- Record Revenue, Adjusted Consolidated EBITDA, Adjusted EPS, Free Cash Flow;
- Raises Four Quarter Outlook;
- New President and COO Resigns to Seek CEO Role Elsewhere; and
- Carlos Quezada Joins the Executive Team for Good To Great Journey Part II .
Conference call on Wednesday, July 29, 2020 at 9:30 a.m. central time.
HOUSTON, July 28, 2020 (GLOBE NEWSWIRE) -- Carriage Services, Inc. (NYSE: CSV) today announced results for the second quarter and first half of 2020 ended June 30, 2020.
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 Carriages Good To Great Journey Part II . Our historically high performance in the second quarter and first six months of this year are more than equal to the standard of TRANSFORMATIVE HIGH PERFORMANCE and are shown below:
Second Quarter Ending June 30, 2020
- Record Total Revenue of $77.5 million, an increase of $9.7 million equal to 14.4%;
- Record Total Field EBITDA of $33.2 million, an increase of $6.1 million equal to 22.6%;
- Record Second Quarter Total Field EBITDA Margin of 42.9%, an increase of 290 basis points;
- Record Adjusted Consolidated EBITDA of $25.4 million, an increase of $6.2 million equal to 32.0%;
- Record Adjusted Consolidated EBITDA Margin of 32.8%, an increase of 440 basis points;
- Record Second Quarter Adjusted Net Income of $8.0 million, an increase of $2.3 million equal to 40.8%;
- Record Second Quarter Adjusted Diluted EPS of $0.45, an increase of $0.14 per share equal to 45.2%;
- Record Adjusted Free Cash Flow of $17.9 million, an increase of $8.5 million equal to 90.1%;
- Record Adjusted Free Cash Flow Margin of 23.1%, an increase of 920 basis points;
- Total Debt Outstanding of $508.5 million, a decrease of $24.4 million (net after cash decrease of $11.2 million) since March 31, 2020;
- Net Debt to EBITDA Multiple of 6.0 times (recent four quarters EBITDA of $84.8 million);
- Forecast Net Debt to EBITDA Multiple of 4.5 times (Rolling Four Quarter Outlook) 1 ;
- Record Net Income of $6.4 million, an increase of $1.5 million equal to 31.6%; and
- Record GAAP Diluted EPS of $0.36, an increase of $0.09 per share equal to 33.3%.
First Six Months Ending June 30, 2020
- Record Total Revenue of $155.0 million, an increase of $18.1 million equal to 13.3%;
- Record Total Field EBITDA of $63.3 million, an increase of $7.9 million equal to 14.2%;
- Total Field EBITDA Margin of 40.9%, an increase of 40 basis points;
- Record Adjusted Consolidated EBITDA of $48.3 million, an increase of $8.2 million equal to 20.3%;
- Record Adjusted Consolidated EBITDA Margin of 31.2%, an increase of 190 basis points;
- Adjusted Net Income of $14.1 million, an increase of $1.6 million equal to 12.6%;
- Adjusted Diluted EPS of $0.79, an increase of $0.10 per share equal to 14.5%;
- Record Adjusted Free Cash Flow of $30.5 million, an increase of $11.4 million equal to 60.1%;
- Record Adjusted Free Cash Flow Margin of 19.7%, an increase of 580 basis points;
- Total Debt Outstanding of $508.5 million, an increase of $5.6 million since December 31, 2019 and decrease of $25.5 million from January 3, 2020 (decrease from peak debt of $534.0 million after closing on Oakmont);
- Net Income of $2.2 million, a decrease of $9.2 million equal to 80.7%; and
- GAAP Diluted EPS of $0.12, a decrease of $0.51 per share equal to 81.0%.
| 1 Rolling Four Quarter Outlook Ranges using midpoints of Adjusted Consolidated EBITDA of $98 million and Total Debt Outstanding of $455 million. |
Rolling Four Quarter Outlook
- Total Revenue of $312 million - $320 million;
- Adjusted Consolidated EBITDA of $95 million - $100 million;
- Adjusted Consolidated EBITDA Margin of 30% - 31%;
- Adjusted Diluted EPS of $1.65 - $1.75;
- Adjusted Free Cash Flow of $50 million - $54 million;
- Adjusted Free Cash Flow Margin of 15.8% - 16.8%; and
- Total Debt to EBITDA Multiple of 4.5 - 4.7.
Our record second quarter performance was produced amidst two once in a lifetime crises of a Coronavirus Pandemic together with a government economic shutdown of most of our economy with stay at home orders and strict limitations on individual behavior and social gatherings in most states. As we entered April after a weak ending to March because of the initial lockdowns and social restrictions, we expected an unknown degree of decline in our Total Revenue, EPS and Free Cash Flow that would likely have impaired our liquidity and financial flexibility. Yet we adapted quickly and were organizationally and financially determined to meet these operational challenges and not let these uncontrollable events inhibit successful execution of our annual theme of TRANSFORMATIVE HIGH PERFORMANCE .
Given the decentralized decision making nature of our business model and the entrepreneurial can do nature of the vast majority of our Managing Partners and Sales Managers, combined with the adapt or die mindset of our Field and Houston Support Leadership Teams with Legal (what you can and cannot do) and Information Technology out front in the lead, we quickly implemented Digital Transformative High Performance changes at businesses in those areas and markets most impacted by the spreading Coronavirus Pandemic. Innovation in business practices and acceptance of technological and digital tools as an accelerator of TRANSFORMATIVE HIGH PERFORMANCE against abrupt, mandated obstacles related to meeting and communicating with client families was embraced and adopted across our portfolio at what seemed like warp speed. It is ironic indeed that, in a traditional industry normally resistant to change and especially technological change, our response to the adversity of a new and threatening harsh operating environment was to adapt in ways that have fundamentally enhanced our service and guest experience delivery and driven competitive differentiation for years to come.
Instead of the expected decline, our second quarter performance was historically high, starting in April during the height of the Coronavirus Crisis and economic shutdown and gaining broad revenue momentum during the quarter at high Field EBITDA Margins. Year over year our Total Revenue increases were 3.6% for April, 17.8% for May followed by a strong finish with June being a record operating performance month in the history of Carriage with Total Revenue of $26.9 million (up 23%) and Total Field EBITDA of $11.5 million (up 29%). During June our funeral and cemetery portfolios across all three regions experienced strong revenue growth at high Field EBITDA Margins.
Moreover, our June Financial Revenue and EBITDA got the full benefit of an approximately $3 million sustainable annual increase in cemetery perpetual care income, a result of the $5.7 million increase equal to 68% in recurring annual trust fund income from our recent $61.5 million trust fund capital deployment during and after the Coronavirus Crisis market crash in March.
Our second quarter performance traditionally has ranked third highest in Same Store Revenue and Adjusted Consolidated EBITDA Margin out of four quarters because of the seasonal variation in funeral volumes and our 75%/25% mix of funeral versus cemetery revenue. Our first quarter has always ranked first because of the peak flu season and the fourth quarter second because of the beginning of the flu season. Therefore, we do not believe the Revenue, EBITDA Margins and Free Cash Flow outperformance of our company during the second quarter during the height of the Coronavirus Pandemic Crisis is sustainable at these levels in a more normalized long term environment. However, the record second quarter and first half results confirm the inherent earning power in our existing portfolio of businesses, including especially the four large high quality acquisitions made in the fourth quarter of 2019 and early January 2020 whose integration and performance accelerated during the second quarter.
We do believe that the second quarter and first half results are a leading performance indicator that our Adjusted Consolidated EBITDA Margin, representing the cash earning power of Carriage as a percent of revenue, has reached a new and sustainable plateau above 30%, a milestone achievement one year ahead of the 30% - 31% level shown for 2021 in our Three Year Roughly Right Range Scenario. Moreover, this milestone performance metric to our knowledge has never before been achieved by another public deathcare consolidation company.
Our amazing performance in the second quarter and first half was the result of over one and a half years of transformational process with five major elements: first, the rapid and effective adoption and use of technological and digital tools in businesses most impacted by the lockdowns, social restrictions and fear of the unknown with our employees and our client families and their communities on the front lines of this battle against the Coronavirus. The technological and digital tools that were most commonly adopted and used include OneRoom Live Streaming and Funeral Service Recording; DocuSign with customized branding by business; Zoom for online meetings with client families and intra-Carriage business operations; online selection rooms for all funeral merchandise that can be virtually selected from our individual business websites; and enhanced digital marketing strategies for preneed cemetery sales.
Secondly, difficult and sequential leadership decisions in all areas of the company that began in mid-September 2018 and continued through March 2020; third, an update and reboot of our funeral and cemetery high performance standards on December 3, 2018 that incentivizes three year compounded revenue growth rates at high and sustainable Field EBITDA Margins; fourth, achieving Carriage Value Creation Platform critical mass in our funeral and cemetery portfolios by bold strategic acquisition and financing moves in the fourth quarter of 2019.
Fifth and finally, our performance in the second quarter was and will be in the future impacted by dramatically improved alignment of short-term (one year) and long-term (five years) performance incentives at all leadership positions within our company. I explained Carriages unique Five Year Good To Great II Shareholder Value Creation Incentive Plan for forty-seven of our senior leaders in our May 19th first quarter earnings release and will expand on that commentary later in this release.
On February 6, 2020, the ten Managing Partners on our Standards Council convened in Houston for the annual meeting to approve Standards Achievement for each of our businesses for 2019, and also unanimously approved material changes to our Managing Partner Annual Being The Best and Five Year Good To Great Incentive Bonus Criteria effective for the 2020 performance year. These ten Managing Partners represent the Best of The Best in long-term high and sustainable operating and financial performance within our portfolio of funeral homes and cemeteries and are highly respected throughout our company including within our Board of Directors. Shown below is an excerpt from their Memorandum to all Managing Partners dated February 21, 2020.
Standards Council Memorandum
Considering Carriages theme of Transformative High Performance for 2020, we as a Standards Council have reviewed the history of Being The Best Annual and Good To Great Five Year Performance Winners and their bonuses compared to actual performance, especially the sharing of profit split between the Managing Partner and employees compared to that retained by Carriage. We also reviewed the criteria for the annual Pinnacle Trip and five year Good To Great Trip. We concluded that these industry leading incentive programs were in need of updating so that the current generous profit sharing leaves more performance to be retained by Carriage to grow its portfolio of businesses.
Being The Best Annual Incentive Funeral Home and Cemetery
The idea behind an annual Being The Best Incentive is to drive High Performance at each of our businesses and then have the Managing Partner and employees who earn this incentive share in the financial success by sharing in the EBITDAR Performance. When we have more businesses with low performance, it is difficult for the High Performance businesses to make up for it. If a funeral business fails to achieve at least the Minimum EBITDAR Margin or a Cemetery business the Minimum Operating Margin, then the full EBITDAR financial performance has not met our definition of Being The Best Standards Achievement success. So, if the business is not contributing its fair share of financial performance to Carriage, then the Being The Best Performance Bonus for that year should be lower than currently calculated.
We met to discuss these performance incentive issues and unanimously approved, starting in 2020, that if a business does not achieve its EBITDAR or Operating Margin Minimum, the Funeral Home and Cemetery Being The Best Annual Incentive earned will be 50% of the current calculation for both the Managing Partner and their staff, concluded the Memorandum.
In this same Memorandum the Standards Council announced material changes to the Being The Best Annual Cemetery profit sharing percentage and material changes to the Funeral Home Five Year Good To Great profit sharing formula. Moreover, during the portfolio review of 2019 Standards Achievement for each business at the Standards Council Meeting on February 6, 2020, the Council Members volunteered and were assigned as a high performance helper partner to one or more businesses in our portfolio that had the most upside potential which was not being currently realized at the time.
Given the critically important role Standards Council Members have to the credibility and current level of performance execution of our Standards Operating Model, our Standards Council Members were included for the first time in a total company incentive plan as ten of the forty-seven participants in the Good To Great II Shareholder Value Creation Plan.
The Carriage transformation process since September 2018 has been well documented in quarterly earnings releases starting with the 2018 third quarter release on November 1, 2018, the 2018 and 2019 Shareholder Letters and the press releases announcing the four large strategic acquisitions in the fourth quarter of 2019, concluding with the 2019 full year performance release on February 19, 2020 that included the high performance milestones to be reached in a Three Year Roughly Right Range Scenario ending in 2022. But the essence of why our company has raised and accelerated its TRANSFORMATIVE HIGH PERFORMANCE during the second quarter is because we were able to get the Right People in the Right Seats at the Right Time so that even two once in a lifetime crises have not been able to stop the Good To Great Flywheel Effect of the Carriage High Performance Culture Framework Bus .
Only when the huge performance power of Carriages unorthodox core idea of our Standards Operating Model within our High Performance Culture Framework is broadly unleashed throughout our portfolio of funeral homes and cemeteries by having the right people executing, supporting and leading this idea do you put the entire company in the position of creating market beating compounded shareholder returns over the next five years, which we are now extraordinarily well positioned to do.
Bill Goetzs Resignation as President and COO
In my 2018 Shareholder Letter on Page 12, I outlined my plan to beef up executive leadership in the third paragraph of an internal memorandum to all Houston Support Center and Field Leadership dated October 31, 2018, as follows:
My intention is to lead operations through 2019 and the first half of 2020 but to begin an external search for a President and COO during the first half of 2020 and to have this new leader in place by the end of 2020.
In the fifth and final paragraph of this section about Carriages Executive Leadership Team, I expressed my intentions as Co-Founder, largest individual shareholder and Chairman and CEO as follows:
I am blessed that my health is outstanding even relative to much younger men, and my energy and passion for our people, our business and our company has never been greater. I intend to remain in my role as Chairman and CEO after finding the right President and COO and have no plans to retire as long as I am healthy and adding value to our company.
After successfully recruiting Bill Goetz late last year (about one year ahead of plan), Bill joined Carriage at the beginning of this year with the understanding that he would first go on a learning journey in connection with the funeral and cemetery business and especially with the unique high performance ideas and concepts related to Carriage (Standards Operating Model, etc.). After getting back to the office in early May after the Coronavirus Crisis Stay At Home Orders were lifted in Texas, Bill and I finally had occasions to compare expectations and timeframe in which he might formally succeed me as CEO. To our mutual surprise, we were at least two years apart with Bill thinking as soon as the end of this year and me not wanting to be specific this early into his Carriage learning journey but thinking no earlier than the end of 2022.
After Bill and I thoroughly discussed the CEO succession timeframe disparity we each felt strongly about, Bill made a personal decision on June 25 th to resign on good terms with me and his Carriage teammates and will now seek to become the CEO of a public company during his next career phase. Bill is a first class person and wonderful leader of people and speaking on behalf of Carriages Board, Executive Team, Standards Council and all field and Houston Support Center leaders and employees, we wish Bill nothing but the greatest of success as he seeks to achieve the next goal in his highly successful career.
Carlos Quezada Joins Executive Team
As Carriage was founded as a funeral operations and acquisition company in 1991, we have long been funeral revenue dominant at about 75% funeral and 25% cemetery, having acquired our first large cemetery in Northern California on January 1, 1997. While in the past we have had spurts of broad 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, a point which was fully transparent in our record second quarter performance. Because of a record Same Store Cemetery preneed property sales performance in April of 2019, our Same Store Cemetery operating segment was the only one to have a material decline in revenues and Field EBITDA for the 2020 second quarter, whereas our other four operating categories made substantial Field EBITDA contributions.
So with great opportunities at Carriage including three large combination businesses acquired in the fourth quarter of 2019 and early January 2020, we successfully recruited Carlos Quezada who left SCI with his immense cemetery sales leadership and joined Carriages Good To Great Journey Part II as the tenth member of our Executive Team.
Following is an excerpt from an internal email from me to all employees dated July 1, 2020 announcing that Carlos had joined our Executive Team:
Carlos will have the primary responsibility of building high performance sales teams and standardized sales systems across our portfolio of cemeteries, as 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, especially our largest cemeteries that now include three top quality combination businesses acquired in the fourth quarter of 2019 and early January 2020. Carlos will join Chris Manceaux, Shawn Phillips, Paul Elliott, Peggy Schappaugh and me as the six operations leaders on our Executive Team in collaboration with Ben Brink, Viki Blinderman, Steve Metzger and Mike Loeffel as the Houston Support Center leaders who combined will comprise ten joint leader owners of every wonderful area of our company.
Carlos has been the missing piece on Carriages Good To Great Journey Bus which means we now have all the right people in the right seats at the right time. So my job as the driver of our Carriage High Performance Culture Framework Bus has just become the easiest job I have ever had because of the nine powerful Executive Team Leader Owner Engines firing on all cylinders as we accelerate and drive in the direction of greatness on our Good To Great Journey that never ends. But the real secret to our company lies with the huge and unlimited leadership and people power in each of our operating businesses in alignment with our Third and Fifth Guiding Principles:
- Belief In the Power of People through Individual Initiative and Teamwork; and
- Growth of The Company is Driven by Decentralization and Partnership.
Together we will drive toward and achieve our Mission and Vision of Being The Best as an operating, consolidation and value creation company in the deathcare industry. CARLOS, WELCOME TO CARRIAGE!"
When we made the bold capital allocation decisions in the last quarter of our 2019 performance turnaround year to acquire four large, high quality funeral and cemetery operations including the largest acquisition in the history of Carriage, we knew the critical importance of integrating these businesses over the first six months of this year. While we could have never predicted the unprecedentedly difficult operating conditions brought on by the Coronavirus Crisis, the Managing Partner leaders and their teams of employees at each of these businesses have embraced Carriages High Performance Culture and the Being The Best Mission and mentality that has evolved over the past 30 years.
The results of our acquired portfolio in the second quarter are a testament to the great work that has been done so far by our integration and operational support teams to integrate these businesses. The Acquisition Funeral Field EBITDA Margin was 41.2% in the second quarter, a 500 basis point increase compared to the first quarter, while the Acquisition Cemetery Field EBITDA Margin increased 590 basis points to 35.4% as each business experienced substantial momentum in preneed property revenue and margin management trends. We expect these businesses to be material drivers of Funeral and Cemetery Acquisition Revenue and Field EBITDA growth for many years to come, which will support our new and higher plateau of Adjusted Consolidated EBITDA and Free Cash Flow Margins.
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 Performance, i.e. incentive awards paid in appreciated CSV shares in early 2025 to forty-seven 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). Yet I dont think enough shareholders took us seriously when we publicly announced our Three Year Roughly Right Range Scenario on February 19, 2020 and again on May 19, 2020, as otherwise our share price would not continue to be what we consider seriously undervalued in the recent range of $15 to $20 per share. However, I cant say I blame investors as I have often been overly optimistic in the past about our future performance and valuation prospects, which I easily explain by saying, I have been right so early that it seemed to others that I was wrong for so long.
But that was then and this is now and the recent performance data and trends dont lie. All the transformative elements of our Three Year Roughly Right Range Scenario are falling into place just as we first presented them publicly on February 19, 2020. We plan to refinance our $400 million of 6]% Senior Notes after our first call date of June 1, 2021 when market conditions are most favorable, which should produce a substantially lower cost of capital and enable our company to continue its evolution into a superior value creation platform. Because of increasing Free Cash Flow from our increasing Total Revenue and Free Cash Flow Margin, we should achieve Total Debt approaching four times EBITDA by the end of 2021 consistent with our rapid deleveraging program and in complete alignment with a moderate leverage policy. If our currently high plateau of Adjusted Consolidated EBITDA Margins and Free Cash Flow Margins can be sustained after our senior notes refinancing into 2022 and thereafter as expected, we will be able to allocate over $60 million in Free Cash Flow annually in flexible ways to maximize the ROIC spread over our lower cost of capital, which in turn will drive higher compounded growth rates in the intrinsic value of Carriage per share.
I mentioned in my 2016 Shareholder Letter that I had been introduced to Will Thorndike and his wonderful book, The Outsiders , which profiled eight CEOs who mastered capital allocation in their companies and created market beating long-term compounded shareholder returns over decades. I subsequently invited Will as a special guest to our February 2017 Board Dinner and Meeting, which was immediately after we had completed the first five year timeframe in 2016 of Carriages Good To Great Journey during which we achieved a share price CAGR of 38.6% and total shareholder return of 429% including dividends. When I asked Will which of the eight CEOs and companies if any did Carriage compare to, he immediately responded Tom Murphy and Capital Cities Broadcasting.
Will, I promise this time we will get it right, make it last and make you proud to have compared us to Tom Murphy and Capital Cities Broadcasting!, concluded Mr. Payne.
Updated Three Year Roughly Right Scenario/Rolling Four Quarter Outlook
Ben Brink, Chief Financial Officer, stated, Given our strong performance in the second quarter, we are increasing our 2020 (Post COVID-19) Roughly Right Ranges and raising our Rolling Four Quarter Outlook of performance over the next twelve months. We believe the revenue and margin performance momentum weve experienced during the second quarter even as we continue to navigate the prolonged uncertainty of the Coronavirus Crisis will produce significantly improved results compared to especially the last half of 2019, which is reflected in our Rolling Four Quarter Outlook earlier in this release.
The important operational and financial milestones that should be achieved over the next two and a half years ending in 2022 are as follows: over $325 million in Revenue, over $100 million in Adjusted Consolidated EBITDA, over 31% Adjusted Consolidated EBITDA Margin, over $2.25 in Adjusted Earnings Per Share, over $60 million in Adjusted Free Cash Flow and an Adjusted Free Cash Flow Margin of over 19%. These future performance milestones will be achieved by the consistent High Performance Culture Execution of our Standards Operating Model by Carriage Managing Partners and their teams of outstanding employees in each of the local markets where they are privileged to serve their client families and communities.
MILESTONE THREE YEAR SCENARIO
|Roughly Right Ranges|
|Years Ending December 31 (millions)|
| Actual |
| Pre-COVID |
| Post-COVID |
|2021||2022|| Midpoint |
|Total Revenue||$274.1||$315 - $319||$306 - $312||$321 - $325||$330 - $334||6.7%|
|Total Field EBITDA||$109.8||$127 - $131||$123 - $127||$135 - $140||$141 - $145||9.2%|
|Total Field EBITDA Margin||40.0%||40% - 41%||40% - 41%||42% - 43%||42% - 43%||2.0%|
|Adjusted Consolidated EBITDA||$76.6||$92 - $96||$91 - $95||$98 - $102||$103 - $107||11.1%|
|Adjusted Consolidated EBITDA Margin||27.9%||29% - 30%||30% - 31%||30% - 31%||31% - 32%||4.1%|
|Adjusted Diluted EPS||$1.25||$1.55 - $1.65||$1.50 - $1.60||$2.00 - $2.20||$2.30 - $2.45||24.0%|
|Adjusted Free Cash Flow||$37.4||$42 - $45||$46 - $50||$54 - $57||$61 - $64||18.7%|
|Adjusted Free Cash Flow Margin||13.6%||13.5% - 14.0%|| 14.7% - 15.7% ||16.8% - 17.3%||18.5% - 19.0%||11.3%|
|Total Debt Outstanding||$502.9||$480 - $490||$470 - $480||$430 - $440||$380 - $390||(9.3)%|
|Total Debt to EBITDA Multiple||6.6*||5.0 - 5.2||4.8 - 5.0||4.2 - 4.4||3.6 - 3.8|
|* Doesnt include Proforma for Acquisitions|
We have updated our Milestone Three Year Scenario to reflect our updated Rolling Four Quarter Outlook, especially related to the approximately $3 million increase in annual perpetual care Financial Revenue and Field EBITDA from the trust fund portfolio repositioning strategy we executed in response to the Coronavirus Market Crisis. The roughly right ranges of performance and the compound growth rates clearly demonstrate our ability to leverage single digit growth in Total Revenue into higher growth rates in Total Field EBITDA and even higher growth rates in Adjusted Consolidated EBITDA. The THREE YEAR SCENARIO above clearly reflects that when our Standards Operating Model and Strategic Acquisition Model are well executed over time, the financial leveraging dynamics of Carriages Value Creation Platform leads to faster growth rates in Adjusted Diluted Earnings Per Share and Adjusted Free Cash Flow, a shareholder value creation process that will accelerate after our planned senior note refinancing in the middle of 2021.
Liquidity, Leverage, Free Cash Flow, Senior Note Refinancing Outlook
We produced Adjusted Free Cash Flow from operations for the six months ended June 30, 2020 of $30.5 million compared to Adjusted Free Cash Flow from operations of $19.0 million for the corresponding period in 2019. A reconciliation of Cash Flow Provided by Operations to Adjusted Free Cash Flow for the three and six months ended June 30, 2019 and 2020 is shown below as follows (in thousands):
| For the Three Months Ended |
| For the Six Months Ended |
|Cash flow provided by operations||$||10,918||$||17,455||$||21,912||$||31,001|
|Cash used for maintenance capital expenditures||(2,482||)||(1,342||)||(4,175||)||(2,898||)|
|Free Cash Flow||$||8,436||$||16,113||$||17,737||$||28,103|
|Plus: Incremental Special Items:|
|Acquisition and Divestiture Costs||45||159|
|Severance and Separation Costs||611||275||828||563|
|Natural Disaster and Pandemic Costs||832||972|
|Other Special Items||418||418|
|Adjusted Free Cash Flow||$||9,403||$||17,878||$||19,046||$||30,485|
Adjusted Free Cash Flow through the first six months in 2020 increased 60.1% to $30.5 million on Total Revenue of $155 million, representing an Adjusted Free Cash Flow Margin of 19.7%. For the second quarter the Adjusted Free Cash Flow increased 90.1% to $17.9 million with an Adjusted Free Cash Flow Margin of 23.1%. This extraordinary Adjusted Free Cash Flow performance in the second quarter and first half is a reflection of the resilient cash generating ability of our portfolio of high-quality funeral home and cemetery operations.
The recurring and growing nature of our Free Cash Flow will enable Carriage to have substantial financial flexibility over the coming years to allocate capital toward the goal of optimizing growth in the intrinsic value of Carriage per share. We are focused over the next year on using our internally generated Free Cash Flow of over $50 million to reduce our debt outstanding and improve our leverage ratio. Our Total Debt to Proforma Adjusted Consolidated EBITDA for the recent twelve month period was 5.5 times at the end of the second quarter which is expected to decline to approximately 4.5 times over the next twelve months ending June 30, 2021.
Our proforma leverage ratio was below our bank covenant compliance maximum leverage ratio of 5.75x at the end of the second quarter and we are expecting to remain in compliance with our bank credit facility covenants going forward. We currently have approximately $105 million available on our $190 million credit facility after paying down an additional $8 million of debt (Total Debt $500 million) since the end of the quarter, which included proceeds from three recent divestitures.
Our rapid deleveraging program will additionally benefit from the execution of our previously announced divestiture program, which we expect to generate approximately $15 million of proceeds and should be substantially complete by the end of this year. We have completed three divestitures of non-core businesses or real estate for $4 million of proceeds so far in the third quarter.
We plan to execute a Senior Note refinancing after our 6.625% notes are callable on June 1, 2021 at $104.969. This refinancing will allow Carriage to substantially lower our cash interest expense, as we expect to be able to lower the coupon on the new notes by approximately 200 basis points which will equal $8 - $10 million of annual cash interest savings compared to our current senior notes. Our current senior notes have traded strongly throughout the most recent Coronavirus Market Crash, briefly trading in the mid $90s and now trading around $106 for a yield of 5%. The anticipated refinancing will accelerate our Earnings Per Share and Free Cash Flow growth as well as expand our Adjusted Free Cash Flow Margin through the second half of 2021 and thereafter.
Capital Allocation Over Next Three Years
The improving Adjusted Free Cash Flow Margin over the course of the next three years will translate into a growing percentage of our revenue being converted into Free Cash Flow, the large majority of which is available to allocate among various shareholder value enhancing capital allocation opportunities. We expect our Adjusted Free Cash Flow Margin to reach about 20% of Total Revenue on an annual basis in 2023 and be sustainable at approximately that level into the future. While our primary focus over the next twelve months will be on using our internally generated Free Cash Flow to repay debt and reduce leverage ahead of the planned senior note refinancing, we are also focused on investing in select, high return, internal growth capital projects including cemetery inventory development and funeral home remodels and expansions.
With an improved credit profile and lower cost capital structure after our senior notes refinancing, we will have the necessary financial flexibility to make select high quality acquisitions and/or opportunistically repurchase CSV common shares if they trade at a significant discount to our view of intrinsic value, which would include whenever our shares trade at Adjusted Free Cash Flow Equity Yields of 15% or higher, as they have recently.
We believe the successful acquisition and integration of Fairfax, Rest Haven, Oakmont and Lombardo only enhance our reputation as the succession planning solution for the best remaining independent funeral home and cemetery operations in the U.S. We remain in close contact with a number of these acquisition candidates and believe the acquisition landscape will remain favorable for Carriage to partner selectively with high quality independent businesses in large strategic markets.
The final component of our capital allocation strategy is to maintain and steadily grow our dividend over time. As previously announced, our extraordinary Free Cash Flow generation over the first half of the year supported our Board of Directors decision to increase our annual dividend by $0.05 to $0.35 in the midst of the Coronavirus Pandemic beginning with the next dividend date of September 1 st .
Trust Fund Market Crash Capital Deployment / Results
Shown below are consolidated performance metrics for the discretionary preneed trust fund portfolios (preneed funeral, preneed cemetery and cemetery perpetual care) at key dates since December 31, 2019.
|CSV Discretionary Preneed Trust Holdings (in millions)|
|At December 31, 2019||Cost||% Total||Market||% Total|| Unrealized |
| Estimated |
|Cash & Cash Equivalents||15,518||7.5||%||15,518||7.3||%||70|
|At February 19, 2020||Cost||% Total||Market||% Total|| Unrealized |
| Estimated |
|Cash & Cash Equivalents||40,934||18.8||%||40,934||18.3||%||477|
|At March 6, 2020||Cost||% Total||Market||% Total|| Unrealized |
| Estimated |
|Cash & Cash Equivalents||53,876||24.6||%||53,876||26.1||%||85|
|At July 25, 2020||Cost||% Total||Market||% Total|| Unrealized |
| Estimated |
|Cash & Cash Equivalents||15,687||7.2||%||15,687||7.3||%||1|
Since we began to manage our preneed trust funds with an in-house team at Carriage during the depths of the financial crisis in October 2008, we have managed a consistent investment strategy focused on a balanced portfolio between quality equity and high yield fixed income securities, while making individual security selection and asset allocation decisions based on shorter term market dynamics. As Mel wrote in his 2016 Shareholder Letter, Given the long term nature of preneed contract liabilities and the almost permanent nature of our capital, we have the ability to take a long term and patient view of our investments and be most active in the portfolio at times of market distress and dislocation (i.e. Be Greedy when others are Fearful).
Over the past 12 years of our management of the majority of our preneed trust assets, we have used periods of financial crisis and market distress like the 2008/2009 financial crisis, the downgrade of the U.S. credit rating by S&P in August of 2011, the energy crash in late 2015/early 2016 and again with the sudden almost 20% market decline in late 2018 to strategically reposition the portfolio for higher long-term capital appreciation and increased annual recurring income. In each of those instances we have experienced, to varying degrees, a corresponding increase in our reported Financial Revenue and EBITDA. These increases initially were due to increased income generated from our cemetery perpetual care trusts that is earned as revenue in a current period as well as over the longer term in higher contract averages when preneed funeral and cemetery contracts mature.
At the beginning of this year we began to get more cautious because of several key indicators of market health trending in ways that were symptomatic of more risk ahead (decreases in oil prices and 10 Year Treasury Yields, increases in VIX Index). As the market reached all-time highs on February 19, 2020, we were reducing our risk exposure by actively raising cash, which reached about $54 million or 25% of total assets under management by March 6, 2020.
Like during other periods of market distress, we repositioned our preneed trust fund portfolio through the most recent Coronavirus Crisis market crash to be much more resilient in the short term as well as to provide opportunity for significant capital appreciation upside over a longer term in a more normalized post COVID-19 environment. Starting on March 9 th and continuing over the past four months, we deployed about $61.5 million of new capital which has increased the recurring annual trust fund income by approximately 68% to $14 million.
Our highly successful repositioning will have the immediate impact on our reported Financial Revenue and EBITDA primarily through increased income earned through our cemetery perpetual care trusts. The $5.7 million increase in recurring annual income from our major capital deployment should produce a sustainable annual increase of about $3 million in recognized and reported Financial Revenue and an increase in Financial EBITDA Margin to about 95%, which combined will translate into an increase in Financial EBITDA of about $2.85 million or more than 10 cents of EPS per CSV share.
Because there are no overhead or capital costs associated with the expected increase in Financial EBITDA, the increase will flow dollar for dollar into Adjusted Consolidated EBITDA and pretax Free Cash Flow, leading to higher and sustainable Total Field EBITDA Margins, Adjusted Consolidated EBITDA Margins and Adjusted Free Cash Flow Margins. These valuation performance metric increases are reflected in our updated Three Year Roughly Right and Rolling Four Quarters Outlooks, concluded Mr. Brink.
CONFERENCE CALL AND INVESTOR RELATIONS CONTACT
Carriage Services has scheduled a conference call for tomorrow, July 29, 2020 at 9:30 a.m. Central time. To participate in the call, please dial 866-516-3867 (conference ID-6760527) and ask for the Carriage Services conference call. A replay of the conference call will be available through August 3, 2020 and may be accessed by dialing 855-859-2056 (conference ID-6760527). The conference call will also be available at www.carriageservices.com . For any investor relations questions, please contact Viki Blinderman at 713-332-8568 or Ben Brink at 713-332-8441 or email InvestorRelations@carriageservices.com .
|CARRIAGE SERVICES, INC.|
|OPERATING AND FINANCIAL TREND REPORT|
|(IN THOUSANDS - EXCEPT PER SHARE AMOUNTS)|
|Three Months Ended June 30,||Six Months Ended June 30,|
| 2019 || 2020 ||% Change|| 2019 || 2020 ||% Change|
|Same Store Contracts|
|Total Same Store Funeral Contracts||7,844||8,785||12.0||%||16,113||17,508||8.7||%|
|Total Acquisition Funeral Contracts||961||2,350||144.5||%||1,966||4,516||129.7||%|
|Total Funeral Contracts||8,805||11,135||26.5||%||18,079||22,024||21.8||%|
|Funeral Operating Revenue|
|Same Store Revenue||$||41,690||$||42,664||2.3||%||$||86,565||$||87,249||0.8||%|
|Total Funeral Operating Revenue||$||47,988||$||54,001||12.5||%||$||99,597||$||110,108||10.6||%|
|Cemetery Operating Revenue|
|Same Store Revenue||$||13,227||$||11,694||(11.6||%)||$||24,516||$||22,639||(7.7||%)|
|Total Cemetery Operating Revenue||$||13,227||$||15,749||19.1||%||$||24,516||$||29,493||20.3||%|
|Total Financial Revenue||$||4,147||$||4,758||14.7||%||$||7,940||$||9,036||13.8||%|
|Total Divested/Planned Divested Revenue||$||2,390||$||1,852||(22.5||%)||$||4,780||$||4,062||(15.0||%)|
|Same Store Funeral EBITDA||$||15,550||$||18,026||15.9||%||$||33,564||$||35,152||4.7||%|
|Same Store Funeral EBITDA Margin||37.3||%||42.3||%||500 bp||38.8||%||40.3||%||150 bp|
|Acquisition Funeral EBITDA||2,445||4,672||91.1||%||5,162||8,900||72.4||%|
|Acquisition Funeral EBITDA Margin||38.8||%||41.2||%||240 bp||39.6||%||38.9||%||(70 bp)|
|Total Funeral EBITDA||$||17,995||$||22,698||26.1||%||$||38,726||$||44,052||13.8||%|
|Total Funeral EBITDA Margin||37.5||%||42.0||%||450 bp||38.9||%||40.0||%||110 bp|
|Same Store Cemetery EBITDA||$||4,808||$||3,674||(23.6||%)||$||8,469||$||6,825||(19.4||%)|
|Same Store Cemetery EBITDA Margin||36.3||%||31.4||%||(490 bp)||34.5||%||30.1||%||(440 bp)|
|Acquisition Cemetery EBITDA||1,434||2,261|
|Acquisition Cemetery EBITDA Margin||%||35.4||%||3,540 bp||%||33.0||%||3,300 bp|
|Total Cemetery EBITDA||$||4,808||$||5,108||6.2||%||$||8,469||$||9,086||7.3||%|
|Total Cemetery EBITDA Margin||36.3||%||32.4||%||(390 bp)||34.5||%||30.8||%||(370 bp)|
|Total Financial EBITDA||$||3,762||$||4,532||20.5||%||$||7,154||$||8,392||17.3||%|
|Total Financial EBITDA Margin||90.7||%||95.3||%||460 bp||90.1||%||92.9||%||280 bp|
|Other EBITDA Margin||%||28.7||%||%||27.2||%|
|Total Divested/Planned Divested EBITDA||$||535||$||562||5.0||%||$||1,074||$||1,169||8.8||%|
|Total Divested/Planned Divested EBITDA Margin||22.4||%||30.3||%||790 bp||22.5||%||28.8||%||630 bp|
|Total Field EBITDA||$||27,100||$||33,221||22.6||%||$||55,423||$||63,315||14.2||%|
|Total Field EBITDA Margin||40.0||%||42.9||%||290 bp||40.5||%||40.9||%||40 bp|
|OPERATING AND FINANCIAL TREND REPORT|
|(IN THOUSANDS - EXCEPT PER SHARE AMOUNTS)|
|Three Months Ended June 30,||Six Months Ended June 30,|
| 2019 || 2020 ||% Change|| 2019 || 2020 ||% Change|
|Total Variable Overhead||$||3,042||$||3,737||22.8||%||$||4,980||$||5,373||7.9||%|
|Total Regional Fixed Overhead||1,028||872||(15.2||%)||2,029||1,910||(5.9||%)|
|Total Corporate Fixed Overhead||4,726||4,933||4.4||%||9,603||10,130||5.5||%|
|Overhead as a percentage of Revenue||13.0||%||12.3||%||(70 bp)||12.1||%||11.2||%||(90 bp)|
|Consolidated EBITDA Margin||27.0||%||30.6||%||360 bp||28.4||%||29.6||%||120 bp|
|Other Expenses and Interest|
|Depreciation & Amortization||$||4,597||$||4,698||2.2||%||$||8,920||$||9,247||3.7||%|
|Non-Cash Stock Compensation||518||715||38.0||%||1,103||1,546||40.2||%|
|Accretion of Discount on Convertible Subordinated Notes||60||66||10.0||%||117||131||12.0||%|
|Impairment of Goodwill and Other Intangibles||14,693|
|Expense for Income Taxes||2,043||3,248||4,620||6,048|
|Tax Expense (Benefit) Related to Impairments||51||(4,885||)|
|Tax Adjustment Related to Certain Discrete Items||103||150||202||136|
|Net Tax Expense||2,146||3,449||4,822||1,299|
|GAAP Net Income||$||4,862||$||6,397||31.6||%||$||11,387||$||2,200||(80.7||%)|
|Special Items, Net of Tax, except for **|
|Acquisition and Divestiture Expenses||$||$||36||$||$||126|
|Severance and Separation Costs||483||217||654||445|
|Performance Awards Cancellation and Exchange||56||56|
|Accretion of Discount on Convertible Subordinated Notes **||60||66||117||131|
|Net Impact of Impairment of Goodwill and Other Intangibles||51||9,808|
|Natural Disaster and Pandemic Costs||657||768|
|Other Special Items||371||371|
|Adjusted Net Income||$||5,686||$||8,005||40.8||%||$||12,538||$||14,118||12.6||%|
|Adjusted Net Profit Margin||8.4||%||10.3||%||190 bp||9.2||%||9.1||%||(10 bp)|
|Adjusted Basic Earnings Per Share||$||0.31||$||0.45||45.2||%||$||0.69||$||0.79||14.5||%|
|Adjusted Diluted Earnings Per Share||$||0.31||$||0.45||45.2||%||$||0.69||$||0.79||14.5||%|
|GAAP Basic Earnings Per Share||$||0.27||$||0.36||33.3||%||$||0.63||$||0.12||(81.0||%)|
|GAAP Diluted Earnings Per Share||$||0.27||$||0.36||33.3||%||$||0.63||$||0.12||(81.0||%)|
|Weighted Average Basic Shares Outstanding||17,959||17,860||18,008||17,833|
|Weighted Average Diluted Shares Outstanding||17,988||17,889||18,043||17,862|
|Reconciliation to Adjusted Consolidated EBITDA|
|Acquisition and Divestiture Expenses||45||159|
|Severance and Separation Costs||611||275||828||563|
|Natural Disaster and Pandemic Costs||832||972|
|Other Special Items||418||418|
|Adjusted Consolidated EBITDA||$||19,271||$||25,444||32.0||%||$||40,120||$||48,284||20.3||%|
|Adjusted Consolidated EBITDA Margin||28.4||%||32.8||%||440 bp||29.3||%||31.2||%||190 bp|
CARRIAGE SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
|December 31, 2019||June 30, 2020|
|Cash and cash equivalents||$||716||$||692|
|Accounts receivable, net||21,478||20,033|
|Prepaid and other current assets||10,667||12,087|
|Total current assets||39,850||40,222|
|Preneed cemetery trust investments||72,382||72,569|
|Preneed funeral trust investments||96,335||90,235|
|Preneed cemetery receivables, net||20,173||20,238|
|Receivables from preneed trusts||18,024||17,471|
|Property, plant and equipment, net||279,200||277,564|
|Cemetery property, net||87,032||101,509|
|Intangible and other non-current assets, net||32,116||33,348|
|Operating lease right-of-use assets||22,304||21,407|
|Cemetery perpetual care trust investments||64,047||63,228|
|LIABILITIES AND STOCKHOLDERS EQUITY|
|Current portion of debt and lease obligations||3,150||3,456|
|Accrued and other liabilities||24,026||23,267|
|Convertible subordinated notes due 2021||6,115|
|Total current liabilities||35,589||40,880|
|Long-term debt, net of current portion||5,658||5,285|
|Convertible subordinated notes due 2021||5,971||...|