By Thomas A. Parmalee
When Service Corporation International detailed its second-quarter earnings on a conference call with Wall Street analysts Aug. 2, two things got a lot of attention: its new preneed agreement with Global Atlantic and some accounting changes in SCI Direct business.
Tom Ryan, the company’s president, CEO and chairman, began the call by summarizing the company’s quarterly performance.
“For the second quarter, we generated adjusted earnings per share of $0.79 which compared to $0.83 in the prior year,” he said.
He attributed the decline to lower funeral profits from a larger-than-anticipated decline in services performed. “This decline was slightly offset by an increase in cemetery profits and better-than-expected results from recent acquisitions,” he said. “Below the line, the favorable impact of a lower share count was offset by the negative impact of higher interest expense and a higher tax rate.”
He went on to provide a more detailed look at results, stating, “Total comparable funeral revenues declined $5 million or about 1% over the prior year quarter. Comparable core funeral revenues accounted for this shortfall as it declined almost $7 million. Core funeral volume declined 2.7%, versus our expectation of flat to slightly higher volume. Funeral volumes tracked our expectations during the first four months of the year, and we saw an unexpected decline in May and June.”
The COVID-19 “pull forward effect” is still weighing on the business, he disclosed. “However, we are seeing a more positive funeral volume trend in the month of July with comparable case volume trending positively versus the prior year and our modeling expectations,” he added.
In the cemetery segment, comparable cemetery revenue increased $12 million or about 3% compared to the prior year second quarter, Ryan said. “The increase was due to a $7 million increase in core revenue and a $5 million increase in other revenue. The $7 million core revenue increase was primarily the result of a $10 million or 11% increase in recognized preneed merchandise and service revenue. Robust increases in contract averages being delivered out of the backlog favorably impacted by cumulative trust earnings were responsible for the impressive year-over-year increase.”
The other revenue increase was predominantly the result of a $4 million increase in endowment care fund income, he said. “Comparable preneed cemetery sales production decreased by $7 million or 2%, which was less than our flat to slightly up expectation. While we saw a $4 million increase in core sales production, we had an offset of an $11 million decline related to large sales. We believe this is purely timing as we continue to see long-term strength in our premium cemetery inventory and sales production.”
Year-to-date preneed cemetery sales production is up $17 million or about 3%, Ryan revealed. “Cemetery gross profits in the quarter increased by $5 million and the gross profit percentage increased by 30 basis points, generating an operating margin percentage of 33%. The profit from higher revenues was slightly offset by higher maintenance costs and an increase in annual incentive compensation costs, again reflecting the timing of incentive accrual adjustments as compared to the prior-year quarter.”
He also commented on the company’s outlook for the remainder of the year, noting, “We now believe our full-year results will be in the lower end of our adjusted earnings per share guidance range of $3.50 to $3.80 for 2024. For the back half of 2024, we would expect growth in revenues and margins for both the funeral and cemetery segments resulting in impressive earnings per share growth versus the prior-year six-month period as well as compared to sequentially to the first six months of 2024.”
Ryan then he shared the exciting news about the company’s partnership with Global Atlantic and also spoke about how some operational changes in its SCI Direct business should have a positive effect moving forward.
“As we think about 2025, we would expect to return to earnings per share growth toward the higher end of our historical annual guidance range of 8% to 12%, as the negative effects of comparably higher interest rates and SCI Direct operational changes subside, and the positive impact of our new Global Atlantic preneed funeral insurance agreement takes effect.”
He highlighted the pact with Global Atlantic and SCI Direct again later on the conference call. “In the first half of the year, we had essentially $20 million of revenue that was not recorded because of changes in the way we deliver merchandise on the SCI Direct side and some changes that relate to selling away-from-home insurance,” he said. “So, those two negative effects kind of go away in the back half of the year and also go away in 2025. So out of the gates, you have two negative trends that kind of disappear.”
He sounded very bullish about what he expects in the future as it relates to working with Global Atlantic.
“With this new agreement and some of the terms that are in it, we believe we can generate higher general agency commission,” he said. “So, we would anticipate the positive effects of that to lift us up in 2025.” He added, “We’ll have a better ability to write for our customers a guaranteed insurance product. The way we had to do it under our old agreement, it was more difficult to get people underwritten and, therefore, get more protection to our customer, which also happens to generate a higher commission for us. And we worked really well with Global Atlantic in finding ways to on-board more people.”
The bottom line is Ryan firmly believes SCI will have a higher percentage of underwritten products for its customer base. And that is better for customers, better for SCI’s commissions and “better for Global Atlantic, quite honestly.” He added, “So, it has allowed us to kind of think through a better way to serve our customers, which also should, again, if we execute correctly, generate higher commission rates.”
As far as SCI Direct, the company is “deferring a lot of revenue that we’re still selling,” he said. “And one day, that money is going to come out of trust and the margins on SCI Direct operational business are going to go way up. So, this is a timing thing, and the business itself is very healthy. The consumer is very healthy. And so long term, I love our trend. Short term, we’re having to stomach a little bit of earnings indigestion.”
Eric Tanzberger, senior vice president and chief financial officer, shared some insights on mergers and acquisitions.
“From an M&A perspective, we were successful in closing three transactions,” he shared. “One was in Illinois, one was in Kentucky, and one was in Western Canada, for a total spend of about $23 million. That brings our first-half acquisition spend to about $38 million. And as kind of how I alluded to last quarter, we continue to remain very optimistic about our momentum here and investment opportunities that are expected to end the year above our targeted range of $75 million to $125 million of capital invested in mergers and acquisitions. In addition to acquiring businesses, we also spent $15 million purchasing real estate including $8 million for expansionary cemetery land in the Western United States.
Read a summary of the company’s second-quarter earnings results.
Read the full earnings call transcript.
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