Finance

Our thoughts on SCI’s earning report. . .leaders comment on SCI Direct, West Coast cemeteries, and the acquisition environment

Last week we provided a link to where you could go to read the 3rd Quarter report on Service Corporation International.  We will provide that link again here.  Here’s what SCI President and CEO, Tom Ryan, commented on in that report.  “. . .This solid funeral performance driven by an increase in funeral services performed couple with an anticipated decrease in general and administrative expenses was offset by lower cemetery segment profit associated with anticipated lower completed construction revenue.  Additionally, we experienced softness in preneed cemetery sales production in two west coast markets within our Asian consumer base.”

That’s what the CEO said, but at Funeral Director Daily as we have analyzed the report we will bring you what we believe are the highlights and low lights of the report from our point of view and in context with how we see the death care industry moving.

  • First of all, in SCI’s comparable funeral revenue report we noticed that the company’s “Core” funeral revenue was up about 1% for the quarter but the number of funeral services performed was up about 1.7% for the quarter which resulted in a drop in the “Revenue per Case” from $5,296 to $5,270 on a per case basis.  That trend continues to move downward in a business where cremation percentage is moving upward.  It is not a surprise, but it is a trend that will continue to erode the bottom line.
  • As to cremation rate, the SCI report shows that “Total Comparable Cremation Rate” for the company has inched up to 56.8% for the 3rd Qtr of 2019 as compared to a rate of 55.3% in the 3rd Qtr of 2018.
  • We also noticed that in the “Comparable cemetery report” that “Total Comparable Revenue” dropped in the 3rd Qtr of 2019 to $304.3 million from $323.1 million in the same quarter of 2018.  That is a drop of almost $19 million or about 5.8%.  All of that decrease comes from “Recognized preneed property revenue” and CEO Ryan has an explanation from this in his earnings call comments below.

You can read or listen to CEO Ryan’s and other company officer’s earnings call explanations on the company here.  We have printed a couple exerts from it below which deal with:

  1. SCI Direct’s shining performance growth.  This is “non-funeral home” death care revenue such as strip-mall direct cremation services.
  2. A clip on how the Trump administration trade stand-off with China may be affecting Asian purchasing habits in the United States more than you thought.
  3. Some information on the acquisition environment and what we see as a trend in strategic investments in demographic hunting and site selection more so than in acquisitions.

CEO Tom Ryan on SCI Direct and other non-traditional sales channels:

“Our non-funeral home channel or SCI Direct continues to perform well. We continue to show solid growth and we are excited about the potential opportunities to continue to expand this channel. SCI Direct or non-funeral home revenue grew 7% or almost $1 million with strong increases in both volume and average.

Recognized preneed revenues grew $1.1 million or — recall this represents products sold on a preneed basis, primarily by SCI Direct and are delivered at the time of sale resulting in immediate revenue recognition.

In the current quarter, preneed sales at our SCI Direct locations grew a strong 5%. Preneed sales at our core locations increased 1% over the prior year quarter. We believe that we can deliver, a solid growth rate in the coming fourth quarter.”

CEO Tom Ryan on West Coast cemeteries and the drop in Asian preneed cemetery sales: 

“Not to make light of the situation, but this is just part of the business we’ve chosen to use an old-timer offline from Godfather II. That is why I’m not going to make an excuse only an observation and a commitment to get back to our 4% to 6% growth target. We have three cemeteries in two West Coast cities that have historically produced not only the largest cemetery sales production in the company, but have had a very high concentration in the Chinese consumer segment.

On a year-to-date basis, just in these three cemeteries, our preneed cemetery sales production is lower by about $18 million or over 20% of the segment. If you add back just the Chinese production decline, from the two markets year-to-date, it would take our company preneed cemetery sales growth from 0.2% to 3.3% growth very close to our target range. Most of this decline is in the large sales category. These are the facts. The reasons why and when it will come back is where we shift from facts into speculation.

Based on feedback from our customers, they are encountering challenges for more restrictive policies implemented by the Chinese government that have impacted movements of cash out of China. This combined with a variety of ongoing political uncertainties, we believe has caused a pause in certain of the large sales consumers as near-term access to their assets remains uncertain.”

SVP and CFO Eric Tanzberger on Acquisitions and Capital Investments:

“So in terms of breaking down the components. First, I’ll mention that we did not close in any business acquisitions during the third quarter, but we anticipate a solid fourth quarter of activity with good visibility into the acquisition pipeline. We remain confident in our guidance of $50 million to $100 million of acquisition capital being deploy for the year with about $32 million already invested year-to-date.

During the quarter, we did have an investment of $35 million in land for new cemeteries and we mentioned this in our last quarter call that this represents the unique acquisition of some land in California that is adjacent to or even near three of our large cemetery in the Los Angeles market. This represents an exciting investment in our future in this market that is already a great producer for us and ensures that we continue to create cemetery offerings that appeal to the varied preferences in that market for many years to come.

In the quarter, we also invested an additional $10 million on new build projects which included new funeral homes in Florida, Colorado, California, Georgia and North Carolina. In addition to the great returns that we normally get on these investments, we are excited to expand in these desirable markets.”

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