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Carriage Services Inc  (NYSE:CSV)
Q4 2018 Earnings Conference Call
Jan. 17, 2019, 9:30 a.m. ET

Contents:

Prepared Remarks

Questions and Answers

Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Carriage Services 2018 Pre-Release Earnings Call. At this time all participants are in a listen only mode and later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today’s conference Ms. Viki Blinderman. Ma’am you may begin.

Viki Blinderman — Senior Vice President, Principal Financial Officer, Chief Accounting Officer and Secretary

Thank you, and good morning, everyone. Today, we’ll be discussing the Company’s preliminary and unaudited results for 2018, as well as our rolling four quarter outlook for ’19 and discussing certain operating changes since our last conference call. Our related press release was released yesterday after the market closed.

Carriage Services has posted this press release including supplemental financial tables and information on the investors page of our website. The audio conference is being recorded and an archive will be made available on our website later today through February 25th. Replay information for the call can be found in the press release distributed yesterday.

On the call today from management, besides myself, is Mel Payne, Chairman and Chief Executive Officer, and Ben Brink, Chief Financial Officer. Today’s call will begin with formal remarks from management, followed by QA period.

Please note that during the call we will make forward-looking statements in accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. I would like to call your attention to risk associated with these statements, which are more fully described in the Company’s report filed on Form 10-K and other filings with the SEC. Forward-looking statements, assumptions or factors, stated or referred to on this conference call are based on information available to Carriage Services as of today. Carriage Services expressly declaims any duty to provide updates to these forward-looking statements, assumptions or other factors after the date of this call to reflect the occurrence of events, circumstances or changes in expectations.

The financial results discussed are preliminary and unaudited and these results are subject to change upon the completion of the Company’s Form 10-k for the period ended December 31st, 2018, including the effects of any subsequent events and audit by the Company’s independent registered public accounting firm for 2018 consolidated financial statements. As a result, the Company’s actual results may vary. In addition, the preliminary unaudited financial data should not be viewed as a substitute for the full financial information prepared in accordance with GAAP, which will be filed with the SEC at a later date.

Furthermore, during the course of the morning’s call, we will reference certain non-GAAP financial performance measures. Management’s opinion regarding the usefulness of such measures together with a reconciliation of such measures to the most directly comparable GAAP measures for historical periods are included in the press release and the Company’s filings with the SEC.

Now, I’d like to turn the call over to Mel.

Mel Payne — Chief Executive Officer Chairman of the Board

Thank you, Viki. I will reserve my commentary about everything that has happened underneath the public covers of Carriage over the last four months and how these actions will affect our future performance until the question-and-answer session at the end of our call. Ben?

Ben Brink — Ben Chief Financial Officer

Thank you, Mel. First off, I want to introduce our rolling four quarter outlook for 2019. We expect adjusted consolidated EBITDA of between $77 million and $79 million, adjusted diluted earnings per share of $1.34 to $1.44, and adjusted free cash flow between $37 million and $40 million. Our 2019 results will benefit first and foremost from: improved operating performance versus 2018; a reduction of overhead and non-cash stock compensation expenses of approximately $6 million, $4 million of which will be lower overhead expenses; full year results from acquisitions we made in the third quarter; and a lower share count due to the common stock and convertible note repurchases we executed during the fourth quarter.

In the fourth quarter, we took advantage of the decline in our share price to repurchase 1.1 million shares for $17.7 million, at an average purchase price of approximately $16 per share. We also repurchased $22.4 million face amount of our 2.75% subordinated convertible notes and privately negotiated transactions which leaves $6.3 million of those notes outstanding. The repurchase activity in the fourth quarter capped off a busy 2018 in regards to our capital structure in which we repurchased 95% of the convertible notes that were outstanding, which in effect reduced potential future dilution from the notes by 3.4 million shares, along with a net issuance of 1.7 million shares of common stock after our open market repurchases in the quarter. Going forward, we expect diluted share count will be right around 18 million shares, only 300,000 shares higher than our reported diluted share count in the first quarter 2018, before we executed the various capital structure transactions.

We expect our bank covenant compliance leverage ratio to be 5.1 times as we exit 2018, and our pro forma leverage ratio of 4.9 times based on the mid-point of our rolling four quarter adjusted consolidated EBITDA outlook. Our expectations for $37 million to $40 million of adjusted free cash flow in 2019 includes $23.5 million of cash interest expense, $5 million for dividends paid and $10 million for maintenance capital expenditures.

We expect to have total capital expenditures between $16 million and $18 million, with the majority of growth capital to be invested in cemetery inventory projects. Free cash flow will also benefit from our expectation of paying no federal tax payments in 2019 due to a tax method change related to deferred pre-need revenue we’re in the process of implementing. We also expect that this will put us in a net operating loss position for tax purposes in 2019 and 2020. I’m really proud of our tax team for all the work they’ve done on this.

Now, I’ll turn to our preliminary 2018 results and provide a little update on our thinking regarding write downs and divestitures from our last call. For the year, adjusted diluted EPS is estimated to be $1.19, a decline of 14% compared to 2017. Adjusted consolidate EBITDA is expected to be $70.5 million, an increase of 2.6% versus last year and an estimated adjusted consolidated EBITDA margin of 26.3%.

During the quarter, we booked $1.4 million of severance charges, a $1 million reserve for a potential legal settlement and related expenses, a $4.5 million non-cash charge due to the cancellation of previously issued equity performance awards, and an additional $1 million charge related to goodwill and other impairments.

The impairment charge is significantly less than we anticipated when we discussed it on our last call due to our belief that it is most appropriate to allow all of our businesses to operate for a time period under our rebooted and updated Standards Operating Model before we make decisions regarding write downs and divestitures. Consequently, we don’t anticipate divesting any businesses in the near term and any potential future divestitures will have an immaterial impact to our financial results.

Finally, I want to take this opportunity to thank all of our managing partners, their teams, our Standards Council members, our operating leadership and everyone here at the Houston Support Center for all of their great and hard work over these past four months to set us up for improved operating results here in 2019. It is an exciting time here at Carriage and we look forward to sharing all the results with you as we move through the year. And with that, we will open the call up for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Alex Paris with Barrington. Your line is open. Please go ahead.

Chris Howe — Barrington — Analyst

Good morning everyone. This is Chris Howe sitting in for Alex.

Viki Blinderman — Senior Vice President, Principal Financial Officer, Chief Accounting Officer and Secretary

Hello.

Mel Payne — Chief Executive Officer Chairman of the Board

Good morning, Chris.

Chris Howe — Barrington — Analyst

Good morning. My first question just digging into the press release here, the growth that you saw from 2012 to 2016, as we look at part two, can you perhaps share some high level overview of what your financial expectations are In terms of reaching the levels of growth and exceeding those levels of growth perhaps that you saw over the five-year period ending in 2016?

Mel Payne — Chief Executive Officer Chairman of the Board

This is Mel. No. I can’t give you anything like that. I can only tell you that what I wrote to our people in the field and I had a choice to make, I could either try to interpret for Wall Street and analysts some version of that that might be more understandable. Or I could show you what I actually wrote our people and this is the fourth memorandum that I’ve written since October 1. Each one has gotten progressively more interesting, I never could have foreseen at the middle of September when all this started, how things would play out, all the feedback I would get from our field and the standards themselves that have we now updated and rebooted, are very focused on same-store, compounded revenue growth over multiple years, both in the funeral home and cemetery, rather than more rigid, outdated standards that were demoralizing our entire organization. And it’s a term I’ve used here over the recent past, we had some standards that had grown outdated and frankly the leadership had weaponized them and that had demoralized our entire organization, that has been eliminated.

And what we have now is a highly motivated, excited group of managing partners, sales managers and everybody else that supports them, ready to go, with more focus on compounded revenue growth of existing operations. And I’ve told the team here that the last four months will turn out to be a blessing in disguise because the amount of work and the documentation of that work in our Company is something really I have never seen in my career and it’s amazing. And so, I think you’ll have — I’m not going to give a model forecast of what the next five years are going to be like. I was told not to put that in there by our attorneys. I didn’t listen to them. I knew I’d get the question. It’s OK. And I think we’ll have similar growth and I think we’ll have similar results. Whether the stock price will do what it did the last time? I don’t know, but I don’t think it’s going down. That’s why I bought 150,000 shares, way before any of this became clear of how it would work out.

Chris Howe — Barrington — Analyst

Thank you. That is helpful. My next question is in regard to the game changer, the funeral service and guest experience that continues to evolve. Can you perhaps add some additional color into this and where it’s at now and the evolution of it and where you hope it will go over the next five-year period?

Mel Payne — Chief Executive Officer Chairman of the Board

Yes. We’ve got some very — I mean we’ve got some fantastic entrepreneurial innovative people in our businesses and they weren’t being listened to. They weren’t being empowered. That’s not true anymore and some of the best are on the Standards Council. And so, Kyle Cordano (ph), who is one of our best and most innovative and got two chapels, Bryan and College Station, Texas and they are fabulous businesses. I bought that little business in ’94, what it looks like today is unbelievable, and it’s because of Kyle. Kyle believes and I share that view that if you want to be the best at this business, we consider it a high value personal service business, even though cremations are having less revenue per service, that doesn’t mean it’s not a high value personal service business. It’s in the mindset of your employees and your leaders.

And we’ve always been focused on being the best in the market, it’s a service of the client family, who suffered the loss of a loved one. What we haven’t been focused on is the guest experience, that’s anybody, but the client family and their relatives, it’s everybody else at every point of contact. From the first phase to the last phase, there is so many opportunities to make a lasting impression on the visitors, we call it guest experience. It’s going to require a change in mindset, but Kyle has proven that it works in growing his business I mean like a runaway train, and it will work. And so, we eliminated what wasn’t working and what was demoralizing people. We eliminated the two people standards that were being tied to the rigid average revenue per contract of each funeral, which had grown outdated three or four years ago, and nobody thought enough about change and lost touch with our businesses to do a fresh thinking on it.

Now, we have something that is a little subjective, but it won’t stay that way because if you’re really good at this standard, you will also be able to grow your revenue at higher compounded rates over time. And this won’t be even questionable, either you can do it or you can’t. And now we have a portal that’s unique and design for people to share. We don’t have these ideas here in Houston. The ideas are out there. This is now a way to share those ideas that really work among the managing partners in this portal and to really communicate across the Company what’s working, what’s not working, and how your people are responding and this kind of things. So I think this will have — it is a work in process, I think it will take time, but I don’t think it’s going to take years. I think this will be infectious when people see that this actually works and you have your people going out of their way to practice random kindness, courtesy to somebody who doesn’t expect it, they’re just there as a visitor or a guest, I think is going to make a huge difference over time, but you won’t be able to model it, that’s the problem.

Chris Howe — Barrington — Analyst

That’s great to hear. And following up on that, this in combination with — you mentioned before the future recruitment of a President and COO, is there anything else beyond the past four months that is still remaining that will further strengthen Carriage’s position moving forward as part of the restructuring?

Mel Payne — Chief Executive Officer Chairman of the Board

I’m not completely clear on your question. It’s very clear that I don’t have anybody in the Company.

Ben Brink — Ben Chief Financial Officer

No, just as far as the past four months, everything is complete and Carriage is in position moving forward, there’s nothing remaining as part of the restructuring that still needs to be completed?

Mel Payne — Chief Executive Officer Chairman of the Board

No. I think the updating and rebooting, the elimination of the problem on leadership, we will update our strategic criteria for acquisitions. We haven’t done that yet. That will be next. It will be so easy now that we have these rebooted standards, and we will look back at the history of every business that we have an opportunity to acquire over 10 years and look at their compounded revenue growth, and whether it’s declining or accelerating over the last 10 years, because that’s going to be, along with all the other work we do on demographics, competitive standing and so on, and mixed changes, that’s going to be something that really differentiates the valuation of what we buy, even more clearly and precisely than we’ve ever done.

And — but in terms of positioning our portfolio, I mean there are a lot of people out there who are new in some of the businesses that had been declining and I’m hearing from them. I’ve heard from and they don’t want to be sold. They want to make a comeback, they want to be a hero, they want to perform. They want to grow and that’s why when we went into this, we weren’t sure how many dispositions we might make and what the size of the write down will be. Now, I’m going, wow, I can’t believe the response. And the response on these rebooted standards has been overwhelming. The amount of feedback that I’ve gotten has been unbelievable. Make a great study at Harvard Business School over four months, except nobody would believe it. And that’s why we’re all excited about what lies ahead.

Now, that doesn’t mean that everybody is going to be at peak performance right out of the gate. No way. This will take time, but it will grow, it will be effective. I do think it will be a similar process in growth and performance like we had in ’12, ’13, ’14, ’15 and ’16. It was only after I promoted a bunch of people that weren’t ready that it began to bit change and I backed out and that’s, my bad. So that’s — I expect this thing to — over the course of a year because last year we had a great December and a great January because of the spike in flue deaths and then from then on the rest of the year we began to leak performance. I don’t expect that to happen this year, I expect just the opposite.

Chris Howe — Barrington — Analyst

Thank you, Mel, Viki, and Ben. I’ll hop back in the queue.

Mel Payne — Chief Executive Officer Chairman of the Board

Thank you, sir.

Operator

Thank you. And our next question comes from Komal Patel with Goldman Sachs. Your line is open Please go ahead.

Unidentified Participant — — Analyst

Hi. This is Jack (ph) on for Komal. Could you talk specifically about how you updated your funeral and cemetery standards to account for the secular shift toward commission from burials? I think you had mentioned that you’re going to have a special meeting in November to make those standards more relevant, so any additional color on that would be super helpful.

Mel Payne — Chief Executive Officer Chairman of the Board

Yeah. We hosted a Carriage University Day on Thursday, November 29th. There was an entire day, morning until late afternoon, and it was only the field leadership above the managing partner, our Directors of Support, I think we have eight, three regional partners, four analysts operational and planning analysts here. And then all those support teams in Houston from all the support departments HR, legal, IT, accounting, the accounting lieutenants had some of the best ideas about how to update the standards. I just loved their ideas. And so, I spent the whole day, we called it Carriage University, explaining the idea of a Standards Operating Model, the concept, why it needed to be decentralized, but decentralized only worked with discipline and performance when they were relevant. And the last time they had been updated was 2011.

So with the changes in cremation and from burial and all that, the average revenue per contract which was a combined average of cremation and burial, it had grown very difficult to achieve. And unbeknownst to me, it had become completely the other two people standards. That’s where you get your average revenue per contract family by family, is your people. So they were losing out on not only that, they were losing out on the two people standard. So that’s 35% off 100%. I mean, if you’re below 50%, you’re below minimum. And so that’s the kind of thing that was going on. So we got — we eliminated the two people standards and the ARPC and we replaced it with — the volume is still very important and so the three-year average — your volume standard this year has to be the three-year average of the last three. So if you’re going up, you have no problem, but if you’re declining, three years ago was higher than the most recent year, you won’t be able to make it unless it turns back up.

We changed that weighting from 30% to 15%. And then we put in one, two, three, four categories of three-year compounded revenue growth and we use as the base ’15,’ 16, we added those together. That’s the base year. So now we have ’16, ’17 and ’18 compounded and ’19 will be another year. So if they get 0% to 1% compounded revenue growth over three years, they achieve 10% up to 35%. If it’s 1% to 2%, 25% credit, 2% to 3%, 30% credit and over 3%, 35% credit. Well I can tell you, that gives you 15% on the volume, which is three years, and up to 35% on the compounded revenue. If you can compound revenue in this business, funeral business, anywhere from 1% to 2%, you can compound the field EBITDA at 2% to 4%. If you can compound revenue at 3% or over 3%, of course, the field EBITDA compounding goes way up to.

So we got smart, a little late, but not too late, and we did the same thing in the cemetery, except we have a little bit of increase in the compounded revenue growth. They get 10% credit if it’s 2% to 3%, and 3% to 4%, they get 25%, 4% to 5%, 35%, and 5% and greater, because we want some performance upside out of our cemetery portfolio, especially the big ones, they get 45%. So on market share and revenue growth in the cemeteries it’s now up to 70%. The operating margin range is 30%. That’s a five point range depending on the size and history of that business. We eliminated all that other stuff and made this very simple. This is about growth of what we already have, people who can’t grow will have to look at whether that business belongs here. Certainly if they’re declining, they won’t stay here, which was one of the problems we had before. No one was being held accountable on these outdated standards. When you update and reboot and get people that are highly motivated and skilled re energized and then you put minimum standards of being held accountable, wonderful things happen because they know you’re serious. I hope that helps.

Unidentified Participant — — Analyst

Yeah it’s super helpful. And just I think you had mentioned on the cemetery side as well, so can you just touch on that side? So wanted an update on how were pre-need cemetery sales in 4Q and tracking in early 2019? We know that was like one of the major focuses as well in the near term.

Mel Payne — Chief Executive Officer Chairman of the Board

Yeah. I reorganized who has got the big cemeteries and that will be Kevin Doherty. Kevin had the central region. Kevin came from SCI. He has got a lot of background in cemetery operations and sales, and we have another Director of Support who was not in my view as well organized and focused — not her. It was who, she had it (ph) directing her. So these two are going to be our cemetery high performance duo and I expect them to be high performance heroes by the end of this year. I wouldn’t pay a whole lot of attention to what happened in the fourth quarter. Our cemeteries were not hitting on all cylinders while all this was going on, because I was paying more attention to the funeral homes, which is 75% of our revenue and earnings, but that didn’t last. So, we came to that last, but it’s going to be — I expect broad performance out of our 10 largest cemeteries. If we get broad and high performance out of those, they are what I call big meter movers. That’s why we have CapEx that Ben mentioned allocated for them. Whether that goes up in January or the first quarter or second quarter, I will tell you, by the end of the year, they’ll be humming.

Unidentified Participant — — Analyst

Got it. And just last one from me. You completed three acquisitions in the third quarter. What are you seeing so far in terms of performance there? And then, where there any additional in 4Q as well?

Mel Payne — Chief Executive Officer Chairman of the Board

What we did there, we almost had to get lucky that they were already fully integrated, because the operating leadership — they weren’t on top of that and some of the integration over the last few years was horrible. That’s what I found. That is over. And I don’t know whether they didn’t explain to people what these standards were and what was required and how fast integration would have to happen, but some of this dragged on and dragged on and I got tired of trying to explain it. That is over. So, what we got now is a bunch of people that understand everything and needs to happen. There’s a sense of urgency and purpose. There’s a sense of, look, we blew it, we’ve disappointed a lot of people, especially me. I disappointed a lot of people, because I had the wrong people that disappointed me, and therefore, you got disappointed and people gave up on me and the Company. I’m OK with that, but that’s just not acceptable going forward. You may actually be able to tell, I’m in this thing. I’m having a lot of fun with our people. Everybody understands what the deal is.

Unidentified Participant — — Analyst

Appreciate it. Thank you so much.

Mel Payne — Chief Executive Officer Chairman of the Board

I have never seen such alignment. I have never seen such alignment come together so fast, so broad and so deep.

Operator

Thank you. And our next question comes from the line of Chris McGinnis with Sidoti Company. Your line is open. Please go ahead.

Christopher McGinnis — Sidoti Company — Analyst

Good morning. Thanks for taking my questions and appreciate the color so far and in the release. I guess just to follow-up, Mel, on that — on the last question around the acquisitions, and the MA and the people in place. So has the integration team been changed, or because I remember, it was a year and a half ago, almost two years ago, I think the MA team itself was changed? Can you maybe just — and then how quickly is that the kind of adoption of the standards expected to be when going forward on the MA side?

Mel Payne — Chief Executive Officer Chairman of the Board

Look, I don’t want to play games. I’ve been very disappointed at integration, and I wasn’t involved in it and that includes some of the recent ones. And that can’t be true because what we can’t do here, whether it’s a new acquisition or existing business, is allow so many and we have so many high performing businesses to subsidize those that aren’t, that just won’t cut it. So integration team in terms of the normal things like HR, IT, it’s been wonderful, they’ve done (ph) operations, that are horrible and I think the same thing on the MA team. They were new, I taught them, I had lot of materials about it, I had to go out and turn down some businesses that we never should have been even looking at in the first place, spend a lot of time and effort on it and then I saw what it was and so I’ve had to redo all of that. And now it’s tight, it’s right and it isn’t going to get wrong anytime soon, but we got the teams in place now. Everybody’s aligned, everybody’s knows what we did wrong, everybody knows what we’re now going to do right, and anybody that does anything wrong, is going to stand out like a sore thumb, there’s no place to hide.

Christopher McGinnis — Sidoti Company — Analyst

Thank you for that. And then, I guess just a follow up on some of the earlier questions around the adoption of new standards and why they were brought in. So did the issues around the old standards appear after the strength of — the beginning of 2018 and it just highlighted? Because it sounds like maybe there were rumblings before this and so I guess, can you just walk us through a little bit of how it came out to you and became apparent that there were some issues around the standards and that they needed to be changed?

Mel Payne — Chief Executive Officer Chairman of the Board

Yeah. I’ve been thinking this for a couple of three years. I get a standards achievement report every month and I’ve been looking at them and I’m going — but once I backed out of operations, which was really more toward the end of ’15, even though I still had the role, things were going on OK, and ’16, if you look the five years, it was unbelievable. But there were signs, there were small symptoms in some of the smaller businesses in particular. And then I kept hearing more and more about this average revenue per contract and the people standards. And those symptoms began to emerge in ’17, but not in such a material way. Our bigger businesses were basically still doing really fantastic. And they were covering up in terms of consolidated number some of the demoralization in some of the smaller groupings of our funeral homes in particular.

And our cemeteries began to show some signs on the sales side. So it started, I’d say — pretty seriously, I began to notice things in the last half of ’17, but we still ended the year OK. But in the first quarter, I was really pumped up after January. And then I began to see — even though January was so spectacular, I was surprised about February and March. And then I was surprised it kept continuing and in the second quarter, I almost made a move then. I decided not to in terms of not exactly what’s happened now, but in the third quarter, it just got worse and worse. And we had a meeting in June with all the MPs, I thought it went really well. I thought we’d get some real performance uplift and turn around in the last half or in the third quarter. It went the other way and that’s when I said I’ve had enough.

Christopher McGinnis — Sidoti Company — Analyst

Okay. I appreciate that. Thanks very much for that color and look forward to hearing more in Q4.

Mel Payne — Chief Executive Officer Chairman of the Board

You bet.

Ben Brink — Ben Chief Financial Officer

Thanks, Chris.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Duncan Brown with Wells Fargo. Your line is open. Please go ahead.

Duncan Brown — Wells Fargo — Analyst

Hey. Good morning. You provided a little color on Q4 on the cemetery side of the business, so I wondered if you could give us some details on the funeral side, anything on volumes, pricing or perhaps any changes in cremation mix we should be aware of?

Ben Brink — Ben Chief Financial Officer

Yes. Nothing too specific. I would say in terms of trends in cremation rates about where we would expect, trends in volume about where we expect. So, Mel pointed out about the tough comparisons between December of 2017 and January last year. And margins aren’t declining where they were in the third quarter and certainly we’ve seen them stabilize. So progress, nothing to scream too loudly about in the fourth quarter.

Mel Payne — Chief Executive Officer Chairman of the Board

Yes. I saw an improvement from August, September, even October. Remember, in the release yesterday, the October 1 memorandum was really a, we got a serious problem here. And I put out there for all of our people a diagnosis of problem analytically over a period of seven years from 2011 as a base year and it became very clear, but we just weren’t sure what the problem was. And so August was terrible. September, October was maybe a little better, and then, November jumped way up. December versus last year, I mean, was a tough comparison, but there’s more than hope. I think there’s a trend that will become our friend increasingly throughout this year. Everything I put in the in the pre-release, I wouldn’t have done that if I didn’t feel that way.

Duncan Brown — Wells Fargo — Analyst

Okay. Thanks for that. And then, if you look at the four quarter rolling outlook obviously, EBITDA growth well outpaced top line. And my sense is some of that’s from reduction overhead. I wondered if you can give us a little — I think, I heard $4 million reduction, if you could confirm that one way or the other? And then maybe give us a little more color on where those costs are coming from, especially with all the changes sounds like you’re making in terms of integration teams and things like that?

Ben Brink — Ben Chief Financial Officer

Yeah, I mean, it’s pretty simple. It’s people and operating expenses that as we took a look at where were your run rate in 2018, 2017, we felt that we could cut back on and save and tighten the belt in 2019 that’s really where those are coming from.

Mel Payne — Chief Executive Officer Chairman of the Board

I think we took a thorough review of every department , every business and this was something that hadn’t been done in a while. I think we got better by shrinking the cost. I think we got better by having the people left, be more aligned and productive and collaborative and restore what I consider a high performance culture across the platform. And I think the people in the field sense it. They sense here, we’re all together, and before, that wasn’t true. When we’re all together as one team, with one vision, they tend to want to produce and perform at a higher level also.

Duncan Brown — Wells Fargo — Analyst

Okay. So just to go back to the cost side, it I mean sounds like it’s broad based, it’s not necessarily from one part like HR or something like, is that the right way to think about it?

Mel Payne — Chief Executive Officer Chairman of the Board

I mean there some concentrations. I will let Ben and Viki mention it.

Ben Brink — Ben Chief Financial Officer

Yes. I mean, like I said, nothing specific, right. Changes in people and just getting cleaner on operating expenses across the board. It really was looking — like Mel said, really digging deep in all of our overhead expenses, our teams, what have we done over the past couple years, what do we look like going forward. For instance, as an example, right, in our IT department, we had a lot of investments in the infrastructure and different software over the past couple of years and people, and now it’s really into a take that and grow with it. And we are really excited about that area specifically. So —

Duncan Brown — Wells Fargo — Analyst

Okay. That’s helpful. And the last one from me. I wondered if you could just state the Company’s current leverage targets, time to expect to reach that and then also that in the context of perhaps your share repo activity and goals going forward?

Ben Brink — Ben Chief Financial Officer

Yes. Our long term goals are still in that 4 — operate the Company in that 4 times to 4.5 time leverage range, that hasn’t changed. Obviously, we’re delayed (ph) based on operating performance and the share repurchases we did here at the end of the year. Can’t quite give you a time frame when that 4.5 looks like yet, I think we will have a better idea as we get further into 2019, but that is certainly our intention.

Mel Payne — Chief Executive Officer Chairman of the Board

This is Mel. Look, we issued high yield bonds back in May, $325 million. And at that time, I could not have foreseen what was about to happen. And so, when it did happen and that’s when we made a policy of 4 times to 4.5 times. More because — not 3.5 to 4, which I think SCI has as a policy, which is probably a more comfort level for bondholders, who generally think a smaller company with more leverage is more risk. That’s not how I look at it, but I knew that there were lot of common stock investors as well who were nervous about 5 times EBITDA leverage. And when you start declining in your performance, then it really gets more uncertain for them and higher risk in perception. So when we got into this — there’s a book called The Outsiders, by Will Thorndike, and he profiles eight companies over many decades, all of them famous. And from time-to-time, those companies were able to create a lot of shareholder value when the market served up, an intrinsic value that was disconnected from the market value and they were very aggressive moving at that time. And so, when this happened, even though we had recently established a policy of 4 to 4.5, I couldn’t believe it that — I mean I just couldn’t believe that I wasn’t sure how it would turn out. But I knew one thing, I knew the Company wasn’t worth $15 or $16 and I knew that we could get it going again and get the free cash flow and that’s what we did.

So I think this is one of those things that comes along every once in a while, sometime a long while. Same thing happened in ’08, ’09. And this time, as opposed to ’08, ’09, we got a much better Company. And once we diagnosed the symptoms of the illness, I mean you big shot of penicillin and shock, this thing is getting healthy fast. Yeah, there’s work to do, but I think we’ll look back on this and say, wow, I can’t believe we did that, we created a lot of value for our shareholders that will now be next five years whatever our performance is, will be spread over fewer shares and we get rid of the upside on that dumb convert that was a mistake in ’14 by getting rid of it. So I’m thrilled from a shareholder value creation point of view that we made these moves and some people might consider it reckless, not us. We have total faith in our people being able to run their businesses and now we’ve downsized the overhead, we’ve gotten better, we are going to create a lot of cash flow. I was looking at free cash flow yield just on our outlook. I mean, that’s ridiculous. So we’re excited and we’re going to get back to a lower leverage policy because we have the flexibility in the cash earning power to do so. We will get back there, I promise.

Duncan Brown — Wells Fargo — Analyst

Thanks for the color.

Operator

Thank you and our next question comes from the line of Ben Bell (ph) with Columbia. Your line is open. Please go ahead.

Unidentified Participant — — Analyst

Hi Mel. Hi, Ben. It’s Dan Beleson (ph). My question has less to do with numbers and more about understanding your customer value proposition and the strategy or what’s changing in your strategy of the business better. I understand the incentive and operating standard changes, even the personnel changes, but when you look down at a highly decentralized level, can you please share more in layman’s terms about what the actual issues have been in the business and what’s changing you? Some examples, what have your competitors been doing better than you, are their pricing changes that have needed to be made, is there unexpected increase in cremation rates, have you been losing out on cross selling opportunities, what from a strategy and business perspective? And I know you have lots of different businesses and maybe one in Texas has a different problem than one in South Carolina, but when you kind of group the issues together, what is the biggest needle movers?

Ben Brink — Ben Chief Financial Officer

Yes. Again, I think for us, nothing as we look at, the reboot of the standards does two things. One focuses our managing partners and their teams on compound revenue growth, not on the components of revenue growth, but how can we grow our businesses. And that’s across the board, that’s taking every — and that ties — then it ties into the updated standards of service and guest experience. How each and every time we engage with a client family, whether it be a client family or other people in that family or friends or other relatives that are coming to the surface, how can we show them each and every time that high value personal service, so that that next customer is looking at our funeral home saying, man that is the type of service that I would want.

And I think as we take away that average — that focus on average revenue per contract as a standard, not as a — it’s still going to be top of mind, that people aren’t making decisions about how I can raise my average revenue per contract. We are making decisions about how we can provide a great service, a great guest experience each and every time so that more people are looking at our funeral homes as a place to remember their loved ones.

Mel Payne — Chief Executive Officer Chairman of the Board

Yes. This is Mel, Dan. It’s hard for me to answer your question because each business and each community in which we operate is uniquely different. And they tend to be not similar enough so that you could come up with centralized solutions and feed it down and that works broadly across the entire portfolio. Our whole strategy is to create standards. And these standards are performance standards, high performance standards that are not easy to achieve, certainly not easy to achieve a 100%, that’s why 50% is a minimum. Now, as they’re updated and relevant, the main issues that our people have been facing were these rigid standards that caused them to behave and operate in a way that wasn’t consistent with long-term opportunistic growth in all market share, including relatively low versus burials, cremations. And so the standards we had in place were — they were posing a disincentive and they were causing in too many cases, I’d find out people to pass on opportunities to grow market share, and have an opportunity to have a guest experience. And so I think the answer is and this came from all the feedback that came back to us, we’ve changed this in a way that we took away all the reasons somebody can’t grow their business that are higher rate of revenue. How they do that locally is case by case and they figure it out.

Now, when they can’t figure it out and can’t make these standards, that becomes obvious first (inaudible). But I think we’ve got a lot of great talent out there. We’ve had too much turnover. I think the people we’ve got in place are really good. In almost every business, there will always be upgrades on that, but not wholesale. And I think this whole change and this whole reboot will have results that will make investors happy over time. And we’re not going to get into trying to say, we don’t do any pricing here, we don’t do any this or that, we don’t do any centralized stuff that we hand down, and so they’ve got to have to figure this out. And that’s the whole reason we look at the leadership in each — we look at them as partners. We look at them as partners and what we can do to help our partners to be successful now we got these standards, these are their standards, created by their best peers, not me, not Ben, not Viki, these are there’s. And they’re not easy to achieve. Now, we have to do a better job of supporting them like social media, various IT things, like this portal ,yeah, there’ll be training, selective training on cremation, how do you better handle cremation families. And that’s especially a problem in the northeast because it came their last and you could see a difference across the Company, depending on the geography and how soon these trends are hitting them and that’s what this is all about. It really is a new beginning for our Company.

Unidentified Participant — — Analyst

Okay. So, Mel, just to sum up, please correct me if anything I’m interpreting is wrong here, but it sounds like the changes in the standards that you’ve made and the issues that you were dealing within the past were more focused around passing on smaller pieces of business, turning away cremation business and not having a greater focus on customer service. Is that right?

Mel Payne — Chief Executive Officer Chairman of the Board

Yeah. I think that that’s a good executive summary. And when this thing started trending down, one of our long term investors and a friend reached out to me and they said, Mel, if you could estimate why these declining trends are happening, and say, look how much of it is secular stuff happening in the industry trends that you can’t control, outcomes you can’t control, and how much of it is self inflicted Company, and at that time this was right at the beginning, maybe even before the beginning, I said, I think 85% to 90%, it’s under our control. Now, once I got into this, and today, I have a totally different view. I think 99%, it was us.

Unidentified Participant — — Analyst

Got it. And Mel lastly, we’ve spoken a lot in the past about capital allocation, your balance sheet, you’ve spoken previously on the call, looks a little bit different than what you would ideally want it to look like today. How has that or how is that going forward going to change some of your capital allocation decisions? Is MA completely off the table for now until you lever back down and do your hurdle rates change in some of the other investment opportunities that you have, whether it’s buying back stock or reinvesting back into the business while leverage is this high?

Mel Payne — Chief Executive Officer Chairman of the Board

Yeah. I think that’s a fantastic question Dan. It’s an unusual period of time. We left what was a good policy to get less leverage 4 to 4.5 times, but that was predicated on the Company still continuing to produce and grow and that didn’t happen. So we reallocated, we reprioritized capital allocation. I’m real happy with how it turned out. Now, we want to execute operationally. We don’t want to have this much leverage. That doesn’t mean that if we see this thing really — as I put in my letter to all our people, doing a snap back come back, I don’t mean in a week or a month, that we would entertain the right quality, reputational enhancing acquisition if it were going to do something for the Company strategically, but it would have to be big and high quality to fit that category, we would do that, but I have to get comfortable that we first have the cash flow power. And I have that comfort right now, but I want to see it as it lays out but we want to be flexible Dan over this year. I think this year is going to be a transformative year for our Company. But I don’t want to be stupid though.

Unidentified Participant — — Analyst

Thanks for taking the question as always guys.

Mel Payne — Chief Executive Officer Chairman of the Board

You bet.

Ben Brink — Ben Chief Financial Officer

Thanks, Dan.

Operator

Thank you. And I’m showing no further questions at this time. And I would like to return the conference back over to Mr. Mel Payne for any closing remarks.

Unidentified Speaker —

Thank you so much. Well, this was everything we expected and more. So we really appreciate the questions and we look forward to reporting our progress as we move through the year. Thank you so much.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.

Duration: 53 minutes

Call participants:

Viki Blinderman — Senior Vice President, Principal Financial Officer, Chief Accounting Officer and Secretary

Mel Payne — Chief Executive Officer Chairman of the Board

Ben Brink — Ben Chief Financial Officer

Chris Howe — Barrington — Analyst

Unidentified Participant — — Analyst

Christopher McGinnis — Sidoti Company — Analyst

Duncan Brown — Wells Fargo — Analyst

Unidentified Speaker —

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