By Thomas A. Parmalee
On Aug. 1, Service Corporation International, the largest provider of death-care products and services in North America, reported second-quarter adjusted earnings of 83 cents per share compared to 84 cents in the prior-year period. Revenue grew $22.6 million over the prior year quarter to just over $1.0 billion.
A day later, the company announced that its board of directors approved an increase in its quarterly cash dividend to 29 cents per share of common stock. “This quarterly cash dividend declared today represents a 7.4% increase from the previously declared quarterly dividend of 27 cents per share of common stock per quarter,” according to a news release The quarterly cash dividend is payable Sept. 29 to shareholders of record at the close of business on Sept. 15.
Some second-quarter highlights from the company include:
- Net cash provided by operating activities was $144.1 million compared to $140.7 million in the prior year second quarter.
- Net cash provided by operating activities excluding special items was $157.4 million compared to $140.7 million in the prior year second quarter.
- Comparable core funeral sales average grew 4.2%.
- Comparable preneed funeral sales production grew $12 million, or 3.8%.
Tom Ryan, the company’s chairman and CEO, said in a news release, “Today we are pleased to report adjusted earnings per share of 83 cents and net cash provided by operating activities excluding special items of $157 million for the second quarter of 2023. Adjusted earnings per share has grown an impressive 15% on a compounded annual basis compared to the pre-pandemic second quarter of 2019 (compared to an annual expectation of 8%-12%). Despite a 9-cent increase in interest expense, as well as a challenging inflationary environment for the consumer, we delivered strong operating results on par with last year.”
Despite the strong results, the company narrowed its full-year adjusted earnings per share guidance to $3.40 to $3.60 from $3.45 to $3.75, with Ryan citing “the challenging inflationary environment and its impact on consumer discretionary spending.”
On the plus side, however, the company increased its adjusted operating cash flow guidance to $830 million to $880 million from $740 million to $800 million “reflecting the resilience of our pre-tax adjusted operating cash flow and the expected decrease in cash taxes associated with a tax accounting method change,” Ryan said.
He added, “We continue to believe our long-term growth strategy is on track as we continue to grow revenue, leverage our unparalleled scale, and allocate our capital wisely to enhance shareholder value. I would like to thank our 25,000 associates for their dedicated service to our client families that has made these results possible.”
Insights from SCI’s Conference Call
On a conference call with Wall Street analysts, SCI executives provided additional insights on how business is going.
Drilling into the results and comments from the call, the overall theme seems to be this: Consumers at the high end are spending more (especially in the cemetery arena, with estates), consumers in the middle are behaving about the same, and consumers that are more sensitive to changes in the economy are starting to adjust their purchasing behavior – especially when it comes to an expense (like buying cemetery property) that may not be an urgent need.
According to Ryan, “Funeral metrics were strong and performed at or above our expectations. Cemetery preneed sales production increased slightly quarter-over-quarter. However, they fell short of our internal expectations, as we experienced a decline in the number of contracts sold, primarily within the entry-level price-sensitive consumer segment.” He continued, “We believe this is predominantly attributable to a decline in discretionary consumer spending by this entry-level consumer due to the actual and perceived impact of inflation on our preneed cemetery property sales and a variety of other discretionary purchases.”
There was, however, much to be pleased about as the average revenue per service grew 4% over the prior year, even after absorbing the negative effects of a 120-basis point increase in the cremation mix, Ryan said. “From a profit perspective, funeral gross profit declined slightly by $2 million, while the gross profit percentage remained about 21%, well above our pre-pandemic second quarter margin of 19.5%,” he said.
Preneed remains strong, as sales production on the funeral side grew $12 million, or about 4% over the second quarter of 2022, Ryan said. “Both the core and the SCI Direct channels experienced sales production growth that was primarily driven by increases in sales contract velocity,” he said. “We continue to see consumers awareness, and openness to preplanning elevated, with continued strength in marketing leads in preneed funeral sales production.”
While SCI performed well, it did observe that it is up against some challenges, particularly in the cemetery segment.
“Based on examining a variety of consumer discretionary data sources, and from feedback from our customers as well as from our frontline sales teammate, we believe that a significant reason our sales velocity has been negatively impacted is due to a more cautious consumer, particularly consumers that are more acutely impacted by the effects of accelerated inflation,” Ryan said.
He added, “Additionally, as we get further away from the acute impact of the pandemic, there seems to be a slightly diminished urgency for this specific entry-level consumer to transact, at the pace we’ve experienced over the last three years. The good news is, that we believe these consumers are deferred not lost.”
During the Q&A segment of the call, Ryan spoke a bit more about what SCI is seeing in its cemetery business, noting “We saw a lot more volatility in the consumer — in the cemetery segment versus the funeral. And I think there’s a reason for that. The average consumer is younger in cemetery. We’ve talked about before – they tend to transact earlier.”
Looking back at COVID-19, even younger people grew concerned about the spike in deaths, and so there was a surge in interest in buying cemetery space and products, Ryan said. “And so. I think what’s happening is when you saw a lot of inflation – particularly around food – and I’d say from a consumer discretionary perspective you’re getting hammered by a consumer staple right? So, as those prices went up and people had to make choices this is a discretionary purchase, they’re kind of backing away.”
As time goes on and inflation eases, however, that type of behavior should subside, he said.
Eric Tanzberger, SCI’s senior vice president, chief financial officer and treasurer noted that during the quarter, the company invested almost $10 million related to the construction of new funeral home facilities in several states including Virginia, California, Florida as well as the expansion of existing funeral homes and cemeteries in Ohio, Louisiana, and Texas.
“On the acquisition front, we closed three transactions in Illinois, California and Tennessee for a total of just over $30 million, which brings our first half acquisition spend to almost $40 million,” he said. “We remain positive and very optimistic about our acquisition momentum and our full year acquisition investment target range of $75 million to $125 million, which we still firmly believe in.”
He also commented on the looming prospect of the Federal Trade Commission possibly revising the Funeral Rule to require the online posting of prices.
“We continue to have pricing online on two-thirds to three-fourths of our funeral homes as we sit here today and GPLs online from that perspective,” he said. “And we continue to believe that we have price transparency for our consumers.” He added, “Our consumers have told us that clearly in the J.D. Power’s surveys and we feel comfortable with where we are moving forward.”