Carriage Services, Inc. Q2 FY2025 earnings call

• Financial results: GAAP net income for the quarter was $11.7 million, up 85.7% from the same quarter last year. Adjusted consolidated EBITDA for the second quarter was $32.3 million, down 1% from the prior year period, but corporate overhead cost was 12.2% of revenue, 80 basis points lower than the long-term range.
• Initiatives: Earned core line gaining traction, casket core line in final planning stages, Passion for Service program to enhance service culture.
• Acquisitions: Under contract to acquire new businesses, expected to close this quarter, subject to regulatory approvals, with combined businesses serving over 2,600 families and generating over $15 million in revenue last year.

Total revenue for the second quarter was $102.1 million, essentially flat compared to the same quarter last year. Funeral operating revenue grew 1.4% to $59.6 million in the second quarter, with year-to-date growth of $3.9 million or 3.1% and volume up 1.5%. Cemetery operating revenue was $33.5 million, a slight decrease of 0.6% from the same period last year, but year-to-date up 2.2%. Financial revenue rose 18.8% to $8.2 million in the second quarter, primarily driven by a 96.2% increase in preneed funeral commission income.

Updated full-year guidance anticipates revenues in the range of $410 million to $420 million, adjusted consolidated EBITDA between $129 million to $134 million, adjusted diluted EPS of $3.15 to $3.35, overhead expenses ranging from 13% to 13.5%, adjusted free cash flow between $40 million and $50 million, and leverage ratio ending between 4.1 and 4.2x.

Factors identified in earnings release and SEC filings, including economic trends, regulatory approvals for acquisitions, and inventory delays in cemeteries impacting cemetery revenue growth.

Q: Congratulations on the quarter. I have a few questions for you. I guess I'll start with the exciting news on M&A. The businesses are under contract. Just the way the press release was written, is this more than one entity you're acquiring? Or is it an entity with multiple locations?

A: Alex, this is Steve. So yes to both. So it's multiple transactions and each one has multiple businesses.

Q: Carlos, you highlighted the overhead coming down and significantly down year-over-year. But how long can that go? I mean it's sort of an impressive -- it is a very impressive drop.

A: Liam, over the last couple of years, we have worked really hard in creating a foundation for growth, right? We couldn't really go back to acquisitions after Greenlawn. We focus on paying down our debt. But part of that was really to working hard in systems, process and people, especially here at the Houston Support Center. And we have been able to add positions we never had before with new departments and also reengineer and restructure some of what we had from a serviceability perspective and financial analysis perspective as well. I think we're pretty much where we should be. I think the overhead right now is quite stable. We might add one more position probably before the end of the year, potentially two, but I don't -- they're not highly paid positions. And I do think that along with the revenue growth we're projecting, we should be right under the 13% we have as a long-term range of -- or number of percentage to revenue on overhead costs here at the office. We do feel though that as we continue to grow through acquisitions, starting with this new acquisitions in the third quarter, that we will not need to add cost to the overhead for the short-term future.

Q: Maybe to start, I'll just follow up on one of the previous questions, just trying to better understand your revenue guide and the change versus prior. Could you break -- so if the midpoint of your revenue guide grew $10 million, could you just break down between sort of what changed on the organic business and then divestitures -- the newly added divestitures and acquisitions. Can you just give us a more detailed breakdown of how that $10 million breaks out?

A: Yes. So if you think about -- and again, these are going to be broad numbers. If you think about just the acquisitions and the comment around $15 million of acquisition revenue, if you just take -- think about the last 1/3 of the year, that would equate to roughly about $5 million. Obviously, it might be a little bit more weighted than that. So call that -- call it about half of the increase associated with the guide increase and then -- which is offset a little bit by the divestitures, but not terribly significantly. And the rest would be associated with the core business or the organic business. The fourth quarter was a tough quarter for us last year as compared to kind of a normal quarter. So we've taken that back into consideration and looking at a normal fourth quarter as we look at the businesses. So that's both in Funeral as well as Cemetery.

Q: Your Cemetery expectations for the back half. I think in your prepared remarks, you said you expect to get back to 10-plus percent growth. Maybe that was just preneed, but what is -- what's the plan to get back there? Is it really just all about inventory? Or is there anything else that's worth flagging?

A: So George, what has happened is we got some delays on permits in some very high-end, high-volume businesses that we own, Cemetery specifically. And when you look at our year-to-date and quarter -- for the second quarter, our contract count versus last year, contract volume is higher on preneed cemetery sales than last year. But these are the single sales, right? So low average sales, your bread and butter sales, which we always want to do. It's just the lack of higher-end sales because of the lack of inventory that were not able to be sold [ pretty well ] for the second quarter and really the first half of this year. We do expect those projects to be finalized and able to sell within the third quarter and then fourth quarter should allow us to then catch up to some of that growth we're expecting for the year. That's really it because the sales force are working really well. They're delivering the numbers with honestly just single sales, and that's pretty hard to do, and I'm very proud of their work on being able to achieve that without having those $150,000 to $250,000 sales, which imagine that makes up probably about 50 contracts. So great, great job, and I do expect to be back on track by Q3.

Q: Carlos, you highlighted the overhead coming down and significantly down year-over-year. But how long can that go? I mean it's sort of an impressive -- it is a very impressive drop.

A: Over the last couple of years, we have worked really hard in creating a foundation for growth, right? We couldn't really go back to acquisitions after Greenlawn. We focus on paying down our debt. But part of that was really to working hard in systems, process and people, especially here at the Houston Support Center. And we have been able to add positions we never had before with new departments and also reengineer and restructure some of what we had from a serviceability perspective and financial analysis perspective as well. I think we're pretty much where we should be. I think the overhead right now is quite stable. We might add one more position probably before the end of the year, potentially two, but I don't -- they're not highly paid positions. And I do think that along with the revenue growth we're projecting, we should be right under the 13% we have as a long-term range of -- or number of percentage to revenue on overhead costs here at the office. We do feel though that as we continue to grow through acquisitions, starting with this new acquisitions in the third quarter, that we will not need to add cost to the overhead for the short-term future.

Q: Scott, you had a question about the July 4 federal tax act. Might you see some benefit going forward in free cash flow and cash taxes from anything in the bill at Carriage?

A: Yes. So we looked at it. Right now, our expectation is probably around about a $5 million to $6 million benefit associated with cash taxes in 2025. And as we look through the remainder of kind of the bill time frame, we'll see small incremental benefits associated with cash taxes.