Carriage Services Inc. Outlook Revised To Positive; 'B' Ratings Affirmed On Solid Performance, Deleveraging
- Houston-based death care company Carriage Services Inc. (CSV) demonstrated solid operating results in 2024 led by strength in its preneed cemetery segment and pricing efforts to offset some headwinds in funeral volumes.
- CSV also paid down roughly $42 million in outstanding amounts under its revolving credit facility (RCF), leading to S&P Global Ratings-adjusted leverage of 4.8x in 2024. As a result, we now expect leverage of mid- to high-4x in 2025 and 2026.
- We expect CSV to increase its growth investments in 2025, and we see some risk to the company maintaining leverage in the mid-4x range, given prior willingness to increase debt for certain opportunities.
- As such, we revised our outlook to positive.
- We also affirmed our ‘B’ long-term issuer credit rating and our ‘B’ senior unsecured issue-level rating; the recovery rating on this debt remains '4'.
- The positive outlook reflects improving credit metrics and the potential for a higher rating in the next 12 months as the company demonstrates its willingness to maintain adjusted debt to EBITDA comfortably at 4x-5x.
TORONTO (S&P Global Ratings) March 14, 2025--S&P Global Ratings today took the rating actions listed above.
We now expect S&P Global Ratings-adjusted leverage of 4.5x-4.75x in 2025 and 2026 due to margin improvements. S&P Global Ratings-adjusted leverage came in slightly below our expectations at 4.8x as of year-end 2024 primarily from lower total debt as the company paid down $42 million of amounts outstanding under its RCF.
S&P Global Ratings-adjusted EBITDA margins saw some pressure in 2024 stemming from costs related to severance and external fees that we do not expect will recur in 2025. These costs were partially offset by margin improvements in its cemetery segment as its investments in property enhancements have led to higher-value products and a build-out of its preneed backlog.
In 2025, we expect CSV to maintain stable debt levels and roll off one-time costs, boosting EBITDA margins to 30%-31%. We expect margin expansion will improve leverage to around 4.6x in 2025 compared to 2024.
Despite our expectations for improving credit metrics, there remains some uncertainty in the company’s long-term financial policy. The company has appointed a new CFO and has mentioned it is interested mergers and acquisitions (M&A) in 2025. These items present some uncertainty related to long-term leverage, and the company has historically shown willingness to increase leverage above 5x for M&A and other investments.
However, over the last year, CSV has prioritized deleveraging, focusing on deploying capex strategically and focusing on organic growth. The company also has a stated long-term leverage target of 3.5x-4x (historically S&P Global Ratings-adjusted leverage is about 0.5x above company-calculated leverage), and management expects to end the year within this range.
While this would indicate a more-conservative financial policy, the company has yet to prove a track record of maintaining leverage in its long-term range while also pursuing an M&A growth strategy. Additionally, a significant increase in preneed sales boosted CSV's recent financial results, which is a newer source of revenue that could slow. We are also uncertain if the company would pull back on growth investments if operating results underperformed expectations.
We forecast the company’s leverage to remain mid-4x; however, a relatively large debt-funded transaction could lift leverage above 5x. We believe CSV is incentivized to pursue M&A given its industry is characterized by a low-single-digit percent organic growth rate. These transactions often pressure credit metrics. This risk further supports our need for a proven track record of a more-conservative financial policy before upgrading CSV.
We believe CSV's focus on preneed sales and normal pricing increases will support steady near-term growth amid a normalizing death rate. Funeral volumes continued to be a headwind for CSV through 2024 with funeral contract volumes down 4.9% over the prior year. Much of the headwind is related to the pull-forward effect of COVID-19 on the U.S. death rate and a delayed flu season in the fourth quarter of 2024, which may have shifted some volumes into the first quarter of 2025. However, the company has offset funeral volume slowness with pricing and growth in preneed cemetery sales through resilient demand and marketing efforts.
While we think funeral volumes are still reverting to the long-term trend, we expect demand for preneed cemetery to remain resilient and strategic pricing to mostly offset inflationary pressures. Longer term, population growth and aging will support revenue growth. Additionally, the continued trend toward cremation is a potential risk for the industry, that said CSV has enhanced its offerings and utilized bundling to offset some of the impact. We believe this trend will continue at a gradual pace and should be manageable.
Our positive outlook reflects our expectation for S&P Global Ratings-adjusted debt to EBITDA of mid-4x in 2025 and 2026, which, if sustained, is commensurate with a higher rating. We expect low-single-digit percent organic growth and modest EBITDA margin expansion in 2025 as the company rolls over certain one-time costs incurred the year prior.
We could revise the outlook on CSV to stable if we expect S&P Global Ratings-adjusted debt to EBITDA to be sustained at or above 5.0x. The scenario could result from:
- Sustained operating challenges from the normalizing death rate or increased competition, limiting its ability to grow in the preneed cemetery space; or
- CSV prioritizing growth through acquisitions and investments, leading us have a more-aggressive view of its financial policy.
We could raise the rating on CSV over the next 12-months if the company sustains S&P Global Ratings-adjusted debt to EBITDA in line with our base case, maintaining leverage well below 5x. In this scenario, we would expect the company to establish a track record of maintaining leverage at this lower level while also pursuing its growth strategy.
Related Criteria
- Criteria | Corporates | General: Sector-Specific Corporate Methodology, April 4, 2024
- Criteria | Corporates | General: Methodology: Management And Governance Credit Factors For Corporate Entities, Jan. 7, 2024
- Criteria | Corporates | General: Corporate Methodology, Jan. 7, 2024
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
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