Executives: Viki Blinderman - SVP and Principal Financial Officer Mel Payne - Chairman and CEO Ben Brink -

CFO
Analysts: Alex Paris - Barrington Research Chris McGinnis - Sidoti &

Company
Operator: Good morning, ladies and gentlemen and welcome to the Carriage Services Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to your host for today's conference, Ms.

Viki Blinderman, Senior Vice President and Principal Financial Officer. Ma'am, you may begin.

Viki Blinderman: Thank you and good morning everyone. We are glad you can join us. We would like to welcome you to the Carriage Services conference call.

Today, we will be discussing the company's results after the second quarter of 2017, which was released yesterday after the market closed. Carriage Services has posted a press release, including supplemental financial tables and information on its Investor's page of our website. This audio conference is being recorded and an archive will be made available on our website later today through July 31. 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, Chief Financial Officer.

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 make 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 the 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 SEC. Now, I would like to turn the call over to Mel Payne, Chairman and Chief Executive Officer.

Mel Payne: Thank you, Viki. In my recent shareholder letter, I made the statement that we used to think of the first five years starting in '12 as a good to great journey and in the last two years of that five year timeframe, we began to think differently over a much longer period of time and we changed it to a good to great journey that never ends, because there was still so many ways across our consolidation and operating platform that we could get better.

The second quarter is a case study in a glass half full quarter with so many opportunities to improve our company over the next six months and over the next 4.5 years within the second five-year timeframe of our good to great journey. I'll let Ben go over some of the details of the quarter and then if there are questions afterwards on some of the ways we can get better and are working in highly focused on doing so, would be glad to answer those. Ben?

Ben Brink: Thank you, Mel. Carriage Services second quarter and year-to-date results reflected weak operational performance in a concentrated set of businesses in both our same-store cemetery and acquisition of funeral home portfolios along with increased investment in quality people and teams that are key to our continued long term success. In the second quarter, Carriage produced record total revenue and field EBITDA of 63.9 million and 25.3 million respectively, while adjusted consolidated EBITDA declined 7.1% to 16.5 million and adjusted diluted earnings per share declined 18.9% to $0.30 per share compared to last year.

Year-to-date, total revenue increased 5.4% to 132 million and field EBITDA increased 3.8% to 54.8 million, while adjusted consolidated EBITDA declined 1.6% to 37.1 million. Adjusted Consolidated EBITDA margin declined to 28.1%. Adjusted net income decreased 4.6% to 13.6 million and adjusted diluted earnings per share decreased 10.7% to $0.75 per share. The year-to-date decline in adjusted diluted earnings per share can partially be attributed to our improved non-GAAP reporting and an additional 1.2 million GAAP diluted shares related to our outstanding convertible notes. Compared to the first half of 2016, the differences in these two items had a negative $0.10 per share impact on our adjusted diluting earnings per share.

Our same-store funeral segment continued the momentum from the first quarter as the year-to-date revenue and field EBITDA increased 1.7% and 3% respectively. Our managing partners and their high performance teams continued to make incremental improvement in field EBITDA margin, which increased 50 basis points to 39.6% for the first half of the year. The cremation rate in our same-store funeral portfolio increased 130 basis points to 52.4%, while our average revenue per funeral contract increased slightly to $5300 - $53.46 [ph]. Year-to-date, acquisition funeral home revenue increased 53.6%, field EBITDA increased 45.9% to 7.1 million and field EBITDA margin declined 200 basis points to 40.9%. The decline in field EBITDA margin is entirely concentrated at two acquisitions we made in the second half of last year.

We fully expect margins at these businesses to improve over time as they become fully integrated into the Carriage framework of operational support and learn how to execute within our unique and differentiated standards of operating model for long term operating and financial high performance. We are confident of the near term future performance of these recent acquisitions, given the performance of the rest of the acquisition funeral home portfolio. Disregarding acquisitions we made last year, the remaining businesses acquired between 2013 and 2015 grew revenue by 6.2% and grew field EBITDA by 12.4% with field EBITDA margins of 45.6% in the first half of 2017 compared to last year. The second quarter financial results in our cemetery segment continued from the first quarter trend of weak operating performance, particularly preneed property sales in a concentrated group of four of our larger cemeteries. Through the first six months of the year, cemetery total revenue and field EBITDA decreased 2.3% and 13% respectively with field EBITDA margins declining 360 basis points to 29.5%.

These declines were entirely attributable to a 13.7% decrease in preneed property sales. We have or in the process of taking the necessary steps to improve the operating and financial performance in these four particular businesses and across our entire cemetery portfolio and expect to report improved results as we move through the balance of the year. Year-to-date overhead expenses have fallen $1.2 million and overhead, as a percentage of revenue, has dropped 13.4% versus 15.1% in the first half of 2016. Overhead costs in the second quarter increased 1.2 million compared to last year due to our investments in quality people we've made in 2017, a $300,000 increase in severance expenses and an increase in costs related to our proxy and shelf registration. Throughout the first half of 2017, we have taken the opportunity to selectively add to our high performance corporate development, information technology and operational support teams.

We view these three areas as critical components for Carriage to take full advantage of the increased level of consolidation activity we see within our industry over the next five to ten years and we are happy with the quick progress we have made in adding to those teams. Reported adjusted free cash flow declined by approximately 10 million during the first two quarters of 2017. The decline in reported adjusted free cash flow was due to the second quarter operating performance, the change in non-GAAP reporting methodology we made this year and timing differences related to maintenance capital expenditures and federal tax payments compared to last year. Given our view of the current and near term operating trends along with the permanent overhead expenses being higher than we originally expected, we are reducing our rolling four quarter adjusted diluted earnings per share outlook to a range of $1.65 to $1.69. Thank you for the opportunity to join us on the call today and we look forward to reporting our results again in October.

And with that, I'll turn the call back over to Mel.

Mel Payne: Thank you, Ben. Listed below in the press release on page two are the High Performance Hero Managing Partners during the second quarter and I'd like to call them out by name; Dave DeRubeis, Cody-White Funeral Home; Milford, Connecticut, Patrick Schoen, Jacob Schoen & Son Funeral Home; New Orleans, Jason Higginbotham, Lakeland Funeral Home; Lakeland, Florida, Heather Simons, Hubbard Funeral Home; Baltimore, Maryland, Randy Valentine, Dieterle Memorial Home & Cremation Ceremonies; Montgomery, Illinois, Bob Thomas, Malone Funeral Home; Grayson, Kentucky, Pam Parramore, Baker-Stevens-Parramore Funeral Homes; Middletown, Ohio, Cliff Pope, Havenbrook Funeral Home; Norman, Oklahoma and Scott Glover, Alsip & Persons Funeral Chapel; Nampa, Idaho. And with that, I'd like to open it up for questions.

Operator: Our first question goes to the line of Alex Paris with Barrington Research.

Alex Paris: I got a couple of questions. First of all, I'll start with cemetery. Versus my estimate, the shortfall in cemetery was 100% of the variance versus my estimate for total revenue. Cemetery has been an issue in the fourth quarter and in the first quarter. And in the first quarter, you talked about replacing some of the leaders in those largest cemetery properties and you felt good about the changes.

Is it an issue, it's going to take a little time for those guys to gain a little traction with some initiatives? What's going on there and are there any other changes that need to be made to get that growing again?

Mel Payne: Yeah. This is - the cemetery, when you find weakness and you'd have to go back and look at our history, this has happened once before in 2008 in April. I basically said, look, we're not very good at the cemetery sales business and we basically wiped out all of those sales managers and key people at our largest places and started over rebuilding. It took us 8 months. But to tell you what happens when you do it right, Alex, the great market crash, recession hit at the end of '08 and everybody said, you won't be able to make any preneed sales in your cemeteries.

We had a record first half in 2009 in cemetery property sales. So we've added some talent on the operating team with sales expertise in the last few months. I fully expect by the end of the year and I think it'll take that long to rebuild these teams, there are only four large cemeteries where this is an issue. But those four move the meter and one of them is rolling hills. That's our biggest one and it really moves the meter.

And so, I fully expect by the end of this year, we'll have our sales teams repopulated with talent. Leading into 2018, we'll be hitting on most cylinders again.

Alex Paris: Was the issue primarily preneed sales again?

Mel Payne: Yeah. There was an advanced planning team at Rolling Hills that basically got wiped out and that was a big portion. It's all preneed property sales, absolutely.

And then we have some turnover down at seaside, in Corpus Christi, which is a big cemetery and then a couple of others. So, these are things that you can repair, it's not permanent. We're all over it. Believe me when I say we're all over it. That means, we're all over it.

There is a little stress being applied, little tension here, a little forward leadership with edge. So it will get better Alex.

Alex Paris: I believe you. I wouldn't expect anything less from you.

Mel Payne: Thanks for your understanding.

Alex Paris: Yeah. And is that where the bulk of the severance comes from the 300,000 that Ben called out.

Ben Brink: It's kind of a mix across the board, Alex. It's a little bit in cemetery and elsewhere.

Mel Payne: One of the things Alex and if you don't mind, I'll take this.

We had a mid-year review. I had a mid-year review with all the senior leadership team and you go 5.5 years and you create a lot of value and everybody's happy and good to great journey and all that, well, that's never good enough. So you do a mid-year review half way through the six year and you say, look, whatever we thought we were good at before, I'm telling you, we're not good enough. And so I would say right now, you've got this team in the last little while parked up, energized, ready to play at a much higher level, because that is the requirement. And there's not an option.

So I think this has been actually a good thing, a wake-up call, some weakness, little humbling by high. And I think this is going to be energizing for the entire team. Our field is good except at these places that we mentioned, but overall the morale and the team in the field, the energy partners, the businesses are high morale. We had our MP meeting at June and we were ready to go to end the year strong. With these few areas of weakness, we'll get those you know if they were brought that's one thing but it's not, it's highly focused and concentrated.

And it is exciting an opportunity for all of us to take our game to a new level.

Alex Paris: I know you don't like focusing on three months at a time and that sort of thing. Your response to me, Mel, was as you fill out these sales teams over the course of this year, you'll be well positioned for next year. Should we expect any, I guess, Ben, kind of alluded to this, should we say expect some at least sequential improvement over the balance of this year?

Mel Payne: I'd be disappointed if we don't. But I guess you know it is it is just a quarter, but it was a wake of quarter, okay.

Now I remember you saying, it's a report card, well we didn't get a very high grade. And believe me, I don't like not getting high grades. And as the largest individual shareholder that's unacceptable. So I think we'll get a better grade from here on out. I just can't predict exactly what that incremental improvement will be.

Alex Paris: So I'll leave it at that and cemetery. It sounds like you're aware of the issues and you've addressed them and we'll wait and see how it improves going forward.

Mel Payne: Let's just say we're taking no prisoners.

Alex Paris: Moving onto the acquisition EBITDA margins, I think, Ben, you called out it was just a couple of the most recent acquisitions that you made in the second half of last year, what have you done there to improve expectations for the future.

Mel Payne: Let me to speak to that, Alex, because I've been working with Shawn and his team, I've actually been out with them.

We had a good track record over the last five years. But it was spotty, it wasn't you know a predictable number of acquisitions sort of that you could predict out in any kind of way. But we made some very, very good acquisitions. Now Shawn has got a new team and they're really are seeing relationships across the country. And the interesting thing about this industry, it is so local and not everybody is in some kind of national association and following all the other things that go on with the public companies.

And now there are only two of us. So a lot of the times I just don't have an awareness of the uniqueness of our framework, the standards models and all of that. So we made a big acquisition and it had been around for nine months and we finally got across the finish line. And so we didn't have it fully vetted out in terms of integration plans and things like that because we've had a lot of difficulty trying to get it across the finish line and the integration plan took - was delayed until after we got it across the finish line and closed it. That will happen now, but this is also been a highlight on how we can do better when we get a business that we've vet through ten strategic criteria that we think fits and has a higher revenue growth profile both in terms of volumes and pricing power and revenue over five or ten years.

We are getting much better at before the closing, building integration plans and having a common commitment to execution of an integration plan to bring that business up to what we call a high level of standards achievement, meaning above 70% or 80% which then leads to high and sustainable financial performance. So as we speak are perfecting if not perfecting then we are improving dramatically the pre-closing development and commitment by both parties to an integration plan and the accountability that they have to us and we have to them after the closing and I think you'll see a huge difference in that over the next five years.

Alex Paris: So given all these pre-closing measures that you're taking with acquisitions in some form of negotiation pipeline. Does that contributed to delaying a closing or does it not have any effect?

Mel Payne: Absolutely, no question. We're having - what we've learned the hard way is that someone really needs to understand us and they can't understand us if they never leave their hometown.

If we're just communicating with them in writing or verbally, they can't fathom how different this is. So we're requiring now that they visit one or two of our managing partners for a couple of days, see how this works, see all the support that is provided by Houston. Just see how their business will get better, even though it's a good business, it will absolutely get better once it's fully integrated into our support framework and they don't have to worry about all the stuff that a typical owner has to worry about, HR, IT, legal, regulatory, all this stuff. We do all that form and we eat it, we don't allocate any of it to them. And our incentive programs are incredibly generous and so we build a five and ten year plan of the future before we do an acquisition now.

And we have them commit to that because we want them to win this what we call this good to great five year value creation award, which is incredible. And it in order to do that they have to grow revenue at 2% compounded annually or higher and they have to do it in sustainable margins within the margins that we - that I wrote about in the shareholder letter in their grouping and these are not low margins, there are EBITDA ranges. So when you get them to visit our businesses, see how best managing partners are executing in this framework and then come to the home office and see all the support. This takes a little time that we didn't used to build into the process. And that time will pay off in spades.

Alex Paris: I don't doubt it. So that brings me to my last question, the acquisition pipeline. I noticed that there's not any LOIs as part of you rolling four quarter guidance. We haven't done an acquisition year to date undoubtedly and I agree with you that there's a great opportunity over the next five years and you're positioning the team to be prepared for that. Nearer term, what does the pipeline look like and what are your expectations there?

Mel Payne: There's a lot of activity, there are a lot of activity.

We are four people, Shawn and three other members of his team, two very active out in the field calling every week, building relationships. We have three LOIs outstanding. That doesn't mean that they will all be signed and closed. There are good businesses and there could, you know, they're in various stages of processing and yet we wouldn't have those LOIs even outstanding if they hadn't gone through the vetting and the criteria ranking and we think they're a good fit. Do I think some of those will close? Yes.

When? I don't know. If on the outside chance I don't want to jinx it, there is some kind of tax reform somehow magically, at the end of the year or early next year I think that could lead to an acceleration of consolidation over the next five years. Because a lot of - what we've found is a lot of these businesses still don't have the ideal corporate structure for after tax proceeds upon an exit, believe it or not.

Operator: Thank you. And our next question comes from the line of Chris McGinnis with Sidoti & Company.

Your line is open.

Chris McGinnis: I just want to kind of follow up in what you're saying. I was wondering if you could talk a little bit about how long does it take for a new operator to kind of learn the culture and get comfortable that he is making from the way he traditionally ran the company. And are there any pushback to that when they come in or is it more kind of embracing relationship?

Mel Payne: That's a great question Chris, it's case by case. I'm thinking back over the different acquisitions we made just over the last five years there have been some - some business is already being well run in terms of - once they close with us and we integrate, some are out of the gate just on fire.

Now typically that's with a managing partner I can think of, a big business we bought in Chattanooga had two really nice sized chapels, one in East Chattanooga in Tennessee and one just South Chattanooga in [indiscernible]. And the former owner had a key guy and then he had his son, so each one became a managing partner in these businesses is almost from day one flourished. The same with the business in Clarksville, Tennessee, the former owner Mike Parchman, and then a business in North Carolina Bright, where we recruited a guy but he had worked there before, just hit the ground running. And these have been high performance almost from day one. There are others who join us, it took a year or so and yet now they're very high performing, really just hitting it out of the park.

So the alumni over the last five years except for these two recent ones, there aren't any exceptions in there. They're all high performance. The ones we bought in New Orleans, four and two in Fairfax and 14 from SCI, they're all except one small one in Fairfax, they're all growing and achieving. So like Ben said if you exclude these two, the performance really is extraordinary as a group through the first half of the year. And so I'd say our goal going forward is to have the ones that we know will struggle because we can look at how it's being operated, how it's being staffed.

Have that integration planned, specifically outlined before the closing and committed to. And we're looking at one of those now and if you've got a really great business and especially a bigger business, you don't want to rush that and overdo it. So I'd say you want it fully integrated within a year. But a lot of them will get that way sooner, some of them right out of the gate, but most probably within six months

Chris McGinnis: And are you still adding to that team or - to the M&A or you [indiscernible].

Mel Payne: We have the team, we have to analyst, acquisition analyst and four - we have one support person, we build profiles on markets, we're building profiles on individual businesses that we think we'll fit within each major strategic market.

We've been building out this plan and then focusing and allocating the human resources on the ground to build the relationships within the markets we want to build groups within.

Operator: Thank you. And our next question comes from Barry Mendel with Mendel Money Management. Your line is open. If you're phone is on mute please unmute your phone.

Mel Payne: Don't be shy Barry.

Operator: All right, it might be a bad connection. I'm not showing any further questions. So I'll now turn the call back over to Mel Payne, CEO, for closing remarks.

Mel Payne: Thank you very much.

We had another quarter. The first weak quarter we've had in a long while and it won't stay that way. So we're all excited here at Carriage. We have a lot of people on the phone from Carriage and our businesses. I want to say hi to all of them and keep it up.

I think the great journey will continue and we will continue to report our progress to our investors as we go. Thank you very much.

Operator: Ladies and gentlemen, this does conclude the program, you may now disconnect. Everyone have a great day.