Service International(SCI) - 2023 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company raised its 2023 adjusted after-tax operating cash flow guidance by $85 million, now expecting a range of $800 million to $880 million, with a midpoint of $855 million, which is a $30 million increase over the $825 million generated in 2022 [1] - Adjusted earnings per share for the second quarter was $0.83, consistent with the prior year, despite a $19 million increase in interest expense due to a more than 400 basis point rate increase in variable rate debt [83][90] - The company generated strong adjusted operating cash flow of $157 million in the quarter, exceeding expectations by more than $16 million year-over-year [119] Business Line Data and Key Metrics Changes - Total comparable funeral revenues increased by $11 million or about 2% year-over-year, driven by an increase in core funeral revenue, despite a 2% decline in comparable core funeral volume [86] - Preneed funeral sales production grew by $12 million or about 4% over the second quarter of 2022, with both core and SCI Direct channels experiencing growth [87] - Comparable cemetery revenue increased by $5 million or just over 1% compared to the prior year, with recognized preneed revenue increasing by $6 million or 2% [92] Market Data and Key Metrics Changes - The company noted a decline in contracts sold in the entry-level price-sensitive consumer segment, attributed to reduced discretionary spending due to inflation [85] - Preneed cemetery sales production was about 47% above the second quarter of 2019, representing a 10% compounded annual growth rate over four years [93] - The average revenue per service in the funeral segment grew by 4% year-over-year, despite a negative impact from an increase in the cremation mix [91] Company Strategy and Development Direction - The company is focusing on enhancing customer propositions for entry-level consumers through more consumer-friendly payment terms on cemetery property [113] - The company remains optimistic about acquisition momentum, with a target range of $75 million to $125 million for full-year acquisition investments [99] - The company is strategically managing its leverage, targeting the lower end of its leverage range of 3.5 to 4 times [127] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the high-end consumer demand remaining stable, with growth observed in large estate property sales [41] - The company anticipates low to mid-single-digit declines in funeral volume for the rest of the year, as the impact of COVID-related pull-forward slightly outpaces increasing volume trends [95] - Management expects a material reduction in cash taxes for 2023 due to a change in tax accounting methods, estimating about $80 million of lower cash taxes [128] Other Important Information - The company invested a total of $258 million during the quarter, including $70 million back into current businesses and $127 million returned to shareholders [97][125] - Corporate G&A expenses were $35 million, $11 million lower than the prior year, primarily due to lower incentive compensation expenses [126] Q&A Session Summary Question: What does the cumulative surge over the last three years in cemetery sales total, and how long might demand need to normalize? - Management acknowledged the impact of inflation on consumer behavior and indicated that they are exploring more affordable payment terms to assist consumers [5] Question: Are there any updated thoughts on the pull-forward effect? - Management noted that the pull-forward effect is still present but expected to diminish over time, with a projected volume decline of about 5% [68] Question: What is the expected impact of pricing competition in the funeral market? - Management stated that they continue to maintain price transparency and have pricing online for a significant portion of their funeral homes [52] Question: How is the company managing its cash flow and interest expenses? - Management indicated that they are effectively managing interest rate risks and targeting the lower end of their leverage range [122][127] Question: What are the expectations for cemetery margins and production? - Management expects cemetery margins to remain in the low-30s to mid-30s range, consistent with previous expectations [157]