By Thomas A. Parmalee
Service Corporation International reported fourth-quarter earnings Feb. 12 and commented on some significant news – particularly for FuneralVision.com readers – that has been 10 years in the making.
In the fourth quarter, revenue increased $28 million to $1.1 billion. The company reported adjusted diluted earnings per share of 93 cents compared with 92 cents in the year-ago period.
Other highlights included:
- Comparable preneed cemetery sales production grew 9.4%.
- Comparable preneed funeral sales production grew 4.2%.
- Operating cash flow of $278 million and $869 million, for the fourth quarter and full year 2023, respectively.
- Adjusted operating cash flow of $882 million for the full year 2023, just above the high end of the company’s expectations.
A big topic of discussion for SCI on its call with stock analysts, however, is that very soon, it will no longer be required to seek Federal Trade Commission approval before acquiring firms in certain markets.
SCI made that agreement – and agreed to other terms as well – almost 10 years ago to resolve antitrust concerns raised by the FTC after it agreed to buy Stewart Enterprises.
The “stand-still agreement” was to last 10 years and is about to expire. It covers parts of Alabama, California, Florida, Louisiana, Maryland, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia.
You can view a more detailed breakdown of where SCI will soon be able to acquire firms without notifying the FTC in Appendix B of the consent agreement made between SCI and the FTC all those years ago.
According to that agreement, which will expire in May, “For a period of ten (10) years from the date this Order is issued, Respondents shall not, without providing advance written notification to the Commission, with respect to any of the geographic areas identified in Appendix B of this Order, acquire, directly or indirectly, through subsidiaries or otherwise, any leasehold, ownership interest, or any other interest, in whole or in part, in any concern, corporate or non-corporate, or in any assets engaged in Funeral Services or Cemetery Services, as specified in the relevant section of Appendix B of this Order.”
The order goes on to note, “Respondents shall provide the Notification to the Commission at least thirty (30) days prior to consummating the transaction (hereinafter referred to as the “first waiting period”). If, within the first waiting period, representatives of the Commission make a written request for additional information or documentary material (within the meaning of 16 C.F.R. § 803.20), Respondents shall not consummate the transaction until thirty (30) days after submitting such additional information or documentary material.”
During their conference call, SCI executives noted that while they did not think the expiration of the agreement would suddenly lead to an explosion of new acquisitions, it would, in a sense, untie its hands and allow it to become a more formidable player in certain markets.
“My guess is probably somewhere that we’d be interested in 15 to 25 type of markets that are out there that we’ve not had the ability really to think too heavily as it relates to growing through acquisitions,” said Eric Tanzberger, SCI’s chief financial officer.
Thomas L. Ryan, SCI’s chairman, president and CEO, noted, “What’s happened in the past is, it was a competitive situation where we would be asked to look at a business, we were at a competitive disadvantage because the seller would know that we have to get prior permission.” He added, “So, maybe that’s a better way to think about it is we were kind of behind the 8 ball, because we introduced risk into a transaction that our competitors didn’t have to deal with. And that should become more competitive as we move through this May date.”
Tanzberger added that he doesn’t think the sunsetting of the agreement will be a “game changer,” as the company has cultivated long-term relationships in the markets in question. “Our field operations, our management here has done a very good job having long-term relationships with independents that certainly we would love to talk to,” he said. “And what Tom said, just to reiterate, we talk to them now. It just is going to be their decision when they want a liquidity event for their generational planning and for their particular family.”
The implications for FuneralVision.com readers, however – particularly those that may soon be looking to make a transition in these affected markets – is clear: bringing SCI into the mix may now be a more appealing proposition than it was just months ago.
You can read the FTC’s full news release on the stipulations it put on SCI related to its acquisition of Stewart Enterprises here.
More Insights from SCI’s Report
In SCI’s news release announcing its quarterly results, Ryan gave a nod to the “solid quarter” it turned in to close out the year, noting that the company reported growth in revenue and adjusted earnings per share.
“The revenue growth is primarily due to a 9% increase in preneed cemetery sales production, which drove higher gross profit,” he said. “Adjusted cash flow for the quarter grew over $100 million from improved operating income enhanced by expected lower cash taxes and increased sources of working capital that more than offset higher cash interest payments.”
He continued, “For the full year of 2023, we reported adjusted earnings per share of $3.47, which represents a 16% growth on a compounded annual basis since pre-pandemic 2019.
- The number of comparable funeral services performed is 3% higher than pre-pandemic 2019 levels on a compounded annual growth basis.
- Comparable cemetery preneed sales production in 2023 experienced a 10% compounded annual growth rate over 2019 levels.
These results are all made possible by our greatest asset, our 25,000 associates.”
During the call with analysts, the “pull forward” effect of COVID-19 was another hot topic of conversation.
“The waning effect of excess deaths, including COVID, impacts not only funeral volume but at-need cemetery revenue and slightly reduces the normalized growth expectation in preneed cemetery sales production as we talked about last quarter,” Ryan said. “This, coupled with a higher year-over-year interest rate backdrop, particularly in the early part of the year, will have a dampening effect on our annual earnings per share growth expectations for 2024. We believe that in 2025, we should return to our normalized earnings per share growth expectation of 8% to 12%. We expect to capitalize on opportunities during 2024 by further utilizing our scale that should enhance the margins in both our funeral and cemetery segments into 2025 and beyond.”
Later on the call, Tanzberger said, “There continues to be a headwind as it relates to COVID. It is getting better every year, and you could see that in the fact that the total funeral volumes were down mid-single digits. And now we’re really calling it relatively flat. I mean, I think the fiscal guidance is flat to down 1% or 2%, but let’s just call it flat for purposes of this explanation. What you’re seeing in the positive is the natural growth that’s occurring in North America. You can call that 1% or so per year in terms of just the growth of the population, and that population aging and that population needing services of this particular industry.”
He continued, “Specific to our company, you have to also take into account acquisitions. In acquisitions, it depends on the particular year whether our acquisitions are heavy funeral or have heavy cemetery. But ultimately, you could add, call it, 2,000 to 4,000 funeral services in a particular year related to a full amount of acquisitions. So, you have that natural effect. You have the acquisition effect, which is specific to our company and what is being watched in this situation, specifically in 2024, is the pull- forward effect related to COVID.”
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