Carriage Services Q3 2026 Earnings Webcast - CARRIAGE SERVICES INC

Financial Performance:

• Q3 2026 total revenue was $100.3 million, a 2.4% decline YoY, driven by weaker cemetery pre-need sales and financial income impacts.
• Adjusted consolidated EBITDA was $27.7 million (down 16% YoY) with an adjusted EBITDA margin of 27.6% (vs. 32.1% prior year).
• Diluted EPS was $0.59 (vs. $0.75 prior year); adjusted diluted EPS would have been $0.73 excluding a discrete $2.5 million trust tax impact from MLP sales.
• Funeral comparable revenue grew 3.6% to $56.8 million, supported by volume and average revenue per contract (ARPC) increases.
• Cemetery comparable revenue declined 7.8% to $32.5 million; pre-need sales fell 4.8% to $25.7 million.
• Adjusted free cash flow was $19.3 million for the quarter; year-to-date adjusted free cash flow was $33 million.
• Operating cash flow for Q3 was $24.7 million, nearly flat YoY; Y-to-date operating cash flow was $47.2 million.
• Bank leverage ratio remained flat at 4.1x; a new $300 million credit facility was closed, increasing borrowing capacity by $50 million.
• Capital expenditures totaled $5.8 million in Q3 ($2.7M maintenance, $3.1M growth); Y-to-date CapEx was $15.1 million.

Guidance and Future Outlook:

• Full-year 2026 revenue guidance revised down to $415–$420 million (previously $435–$445 million).
• Full-year 2026 Adjusted EBITDA guidance revised down to $125–$130 million (previously $135–$140 million).
• Full-year 2026 Adjusted Diluted EPS guidance revised down to $2.90–$3.05 (previously $3.35–$3.55).
• Full-year 2026 Adjusted Free Cash Flow guidance revised to $40–$45 million (previously $40–$50 million); CapEx guidance unchanged at $20–$25 million.
• Implied Q4 2026 revenue is $106–$111 million; implied Q4 EBITDA is $30–$35 million.
• Management anticipates funeral comparable contract growth to be flat to low single-digit in Q4, potentially reaching low single-digit revenue growth with ARPC increases.
• Management expects cemetery pre-need sales to return to full growth trajectory by Q1 2027 following implementation of sales improvements.

Business Segments and Product Lines:

• Funeral: Same-store funeral contracts grew 2.3% in Q3 (vs. declines in H1), reversing a trend of lower volumes; ARPC increased $109 (1.9%); insurance-funded pre-need contracts sold grew 7%.
• Cemetery: Performance concentrated in California, where pre-need property sales declined 7.1% YoY, while other regions grew 10.1%; low-price brackets (<$20k) drove the deficit, while $20k–$30k brackets grew 13.7%.
• Acquisitions: Pipeline includes over $14 million in annual revenue across five transactions (funeral, cemetery, and crematories) in five states; five closings expected, some in Q4 2026 and the rest in Q1 2027.
• Strategic Initiatives: Launched "The Carriage Way," a cultural initiative to unify operations, leadership development, and service standards across the organization.
• Financial Services: Income impacted by a one-time trust tax event related to MLP sales; no further impact expected in Q4.

Market and Competitive Landscape:

• Funeral operations gained market share despite industry-wide mortality rates below the historical 1% trend in H1; third quarter mortality remains uncertain but volume growth suggests competitive strength.
• California market faces discretionary spending pressures and pricing sensitivity in lower contract brackets.
• M&A environment sees increased competition from private equity firms in competitive bidding processes, leading to higher multiples in select deals; management maintains a preference for home-sourced, non-competitive deals.
• Management remains disciplined on M&A, prioritizing quality, cultural alignment, and return on invested capital over sheer size.

Risks and Challenges:

• Mortality rates remaining below historical averages, particularly in H1, impacting funeral volumes.
• Significant underperformance in cemetery pre-need sales, driven by execution gaps in recruiting, training, lead generation, and conversion.
• California market underperformance linked to economic pressures on lower-price contract brackets.
• One-time tax impact from financial trust investments reduced Q3 earnings.
• Potential seasonality shifts in flu seasons affecting death rates and funeral volume forecasting.

Management Commentary and Tone:

• Management acknowledged Q3 results fell short of expectations but highlighted encouraging momentum in funeral contract growth and acquisition pipeline.
• CEO Carlos Quezada expressed strong confidence in the long-term strategy and the 2030 vision, attributing current struggles to execution issues rather than fundamental business flaws.
• CFO John Enright emphasized the temporary nature of financial tax impacts and the disciplined approach to capital allocation.
• Tone was accountable regarding cemetery sales failures, outlining a specific action plan focusing on sales leadership and system execution.
• Management stressed that "flat performance is not good enough" and committed to returning to the expected growth trajectory.

Analyst Questions and Answers:

• Cemetery Weakness: Confirmed as highly concentrated in California (low-end pricing); non-California markets are performing well (up 10.1%).
• Divestitures: Non-core divestiture program is effectively complete; no further sales planned.
• Acquisition Pipeline: Pipeline of $14M revenue includes 5 deals across funeral, cemetery, and crematories; mix includes new markets and existing market expansion; pricing remains in historical ranges for non-competitive deals.
• Funeral Growth Outlook: Q4 expected to show low single-digit revenue growth driven by slight contract volume recovery and ARPC gains; mortality data remains lagging but share gains are evident.
• Cemetery Recovery: Management targets full recovery of sales performance by Q1 2027; current actions focus on sales headcount, training, and lead management, with some improvement visible in September/October.
• Margin Pressure: Funeral margin contraction driven primarily by salary and benefit costs, which will persist into Q4.
• M&A Financing: Transactions to be funded via free cash flow and the new credit facility; year-end leverage expected to remain between 4.0x and 4.1x.
• Trinity Training Pilot: Third-party assessment ongoing to evaluate training program effectiveness; further updates expected in Q4.

Other Key Points:

• Trust-related tax impact was a discrete, one-time event affecting Q3 financial income but not future quarters.
• Overhead expenses remained relatively flat at $13.6 million in Q3 (13.5% of revenue).
• Management indicated that acquisition timing is heavily dependent on regulatory approvals and seller readiness.
• The company is actively recruiting additional sales headcount to meet targets, particularly in the cemetery segment.