By Thomas A. Parmalee
On May 1, Service Corporation International, the largest provider of death-care products and services in North America, reported diluted first-quarter earnings of 93 cents per share compared with $1.34 in the year-ago period.
That performance beat the Zacks consensus estimate of 88 cents per share.
Tom Ryan, the company’s chairman and CEO, said, “We are excited to start the year with GAAP earnings per share of $0.93 and net cash provided by operating activities of $220 million for the first quarter of 2023. We continue to exceed our long-term growth expectations when comparing against a pre-pandemic first quarter of 2019.”
Quarterly highlights include:
- Adjusted earnings per share has grown an impressive 19% on a compounded annual basis compared to the first quarter of 2019 (compared to an expectation of 8%-12%).
- The number of funeral services performed is trending higher than the company anticipated and is approximately 4% higher than the first quarter of 2019 levels on a compounded annual growth basis.
- Both cemetery and funeral preneed sales production have increased at a 9% compounded annual growth basis over first quarter 2019 levels.
“We 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,” Ryan said. “I would like to thank our 25,000 associates for their dedicated service to our client families that has made these results possible.”
Other highlights include:
- Comparable funeral sales average grew 2.4%.
- Comparable preneed funeral sales production grew $24 million, or 8.1%.
- The 41 cent per share decline in earnings is primarily due to an expected decline in gross profit related to decreases in COVID-19 related activity compared to the prior year. Additionally, fewer shares outstanding and a lower tax rate helped to offset the impact of higher interest expenses, primarily due to rising interest rates.
- Net cash provided by operating activities declined $112.6 millionto $219.6 million in the first quarter of 2023 compared to $332.2 million in the first quarter of 2022. The decrease in operating cash flow is primarily due to lower operating income resulting from a decrease in COVID-19-related activity, higher cash interest, and a slight net working capital use.
- Quarterly revenue was $1.03 billion compared with $1.1 billion in the year-ago period.
The company noted that its 2023 outlook for diluted earnings per share from continuing operations excluding special items is anticipated to be at the upper end of its expected long-term growth framework of 8%-12% when excluding the impact of COVID-19 activity in 2022 and before absorbing an expected 25 cent increase in interest expense. Its outlook for net cash provided by operating activities excludes special items relating to the payments of certain estimated legal charges of $64.6 million recognized in the fourth quarter of 2022.
Get more details in the company’s earnings report.
More Insights on Conference Call
On a conference call with Wall Street analysts, company executives shared more insights on its earnings and what it is seeing in the marketplace.
Before the call started however, Ryan took a moment to honor the company’s founder and chairman emeritus, Robert L. Waltrip, who died at age 92 on Feb. 27.
“Without Bob’s vision and tenacity, there would be no SCI,” Ryan declared. “He was a tremendous mentor and the consummate funeral service professional. We will all be forever grateful for this company he created and we’re all better for having known and learned from such a great man. He will be missed immensely.”
Ryan noted that SCI continues to see significant earnings per share growth over pre-pandemic results. “Compared to our first quarter of 2019 of $0.47 per share, we have effectively doubled earnings per share from four years ago, growing at a compounded at annual rate of 19%,” he said.
He continued, “Funeral metrics were strong and performed at or above our expectations while cemetery preneed sales production fell short of our internal expectations as we experienced unusual weather events on the West Coast, which temporarily affected cemetery sales activity at some of our largest properties.”
As for prearrangements, he noted that preneed funeral sales production grew an impressive $24 million, or more than 8% over the first quarter of 2022. “Both the core and the SCI Direct channels showed growth in both contract velocity and sales averages,” he said. “We continue to see consumers’ awareness and openness to preplanning elevated with continued strength in marketing leads and preneed funeral sales production.
SCI stockholders likely took some comfort in Ryan’s observation that “the dramatic tough comparison quarters are over as the first quarter of 2022 was the last one impacted meaningfully by COVID-19.” He added, “From an earnings per share perspective, we would expect to be able to deliver year-over-year growth in the coming quarters as the favorable impact of higher year-over-year cemetery revenues and the impact of our share repurchase program will more than offset the negative effects of slight volume declines and higher interest expense from our variable rate debt.”
Eric Tanzberger, the company’s chief financial officer and senior vice president, noted that on the acquisition front, SCI closed on three transactions for a total of $9 million in Connecticut, Louisiana and Pennsylvania. “Based on the current transactions under LOI and other acquisition pipeline activity, we remain confident about our acquisition investment full year target of $75 million to $125 million,” he said.
Ryan also responded to a question about the Federal Trade Commission’s review of the Funeral Rule, which many have speculated may result in a mandate to post prices online.
According to Ryan, “In January, we submitted our responses in early January to what was called the advanced notice of proposed rulemaking, which was the 40 questions that they sent out. We did that. We were very consistent with our responses before. Our responses before have been anchored in two facts with the data that we’ve submitted to them. That relates to pricing, and that is that 91% of our customers, for the last five years with the J.D. Power surveys, rank us nine out of 10 or higher in clarity of pricing and 75% of our customers believe our prices either met or were lower than expected. So, that’s the data. That’s what we submitted to the FTC.”
Ryan noted that when the FTC proposes a rule, stakeholders will have another chance to provide input. “Independent of this FTC situation, we continue to do a great job in terms of initiating pricing initiatives through our Dignity Memorial websites,” he said, noting that at many of its locations, SCI provides at least “starting at” prices. In fact, about 900 of its 1,500 funeral homes provide some type of pricing information online, he said.
“This is going to take a while. It’s been a while, and it’s going to take a longer period of time before this really does come to fruition with the new rule,” Ryan said.
Ryan also commented on inflation, noting that compared to other businesses, he feels good. He is starting to see “some normalization” as it relates to the cost of labor, and he noted that the company has long-term agreements with suppliers, which helps ease inflationary pressures.
The tumultuous economic environment we find ourselves in may be an opportunity for the company, Ryan said.
“As you look at these periods when rates rise, a lot of these consolidators that are financing are looking for exits,” he said. “So, we’re aware of that. We’re ready to pounce … If a number of deals come along, we’re going to do them.”