SERVICE CORP INTERNATIONAL Q3 FY2024 earnings call

Key Points

• Tom mentioned that for the third quarter, adjusted earnings per share was $0.79 compared to $0.78 in the prior year. Gross profit from funeral and cemetery segments was relatively stable. There was a net $0.01 increase in earnings per share due to a lower share count, lower tax rate, but offset by increased corporate, general, and administrative expense and interest expense. The company invested $123 million in top tier businesses in growing major metropolitan markets, adding 10 funeral homes and two cemeteries, and $31 million in real estate transactions.
• Eric discussed cash flow results: adjusted operating cash flow was $269 million, exceeding expectations, driven by favorable working capital sources. Capital investments in the quarter totaled $320 million, including $88 million in maintenance capital, $13 million in growth capital, and acquisitions of $123 million. Returned nearly $65 million to shareholders through dividends and share repurchases. Corporate G&A expense was $44 million, higher than expected due to higher long-term incentive compensation. Liquidity was $1.5 billion at the end of the quarter with a leverage ratio of 3.78 times.

Funeral Segment

• Total comparable funeral revenues increased $7 million, or about 1% over the prior year quarter. Comparable core funeral revenue provided $4 million of the $7 million revenue increase, with core average growing by 2% absorbing a 30 basis point increase in the core cremation rate despite a 1% decline in core funeral volume. SCI Direct non-funeral home pre-need sales revenue decreased by $5 million. Core general agency and other revenue grew $8 million. Funeral gross profit declined slightly by about $2 million, while the gross profit percentage declined 50 basis points to just over 19%. Pre-need funeral sales production decreased by $22 million or about 7% over the third quarter of 2023, with core pre-need funeral sales production decreasing by $14 million or 6% and non-funeral home pre-need sales production decreasing $8 million or 10%.

Cemetery Segment

• Comparable cemetery revenue was flat as compared to the prior year quarter as a $5 million increase in other revenue was offset by a $5 million decrease in core revenue. The $5 million decline in core revenue was primarily the result of a $4 million decline in at-need revenue combined with a $1 million decline in total recognized pre-need revenue. Comparable pre-need sales production decreased by $8 million, or about 3%, primarily due to a decline in large sales. Cemetery gross profits in the quarter increased by $1 million, and the gross profit percentage increased by 10 basis points, generating an operating margin of 32%.

Guidance

• 2024 fourth quarter adjusted earnings per share expected to be $1 to $1.10, representing expected growth of 8% to 18% compared to the fourth quarter of 2023.
• 2025 expected to return to earnings per share growth towards the higher end of historical annual guidance of 8% to 12%.
• 2024 adjusted cash flow from operation guidance midpoint raised from $930 million to $950 million, resulting in a range of $940 million to $960 million for the year and $230 million to $250 million for the fourth quarter. Total maintenance CapEx guidance for 2024 remains unchanged at about $325 million. 2025 cash flow expected to be positively impacted by earnings growth and pre-need installment cash receipts, with maintenance capital generally flat to 2024 levels.

Q: Scott Schneeberger asked about cemetery pre-need sales recognition into the end of the year and 2025, and large sales at Rose Hills.

A: Tom Ryan responded that fourth quarter recognized revenue will be slightly below last year but in line with previous, and in 2025, sales production and recognition should return to low to mid-single-digit percentage growth. Rose Hills' ongoing construction affected large sales, but expected to be a growth opportunity in 2025.

Q: Scott Schneeberger asked about funeral volume growth in 2025 and pre-need funeral weakness.

A: Tom Ryan said funeral volumes are expected to stabilize in 2025 as pull-forward effects lessen and demographics shift. Pre-need funeral should improve with transitioning to new contracts and insurance products, with core expected to return to low to mid-single-digit growth and SCI Direct taking longer due to licensing complications but expected to grow in the back half of 2025.

Q: Tobey Sommer asked about the new insurance relationship and sales force efficiency.

A: Tom Ryan said core funeral expected to return to low to mid-single-digit growth, SCI Direct to mid to high single-digit, with SCI Direct taking longer due to licensing but setting up for tremendous growth with higher contract values from backlog.

Q: Tobey Sommer asked about acquisitions pipeline and post-COVID seller willingness.

A: Eric Tanzberger said there's a strong pipeline of acquisition opportunities in major metropolitan areas, expecting to spend in the $75 million to $125 million range next year but potentially higher, with a strong liquidity position to move quickly.

Q: Joanna Gajuk asked about cemetery large pre-need sales compared to 2019, and funeral margins and cremation shift.

A: Eric Tanzberger said large pre-need sales are running at a higher rate than 2019, and Tom Ryan said funeral margins expected to improve in 2025 by about 150 basis points, with cremation shift ebbing and flowing but still expected to have an impact.

Q: AJ Rice asked about volumes trending positive, pull-forward effect on cemetery sales, acquisitions accretiveness, and management changes.

A: Tom Ryan said volumes will trend positive as pull-forward effects lessen and demographics shift. On acquisitions, they're accretive with good revenue streams and cost synergies. Management changes are part of succession planning with a long-term plan.

Q: Parker Snure asked about pre-need cemetery selling stability, hurricane impacts, and acquisition integration.

A: Tom Ryan said pre-need cemetery selling stability is due to core resilience and pull-forward effects, no changes in payment terms. Hurricane impacts caused a slight headwind but the business is resilient. On acquisitions, they're accretive with solid revenue streams and former owners staying on to help with integration.