Executive Summary / Key Takeaways

• Carriage Services (CSV) has undergone a significant strategic transformation over the past two years, prioritizing disciplined capital allocation, relentless improvement, and purposeful growth to strengthen its financial position and operational efficiency.
• Recent financial performance, particularly in Q1 2025, demonstrates the effectiveness of this strategy, with revenue growth driven by enhanced funeral pricing and preneed cemetery sales, alongside substantial improvements in net income and adjusted EPS.
• Key operational and technological initiatives, including the rollout of the Trinity ERP system, supply chain optimization, and enhanced sales strategies, are expected to drive future efficiencies, margin expansion, and market share gains.
• Aggressive debt reduction through strong free cash flow generation and strategic divestitures has significantly lowered the leverage ratio, positioning the company to re-engage in accretive M&A in 2025.
• While macroeconomic uncertainty and death rate fluctuations remain potential headwinds, management's prudent 2025 guidance, coupled with a track record of outperforming expectations, suggests a solid foundation for continued value creation.

Setting the Scene: A Transformation Underway

Carriage Services, Inc. stands as a prominent provider of funeral and cemetery services and merchandise across the United States. Operating 160 funeral homes in 25 states and 28 cemeteries in 10 states as of March 31, 2025, the company is a significant player in the fragmented deathcare industry. Its business model is bifurcated, with Funeral Home Operations contributing approximately 70% of total revenue through burial and cremation services and related merchandise, and Cemetery Operations accounting for the remaining 30% via sales of interment rights, merchandise, and services. Both segments serve customers on an atneed (time of death) and preneed (planned prior to death) basis.

The industry landscape is characterized by a mix of large public companies, regional players, and numerous independent operators. Carriage Services competes directly with larger entities like Service Corporation International (SCI), which holds a dominant market share, and other publicly traded companies such as StoneMor Inc. (STON) and Matthews International Corporation (MATW), as well as numerous private firms. While SCI leverages its vast scale for cost efficiencies and broad market reach, CSV has historically differentiated itself through a localized, family-oriented service model and a strategic focus on acquiring and integrating premier businesses. However, this smaller scale relative to SCI has historically resulted in higher operating costs per unit and potentially slower digital adoption compared to larger, more technologically advanced competitors like MATW in certain areas.

Over the past two to three years, Carriage Services has embarked on a deliberate strategic transformation. Recognizing the need to strengthen its foundation and enhance its competitive posture, the company shifted its focus from aggressive acquisitions to three core strategic objectives: disciplined capital allocation, relentless improvement, and purposeful growth. This period marked a concerted effort to deleverage the balance sheet, optimize existing operations, and lay the groundwork for sustainable organic and inorganic growth. This strategic pivot, driven by management's clear vision, has been instrumental in shaping the company's recent performance and future trajectory.

Strategic Pillars Driving Performance

Carriage Services' recent performance is a direct outcome of executing its three strategic pillars.

Disciplined Capital Allocation: A cornerstone of the recent strategy has been the aggressive reduction of debt. Leveraging strong internally generated cash flows and strategically divesting non-core assets and excess real estate, the company has significantly strengthened its balance sheet. In Q1 2025 alone, the company paid down $17.0 million on its revolving credit facility, contributing to a reduction in outstanding borrowings under the facility to $120.0 million at March 31, 2025, down from $137.0 million at December 31, 2024. This focus on delevering has driven the leverage ratio down to 4.2x at Q1 2025 from 5.0x at Q1 2024, moving closer to the long-term target range of 3.5x to 4x. Strategic divestitures, such as the sale of two funeral homes and three cemeteries for $15.8 million and real property for $2.9 million in Q1 2025, have generated significant proceeds, which management intends to redeploy into higher-quality, EBITDA-producing businesses or use for further debt reduction until accretive acquisitions are completed. This disciplined approach to capital management has not only improved financial flexibility but also reduced interest expense, contributing directly to bottom-line growth.

Relentless Improvement: This pillar encompasses initiatives aimed at enhancing operational efficiency and effectiveness. A major undertaking is the implementation of the Trinity system, an integrated ERP and customer experience platform. This is not merely a back-office upgrade but a foundational technological investment designed to streamline processes, improve data analytics, and elevate the customer experience. Phase 1, focusing on back-office systems, is currently being implemented, with Phase 2 expected to begin in Q3 2025. Management highlights that Trinity is in the final stages of testing and is expected to deliver significant benefits and synergies, including overhead efficiencies and improved reporting. While associated costs contributed to elevated overhead in Q1 2025 ($800k), the long-term goal is to leverage this technology for better cost management and operational insights.

Beyond Trinity, the company is actively reengineering its supply chain strategy. Phase 1, focusing on merchandise like urns and caskets, is expected to yield initial savings of $450k-$700k by the end of Q4 2024 and approximately $2 million throughout 2025. Future phases targeting other procurement areas like fleet management are anticipated to generate potentially an additional $5 million in savings over 2025 and 2026. These efforts aim to leverage the company's scale to secure better vendor agreements, reduce complexity, and drive cost efficiency. Other efficiency initiatives include centralizing accounts payable (expected Jan 1, 2025) and leveraging scale on technology services.

Purposeful Growth: This pillar focuses on driving both organic growth within existing businesses and strategically pursuing accretive acquisitions. Organic growth is being fueled by several initiatives. The funeral home pricing strategy, involving quarterly reviews based on data analytics, competition, and market share, has successfully boosted average revenue per contract. In Q1 2025, average revenue per funeral contract (excluding preneed interest) increased by 2.3% to $5,710. The cremation strategy is focused on increasing the conversion ratio from direct cremation to higher-revenue cremation services through education and presenting full options to families. The "Passion for Service" program, rolling out in Q1 2025, is an experience-focused initiative aimed at elevating service delivery and gaining market share. An enhanced e-commerce strategy is also being tested and planned for a full rollout in 2025.

In the Cemetery segment, the preneed sales strategy continues to be a significant growth driver. Despite a slight decrease in the number of preneed interment rights sold in Q1 2025 (-5.8%), an 11.8% increase in the average price per interment right sold ($5,419) resulted in a 5.8% increase in operating revenue for the segment. Management believes this strategy, still relatively new compared to peers, has a long runway for growth, targeting low double-digit (10%-20%) year-over-year growth for the next 4-5 years through team development, lead generation, and training.

With the balance sheet significantly strengthened, Carriage Services plans to return to the M&A market in 2025. Management is actively building a pipeline and refining its integration playbook, focusing on larger, high-quality assets and strategic tuck-ins that complement its existing footprint. This return to growth mode is expected to accelerate value creation by adding accretive EBITDA and expanding market presence.

Financial Performance Reflecting Strategic Execution

Recent financial results underscore the positive impact of Carriage Services' strategic transformation. In the first quarter of 2025, total revenue reached $107.1 million, a 3.5% increase compared to Q1 2024. This growth was primarily driven by a 4.6% increase in funeral operating revenue and a 5.8% increase in cemetery operating revenue. Funeral operating revenue benefited from both a 0.7% increase in contract volume (partially attributed to a delayed flu season) and the aforementioned 2.3% increase in average revenue per contract. Cemetery operating revenue growth was fueled by the strong increase in the average price per preneed interment right sold, offsetting a slight decrease in volume.

Gross profit for Q1 2025 increased by $0.6 million to $37.8 million. While funeral segment performance contributed positively, cemetery segment adjusted operating profit margin decreased by 300 basis points to 40.7% due to increased operating expenses, including promotional expenses and allowance for credit losses.

The most significant financial improvement was seen in net income, which surged by $14.0 million to $20.9 million in Q1 2025 compared to Q1 2024. This dramatic increase was primarily driven by a substantial increase in the net gain on divestitures and sale of real property ($5.8 million gain vs. $1.5 million loss in Q1 2024), a $4.2 million decrease in general, administrative, and other expenses (reflecting lower severance and consulting costs compared to the prior year), and a $1.4 million decrease in interest expense due to debt reduction and a favorable credit facility amendment. Adjusted diluted EPS for Q1 2025 rose by 28.0% to $0.96.

Looking back at the full year 2024, total revenue grew by 5.7% to $404.2 million, and adjusted consolidated EBITDA increased by 11.5% to $126.2 million, resulting in a strong adjusted EBITDA margin of 31.2%. Adjusted diluted EPS for 2024 was $2.65, a 21% increase year-over-year, benefiting from lower interest rates and a lower effective tax rate. This consistent performance, including outperforming expectations in multiple recent quarters, demonstrates the operational discipline and strategic effectiveness achieved over the past two years.

Liquidity remains robust, with primary sources being operating cash flows and Credit Facility availability. Cash provided by operating activities in Q1 2025 was $13.8 million. The company's improved financial health and reduced leverage provide ample flexibility to fund ongoing operations, strategic investments, and planned M&A activity in 2025.

Competitive Positioning and Technological Edge

Carriage Services operates in a competitive landscape dominated by larger players like SCI and specialized firms like STON and MATW. While SCI benefits from superior scale and market penetration, leading to higher operating efficiencies and potentially lower costs per unit, CSV differentiates itself through its localized approach and integrated funeral-cemetery model. CSV's recent focus on enhancing its preneed cemetery sales strategy has yielded impressive growth rates (e.g., 28.2% preneed sales growth in Q3 2024), outpacing the steady growth of larger competitors and positioning CSV for stronger recurring revenue streams.

CSV's technological advancements, particularly the Trinity system and data analytics capabilities, are increasingly becoming a competitive factor. While larger competitors may have more extensive digital infrastructure, Trinity's integrated ERP and customer experience features, including the planned family portal, aim to provide a differentiated service experience that could enhance customer loyalty and potentially capture market share. The use of data analytics in the pricing strategy allows CSV to make more informed, market-specific adjustments, balancing price and volume to optimize revenue in competitive local markets. The supply chain optimization efforts, driven by data and strategic vendor partnerships, are designed to close the efficiency gap with larger competitors like SCI and STON by leveraging scale in procurement.

Compared to STON, which focuses primarily on cemeteries and excels in cost-effective operations in rural areas, CSV's integrated model offers a more comprehensive service offering. CSV's higher preneed sales growth and better net margins (15-20% in recent quarters vs. STON's 5-10%) indicate stronger revenue generation and capital efficiency. Against MATW, a product-heavy competitor specializing in memorials, CSV's service-oriented model and operational efficiency in service delivery (e.g., faster interment processing) provide an advantage, although MATW's product innovation and durability metrics pose a challenge in the merchandise segment.

Overall, CSV's competitive positioning is strengthening through strategic focus. By improving operational efficiency via technology (Trinity, supply chain) and data analytics (pricing, lead generation), driving high-growth preneed sales, and leveraging a disciplined capital allocation strategy to enable accretive M&A, Carriage Services is actively working to enhance its market share and profitability relative to its peers, mitigating some of the disadvantages of its smaller scale.

Outlook and Risks

Management's outlook for 2025 reflects a balance of confidence in the company's strategic momentum and prudence regarding the uncertain macroeconomic environment. The full year 2025 guidance, maintained after a strong Q1, projects total revenue in the range of $400 million to $410 million, adjusted consolidated EBITDA between $128 million and $133 million, and adjusted diluted EPS of $3.10 to $3.30. Adjusted free cash flow is expected to be in the range of $40 million to $50 million, with total capital spending anticipated between $19 million and $21 million. The leverage ratio is targeted to end 2025 between 3.7x and 3.8x.

This guidance implies continued organic growth, particularly in preneed property sales (high single digits expected), and modest growth on the funeral side (~1% organic). Key drivers for expected EPS growth include significant interest expense savings ($5 million to $6 million) from debt reduction and the credit facility amendment, and a lower adjusted tax rate (28%-30% vs. 34.2% in 2024). Overhead is expected to remain slightly elevated in 2025 due to Project Trinity investments, but long-term efficiencies are anticipated. Management indicated that if current momentum holds through Q2 2025, they may raise guidance, signaling potential upside. The guidance explicitly excludes the impact of future acquisitions, highlighting the potential for further upside from inorganic growth in the latter half of 2025.

Despite the positive momentum, several risks warrant investor attention. Macroeconomic uncertainty, including market volatility, inflation, and potential recession concerns, could impact consumer discretionary spending on services and merchandise, although the industry has historically shown resilience. Rising tariffs could increase costs for goods and impact the supply chain. Fluctuations in the death rate, while potentially providing short-term volume shifts (like the delayed flu season in Q1 2025), introduce unpredictability. Litigation risks, inherent in the industry, could result in unexpected costs. The successful implementation and realization of benefits from major technological initiatives like Trinity and supply chain optimization are crucial assumptions underlying the efficiency and margin expansion outlook. Finally, competition remains intense, and the ability to effectively execute strategic initiatives to gain market share and maintain pricing power against larger, well-resourced competitors is key to achieving long-term growth targets.

Conclusion

Carriage Services has successfully navigated a period of strategic transformation, emerging with a stronger balance sheet, enhanced operational focus, and a clear roadmap for future growth. The disciplined approach to capital allocation, highlighted by significant debt reduction and strategic divestitures, has positioned the company for renewed M&A activity in 2025. Simultaneously, investments in technology, supply chain optimization, and sales strategies under the "Relentless Improvement" and "Purposeful Growth" pillars are driving organic performance and building a more competitive foundation.

The strong financial results in Q1 2025 and full year 2024 provide tangible evidence of this strategy's effectiveness. While macroeconomic uncertainties and industry-specific dynamics present ongoing challenges, management's prudent outlook, coupled with a demonstrated ability to execute and outperform, supports the investment thesis. The successful integration of the Trinity system, realization of anticipated supply chain savings, and accretive M&A in 2025 will be critical factors to watch. For investors, Carriage Services represents a compelling opportunity in the stable deathcare industry, underpinned by a strategic transformation that is enhancing profitability, reducing risk, and setting the stage for purposeful growth in the years ahead.