SCI CEO Tom Ryan on Covid deaths, preneed, and acquisitions

Service Corporation International (SCI), the largest provider of funeral services in North America, recently released their 3rd Quarter 2021 results and following that company executives answered questions from stock analysts about the company and death care in general.  You can read a complete transcript of that commentary here.

If you are not interested in reading the entire transcript here are some things that Funeral Director Daily found interesting from the discussion and we center on the items of Covid deaths, Preneed, and the acquisition environment.  Here’s how SCI CEO Tom Ryan responded to questions on those topics.

On Covid-19:

Ryan :  “Now for an overview of the third quarter. Let’s start by taking you back to our mindset the last time we spoke in mid-July. We were seeing a declining trend of COVID deaths that began during the second quarter. This downward trend, coupled with the IHME’s outlook, was reflected in our earnings guidance for the back half of 2021.

Shortly thereafter came the impact of the Delta variant, and we saw an unexpected surge in COVID and non-COVID mortality that began in August and has continued into October. Therefore, we have seen funeral volumes and cemetery revenues that have exceeded our previous expectations. . . . 

When looking out over the next couple of years, we expect COVID to have a negative pull-forward effect on revenues and earnings temporarily. . . . we expect the impact of COVID to begin to wane, thereby bearing the brunt of the pull-forward effect. . . . .I wish I’d never heard of COVID-19, but it is the reality of our company, country, and world have had to deal with and are dealing.”

On Preneed:

Ryan:  “Preneed funeral sales production for the third quarter grew $50 million or nearly 22%, which exceeded our expectations. Both our core funeral home and SCI Direct businesses posted strong production increases. . . We continued to see growth in marketing leads from both digital and seminars that have not only (been) very successfully generated (and grew) preneed sales production, but have done it at a lower cost.” 

Tom Ryan

On Acquisitions:

Ryan:  “. . . there’s so much uncertainty around what’s going to happen.. . .

. . .the Biden tax plans that have been out there have motivated some people that were probably in the window of thinking about selling their business to get out there. So I do think we’re seeing an influx of activity associated with that, and to Eric’s (CFO Eric Tanzberger) point, is why I think we’d expect the fourth quarter to be a nice closing quarter as you think about acquisitions.

As far as pricing goes, I guess I’d say two things. There’s clearly a little more robust activity that’s probably putting a little bit of upward pressure. The other unique factor you have is COVID, right? So am I selling off my 2020 results, my 2021 results or ’19 results? So I think that’s one of the confusing aspects of trying to understand what are you paying a multiple off of that, again, probably puts some confusion and maybe a little bit of upward pressure. But overall, I mean, these are still deals that the ones that we’re looking at and competing for, they’re going to have meaningful internal rates of return that you and our other stakeholders would say, good use of capital, team.

So we feel good about it.”

Funeral Director Daily take: A good report from SCI and some timely topics to discuss.  Let me add from my own experience and thought process on the three subjects that are touched on here — Covid deaths, Preneed, and Acquisitions.

Covid Deaths —  As of Monday, the number of certified Covid-19 deaths in the United States was listed as 754,000.  When you expect the United States to have about 2.8 to 2.9 million deaths per year in a non-Covid world, you can see that it appears that Covid, over two years of deaths, has added somewhere between 12-15% of increased deaths for each of the years 2020 and 2021.

A couple of things come to mind when you figure it that way. . . . One, funeral homes should have experienced, on a national basis, a 12-15% increase in deaths and those numbers should help a funeral home profit. . . so it is no surprise that the national players in the business have had good financial years.

Tom Anderson
Funeral Director Daily

Two, that increase of 12-15% had to come from somewhere.  Many of us suspect that a lot of people who died of Covid were elderly with other underlying  health issues.  If that is true, it is probably true that those deaths were caused, via Covid, a year or two pre-mature to when those people would have died otherwise.  Those are what Ryan refers to as “pull-forward” deaths.  What worries some in funeral service is that moving forward post-Covid instead of the 2.8 million + Covid deaths, we will soon experience the 2.8 milliondeaths minus pre-mature pull forward deaths which may cause a reduction in revenue.  Ryan states, “we expect Covid to have a negative pull-forward effect on revenue and earnings“.

I think that is expected as Covid deaths are reduced in our society.  For 2022, it may be best to look at 2019 results to get true comparisons to where a company is in relation to its performance.

Preneed— Interesting how preneed plans are growing for SCI.  And, it is interesting how they are relating it, at least somewhat, to increased digital marketing and seminars.  I think that is a warning sign to those of you who are not doing those types of client prospecting methods and stick only with the “word of mouth” and/or mailings.

I think another aspect at work in increased Preneed activity is that the Covid pandemic has brought the thought of mortality to millions of people who never even thought about it before.  I expect the idea of “increased mortality awareness” to be ongoing for the extended future and the planners that can reach interested parties first will get that business.  It is time to ramp-up pre-planning and be the first to knock on the door.

When I was working I did a seminar the second Tuesday of every month at 9:30 am for people in our community over 55 years of age and it was always well attended and our number one lead generator.  It cost us donuts and coffee and the key was making sure people knew it would be over in less than one hour.  If you need to know more about setting up seminars that work contact Patrick Zalusky of Laker Planning Service (one of the Funeral Director Daily sponsors) at 256-822-2103.  I think you will be glad you did.

Acquisitions —  There are no shortage of companies that want to acquire funeral and cremation businesses that fit in with their strategy.  And, there is a strategy out there that probably fits your funeral home.  The big acquisition companies – public and private, nationwide and regional — like to go after the big fish and work to control major markets.  However, even if you have a pretty small funeral home, the smaller regional companies do many of what they call “tuck-in” acquisitions that can work out quite well for you as a seller. . and for the buyer as well.  The key is knowing who is doing the tuck-in purchases and where.  Again, one of the Funeral Director Daily sponsors, Johnson Consulting Group, is as good as there is in knowing that information for you.

SCI’s Ryan notes the pros and cons of acquisitions at this time. . . .for instance, what is the proper revenue for funeral homes that may have been buoyed upward by Covid pull-forward deaths?  And, it doesn’t surprise me that there are a lot of potential targets out there at this time when you think of the combination of 2020-2021 having higher deaths and higher revenues, older owners who have been stressed with the pandemic, and the thought of capital gains taxes possibly moving upward under the Biden administration.

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