Carriage Services Inc. Aktie

Good day, and thank you for standing by. Welcome to the Carriage Services Q1 2026 Earnings Webcast. 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, and thank you for joining us to discuss our first 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, Senior Vice President and 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 press 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 us for today's first quarter earnings call. We are pleased with our first quarter performance, especially against a strong comparison to the first quarter of 2025. Our results reflect steady execution, discipline and continued focus on what we can control.

As I step back and look at our progress, I am encouraged by the consistency we're building across the businesses. We are strengthening our foundation, improving how we operate and positioning Carriage for long-term value creation.

Before turning to the financials, I want to recognize our managing partners, our field teams and our Houston support center. You are the heartbeat of Carriage. These results are not by chance. They are built on a clear vision, high standards, a strong accountability and a deep passion for this profession. Thank you for living our values and for delivering premier experiences to the families every day.

Today, we'll cover our first quarter performance and share 3 key phases of our journey: where we were; where we are today; and most importantly, where we are going. John will then walk through our financial details, including cash from operating activities, balance sheet strength, capital expenditures, overhead and our at-the-market offering program.

Now to my report. For the first quarter, we reported revenue of $106.1 million, a 0.9% decrease from the same period last year. The primary reason for this variance was a decline in funeral home admit volume of 5.8%. As you may remember, we had a strong first quarter last year due to the flu season pushing into January and February. After normalizing funeral volume by combining the fourth quarter of 2025 and the first quarter of 2026, the actual volume decline is only 2.3%.

As we look at our segments, funeral comparable revenue was $63.3 million, down 4.2% from the previous year. The volume decline was partially offset by a small 1.6% increase in comparable average revenue per contract versus the prior year quarter. As we look ahead to April, we expect funeral volume to be on a normal trend.

Turning to comparable cemetery revenue. We generated $29.6 million in the first quarter, an increase of $1.7 million or 6% versus the prior year quarter. This growth was primarily driven by a 9% increase in comparable preneed cemetery sales production and a 15.3% increase in average revenue per property contract. The Cemetery segment continues to benefit from our disciplined inventory development and strategic pricing and focused preneed execution.

Financial revenue for the quarter was $8.5 million, up 15.7% year-over-year, primarily reflecting a strong performance in our preneed funeral sales strategy and the preneed funeral commission income we generated from those sales. We ended the quarter at $2.5 million, an increase of 26% compared to the same period last year.

Consolidated preneed funeral insurance contracts sold increased 8% compared to the same quarter last year, reinforcing the strength and scalability of our funeral preneed insurance platform, supported by the continued execution of our sales organization.

On profitability, adjusted consolidated EBITDA for the first quarter was $33.8 million, an increase of $805,000 or 2.4%, with an adjusted consolidated EBITDA margin of 31.8%, up 100 basis points from the prior year quarter. Adjusted diluted EPS for the first quarter was $0.86 per share compared to $0.96 per share in the prior year quarter, representing a decrease of $0.10 per share or 10.4%. John will share more details on this variance.

Overall, we are pleased with our first quarter results, which reflect a strong operating momentum and continued progress towards our strategic objectives.

Now let's talk about where we were. Three years ago, the company was operating under constraints, elevated leverage, fragmented processes and underinvestment in core systems and technology. Operational variability across locations, limited scalability, pricing discipline was inconsistent and capital allocation lacked the rigor required to optimize returns. In short, our company had strong underlying assets, but was not positioned to fully convert that potential into durable financial performance.

Today, the business reflects a fundamentally different operating profile. We have materially strengthened the balance sheet, reduced leverage and enhanced liquidity. At the same time, we have institutionalized processes across operations, implemented more disciplined pricing frameworks and invested in systems and data infrastructure to improve visibility, accountability and decision-making.

These changes are translating strategy into disciplined execution, driving greater sales predictability, expanding margins and delivering consistent free cash flow. Importantly, we continue to build a culture of operational excellence that is embedded, repeatable and scalable across our businesses. An example of this is that 2025 marked the strongest financial performance in Carriage's 35-year history, surpassing even 2021 results during the peak of the pandemic.

Now where we are heading. Our focus is on compounding this progress in line with our long-term strategic objectives and 2030 vision. We are building a data-driven high-performance platform designed to deliver sustained organic growth, margin expansion and superior capital efficiency.

Our priorities include deepening preneed penetration across both Funeral and Cemetery segments, optimizing the service mix towards higher volume offerings, expanding pricing sophistication and leveraging technology to enhance both the customer experience and operating leverage.

In parallel, we will continue to execute a disciplined capital allocation framework that balances high-return investments, strategic acquisitions and shareholder returns. By 2030, our vision is to position the company as a premier best-in-class operator in the death care industry, defined by consistent top-tier margins, improved free cash flow generation and a scalable technology-enabled operating model.

We believe this strategy will drive durable long-term value creation and establish a structurally advantaged business capable of outperforming across market cycles.

Finally, the at-the-market offering program is a strategic extension of the progress we have already made. With a stronger balance sheet, improved free cash flow and a more disciplined scalable operating platform, we believe we are now in a position to deploy capital with precision. This program gives us the flexibility to do that strategically, raising equity at market prices in a measured way and only when it supports high returns for shareholders.

Additionally, the at-the-market program allows us to accelerate strategic growth initiatives, pursue disciplined acquisitions in a highly fragmented industry and maintain balance sheet strength. It enables us to move faster on opportunities and convert our operational momentum into sustained shareholder value creation. We are energized by our growth plans and confident in the long-term value we're building through disciplined capital execution, growth generated with purpose and intention and an unwavering commitment to service excellence.

Thank you. And with that, I will turn the call over to John.

Thank you, Carlos, and good morning, everyone. As Carlos mentioned, we are pleased with our first quarter results, especially considering the tough comparison to prior year, which included approximately $4.8 million in revenue from businesses that were divested during 2025. As noted in our earnings release, we are excited to announce that we established an at-the-market equity offering program, or ATM program, as a prudent enhancement to our capital markets toolkit.

The ATM program is intended to provide efficient incremental funding flexibility that enables us to continue executing our disciplined acquisition strategy while ensuring leverage remains comfortably within our targeted range. We expect to access the ATM program selectively and opportunistically consistent with our commitment to balance sheet strength, disciplined capital allocation and shareholder value creation.

With that, let's discuss first quarter results. We reported consolidated adjusted EBITDA of $33.8 million or 31.8% of revenue, up from $32.9 million or 30.8% of revenue in last year's first quarter. Gains were driven by improved cemetery operations and premium funeral sales, adding $2.5 million of EBITDA. However, comparable funeral EBITDA fell by approximately $2.4 million due to lower volume within the channel this quarter, which offset the majority of those gains.

For the first quarter of 2026, our adjusted diluted EPS declined to $0.86, representing a 10.4% decrease from $0.96 in the prior year. The decline was primarily a result of a higher effective tax rate in this year's first quarter. The effective tax rate for the first quarter was 26.7% compared to 20.3% in the first quarter of 2025.

The adjustment in tax rate resulted in an estimated impact of $0.07 to $0.08, primarily due to higher excess tax benefits recognized in the previous year upon the settlement of employee share-based awards. On a GAAP basis, diluted EPS for the first quarter was $0.84 compared to $1.34 in the same period last year. The prior year results included the benefit of a $7.9 million gain associated with the divestiture and the sale of real estate assets.

Moving on to cash from operating activities. We saw an increase of $1.1 million over the prior year or an 8% increase, primarily because of year-over-year improvement in operating results. Free cash flow in the quarter was $400,000 or 3.5% higher than the prior year first quarter. Adjusted free cash flow was $2.2 million lower than the prior year first quarter as the first quarter of 2025 was impacted by special payments for professional services related to the review of strategic alternatives as well as severance payments.

As a result of our ongoing commitment to executing disciplined capital allocation, our bank leverage ratio decreased to 4x from 4.2x at the close of the first quarter of 2025. We remain within our long-term leverage ratio target of 3.5 to 4x. Capital expenditures for the quarter totaled $3.9 million in the first quarter of 2026 compared to $3.2 million in the prior year's first quarter.

The $700,000 increase was predominantly associated with maintenance capital, driven by incremental spending in our funeral homes, coupled with an IT investment to refresh and improve the quality of our network connectivity within our field locations.

For the quarter, we spent $2.2 million on maintenance capital and $1.7 million on growth capital. Overhead expenses for the quarter totaled $14.8 million or 14% of revenues compared to $15.3 million or 14.3% of revenues in the first quarter of 2025. The decrease was a result of some variable expenses, coupled with effective cost management.

Moving on to our 2026 outlook. We are maintaining our previously disclosed full year outlook. As a reminder, our outlook anticipates certain planned acquisitions that we expect to be completed in 2026. Also, utilization of the previously mentioned ATM program have not been factored into any of our metrics in our outlook.

As a reminder, our outlook for the following metrics are: revenues are expected to be in the $440 million to $450 million range; adjusted consolidated EBITDA is expected to be in the range of $135 million to $140 million; adjusted EBITDA margins between 30.5% and 31.5%; adjusted diluted EPS of $3.35 to $3.55; overhead expenses to be between 13.5% to 14.5% of revenue; adjusted free cash flow in the range of $40 million to $50 million; leverage ratio end 2026 between 3.5 to 4x.

That concludes our prepared remarks, and I will turn it back over to the operator to open it up for questions.

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

I got a couple. I think I'll start with funeral results which were down year-over-year. I get it, tough comp, strong flu season 1 year ago, not too different from your large publicly traded competitor who said the same thing and had a similar comparable volume decline year-over-year. But you reaffirmed your guidance for the full year. It's early in the year. And it suggests that there should be revenue growth returning in the remaining quarters of the year. Can you comment on that or provide some additional color, your thoughts or your confidence why revenue growth will return in the subsequent quarters?

Absolutely. Thank you, Alex, for the question. It's a great question. We have seen in cycles, right, that death care is -- you have this clarity, if you will. It goes up and down. Normally, it's always been first quarter first, fourth quarter, second. But since COVID-19, that has actually changed significantly. What we have seen is that even though first quarter may be down, it picks up some of that volume as we go throughout the year.

For us, especially because we are still in the process of integrating our latest 2 acquisitions in Florida and the divestiture that we did from last year also impact that. As we wash off Q1, we have now passed the largest divestiture, and we feel pretty positive we will be able to make our volume up for the next 2 to 3 quarters.

Good. That's helpful. And speaking of acquisitions, I was wondering if you can give us an update on the integration process with Osceola, how is it performing? Osceola and the other acquisitions since they were acquired last September?

Alex, it's Steve. So both acquisitions are really trending in a positive direction, Faith Chapel over in Pensacola and then Osceola that you mentioned over in Kissimmee. So excited about the progress of both businesses. And as you know, with the Osceola business, it allows us with our current footprint in that market to really recognize some synergies that's unique for us with acquisitions. So excited to see how that continues to move forward.

Is -- are these acquisitions fully integrated at this point? Or they're on their common systems and things like that?

Yes. All the systems and people are fully integrated. We actually just with Osceola broke ground a couple of months ago with a new development in the cemetery, so adding some additional inventory and product for the community there. That should be finished in the next month or 2. So yes, all systems go with Osceola and Faith Chapel in terms of integration.

Great. And then just one last one, and I'll get back in the queue. I'm wondering if you can give us a little update on the M&A pipeline and outlook? As you noted in the prepared comments, there is an acquisition assumption for -- likely acquisitions or potential acquisitions that might close in 2026. I think that assumption was $5 million to $10 million in revenue. Just looking for a little color there?

You bet. So yes, the pipeline is robust right now. We have one acquisition that is scheduled to close later this month. It's going to allow us to enter a new market with a pretty strong growth profile. So we're excited to provide some more detail on that here probably in the next couple of weeks. We're having a number of conversations with owners throughout the country. We've grown the corporate development team out of need, quite frankly. We've just had a lot of interest from owners across the country.

I would expect in the back half of the year, we're going to see significant activity that we'll be able to report on. And Carlos and John mentioned this, one of the benefits with the ATM is being able to support what we think is going to be a pretty significant opportunity for growth through M&A.

So last related with the ATM, would you think that there's the potential to exceed that $5 million to $10 million assumption that's baked in guidance given the greater flexibility and wherewithal?

My expectation is you're going to see more activity in the back half of the year. In terms of when things close, you may see some of that bleed into early next year as well. We continue to be focused on ensuring the businesses that we're working with and we're integrating are high-value businesses, high-growth markets. So we're not just going to add businesses to add to the top line.

That means probably Q3, Q4 into Q1, you'll see some significant activity. And I -- look, I think the next 3 or 4 quarters we certainly plan to exceed the $10 million, whether it hits in Q1 of next year or Q3 and Q4 this year remains to be seen.

We will take our next question from Laura Maher with B. Riley Securities.

My first question, it seems the burial to cremation mix is stabilizing. How does this influence your average revenue per contract and funeral home EBITDA margins going forward?

Do you want to answer? Go ahead.

Yes. So we have seen over the last 3 quarters some normalization or some benefit associated with the cremation mix. It was 40 basis points growth in this quarter. And as burial kind of flattens, you should see and we should see our ARPC increase.

Great. And then second, are there any other funeral home properties you're looking to divest?

At this time, Laura, we feel pretty good about the portfolio is currently constructed. So no additional divestitures are planned.

We will take our next question from Parker Snure with Raymond James.

Just on the funeral volumes, just curious on comparable funeral volumes, how they progressed through the quarter, January, February, March? And then what are you seeing in early days of the second quarter?

Yes. So the tough comp was really January and February. March also came a little light, to be pretty straightforward. I think the 3 months were pretty much the same as it comes to the decline. April started a little slow. We do believe that with the divestiture out may come back. But we do foresee this cyclical terms of Q2, Q3, Q4 coming in to be able to make up for what Q1 is missing. That's what we have seen in years past, and that's what we are really aiming to do.

In addition to that, our teams at the field level, which is what really matters, continue to fight pretty hard for market share gains. And so while there might be a compression of death rate, seems like it because as we talk to vendors, we've seen reports from other public companies, we see that, that's probably the case. We continue to fight pretty hard to make sure that the Carriage businesses gain as many market share gains as we can by providing premier experiences to the families that we serve and delivering on that experience to each one of those families.

Okay. Okay. Understood. And then on the preneed cemetery production, you had strong growth there despite lower contract volume, you have better revenue per contract. Just curious on the puts and takes there? Were there any large ticket sales that helped drive that? Is that better product, increased pricing? Maybe just more details on the preneed cemetery growth?

We have the normal large sales activity, nothing too large that would offset that. We have been actually working really hard to making sure we have a great sales average on the preneed cemetery side. We're hoping for a little bit more, although if I go back -- I'll give you some data, which I think is fascinating to me. If I go back to Q1 2019 and then calculate the CAGR to Q1 2026, preneed sales is a 22.4% CAGR over this period, which is fantastic.

For Q1 2026, what was a little like [ Qingming ] really started a little later this year, has been not great. That's what we have seen. And even on top of that, we're still able to deliver some pretty amazing performance in Q1. So I feel pretty good about our pipeline for preneed business on both funeral and cemetery. And I don't see why we would not slow down.

Okay. Okay. And then just last one for me. Just given the news of the ATM program, is it a reasonable expectation that you will finance the acquisitions that are built into your '26 guidance with the ATM program? Or will you use a combination of that and free cash flow from this year? And then also just curious on the expected cash needs or cash outlays to complete these acquisitions?

Yes. So I think it might be on timing. So there might be usage of basically free cash flow that we can fund through the ATM program. To the point, it depends on the size of the acquisitions is really when we would be opportunistically accessing the ATM.

And really, if you just look at a typical multiples from the $5 million to $10 million of expected revenue, our typical margins are depending on funeral and cemetery, we still expect the margins or the multiples depending on the size to call to be in the average range of, call it, 6 to 8x from an EBITDA multiple percent. So the cash needs would be based on that.

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

A couple for you. First, can you update us on the status of Trinity?

Yes. So I'll speak to that. So Trinity, as you know, George, we're in one location right now with the second location is going to go live in May. Provided that's successful, which we expect it to be successful, then we'll do a rollout of our funeral homes starting in July, what we're calling Velocity and all the funeral homes, not the combos or cemeteries, but all the funeral homes should be done in 2026. Then we move into the first quarter of 2027, and we expect all the combos and cemeteries to be up and live.

Okay. Okay. Understood. And then second question from me. Your funeral margin held in pretty well given the downtick in revenue. You commented in your prepared remarks about finding efficiencies and just being disciplined on the cost side. What were you able to -- what efficiencies were you able to find? And are those things sustainable? Should we think of you being able to maintain ,like pretty easily maintain that above 40% margin? Or just how should we think about those efficiencies? Can you detail any of that?

Yes. So in that particular channel, we saw some efficiencies on the labor side. So labor was, comparatively speaking to last year in the first quarter, down or roughly flattish, right? So from a margin perspective. And then we saw some other expenses, onetime expenses that may have happened last year, that ultimately didn't reoccur in 2025 in the first quarter.

When we talk about just efficiencies in general, it wasn't just within the field. We saw some efficiencies in the cemetery locations, but also in corporate, right? We made some disciplined choices this year in the corporate side to kind of manage as we saw the volume tick down, and we'll continue to do that. We'll be very thoughtful as we think about the next 3 quarters on where we can and can't spend, especially on discretionary.

Yes, George, if you think about -- we saw the volume starting to come down in early January, and we made decisions to adjust for that. And we've still been able to have adjusted consolidated EBITDA margin greater than Q1 2025 of 31.8% and up 2.4% to last year is pretty impressive. And it speaks highly of the disciplined execution from the bottom up business by business and leader by leader all the way through our overhead. And so we feel pretty proud about accomplishing that despite the volume decline.

Okay. Okay. And then last question for me, I guess, a follow-up to one of your earlier responses. Can you talk more about how you're going after market share gains?

Yes, absolutely. Happy to do that. So one of the things we're doing, George, is, earlier last year -- midyear last year, we started to do mystery call shops. So basically, what that is, we start to call the funeral homes and -- through our company, so they can let us know how good are we at picking up the phone call, right? And that matters because a significant percentage of the volume that comes through the funeral homes comes through the phone. That's first call. That's why we call them calls because people call in and set up an appointment to go and see if that's a good funeral home for their family.

And so we learned that we have some opportunities for improvement, and we have since then started a program to finalize training, to really improve how we entering the phone, to elevate that experience, to address all the touch points we want to address through the phone call, and in doing so, keeping those families more interested in staying with us than going to the competition.

We will take our next question from Scott Schneeberger with Oppenheimer.

Just one for me. Could you guys just provide an overview of what you look for in M&A? What are some of the things that you're looking to achieve as you're in the market?

Good morning, Scott. So there are a few things that are core to how we view an opportunity. The first is the market. So we do want to be focused on a market that has a favorable growth profile, also looking at the growth of certain age ranges that are significant with our consumers.

The second is the opportunity to grow the business. So for example, and we've seen a lot of this, there may be great businesses with great owners, but the ability to grow that business may be limited. So that would be one that we pass on. But if we see an opportunity with the cemetery or with the sales team or with preneed to grow that with the support and the investment from Carriage, then that becomes very attractive to us.

And then the final piece is the valuation. So as we've talked about, I would say of the consolidators in this business, we probably do, on average, the fewest number of total transactions, but we see that come back on revenue and margin and growth of those businesses. And the reason for that is we see the same number of opportunities. We just pass on a lot of them because of either valuation and price or opportunity. So we'll continue to be selective, and that's why it's tough for us to predict quarter-by-quarter which businesses will come in. But long term, we know there's going to be a pretty significant growth for Carriage on the M&A front.

There are no further questions in the queue at this time. I will now turn the call back over to Carlos Quezada for closing remarks.

Thank you, everybody, for attending our call today. Our focus remains clear, disciplined execution, purposeful growth and consistent improvement. We appreciate your confidence and support. Have a great day, and we'll talk during our second quarter report.

This concludes today's call. Thank you for your participation. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Carriage Services Fourth Quarter 2025 Earnings Webcast. 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, and thank you for joining us to discuss our fourth quarter and year-end results for 2025. 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, Senior Vice President and 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 us for today's fourth quarter and full year earnings call. As we close out 2025, I am incredibly proud of what our Carriage team has accomplished. This year reflects disciplined execution, cultural alignment and a relentless commitment to creating premier experiences for the families we serve. Before discussing our financial performance, I want to recognize every managing partner, every team member in the field and every support member across our organization.

You are the heartbeat of Carriage. Our results are not accidental. They are the result of a clear vision, high expectations, accountability and a deep passion for this noble profession. Thank you for living our values and for delivering excellence to every family every time.

Today, I will highlight our financial performance for the fourth quarter and the full year and provide an update on the progress of some of our strategic objectives. John will then provide additional detail on our financial metrics, cash from operating activities, balance sheet strength, capital expenditures, overhead and 2026 guidance.

Now to my report. 2025 was a year of defined purpose and intentional value creation. We continue to build a more scalable operating framework, optimize our supply chain processes, enhance our passion for service mindset and reactivated our disciplined growth strategy through high-quality acquisitions.

At the same time, we further strengthened our balance sheet and reinforced our capital allocation discipline. We are no longer in the rebuilding phase. We are now firmly in the compounding phase.

Let's begin with the numbers. For the fourth quarter, we reported total revenue of $105.5 million, representing a solid 8% increase compared to the same period last year. When we look at each segment, total funeral operating revenue was $61.1 million, reflecting a 9.6% growth year-over-year. Funeral home operating volume was 10,571, an increase of 6.8% over the same period last year, while average revenue per contract was $5,777, an increase of 2.6% over the previous year's quarter.

This performance reflects our continued focus on strategic pricing, new burial information offerings, service mix optimization and steady execution in our businesses. As you may recall, December 2024 had lower-than-expected volumes due to a shift in the flu season that pushed volume to January. This December, we experienced a more typical flu season.

Moving to total cemetery operating revenue. We finished the fourth quarter at $33.8 million, an increase of $5.3 million or 18.4% compared to the same quarter last year. This performance was primarily driven by a 25.5% increase in preneed cemetery sales production, a 15.6% increase in preneed interment rights sold and a 5.3% increase in the average sales per property contract. Our cemetery performance continues to highlight the power of diverse inventory development, strategic pricing and focused preneed execution.

Moving to total financial revenue. The company ended the quarter at $9.3 million, an increase of 15.3% compared to the same period last year, primarily driven by the strong performance of our trust fund investments. Preneed insurance contracts sold increased by 33.8% compared with the same quarter last year, reinforcing the continued strength of our funeral preneed insurance sales strategy and the outstanding work of our sales teams who continue to focus on the education of our families on the value of preplanning.

Turning to profitability. Adjusted consolidated EBITDA for the fourth quarter was $32.5 million, an increase of $3.2 million or 11%, and adjusted consolidated EBITDA margin was 30.8%, an increase of 80 basis points when compared to the same quarter the previous year. This margin expansion reflects the combined impact of our supply chain initiatives, strategic pricing and capital allocation discipline. Adjusted diluted EPS for the fourth quarter was $0.75 per share compared to $0.62 during the same quarter the previous year, an increase of $0.13 per share or 21%. Our fourth quarter of 2025 delivered strong performance, and we are pleased with the progress made.

Now let's move to our full year performance. Total revenue was $417.4 million, up from $404.2 million in 2024, representing a 3.3% growth. While reported revenue growth of 3.3% may appear modest at first glance, it significantly understates the company's underlying performance in the context of our portfolio repositioning. In 2025, the divestiture of noncore businesses negatively impacted revenue by approximately $9 million, and we acquired strategically selected high-quality assets in September, which contributed about $4 million in revenue.

We expect these new businesses to reach $16 million in revenue in 2026. Overall, while we felt the top line impact of the divestitures of noncore businesses in 2025, this portfolio optimization will enhance our ability to grow revenue and margins in the future and showcase our commitment to disciplined capital allocation and return of invested capital.

Moving to adjusted consolidated EBITDA. We ended the year at $130.7 million, an increase of $4.4 million (sic) [ $4.5 million ] or 3.5%, while adjusted consolidated EBITDA margin finished at 31.3%, an increase of 10 basis points, both compared to the prior year. Adjusted diluted EPS was $3.20 per share compared to $2.65 per share, an increase of $0.55 or 20.8% compared to the prior year.

These results demonstrate the execution discipline of our operations and validate the effectiveness of our strategy to turn around the company. Over the past 3 years, we have rebuilt Carriage with intention, purpose and disciplined execution, not simply to improve performance and build credibility, but to create a more sustainable, profitable and predictable company.

We have reshaped our revenue mix for higher quality earnings, institutionalized rigor with our operating system to reduce volatility and improve our margin profile through disciplined pricing, supply chain optimization and strategic capital allocation. These actions are designed to generate consistent cash flow, expand profitability over time and enhance earnings visibility. Most importantly, our leadership teams are fully aligned and executing with accountability to deliver performance that we believe is repeatable and scalable.

Moving to updates on our strategic initiatives. We continue to invest in systems and infrastructure to support disciplined growth, advancing continuous improvement initiatives, modernized technology platforms and enhanced reporting capabilities. These investments improve our reliability, visibility and decision-making quality, converting efforts into behaviors and repeatable outcomes.

For example, we upgraded our sales infrastructure by deploying Sales Edge 2.0, our CRM, achieving approximately 80% adoption by year-end. The platform enhanced funnel visibility, campaign targeting and reporting precision, contributing $2.6 million in fourth quarter preneed production.

In parallel, we fully integrated our preneed funeral sales strategy across the sales organization. We expect Sales Edge 2.0 to become our preneed sales engine in 2026. At the same time, we develop our leadership capability and reinforce a meritocratic culture aligned with performance expectations. Culture at Carriage is a measurable economic asset that makes execution stronger, reduces risk and supports sustainable profitability.

Our supply chain optimization strategy continues with our urn and casket core line initiatives now fully embedded across our organization. These strategies are driving purchasing consistency, margin improvement and a more curated presentation for families. We expect future optimization opportunities and additional national partnerships will allow us to further reduce complexity and enhance our operating leverage.

In closing, we're building a best-in-class death care company defined by premier experiences, a high-performance culture, meritocracy and accountability, all aligned with our 3 strategic objectives: disciplined capital allocation, purposeful growth and relentless improvement. Our performance in 2025 reflects disciplined execution guided by a clear, consistent framework rooted in our purpose to create premier experiences through innovation, empowered partnerships and elevated service.

These are not aspirations. They are operating standards that guide capital deployment, operational decisions and long-term value creation. Our balance sheet is stronger. Our systems are more robust. Our acquisition engine is active and disciplined, and our culture is aligned with our 2030 vision. We're not chasing growth. We're building durable, predictable and compounding long-term shareholder value. As we enter 2026, we do so with confidence, clarity and intention.

Thank you for your continued trust and belief in Carriage. I will now turn the call over to John.

Thank you, Carlos, and thanks, everyone, for joining us today. Before I start, I'd like to look back on my first year at Carriage Services. I knew stepping into a new industry would bring professional growth, but what stood out most was the dedication and commitment throughout the organization.

Our teams are truly unmatched in their focus on enhancing the care and service we provide for the families who choose us. I appreciate both our field and support center teams for everything you do each day.

My comments today will primarily focus on performance in the fourth quarter of 2025 compared to the fourth quarter of 2024. After that, I will share our outlook for 2026. We reported consolidated adjusted EBITDA of $32.5 million, representing 30.8% of revenue, an increase from $29.3 million or 30% of revenue in the fourth quarter of last year. The increase, both in absolute terms and percentage were driven by improved performance across our field operations, resulting in a $5.5 million increase in field EBITDA.

However, this progress was partially offset by an unanticipated employee benefit expense of approximately $1.2 million, which stemmed from a few high-cost claimants during the quarter as well as higher volume of medical insurance claims filed in December of this year compared to previous year. Additionally, overhead expenses rose, which I'll discuss further shortly. For the fourth quarter of 2025, our adjusted diluted EPS rose to $0.75, representing a 21% increase from $0.62 in the prior year.

The previously mentioned unanticipated employee benefit expense in the fourth quarter of 2025 impacted diluted EPS by approximately $0.05 to $0.06. On a GAAP basis, diluted EPS for the fourth quarter was $0.77 compared to $0.62 in the same period last year. For the full year, GAAP diluted EPS increased by $1.15 or 54.8%, while adjusted diluted EPS grew by $0.55 or 20.8%.

Moving to cash from operating activities. We saw an increase of $4.8 million over the prior year quarter or a 52.2% increase, primarily a result of year-over-year improvement in operating results. Adjusted free cash flow in the quarter was down $400,000 or 5.4% from the prior year fourth quarter, primarily due to higher capital expenditures.

Due to our ongoing commitment to disciplined capital allocation, our bank leverage ratio decreased to 4x from 4.3x at the close of the fourth quarter of 2024. In recent years, we've concentrated on enhancing operations and deploying capital efficiently. We're pleased to finish the year within our long-term leverage ratio target of 3.5x to 4x. Capital expenditures for the quarter totaled $7.9 million in the fourth quarter of 2025 compared to $4.4 million in the prior year's fourth quarter. The $3.5 million increase was predominantly associated with growth capital, specifically investment in cemetery development, which allows us to continue to drive strong preneed cemetery sales production.

For the quarter, we spent $5.2 million on growth capital and $2.7 million on maintenance capital. Overhead expenditures for the quarter totaled $15.2 million or 14.4% of revenues compared to $12.9 million or 13.2% of revenues in the fourth quarter of 2024. The increase was predominantly associated with higher incentive pay for the field based on performance for the year. On a full year basis, overhead expenses totaled $56.6 million or 13.6% of revenues, which aligns with our long-term target.

Moving on to our 2026 outlook. In forming an outlook for the upcoming year, we have shifted toward a growth-oriented approach, along with incorporating the projected full year benefits from our 2025 acquisitions. Additionally, we have factored in the expectation of certain potential acquisitions that we believe may be completed in 2026. Revenues are planned to be in the $440 million to $450 million range compared to $417.4 million in 2025, which represents a growth rate of approximately 5.5% to 8%.

We expect same-store funeral growth in the low single digits and cemetery growth in the high single digits. Preneed cemetery sales production should remain within our 10% to 20% target range. Adjusted consolidated EBITDA is forecasted at $135 million to $140 million for 2026, up from $130.7 million in 2025. Margins are expected to range between 30.5% to 31.5% compared to 2025 margin of 31.3%. Overhead is projected to be 13.5% to 14.5% a bit higher than our long-term goal of 13% to 14%, mainly due to expected increases in IT investments, ongoing Project Trinity rollout expenses and continued investment in talent.

Based on these targets, we anticipate adjusted diluted EPS of $3.35 to $3.55 compared to $3.20 in 2025. Our adjusted diluted EPS will be somewhat impacted by our expected full year effective tax rate moving to a range of 28.5% to 29% compared to 26.7% in 2025.

Finally, we anticipate our adjusted free cash flow to be in the range of $40 million to $50 million, which assumes total capital expenditures in 2026 of $25 million to $30 million, reflective of the continued investment in our core business.

That concludes our prepared remarks, and I will turn it over to the operator to open it up for questions.

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

Congrats on the strong finish to the year and the guide. My questions are in 3 parts. First, on the quarter, you beat on revenue pretty handily. And I think you said the acquisitions of the third quarter added around $4 million for the year. How much for the fourth quarter did they add?

They added about $3 million, generally speaking.

Okay. Adjusted EBITDA was in line despite that increase in overhead that you mentioned and the unanticipated insurance costs. Are those insurance costs included in overhead or no?

So they're spread between overhead as well as field margins. So predominantly, they're in field margins. But yes, there's an impact to overhead as well as we allocate.

Okay. And then adjusted EPS was a little bit lower than our expectations, but versus my model, you had higher interest expense and a higher tax rate than I had modeled. Anything else in there?

No, no, that's -- I mean, as you think about our expectations and how we guided to really, if we didn't have that unanticipated employee benefit expense, we would have fallen right within where we expected.

That's true. Okay. And then moving to guidance. Revenue growth, 5% to 8%, adjusted EBITDA 3% to 7%, adjusted EPS growth, 5% to 11%. My question is, what are the underlying assumptions for the low end and the high end? In other words, what would it take to get to the high end of guidance?

So from a high end of guidance, you would need to -- the impact of the new acquisitions would have to be at our high end. So we're estimating the acquisitions to be between $5 million and $10 million of impact to performance in 2026. So we would be at the high end of that. We would be at a little bit higher end of the -- our impact. So as you think about our funeral business, we expect low single-digit growth. That could be between 1% to 3% would be at the high end of that. And then in cemetery really between 6% and 8%, we'd be at the high end of that.

Got you. That's helpful. And then you said that, that guidance included an assumption for acquisitions that have not yet been announced. Can you quantify it? Perhaps you did in the prepared comments, but I missed it. And what's the methodology for including or not including? For example, are you at letter of intent stage by the time you increase it? What's the methodology for factoring in future acquisitions?

Yes. So the acquisitions, the impact to the guide is about $5 million or $10 million. We expect it to range within that. I can let Steve speak to kind of the perspective. But we -- both Carlos and I spoke in our prepared remarks, be more focused on growth and being growth oriented. And ultimately, based on that, as we are more proactive in our M&A program, we felt it appropriate to apply something this year.

This is Carlos. I just want to reinforce. So as you remember, we spent the most part of the last 3 years trying to get all the systems updated, the foundation for growth for the company and really focusing on paying down our debt to a range that we feel comfortable, which is that 3.5x to 4x. We achieved the 4x as we close 2025.

And we truly believe now Carriage at its core is a consolidation company. So really trying to advance and make some rapid moves on growth from an M&A perspective in organically speaking. And I truly believe this is why we want to signal to our investors that within the guidance that we're ready for that.

That's great. The point of clarification though, the high end of guidance includes a $5 million to $10 million impact year-over-year from I assume the third quarter acquisitions. And then you're saying there's potentially another $5 million to $10 million in acquisitions that you expect to make in 2026.

Yes. So that's a great clarification. So for 2026 results, we expect the acquisitions that happened in 2025 to generate about $16 million worth of revenue. You have to net that against the $4 million that they had in 2025 as well as the divested revenue that we had in 2025 of about $9.7 million. So the impact of just that program is probably an increment of about $4 million, right, roughly. In 2026, we're estimating new acquisitions that we believe will have $5 million to $10 million of impact to revenue.

Okay. Good. And then in terms of new acquisitions, I don't know if I fully heard the answer. Are these specific acquisitions that you're talking about or just a methodology to include some sort of number for acquisitions since you're a consolidator?

Alex, it's Steve. So it's a combination of both. So at this point, we -- last year, we talked a little bit about investing in more resources internally to make sure we can be more proactive on sourcing deals. And so we are talking to more owners, quite frankly, than at any time during my 8 years at Carriage. And we still balance that with looking for a very particular type of business.

So at this point, we've got more that we will be able to report next quarter on some ongoing discussions with owners who are ready. So we're excited to talk about that when the time is appropriate. But parallel to that, we're talking with a number of owners who are getting comfortable and we're getting comfortable with them with some potential opportunities this year. So it's a little bit of both. We've got some that are closer to, call it, seventh or eighth inning and then some that are earlier innings.

Got you. Okay. And then the last question is I was wondering if we can get an update on the Q3 acquisitions. They had roughly $15 million in revenue in 2024. That's what you had announced at the time of the acquisition. You're saying that they're going to be $16 million in 2026 after having contributed a partial year of $4 million in 2025.

So now that we're back in the M&A business after the hiatus, what is the integration process for acquisitions once closed? What is step 1, step 2, step 3? And where are we on the integration process for those Orlando-based acquisitions?

It's a great question. And I would -- I'd reframe it a little bit. So the integration process really for us begins before close. So we've dialed in with our continuous improvement team, a more structured management approach to systems, employment, onboarding, policies and procedures. And we begin all of that before close, obviously, in partnership with the sellers, so we can hit the ground running on day 1.

As it relates to these 2 acquisitions, very different acquisitions, although both in really strong markets. So starting with Osceola, as we talked about before, Osceola is unique in that it allows for a holistic operation in the Kissimmee market. So between the cemetery and the opportunities on cemetery development, I think we're really excited there. So we will have some new development, significant development available for the folks in Kissimmee here in just a few months.

We have been working on that development before close. The preneed opportunity for both Kissimmee and then Faith Chapel in Pensacola is significant. So we've got our preneed teams ramped up there to try and take advantage of that as well. But I would say both businesses are pretty mature, but both have a lot of opportunity. And we're seeing steady progress from, call it, day 1 back in late September to where we are now.

January was the strongest month by far for both businesses. So we're seeing kind of that preplanning on the integration side paying off for us based on kind of historical approach and look forward to seeing what they'll do this year.

We'll take our next question from John Franzreb with Sidoti & Company.

Congratulations on a good year. I'd actually like to start the fourth quarter. Carlos, you mentioned that flu activity returned to normalcy, if you will, in the December period, specifically in December and of itself was very active. I'm curious what you saw in January. We're seeing the secondary resurgence of the flu. I'm curious about the comps on a year-over-year basis and how they could play out considering last year was so particularly strong.

That's a great question, John. Thank you for the question. And so as you know, and I mentioned on my prepared remarks, December 2024 came pretty light as a consequence, we believe, to the push of the flu season into January of 2025. This last year, 2025, December came as a normal flu season. So we saw that activity volume increase on a comparable basis, December '25 to '24. And then January, it came out quite light on a comparable basis on volume.

However, I still feel pretty strong of our performance because we're able to make up that loss of volume on a comparable basis because the flu season came earlier and we still end up having a pretty decent -- I don't want to disclose too much, but January looks good even after the, let's call it, the alignment of the flu season between December and January over the past year.

And what are the prospects for year-over-year growth in the first quarter versus last year's first quarter, given the tough comp?

Your question was on volume?

Yes. I think the first quarter will be a little bit tougher this year from a comparable perspective because the first quarter was strong throughout the whole quarter because of the flu season in January, February and a little bit into March. So to Carlos' earlier point, we're not going to disclose exactly how we're performing, but we're happy with the performance, but it will be a tougher comp.

Got it. Got it. And where do you stand in the supply chain optimization process at this point? Can you give us an update there?

Yes. I would say, and Steve, please jump in if you have anything different to say. I would say we're still in the early innings of that program. We really started in 2024 with one individual kind of running that program. And in '25, we've got the program up to a little bit more speed. But I would say we still have opportunity there, and we'll see some more opportunity as we see 2026 results and into '27 results.

John, it's also a great question. I want to give you a little more context to that. It's a new department we started probably about 2 years ago, beginning of 2 years ago. And a slow start, just to be honest with you, we were able to deliver the caskets, urns, a couple of other things, but there's so much opportunity. And part of the challenge was that we're trying to change a lot of things operationally and system-wise at Carriage.

And at the time, as you may remember, it was really just from a senior leadership perspective, Steve and me driving those initiatives. And so this year, we have realigned with the changes we made and the promotions we made to allow for more focused work. So now supply chain actually reports to John, and John can place a more specific emphasis to supply chain and accelerate the journey on that side. At the same time, that Steve can put more focus on the operational side moving forward and continue to grow our organic strategy through M&A activity.

Got it. Makes sense. One last question on the M&A. It seemed like last conference call that the expectation was there's going to be a lot of closure activity in the first quarter. Reading between the lines, it sounds like now that that's been extended maybe a little bit. Is that a function of multiples have gone up? Or is there something else that we should be aware of?

Yes, John, I don't think it's a product of multiples going up. I think we're seeing those remain pretty steady. And obviously, we remain disciplined in how we approach it. It really is a matter of sellers being ready and us respecting their time lines, but also us being pretty selective. So again, the type of business we're looking for, it's a smaller group of businesses that are going to fit that profile. So there's a number of folks out there, but their time line is just as important as ours.

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

First one on your guide for 2026. There's a CapEx step-up versus what you've been doing in recent years. So I was wondering if that's related to a specific project or more maintenance related or just any kind of context around your CapEx guide.

Yes. So over the last couple of years, as we've been very disciplined in our capital allocation, we've pulled back a little bit of maintenance. So there's going to be more maintenance in 2026 than there was in '25 and '24. And we're thoughtful on what we're going to do, but there's some just needed to be done. Also, there is still some additional growth capital, right? For us to continue to deliver 10% to 20% in preneed cemetery sales, we have to develop some cemeteries and there's also some incremental capital associated with that.

And is that $25 million to $30 million -- I'm hearing feedback. But is that a good sort of go-forward number to use beyond '26? Or is this kind of a 1-year maintenance catch-up?

Yes. I would use -- I think I would use, yes, $25 million to $30 million is probably a good going-forward number.

Yes, George, if you remember, even you go back to '20, '21, '22, we're doing $22 million, $24 million, $26 million of just maintenance and growth CapEx at the time. And we did ask our managing partners to give us an opportunity to use some of that so we can pay down our debt. And they did, they were very patient for a little over 3 years. And now it is really time to give back to them some of that. And I think the $25 million to $30 million is really the right range going forward.

Okay. Sounds good. And then just a couple of other ones for you. On Trinity, can you walk through the expectations for the year, the rollout testing, what you're most excited about? Just an update on that front would be helpful.

Yes. So from a rollout perspective, we still anticipate a rollout in the, call it, second quarter. So right now, we're still in pilot phase. So we have a location in pilot phase. We're looking to move to a pilot phase for a second location shortly. And if successful, we expect to roll out our funeral homes into basically the beginning of the third quarter, ultimately maybe at the end of the fourth quarter. And then what we would do after that is the cemetery locations or the combos is really where we think the rollout. So there will be some rollout into 2027.

And just to give you more context, George, the truth is that we are behind with Trinity. That's the bad news. The good news is Trinity became so much more robust in terms of system integrations, API connectivity, reporting capability, our ability to track loved ones and chain of custody, our ability to increase our sales average per contract based on inventory and core lines and things of that nature. So the excitement is very, very high.

The frustration is that we're a little behind in terms of time frames, but the solution has become a lot more robust with automation, AI and other components that initially were not part of the scope. So there is a lot of excitement. There is a lot of good energy going into 2026 because of all that Trinity means, which is they collectively -- so Trinity means all of the systems that basically tap into our ERP system.

Okay. Maybe just one more on Trinity. Is there much of an uplift to the contract -- the average price per contract that's baked into your guide? And if not, Carlos, are you still based maybe on what you're seeing in the pilot or just generally, are you still optimistic that it can really drive a lot of pricing growth per contract?

I'm still very optimistic that we can continue to grow our sales average revenue per contract. We have been able to achieve that and to absorb the cost and then pass on the cost to the consumer. However, it's a phased approach. And what I mean by that is, right now, we have -- thinking of more in manual presentation. We have offerings. We have materials that we present to the families that they can see.

As Trinity rolls out, it will still be a combination of a manual process with the system process. And the phase that follows to that is integrating to a full digital experience to Trinity that embeds the presentation and the contract in the same moment. And so it will be a phased approach. Now that phased approach will not slow us down from the point of view of still presenting the full story with all of the options to all families regardless where they choose burial or cremation.

And then to answer the question on whether or not we factored in any increases in sales performance into the guide, we did not, right? So there is no expected impact of Trinity in 2026 guide.

Okay. And then last one for me is just about the M&A that's contemplated in your guide. How much do you factor in or how much do you expect to pay for those transactions? What's like the value? And where do you expect to end the year on a net leverage basis? And that's all I have.

Yes. So again, from a multiple perspective, we're going to be disciplined. So it depends on the asset that we get because they're not all identified asset. But you can think about from an EBITDA multiple perspective, anywhere between [ 7 and 9 ] is probably a fair way to think about that. And from a debt leverage perspective, we expect to end the year based on hitting performance between 3.9x and 4x.

We'll take our next question from Parker Snure with Raymond James.

Just kind of drilling down on the first quarter, I know you mentioned it's a tough comp. Are you seeing any impact from the first quarter, the winter storms or just generally the poor weather that we're seeing across the country? I guess more so on the preneed side, is that affecting any sales activity? And then also just more broadly on the entire business?

If I give you a little bit of -- well, first Parker, thanks for the question. But if I give you a little bit of an insight on January 2026 going into our full first quarter for the year, from a comp perspective on volume, we do see a decline because January of 2025 was so strong because of that push back of the flu season from December.

However, we're very pleased, as John mentioned, on our performance because our continued cemetery performance made up and then some of that plus our sales average per contract continues to remain very strong. Our ability to convert direct cremation to cremation, it's an area of focus for us. Cremation mix continues to be within our range and is not growing at any fast rate as we have seen in some other consolidators out there. And so it's really exciting that even with a bad comp from a plugging perspective, we still have very positive results as a financial -- from a financial perspective overall in January of 2026.

Okay. Okay. And then I guess just more of a bigger picture question. I like the comments you said you're moving out of the rebuilding phase into the compounding phase. And Carlos, you've undertaken a fair amount of strategic changes since taking the seat. I guess what is the next strategic frontier in your view for the business? What's the next initiative? And maybe there isn't one, maybe it's just executing on kind of the good work that you guys have done so far, but maybe just kind of speak high level on just kind of your views on the forward-looking kind of strategic initiatives for the business.

That's a great question. So not wrong, there's been a lot of work, whether it is continuous improvement strategies and departments that are now meeting and guiding our decisions at Carriage. Our framework for decision-making within our 3 strategic objectives, all the focus on margin expansion to our supply chain strategy. And of course, all the different changes we have made over the last probably 3 years with leadership. We have now a new structure within executive rank. And so for us right now, it's really to capitalize, maximize and really optimize all those changes we have made.

I don't really have more changes that I have in my head other than deliver Trinity and really maximize and optimize the field engagement and opportunity to increase our opportunity with families through that solution to help and support Steve on the operational side and continue to grow sales at our 10% to 20% year-over-year preneed production rate. But most -- and most important, our main focus now other than optimizing what we have done over the last few years is really our focus on M&A.

Okay. Yes. And just maybe just -- I know this question has been asked kind of a few times in a different way, but just broadly on capital allocation priorities. You expect to do $40 million to $50 million of free cash flow this year. There are some deals that are built into the 2026 guidance, more focused on growth. Your leverage is around 4x. I think you kind of want to keep it in that range. But just how should we think more broadly about the split of how you're going to spend your free cash flow going forward? Are we kind of -- is it going to be kind of 50-50, more levered towards M&A? And just how do you think broadly about that whole kind of dynamic moving forward?

We want to take an opportunistic view of the deals as they come, right? And so we have our plan. We have an idea of how that could be structured from a guidance perspective, and John did mention some of the ranges there. But they have flexibility, right? And so for example, if you have a deal, let's just say another Fairfax comes through and we may be willing to pay a little more multiple for something like that. And then we will have to move some of the flexibility we have within our balance sheet to decide if that's the right deal to do or not.

If the stock were to -- for some black swan event, we would consider that and put our numbers and make the best decision on behalf of the shareholders. We will look at all of the opportunities as they come from a very opportunistic point of view within our disciplined capital allocation framework. Does that make sense?

Yes, I absolutely understood.

For our next question, we'll return to John Franzreb with Sidoti & Company.

Yes. I'm actually a little curious about the $1.2 million of medical insurance cost that you incurred in the quarter. How unusual is that on a year-to-year basis? I mean, was the full year number much bigger than that? Or just contextualize it for us maybe?

Yes. So I can speak to the actual activity, and I've only been here a year. But we've done a really nice job from an employee benefits perspective over the last few years. There's -- being a smaller company, there's a large claim that happened. When you have large claimants that happen, ultimately, that can impact results. We haven't had a significant claim over the last few years. So I would say that was a, call it a one-off in the last couple of years.

The activity associated with December results versus the December of the last 2 years, I can't really speak to why that happened, but it was just -- I mean it can happen. So I would say we have planned for it in the guide, we have planned for what we believe is the appropriate expense associated with employee benefits, taking into consideration what happened in 2025.

Yes. We typically look at 3 years to figure it out what the right reserve should be for claims and things like that. And we are a self-insured company from our point of view, right? And so we also have a tremendous focus on health benefits for the employees. We have a tremendous focus on making sure that all of our employees are active, are keeping their numbers within the range and helping in any way we can to drive that health performance of the company overall.

But sometimes, even we haven't seen it in a long time, you get an event. In this case, it was one major event and then maybe a couple of other events that add up to that number that you cannot really expect. It just happened. These are major things, right? I can't really disclose much, but you have hard events, rain situation events, and we just have to be responsive to the employee when those happen.

Got it. I just appreciate the clarity and how -- and the frequency of it all. That's what I was kind of looking for.

For our next question, we'll return to George Kelly with ROTH Capital Partners.

Just a quick one. How much EBITDA contribution from your -- the 2026 M&A is baked into your guide?

So we basically -- in the '26 guide, so are you asking about the new acquisition, the $5 million to $10 million?

Correct.

Yes. So we basically have them at the average margin, roughly, call it, 30%.

It appears there are no further questions at this time. I'd like to turn the conference back over to Carlos for any additional or closing remarks.

Thank you, operator, and thank you for your trust, your partnership and your continued belief in Carriage. We are building a disciplined high-performance company with a clear purpose, a focused strategy and the intention to execute with excellence. We look forward to updating you next quarter as we continue creating long-term value for our shareholders, our teams and the families we serve. Have a great day.

This concludes today's call. Thank you again for your participation. You may now disconnect, and have a great day.

Good day, and thank you for standing by. My name is Margie, and I will be your conference operator today, and welcome to the Carriage Services Third 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, and thank you for joining us to discuss our third 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 press 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. Good morning, everyone, and thank you for joining our third quarter earnings call. I am excited to share our performance and the progress we are making towards our 2030 vision. This quarter reflects continued momentum and demonstrates the effectiveness of our strategic objectives, grounded in disciplined capital allocation, relentless improvement and purposeful growth, which continue to deliver meaningful and sustainable results.

During this call, I will highlight the key financial and operational drivers. Then John will take a deeper dive into our financial performance, balance sheet, recent divestiture activity and guidance for the remainder of the year. Before we begin, I want to thank our incredible Carriage team. Your passion, ownership mindset and unwavering commitment to creating premier experiences for the families and communities we serve are at the heart of this company. You continue to build a best-in-class culture rooted in trust, partnership and service excellence. Through every premier experience, you elevate the reputation of our funeral homes and cemeteries across the country, one family at a time. Thank you.

I also want to welcome the newest members of the Carriage family, Faith Chapel Funeral Homes and Crematory, Osceola Memory Gardens Cemetery Funeral Homes and Crematory, Porta Coeli Funeral Home and Crematory, Fisk Funeral Home and Crematory, Funeraria Borinquen and Cremation Care Providers of Central Florida. We are honored you chose to partner with Carriage. We will work every day to protect and elevate your legacy. Welcome to the team.

Now turning to our financial results. Total operating revenue for the quarter grew to $101.3 million, an increase of 5.2% over the same period last year, primarily driven by an impressive 21.4% year-over-year increase in preneed cemetery sales. Another strong driver was general agency commission revenue tied to insurance-funded prearranged funeral sales, which grew to $2.6 million, up 61% from last year's third quarter.

As we look at each segment, funeral operating revenue was down $753,000 or 1.3%, primarily driven by a 2.1% reduction in funeral volume. The summer months, July and August produced lower volumes than expected. However, we're glad to see volume return to normal in September. And based on what we have seen in October, we expect a normalized volume trend to continue in the fourth quarter. As it relates to our cemetery segment, it continues to be a key long-term value engine with operating revenue reaching $35.6 million, an increase of $4 million or 12.6% year-over-year.

This performance underscore a strong runway for purposeful growth as we continue our investment in property development, technology-enabled sales capabilities and deepening community relationships, which we believe will create enduring value for families and our shareholders. Regarding our insurance-funded pre-arranged funeral sales strategy, we're very pleased to report that our progress is exceeding expectations, with September setting an all-time high and surpassing the $7 million mark in preneed funeral sales. This accounted for 50.5% of the year-over-year growth in financial revenue from general agency commissions.

We continue to work hand-in-hand with our sales partners, the National Guardian Life Insurance Company and Precoa to identify ways to leverage their technological capabilities and increase preneed sales. With our continuous focus on execution, we believe we can sustainably grow preneed funeral sales through 2026. Total field EBITDA for the quarter was $46.3 million, an increase of $1.4 million or 3.1%. This growth was driven in large part by renewed momentum in preneed cemetery sales following permit delays earlier in the year, resulting in a strong 21.4% increase over the same period last year.

We are very excited about the short-term future of our preneed cemetery sales strategy with the launch of Sales Edge 2.0, our upgraded CRM platform, which now integrates a marketing module to generate and convert leads more effectively. And in November, we will introduce Titan, our AI-powered sales agent designed to generate leads and schedule appointments for our preneed counselors. Sales Edge 2.0 and Titan represents a significant step forward in leveraging technology, innovation and data analytics to accelerate sales growth.

We remain confident in our sales strategy and continue to grow preneed cemetery sales within our previously stated range of 10% to 20%. During the third quarter, adjusted consolidated EBITDA grew to $33 million, up $2.2 million or 7.3% versus last year. And adjusted consolidated EBITDA margin was 32.1% compared to 30.5% during the third quarter of last year, an expansion of 160 basis points, reflecting our strong operating leverage and positive momentum heading into the last quarter of this year.

Adjusted diluted earnings per share were $0.75, up from $0.64 in the same quarter last year, an increase of 17.2%, reflecting our continued operational momentum and disciplined financial management and reinforcing our commitment to long-term shareholder value creation. In closing, we are very pleased with our third quarter results. They reflect disciplined execution and our unwavering focus on delivering premier experiences for the families we serve. These results also underscore the strength of our team, the power of our partnerships and the meaningful progress we're making as we elevate the experience and lead with a true passion for service.

Our focus remains grounded in successfully executing on our 3 strategic objectives: disciplined capital allocation to invest in long-term strategic value creation while maintaining a strong balance sheet, relentless improvement to elevate performance, efficiencies and talent at every level and purposeful growth, fueled by culture, innovation, partnerships and strategic acquisitions. We believe our greatest strength is our culture, rooted in trust, empowerment, innovation and a sincere passion for delivering premier experiences to every family every time.

Our field leaders exemplify compassion, excellence and ownership, redefining how families are served and advancing our mission every single day. We are continuing to build something enduring, a modern, innovative, values-driven Carriage positioned for sustainable long-term value creation for our families, our employees and our shareholders. As we enter the final quarter of the year, we do so with momentum, confidence and a clear vision for the future.

Thank you, and I now turn the call over to John.

Good morning, and thank you, Carlos. The third quarter results are a testament to our team's commitment to excellence and strategic focus. Building on a strong first half, we delivered adjusted EPS growth of 17% reflecting our commitment to disciplined execution across all business segments. Year-to-date, our 21% EPS growth demonstrates how our strategic objectives are driving consistent results. I am proud of our organization's dedication and look forward to sustaining the momentum. My comments today will primarily focus on our performance in the third quarter of 2025 compared to the third quarter of 2024.

We achieved consolidated adjusted EBITDA of $33 million, 32.1% of revenue, up from $30.7 million or 30.5% of revenue in last year's third quarter. This improvement came from better results in our cemetery segment and prearranged funeral program, which resulted in an increase in EBITDA of approximately $2.7 million, offset by a small decline in funeral home volume compared to last year. Our adjusted EPS performance in the third quarter of 2025 increased to $0.75 from $0.64, which is an increase of $0.11 compared to the prior year's third quarter.

When looking at GAAP results, our EPS in the third quarter was $0.41 compared to $0.63 in the third quarter of 2024. As we anticipated, our GAAP performance was negatively impacted by a loss on divestitures and impairment of long-lived assets from businesses held for sale at the end of the third quarter of 2025. To provide further insight into our divestiture strategy, we successfully completed the sale of several noncore assets in the third quarter. Over the past 5 years, we have systematically divested businesses that no longer fit our long-term growth strategy.

By reallocating the proceeds from these transactions, we have made significant progress toward achieving our target leverage range by paying down debt and investing in acquisitions that offer greater potential in strategic markets. Throughout this period of portfolio transformation, we have consistently grown both revenue and profitability while steadily reducing our leverage. Looking ahead, although occasional divestiture opportunities may arise, we do not anticipate any substantial activity in this area going forward.

Moving on to cash from operating activities. We saw an increase of $3.8 million over the prior year or an 18.3% increase, primarily a result of year-over-year improved operating results. Based on these results, our adjusted free cash flow in the quarter increased by 7.7% over the prior year. The $3.8 million increase in cash from operating activities was almost offset by a year-over-year increase in our capital expenditures in the quarter. During the quarter, significant activity occurred related to acquisitions, divestitures and capital expenditures. The net cash outflow from these activities for the quarter amounted to $44.7 million.

Year-to-date, these activities have led to a total cash usage of $31.9 million. In alignment with our disciplined capital allocation strategic objective, our leverage ratio improved to 4.1x this quarter, down from 4.2x last quarter. We reduced our debt by approximately $5.1 million compared to last year's third quarter. Due to our focus on managing debt, interest expense fell by $1.1 million, and our average interest rate was roughly 180 basis points lower than last year.

Capital expenditures for the quarter totaled $6.7 million compared to $4.6 million in the same period last year. Of the $6.7 million, $1.7 million was allocated to maintenance capital and $5 million to growth capital. Overhead expenditure totaled $13.7 million or 13.4% of revenues compared to $14.2 million or 14.1% of revenues in the same quarter of the previous year. Our teams remain committed to actively managing controllable expenses, such as overhead spending. Throughout the year and during the quarter, corporate spending has consistently been aligned with the targeted range of 13% to 14%.

Now moving on to our updated outlook. With 1 quarter remaining in the fiscal year, we have narrowed our guidance ranges and are reaffirming the midpoint previously communicated. Achieving these results would mark record highs for revenue, adjusted consolidated EBITDA, adjusted diluted EPS in our company's history, which includes results during the peak of the pandemic. We believe these results will position us strongly for 2026. Our current outlook anticipates revenues in the range of $413 million to $417 million, adjusted consolidated EBITDA between $130 million and $132 million, adjusted diluted EPS of $3.25 to $3.30, overhead expenses ranging from 13% to 13.5% of revenues, adjusted free cash flow between $44 million and $48 million, leverage ratio ending 2025 between 4x to 4.1x.

This concludes the prepared remarks. I will now turn it over to the operator to open it up for questions.

[Operator Instructions]

Your first question comes from the line of George Kelly of ROTH Capital.

A couple for you. I'll start with the contract weakness that you flagged for, I think it was July and August. Can you quantify what you saw monthly just intra-quarter? And then you mentioned that you expect 4Q to kind of return to normal. What did October look like?

George, thank you so much for the question. So I don't have a specific volume for each one of the 2 months. What we saw from a percentage perspective, somewhere around middle-digit percentage of negative volume on both months of July and August, but then came back very strong in the month of September. Therefore, I have been able to make up a lot of the ground we lost in those 2 months.

There's no specific reason. What I can tell you about what we found out from our partners and vendors across the industry is that it was pretty broad across the board, not just consolidators, but also privately owned funeral homes and -- experienced the same thing. As it relates to October, we see very positive trends in the month of October. I don't want to disclose the number just yet, but I do feel pretty positive about the fourth quarter. And specifically related to volume, we did better than last year.

Okay. That's helpful. And then another question on the same theme. Just thinking high level for 2026, is it fair to just kind of baseline like with a low single-digit volume growth year be reasonable?

I believe so, George. What we have typically modeled or been talking about modeling for next year is a 1% to 2% growth on the funeral home side related to volume.

Okay. That's great. And then just one last question for me. Your preneed cemetery business was again really strong in the quarter after a little bit lower growth in the first half of the year. Was that related to 1 or 2 kind of specific CapEx projects? Or I know you were working through permitting. Like anything you can flag there? And what's the expectation going forward in that business?

You bet. So if you remember during the first quarter and the second quarter, I mentioned that we did experience some delays in some of our largest cemeteries, the ones that are actually giving a lot of the contribution from a preneed cemetery sales perspective into our performance. And that was the delay. Although, I mean, we still had some pretty nice middle single-digit growth in the first quarter and second quarter. But our range is typically 10% to 20%.

For this month, we have some pretty significant numbers at almost 21.4%. And so our running expectation of range remains at 10% to 20%. We do see a strong fourth quarter from that point of view. I don't foresee many more delays as we have some good learnings from the permit process in some of those states that are a little more restrictive. And we're taking all the precautions and all the time ahead as we continue to develop premier inventory in those cemeteries.

George, to Carlos' point, and we've commented to this in the past, at the beginning of the year, we had a large cemetery that had a sinkhole that we were working through, and we saw some of that benefited really. We were able to recognize some of those sales in the third quarter associated with sales that happened, but the development didn't get completed until the third quarter. So that was partially a result of some of the cemetery performance in the third quarter.

Your next question comes from the line of Liam Burke of B. Riley Securities.

Carlos, you mentioned that overall macro, the industry saw slower activity in the funeral home side. Margins were lower year-over-year. Is that just a function of volume? Or are there any other expenses in there that need to be worked through?

No. When you look at our margins, remain pretty strong. It's just that on the cemetery side, we are promoting a lot of premium cemetery sales in this year.

I'm sorry, Carlos. This is just on the funeral home side.

On the funeral home side, I'm sorry. Yes, on the funeral home side, it really is just a leverage question, right? At the end of the day, ultimately, sales were down. And when calls are down, it's a high fixed cost segment. So when we see calls down, we see margin, call it, closer to the high 30s. In the first quarter, when you saw volume up, you saw us in the low 40s. So it really is a -- the leverage really is just a driver being a fixed cost.

Perfect. That's what I thought. And on cemetery, now that Carlos brought it up, margins were great there. Obviously, they bounce around from quarter-to-quarter, but -- and I don't need a specific number. Are you sensing a floor EBITDA margin level at the cemetery business?

I really don't. You see the fluctuations come from our ability to recognize what we're selling on the preneed sales side. If for some reason, we are selling, let's say, it's a large private mausoleum that is going to take time to develop or is a recently developed project that is not fully completed, it won't be able to be recognized. So that month, you're going to get a greater cost from the commissions coming from those preneed cemetery sales, but you won't be able to recognize the revenue related to those sales.

So that dynamic plays a little bit, as you know, on the cemetery side. As the months go through and you develop and deliver that inventory, then you are able to recognize the revenue, and that's where you see those fluctuations. But overall, as you see for the year-to-date numbers, they're pretty strong.

Yes, they are.

Your next question comes from the line of Parker Snure of Raymond James.

I just wanted to hit on the insurance-funded preneed progress, making a lot of good progress there. I know you said that you think it can grow sustainably into 2026. But I was just hoping you could maybe just dive a little deeper there just in terms of like what inning in the kind of baseball analogy, do you think we are kind of getting that fully rolled out?

Is this fully rolled out to all of your salespeople? Is there still some room to go? What is the kind of total amount of commission dollars that you're generating from that business line? And where do you think that can go? And just any other comments on kind of where we are in that trajectory and getting that to kind of more of a sustainable kind of base?

Great question. As you have seen probably over the last 1.5 years since we rolled out our partnership with NGL and Precoa, we have been able to fully and completely roll out this everywhere across our network. However, some businesses were able to grow significantly right off the bat and some were lacking.

Over the last probably 4 months, we have been working on updating those that were not performing to the level of expectation we have and the opportunity that is in front of us and then tweak some of the models that we have. To give an example, there are different models that we have allocated based on the specificity of the business, the location and the opportunity that is in front of that particular business.

That will -- just to give you some examples, one is called proactive model, right? So that marketing opportunity, the ability to create leads, it is owned by the Precoa team, and they are accountable for that. If we take ownership of that and the local manager don't do a good job is not on it, then we won't be able to generate as much lead. So what we did is move some of those selective services businesses now into the proactive model to be a little bit more aggressive.

So we do expect additional growth from our strategy. In addition to that, our partner, Precoa, it is rolling out new technological tools to drive. We have a new CRM as well. They have new AI tools that are going to accelerate lead generation and the ability to close on more deals. So I do think from your question, probably we're somewhere around maybe the fifth, sixth inning. We have big targets for pre-arranged funeral. I mentioned in my remarks that we achieved for the first time in one single month, the $7 million mark. I do expect that to continue to grow throughout 2026 to maybe getting to a very low double digit.

Okay. Great. And maybe just remind us where we are in the kind of course of the Trinity implementation. Is there -- I know we're getting towards the end of that, but is there any ongoing kind of implementation costs that are still flowing through the P&L that we can maybe expect those to kind of wean off over the next couple of quarters? And then just what kind of -- remind us what kind of efficiencies you think you can kind of garner from that technology throughout your enterprise?

Parker, this is John. So from implementation costs, we'll still have some implementation costs as we roll into next year. So we're at the beginning stages of the pilot that rolls out this year, and then we'll have more of a significant rollout as we hit the first quarter into next year. And that really is specific to call our funeral homes.

And then we'll roll into our either combos or cemeteries, which will be in the later part of next year, which will have some costs. So as you think about it, the cost will be equitable to probably 2026, which was down from -- excuse me, equitable in 2026 to '25, which was down from implementation costs from 2024. We'll see the real benefit or some leverage associated with the rollout really into '27 because that's when the whole network will be rolled out.

Yes. In addition to that, Parker, I truly believe that you won't see much synergies from this new system in '26, mainly coming from some parallel systems, making sure that the transition is effective and ensuring the accuracy of every single piece of our software.

[Operator Instructions]

Your next question comes from the line of Alex Paris of Barrington Research.

Nice job on the quarter. I appreciate your prepared comments. Just a further question on funeral services revenue and volume and price per contract. I appreciate the comments that July and August were below expectations, returned to normal in September. And in October, you returned to sort of normalized growth, which you're defining as 1% to 2%, if I'm not mistaken.

When can we expect this business to get to more normalized growth on a consistent basis, deaths and taxes, right? The death rate influences that, obviously, for larger consolidators such as yourself. We had a pull-forward effect from COVID that I believe we worked our way through largely and demographics should be helping. I don't know if it's helping yet, but just any more color you can give really on the longer-term outlook for funeral services contract growth.

Yes, absolutely. From a pull-forward effect, we don't really see much more of that impact to be significant over the next few quarters. We truly believe that's pretty much in the past. As you mentioned, we do believe there's a nice tailwind that's going to help us continue to grow basically because of the demographics.

I mentioned in the past that right now, the oldest baby boomer is right about 80 years old, specifically. The average age of death in the United States today is 79.5. So we could expect the beginning of favorable death rates in the near future. We're not putting too much of those numbers into our forecast. We want to be more thoughtful. I am more concerned about the flu season, for example, coming up into this fourth quarter.

If you remember, the fourth quarter of last year, typically, you'll have the beginning of the flu season, which drives a greater death rate. And for some reason, it is shifted from December into January, therefore, having a little weaker fourth quarter than expected last year and a stronger first quarter of this year. If that trend remains, it may shift how we perceive quarters in terms of the seasonality. But I do believe, other than that, we should be able to slowly, but surely go back to our normalized volumes and the death rate should stabilize with some significant headwinds over the next many years.

Yes. I realize it varies by quarter even in a normalized environment. But over the course of the year, it usually tracks with the death rate and demographics favor a rising death rate in the U.S., as you pointed out, morbid, but unavoidable, right? So all right.

And then I just wanted to circle back on acquisitions and divestitures. Acquisitions, this is the first acquisition -- acquisitions that you've made in 2.5 years by my count, the time during which you kind of reduced the debt, improved the balance sheet.

But first of all, let's start with the acquisitions before we go to divestitures. You announced that on September 9, it was 2 businesses, collectively known as Osceola together, more than $15 million in revenue, one combo, five funeral homes, one crematory and central care facility, one cremation-focused business. And then beyond that, let's talk about pipeline and the multiples you're seeing in the M&A.

Alex, as far as the pipeline goes, we're pretty excited about what we're seeing right now. We're in active conversations with a number of premier businesses and owners. We won't see anything this year, but Q1 of next year, we anticipate to be busy. We're also a little more aggressive on our proactive outreach to businesses that we've identified would be good partners for Carriage based on our criteria. So excited about the pipeline, excited about the opportunity that lies there. And then just circling back, you highlighted Osceola, but also we want to welcome Pensacola and the Faith Chapel team. That's another business that joined us that we're really excited about. But integration is off to a good start. So really the team here just excited about being able to get back to growth.

And then the last question in that list of questions was what is the level of competitive activity in M&A? And what are you seeing in terms of trends in multiples being paid, either what you're paying or what they're paying in the industry for the kind of assets that you're targeting, high-quality assets and demographically favorable geographies?

The way I would answer that is there's really 2 categories there. One category are those businesses that we're sourcing internally. It's not really a competitive process. It's based on reputation and us really paying a fair price for a good business. And that's obviously our preferred path. And then the second are businesses that are being led by brokers. Those tend to be fairly competitive. We see the same players show up for those high-quality businesses. We're going to win some, and we're not going to win them all.

In terms of multiples, for an average business, I think we all kind of circle around 7 to 8 times. And then for a premium business, you're looking at high single digits on the multiple. The thing I would add to that, though, the EBITDA multiple is one thing we look at, but the reality for us is I use Osceola as an example. If there's a business that has significant levers for us in terms of upside growth. So for example, they have a great cemetery where maybe there's not a diverse selection of inventory.

That's something that we're particularly good at here at Carriage, then we see that as an opportunity where we might be willing to pay a bit more of a premium because the upside is there or maybe the market has some synergies for us with existing businesses where we can share resources and we can work together on that front. So we'll look at the multiple, but we'll also be flexible based on the opportunities that a particular business offers us.

And then lastly, on that topic, you said Q4 will -- we shouldn't expect to see any acquisitions announced, but potentially in Q1. Can you remind us what the methodology is for guidance? When do you factor the acquisition in the guidance? I think it's when it becomes under contract, et cetera.

Yes, that's exactly right. So obviously, we're working through the 2026 plan as well as what we'll be presenting for guidance. So if we don't have anything known by the time we present Q4 results, we'll exclude that from our expectations.

Got you. That's what I thought. And then just moving on to the divestiture of noncore assets. According to the press release, I believe, seven funeral homes, one cemetery. What were the revenues and EBITDA of those operations? And I presume that they are factored into current fiscal 2025 guidance.

Yes. So Alex, for the businesses that we divested in Q3, they represented about $2.4 million in EBITDA, about $9 million in revenue and proceeds there were just over $19 million.

And in regards to guidance, yes, we took the lost business into consideration when we put the guidance together.

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

Thank you for joining us today. Carriage remains focused on driving sustainable, profitable growth through disciplined capital allocation and operational excellence. The strategy is delivering results, making our balance sheet stronger and positioning us to create long-term shareholder value.

We're confident in our momentum and in our ability to execute on our strategic objectives. We appreciate your continued support of Carriage, and we thank you, and we'll see you next year as we deliver results for the fourth quarter.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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.

This concludes today's call. Thank you for your participation. You may now disconnect.