT HIGHLIGHTS

(000’s except for volume, averages & margins)

4TH QTR 2019

1ST QTR 2020

2ND QTR 2020

3RD QTR 2020

4TH QTR 2020

Funeral Same Store Contracts

8,156

8,625

8,647

8,874

9,669

Average Revenue Per Contract (1)

$5,251

$5,108

$4,855

$4,987

$5,118

Funeral Same Store Burial Contracts

3,038

3,165

3,121

3,132

3,566

Funeral Same Store Burial Rate

37.2%

36.7%

36.1%

35.3%

36.9%

Average Revenue Per Burial Contract

$9,179

$9,032

$8,656

$8,913

$8,981

Funeral Same Store Cremation Contracts

4,471

4,771

4,977

5,114

5,451

Funeral Same Store Cremation Rate

54.8%

55.3%

57.6%

57.6%

56.4%

Average Revenue Per Cremation Contract

$3,324

$3,257

$3,036

$3,234

$3,223

Funeral Same Store Preneed Ratio

17.9%

16.9%

17.1%

17.4%

17.4%

Funeral Same Store Revenue

$42,827

$44,060

$41,983

$44,252

$49,484

Funeral Same Store EBITDA

$16,723

$17,081

$17,808

$18,148

$21,780

Funeral Same Store EBITDA Margin

39.0%

38.8%

42.4%

41.0%

44.0%

Funeral Acquisition Revenue

$8,414

$11,522

$11,337

$11,702

$12,336

Funeral Acquisition EBITDA

$3,119

$4,228

$4,672

$4,699

$5,018

Funeral Acquisition EBITDA Margin

37.1%

36.7%

41.2%

40.2%

40.7%

Cemetery Same Store Revenue

$12,061

$10,906

$11,611

$14,393

$14,784

Cemetery Same Store EBITDA

$4,158

$3,167

$3,656

$6,175

$6,471

Cemetery Same Store EBITDA Margin

34.5%

29.0%

31.5%

42.9%

43.8%

Cemetery Acquisition Revenue

$295

$2,799

$4,055

$5,220

$5,509

Cemetery Acquisition EBITDA

$73

$827

$1,434

$2,335

$2,532

Cemetery Acquisition EBITDA Margin

24.7%

29.5%

35.4%

44.7%

46.0%

Total Financial Revenue

$4,116

$4,236

$4,682

$5,591

$5,226

Total Financial EBITDA

$3,709

$3,819

$4,456

$5,242

$4,887

Total Financial EBITDA Margin

90.1%

90.2%

95.2%

93.8%

93.5%

Total Revenue

$71,149

$77,490

$77,477

$84,393

$90,088

Total Field EBITDA

$28,613

$30,094

$33,221

$37,309

$41,318

Total Field EBITDA Margin

40.2%

38.8%

42.9%

44.2%

45.9%

Adjusted Consolidated EBITDA

$19,183

$22,840

$25,444

$27,666

$28,300

Adjusted Consolidated EBITDA Margin

27.0%

29.5%

32.8%

32.8%

31.4%

Adjusted Diluted EPS

$0.28

$0.35

$0.45

$0.51

$0.57

Adjusted Free Cash Flow

$7,214

$12,607

$17,878

$27,608

$11,870

Adjusted Free Cash Flow Margin

10.1%

16.3%

23.1%

32.7%

13.2%

(1) Excludes Preneed Funeral interest earnings reflected in Total Financial Revenue.

We added more detailed contract data to the Funeral Same Store Section for highly relevant additional transparency over this fifteen month period that shows the initial shock and impact from the Coronavirus Pandemic to our funeral revenue averages in March, then the peak negative impact on revenue averages in the second quarter with a trend toward normalization of revenue averages reflected in the third quarter. The fourth quarter reflects a huge spike in deaths beginning in December 2020 that contributed 1,016 (up 35.7%) or two-thirds of the increase of 1,513 (18.6%) in Same Store Funeral Contracts in the fourth quarter of 2020 over fourth quarter 2019.

Even as the COVID-19 Pandemic has recently caused a new and higher spike in deaths along with renewed mandated social restrictions, our Funeral Managing Partners and their teams of employees performed an increasing number of traditional funerals both in absolute terms and as a percentage of total funerals. The ability by our funeral Managing Partners to adapt quickly and effectively in the fourth quarter to rapidly changing local conditions was a function of learning how best to safely innovate during the early months of the pandemic, reflecting the entrepreneurial leadership skills that produced a same store average revenue per funeral contract of $5,118 in the fourth quarter of 2020, higher than any quarter during 2020 and only 2.5% lower than the $5,251 in the pre-COVID fourth quarter of 2019.

Maybe even more impressive was that our Cemetery Same Store EBITDA Margin of 43.8% in the fourth quarter almost equaled the all time record high 44.0% Funeral Same Store EBITDA Margin also achieved in the fourth quarter, but what was “mind blowing” to all our operating and Executive Team leaders was that our Cemetery Acquisition EBITDA Margin of 46.0% in the fourth quarter exceeded our Funeral Acquisition EBITDA Margin of 40.7% by 530 basis points. Our atneed cemetery performance was meaningfully and broadly higher because of the COVID-19 elevated death rate while our cemetery preneed property sales were no doubt dampened by the increased restrictive social mandates in some of our largest markets.

Nevertheless, our Cemetery Same Store Preneed Property Revenue in the fourth quarter of 2020 was amazingly 26.7% higher than 2019 while Same Store Preneed Margin Dollars was 45.9% higher due to an increase of 690 basis points in the Preneed Margin Percentage from 52.4% to 59.3% of Same Store Total Preneed Property Revenue. Moreover, when the higher Same Store Cemetery preneed sales and margin performance is combined with our higher atneed performance, the Same Store Cemetery Total Operating Revenue in the fourth quarter was $14.8 million or 22.6% higher than 2019, while Same Store Cemetery EBITDA was $6.5 million or 55.6% higher than 2019 because of a 930 basis point increase in Same Store Cemetery EBITDA Margin to 43.8% from 34.5% in 2019. Such outstanding performance in our Same Store Cemetery portfolio is reflective of the inherent operating leverage of significantly higher revenue flowing through the mostly fixed costs of each business which was optimized by the management skills of our Cemetery Managing Partners.

From an operational and financial perspective, when our Executive Team saw that our Total Field EBITDA Margin in the fourth quarter was 45.9% (almost HALF of Total Revenue!) on record revenue of $90.1 million, we were first almost in disbelief, which quickly turned to being humbled, honored and inspired by the breadth and depth of such amazing work by highly motivated and skilled leaders and employees throughout our highly diverse (size, geography, revenue profile) portfolio of funeral homes and cemeteries under incredibly harsh local environments. To have so many High Performance Heroes in our company during a tragic COVID-19 Pandemic courageously serving client families and communities when they are needed the most is truly a milestone achievement for a company whose Mission is Being The Best,” concluded Mr. Payne.

Updated Milestone Two Year Scenario

Ben Brink, Chief Financial Officer, stated, “We are excited to announce an updated Milestone Two Year Scenario that shows significantly higher performance expectations through 2022 compared to our previous third quarter earnings release on October 27, 2020. We believe it is important to provide the investment community with our best ‘Roughly Right Ranges’ view of our future performance regardless of the uncertainty that may exist in the world around us, as we wear as a badge of high performance honor that we never withdrew our Three Year Scenario during the initial peak period of Coronavirus Pandemic uncertainty. After initially lowering the 2020 ranges after our first quarter earnings release on May 19, 2020, we began to raise the performance ranges but not fast enough to catch up with our increasing record 2020 performance metrics, during the balance of the year, which exceeded those for 2022 in our initial forecast and led to Carriage raising its dividend twice during the pandemic (May and October).

The updated two year scenario on the next page does not include any new acquisitions but does include the impact of our planned divestitures and the completion of a planned refinancing transaction of our high yield notes in June 2021. The major takeaways from the updated Milestone Two Year Scenario are:

Improved operating and financial performance expectations through 2022 driven by:

  • Continuation of Same Store Funeral market share gains with improvement in our average revenue per contract, particularly cremations;

  • Higher growth rates in preneed cemetery property sales beginning in 2021 and accelerating in 2022 at higher Cemetery Field EBITDA Margins;

  • Successful integration of the four recent strategic acquisitions leading to improved performance expectations compared to our initial expectations;

  • Full impact of our trust fund repositioning strategy resulting in a significant and sustainable increase in Financial Revenue and EBITDA; and

  • Substantially lower cash interest costs from our planned senior notes refinancing during the second half of 2021 and full year 2022.

After the planned refinancing of our senior notes as soon as June 1, 2021, we will have completely transformed all parts of our company into a sustainable and predictable shareholder value creation platform for the future by savvy, flexible and wise capital allocation to optimize the intrinsic value of each CSV share over time. One year from now at the beginning of 2022, hopefully after the tragedy of COVID-19 is behind our country and the world, we will produce another Three Year Roughly Right Scenario for the 2022-2024 timeframe. This time we will also include multiple scenarios relating to various capital allocation assumptions and the application of benchmark valuation methodologies to our increasing performance metrics which will reflect a range of CSV share price levels over the three year period that closely align with the higher 30% to 40% five year compounded CSV share price return categories in our Good To Great II Shareholder Value Creation Incentive Plan, covered in a separate section on Page 13 in this release.

Updated Two Year Scenario

Performance Metric

2019A

2020A

2021

2022

3 Year
Midpoint CAGR

Total Revenue

$274.1

$329.4

$330 - $338

$335 - $345

7.5%

Total Field EBITDA

$109.8

$141.9

$143 - $148

$146 - $152

10.7%

Total Field EBITDA Margin

40%

43.1%

43.0% - 44.0%

43.5% - 44.5%

3.2%

Adjusted Consolidated EBITDA

$76.6

$104.3

$104 - $110

$108 - $114

13.2%

Adjusted Consolidated EBITDA Margin

27.9%

31.6%

31.5% - 32.5%

32.0% - 33.0%

5.2%

Adjusted Diluted EPS

$1.25

$1.86

$2.25 - $2.35

$2.45 - $2.65

26.7%

Adjusted Free Cash Flow

$38.8

$70.0

$63 – $67

$67 - $71

21.8%

Adjusted FCF Margin

13.6%

21.2%

19.0% - 20.0%

20.0% - 21.0%

14.6%

Total Debt Outstanding (1)

$534(2)

$461.1

$420 - $430(3)

$365 - $375

(13.5)%

Total Debt to EBITDA Multiple

7.0(1)

4.4

3.8 - 4.0

3.2 – 3.4

N/A

(1) Includes 2020 EBITDA for acquisitions.
(2) Jan 3, 2020 Acquisition of Oakmont and peak debt.
(3) Doesn’t include approximately $20 million prepayment premium on planned $400 million Senior Notes refinancing.

Free Cash Flow and Leverage

Our record operating results in 2020 led to a record $70 million of Adjusted Free Cash Flow and a record Adjusted Free Cash Flow Margin of 21.2%. These historic performance records represent incredible increases of 80.3% in Adjusted Free Cash Flow and 700 basis points in Adjusted Free Cash Flow Margin in 2020 compared to 2019, and demonstrate the cash earning power and potential of Carriage going forward.

We introduced the new Adjusted Free Cash Flow Margin financial metric in our first quarter earnings press release dated May 19, 2020 to further illustrate the growing percentage of each dollar of revenue that is available as internally generated cash capital for allocation into high return investments to optimize the growth in intrinsic value per share of Carriage. We will continue to report this important differentiating metric in our future performance releases and expect continued expansion on an annual basis after completion of our senior note refinancing transaction.

Our record Adjusted Free Cash also benefited from a minimal amount of cash taxes being paid in 2020 due to previously implemented internal tax methodology changes and benefits from the CARES Act. In addition, we received a tax refund of approximately $7 million that is not included in our reported Adjusted Free Cash Flow for 2020. Carriage will be a full cash taxpayer in 2021, which is the only reason we have forecast the range of Adjusted Free Cash Flow to be slightly lower at $63 - $67 million in 2021 compared to 2020.

The record Adjusted Free Cash Flow allowed Carriage to make remarkably fast progress on our commitment to reduce debt and improve our leverage profile in 2020. For the year our leverage ratio improved 1.6 turns to 4.4 times from a high of 6.0 times, as our Total Debt declined $72.9 million or 13.7% from a peak of $534 million on January 3, 2020 to $461.1 million at year end. Our Total Debt to Adjusted Consolidated EBITDA ratio should fall to 4 times or below during the first half of 2021 ahead of our anticipated senior note refinancing.

We closed on $8.5 million in divestitures in 2020 and have another $10 - $11 million in divestitures that are either under contract or currently being actively marketed. We believe we will have closed or have the majority of these divestitures under contract to sell by the end of the second quarter.

Senior Note Refinancing & Capital Allocation

As we have outlined in previous earnings releases, we intend to execute a capital markets transaction to refinance our $400 million 6.625% unsecured senior notes when they become callable at $104.696 on June 1, 2021. Based on the current trading price and yield of our outstanding bonds, the continued low interest rate environment and the strength of the high yield bond market, we expect to refinance the $400 million of notes with a new 8-10 year unsecured senior notes issue with a coupon approximately 250 basis points lower than our current rate. This planned transaction would be immediately accretive to annual earnings per share by $.34-$.38 and would substantially increase annual Adjusted Free Cash Flow by reducing cash interest expense by $9-$10 million.

We view the approximately $20 million call premium on our senior notes from the ROIC perspective of a new investment opportunity just as we would a new acquisition or share repurchase. In this case, assuming a new $400 million senior notes issue at a coupon of 4.125% versus the existing coupon of 6.625%, the pretax cash ROIC would be 50% annually for the 8-10 year maturity of the issue. It would be almost impossible to find a better value creation use for our capital. Moreover, this transaction should lower our cost of capital a full point to about 6.5% from 7.5%, enhancing the value creation ROIC spread on all future capital allocation investments.

Post the completion of our senior notes refinancing, Carriage would have the financial flexibility to allocate our capital strategically to optimize the intrinsic value of each share. We believe Carriage has entered a capital allocation and value creation ‘sweet spot’ for the next 5-10 years, meaning numerous attractive investment opportunities with higher long term organic growth potential and consequently higher rates of return on invested capital than ever before in our history. Savvy and flexible capital allocation will primarily be funded with our own recurring and growing Free Cash Flow, allowing Carriage to maintain a more moderate Debt to Adjusted EBITDA leverage profile and policy than in the past. Higher return capital allocation in combination with our lower cost of capital from the refinancing transaction should lead to significant increases in Carriage’s overall return on invested capital in the years ahead.

After completion of the refinancing transaction our capital allocation decisions will be focused on the following five areas:

  1. Acquisitions. Partnering with the best remaining independent funeral homes and cemeteries in America based on our updated Strategic Acquisition Model. Due to the operational challenges that our industry has experienced due to the Coronavirus Pandemic, we have seen the acquisition market for high quality independent businesses in large strategic markets be close to non-existent over the past year, as independent owners focused on the challenges of the pandemic rather than succession planning. We expect this dynamic to change in the latter half of this year and into 2022 and believe Carriage will be uniquely positioned to continue to be a preferred choice for leading independent owners who are looking for the best long term succession planning solution for their businesses, employees and communities they serve.

  2. Internal Growth Capital Expenditures. We believe the best businesses are ones that have superior growth opportunities, enabling us to allocate more capital over time at higher and increasing rates of return on invested capital. We are excited about the opportunities we have across our portfolio to allocate capital at high rates of return as part of our expectation for higher organic Funeral Home and Cemetery Revenue and Field EBITDA growth rates in the future.

  3. Share Repurchases. We will allocate capital opportunistically to repurchase Carriage shares if we believe they trade at a significant discount to intrinsic value. We will also evaluate potential share repurchase activity in relation to any near term large scale acquisition opportunities, as we are much more focused on increasing the long term compounding rate for each of our ownership shares than on just getting bigger by adding revenue from acquisitions.

  4. Dividend Increases. We were pleased to increase our annual dividend to shareholders by 33% in 2020 with two increases of $.05 each in the second and fourth quarter. Our current annual dividend is $.40 per CSV share and represents a current dividend equity yield of about 1.1%. In the future, we intend to have our annual dividend per share at a level that approximates a 1% dividend equity yield, while the total amount of dividends paid would approximate no more than 10% of our annual Adjusted Free Cash Flow.

  5. Debt Repayment. We made amazingly fast progress on our debt reduction plan in 2020 that led to acceleration of the improvement in our credit profile. Once we have completed the refinancing transaction, we intend to operate at a more moderate leverage policy of about 4 times Debt to Adjusted Consolidated EBITDA in order to maintain the maximum financial flexibility to support our future capital allocation. We also believe equity investors would support this policy as less risky, which could have the impact of increasing our valuation multiples.


Preneed Trust Fund Portfolio & Financial Revenue

CSV Discretionary Preneed Trust Holdings (in millions)

At December 31, 2019

Cost

% Total

Market

% Total

Unrealized Gain/Loss

Annual Income

Fixed Income

$

114,519

55%

$

118,668

56%

$

4,148

$

7,532

Equity

$

77,815

37%

$

78,957

37%

$

1,142

$

2,568

Cash & Cash Equivalents

$

15,518

8%

$

15,518

7%

$

-

$

70

Total

$

207,852

100%

$

213,143

100%

$

5,290

$

10,170

At March 6, 2020

Cost

% Total

Market

% Total

Unrealized Gain/Loss

Annual Income

Fixed Income

$

88,371

40%

$

89,039

43%

$

668

$

6,957

Equity

$

76,951

35%

$

63,239

31%

$

(13,711

)

$

2,345

Cash & Cash Equivalents

$

53,876

25%

$

53,876

26%

$

-

$

85

Total

$

219,198

100%

$

206,154

100%

$

(13,043

)

$

9,387

At March 23, 2020

Cost

% Total

Market

% Total

Unrealized Gain/Loss

Annual Income

Fixed Income

$

100,801

46%

$

80,113

51%

$

(20,688

)

$

8,305

Equity

$

107,303

49%

$

67,927

43%

$

(39,376

)

$

3,791

Cash & Cash Equivalents

$

10,286

5%

$

10,286

6%

$

-

$

65

Total

$

218,390

100%

$

158,326

100%

$

(60,064

)

$

12,161

At December 31, 2020

Cost

% Total

Market

% Total

Unrealized Gain/Loss

Annual Income

Fixed Income

$

138,548

61%

$

150,722

63%

$

12,174

$

12,247

Equity

$

82,332

37%

$

85,401

35%

$

3,069

$

3,673

Cash & Cash Equivalents

$

4,667

2%

$

4,667

2%

$

-

$

-

Total

$

225,547

100%

$

240,790

100%

$

15,243

$

15,920

At February 8, 2021

Cost

% Total

Market

% Total

Unrealized Gain/Loss

Annual Income

Fixed Income

$

138,491

63%

$

154,135

61%

$

15,644

$

12,229

Equity

$

78,050

35%

$

95,306

38%

$

17,256

$

3,720

Cash & Cash Equivalents

$

4,052

2%

$

4,052

1%

$

-

$

-

Total

$

220,593

100%

$

253,493

100%

$

32,900

$

15,949



Investment Performance 2020

Time Frame

Investment Performance

Index Performance

1 year ended 12/31/2020

Discretionary

Total Trust

S&P 500

High Yield Bond Index

70/30 Index Benchmark

16.10%

14.90%

18.40%

7.10%

10.50%

Carriage’s Discretionary Preneed Trust Fund Portfolio had a total return of 16.1% in 2020 compared to 18.4% for the S&P 500 and 10.5% for our 70/30 High Yield Bond/S&P 500 benchmark. The 16.1% return in 2020 improved our long term average annual total return for our Discretionary Preneed Trust portfolio to 13.9% since Carriage began to manage its trust funds assets internally on October 14, 2008.

We have described in-depth in our previous three quarterly earnings releases the successful execution of our Trust Fund Repositioning Strategy beginning at the height of the Coronavirus Market Crisis in March 2020 when we quickly deployed $50 million of cash capital as liquidity dried up and normal price discovery mechanisms broke down throughout both equity and fixed income markets. Since March 6, 2020, we have deployed a total of about $90 million in new capital through February 2021 that has led to the following benefits to the current and future performance of our trust fund portfolio and the correlated substantial increase in Carriage’s reported Financial Revenue and EBITDA:

  1. The $90 million of new capital deployed increased recurring annual income in our trust fund portfolio by approximately $8.3 million or 108%, which increased the total recurring annual income to $16 million.

  2. The $90 million of new capital deployed has generated $36.3 million of realized and unrealized capital gains, of which about $33.7 million remain unrealized at this time.

  3. The $90 million of new capital deployed was allocated $37.8 million (42%) into equities at a yield to cost of 7.2% which currently have $23 million in unrealized gains, and $52.1 million (58%) into fixed income securities at a yield to cost of 10.6% which currently have $10.7 million in unrealized gains.

  4. Execution of the Repositioning Strategy coupled with existing long term core holdings has positioned our Preneed Trust Funds for additional long term capital appreciation and the ability to maintain the current high level of recurring income.

  5. Primarily driven by the increase in recurring investment income earned by our Cemetery Perpetual Care Trusts, our recognized and reported Financial Revenue increased 24.6% to $19.7 million while Financial EBITDA increased 29.3% to $18.4 million in 2020 compared to 2019. This increase while substantial only included the benefits to Financial Revenue and EBITDA from our Repositioning Strategy for 7 months from June through December.

  6. Financial Revenue is expected to increase to approximately $22 - $23 million in 2021, while Financial EBITDA is forecast to grow to $21 -$22 million at a 94% -95% Financial EBITDA Margin in 2021. We view this amount of Financial Revenue and EBITDA as sustainable over the next 3-5 years based on the current dividend profile of our equity positions and maturity and quality profile of our fixed income portfolio.

  7. Upside drivers to our current ‘Roughly Right Ranges’ of Financial Revenue and EBITDA forecasts are higher value of maturing preneed funeral and cemetery contracts from currently unrealized capital gains that are recognized over the next 3-5 years and accrued to the underlying preneed contracts, as well as higher Cemetery Finance Charges from substantially higher increases in cemetery preneed property sales.

For additional detail regarding the execution of our Trust Fund Repositioning Strategy I would encourage investors to refer to our three previous 2020 quarterly earnings press releases,” concluded Mr. Brink.

Cemetery High Performance Culture Sales Organization

Mr. Payne continued, “In June 2020 Carlos Quezada joined our Executive Team to lead Cemetery Sales and Marketing and I introduced him to the public in our second quarter earnings release on July 28th as follows:

“While in the past we have had spurts of high property sales performance in our ten largest cemeteries, we have never been able to sustain such performance over the long term under our decentralized decision making business model designed originally for our standalone funeral business portfolio.

Carlos will have the primary responsibility of building high performance sales teams and standardized sales systems across our portfolio of cemeteries. We believe that his leadership and past success at building high performance winning teams will finally unleash the broad and sustainable performance power within our cemetery portfolio.”

It has been only six and one half months since my introduction of Carlos in the July 28th second quarter earnings release, yet he has made amazing progress designing and implementing the foundational elements and initial phases of a two year plan to achieve his mission as stated above. Perhaps the most important achievement thus far is that he and the team he has assembled has instilled a sense of “high performance belief and excitement” not only among the leaders in our cemetery portfolio but also among leaders in the funeral portfolio, Houston Support Center and especially the Executive Team about “what’s possible” related to the substantial incremental cemetery portfolio contribution to our future revenue, earnings and free cash flow.

While it would be difficult to define the impact Carlos and his team have had on our record Cemetery Preneed Property Revenue and Field EBITDA Dollars and Margins as reflected in the third and fourth quarters of our Five Quarter Trend Report ending December 31, 2020, we believe the impact was material yet remarkably achieved under the harshest and most restrictive preneed sales environment in the history of our company. But as Carlos and his new team constantly say, “This is only the beginning, the best is yet to come and ‘It’s A Great Time To Be At Carriage’!”

Carlos and his team have collaborated seamlessly with all other members of our operations leadership teams as well as with Ben Brink and our other Executive Team members to build an initial financial forecast for our same store and acquisition cemetery portfolio which for the first time has been included in our updated and increased Two Year Roughly Right Scenario for 2021 and 2022. Carlos will be on our conference call tomorrow morning to share more of his exciting plans for our cemetery portfolio and how those plans will impact the future of Carriage.

High Performance Talent Acquisition Program: First Who, Then What

Jim Collins published his famous book Good To Great in 2001, yet we did not believe we were good (enough) to launch our first Five Year Good To Great Journey until the end of 2011. Since then we have focused relentlessly on the simple high performance culture concept of First Who, Then What to get the Right Who’s on the Carriage Good To Great Journey Bus, get the Wrong Who’s off the Bus, and then get the Right Who’s in the Right Seats on the Bus: BEFORE stepping on the gas and heading toward our Good To Great Journey Destination.

As we learned the hard way in 2017 and 2018, writing the above concept down is easy, but getting it mostly right most of the time is extraordinarily difficult to sustain over many years. But it works magic when you do get it right, the most recent example being the Tom Brady led Tampa Bay Buccaneers winning the Super Bowl over the Kansas City Chiefs and their $500 million superstar magician quarterback Patrick Mahomes. I heard over and over in both the pregame activities and during the game that when Brady chose to go to the Buccaneers one year ago after winning six Super Bowls and becoming the Greatest Quarterback Of ALL Time (GOAT) with the New England Patriots, he had assessed the players and coaches and believed they lacked only one thing to become a perennial winner – A CHANGE IN THEIR MINDSET and CULTURE so that LOSING was unacceptable and WINNING was the only option.

When I had to step back into leading operations in September 2018, I found that the operating leaders whom I had promoted had lost the high performance followship of our winning leaders and teams across our portfolio, and had therefore lost the winning mindset and cultural edge and alignment needed to produce broadly higher and sustainable performance in our portfolio. First Who, Then What works just as powerfully in a negative direction when you have the Wrong Who’s responsible for leading a group of Right Who’s. It was my First Who, Then What mistake that let our people become demoralized, so it was my duty to make it right with the help of many aligned leaders and employees. Losing was unacceptable, failure was not an option and becoming a Carriage Being the Best TEAM of WINNING TEAMS again across our portfolio was the only option.

So when we turned for help in finding a large number of Right Who A Player operating leaders at all levels of the company to replace the Wrong Who’s from their seats on the Carriage Good To Great Journey Bus, Jason Buchbinder stepped up big time as head of our High Performance Talent Acquisition Program. Jason had joined Carriage only six months earlier on March 12, 2018 after twelve years of broad operating experience in our industry with another consolidation company.

What Jason has achieved in collaboration with our Operating Leaders and Executive Team Members since September 2018 has itself been transformative to the very nature of our definition of Carriage as a high performance culture company that just happens to be in the funeral and cemetery industry. He has mastered the art of getting the high performance culture concept of First Who, Then What to be The RIGHT WHO A PLAYER with almost every opportunity for High Performance Talent Acquisition that he handles, especially Directors of Support, Managing Partners, Sales Managers, Funeral Arrangers and Preneed Sales Counselors. It is an honor indeed to have him as one of the 47 key leader participants in our Good To Great II Five Year Shareholder Value Creation Incentive Plan and a guest Carriage High Performance Culture Leader participant on our call tomorrow.

Good To Great II Five Year Shareholder Value Creation Incentive Plan

We have received a lot of positive feedback from institutional investors about what I labeled on Page 7 of our first quarter release dated May 19, 2020 as a pure form of shareholder aligned “Pay For Long Term High Performance”, i.e. incentive awards paid in appreciated CSV shares in early 2025 to 47 key leaders of Carriage conditioned on achieving one of five CSV share price CAGR categories (20%, 25%, 30%, 35%, 40%) over the five years ending 2024 (CSV price range of $35.78 to $77.34). After initially publishing our Milestone Three Year Roughly Right Scenario on February 19, 2020, and subsequently having our shares plummet below $15 per share in the Coronavirus Pandemic market crash, it seemed like a “no-brainer” to create a unique five year “pay for sustained high performance incentive plan” for 47 of our leaders (ten of which are Best of the Best Managing Partners who serve on our Standards Council), all of whom I considered critically important to the execution of our five year operating and financial performance plan.

As I have learned from being a long time student of the awesomely simple but wonderful investment ideas of Warren Buffett and Charlie Munger, patience is a “competitive advantage virtue” not only in investing but also in building a good and valuable company over time based on the Good To Great high performance concepts of “First Who, Then What”, especially related to that company finally evolving after almost thirty years into a unique superior long term investment opportunity. Given the thousands of investment choices available in markets across the world, I realized that Mr. Market crashing almost 40% in February and March last year because of scary and real “Black Swan Events” related to COVID-19 had served up one of the greatest investment opportunities of my life in the company I had co-founded on June 1, 1991.

As the largest individual shareholder owning about 10% of outstanding shares with my wife and two grown children and owning nothing else but Carriage, it made total sense to create “a unique one time only” incentive program over five years for 47 of our most talented and aligned people based on wealth creation defined by compounded share price returns of between 20% and 40% at 5% increments, starting with the Mr. Market base “gift price” of $14.38. All I could think about was mentoring the other 46 participants over the five year vesting timeframe on how each of them could and therefore would execute their role individually and as a team to create sustained high performance wealth for all our shareholders which in turn would achieve financial rewards in the form of ownership of their company beyond what they could previously have imagined.

We pride ourselves for having created and evolved the most generous annual Being The Best and five year Good To Great Incentive Programs for our Managing Partners (owners) in the sixty year history of consolidation of our industry. Our annual funeral Being The Best incentive concept is simple: The higher the annual Standards Achievement between 50% (minimum for incentive bonus) and 100% by our funeral Managing Partners, the greater the percentage of the business Field EBITDA shared with the Managing Partners and his/her employees with no dollar limit. A Managing Partner of a funeral business that achieves Being The Best Standards between 50% and 70% shares in 3% times the annual Standards Achievement % times annual Field EBITDA (employees another 1% or 33% of Managing Partner incentive earned); those Managing Partners achieving 70% - 85% share in 4½% and those achieving 85% - 100% share in 6% of their business Field EBITDA. Funeral Revenue and Field EBITDA referenced here includes financial revenue, which we separate on our Trend Reports but which our Managing Partners get full credit for in their incentive programs.

For example, we had a record 61 funeral businesses (excluding our four newest acquisitions) achieve between 85% - 100% of Standards during 2020, representing 48% of our 126 separately managed funeral businesses, 56% of Funeral Revenue and 59% of Funeral Field EBITDA at a combined Field EBITDA Margin of 46.2%, 510 basis points higher than 2019. This group of high performance funeral homes increased revenue in 2020 by $13.8 million or 13% over 2019 and Field EBITDA by $11.8 million or 26.7%, converting an amazing 86% of increased revenue into increased Field EBITDA. The 61 Managing Partners and their employees earned a total of $4 million in Being The Best Incentive Bonuses, an increase of $1.8 million over 2019 equal to about 15% of the increase of $11.8 million in Field EBITDA that was earned and shared with these 61 High Performance Managing Partners and their employees.

The five year Good To Great Incentive Plan for Managing Partners requires at least a minimum 1% compounded annual net revenue growth rate scaled up to a maximum of 4% compound revenue growth rate, which given the inherent operating leverage of more revenue flowing through the high fixed costs of each business, should lead to increasing Field EBITDA Margins over the full five year period, thereby producing substantially higher incremental Revenue and Field EBITDA by the end of each five year timeframe. Such sustained high performance by a funeral Managing Partner produces a substantial incentive bonus after five years, the size of which is a function of five year CAGR in Revenue and the average annual Being The Best Incentive Bonus paid in each of the five years.

All other things being equal, a 4% or higher compounded revenue rate under the five year Good To Great Incentive Plan would produce a bonus 4 times greater than a 1% compound revenue rate, paid half in cash and half in appreciated CSV shares after five years. We currently have 31 funeral businesses out of a potential group of 50 businesses which qualify for the Good To Great Award heading into their fifth year, i.e. each has achieved 1% - 4% or higher compounded revenue after four years ending 2020 under the leadership of the same Managing Partner. At the end of each five year Good To Great timeframe, this long term incentive program reboots for another five years so long as the Managing Partner (First Who, Then What) remains the same.

Therefore, the Five Year Good To Great II Shareholder Value Creation Incentive Plan for 37 critical leaders who aren’t Managing Partners of one of our businesses aligns perfectly with the annual and five year incentive plans for our Managing Partners, which in combination serves as a “superglue” for high performance culture A Player talent at all levels to execute their roles individually and in teams at the highest possible level. At the end of 2020 our Executive Team and other leaders within the Houston Support Center began to brainstorm the critical components and sequential elements of the “Carriage Flywheel” for purposes of educating all of our people both in the field and Houston Support Center on why Carriage has become a high performance culture company that just happens to be in the funeral and cemetery business, which then led to our 2021 theme of Carriage Services 2021: Accelerating High Performance Flywheel Effect!

I have explained to all of these wonderful leaders and employees that few people in their careers are at the right company in the right industry at the right time so that their financial dreams and aspirations can come true while at the same time finding great meaning and joy in their work. We are all committed to the passionate belief that the right company is Carriage and the right time is NOW, and that we have control over our own performance destiny based on HIGH PERFORMANCE CULTURE EXECUTION, EXECUTION, EXECUTION!

Observations About 2020, the Evolution of our Standards Operating Model, and the Future

After the shock of a once in a lifetime worldwide Coronavirus Pandemic during which death and the fear of death and the unknown becomes part of daily life (or the lack of normal daily life as we had known it), it has been a time for reflection on what really matters both personally and professionally. Within Carriage, we are blessed that the nature of the noble work that our wonderful people do means that there is little distinction between personal and professional, as Carriage has become like family to most of us who are committed to a Good To Great Journey that never ends.

For those of you interested in Carriage but maybe new to our almost thirty years of history, I will repeat verbatim the entire last section in my 2016 Shareholder Letter (Pages 38 and 39), which covered the first 25 years of Carriage and was titled, “The Evolution of Our Learning Journey.” As you reflect upon our amazing milestone year of Transformative High Performance in 2020 during the tragedy of a Coronavirus Pandemic, I believe you will find the content in this section more profoundly valid today in the era of the COVID-19 Pandemic than when it was written four years ago in early 2017.

Final Observations About The Past and Present

To conclude this Shareholder Letter, I will share a few observations and conclusions about human nature and the nature of our markets as well as what I believe to be the current state of the nature of Carriage.

  • It is very difficult for most people (even some very smart ones) to think about something in a completely new, unorthodox, counterintuitive and unconventional way – which makes the uniqueness of Carriage as it has evolved pretty cool for those who “get to the other side!”

  • Our small market capitalization size is a large hurdle to overcome with many institutional investors who perceive our small size as riskier and/or need to invest much larger pools of capital than the liquidity of our outstanding shares can accommodate, but we have learned to live with this frustration and focus only on maximizing the compounding of the intrinsic value of each of our shares over five to ten year timeframes into a “coulda, woulda, shoulda bought that” share price!

  • Our organizational framework is designed around the idea of partnership. Our three models and high performance culture ideas and concepts as they have evolved over the last thirteen years have turned the classic methodology of consolidation upside down and made the most important jobs in the company those of our Managing Partners at the local business level rather than up the chain of command.

  • The high performance culture ideas and concepts of Carriage as they have been implemented and evolved have dramatically flattened our organization structure; eliminated numerous bureaucratic layers and the associated politics, perks and meaningless titles; simplified and eliminated in many cases the complexity of burdensome reporting, policies and procedures; and eliminated endless corporate process oriented initiatives – all characteristics that creep into most companies as they grow through a succession of enterprise leaders over time.

  • Our High Performance Culture Framework is more cost effective organizationally, as the corporate organizational overhead does not “eat up” a substantial amount of the incremental financial performance of our field businesses, especially as we leverage our consolidation platform with growth by highly selective acquisitions, enabling more of the value creation to be shared with both those who create it locally and with public shareholders.

  • The best remaining family owned funeral home and cemetery business franchises in the best markets will absolutely get better over time after full integration into our Being The Best framework of operations support.

  • The innovation, evolution and application of our Standards Operating Model and High Performance Culture Framework for operating and consolidating the funeral and cemetery industry is akin to intellectual property that was developed over the last thirteen years which forms a “protective cultural moat” around Carriage’s earnings power.

  • Curious and disappointed why no one has challenged our contention that Carriage’s 29.7% Adjusted Consolidated EBITDA Margin in 2016 is not only a company but an industry milestone that has never been achieved. But even more profoundly, “What Does It Mean?”

  • Intrigued why no one has had the curiosity to ask us about the book Beyond Budgeting co-authored and published in 2003 by Robin Frazer and Jeremy Hope or about their article “Who Needs Budgets” published in the February 2003 edition of Harvard Business Review. But really fascinated that the ideas and concepts they researched on a “radically decentralized” business model have gone nowhere fast in “Corporate America” over the last fourteen years.

  • Fascinated to learn about and read The Evolution of Cooperation, authored by Robert Axelrod and published in 1984, from a recommendation in Mark Leonard’s 2014 Constellation Software Shareholder Letter, a book he said changed his thinking on many important matters. After reading this book and a subsequent one titled Harnessing Complexity with the subtitle Organizational Implications of a Scientific Frontier, co-authored by Robert Axelrod and Michael D. Cohen in 2000, I would postulate (maybe not so humbly) that Carriage has evolved into a rather advanced state of “harnessing the complexity” of successfully operating and consolidating the highly fragmented funeral and cemetery industry for the huge benefit over time of long term shareowners.”

Who and What Really Matters

The very best part of my job is letting our wonderful leaders and employees know what those of us here in the Houston Support Center and our Board think of them and the noble work they do no matter the harshness of the environment or local conditions in which they are called to service. Shown below is the last paragraph of my 2020 annual theme letter to Managing Partners, Sales Managers and Houston Support Center Leaders at the beginning of the year dated February 18, 2020, followed by my verbatim year end message to all employees dated December 29, 2020, which together serve as the beginning and ending bookends to a year that profoundly changed our country and the world:

Last Paragraph of 2020 Theme Letter Dated February 18, 2020

“I will end this theme letter the same way I have ended many others since we launched the first five year Good To Great Journey on January 1, 2012, with a quote from the book Good To Great by Jim Collins:

Greatness is not a matter of circumstance. Greatness, it turns out, is a matter of conscious choice!”

As I have always done and can never do otherwise, I choose Greatness because the challenges and difficulties that must be overcome by special people bound together by a common cause of Being The Best at their noble profession is simply the most meaningful and wonderful journey in business and life that anyone could hope for or indeed imagine.

Mel”

Year End 2020 Message to All Employees Dated December 29, 2020

“We entered this year with high hopes of 2020 being a breakout year of TRANSFORMATIVE HIGH PERFORMANCE for each of our operating businesses and for Carriage as a Being The Best Company in the funeral and cemetery industry. And then the world, our country, our industry and our company were all shocked to the core by the Coronavirus Pandemic Crisis which began in March and is now reaching new peaks of infections and deaths during what has typically been our peak flu season.

Yet our wonderful Managing Partners, Sales Managers and their teams of high performance employees in each of our businesses adapted quickly to the many fears and initial unknowns related to the COVID-19 Pandemic and became role models for their communities and client families for what courageous leadership in times of crisis is all about. And the wonderful support teams comprised of our Directors of Support and Sales across the country along with the leaders and employees in the various Houston Support Center departments have been in your foxhole since day one of the pandemic supporting each of you through the battle against not only the Coronavirus but the endless mandated restrictions and frequently with a shortage of staff for serving your client families effectively when they needed it most.

In a normal environment the leaders and employees of our funeral homes and cemeteries have the heavy fiduciary responsibility of performing the noble work of caring for client families who have lost a loved one to death or are planning in advance for that inevitability. Even amidst a once in a lifetime Coronavirus Pandemic, client families have not been immune to the need for a special ritual to grieve and/or celebrate the life of a loved one or friend who has died, a uniquely human need dating back thousands of years to the beginning of time.

So I am honored and proud to express the gratefulness and pride that our Leadership Team feels toward each of you and what you have achieved through your courageous service to your client families and communities throughout this year of the Coronavirus Pandemic.

Each one of you are nothing less than an inspirational hero to each member of our Leadership Team and Board of Directors and we thank you from the bottom of our hearts.

And you did achieve a breakout year of TRANSFORMATIVE HIGH PERFORMANCE! THANK YOU FOR THE BLESSING OF YOU!

May you and those near and dear to your heart have a SAFE, HEALTHY AND HAPPY NEW YEAR!, concluded Mr. Payne.

CONFERENCE CALL AND INVESTOR RELATIONS CONTACT

Carriage Services has scheduled a conference call for tomorrow, February 18, 2021 at 9:30 a.m. Central time. To participate in the call, please dial 866-516-3867 (conference ID-8569439) and ask for the Carriage Services conference call. A replay of the conference call will be available through February 23, 2021 and may be accessed by dialing 855-859-2056 (conference ID-8569439). The conference call will also be available at www.carriageservices.com. For any investor relations questions, please contact Ben Brink at 713-332-8441 or email InvestorRelations@carriageservices.com.


CARRIAGE SERVICES, INC.

OPERATING AND FINANCIAL TREND REPORT

(IN THOUSANDS - EXCEPT PER SHARE AMOUNTS)

Three Months Ended December 31,

Years Ended December 31,

2019

2020

% Change

2019

2020

% Change

Same Store Contracts

Atneed Contracts

6,695

7,990

19.3

%

26,037

29,660

13.9

%

Preneed Contracts

1,461

1,679

14.9

%

5,692

6,155

8.1

%

Total Same Store Funeral Contracts

8,156

9,669

18.6

%

31,729

35,815

12.9

%

Acquisition Contracts

Atneed Contracts

1,535

2,212

44.1

%

4,046

8,291

104.9

%

Preneed Contracts

136

216

58.8

%

513

818

59.5

%

Total Acquisition Funeral Contracts

1,671

2,428

45.3

%

4,559

9,109

99.8

%

Total Funeral Contracts

9,827

12,097

23.1

%

36,288

44,924

23.8

%

Funeral Operating Revenue

Same Store Revenue

$

42,827

$

49,484

15.5

%

$

168,884

$

179,779

6.5

%

Acquisition Revenue

8,414

12,336

46.6

%

27,547

46,897

70.2

%

Total Funeral Operating Revenue

$

51,241

$

61,820

20.6

%

$

196,431

$

226,676

15.4

%

Cemetery Operating Revenue

Same Store Revenue

$

12,061

$

14,784

22.6

%

$

49,218

$

51,694

5.0

%

Acquisition Revenue

295

5,509

1,767.5

%

295

17,583

5,860.3

%

Total Cemetery Operating Revenue

$

12,356

$

20,293

64.2

%

$

49,513

$

69,277

39.9

%

Total Financial Revenue

$

4,116

$

5,226

27.0

%

$

15,839

$

19,735

24.6

%

Other Revenue

$

748

$

1,197

60.0

%

$

748

$

4,661

523.1

%

Total Divested/Planned Divested Revenue

$

2,688

$

1,552

(42.3

%)

$

11,576

$

9,099

(21.4

%)

Total Revenue

$

71,149

$

90,088

26.6

%

$

274,107

$

329,448

20.2

%

Field EBITDA

Same Store Funeral EBITDA

$

16,723

$

21,780

30.2

%

$

65,109

$

74,817

14.9

%

Same Store Funeral EBITDA Margin

39.0

%

44.0

%

500 bp

38.6

%

41.6

%

300 bp

Acquisition Funeral EBITDA

3,119

5,018

60.9

%

10,579

18,617

76.0

%

Acquisition Funeral EBITDA Margin

37.1

%

40.7

%

360 bp

38.4

%

39.7

%

130 bp

Total Funeral EBITDA

$

19,842

$

26,798

35.1

%

$

75,688

$

93,434

23.4

%

Total Funeral EBITDA Margin

38.7

%

43.3

%

460 bp

38.5

%

41.2

%

270 bp

Same Store Cemetery EBITDA

$

4,158

$

6,471

55.6

%

$

17,118

$

19,469

13.7

%

Same Store Cemetery EBITDA Margin

34.5

%

43.8

%

930 bp

34.8

%

37.7

%

290 bp

Acquisition Cemetery EBITDA

73

2,532

3,368.5

%

73

7,128

9,664.4

%

Acquisition Cemetery EBITDA Margin

24.7

%

46.0

%

2,130 bp

24.7

%

40.5

%

1,580 bp

Total Cemetery EBITDA

$

4,231

$

9,003

112.8

%

$

17,191

$

26,597

54.7

%

Total Cemetery EBITDA Margin

34.2

%

44.4

%

1,020 bp

34.7

%

38.4

%

370 bp

Total Financial EBITDA

$

3,709

$

4,887

31.8

%

$

14,235

$

18,404

29.3

%

Total Financial EBITDA Margin

90.1

%

93.5

%

340 bp

89.9

%

93.3

%

340 bp

Other EBITDA

$

298

$

278

(6.7

%)

$

298

$

1,186

298.0

%

Other EBITDA Margin

39.8

%

23.2

%

(1,660 bp

)

39.8

%

25.4

%

(1,440 bp

)

Total Divested/Planned Divested EBITDA

$

533

$

352

(34.0

%)

$

2,355

$

2,321

(1.4

%)

Total Divested/Planned Divested EBITDA Margin

19.8

%

22.7

%

290 bp

20.3

%

25.5

%

520 bp

Total Field EBITDA

$

28,613

$

41,318

44.4

%

$

109,767

$

141,942

29.3

%

Total Field EBITDA Margin

40.2

%

45.9

%

570 bp

40.0

%

43.1

%

310 bp

OPERATING AND FINANCIAL TREND REPORT

(IN THOUSANDS - EXCEPT PER SHARE AMOUNTS)

Three Months Ended December 31,

Years Ended December 31,

2019

2020

% Change

2019

2020

% Change

Overhead

Total Variable Overhead

$

6,285

$

6,740

7.2

%

$

14,117

$

16,190

14.7

%

Total Regional Fixed Overhead

961

1,203

25.2

%

4,052

4,133

2.0

%

Total Corporate Fixed Overhead

4,857

5,220

7.5

%

19,385

20,191

4.2

%

Total Overhead

$

12,103

$

13,163

8.8

%

$

37,554

$

40,514

7.9

%

Overhead as a percentage of Revenue

17.0

%

14.6

%

(240 bp

)

13.7

%

12.3

%

(140 bp

)

Consolidated EBITDA

$

16,510

$

28,155

70.5

%

$

72,213

$

101,428

40.5

%

Consolidated EBITDA Margin

23.2

%

31.3

%

810 bp

26.3

%

30.8

%

450 bp

Other Expenses and Interest

Depreciation & Amortization

$

4,416

$

5,109

$

17,771

$

19,389

Non-Cash Stock Compensation

537

897

2,153

3,370

Interest Expense

6,615

7,728

25,522

32,515

Accretion of Discount on Convertible Subordinated Notes

63

16

241

216

Loss on Extinguishment of Debt

6

Net Loss on Divestitures

8

1,832

3,883

6,749

Impairment of Goodwill and Other Intangibles

233

963

14,693

Other, Net

(45

)

(186

)

(736

)

(152

)

Pre-Tax Income

$

4,683

$

12,759

$

22,416

$

24,642

Net Tax Expense

$

2,114

$

4,394

$

7,883

$

8,552

GAAP Net Income

$

2,569

$

8,365

225.6

%

$

14,533

$

16,090

10.7

%

Special Items, Net of Tax, except for **

Acquisition and Divestiture Expenses

$

1,646

$

(135

)

$

1,646

$

(9

)

Severance and Separation Costs

62

951

445

Performance Awards Cancellation and Exchange

84

224

Accretion of Discount on Convertible Subordinated Notes **

63

16

241

216

Net Loss on Divestitures and Other Costs

188

1,317

3,331

4,562

Net Impact of Impairment of Goodwill and Other Intangibles

184

124

761

9,932

Litigation Reserve

138

592

213

Tax Expense Related to Divested Business**

51

911

Gain on Insurance Reimbursements

(195

)

(699

)

Natural Disaster and Pandemic Costs

250

1,286

Other Special Items

265

265

324

Tax Adjustment Related to Certain Discrete Items**

400

400

Adjusted Net Income

$

4,971

$

10,421

109.6

%

$

22,532

$

33,683

49.5

%

Adjusted Net Profit Margin

7.0

%

11.6

%

460 bp

8.2

%

10.2

%

200 bp

Adjusted Basic Earnings Per Share

$

0.28

$

0.58

107.1

%

$

1.26

$

1.88

49.2

%

Adjusted Diluted Earnings Per Share

$

0.28

$

0.57

103.6

%

$

1.25

$

1.86

48.8

%

GAAP Basic Earnings Per Share

$

0.14

$

0.47

235.7

%

$

0.81

$

0.90

11.1

%

GAAP Diluted Earnings Per Share

$

0.14

$

0.46

228.6

%

$

0.80

$

0.89

11.3

%

Weighted Average Basic Shares Outstanding

17,760

17,927

17,877

17,872

Weighted Average Diluted Shares Outstanding

17,901

18,147

18,005

18,077

Reconciliation to Adjusted Consolidated EBITDA

Consolidated EBITDA

$

16,510

$

28,155

70.5

%

$

72,213

$

101,428

40.5

%

Acquisition and Divestiture Expenses

2,083

(170

)

2,083

(11

)

Severance and Separation Costs

79

1,205

563

Litigation Reserve

175

750

270

Natural Disaster and Pandemic Costs

315

1,627

Other Special Items

336

336

373

Adjusted Consolidated EBITDA

$

19,183

$

28,300

47.5

%

$

76,587

$

104,250

36.1

%

Adjusted Consolidated EBITDA Margin

27.0

%

31.4

%

440 bp

27.9

%

31.6

%

370 bp


CARRIAGE SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)

December 31,

2019

2020

ASSETS

Current assets:

Cash and cash equivalents

$

716

$

889

Accounts receivable, net

21,478

25,103

Inventories

6,989

7,259

Prepaid and other current assets

10,667

2,076

Total current assets

39,850

35,327

Preneed cemetery trust investments

72,382

86,604

Preneed funeral trust investments

96,335

101,235

Preneed cemetery receivables, net

20,173

21,081

Receivables from preneed trusts, net

18,024

16,844

Property, plant and equipment, net

279,200

269,051

Cemetery property, net

87,032

101,134

Goodwill

398,292

392,978

Intangible and other non-current assets, net

32,116

29,542

Operating lease right-of-use assets

22,304

21,201

Cemetery perpetual care trust investments

64,047

70,828

Total assets

$

1,129,755

$

1,145,825

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Current portion of debt and lease obligations

$

3,150

$

3,432

Accounts payable

8,413

11,259

Accrued and other liabilities

24,026

31,138

Convertible subordinated notes due 2021

2,538

Total current liabilities

35,589

48,367

Acquisition debt, net of current portion

5,658

4,482

Credit facility

82,182

46,064

Convertible subordinated notes due 2021

5,971

Senior notes due 2026

395,447

395,968

Obligations under finance leases, net of current portion

5,854

5,531

Obligations under operating leases, net of current portion

21,533

20,302

Deferred preneed cemetery revenue

46,569

47,846

Deferred preneed funeral revenue

29,145

27,992

Deferred tax liability

41,368

46,477

Other long-term liabilities

1,737

4,748

Deferred preneed cemetery receipts held in trust

72,382

86,604

Deferred preneed funeral receipts held in trust

96,335

101,235

Care trusts’ corpus

63,416

69,707

Total liabilities

903,186

905,323

Commitments and contingencies

Stockholders’ equity:

Common stock

259

260

Additional paid-in capital

242,147

239,989

Retained earnings

86,213

102,303

Treasury stock

(102,050

)

(102,050

)

Total stockholders’ equity

226,569

240,502

Total liabilities and stockholders’ equity

$

1,129,755

$

1,145,825


CARRIAGE SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

(unaudited)

Three Months Ended December 31,

Years Ended December 31,

2019

2020

2019

2020

Revenue:

Service revenue

$

37,110

$

44,154

$

142,554

$

164,984

Property and merchandise revenue

29,056

39,419

114,514

139,630

Other revenue

4,983

6,515

17,039

24,834

71,149

90,088

274,107

329,448

Field costs and expenses:

Cost of service

18,928

20,010

72,991

79,634

Cost of merchandise

22,750

27,503

89,294

103,064

Cemetery property amortization

995

1,511

3,985

4,956

Field depreciation expense

3,120

3,236

12,370

13,006

Regional and unallocated funeral and cemetery costs

3,819

6,853

13,827

18,057

Other expenses

858

1,257

2,055

4,808

50,470

60,370

194,522

223,525

Gross profit

20,679

29,718

79,585

105,923

Corporate costs and expenses:

General, administrative and other

8,821

7,207

25,880

25,827

Home office depreciation and amortization

301

362

1,416

1,427

Net loss on divestitures and impairment charges

241

1,832

4,846

21,442

Operating income

11,316

20,317

47,443

57,227

Interest expense

(6,615

)

(7,728

)

(25,522

)

(32,515

)

Accretion of discount on convertible subordinated notes

(63

)

(16

)

(241

)

(216

)

Loss on early extinguishment of debt

(6

)

Other, net

45

186

736

152

Income before income taxes

4,683

12,759

22,416

24,642

Expense for income taxes

(1,845

)

(3,971

)

(7,395

)

(7,985

)

Tax adjustment related to discrete items

(269

)

(423

)

(488

)

(567

)

Total expense for income taxes

$

(2,114

)

$

(4,394

)

$

(7,883

)

$

(8,552

)

Net income

$

2,569

$

8,365

$

14,533

$

16,090

Basic earnings per common share:

$

0.14

$

0.47

$

0.81

$

0.90

Diluted earnings per common share:

$

0.14

$

0.46

$

0.80

$

0.89

Dividends declared per common share:

$

0.0750