Ladies and gentlemen, welcome to Fourth Quarter and Year End 2020 Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow 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 today, Mr. Steve Metzger from the Management. Sir, please go ahead.

Thank you, operator, and good morning, everyone. This is Steve Metzger, Senior Vice President and General Counsel for the company. Today, we'll be discussing our fourth quarter and year end results for 2020. Our related earnings release was made public yesterday after the market closed. We have posted the press release, including supplemental financial tables and information on the 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 February 23. In addition to myself, on the call this morning from the Management team are Mel Payne, Chairman and Chief Executive Officer; Ben Brink, Senior Vice President and Chief Financial Officer; Pablo Casado, Senior Vice President of Sales and Marketing; Peggy Schappaugh, Vice President of Operations and Acquisitions Analysis; and Jason Buchbinder, Director of Talent Acquisition. 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 some forward-looking statements. Any comments made by our management that state our plans, beliefs, expectations or projections for the future are forward-looking. These forward-looking statements are subject to risks and uncertainties that could cause actual results to defer materially from those contemplated in such statements. These risks and uncertainties include, but are not limited to both factors identified in our earnings release and in our filings with the SEC, both of which are available on our website. During this call, we'll also discuss certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to the appropriate GAAP measures can also be found in our earnings press release as well as on our website. Now, I'd like to turn the call over to Mel.

Thank you, Steve. It's hard to describe in words what this last year has meant when the world is in crisis with a once in a lifetime hopefully, pandemic of COVID-19 with new variants around the world popping up even now and yet the shock of that hit the world and hit the U.S. state by state, area by area, then it hit our industry and our company and our people. And it was a year of great tragedy for many individuals, companies, families, and yet we are in the business of death. And death has been around since the human species has been around and so we have a mission and a vision of our company of being the best at serving families when they are most in need and there were many more of them in 2020 than ever before in need. For that reason, this earnings release of the fourth quarter and year was not really just an earnings release. It was the story about our people. There was a story about courageous, heroic service, overcoming adversity and obstacles, both nature made and man-made with government restrictions and mandates. And our people rose to the occasion after initial shock and adaptation period and innovation period and entrepreneurial period and it is impossible to put in words what our people achieved, business by business, community by community throughout 2020. In the process they absolutely were, what I call, a proof of concept of how we operate and consolidated highly fragmented industry called the funeral and cemetery industry. I wrote about this at the end of the '16shareholder letter, it is at the end of this one. So this release is more like a shareholder letter. It's a story of love toward our people and their love toward their…

Thank you, Mel, and thank you all for being with us today. When I came on board with Carriage, I was leaving behind a very successful, almost 11-year career and outstanding record of accomplishment with SCI [ph]. Virtual continuity, innovation and cultural transformation, I was able to exceed expectations constantly over both, sales and operations. When I met with Mel for the first time during my interview process, I was able to conclude very quickly, why Carriage would be a perfect fit for me. Concepts like good grade, flywheel effect, the right people on the right seat of a high performance bus. It focused on people and their development over the same leadership concepts and ideas that I had been implementing during my whole career, and in great measure the main reason for my success. I joined Carriage on June 26 2020 and spent some time understanding the dynamics of the cemetery sales teams across the portfolio. And while nothing is broken, we are not yet maximizing our true high performance potential, and I can see the vast blue sky that Carriage has to offer. Mel said it perfectly when he wrote on the 2020 second quarter earnings release and I quote, "When in the past, we have had spurts of broad high property sales performance in our 10 largest cemeteries, we have never been able to sustain such performers over the long-term on their other centralized decision making business model, designed originally for a standalone funeral business portfolio. Carlos will have the primary responsibility for building high performance sales teams, and standardized sale systems across our portfolio of cemeteries, as we believe that his leadership in past successes are building high performance winning teams will finally unleash the broad and sustainable performance power within our cemetery portfolio". End of…

Thank you Carlos, I appreciate your comments and I'm excited for the opportunities that we have for our cemetery performance going forward. Before I dive into an explanation of our record operating and financial results for the year, I would like to make the following two points. For any current or curious investor, prospective acquisition candidate, someone thinking about joining our high performance teams, or any other deeply interested party, I would highly recommend you take the requisite time to read our year end 2020 earnings press release as it will certainly do a much better job at encapsulating our record setting results, and our clear vision for the future success of Carriage that I could in my remarks. Combined with the previous 2020 quarterly earnings releases, these documents tell in striking detail and clarity the story of Carriage's remarkable transformation over the course of the past 12 months and should be required reading for all that are truly interested. Secondly, the results I will discuss are our direct results of the incredible dedication, passion and professionalism of every member of Carriage's high performance teams across the country. As the coronavirus pandemic has persisted and measures to limit the spread have become a way of life, our Funeral and Cemetery professionals have overcome previously unimaginable obstacles to answer the bell every single day to provide a high value personal service to every family who has lost a loved one that we have the privileged opportunity to serve. They are supported 24x7 by another amazing group of dedicated professionals here in our Houston Support Center. To all of our employees here, Carriage is with tremendous pride and admiration that I simply say thank you for all your incredible efforts over the course of the past year. Now onto our results. For…

Thank you, Ben. Starting in 2001, after Jim Collins published his great book Good to Great, we did an analysis of what it would take to take Carriage from a good company to a great company. The conclusion was we were not yet good. This was sometime in 2001. It was another 10 years before we revisited the book, Good to Great, in October, November of 2011, and I had everybody read the book, everybody that was still left in the company, we had to do a major reorganization back then and I asked them what they thought. And so the consensus, unanimous consensus was, we are good and we want to go toward the direction of great. So we launched our first good to great journey starting January 1, 2012. Over the next five years, and we think in terms of five-year timeframes, our performance went up, our share price compounded from a beginning price of $5.60, at the end of '11 to $28.64, at the end of '16. That was our 25th year. I wrote the '16 shareholder letter, which was 40 some pages long. And we focused on First Who, Then What as being the primary reason we were able to have a good to great journey that successful over an entire five years. I made a decision at the end of '16 to back out of operations and I made some, First Who, Then What mistakes, cost the company morale, cost the company at a later point a declining performance in all of our areas and trends. And so I had to step back in to operations in September of '18 and we began to make a lot of changes to get the company back on that journey. And so I began to replace a lot…

Thank you, Mel and good morning. It is a tremendous honor to have this opportunity to be on the call today. As an Ambassador for Carriage Services and our 210 partner businesses, I have the distinct privilege of sharing the Carriage Services story to talented men and women across the country. I'd like to begin this morning with a brief quote from our very own CEO, Mel Payne, from the 2016 shareholder letter, aptly named, The Evolution of our Learning Journey. "Yes, Carriage is unique and unorthodox in an otherwise black and white, predictable, conservative industry". I would certainly agree. However, I would argue that there's a word missing from this statement. That word is special, unique, unorthodox and special. You can as I did learn to understand and appreciate the foundation of this unique and unorthodox business model with its five guiding principles, decentralized concept, high performance culture of framework, and Good to Great methodology by looking no further than the 2016 shareholder letter. This 43 page missive, born out of heart and soul, body and mind and brutal honesty, reads much more like a love letter than does a shareholder document. Carriage Services have so thoughtfully designed and crafted itself to be a sustainable, decentralized business model and it's firmly rooted in being a people based, people focused partnership. As we have learned from the Jim Collins book, Good to Great, First Who, Then What, is at the very core of any business in a Good to Great journey. Executing now at the highest level, with the collaborative support of our partners across the country, and placing the right people in the right seat, we are at just the beginning stage of our newfound success, shattering the norm and delivering on amazing results. The First Who, Then What…

Thank you. [Operator Instructions]

Sorry. I think I will have a few closing remarks. I just want to thank Jason, for that wonderful presentation on First Who, Then What, and the importance it is to Carriage. In his section in the release, I think it's on page 12, High Performance Talent Acquisition Program, First Who, Then What? In the second paragraph, I referenced the most recent example of just how valid and powerful the First Who, Then What concept is in relation to Tom Brady leaving New England Patriots and joining the Tampa Bay Buccaneers. Anybody who knows me well, knows that they can compare coaching, whether it's baseball, Tony La Russa, whether it's Bill Belichick, the New England Patriots and all the players that make up winning teams and winning legacies. That's how I view our company as a public holding company, full of winning teams, supported by all the people at the holding company level, being the best, that they can be in the world and supporting the best in every community locally. It's a simple concept. It's a very difficult concept to pull off and sustain. You've got to get the first to then ride it, every seat on that bus. So what's interesting about this is that I mentioned in the second paragraph, Tampa Bay had a losing team, they had a losing franchise, they had a losing mindset, they had a losing culture, it was acceptable to lose. But when time came, it was unacceptable or he wouldn't have come there, if he thought they were going to continue to have that mindset of losing being acceptable. And I heard during the Super Bowl many times, by the various people, that when he came, took a while, but he changed the culture, changed the mindset of the players who…

[Operator Instructions] And your first question comes from the line of Alex Paris from Barrington research. Your line is open. Alex Paris, your line is open.

I'm sorry, I was on mute. I wanted to say congratulations on the beat and raise, the strong finish to a very strong year. And then Mel, specifically to you, a belated Happy Birthday and congratulations on an extension of your employment contract for another seven years. I think that's well placed confidence in your leadership.

Thank you, Alex. I might be technically 78, but I feel 28. You cannot be here, where I am right now and not be having fun because of all the talent we have in the company. It's not like I have a whole lot to do, except cheer them on.

Well keep doing, what you're doing because it's working.

Yes.

Great. I have a number of questions. The first one related to, this is probably for Ben, quarterly cadence in 2021. Obviously, you've raised your guidance for the full year revenue adjusted EBITDA, free cash flow and EPS and January has started off very, very strong. How should we think about the quarterly cadence of revenue in 2021?

Yes, Alex I think you can certainly say that the first half of this year, our expectation is for much like the second half of 2020, higher revenue growth year-over-year, compared to where we were last year. And hopefully, as we see vaccinations continue to take hold and the coronovirus pandemic becomes less of a part of our lives, that the death rates would come to, a higher, probably a higher elevated level, then “normal” as we move in the back half of this year. Cemetery performance, we expect to be strong and continuing to build on the momentum throughout the year. And really, you have the full impact of that financial revenue, that we didn't have last year. So you see a strong year-over-year comparison in the first half on the financial revenue side, certainly compared to last year. That's how we're kind of thinking about the cadence right now. Yes, and for that, I'll turn it over to Peggy Schappaugh with some additional comments.

Now, just and to add that. Sorry, just to add to that, we've seen great improvements on our average as well. So even all in addition to what Ben has said, we've got averages working in our favor. We've got, our cremation average conversion being very strong in the fourth quarter, and really leading into January, and we're seeing that into February. So even as the volume may settle down a little bit, we have all of our funeral homes are serving families. They're actually getting families thanking them for taking the time to serve their families, where other funeral homes may -- might not be doing so or may not be having services. So we continue to see improvement in our average and that will also go up as the year goes along.

Great, thank you. That's helpful. And I was going to ask about that. So you had a spike in the death rate in December and January because of COVID. Tragic and unfortunate, but this is the impact on your financials. Has that settled down in February or halfway through February are we still dealing with this spike in deaths, particularly in places like California?

California has been really busy. We have a lot of businesses in Central California and Southern California and they've definitely been very busy. We do see that continuing into February. We may be a slight slowdown, but it's been really busy. And again, with even with some restrictions out there, they're still able to have those services. So it's, we think the first quarter, just January alone will be better, as Ben said earlier, better than Q1 of last year. So we expect that to continue.

Yes, this is Mel. We see strong momentum continuing in February, which has 28 days this year versus 29 last year, but it will be, it will probably be our second highest revenue month after January in the history of the company. And the margin, so will continue to be this ridiculous, it's hard to tell.

Got you. And then, Ben you mentioned that you're going to be a full tax payer in 2021. What rate? What's the GAAP net tax rate we ought to be using for our models?

We're starting off the year at 30%. As you saw last year, it ended up being a little higher. And that's really driven by divestiture activity, as we sell businesses that potentially have goodwill on the books, and we have to write that off as we sell these assets, that can drive the effective tax rate higher. We'll continue to update as we go through the year. Some of that's obviously really unknown, but for right now, we're going to start at 30% for the year.

So Alex, let me add a little more color to your first question. It's out there, and we're getting this from some investors and about pull forward, pushed down later performance because of COVID. We don't see that. Okay? I don't agree with that. I don't agree with the speculation and prediction that somehow our performance in the second half will be lower, our '22 will be lower. We've got all these other things going on. This company is good. Our people know they're good. And we have updates every Thursday across the country. So we get to hear what's going on business-by-business, area-by-area. And we had a Standards Council update meeting, those are 10 of our best two days ago. And I will tell you, California hasn't started to slide yet. They had a little slow, few days, but now it's back to where it was. And our people are doing unbelievable things, but there are other markets too. I mean, so it's an unusual thing. And I think I've reached out to people who probably have the best data, the best sense of what the future might bring in terms of death rates returning to normal. And I don't know that anybody actually believes that's going to be the case. The baby boomer population has been building up forever. I won't say they've been living the best lives, when they get up into the high 80s and 90s and that's evident by all the assisted living and nursing deaths. And so, you really can't say whether this will turn out to be an endemic problem with COVID, that you need booster shots, various variants of that thing and the medicine trying to keep up with it. No one knows the unknowable right now. And anybody who says they…

I appreciate that. And then I'll just finish with one question and this one is for Carlos, since I had the opportunity to speak to him on today's call. The -- Carlos your primary responsibility is to build a high performance sales team and sales systems across the cemeteries, as I recall, you have more than 30 cemeteries in 12 states. What does the sales organization look like before you got there? Are there one or two people in each location out there selling preneed cemetery? And then what changes should we expect from you? And in your prepared comments, you touched on some of this, but sales may be a little more centralized than the funeral services side, interested to hear your thoughts there?

Let me tee that up for you Alex. I had it wrong. This decentralized decision making model, I put it out in '07 for the cemeteries. We did then for the funeral homes. And my concept was, if you get the right managing partner, and then you get the right sales manager, that whole function can remain decentralized. That is wrong and I proved it over and over. But I never could find anybody else who knew how to get it right, until I met Carlos. So I knew that we had an over reliance on a couple of big cemeteries in California Rolling Hills and Los Gatos, Northern California, when they've got a cold my entire cemetery portfolio performance, got a really bad flu. And it didn't look like they were going to get over it anytime soon. Carlos, his first job was to do diagnostics. What have we been doing wrong that you now can get right? So Carlos, I teed it up for you?

Thank you, Mel and thank you Alex for the question. So when it came aboard, so the centralized model, the local decision is made upon the managing partner, right. And so what happens is that the civility between sales teams, local sales teams, amongst other peers within the company is not really there, the competition is just within 3 to 5, 10 counselors in the cemetery, rather than higher competition. Also the previous compensation plan in some cases, would not incentivize higher performance or would not have, an expectation to meet specific targets for specific positions. Some of that is that we're testing right now, and also changing, in some other areas, and that will create higher expectations with higher rewards. That's one of the comments that I made regarding the creation of performance based incentives and rewards. But also, training has been decentralized at Carriage since its creation. And by creating a sustainable and well robust training program that includes all the different components, for instance, sales positions, like family services, in addition to advanced planning, positions that are most than anything generating leads outside the cemetery will create a significant impact, which by the way, there was only one formal team of AP counselors of Carriage when it came on board. With a few exceptions with an AP counselor reporting to our family service manager here, and there are a couple. And so part of the plan is creating, 12 to 14 AB teams in the top 14 cemeteries, where we can now double up our sales force through the means of outside sales. The communication system, CRM, all of that is providing an additional platform for, sales, learning, sales, progression, and of course all success. I hope that some of the answers that you were looking for.

Yes, no, that's great. Carlos. Thank you. And Carlos, you come from Service Corps, but what was your role there? And then the people that you've recruited since, where did they come from, are they from in the industry or people you've worked with in the past?

Yes, so I spent there almost 11 years with SCI started, leading sales for one of the divisions that SCI, which about the size of a Carriage, leading sales from the south of United States and then moving to operations as a Managing Director for the same division leading, now operations. And so, through that time, of course, I met a lot of people develop a lot of good relationships and work with some very incredible people that wanted to continue to work with us. One of those [indiscernible] who was not at SCI at the time that he was brought up, he went from SCI to another funeral, cemetery consolidator and he came on board from that company, and then Shane Pudenz who was in fact working for SCI when he came on board.

So Alex, if you want to ever be inspired by someone's life story, spend some one-on-one time with Carlos.

I look forward to that. That sounds great. That sounds great and thank you all. I appreciate it and I'll get back in the queue.

Thank you. Our next question comes from the line of Dan Bellehsen from Columbia Threaded Needle. Your line is open.

Hi, guys, first I hope everyone is healthy and doing well. I have two questions and perhaps I may be joined at the hip here. The first one I understand maybe somewhat harder to answer at times, given the highly decentralized nature of the portfolio. But if you guys had to boil it down, and perhaps Carlos, maybe this question is for you, what are the one or two most impactful common threads that have changed from a customer value proposition that you're now offering customers that you weren't before? And then now, I know how much you love Munger, my favorite Mungerism is show me the incentives, and I'll show you the outcome. What do you think are the most impactful changes in the incentive structure that's driven the operating team in such a different way? And how does that extend beyond the top managing partners that are highly incentivized in very tangible cash payouts?

Yes, I mean Dan, thank you. I mean, I can't thank you enough for those two questions. There is a section here. I'll start with the incentives first, but they are linked the answer. The answers are linked. I'll just start with, when we get shocked the last two weeks of March. And it continued into the first two weeks of April. We had to adapt quickly. And one of the things about Carriages is that we were very flat. We don't have layers of management; there really are no layers of management in Carriage. That's why we call our, we call them the managing partners. They're like the owners of each business and that's one of the, if you go to the fifth bullet point back on the observations. Got to a fifth bullet point we talked about that and I'll just read it to you, because it goes to the question you must ask. The fifth bullet point is, I’ll get there. Our high performance culture framework is more cost effective organizationally. As the corporate organizational overhead does not ease up, a substantial amount of the incremental, financial performance of our field businesses, especially as we leverage our consolidation platform, with growth highly selective acquisitions, enabling more of the value creation to be shared with both those who create it locally and with public shareholders. Now in the prior section, Good to Great to five-year shareholder value creation incentive plan, there are four paragraphs in the middle of that section that go directly to your question about incentives and I agree with Charlie. In order to have our organizational structure, the more effective and efficient to create more EBITDA per dollar of revenue, to create more free cash flow per dollar of revenue we eliminated many layers and…

Terrific, thanks, Mel. As I said to Ben recently, I think I picked the right party and it certainly turned into a really fun one. I just arrived a little too early. So patience was important here, but happy to be along for the ride and hope you guys continue to do well.

At any day you want to compare me to a Japanese CEO, just picture Chihiro Kanagawa. And I'll be glad to be, I’m his student by the way, he was my mentor, look him up, Chihiro Kanagawa, you will be blown away. Unfortunately, I can't make a reunion every year, he got to an age still the Executive Chair, not Chairman of his company, Shin-Etsu Chemical and we had a reunion every year lunch until last year, but I hope he's still around. I hope to do it again. He's a wonderful man and I learned a lot from him.

Thank you. And our next question comes from the line of Chris McGinnis from Sidoti and company. Your line is open.

Hi good morning. Thanks for taking my questions and nice quarter. Thanks for all the detail as always and again, congrats on putting up the numbers on top here. Carlos, I just had one kind of question. I guess just starting over in some sector at courage, how did you approach this business coming in differently than the way it was operated at your prior employer and maybe setting that up for success as you go forward? Thanks.

Thank you very much, Chris for your question. So it's, there's a few steps to that, right. And everything starts with, understanding what the opportunity is, and really recognizing the possibility for each one of the properties. And, of course, within a very restrictive environment, with COVID-19 traveling around to every single property has been quite a challenging task, even though I have been able to visit some of those properties. And the second piece to that is creating a plan that takes care or results each one of those possibilities and blue sky opportunities, as I called them in my previous comment. And then the third piece is also making sure that we have the support, right. So having senior leadership involved in building those relationships and having full understanding over the plan entails and the level of commitment that it takes and the collaboration, partnership and support needed to make that happen. And then the final step to that would be, building those local, managing partners of manager really, you know, self customers relationships to make things work. It is a complete change of mindset from the centralized to standardized approach, and it is new, it is change and change is sometimes difficult. But I got to tell you, in the cases that I've been able to visit the cemeteries and meet the team and be involved with the managing partners I have received nothing but support and welcome arms to the change and adopting what we're trying to achieve. So a lot of phenomenal things are coming up our way. This is really just the beginning and I feel very strong about the future for preneed cemetery sales, out of Carriage services.

I appreciate that. Thank you very much and good luck for Q1.

Thanks, Chris.

Thank you. And at this time, I would now like to turn the call over back to Mr. Mel Payne for the closing remarks.

Thank you very much. It's been a great call after challenging and wonderful year for our company, in terms of what our people were able to achieve in the face of adversity that we've never seen before. And because of the continuing epidemic, and the peak period of deaths that we're experiencing in our portfolio, it causes you as a human being to be reflective of what really matters. And that's the last part of this release, I put that in there for a reason. Because we really do in dealing with death, we also deal with life, and how to live a life that matters. And I've reflected on that and went back to my, to the end of my '17 shareholder letter. And I do want to end this call with a quote from that end. Sorry, as follows. As I was finishing my 2016 shareholder letter, I tried to remember how Good to Great ended the book, but drew a blank. So I retrieved my well worn generously highlighted and tabbed copy from my office and turned to the last paragraph on page 210 which reads as follows. When all of these pieces come together, not only does your work move toward greatness, but so does your life. And it is very difficult to have a meaningful life without meaningful work. Perhaps then you might gain that rare tranquility that comes from knowing that you've had a hand in creating something of intrinsic excellence that makes a contribution. Indeed, you might even gain the deepest of all satisfactions, knowing that your short time here on this earth has been well spent, and that it mattered. And that I can tell you, on March 5, 2018 I sent our annual theme letter to all employees and we'll share…

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.