On looking back. . . and moving forward (Part 2)

Foundation Partners why I partnered

We told you yesterday that Carriage Services CEO and Chairman Mel Payne had published a lengthy Letter to Shareholders in early April.   In that letter, that you can access here, he painted what we call a somewhat aspirational future for Carriage Services, after first pointing out how they got to where they are today.

Today, we plan to offer our interpretation of how the company is being transformed from one that has about 174 funeral homes doing about 200 calls apiece to a larger, more profitable company, that we believe will aim for a larger average number of services per facility going forward.

Funeral Director Daily noticed that over a year ago, in late 2019, Carriage Services made four large acquisitions that seemed to be much larger than their historical acquisitions.  Those acquisitions included major players in major markets and you can read more about them on pages 29 and 30 of the Shareholder Letter.  Here’s how CEO Payne explained those purchases in the Shareholder Letter on page 29:

“As we were heading into the final quarter of our 2019 turnaround year, we suddenly had the opportunity
to acquire four large, high quality businesses in large strategic markets. I had personal relationship history
and/or performance potential knowledge of the three large combination businesses and over two years of
performance history knowledge of the large funeral business in Buffalo, New York. I had not experienced
such a flurry of opportunity with high quality acquisition candidates with huge upside growth potential in
our 28 year history, and therefore considered the four together as transformative to Carriage as a Value
Creation Platform, notwithstanding the very high prices we had to pay to get all four of about $170 million. I was
confident that these four would be worth the risk of taking our leverage ratio up to an elevated level of six
times on a proforma basis, and fully integrated would take our company and its performance to a much higher
and sustainable “Critical Mass” level of Revenue. . . .”

There are also basic historical and pro forma financials and suggested opportunities for those four businesses listed on pages 31-33 of the letter.  In essence, it appears to us that the four had combined revenues of about $39.5 million in the acquisition year of 2019.  CEO Payne states in his letter that he believes those four transformational purchases can reach $60 million in revenue by 2024 and that a full $30 million of that revenue will come back to the company in the form of Field EBITDA. . . . . in our opinion, that would be somewhat transformational as it (future Field EBITDA) would represent a full 75% of the total revenue of only five years prior.

Bold ideas. . . . but possible.

Finally, we’ve noticed that Carriage Services is hoping to refinance Senior Notes at about 2 to 2.5% lower interest than they are paying today.  That would save them about $8-10 million annually in financing costs.  Again, if it can be done, it could be transformational.

Finally, on page 35 of the letter, Carriage Services mentions in detail how they plan to allocate future resources.  This type of thought out plan should not be reserved for large conglomerates only. . . . .you should have a detailed plan on how your business will spend cash flow to make sure that you build enterprise value as you continue working the business from day to day and year to year.  Here’s what Carriage Services anticipates doing with their resources:

  1. Acquisitions
  2. Internal growth capital expenditures
  3. Share repurchases
  4. Dividend increases
  5. Debt repayment
Tom Anderson
Funeral Director Daily

So, there is a lot to comprehend in the Carriage Services Shareholder Letter.  If you are an investor in the company, you can learn a little about how they think.  However, I think reading the report is more important to independent funeral home owners.  It gives one company’s thought process and ideas about how they are going to build their business.  If you hope to build your business, you should read the report and compare Carriage’s ideas to your ideas in your market.

Your ideas may be different. . . they may even be better. . . .but regardless, the more ideas and opinions you have on how the business can be grown, the better off you will be.

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