Executives: Viki Blinderman - Co-CFO Mel Payne - Chairman, CEO Ben Brink - Principal Financial Officer,

Treasurer
Analysts: Greg Charpentier - Oppenheimer Chris McGinnis - Sidoti Alex Paris - Barrington

Research
Operator: Good day, ladies and gentlemen, and welcome to the Carriage Services First Quarter 2016 Earnings Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Viki Blinderman, with Carriage Services.

Ma'am, you may begin.

Viki Blinderman: Thank you and good morning everyone. We are glad you can join us today. We'd like to welcome you to the Carriage Services conference call. Today, we'll be discussing the company's results after the first quarter which was released yesterday after the market closed.

Carriage Services has posted the press release, including supplemental financial tables and information on its investor's page on our website. The audio conference is being recorded and an archive will be made available on our Web site. Additionally, later today, a telephone replay of this call will be made available and active through April 30. Replay information for the call can be found in the press release, distributed yesterday. On the call today from management are Mel Payne, Chairman and Chief Executive Officer, and Ben Brink and myself, Chief Financial Officers.

Today's call will begin with formal remarks from management, followed by a question-and-answer period. Please note that during the call, we will be making forward-looking statements in accordance with the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. I'd like to call your attention to the risks associated with these statements, which are more fully described in the company's report filed on Form 10-K and other filings with the Securities and Exchange Commission. Forward-looking statements, assumptions or factors stated or referred to on this conference call are based on information available to Carriage Services as of today. Carriage Services expressly disclaims any duty to provide updates to these forward-looking statements, assumptions or other factors after this date of this call to reflect the occurrence of events, circumstances or changes in expectations.

In addition, during the course of the morning's call, we will reference certain non-GAAP financial performance measures. Management's opinion regarding the usefulness of such measures, together with the reconciliation of such measures to the most directly comparable GAAP measures for historical periods, are included in the press release and the company's filings with the Securities and Exchange Commission and on our Web site. Now, I'd like to turn the call over to Mel.

Mel Payne: Thank you, Viki. I want to a whole lot upfront, I said most of what I had to say in the press release and especially in the shareholder letter, which if you haven't read it, you really should if you want to be an investor in our company.

I do want to say that Dave DeCarlo, would have been here, but he had a family emergency and could not be here, although he is on the call today. So we wish, he and Peggy the best as they deal with that emergency. And in that regard, I just want to compliment Dave and Michael Cumby with the kinds of activity they have growing across the industry to tell the story of Carriage. We are going to close on a wonderful business in the next couple of months, in a wonderful market, two locations, very strategic, very large. The wonderful business will become a bigger wonderful business, as part of the Carriage family over the next five or ten years.

It will turn a few heads, when it happens and it will be a reputation builder, which is one of the things we look for when we do anything. So, I congratulate Dave and Michael on what they are doing, there is other activity in the pipeline. We don't want to forecast that, although I'm sure this year we will do some other acquisitions that will be the right ones at the right time, and will be mutually beneficial over a long time. Now as far as upfront comments, this quarter was probably a statement for us about just how good our company has become at operating. Because everything in the industry I'm told was negative in terms of volumes, new flu season, bla, bla, bla, bla world is coming to an end.

Well, it reminds me of a metaphor that Warren Buffett and if you read any amount of material, I've studied him a lot, uses about the market. And when there is a rising tide of liquidity flowing into a market, it makes all the boats rise. But, when the tide goes out, turns out there have been a lot of boats leaking and a lot of swimmers with no bathing suits on, swimming naked. This was a quarter where the tide went out for our business and yet we had a record quarter. So this shows that broadly speaking our managing partners and their employee teams under the framework of Carriage, executing a standards operating model, took no prisoners, it speaks to the idea that we had a long time ago about Carriage, someday we will be so good at what we do broadly that it will look like we're in a different industry.

I think the first quarter looks like we're in a different industry. With that, I'll turn it over to Ben for more color.

Ben Brink: Thank you, Mel. Our first quarter operating and financial results marked another record setting performance for Carriage. In a tough funeral operating environment we achieved record quarterly revenue of $63.3 million, record field EBITDA of $27.7 million, record adjusted consolidated EBITDA of $19.9 million, record adjusted consolidated EBITDA margin of 31.4% and record adjusted diluted earnings per share of $0.47 a 12% increase over the first quarter of 2015.

Our adjusted free cash flow continue to increase to $11.7 million in the quarter. We experienced a challenging funeral operating environment in the first quarter with same-store funeral contracts down 5.4% and total funeral contracts down 3.2% versus 2015. Despite the decrease in call volume the execution of our standards operating model by our managing partners and their employee teams across the company was extraordinary. With total funeral revenue only down 1.4% and funeral field EBITDA down less than 1%. We've spoken often about the operating leverage that is inherited within the funeral business and that that leverage can work against you in a weak call volume environment.

Given this backdrop, it is equally impressive and a testament to our operating teams that total funeral EBITDA margin increased year-over-year to 41.2%. Our cemetery operating performance continued to demonstrate momentum we've seen in the business over the past few years with revenue increasing $750,000 or 6.8% and cemetery field EBITDA increasing 5.6% compared to the first quarter of last year. Financial revenue and EBITDA were essentially flat year-over-year. Throughout the first four months of the year we have executed on our discretionary trust portfolio repositioning strategy by selling under performing securities, reducing our overall exposure to the equity markets and deploying this capital for better relative value opportunities particularly in the fixed income market. As a result of this repositioning strategy, we have increased our estimated annual income in our discretionary trust portfolio by almost 23% or $2.2 million to $12 million annually.

As stated on previous conference calls we expected our reported overhead to be significantly higher in the first quarter of this year compared to 2015 primarily due to one-time charges related to the operation and strategic growth leadership changes that occurred throughout 2015 and for the retirement of Bill Heiligbrodt this quarter. We amended the portion of our agreement with Bill in order to accrue for GAAP purposes all of the charges in this quarter. The amendment in no way changes Carriage's relationship with Bill, but simply a necessary change for accounting purpose. Given the one-time nature of these charges they have been added back to our non-GAAP reporting for the quarter. Going forward we expect reported overhead to trend below 14% of total revenue and that one-time charges will be minimal in the future.

Over the past 10 months we've had numerous conversations with investors regarding our non-GAAP reporting and we have spoken publicly about our intention to have GAAP and non-GAAP EPS converge over-time. As part of this process beginning with our first quarter release, we will only add back in our non-GAAP reporting special items that are materially outside the normal course of our business. We will discontinue reporting withdrawal trust income in our non-GAAP section as -- it has become insignificant to our overall results and has been a source of confusion for equity investors instead any cash that is withdrawn from these accounts going forward will be recorded in our adjusted free cash flow as it has in the past. Our goal will continue to be to have our transparent non-GAAP reporting reflect the true earnings power of Carriage's operating and consolidation platform. Given the continued momentum we see in our business high performance of all of our managing partners and their teams, we are raising -- roughly right rolling four quarter earnings per share outlook range by $0.02 to $1.71 to $1.75, this raise includes one acquisition and one real estate transaction [indiscernible] property that will close before the end of the quarter.

Both of these transactions are consistent with our commitment to allocate our internally generated capital to grow intrinsic value per share. The real estate purchase is one of our largest operating leases while the acquisition like Mel talked about is a fantastic business in one of our identified strategic markets. Finally, I'd like to mention that this is the earliest Carrier has recorded our quarterly financial result in our history and I want to take this opportunity to recognize our entire financial reporting and accounting teams for all their hard work and dedication over these past few months. And with that, I'll turn the call back over to Mel.

Mel Payne: I completely agree with that last comment and commendation to our accounting team.

They're just a bunch of A players what else can you say about them, its awesome to watch them work, be around them, it's exciting. I had somebody tell me one time you could not apply the foray leadership model to technical people, but I never agreed with that and it's been proven to be untrue. They're all A players and our company is full of A players just about everywhere you look, so it's a lot of fun to come to work. With that, I'll open it up for questions.

Operator: [Operator Instructions] Our first question comes from the line of Scott Schneeberger with Oppenheimer.

Your line is open.

Greg Charpentier: Yes. Good morning, everyone. This is Greg on for Scott. I was wondering if you could discuss how you think about funeral volumes with respect to your new rolling fourth quarter outlook and what type of normalized funeral volume growth could we expect for first quarter 17? Thank you.

Mel Payne: Hello, Scott. I don't know how long you've been covering this industry. But you can model out a lot of different statistical things progression analysis and so on, but it's just unpredictable. Most people are surprised once they start looking at the industry and the volatility of the seasonality, what really counts is long term year-over-year same-store apple-to-apple-to-apple-to-apple comparisons that's what really counts. We show that on our five year trim report that doesn't make it any easier for you to model.

But just like the tide went out in the first quarter of this year with volumes, the tide will come back in. If you look at the last five years our volumes have been essentially flat and so we don't try to model volumes on a quarterly basis we quit doing that in 2003. Ever since 2003, we got rid of budgets and quarterly modeling, because quarterly modeling is noting, but a budget. And budgets didn't make the company any better what happens is, you have to get better at operating and then don't worry about the death rate, or the seasonality of the flu season because that will drive you nuts. What you want to do is be better than anybody else in the local market so that you get more market share no matter what the death rate is for what reason that's the idea of Carriage and its there in full color for anybody to see.

Go back and read the shareholder letter where I laid it out over the last years and it will clear up any confusion you might have.

Greg Charpentier: Great. Thank you for that Mel. And one more if you don't mind, could you discuss some current and future cost initiatives that could be meaningful for continued margin expansion?

Mel Payne: And once again, how do we get such high margins? I have no idea, its not because of cost initiatives or pricing initiatives, in fact, we're initiative free, we're budget free and initiative free, there is none of those ever made us any better. This is -- you have to go back and read company investment profile and read my shareholder letter because it doesn't sound like you read it to really ask good questions on this call.

Greg Charpentier: All right. Thanks Mel.

Operator: Thank you [Operator Instructions] Our next question comes from the line of Chris McGinnis with Sidoti. Your line is open.

Chris McGinnis: Good morning.

Thanks for taking my question. I guess can you just may be elaborate a little bit on the aforementioned acquisition that you plan on making and may be a little bit of how long have you been working on it and how long its come together and how confident you feel about the position of it?

Mel Payne: Chris, it is Mel. We've had a relationship -- with all of the acquisition activity, we're building relationships. And with that relationships in this particular market and business for years. Timing wasn't right.

If you don't have alignment of motivated interest you shouldn't do it. The price won't be the reason to do it. There has to be a mutual alignment of interest for what's going to happen over five or ten years. We had no competition, there was no broker my goodness and it's going to be a wonderful business over the next five or ten years and a wonderful market.

Chris McGinnis: Great.

And maybe just a touch on that, can you maybe just talk a little bit about the competitive landscape in the industry, the consolidation at the moment?

Mel Payne: Yes. I mean we're in a lucky spot. If you just keep trying to get better what to do, and handle things you can't control, someday you might work it up -- wake up and the landscape is turned decidedly in your favor. I said that in the shareholder letter. When the company was founded in 1991, I've seen so many consolidators come and go, many, many, many private equity, venture capital, none of them around and the bigger companies they are all gone, it's just us and SCI really with the same framework and profile.

So, anybody who is got a succession planning problem or issue at some point is going to have to make a choice. We think there is a start choice to be made, if that choice is look, I have a succession planning problem and you are the succession planning solution. And I care about the business, I'm at out to milk it for the last nickel or dime, because I still want to be around in the phase and the community and, I want, and I don't want the business to decline, I wanted to actually prosper. Well, look, we are an easy company to check out. If you go to our Web site, there is so many testimonials that Dave DeCarlo and Michael Cumby has put -- have put together.

I don't even know they we're going to do this. But, I mean it's so easy to check us out talking to our people, you know have to listen to me. Talk to our people, call them up, they want to talk to you and tell you what they think about our company, well, that's going on throughout the industry. So overtime that leads to reputational and quality differences that make us one choice, and then there is other choices. We think the landscape over the next five or ten years could not be better.

Chris McGinnis: Great.

Mel Payne: Can't be better.

Chris McGinnis: All right. Great. And then one just -- one last question understand the kind of issue on the funeral side, but the improvement in the same-store sales on the cemetery, can you just dig a little bit behind that improvement on a year-over-year basis? Thank you.

Mel Payne: If you heard the phrase first-two then what?

Chris McGinnis: No, I haven't actually, I don't think so.

Mel Payne: All right. Well, look on the cover of our annual report its there, it's a high performance concept.

Chris McGinnis: Yes, yes.

Mel Payne: It's the high performance concept that drives everything we do.

If you want to what to be high and sustainable lets say cemetery sales broadly speaking. You got to like Who Right first, we gotten the Who Right better across the cemetery portfolio especially at our bigger cemeteries. I see several high performance managing partners on this call right now at the cemetery that you are asking about, where to go Rick that's how you do it, just not that complicated, but you got to have talented people running your business and if you have to tell them what to do, you don't have the right people, or if you have to come up with top down initiatives or programs, you've got the wrong people.

Operator: Thank you. Our next question comes from the line of Alex Paris with Barrington Research.

Your line is open.

Alex Paris: Good morning, everyone.

Mel Payne: Good morning.

Ben Brink: Hey Alex.

Alex Paris: Hi, I joined the call late.

So I don't want to be repetitive here and if the question was asked please, tell me and I'll get it on the transcript or I'll get it on the follow-up call. But, the -- I just have a couple of -- a couple of questions, first of, same-store revenues in funeral were down 4.5% year-over-year, it was against one of the strongest quarters, have been the second strongest quarter in the company's history now that this quarter is the strongest. And that was a weak flu season compared to a strong flu season. Over the balance of the year, the comps are significantly easier in that respect. Did you, I know this is very short-term now, but do we expect, is my thinking right there in that regard, the comps are easier over the balance of the year, in terms of same-store sales for funeral services.

And the other question, and the reason it's a question is because, the same-store revenue is constantly updated as acquisitions mature and become part of the same-store revenue?

Mel Payne: Okay. Thanks Alex. An acquisition doesn't become part of the same-store revenue until five years of ownership.

Alex Paris: Okay. Five years.

Mel Payne: We're not like a retail operation. So, you can really see same-store or same-store, same-store, same-store, same-store, apples-to-apples, apples-to-apples, apples-to-apples over a five year timeframe, we did that for a reason to prove how good we were at operating these businesses, or not, I was told not to do that, okay. I did it, because people told me not to do it, didn't think that we would ever be as good as we became. And so if you look at the five year, if you read my shareholder letter.

Alex Paris: I guess I did.

Mel Payne: I asked you to do. You will see that in that five years our same-store funeral revenue was up 0.6%, or 0.6% and our same-store funeral field EBITDA was up that was been 3% or 4%. All right, so, do you think there were good quarters and bad quarters in the five years?

Alex Paris: I do.

Mel Payne: Yes. I don't remember which ones they where and didn't care to talk, because this is the deal.

When you get businesses like we have across the country full of people like we have and leaders that we have, they are trying to get market share, not worry about the death rate or the flu season. Because, that's just going to happen when it happens, I wish it was more predictable too, but I quit worrying about that a long time ago and went to work on getting the people and the leadership and the market share right. That's what count. Just like I said earlier you probably didn't hear this, I've used the first quarter like Warren Buffet used liquidity in the market. When the fed starts doing dollars and making money so easily, it lifts all boats.

The tide comes in lifts all boats in the market and lifts all swimmers swimming. But when it goes out, you get to see which boats are leaky, we call that market share and which boats really are going to sink and not naked or whoever is swimming naked that's what he says. Well, this is was the kind of quarter this was. And yes, the tide will come back in, the difference is we've got people running our businesses, I can only imagine what the quarter would look like, it had same-store volumes, which we had last year, it would have been sinful. So, will the tide rollback in, absolutely, it has since I've been doing this 25 years.

Alex Paris: No, no, I…

Mel Payne: I don't know how to predict the quantity every quarter and I made an earlier comment quarterly budgets, which is what we're talking about don't work very well for this industry. So, I quit worrying about those things in 2003 and it took 12 years to get the company where whatever the quarterly seasonality. We can maximize the potential of it through operations.

Alex Paris: No, I hear you and I applaud that, I would not be an investor in the stock on a three month by three month basis, its definitely based on the long-term track record and the long-term outlook of the steady state, the steady growth of funeral services, the death care business generally speaking and then your ability to outperform that industry number.

Mel Payne: The first quarter, I mean if you look at first quarter the acquisition portfolio and this shows the idea behind the acquisition strategy and the acquisition methodology.

Our acquisition route which we now own for a while hid it out of the park in the first quarter wasn't just cemeteries they hid it out the park. And so we're adding businesses that have higher revenue growth profile through demographics, market share, opportunities and pricing power. We do not have aggressive pre-need funeral sales as a good strategy in this industry. So if you sell away and fix your prices, your future pricing power we don't do that it makes no sense and that's why the performance in the first quarter made it look like we're not in the same industry is what I heard it look liked for too many others that was my dream and now its come true.

Alex Paris: Congratulations.

Yes -- it was a great first quarter the best quarter ever against a really tough comp and I know you don't like to talk on a quarterly basis like that but the quarter…

Mel Payne: Yes, awesome -- I couldn't even believe the numbers when it came okay, I'm going somebody cook the bucks…

Alex Paris: Let's hope not.

Mel Payne: No.

Alex Paris: So then, just moving on Ben may be this question was already asked, there was $2.8 million in severance in the quarter, what was that talked about, I don't want to be repetitive here?

Ben Brink: So the biggest portion was related to Bill Heiligbrodt's retirement agreement and a majority of that was of that $2.8 million there were some other over flow from the changes we made in the operations and strategic leadership team last year that hit here in the first quarter this was always going to be a large quarter for overhead expenses and we expected to trend down significantly going forward.

Mel Payne: Alex on that, I told Ben and Viki I said look we've been out now since September to meet with investors we've learned a lot and one of the things it really hurt, I forget who it was some guy and I think in Chicago might have been at your conference said, Mel, Warren Buffett, you're a big fan of Warren Buffett, I said absolutely, he said, well, if he were to look at your reporting your non-GAAP reporting will be highly critical and how to really hurt a guy. So we've been trying to shrink the gap between non-GAAP and GAAP and nothing has changed with Bill, but we had to modify the agreement.

He is a friend of this company and me personally he is here down in office he has got a wonderful assistant he is not going anywhere, if we need his help we will ask him we just had to modify to wash it out so that the GAAP earnings will now look closer to what we've been showing as non-GAAP.

Alex Paris: Okay. And then I assume that came in on the total variable overhead line Ben?

Ben Brink: Yes.

Mel Payne: Yes. And that will -- I mean that's going to be, Ben said its going to go down less that 14% …

Ben Brink: Yes, 14% overall

Mel Payne: Total revenue.

Alex Paris: Got you. And then I guess my last question because I'm going to have a little time with you guys tomorrow, is on guidance, what the actual rate are you assuming on the rolling four quarter guidance? And then related to that the LOI, are we assuming this is a typical sized funeral home just in terms of any revenue production?

Mel Payne: Yes, it's not, it's a wonderful business, well know business but its not, huge business…

Alex Paris: Okay great.

Mel Payne: We will be over the next five or 10 years that's the idea.

Alex Paris: Good. And then…

Viki Blinderman: Alex, that's great.

We are still using it around 40%.

Ben Brink: You might have missed the comments also on this lease we're buying now that's a big deal.

Alex Paris: Go on.

Mel Payne: Go ahead Ben, you were telling.

Ben Brink: Yes.

So on the lease purchase we're thinking it's going to be about $0.5 million and additional EBITDA a year it was a good lease for us to get out.

Alex Paris: Sounds like it, well, we could talk a more about that offline, I don't want to take up more of your time today, but congratulations.

Mel Payne: Really appreciate your support. Yes. Thanks a lot.

Alex Paris: Pleasure, thank you.

Operator: Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Payne for closing remarks.

Mel Payne: I don't have any closing remarks, other than to say, we're very excited, the team here to go to Montreal this week starting on a Thursday. We have three nights, four days with our top performing pinnacle winners. And we're going to treat them like kings and queens that they are, high performance. We listed 14 in the press release we moved them, we promoted them to print and it's an exciting time for our company and for our people. So I expect to see a lot of energy and passion and be back over the next few days.

Thank you very much.

Operator: Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.