Carriage Services, Inc. | NYSE: CSVBy: Kelly Yu, Deeksha Chaturvedi, Jeffrey Chen, Aaron Chow

Agenda1. Business Overview

a. Who is Carriage Services?b. Business modelc. At-need vs preneed sales

2. Industry Overviewa. Trendsb. Competitorsc. Comparable company analysis

3. Variant Perceptiona. Street perceptionb. Variant Perception

4. Valuation5. Risks & Mitigations6. Q&A

1. Business Overviewa. Who is Carriage Services?b. Business modelc. At-need vs preneed sales

2. Industry Overviewa. Trendsb. Competitorsc. Comparable company analysis

3. Variant Perceptiona. Street perceptionb. Variant perception

4. Valuation5. Risks & Mitigations6. Q&A

Business OverviewBusiness Overview

Industry Overview

Variant Perception

Valuation Risks & Mitigations Q&A

Who is Carriage Services?Business Description Performance

● Leading provider of funeral and cemetery services and merchandise in the United States

● Operates in the funeral home and cemetery segment○ Funeral home (78% of revenue): provides

burial and cremation services and sells related merchandise, such as caskets and urns

○ Cemetery (22% of revenue): provides interment rights to cemetery sites and sells related merchandise, such as memorials and vaults

● Operates 178 funeral homes in 29 states and 32 cemeteries in 11 states

● Since 2007, started growing through acquisitions of private funeral home businesses in mainly rural and suburban markets

Current Share Price: $24.55 P/E: 10.34Market Cap: $400M 52 Week Range: $23.15 - $28.96

Business Overview

Industry Overview

Variant Perception

Valuation Risks & Mitigations Q&A

Standards Operating Model● Funeral businesses are grouped into 1 of 4 categories based on number of funerals and average revenue per contract● Local managing partners are given full operational control to meet the standards depending on their category● Funeral homes must meet eight standards

○ Qualitative metrics (50% weight): market share, continuous upgrading of staff, and right quality of staff○ Quantitative metrics: (50% weight): average revenue per contract, salaries & benefits as % of revenue, gross

margin, bad debt as % of revenue, and EBITDA

Business Overview

Industry Overview

Variant Perception

Valuation Risks & Mitigations Q&A

Atneed vs preneed salesCSV provides products and services on an atneed (time of death) basis and a preneed (planned prior to death) basis

● Atneed○ The sale of a traditional burial or

cremation at time of death● Preneed

○ Funded by trust funds■ Accumulated earnings from trust

fund investments offset inflation○ Funded by insurance life policy

■ CSV earns commission from the sales of policies

○ Revenue and accumulated earnings are recognized when the service is performed

● Atneed○ The sale of an interment right at time

of death● Preneed

○ Funded by interest-bearing installment sales contracts■ Recorded as revenue when

10% of contract amount is collected

20% of funeral business revenue is funded by preneed sales 65% of cemetery revenue is funded by preneed sales

Funeral Segment

Business Overview

Industry Overview

Variant Perception

Valuation Risks & Mitigations Q&A

Cemetery Segment

Industry OverviewBusiness Overview

Industry Overview

Variant Perception

Valuation Risks & Mitigations Q&A

Industry trendsDeath trends Burial vs cemetery trends

● Aging baby boomer population: expected to surge, growing at 74% faster than the total population rate

● Death rate is forecasted to rise from the years 2020 onwards

● In 2016, the death rate rose for the first time in a decade

● Industry is fairly stable: an aging US population will provide a continual source of demand

o Mortality rates are higher in rural areas in the midwestern and southern US. This is where CSV focuses

● In 2016, just over half (50.2%) of Americans chose cremation, while 43.5% opted for burial, according the National Funeral Directors Association

● 2015 was the first year cremation outpaced burial● Industry as a whole moving toward cremation

services o Cremation is less costly, requires less

preparation of the body and is becoming more widely accepted

o This method is predicted to continue to grow in popularity over the next 5-10 years

Business Overview

Industry Overview

Variant Perception

Valuation Risks & Mitigations Q&A

Competitors

● Largest provider of death care products and services- network of 2,000 funeral homes across the US

● Concentrated in Texas with 172 locations and Georgia with 135 locations

● Management estimates that they have 15-16% market share

● Deploy strategy by buying funeral homes in regions where they have scale and are populated by Baby Boomers

● Looking to increase their dividend, repurchase stock (maximum of $400M), and repurchase debt

SCI Stonemor Smaller players● Second largest provider of funeral

homes in the US- 94 homes/316 cemeteries in 27 states and Puerto Rico

● Funeral homes account for ~18% of revenue, the rest is Cemetery Operations

● Their primary crematory operations are selling things like urns--management says this differentiates them from SCI and CSV

● They compete with local players for atneed services, and generally make acquisitions in geographies separate from their public competitors

● Most of the consolidators face competition with the small, local players and funeral homes

● These homes have an advantage in the sense that they can develop relationships with the communities they operate in

● However, many don’t offer pre need services and do not have the resources to provide the array of services offered by CSV, SCI, Stonemor

Business Overview

Industry Overview

Variant Perception

Valuation Risks & Mitigations Q&A

Comparable company analysis

Business Overview

Industry Overview

Variant Perception

Valuation Risks & Mitigations Q&A

Variant PerceptionBusiness Overview

Industry Overview

Variant Perception Valuation Risks &

Mitigations Q&A

Street Perception

“We are lowering the midpoint of our Rolling Four Quarter Outlook Ranges on revenues by 2.5%, Consolidated EBITDA by 4.2% and Adjusted Diluted EPS by 9.9%”

Q1 Earnings Call (4/24)

● Rising interest costs on floating rate debt

● Higher diluted share count related to convertible

debt and recent increase in share price.

● An acquisition under LOI (has since lapsed) that

didn’t close in the fourth quarter as expected

Due to three specific issues in Q1...

Street’s Reaction

Stock dropped 6.7% from 4/24 - 4/26Stock is currently 13.26% down since 4/24

Revenue of $73.39M (+7.7%) Missed by $1.88EPS of $0.59 Beat by $0.01

Business Overview

Industry Overview

Variant Perception Valuation Risks &

Mitigations Q&A

Variant Perception - Balance sheet recapitalization4 Years Ago:

● 1999: Issued 30 year $90M 7% hybrid convertible (at $20.44)

● 2014: Refinanced with 7 year $143.75M 2.75% coupon convertible (no early call feature)

● Entire debt structure set to mature early 2021

● CSV gradually began to suffocate from their capital structure refinancing

● Issued $325 million aggregate principal of unsecured senior notes due 2026

● These notes are at 6.625% coupon rate

● Entered into a new $150 million senior secured revolving credit facility (secured)

BS Recapitalization (6/5/18):

● Refinanced all outstanding bank debt (about $365M)

● Provides cash for acquisitions

Business Overview

Industry Overview

Variant Perception Valuation Risks &

Mitigations Q&A

Variant Perception - Convertible Note Yo-Yo Target

Trapped in a cycle:

“The converts made our diluted common share count calculations a complex yo-yo target that correlated to fluctuations in our share price from quarter to quarter, and even worse led to more than 3 million shares sold short (almost 20% of outstanding), essentially restricting our share price to a range of $25 - $28 plus or minus as the converts became concentrated primarily at hedge funds with no interest in the fundamentals or future of our company.”

Business Overview

Industry Overview

Variant Perception Valuation Risks &

Mitigations Q&A

● Due to convertible factor, when the stock dropped below a certain range, debt-owners would convert to equity

● 44.3169 Conversion rate● The $28 price ceiling was publicly communicated

by the owners of those convertible notes

Variant Perception - Acquisitions growthUnclosed Q4 LOI

“The LOI that we had was a really nice business

for reasons that have not gone away but could go

away in the future. That doesn’t mean it won’t

come back and line up and at some point be

another opportunity for us and for them. We still

have a relationship and that relationship will get

stronger over time, not broken.”

● Full quarter results of the high quality acquisitions made in the fourth quarter of last year led to a year-over-year revenue increase of 7.7%

● CSV has 10 businesses in the pipeline which they plan to acquire

● One acquisition that didn’t go through will not hurt in the long term

Acquisitions Growth

Business Overview

Industry Overview

Variant Perception Valuation Risks &

Mitigations Q&A

Variant Perception - Strong performanceSteady growth

● Increased same-store Funeral field contract volumes by 3.4%, revenue by 4% and EBITDA by 2.9%

● 4% and 8.1% year-over-year increase in revenue in same-store Funeral and Cemetery segments, respectively

● Free cash flow for the first quarter more than doubled YoY (6.4M to 13.4M) primarily due to improved operational performance

● Declustering businesses leading to improved performance per store

● Started adding a managing partner, leading to commencing salary and EBITDA benefits

Improving Operational Performance

● Same-store Cemetery field EBITDA increased 14.1%

● Overhead expenditure as a percentage of revenue fell 120 basis points to 12%

● Total overhead spending expected to be roughly in line with 2017 and overhead as a percentage of revenue expected to continue to fall

● Expected GAAP tax rate to be 27.5% with cash taxes paid representing 80% of that rate. (Q1 tax rate was 23.5%, 2017 tax rate was 40%)

● But EBITDA margins were 39.8% in Q1 2018 compared to 43.1% in 2017

Business Overview

Industry Overview

Variant Perception Valuation Risks &

Mitigations Q&A

Variant Perception - Competitive advantages ● Acquires small funeral homes in rural and suburban areas

o Allows them to compete against smaller local businesses, capitalize on markets that are insulated by economic and demographic changes, and easily build strong brand image

o Focus expanding in Southeast, Midwest, and Southwest, where there is a preference for traditional burials over cremations

● Very specific acquisition criteria o Allows CSV to acquire businesses based on quality rather than quantityo SCI is already very big and is acquiring for the sake of sustaining its growth (SCI makes 12-15 acquisitions

per year)● Decentralized business structure

o Local managers are given full operational control for their businesses because they already have a deep understanding of the culture/heritage of its own business and what their local communities want▪ Local managers are also given entrepreneurial incentives: if they are able to achieve an annual

compound growth rate of 2% over a five year period, they receive 4x-6x of their annual bonuseso SCI deploys their own regional managers to take control of product/service pricing and forcing local

managers “top-down” initiatives

Business Overview

Industry Overview

Variant Perception Valuation Risks &

Mitigations Q&A

ValuationBusiness Overview

Industry Overview

Variant Perception

Valuation Risks & Mitigations Q&A

Valuation approach

Business Overview

Industry Overview

Variant Perception

Valuation Risks & Mitigations Q&A

Valuation Range

$21.31 - $31.96

Target price at end of 2018: $26.63

● We essentially split the company into two parts: the service-providing business that we named Deathcare Services, Inc. and the trust fund business that we named Death Trust, Inc○ Deathcare Services, Inc. includes revenue generated from performed

funeral and cemetery services○ Death Trust, Inc. includes trust fund investments, insurance commision

income, and fund management fees ● We applied a P/E multiple on projected 2018 services-derived earnings and a

separate P/E multiple on projected trust fund-derived earnings● We also demonstrated different valuation scenarios by performing P/E sensitivity

analysis, arriving at the valuation range seen on the left

Risks & MitigationsBusiness Overview

Industry Overview

Variant Perception

Valuation Q&ARisks &

Mitigations

Risks & mitigationsRisk Description Mitigations

Falling credit rating on new Unsecured Notes and Highly leveraged business

CSV is currently at a B1 credit rating on Moody’s which is classified as “Highly Speculative.” By contrast, the credit rating on the $325M in debt that CSV issued is B2, which is lower. This could be worrying since they have so much debt to fund their acquisitions

These bonds are set to mature in 2026. CSV has a liquidity rating of Speculative Grade Liquidity Rating, at SGL-1 which is the most liquid. Quick ratio of 0.5 signals high liquidity. Management mentions that they are comfortable operating at 4x-5x leverage, and are currently on track for about 4.5x debt leverage. Debt covenants should ease over time as CSV builds a strong track record as a borrower. The notes have a higher coupon rate so people are not as likely to convert to equity and sell out like last time.

Preneed investments depend on market conditions

CSV invests in a combination of fixed income securities and common stock for their trust funds. If there is a stock market crash like 2008-2009, CSV will suffer losses in its trust funds, hurting its overall earnings.

We looked at financials during the stock market crash (2008-2009) and discovered that what was generating net income for the business during that time was actually the trust funds rather than the service side of the business. Preneed trust earnings is essentially “free money” that is not reduced by tax or interest expenses. Therefore, preneed investment earnings actually can act as a buffer for CSV during a stock market crash.

Business Overview

Industry Overview

Variant Perception

Valuation Q&ARisks &

Mitigations

Risks & mitigationsRisk Description Mitigations

Rising cremation rates

Cremations cost one-third of what a traditional burial typically costs, generating CSV less revenue.

CSV is increasing their cremation contracts over time in order to keep up with the growing industry trends. They are also packaging additional services and merchandise to cremation services to gain more revenue, and focusing on expanding into rural geographies where cremations are preferred over burials.

Competition with local, private businesses

79% of the market is dominated by local, private funeral businesses that have been operating for decades. CSV will face competition from these players.

When choosing a funeral home business, most customers do not choose the company that offers the most affordable service but rather the one that they have a close relationship to. CSV, therefore, does not face high competition with local operators; in fact, it is a leader in most of the markets that it operates.

Antitrust laws CSV may be hindered by antitrust laws when acquiring other local businesses. This has happened to SCI in 2013 when it acquired Stewart Enterprises.

It will take many years for CSV to grow into the size of SCI (10x larger), so it has the opportunity to learn from SCI’s trial and error process with the Federal Trade Commission. Unlike SCI, CSV tends to acquire small businesses, so its acquisitions are less likely to be criticized. Antitrust laws are also easing due to the overall trend of the industry turning into an oligopoly.

Business Overview

Industry Overview

Variant Perception

Valuation Q&ARisks &

Mitigations

Q&ABusiness Overview

Industry Overview

Variant Perception

Valuation Risks & Mitigations Q&A