Illumina Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 8 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Carriage Services 4th Quarter and Full Year 2023 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.

Speaker 1

Good morning, everyone, and thank you for joining us to discuss our Q4 and full year results for 2023. 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 Keon Gramaya, Executive 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 Keyon and will be followed by a question and answer period.

Speaker 1

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 as well as 2024 guidance. Forward looking statements inherently involve risks and uncertainties and only reflect our view 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. Now I'd like to turn the call over to Carlos.

Speaker 2

Thank you, Steve, and welcome, everyone, to our 2023 Q4 and full year earnings discussion. We're excited to dive into our achievements and plans. So let's jump right in. First off, a heartfelt thank you to every Carriage team member. Your dedication and hard work have been instrumental in providing outstanding service to countless families.

Speaker 2

Your efforts, passion and commitment truly matter. We are grateful for your contributions. Now let's talk about our financial highlights. We are thrilled to report significant progress in executing our focused strategies to grow revenue and reduce costs. For the Q4, total revenue grew to $98,800,000 dollars an increase of $4,900,000 or 5.2 percent.

Speaker 2

And for the full year, it grew to $382,500,000 an increase of $12,300,000 or 3.3%. The very solid cemetery sales performance, our 2 most recent acquisitions and our targeted efforts to better leverage our pricing power to improve average revenues per contract, help make up for approximately $13,300,000 of funeral home add need revenues despite the pull forward from COVID that led to a modest decline in volume. Looking at each of our revenue segments, we see that total funeral home operating revenue experienced a reduction of $1,600,000 or 2.4 percent from last year's quarter and by $2,200,000 or 0.9 percent for the whole year. This decline is driven by lower volumes due to the pull forward effect. As for total cemetery operating revenue, we ended the quarter above last year by $3,700,000 or 16.1 percent.

Speaker 2

And for the full year, we grew by $12,200,000 or 13.5%. This fantastic performance is due to the amazing job of our preneed cemetery sales teams knocking it out of the park, with preneed cemetery sales production increasing by $3,900,000 or 25 percent for the quarter when compared to last year and by $12,100,000 or 19.6 percent for the full year. Lastly, total financial revenue took off with an increase of $3,100,000 or 59.5 percent compared to last year's quarter and $3,800,000 or 17 percent for the full year. This boost in financial revenue is equally balanced between our investment strategy and the results of our new prearranged funeral sales program. Regarding adjusted consolidated EBITDA for the 4th quarter, we finished with $32,400,000 an increase of $3,800,000 or 13.2 percent.

Speaker 2

And for the full year, we delivered $113,200,000 an increase of $3,900,000 or 3.5 percent compared to last year. We grew our adjusted consolidated EBITDA margin during the 4th quarter by 230 basis points to 32.8 percent. And for the full year, we grew by 10 basis points to 29.6%. Our focus on cost savings delivered excellent results, including a decrease in total overhead of $3,800,000 or 7% for the year. We saw adjusted diluted EPS in the 4th quarter grew to $0.77 per share, an increase of $0.13 or 20.3 percent.

Speaker 2

And for the full year, we ended at $2.19 which is $0.19 above the top end of our guidance. However, compared to the previous year, we experienced a decrease of $0.42 or 16.1 percent, driven by the high interest rate environment's impact on our revolving credit facility. To put things in perspective, we paid $10,400,000 more in interest expense during 2023 than in 2022, with our debt remaining at a similar level. When converting this to EPS, the impact is approximately $0.48 per share. Debt repayment continues to be at the forefront of our near term goals, and we intend to continue to pay down our debt with free cash flow until our leverage ratio is under 4 times.

Speaker 2

Tian will share more regarding our debt and leverage later on this call. We are very proud of these results, especially after outperforming our guidance for EPS, EBITDA and revenue for 2023. Even though we did revise our outlook due to a lower than expected Q3, we met up for it in the Q4. When comparing our original full year 2023 guidance, we finished the year within our initial ranges in all categories except EPS, which was down due to the higher interest rate environment. Now that we have gone over the past, let us focus on the future.

Speaker 2

We are excited to announce that we are embarking on a transformative journey with our new purpose statement, creating premier experiences through innovation, empowered partnerships and elevated service. This purpose statement is our commitment to every aspect of our business. It focuses on continuous innovation, partnership and service delivery and is rooted in 3 core pillars. The first pillar is disciplined capital allocation. Our focus is to invest our capital in a disciplined manner that identifies areas with the most significant potential for returns, ensuring our resources pave the way for sustainable success.

Speaker 2

The second pillar is purposeful growth. Growth is not a mere increase in size, but a deliberate journey towards enhancing our revenue and financial metrics through strategic, thoughtful and data driven planning. This approach sharpens our focus, enabling broader execution and driving impactful results is about growing not just in scale, but in significance, organically and inorganically. The 3rd pillar is relentless improvement. We understand that lasting success comes from an unwavering commitment to excellence.

Speaker 2

Every day offers a new opportunity to refine our processes, improve our systems, elevate our services and surpass our previous achievements. This dedication to continuous improvement is at the heart of our purpose statement. Together, these three pillars are not just strategies. They are our pledge to relentlessly pursue excellence, to innovate with intention and to lead with a level of service that redefines what is possible. Speaking of possibilities, we hope you had the chance to explore our newly revamped website and visual identity.

Speaker 2

We have brought our purpose statement to life, giving our Carriage logo a fresh innovative look and signaling our focus on driving an exciting new future. We are also excited to share a new role focused on leading our continuous improvement lean management program. This data driven approach will result in refined processes and improved systems that will enhance productivity and identify potential cost savings and other opportunities. It represents our commitment to becoming more efficient and effective in our operations and is aligned with the relentless improvement focus of our purpose statement. This approach to continuous improvement is something we're optimistic about.

Speaker 2

We believe it will pave the way for better processes and outcomes. As we continue to pursue our vision, we look forward to sharing our progress and learnings with you in future updates. It's a journey of growth and learning and we're excited to see where it leads us. As part of our relentless improvement approach and driven by our passion for service excellence, we are pleased to introduce a new role within our team, the Director of Customer Experience. This role is pivotal to our passion for service program, focusing on training, rollout and development of hospitality concepts within our teams in addition to creating key performance indicators to measure customer experience in our delivery of Wow Moments playbook.

Speaker 2

Our objective is clear as a company that prides itself on being driven by service and supported by a team fueled by both passion and compassion. In these service driven times, the importance of customer experience cannot be overstated. It is the cornerstone of differentiation and customer loyalty in a competitive landscape. We aim to set ourselves apart by delivering a customer experience beyond expectations. This commitment to elevating our service delivery ensures we meet and exceed our industry's evolving standards and demands.

Speaker 2

It's more than a program. It's our promise to lead with excellence and make every customer interaction an opportunity to demonstrate our unmatched dedication to service. This program paired with our ERP and customer facing system called Trinity along with our customer centric approach will deliver an enhanced experience that we believe will drive organic growth and increase market share. We are truly excited about the future at Carriage. The dedication and hard work we have invested over the past year, coupled with the strategies outlined today, position us for a future mark by innovation and continuous progress.

Speaker 2

This isn't just about near term achievements. It's about establishing a foundation that will deliver lasting value to our shareholders for years to come. Thank you for your attention and support. With that, I will now turn things over to Kian.

Speaker 3

Thank you, Carlos, and good morning to everyone on the call. Since Carlos provided an overview of our key financial metrics for this quarter and for the full year 2023, I will review a few additional financial highlights for the same periods and I will also provide color around our 2024 outlook and guidance ranges provided in our earnings release yesterday. First, I will start off with corporate overhead. We are very proud of our downward trend in corporate overhead throughout the year. This quarter, when adjusting out special items related to the review of strategic alternatives, our overhead costs total approximately $10,700,000 and for the full year, similar overhead costs would amount to $47,900,000 or approximately 12.5 percent of revenue, which is lower than our previously stated 13% target for the full year 2024.

Speaker 3

The general decrease in overhead expense we experienced is primarily a result of lower incentive compensation relative to prior quarters in previous years, but also our relentless focus throughout 2023 on disciplined spending, which included optimizing and reducing overhead costs. 2nd, I would like to discuss our cash flow from operations, which increased to $13,700,000 this quarter, up from $11,000,000 the same quarter last year. This increase is a direct result of our 4th quarter outperformance that Carlos discussed earlier and ultimately how those results flow down to net income. For the year, cash flow from operations increased by $14,600,000 or 24% from the previous year to $75,600,000 Additionally, our solid cash flow from operations translated into robust adjusted free cash flow. For the quarter, with maintenance CapEx more or less in line with the prior year quarter, our calculation for adjusted free cash flow increased by $2,700,000 or 44 percent after adding back special items.

Speaker 3

In the future, we look to align our adjusted free cash flow calculation with a standard view of free cash flow inclusive of all capital expenditures, not simply isolating maintenance CapEx, which brings me to my last note on the cash flow statement. Our capital expenditures for the year decreased by $8,000,000 down to $18,000,000 when compared to the previous year. This is a direct result of our capital allocation strategy and discipline. The strong cash flow generation along with our well defined capital allocation strategy brings me to my 3rd highlight, the reduction in outstanding borrowings under our variable rate credit This quarter, we were able to pay down an additional $8,200,000 on our credit facility, reducing the outstanding borrowings to $179,100,000 by year end. Though this amounts to a $11,600,000 year over year decrease in the amount drawn under the credit facility, we have to take into consideration that the Greenlawn acquisition, which closed at the end of the Q1 of 2023, resulted in a peak amount drawn under the credit facility of $213,600,000 at quarterend.

Speaker 3

Therefore, over the next 3 quarters through year end, we paid down $34,500,000 on the credit facility, a considerable amount to pay down the supported with our cash flow generation and capital discipline. Looking at leverage, by using our bank covenant compliance ratio as defined by our credit agreement, we have steadily lowered our leverage ratio ending the year at 5.13 times net debt to EBITDA. Despite the pay down, interest rates continue to hover around the same weighted average interest rate of 9% on our credit facility for the quarter as compared to 6.3% in the same quarter last year. For the year, our weighted average interest rate for our credit facility was 8.6% compared to 4% in 2022, a primary driver behind the $10,300,000 of additional interest expense year over year that Carlos mentioned earlier. Now, I will conclude my remarks by turning to our full year 2024 outlook that we provided in our earnings release yesterday.

Speaker 3

Before I dive into our guidance ranges, I would like to highlight that our 2024 outlook is pro form a for divestitures of non core businesses that we have line of sight to a potential close in the Q1 of the year. This includes 2 separate transactions that would remove approximately $5,500,000 of revenue $1,500,000 of field level EBITDA in 2024. The sale proceeds in turn would be used towards paying down our credit facility. With that disclaimer behind us, let us review the 2024 guidance ranges. For total revenue, our range is $380,000,000 to $390,000,000 For adjusted consolidated EBITDA, our range is $112,000,000 to $118,000,000 For adjusted diluted earnings per share, our range is $2.20 to $2.30 And lastly, for adjusted free cash flow, our range is $55,000,000 to $65,000,000 Overall, we expect 2024 to be a continuation, an extension of our performance in 2023, focused on organic growth driven by our key strategic initiatives around preneed sales, both on the funeral and cemetery sides, continued integration and optimization of recent acquisitions alongside continued capital and spending discipline.

Speaker 3

Through the course of the year, we will continue to be laser focused on reducing our leverage to a level that positions Carriage to pursue acquisitions opportunistically again in 2025. As a management team, we have been deliberate in our disciplined approach around capital allocation decisions and executing on our strategic initiatives. And we are pleased to see how those decisions led to positive financial results in the Q4 and for the year. We are excited to continue that momentum into 2024. With that, I'll pass it back to the operator for questions.

Operator

Thank you. We will now conduct a question and answer session. And we'll take our first question from Alex Paris with Barrington Research. Please go ahead.

Speaker 4

Thank you. Good morning, guys, and thanks for taking my questions. I want to first start off by congratulating you on the strong finish to the year. And then a separate congratulations to Mel Payne on his transition from Executive Chairman to Special Advisor, I. E.

Speaker 4

Semi retirement. That's about as close as you'll see him get to retirement, I think.

Speaker 5

The Thanks, Alex.

Speaker 4

Sure. I think I'd like to start with the strategic review. You talked about it in the press release. I'm wondering what additional color you can add. It started nearly 8 months ago.

Speaker 4

You've gone through a process and the Board has obviously decided that the shareholders will be best rewarded through an independent publicly traded company, which I would agree. So just any additional color you can get in that strategic review process to start?

Speaker 1

Sure, Alex. This is Steve. I think 1st and foremost, we're very proud of our Board and our outside advisors on the financial and the legal side. It's been a very thorough process over the past 8 months, very thoughtful process. We were obviously flattered as a company by the interest.

Speaker 1

But ultimately, I think the Board did not believe that the offers presented offered the same value to shareholders as the current strategy and opportunities that lie ahead for us as an independent publicly held company do. So we put a little extra color in the 8 ks just to kind of highlight the amount of time and effort that went through the process. But the Board is as excited as management is about the prospects that laid ahead for us that were outlined in the press release.

Speaker 4

Great. That's helpful. So referring to the strategic plan going forward, new purpose statement and things like that, And this includes the strategic plan. I'm presuming that we're talking about the high performance and credit profile restructuring plan that was originally announced in December of 2022 that focuses on organic growth, debt reduction, etcetera. What would you call out there?

Speaker 4

What additional color you can give us as to a going forward strategic plan?

Speaker 2

Yes. Thank you, Alex, and good morning. It is a continuation of that program with some additional concepts that I actually mentioned on my prepared remarks. We are going into this journey to trying to improve a lot of the processes and systems that we have, not just to accelerate bringing carriage to a level of innovation and through technology and the way we approach things that will deliver better performance than before, but also should deliver productivity improvements and a reduction on cost over time. That's one aspect of it.

Speaker 2

That's here at the support center as well as in the field. However, we also included on the remarks the significant focus on customer experience. As the demands of the industry continues to change from the dynamics of customer changing their preferences for final placement or choices for funeral and service funeral services and cemetery. We also want to adapt and get ahead for the most part than anybody else as it relates to customer experience. We have been working probably a little bit over a year and a half to build that.

Speaker 2

You have heard me talk about passion for service, Wow playbook, and this is the time to finalize that approach to formally launch it and to start capitalizing on that opportunity. So we do believe that in addition to what we have on what we call the HPCPRP plan. This addition to the plan are accretive and significant from a revenue growth opportunity as well as cost savings opportunity.

Speaker 4

Great. That's helpful. And then before I get into I got a couple of questions about guidance. Guidance at the midpoint calls for revenue growth of 1%, adjusted EBITDA growth of 2 for the divestiture for the 2 transactions you expect to execute in the Q1. My related question is, are there any other non core businesses that are excluded from the guidance that you think you might sell this year?

Speaker 4

And just in general, are there other non core businesses that you have identified for potential divestiture in 2024?

Speaker 2

On our guidance, Alex, only ones that Kian mentioned in his prepared remarks are pro form a to the guidance. We do have, however, identified other non core businesses that we may see we want to divest from over the next few months. I wouldn't have any offers or specific plans to that, but we do have a list, a target list, let's just call it, of businesses that we believe no longer fit the criteria of the high performance nature culture of Carriage, and we'll work hard to make that happen. And of course, all the proceedings from that will be to pay down our debt and continue to lower our leverage ratio.

Speaker 4

What is the approximate gross proceeds on these two transactions anticipated? It was $5,500,000 in revenue and $1,500,000 in EBITDA.

Speaker 1

Approximately 11,000,000 to 12,000,000

Speaker 4

dollars And then related question, of the other non core businesses on the target list that may or may not be divested, What sort of gross proceeds can come out of that portfolio do you think? Or said another way, what sort of revenues and adjusted EBITDA are we talking about?

Speaker 1

Yes. I think to Carlos' point, so we haven't identified any offers yet. What we look at, we have that list identified, but what we really focus on when we're talking with other people about potential divestitures is what are the tax implications, what are the multiples and does it make sense for us. Obviously, you'd be losing some EBITDA, but you're going to get cash and to pay down debt. So until we have those numbers in front of us, a little bit tough to say that we have targeted proceeds that we're looking to close on this year.

Speaker 1

It really has to be the right deal that's presented on these businesses. Those conversations are ongoing, so we may have some more color in the quarters to come, but at this point, they're not far enough along to really be able to pinpoint that. But to confirm also,

Speaker 2

Alex, we would not divest from assets where the valuation multiple of the sale is lower post tax than the leverage ratio we're getting to make sure that we find a way to really make a dent on our debt.

Speaker 4

Got you. So between the $11,000,000 or $12,000,000 in gross proceeds, I'm sure there's some tax implications there. And then your expectations for free cash flow in 2024, do you have a net leverage target for year end? I know you had in the past with the high performance and credit restoration plan. Where would you think that we finished out the year in terms of debt based on current guidance for revenue and EBITDA?

Speaker 3

Yes, Alex, on that point, what we're focused on is the capital discipline and continuing to lower our leverage and our leverage ratio as a whole. A lot of that is dependent on kind of how things look for the course of the year on the EBITDA side. But right now, we're at using our bank coverage our bank leverage ratio, we're at 5.13 to end the year. We look to continue that strength and that pay down through the year, looking to get sub-five percent through, let's call it, in the second half of the year, and then looking to make more progress as we get to the end of the year.

Speaker 4

Got you. And then I guess my last question, I'm going to ask you and I'll let somebody else ask questions, is Kean, any color as to the cadence of the quarters this year? We have full year guidance. I think Service Corp. Said on their conference call last week that for them, Q1 is going to be the last of the tough comps and Q2, Q3 and Q4 should be more normalized growth for them and they're taking into account the pull forward effect of COVID as well as maybe interest rates peaking and coming down over the time.

Speaker 4

And then again specific to them the end of certain capital projects. So thoughts about maybe first half versus second half?

Speaker 3

How do you want to go? Yes.

Speaker 2

Alex, I know you

Speaker 3

yes, I know you asked me that question, but when it comes to kind of a long term seasonality, I think Carlos is better equipped for that. So let me kind of pass it over to him and let him give you some context, if that's okay. Sure.

Speaker 2

Thank you, Kean. So I'll break it in a couple of parts. When it comes to pull forward, we believe it will take probably at least 3 more quarters, if not 4, for fully wash off the pull forward effect. We have been experiencing a continuous decline year over year on volume throughout 2023, and we think it's going to take a little bit of time to get to a level where it's flat and then start to grow on a year over year basis. We have been able to then account for and I'm happy to talk about later on a little bit more on that as it relates to our average revenue per contract.

Speaker 2

We believe we can sustain that to 2024 making up for some, if not most of that volume drop. And so that's the one piece on pull forward. I do believe seasonality, meaning the typical Q1 being the highest quarter of the year, Q4 being the 2nd highest of the year, Q2 being the 3rd highest of the year and then Q3 being the 4th highest of the year will be pretty much the same. So seasonality for this industry, in my opinion, will come back to play in 2024, offset here and there by the pull forward effect. So I do expect some sort of normalcy from that perspective and our ability to compensate through strategies that we have created.

Speaker 2

2 that I mentioned is continued focus on pricing power and our cremation offerings to make sure that we capitalize on every cremation opportunity that comes as a reclamation that leaves our business with some sort of service offering merchandise that increase that's our churn per contract.

Speaker 4

Great. Thanks for the additional color everybody and I'll get back into the queue. Thanks.

Speaker 1

Thank you, Alex.

Operator

We'll now take our next question. And that will be coming from John Franzreb with Sidoti and Company. Please go ahead.

Speaker 6

Good morning, guys. Good morning, guys, and congratulations on a good quarter. I guess I'd like to start with the preneed sales success you're seeing in Cemetery. I'm curious what's driving that and were there any sales incentives that were put in place that were successful?

Speaker 2

Absolutely, John. So our cemetery strategy, which started probably about 3, 3.5 years ago, really 3 years, it's building up on its foundation, right? From the moment of recruiting more sales managers, getting the right who in the right place, creating the program, including our lead management system, our CRM, which we call sales edge that we launched about 1.5 years after we initiated this program. It's starting to that foundation that we work from the beginning as we started to ramp up our sales, our premium cemetery sales teams, is starting to really become very consistent. When you add to that also that we integrated a marketing module to our CRM, our marketing team led by Alfred White has done an incredible job in integrating lead generation through different sources from websites and other type of lead generation programs that is helping.

Speaker 2

But the most significant piece, just to be very transparent with all of you is, of course, the integration of the most recent acquisitions on Cemeteries. We acquired 2 different businesses last year. 1 has a cemetery, standalone cemetery in Charlotte and the other 2 cemeteries, which are combos in Bakersfield. And so the integration of those 3 cemeteries have also helped. We have been able to create new inventory on one of the 3 cemeteries, which already started to show tremendous success last year, and we are actually creating significant amount of new inventory on the other 2.

Speaker 2

And so those also help. As a side note, as we change our same store acquisition comparison to be more fairly compared to our peers last year, Q1 will be the last year for Greenlawn as part of being same store. And after that, really, it's all just I'm sorry, acquisitions. Everything will be same store until we get new acquisitions. So this is also an impact of the latest integrations and we're very, very excited about the performance and we believe there's a lot more to come from that in the near future.

Speaker 6

Great. That's very helpful. And the growth of the EBITDA and EBITDA margin in the quarter, I think you attributed to a combination of cost savings and I think overhead reduction, if I heard you properly. I'm curious where you stand on the price cost recovery as you are absorbing some higher vendor costs in the previous quarters? Are you at equilibrium?

Speaker 6

Can you kind of delve down a little bit deeper into that?

Speaker 2

Happy to do it. So when you think about the structure of Carriage being highly decentralized, we did talk about pricing and trying to pass on those increases we received through 2023 starting somewhere around March of last year from vendors and services and other types, including salary and benefits that were increased at the beginning of the year post all the stress from COVID-nineteen. And so we did struggle at the beginning to pass on those increased costs to the families, to the consumers, to the client families because of that decentralization. So it took us some time to figure it out what was the right approach to pricing, to find a way to leverage our ability to influence that pricing through information through the managing partners who have and will remain to have the decision on the pricing power for the company. And so in November, we found a formula that really helped out and we were able to make some significant changes with the support of the field leaders.

Speaker 2

They did an incredible job. As a consequence to that, in the month of December, after just a month of full implementation of this, I'll share that our total contract average for all carriage increased by 5% or $2.74 on the barrel side increased by 1.6% or $155 and on the cremation side increased by 4.9 percent or $175 We believe not only these increases are sustainable, but there's a little bit more to increase as we move forward throughout 2024. And it is great way to keep our cost where it should be, our cost structure and making sure we deliver with an increased customer experience, higher value for that in exchange for those dollars to every family that go to a carriage funeral or cemetery.

Speaker 6

Great. That's very helpful, in fact. And I guess one last question, I'll let somebody ask, get into queue. Regarding the guidance, is it safe to assume that you've embedded incentive compensation into 2024's guidance because it sounds like that was down sizably in 2023? And what kind of assumed tax rate are you putting into that 2024 guidance?

Speaker 3

Hey, John, this is Keon. So, let's answer the tax question. The tax question, we're just kind of using our annual kind of our typical annual assumption on taxes, which is anywhere between 29% to 30%. And then on the incentive comp, so yes, we do have that embedded within our cost, which ultimately hit EBITDA. So that is embedded in our assumptions for the outlook.

Speaker 6

Great. Thanks, Ken. I'll get back into queue.

Speaker 2

Yes. Thank you, John.

Operator

Our next question is coming from Liam Burke with B. Riley.

Speaker 5

Good morning, Carlos. Good morning, Kian.

Speaker 1

Good morning. Good morning, Liam.

Speaker 5

Carlos, your funeral home EBITDA margins were down year over year, which is fine, but your sequential improvement was pretty dramatic, I mean, 200 basis points plus. If you look into some of the cost cuts, that's impressive. How do you see do you see that momentum in that kind of staging going into 2024, that kind of improvement?

Speaker 2

We do see that as a very positive momentum going into 2024. There will be we have our normal round of varied in the field and the Houston presented in February, but we're already planning of what it's going to take to make that up so we can continue the same momentum throughout the year. So we're fully ready, prepared and planned into continuing the same momentum through the next 4 quarters.

Speaker 6

Okay, great.

Speaker 5

And then, Keyon, your financial revenue and EBITDA was sort of off trend. Could you give us some color on that?

Speaker 3

Yes, of course, Liam. So that's really a result of 3 things. I'll just kind of take through them. So one is, embedded within financial income, we also have what we call general agency commission fees and also PC income, which is perpetual care income from our trust. So on the pre need funeral side, on the insurance side, we received commissions.

Speaker 3

We're seeing that growth. If you remember over the summer of 2023, we announced an exclusive arrangement with National Guardian Life and Perkoa, and we started implementing that in different regions. Our Western and Central regions are fully implemented and we're looking to finalize the Eastern region. So we did see some of that come to fruition in 2023 and we'll see more of that come through in 2024. On another topic related to our we call it general agency commission fees, which is a fees related to selling insurance policies.

Speaker 3

We did kind of have a change in recognition policy in 2023. It's an outdated policy we've had for probably 15, 20 years that since selling these policies was such a small part of our business, we would just defer the recognition of those fees, those commissions 100% for over a 12 month period. We changed that recognition policy as a result of us signing this exclusive agreement in summer 2023, and now our policy is an 80 percent recognition. So 20% will defer and 80% will recognize. So that adjustment is also reflected in there for 2023.

Speaker 3

And then on the perpetual care income side, our trust funds just in general have generated from the fixed income side have generated a considerable amount of income and also from the dividend payers. So that income flows through our income statements. So we saw some growth there as well as we continue to rotate into income paying securities.

Speaker 5

Again, I guess my question is just to follow-up on that. Is that typically the trend we can expect for in 2024? I mean, understanding We will I understand that you can't predict your income from the trust. That's fine. But I mean there are other things embedded in that number that are pretty much a little more consistent.

Speaker 3

So I'll talk about the PC income side and I'll pass it over to Carlos when it comes to the preneed funeral strategy side and what to expect in 2024. On the perpetual care income, we do continue to we do have line of sight on what dividends look like for our securities that we own in our portfolio and also from the dividend payers. So we do expect with a slight rotation in our portfolio that we will continue to grow our perpetual care income. So you will see slight growth on the perpetual care income side. With that, I'll pass it to Carlos on the preneed funeral.

Speaker 2

Thank you. Liam, on the funeral side, as you know, for the most part, carriage never had a very specific focus to drive PR range funeral sales to insurance, even though we did sell them individually based on each managing partner deciding to sell some through some local or national based partnerships. After we partnered with Precoa and the National Guardian Life Insurance Company, We created a whole very holistic plan where it's just one insurance company supporting and backing carriage for this paper. And with Perkoa as it relates to our ability to then display sales through all the different through our different funeral homes across the states where we operate. And so the problem we have, the schedule of integration that we have led to a significant improvement in addition to the 80% recognition from what Kian just mentioned.

Speaker 2

But it is just the beginning because our schedule started really in September for integrating with the West being the first region from Carriage being integrated into this new program. December had some of the Central starting to roll in and then really finalizing in Q1 of this year with the East region. So it will be only until the Q2 of this year when we'll have full integration of all of our businesses within this new partnership. So I highly expect we will be able to continue to grow on a year over year basis from our general agent commission and reflected on financial income as PIF for years to come until we catch up to a point where year over year comparison will be more on the mid single digits. But in the meantime, we'll be, in my opinion, probably somewhere around 10% to 15% year over year.

Speaker 5

Great. Thank you, Carlos. Thank you, Kia.

Speaker 1

Thanks, Liam.

Operator

Our next question is coming from George Kelly with Roth MKM.

Speaker 7

Hey everybody, thanks for taking my questions. So first, an accounting question. Keon, just maybe to follow-up on the prior question about the change in accounting recognition in financial income or financial revenue this quarter. Just wondering if you could quantify, sounds like you changed practices and maybe there was kind of a lump amount that was that hit 4Q. So could you quantify that?

Speaker 3

Yes. So for a go forward basis, let's call it January 1, 2024, we will be working off of an 80% recognition, 20% deferral, and that's just based off of kind of historical rates that we've used or that we've seen in our data when it comes to cancellation of those policies. So that 20% is what we're going to go with in terms of the deferral. On a look back basis, within our financial income, there is a, let's call it, a catch up when it comes to the 2023 period of about $1,000,000 that is added in that period as a result of the policy change.

Speaker 7

Understood. Thank you. And then second question for Carlos. You mentioned in response to one of the earlier questions just about pricing and how it took a while and you finally kind of settled on a formula in November that worked. Just curious if you could give more detail on what exactly that means?

Speaker 7

What changed in November? And then second part of the question is just curious what kind of pricing you're anticipating in fiscal year 2024 or what's baked into your guidance? Is it fair to say that it's kind of a low to mid single digit pricing bump across if you were to just look at like a blended average across your businesses in fiscal year 2024?

Speaker 2

Yes, absolutely. Happy to address that, George. So on your first question, what we noticed is that a data driven approach to pricing brings more attention to our managing partners. So what we are doing is creating a framework where it shows market share trends for a few years for each business. Then we have the pricing over the last 3 years to see what pricing impact has been increased or not over the last 3 years.

Speaker 2

Add as much competitive pricing as we can and that information is available, so we can catch that up. And then have a normal market share also as a percentage for the market. And then we have a normal sit down. We financial data including EBITDA margins and things of that nature to come to conclusions that based on the data become quite evident to the side, right? And so those conversations that the Director of Support, regional partners and our FP and A team here at the Houston Sports Center are having are bringing significant awareness and understanding of how pricing matters and how we cannot absorb increases coming from inflation or merchandise costs or whatever it is from our vendors and others.

Speaker 2

And so it's making a significant impact. It's nothing other than awareness through a very specific pricing review process. However, we do lead the final decision to the MP because it is very sensitive, right? We do not want to price ourselves out of the market. And so we listen to what they say, how they're thinking about their business, how what is their value proposition, which is something all of them are working on and defining what it is that this Phenom makes it different than others from a value perception perspective.

Speaker 2

And it is making a significant impact. So that's on your number one question. And then number 2, I do believe that for 2024, we will be right in the middle of single digits for year over year increase on our average revenue per contract. Maybe a little bit higher on the cremation side because we have a very specific approach to cremation, maybe between 7% to 8% on the cremation side. And the approach to cremation is very simple.

Speaker 2

When you think about our burial mix and cremation mix at Carriage, we have about 70% cremation. Of that 70% cremation, 69%, almost 70% too is direct cremation. Direct cremation being the lowest average per contract that we have. And so our focus is going to be on that direct cremation volume and see how many families can we convert to what we call cremation offerings. We have created a very specific strategy to educate families with literature and offerings that include reclamation with a service, reclamation with a pool visitation or IV or merchandise, different approaches customized by business through the support of the managing partner.

Speaker 2

And we believe this will lead to a significant increase on conversion ratio between cremation with something sort of service. And so we're very excited about that. This has started officially in the month of January, and we believe we will see the benefits of that as we report in Q1.

Operator

And this concludes today's question and the answer session. I'll now turn the floor back to Carlos Quezada for any additional or closing remarks.

Speaker 2

Thank you everybody for attending the call today. We're super excited about the future at Carriage. Our ability to now manage pricing power, our continuous improvement program, our program on customer experience and being able to gain market share and better pricing from perceived value from families is very, very exciting. Our brand new purpose statement as the driver and the 3 supporting pillars under the purpose statement, it drives a focus and a way to continue to grow over the next years and provide shareholder value. We're very excited also about our focus on continuing to pay down our debt and really deliver on our promise we made to our high performance grade profile restoration plan to deliver on the leverage ratio that it is ideal for Carriage.

Speaker 2

In closing, I would like to say something regarding Mel Payne. Mel Retirement marks the culmination of over 33 years of exceptional leadership since founding Carriage Services, a journey categorized by visionary foresight, steadfast commitment to being the best and a heartfelt dedication to this noble profession. Under Mel's guidance, the company has become one of the industry leaders, setting high performance standards and fostering a culture of honesty, integrity and quality in all we do. This transition to retirement signifies not an end, but the onset of a new chapter for MeL to explore. The legacy left behind is a testament to a career dedicated to excellence, inspiring those who follow to continue building on this foundation.

Speaker 2

As Mel steps into the next chapter, the hope is for it to be filled with joy, peace and fulfillment, reflecting the richly deserved rewards of our remarkable career. With that, we thank you and we're happy to report our Q1 results as we continue to grow in 2024.

Operator

Thank you. This concludes today's webcast. We thank you for your participation. You may now disconnect your lines at this time.

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