Ladies and gentlemen, thank you for standing by. And welcome to the Carriage Services First Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. After the seeker's presentation, there will be a question and answer session [Operator Instruction]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Carriage Services Management. Please go ahead.

Thank you, and good morning everyone. This is Viki Blinderman, Chief Accounting Officer at Carriage Services. Today we'll be discussing the company's first quarter results for 2020. Our related earnings release was made public yesterday after the market closed. Carriage Services has posted a press release, including supplemental financial tables and information on the investors page of our Web site. The audio conference is being recorded and the archive will be made available on our website later today through May 25th. Replay information for the call can be found in the press release distributed yesterday. On the call today from the management are Mel Payne, Chairman and Chief Executive Officer; Bill Goetz, President and Chief Operating Officer; and Ben Brink, Chief Financial Officer. Today's call will begin with formal remarks from management followed by a question-and-answer period. Before we begin, I would like to remind everyone that during this call we will make forward-looking statements. Certain statements on this call, including financial estimates, assumptions or statements about our plans, future results, expectations or beliefs, may constitute forward-looking statements under applicable securities laws. We make these statements on the basis of our reviews and assumptions regarding future events, business performance and other factors at the time we make. We make them and do not undertake any obligation to provide updates or revise any of these forward-looking statements after the date of this call, whether to reflect the occurrence of events, circumstances or changes in expectations except as required by law. These forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from the results expressed or implied in light of a variety of factors, including factors contained in our annual report on Form 10-K, quarterly reports on Form 10-Q and in our other filings with the SEC. Please note that a reconciliation of non-GAAP measures that may be referred to on this call to equivalent GAAP measures can be found in our earnings press release that was issued yesterday and on the company's Web site. And with that, I'd like to turn the call over to Mel.

Thank you, Viki. Jim Collins and his famous bestseller Good to Great offered a simple but profound truth about leadership, in taking a company from good to great, which was first two then what. Meaning get the right people on your enterprise bus, the wrong people off your enterprise bus, the right people in the right seats on your enterprise bus, before you begin the journey of driving your enterprise bus to a sustained great performance destination. Coming into 2020 and after two full months of performance and integration of Bill Goetz into our 10 member executive team I was feeling highly confident that I finally had the right senior leadership team in place for the future. And then the coronavirus pandemic crisis suddenly shows up, and I'm ordered to stay at home for two months. What happened during that two month period culminated in an April performance that is nothing short of shockingly fantastic, and the best news of all is that I had absolutely nothing to do with it. I was stuck in my home library working on our trust fund capital deployment strategy in collaboration with Ben Brink and Bernadette Pomponio, while Bill Goetz and the other eight members of our executive team led our company on a daily basis through the peak of the coronavirus pandemic crisis in spectacular fashion. I would like to share the names of these high performance leader owner heroes that are on our executive team. These are the leaders who will now drive the Carriage bus to a sustained high performance destination over the next five years. And I'm personally counting on our share price, following their upward trajectory of performance like night follows day. They are three regional partners, Sean Phillips in the central, Paul Elliott in the West, Chris Manceaux in the East, Peggy Schappaugh, operations and acquisitions analysis, Ben Brink, the CFO, Viki Blinderman, Principal Financial Officer and Accounting and Reporting, Steve Metzker, General Counsel and Mike Loeffel, Human Resources. Now I'll turn it over to our fearless leader, Bill.

Great. Thank you, Mel. Good morning, everyone. We appreciate your interest in Carriage Services, and I hope we find you and your families safe and healthy. Before we outline our business results, I want to pass along our thoughts and prayers to all the families that have been directly impacted by the COVID-19 pandemic. Also, I know we have many members of the Carriage team on the call. I want to thank each of them for their heroic work they have done over the last 10 weeks to serve their communities and each other, while prioritizing everyone's health and safety. What the Carriage team has done is truly amazing and I'm so proud to be a part of this organization. As we prepared for the call today, we thought long and hard about what information would be most helpful to you as investors. With that in mind, we will spend less time going through our first quarter results. We believe the more pertinent information is our performance in April, which was the first full month of operating under the new social distancing restrictions. I know many companies have withdrawn guidance, but we are taking a different approach based on the confidence that we have in our business, we will take you through our updated three year roughly right scenario. We'll share with you capital allocation trust fund performance, and our five years shareholder value creation plan. I'm going to start with some context surrounding the timeline of when the pandemic struck our business, the immediate impact we felt in our business as the country began to shutdown and most importantly, the actions that we took that have been delivering superior financial results during the COVID-19 crisis. I'm going to end my comments by also sharing our plan to continue our…

Thank you, Bill. And thanks to all of you for joining our call this morning. We hope that everyone is staying safe and healthy out there. With the advent of the coronavirus crisis in mid-March and the subsequent stay at home other gathering restrictions that were implemented in states and other jurisdictions across the country, our business and our industry had constraints placed upon us that were unprecedented in our history. The response from the entire Carriage family over these past 10 weeks has been remarkable. From the passion, skill and innovation, our managing partners and their high performance teams demonstrated and caring for their clients families, to the work of our Houston support center during the times, I have never been more proud to be a part of the Carriage team. At Carriage, we have a passion and conviction that our high performance culture begins and ends with having the best entrepreneurial leadership talent in every position at our company. Unlike any other time in the history of Carriage has our belief in the power of people through individual initiative and teamwork been more evident. And I join the rest of the executive team in thanking everyone for the dedication and passion for their work over these past 10 weeks. Now, on to the results. We were on pace to deliver a solid first quarter results until the middle of March when the first stay at home and other social distancing restrictions began to be implemented in the Bay Area in California, where we have a significant operational presence and spread to most states across the country. The negative impact to our business came in the form of lower funeral contract averages as we were restricted from hosting large funerals and from a reduction of pre-need cemetery sales activity.…

[Operator Instruction] Your first question comes from Alex Paris of Barrington Research.

I wanted to first congratulate you on the outperformance versus expectations in Q1, and the strong April and early May performance. I was especially pleased to see that you kept guidance, while many others have not and reaffirm for ‘21 and ‘22. There was a lot of information that you gave in the prepared comments. I just wanted to dive down into a couple of the issues that you had been faced with like lower funeral averages and lower pre-need cemetery sales. Again, not uncommon, not a surprise given what others have reported in this space. What role did cremation mix shift have on funeral averages in the first quarter?

Alex, you know in the first quarter and early April, we didn't see a tremendous difference in the pace of change in our cremation rates. We typically see that changing about 1% annually and it was about, there maybe a little bit higher during that time. What we did see is people choose whether to not have a service, to defer service or to have a smaller service. So we had an impact on the averages of our funeral home contracts during that time.

Alex, the only thing I could add, that's a general statement obviously, in some areas, that were probably harder hit. You did see some of that mix change but overall as Ben said, it wasn't a big driver.

And is it still your expectation that the cremation shift will stay in line with historical experience of 100 basis points sort of thing?

Yes, I think as we went through April, we saw the performance of the entire company continue to improve, and that has moved into May. We've seen average funeral home averages approach about 100% of where they were for the first part of May and even last year. So we've seen what I would call you know normalized, happened pretty quickly here recently.

Just to add one thing, I mentioned this in my comments. A big focus is cremation conversion. And because the family chooses cremation as the final disposition that doesn't mean that they don't want to honor, celebrate, memorialize that family member. So we're doing a good job of that now. We believe there's upside to improve those discussions with family to make sure we're providing the right service with that cremation decision.

And then, Ben, I think you said that same-store funeral revenues for the month of April were down 2.3%, while cemetery same-store was down 37.1%. Did I hear that right driven primarily by pre-need sales?

Yes, April, to put in context, April of last year was our best and our best ever record month for pre-need property sales. Our teams performed incredibly well in the second quarter of last year and throughout the rest of the year for that matter. So it was a tough comparison to begin with. And certainly the restrictions right there in Northern California that was put in place fairly early on restricted people's ability to meet face to face, to come to the park to meet with us, and restricted our ability to have a large gathering and ceremony and service like we normally have for that holiday, which is traditionally a big driver of sales for us. And like I said in our remarks, we don't view that as loss sales that these are opportunities to recapture those sales here in the next six to 12 months.

The other thing I mentioned in my comments, we knew that face to face interaction and pre-need property sales was going to be impacted. And so that's why we decided to implement a direct mail program. We knew a lot of people were at home. The response rate on that direct mail program was again, two times industry averages. We also did a text message campaign for 10 of our cemeteries in May around Mother's Day. So we feel good now. We have this really robust pipeline of pre-need opportunities, and we've already sold some of those opportunities. But we feel as social distancing restrictions are lifted, our sales teams, our sales counselors, have a pipeline that they'll be able to quickly activate.

And then question about COVID cases. Obviously, this is top of mind for everybody and I don't want to get morbid here. But how many, how should we think about COVID cases in terms of driving volume? Was it a factor? Was it immaterial? Where did these COVID cases come from? Were they predominantly from nursing homes? Was there pull forward of volume? I guess just a little bit of color on the COVID cases that you handled?

We have the ability to serve over 600 families who lost a loved one due to COVID. You know, I think it speaks to you know our professionals in the field and how they're able to continue to serve families through this, the proper PPE and precautions we were able to take to continue to serve those families, which is really important for us. A lot of that volume was certainly in some hotspots you've heard about, so Long Island, Massachusetts, Northern New Jersey, Connecticut, where we have a large collection of businesses, as well as in New Orleans. We saw big spikes in volume there end of March and throughout April. Some of that has returned to normal and other places, other areas continue to experience some of those higher volumes even here into May.

And then a question I meant to ask, what percentage of cemetery revenue is pre-need sales roughly?

Well, in terms just pre-need property sales about 55% of our cemetery revenue in the current period.

And did you note some improvement in the first couple of weeks of May in terms of pre-need cemetery sales as a result of these marketing campaigns that you've launched?

Again, Alex, I think a lot of activity. We feel really good about, again, these campaigns we did and also the technology that we brought into the business that allow for conversations remotely. So we don't think it's going to be a jump start in May. It'll probably take June and July, but we feel good about our ability to hang on to some of those opportunities. And then as restrictions are lifted to have those conversations with families face to face, touring the cemeteries that obviously are going to improve the close ratio.

Your next question comes from the line of Chris McGinnis with Sidoti and Company.

I guess just a question around as things start to normalize. Are there extra costs that are going to be layered in just given whether it's safe to extra safety precautions due to COVID. Can you just maybe talk about how that plays out as we get maybe back to a more normalized operating environment?

I think the costs related to COVID and our response to it, I think we have a majority of those, whether it’d be the cost we have for additional PPEs, costs we have for reconfiguring space or the cost we had for implementing different technologies that Bill talked about, those have been, those dollars have been spent. We've bifurcated some of those in natural disaster costs on our trend report, we'll have some of those in April as well. I think in general, the cost that you may look to come back in that we've taken out so far is around incentive compensation for the field and potentially for corporate, we’ll kind of address that as we move through the year based on operating and financial performance.

And I guess just, are you starting to see as now starting to open up a more normalized environment of what -- I guess what you're seeing before COVID kind of came in? Maybe a regular funeral and service versus what you have been seen through the restrictions?

I think it's been pretty universal that as we move through April and as things start to loosen up here in May that our client families and people are looking to get back to normal. I mean, the feedback we've gotten from our managing partners and their teams is that folks want to get back to the rituals of celebrating and remembering the life of the loved ones. In areas where also distancing restrictions have been lifted or modified an example is here in Texas, we've been able to host services with 30 and 40 people, while adhering to proper social distancing guidelines. So we're seeing areas like that where we're able to gather and host more completely.

America is a big country, it's a very diverse country. And our whole model and strategy here is to let these entrepreneurs locally go to work, innovate, create. So, you know I know everybody was frightened here across the country. The media was relentless 24/7 on making sure everybody thought they we're going to die the next day but our people were fearless. And it varied case by case across the country. So normalization is coming to our portfolio at very different rates and it's the states where they've been hit the hardest, Massachusetts, New York, New Jersey, of course, Connecticut, Pennsylvania, where you've had these really tough mandated behavioral orders in place and still in a lot of those places. But the rest of our portfolio has been free to create. And so it hasn't been one size fits all recovery for our portfolio, and it speaks to the diversity and strength of the country itself.

And I guess just longer term, any changes do you think COVID maybe present, and maybe positively in the sense of the competitors, you talked about maybe the opportunity to gain share while some are falling back. Just how much has that opportunity presents itself right now? And just given the recent acquisitions, maybe a little bit more levered balance sheet. Does that hold you back on the acquisition strategy maybe a little bit in terms of maybe there's a lot of opportunities to distress properties out there? Can you just talk a little bit about how the industry is playing out? Thanks.

Chris, it’s Bill. I'll take the first part of that. And to Mel’s point, our teams locally really have done a good job. I think as we come out of this, we're in a great position. Based on some of the things that we did during the crisis, a good example of that is the technology that we implemented. We were very quick. Our IT team here did a great job. We were very quick to bring in technology solutions that helped us here in the crisis, but we will benefit by being able to serve families in unique ways and expanded ways. And I think that will impact our business moving forward. I think the other thing that we heard from our managing partners, a lot of them -- as we worked with them, as Mel said, they were very in tune to what was going on in their market they're reacting to that. But from a Houston support center we were close to make sure close to them, to make sure they have the resources that they needed to be successful. And what we heard from quite a few of those managing partners, they were thankful that they have ownership running their local business with the support from the center, opposed to being a independent operator who might struggle in some of these areas to react to a crisis like this. So I think that's one of the benefits you see that our model, again, local ownership, decentralized autonomy, but still resources of a public company. And I think that will continue to benefit us moving forward. And Ben, if you want to talk on the acquisition piece and give your perspective on that.

Yes, I think a couple of things. The concerns that people or national media may have on some shift in consumer preferences or behaviors when it comes to choosing funerals or cemetery products I think is very off base. I think people really appreciate and value what our managing partners and our teams bring, and allow them to celebrate the life of a loved one, and I think that returns back to normal faster than what people expect. I think, the distress from the crisis and everything that people have gone through in our industry at least past couple months has the potential, who knows, to accelerate people's decisions around succession planning solutions. I think we stand ready to partner and affiliate with the best remaining independents in the country, and we'll continue to evaluate those as they come about.

So Chris, this is Mel. I tell you, I had to at home endure relentless reporting. I finally just couldn't watch it anymore about we've got to adjust to a new normal. And then media declaring death care being killed by coronavirus that went on for veterans, all these negative things. And we finally get back here in the office, I couldn't wait and I'm looking at the early May trends. And I'm telling Bill and the team here, you know, the new normal is looking a whole lot like the old normal and the old normal was pretty good. So you know this is the story of our company, and it's also the strength of our industry. Rituals around death had been going on for thousands of years. When you do it right, it has high value but you got to have the right people delivering all the options and executing the plan family by family and when you get the talent, they will overcome adversity. And what we just went through was proof of concept at Carriage. It was proof of concept. If you can't prove the concept works in April, it's not approved. And it's going to be getting better and it's going to stay that way for years and years, that's why we did this good to great two incentive plan. Nobody's mentioned it but it's real and our people are fired up and there are 47 of them and you've never seen so many people fired up about what we can do, what is possible and what this team can do has been amazing. I've been sitting back watching all this as a big shareholder, and I've never been happier and I've never done less work. So to watch them work has been a blessing.…

Thank you. Thanks very much for the insight today and stay safe, and good luck in Q2.

I think that’s it. So I just want to thank the executive team. I want to thank all the managing partners in this company and their teams of employees. It's been something to behold never been more honored to be affiliated with a group of people in my life. So we look forward to reporting our results for the remainder of the year. Thank you.

This concludes today’s conference. You may now disconnect.