Service Corporation International shareholders had quite a week to close out October and open up November, with the stock price shooting up more than 10% the same week the company reported third-quarter earnings.
On Wednesday, Nov. 1, the company reported third-quarter adjusted earnings per share of 78 cents compared to 68 cents in the year-ago period – a 15% increase.
Other highlights included:
- Revenue increased $24.1 millionover the third quarter of 2022 to just over $1 billion.
- GAAP earnings per share were $0.80compared to $0.76 in the third quarter of 2022.
- Net cash provided by operating activities was $227.8 millioncompared to $182.6 million in the third quarter of 2022.
- Comparable core funeral sales average grew 4.3%.
- Comparable preneed funeral sales production grew $15 million, or 4.9%.
Tom Ryan, the company’s chairman and CEO, said in a news release, “Today we are proud to announce strong results that meaningfully grew over the prior year despite what continues to be a challenging consumer and interest rate environment. Adjusted earnings per share grew 15% over the prior year third quarter to $0.78. Gross profit grew $23 million primarily driven by higher recognized cemetery preneed revenue. Net cash provided by operating activities also increased $45 million to $228 million primarily due to expected lower cash tax payments offsetting higher cash interest payments.”
He continued, “Despite the challenging near-term consumer and interest rate trends, we remain focused on our long-term growth strategy, which is on track as we continue to grow revenue, leverage our unparalleled scale, and allocate our capital wisely to enhance shareholder value.”
Read the company’s full earnings release.
‘Pull-Forward Effect,’ Other Topics Addressed on Conference Call
In a conference call with stock analysts and investors, Ryan and other members of his executive team provided more insights on the results, commenting on topics such as the Federal Trade Commission’s review of the Funeral Rule, the “pull-forward effect” in the death rate we’ve seen as a result of COVID-19, what the company is seeing in regard to mergers and acquisitions and more.
Read the entire earnings call conference transcript or listen to the webcast.
Commenting on the impressive 15% year-over-year growth in adjusted earnings per share, Ryan said it is “primarily related to improved cemetery profitability driven by higher cemetery revenue from completed construction projects, along with lower fixed costs in both the cemetery and funeral segments, resulting in higher gross profits and margin expansion.”
He continued, “Below the line, the 425 basis point rise in interest rates on our variable rate debt increased our interest expense, reducing earnings per share by $0.09. This increased interest rate expense was predominantly offset by lower general and administrative expenses and the favorable impact of a lower share count. We have exceeded the pace of our share buyback given our recent stock price. We’re purchasing $65 million of stock during September and $99 million during the month of October.”
He noted that although core funeral volume declined 6% compared to the prior year quarter, SCI believes due to the COVID pull-forward effects, volumes were in line with what it had anticipated. “Notably, funeral volumes are about 11% higher than third quarter 2019 levels,” Ryan pointed out.
Core average revenue per service grew over the prior year grew by an 4%, even after absorbing the negative effects of a 120 basis point increase in the cremation mix, Rhan said.
“From a profit perspective, funeral gross profit increased by $6 million, while the gross profit percentage grew 130 basis points to about 20%. Lower fixed costs and reduced incentive compensation costs over the prior year quarter more than offset the slight revenue decline. Preneed funeral sales production grew an impressive $15 million or about 5% over the third quarter of 2022. Both the core and the SCI direct channels experienced impressive sales production growth during the quarter,” he said.
Comparable cemetery revenue increased $22 million, or just over 5% compared to the prior year third quarter, Ryan said. “Core revenue accounted for the preponderance of the increase as recognized preneed revenue increased by $21 million, or 7%. This growth is primarily due to the expected completion of construction projects during the third quarter, which drove an increase in the revenue recognition rate by capturing sales from both the current and previous quarter sales production.”
Commenting on acquisitions, Eric Tanzberger, the company’s senior vice president and chief financial officer, said SCI invested just over $30 million during the quarter, bringing its year-to-date acquisition spend to $73 million, which is approaching the low-end of its full- year acquisition investment target range of $75 million to $125 million for the full-year of 2023. “Finally, we invested $24 million in real estate purchases, which is predominantly in one of our major Western U.S. markets on a large acre parcel of land to be used for future cemetery expansion,” he said.
Later in the call, Ryan said SCI is predicting that for 2024, funeral volumes will be slightly down because of excess deaths and COVID trending slightly down.
Ryan shared some fascinating insights later in the call regarding what the profession – and SCI investors – can expect in the future from the “pull-forward effect.”
“The way we’re thinking about this is that pull forward effect diminishes each year,” he shared. “So, we do think there’s a pull forward effect in 2024. We think it’s going to be in 2025 and 2026, but it becomes pretty deminimis (too trivial to merit consideration) as you get further out. So, in that regard, year-over-year, it’s actually an improvement when you think about 2024.”
He continued, “Having said that, in 2023, we continue to see some COVID deaths, we continue to experience some excess deaths. And so, as we think about those trends, those are beginning to go away as you get into ’24 and to ’25. So, the net-net is a slightly negative, that’s what we’re trying to point you towards is we think there’s still a bit of a drag on 2024. But probably in the, call it 1% to 2% range, as you think the year-over-year declines versus what we’re seeing this year, about a 5% decline. Then as you get out to ’24 and ’25, our assumption would be that you begin to climb back up and see favorable year-over-year trends. Getting back to kind of that, call it 1% growth in the numbers of deaths and then our competition for market share.
Company executives did not venture to guess when the FTC might make a final decision on whether to update the Funeral Rule, but Tanzberger said, “In terms of pricing online, we haven’t changed our position, but again, I would say right now of our 1,500 funeral homes, we probably have 1,000 to 1,100 of those with prices online. We have different levels of pricing, whether it’s starting at or just the absolute full- blown premium experience drilled down into what exactly the pricing is, pick menus for celebrations, all kinds of things, and it’s going to move and fluctuate because we’re learning. We like it, we love interacting with our consumers using our very powerful Dignity Memorial websites. And we’ll continue to invest digitally into those websites and more to come.”
From an FTC perspective, FTC is “well ahead of the curve” whatever the FTC decides, he said. “And I just don’t see it having a material effect to our company in one way or the other,” he said.
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