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Good day, and thank you for standing by. Welcome to the Carriage Services Second Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steve Metzger, President. Please go ahead, sir.

Good morning, everyone. Thank you for joining us to discuss our second quarter results. In addition to myself, on the call this morning from management are Carlos Quezada, Chief Executive Officer and Vice Chairman of the Board of Directors; and John Enwright, Chief Financial Officer. On the Carriage Services website, you can find our earnings press release, which was issued yesterday after the market closed. Our press release is intended to supplement our remarks this morning and include supplemental financial information, including the reconciliation of differences between GAAP and non-GAAP financial measures. Today's call will begin with formal remarks from Carlos and John and will be followed by a question-and-answer period. Before we begin, I'd like to remind everyone that during this call, we'll make some forward-looking statements, including comments about our business, projections and plans. Forward-looking statements inherently involve risks and uncertainties and only reflect our views as of today. These risks and uncertainties include, but are not limited to, factors identified in our earnings release as well as in our SEC filings, all of which can be found on our website. Thank you all for joining us this morning. And now I'd like to turn the call over to Carlos.

Thank you, Steve, and welcome to everyone joining today's second quarter earnings call. As we move through 2025, I continue to be inspired by the dedication and purpose that drive our Carriage team. The results we're sharing today reflect that our strategy is working, but more importantly, they reflect the power of execution across every level of our organization. To every employee who wakes up each day committed to delivering premier experiences to families in need, thank you. Your impact is felt far and wide. Today, I will walk you through our financial performance for the quarter, followed by updates on a couple of key initiatives. John will then provide more detail around our financial drivers, cash flow and updated guidance. Let's begin with the financial results. Total revenue for the second quarter was $102.1 million, essentially flat compared to the same quarter last year. Total Funeral operating revenue grew 1.4%, reaching $59.6 million, driven by a slight increase in costs of 0.5% for the quarter. Year-to-date, total Funeral operating revenue grew $3.9 million or 3.1%, while year-to-date volume increased by 1.5%. We feel encouraged to see this volume trend, especially after accounting for the divestitures of noncore assets. We are confident in a slight organic volume growth rate of 50 to 100 basis points for the remainder of the year and returning to a normalized volume rate of 1% to 2% in 2026. Cemetery operating revenue was $33.5 million, a slight decrease of 0.6% from the same period last year. While modest, this variance is linked to timing differences in preneed sales against a strong second quarter last year, which were driven by more large sales in addition to the divestiture of two noncore cemeteries in the first quarter of this year. Year-to-date, cemetery revenue is up 2.2%, which is below our year-over-year growth range of 10% to 20%. As mentioned on our previous call, the main reason was the availability of high-end inventory at some of our top cemeteries due to delays in new construction projects. We estimate that most projects will be completed this quarter, and we have a strategy and plan in place that we believe will help us achieve at least a 10% year-over-year growth rate for the remainder of the year. We continue to see strong results in our financial revenue, which rose 18.8% to $8.2 million. This growth was primarily driven by an impressive 96.2% increase in preneed funeral commission income when compared to the same period last year, showcasing the continued strength of our insurance preneed strategy and the ongoing success of our sales teams in helping families plan their final wishes. Turning to profitability. GAAP net income for the quarter was $11.7 million, up 85.7% from $6.3 million in the same quarter last year. GAAP diluted EPS came in at an impressive $0.74 compared to $0.40, an 85% increase when compared to the same period last year. Adjusted consolidated EBITDA for the second quarter was $32.3 million, down 1% from the prior year period. The decline was driven by last year's adjusted expense of $5 million related to nonrecurring costs. However, our corporate overhead cost for the second quarter of this year came in at 12.2% of revenue, 80 basis points lower than our long-term range of 13% to 14% and 39% lower than the same quarter last year. This allowed for adjusted consolidated EBITDA margin to be 31.6%, a slight decrease of 30 basis points from the prior-year period. The modest decline in EBITDA margin is directly correlated to margin compression in both our Funeral and Cemetery segments. Funeral field EBITDA margin was 37%, down 250 basis points from 39.5% last year. Cemetery field EBITDA margin was 44.9%, down 480 basis points from 49.7% last year. While our revenue performance remains solid, this margin pressure reflects the ongoing impact of inflationary costs primarily related to SMB, planned investments in our systems, including our new ERP as well as the timing of unrecognized profits from undeveloped Cemetery sales in previous months. John will share more details regarding field margins. On the earnings front, adjusted diluted EPS for the second quarter was $0.74 per share, an increase of 17.5% compared to $0.63 per share in the prior-year quarter. Year-to-date, adjusted diluted EPS was $1.70 per share, a 23.2% increase over the first half of 2024 and a reflection of our commitment to the execution of our strategic objectives. Looking ahead, we remain confident in our strategy and execution. After 2 years of disciplined capital management and more than $100 million paid to reduce our debt, we are pleased to share that we're back to growth mode, and we're under contract to acquire new businesses, which we anticipate will close this quarter, subject to customary regulatory approvals. Combined, these premier locations serve more than 2,600 families and generated more than $15 million in revenue last year. We are excited to return to our long-term strategy of adding shareholder value through high-quality acquisitions, and we look forward to providing more details once these transactions formally close in the coming weeks. With these new acquisitions and after accounting for the divestitures of certain noncore assets that closed in the first quarter and others expected to close in the third quarter of this year, we're updating our full year guidance. John will share our updated ranges later on this call. We continue to monitor broader economic trends and indicators. And as we move forward with our strategic objectives, we will continue to track them closely. At the same time, we reaffirm our commitment to being prudent stewards of our capital while leaving room for upside value creation through high-quality and strategic acquisitions. As a quick update, our earned core line continues to gain traction across our businesses, and we're in the final planning stages of rolling out our casket core line. Both initiatives are key steps in our broader strategy to streamline operations, elevate service consistency and deliver an enhanced experience to the families we serve. As shared before, we are confident the recently negotiated pricing tied to these core line strategies will drive meaningful margin expansion, but more importantly, the curated selections offer families thoughtful, high-quality options to personalize their loved ones' farewell, further advancing our commitment to creating premier experiences at every touch point with every family, every time. Our Passion for Service program is set to become a cultural movement, igniting a passion for service delivery and wow moments across our organization. By certifying and celebrating team members who go above and beyond in elevated service delivery, we are creating a community of service champions driven by purpose and compassion. Passion for Service will transform how we connect with each other, our work and most importantly, with the families who trust us in their most vulnerable moments. We expect the results to be a higher standard of care, deeper team engagement and a powerful competitive edge that sets Carriage apart. In closing, we're pleased with our second quarter results, which reflect the strength of our business model and the focused execution of our teams. While we experienced some margin compression this quarter, our year-to-date results and momentum remains strong. We continue to invest in the future of Carriage with a clear focus on long-term value creation, cultural alignment and creating premier experiences for the families we serve. The last 2 years, we're focused on paying down our debt while laying the groundwork for exponential growth. Now our systems, processes and people are in place. And with our acquisition strategy back in place, Carriage is positioned well for the future and continue to create value for our employees, the family we serve and our shareholders. Thank you again for your continued trust and believe in Carriage. With that, I will now turn the call over to John.

Thank you, Carlos, and good morning. The company reported strong second quarter results and a solid first half performance. The organization maintained a disciplined approach, resulting in a 17.5% increase in adjusted EPS for the second quarter of 2025. These results would not be possible if it weren't for the collective efforts of the field and support teams and their dedicated service to our families. As Carlos mentioned, EBITDA margins in the field faced some pressure in the second quarter of 2025 compared to 2024. Funeral margins decreased by 250 basis points year-over-year. Approximately half of the decline was due to expenses unlikely to recur, while the remaining half was attributed to inflationary increases, primarily salary expenses. Cemetery margins declined by 480 basis points compared to the prior year with the erosion being more broad-based. Salary and benefit expenses increased due to market adjustments for maintenance teams as well as recently filled positions. Variable expenses tied to revenues were higher in the second quarter of 2025 compared to 2024. General liability expenses increased year-over- year. And unrecognized revenue and profit for land under development also contributed to the variance. If those revenues had been fully recognized during the quarter, Cemetery margin would have improved by approximately 180 basis points. Cash from operating activities for the quarter totaled $8.1 million, an increase of (sic) [ increase from ] $2.2 million in the same period last year. The $5.9 million increase was mainly attributable to operational results. Adjusted free cash flow for the second quarter was $6.9 million compared to a cash outflow of $300,000 in 2024. The variance was driven by higher operational cash flow and lower capital expenditures in 2025. Our leverage ratio was 4.2x compared to 4.6x at the end of the second quarter of 2024. The company paid $7 million toward outstanding debt during the quarter, bringing the year-to-date total to $24 million. As a result of our ongoing debt reduction, interest expense for the quarter was $1.3 million lower than the previous year with a year-to-date decrease of $2.7 million. At quarter end, $113 million was drawn on the credit facility. Capital expenditures for the quarter totaled $2.8 million compared to $3.5 million in the same period last year. Of the $2.8 million, $1.1 million was allocated to maintenance capital and $1.7 million to growth capital. Overhead spending was $12.5 million or 12.2% compared to $20.4 million or 20% in the prior-year quarter. The previous year's figure included $5.1 million in nonrecurring expenses related to the strategic review and $800,000 in separation expenses. Excluding these onetime expenses, prior-year overhead was 14.2% or 200 basis points higher than the second quarter of 2025. The main factors for the improvement in 2025 were reduced incentive compensation and the consolidation and management of award trips, which led to lower expenses than initially expected. Moving on to our updated outlook. For the remainder of 2025, the outlook includes the impact of acquisitions and additional divestitures expected to close in the third quarter, which are not part of our initial guidance. Additionally, small adjustments in the back half of the year have been made to our original expectations to the Cemetery segment to reflect current trends, which should result in full year margins in this segment between 44.7% and 45%. Nevertheless, measures are being taken to address the shortfall of the first 2 quarters, and we expect to have a strong second half of the year. The current outlook 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, leverage ratio ending between 4.1 and 4.2x. This concludes the prepared remarks. I will now turn it over to the operator to open it up for questions.

[Operator Instructions] We will take our first question from Alex Paris with Barrington Research.

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?

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

Okay. And then you expect it to close in Q3. Again, that will be the first closed acquisition since Greenlawn in the first quarter of 2023. The -- you say it had more than 15 -- I guess you can probably talk more about it after you close it, but it has more than $15 million in revenue. I'm curious as to pricing, what did pricing look like relative to recent acquisitions in the market?

Yes. So I'd say pricing is in line with kind of our philosophy on valuation. So generally speaking, without going into specifics, for a premium business where it's a competitive landscape, which is generally the type of business we're looking at, high single digits on the multiples is a fair estimate. And then there's specifics around the actual business. What's the potential for value creation? Does it have a cemetery, [indiscernible] those type of details that will help you kind of fine-tune what that multiple will look like.

Got you. And at this point, you're not going to talk about the properties acquired, you'll do it after you close. Is that it?

Correct. Yes, more details will come. We'll put a press release out once they close and share more about the markets and details of the businesses.

Great. And then on the subject of M&A, divestitures, in the first quarter, you received proceeds of close to $19 million. I think you still had a $6 million property left to sell. Did you sell that in Q2? I don't think so. Do you expect to sell it in Q3?

Yes. So we have closed one divestiture in Q3. We have a couple of others pending, so more details to come there. I would say in terms of thinking about divestitures for us moving forward, they should tail off this year. The reality is we're not shopping businesses, but every now and then, we'll have some inbound interest. But I expect that to really tail off as we get back to focusing on acquisitions.

So you didn't close -- you didn't close the divestiture in Q2, but you closed one in early Q3. Is that what I'm hearing?

Correct.

Got you. And then did the press release suggest that there have been some other properties added to the target list for divestitures from the last time you gave...

Yes. We do have a couple of other properties under contract right now. So more details to come in the back half of the year. But I think we're, again, kind of wrapping up the focus on divestitures and pivoting back over to acquisitions now.

And Alex, just to add to [indiscernible] that, those businesses that make it to the divestiture list are businesses that are located in areas where the demographics are declining, where the trends are not in the right direction, where the business -- it's really not fitting of the business that Carriage portfolio is made of today. And then we're reusing that or deploying that capital for a different type of business that is more fitting of our current portfolio.

No, I mean, that makes sense. And it has a magnification on the portfolio effect. If you're acquiring premium properties and you're divesting properties that might be -- that are profitable generally, but just not in growth markets, it kind of turbocharged the contribution from the portfolio in my opinion. And then last thing about -- for now, last thing on guidance. I'm just wondering if we can get a little bit more color and what assumptions are embedded in the guidance. You obviously raised guidance for revenue, adjusted EBITDA and adjusted EPS. If you look at the midpoint of the new revenue guide, it suggests an acceleration in the second half versus the first half. First of all, is that true? I want to make sure my math is correct. And then where would you think the greatest growth would be? Q3 or Q4? I would -- Q4 because the comp is a little easier year-over-year.

Alex, this is John. I would say when we look at guide, we took into consideration the acquisitions that are going to close in the third quarter as well as the divestitures that we didn't initially anticipate in our original guidance as well as incremental kind of performance in the back half of the year. To your question in regards to kind of where you would see kind of the benefit, the fourth quarter is likely where we see kind of the more impact to performance as compared to last year.

Great. And then Similarly, adjusted EBITDA at the midpoint of new guidance will be up 4% year-over-year. It was up -- it was actually down in the first half year-over-year. So it does suggest even more significant adjusted EBITDA growth in the second half of the year. And where is that leverage coming from? Funeral, Cemetery?

Yes. So it's going to be broad-based, right? At the end of the day, we're going to expect with incremental sales, right, we're going to see some additional EBITDA, just generally speaking, associated with that. The Cemetery margins also were a little bit challenged in the first half of the year, and we've taken that into consideration as we look at the back half. But from a plan perspective and a guidance perspective, we've taken -- we see some opportunity in the back half of the year with Cemetery margins as compared to last year.

Great. And then can I ask just three simple questions. You had given sort of a D&A target, a stock-based compensation target in the first quarter press release. I didn't see it in the second quarter press release. Shall I assume they're the same D&A of approximately $25 million and stock-based compensation of around $8.5 million?

Yes. Those haven't changed.

All right. And then last question, and I'll let somebody else ask. Tax rate for the full year, what's a good number to use? I think the last time you talked about 28% to 30%.

Yes. So it has come down. So if you think about the full year, probably between 27% to 27.5% is a good number to use.

We'll take our next question from Liam Burke with B. Riley Securities.

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.

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.

The only thing I would add to that was when you look at your model, we guided towards 13% to 13.5% from an overhead range perspective. So we did bring that down from 13% to 14%. And as you think about -- and as Carlos just said, as you think about long term, roughly, that's probably the right range for us to be at.

Great. John, you mentioned that on the funeral home, looking at year-over-year profitability that half -- the incremental expense that held back margins was nonrecurring. Is that the Trinity program?

No, there were some benefits that we received last year in our numbers that ultimately didn't recur. So that impact as well as we had a catch-up entry for certain expense that was kind of multiyears. So as you take those two expenses out, we don't expect that to happen again. So ultimately, the impact was really more associated with just inflationary expense and salary and benefits within that channel or within that segment of business, which was really the driver of margin compression there.

We will take our next question from George Kelly with ROTH Capital Partners.

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?

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.

Okay. Okay. That's helpful. And then second question for me on 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?

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.

Okay. Okay. Great. And then last question for me is just back to M&A. Can you talk about beyond these transactions that you've talked about and expect to close in 3Q, what does the pipeline look like behind these transactions? And should we anticipate that in -- I don't know if maybe Q4 is too early, but in 2026, there will be continued stuff that you're seeing that you like that you're working towards? Or just -- I guess, what's the kind of frequency that you hope to execute on more M&A?

George, yes, so the pipeline is strong right now for us. We're currently in several conversations with owners of premium businesses that we're excited about. With that said, the real benefit for us is we're in a position to be selective. So there are some opportunities where we've had to walk away just because the valuation we couldn't all agree on. And at the end of the day, what we're trying to do is continue to build a portfolio that we believe pound for pound is the highest quality group of assets in the industry. So we'll continue to be active with M&A throughout this year. I can't give you timing in terms of when the announcement will be. And then certainly, through '26 and moving forward, I want to get to a regular cadence on acquisitions while we continue to balance our leverage, which has been the goal going back to 2 years ago.

[Operator Instructions] Your next question comes from Scott Schneeberger with Oppenheimer.

I just wanted to ask, you had in second quarter last year, strong growth in average revenue per Funeral contracts. And again, this year, you had nice growth as well. Could you just speak to what's behind that and the sustainability of that attractive growth?

Scott, thank you for your question. It's really coming from two fronts. At the end of last year, we started with what we call the strategic pricing reviews. And what that is on a quarterly basis, the Director of Operations for that business and our analysts here at the Houston Support Center, they come together with the managing partner to evaluate with a very specific set of metrics that look at volume trends for 5 years. They look at average cremation rates, burial rates, they look at competition pricing, their pricing, what was the last time they increased price, service charge, all these different things. And then after the meeting, they decide based on their trends if they want to increase the price. Of course, they look at cost, margins and things of that nature. And so that has worked really, really well because it's not a push down price strategy. It's really making the managing partner aware of what's going on in their market, going on in their business and what strategy they can use to price to make up for any inflationary cost they have seen, for salaries that may have been increasing or perhaps volume trends are going down, and we need to think actually the opposite and increase price, if that's the case or increase price if the volume trends continue to be spiking up. That's one side. The other side has been our cremation conversion strategy, which basically emphasizes an educational process with the family. We created this, brochures if you will, where a family can sit down and be more educated about [ cremation ] so that most likely than not, they can walk away from the funeral home with something more other than just a cremation. That could be just an upgraded urn, could be a visitation, could be a viewing, could be an ID, could be a full-blown funeral service, could be a live cremation. And that has worked really, really well. And so that's helping. And I'll add one more, Scott, if you don't mind, and that is our earned core line strategy. So the margins are expanding a little bit and the price has not decreased from our earned core line that we launched at the beginning of Q1 this year. That's helping also on our average revenue per contract on the cremation side. And so I truly believe those are the three things that are helping us drive price in the funeral home side.

Great. Appreciate that color. And John, for you, my follow-up. The -- any -- have you had a chance to look at 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?

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.

This does conclude today's question-and-answer session. I would now like to turn the call back to Carlos for closing remarks.

Thank you all for joining us today. As we reflect on a strong second quarter, it's clear that our transformation is delivering results, but we're just getting started. The foundation we have built is unlocking new opportunities for sustainable growth, operational excellence and long-term value creation. We're confident in the upside that lies ahead, and we remain focused on executing with discipline, innovation and a passion for service. Thank you for your continued support and belief in our vision. Have a great day.