Finance

SCI’s Tom Ryan: “. . true earnings growth from funeral will require increased funeral services”

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Service Corporation International (SCI) reported their 1st Quarter financial results last week and in it we found a lot of information and perspective that we believe is informative and, in our opinion, pretty good news as to how the American public is coming out of the pandemic with their actions on funeral care seemingly indicating that they are in line with how they felt prior to the pandemic.

First of all, SCI’s results from the first quarter are indicative of their size as a national player in the United States deathcare enterprise and the record number of Covid-19 deaths in January 2021 played into their results.  For the quarter, SCI saw in their “Comparable Funeral Home” data 105,181 services performed as compared to 1Q 2020’s number of 86,063 services. . an increase of 22.2%.  With that increased number of services, they also saw increased revenue of 21.7% to $611 million on the comparable funeral side.

Revenue from all sources for 1Q 2021 was $1.078 billion as compared to $803 million in 1Q 2020. . . an increase of over 34% and Operating Income more than doubled for the company over 1Q 2020.

Even with that great news much of what we took from the report pointed to a future where the Covid-19 pandemic did not drastically change funeral service in ways that many of us were worried about.  For instance, SCI had a “Core Cremation Rate” of 51.8% in 1Q 2020 and in 1Q 2021 that same measurement was at 52.0%. . . only a 2/10 increase in a quarter that included the highest month of Covid-19 deaths (January 2021).  Here’s what SCI Chief Executive Officer Tom Ryan said of that phenomena,  “. . if we learn something from this crisis is that people value what we provide. And you can see the cremation average only moved 20 basis points, which is, again, shocking when you think about your immediate reaction to what will people choose to do through this COVID crisis.” 

Another positive indicator that we saw that bodes well for the profession is that “Comparable Revenue Per Service” actually was higher in 1Q2021 than it was in 1Q2020 for SCI.  That number, basically the average consumer cost for a service (combined funerals and cremations) was $21 higher per case in 2021 even though the entire quarter was what I call a “Covid quarter” in that social distancing rules were in effect.  It’s comparable quarter from last year had only March 2020 in that situation.  Agreed, it is a small increase, but from what we have been hearing, you would have thought the number would have been less than the prior year.

Tom Ryan
SCI CEO

Here’s what CEO Ryan said of that fact, “The average we saw in March was effectively the same as January of 2020, so pre-COVID U.S., Canada. So we’re very pleased that we’ve been able to get back to that number.”  And, on Ryan’s confidence moving forward, “So as you think about the comps in the back half of the year, we would expect the average year-over-year from here on out to grow in the low to almost approaching mid-single-digit percentages on a comparable basis, but look a lot like 2019. And I think as we go forward, we feel very good about our ability to pass-through inflationary pricing and expand the menu of products and services as it relates to that.”

We also noticed that SCI’s comparable preneed sales had increased a total of 16.4% in the quarter and their preneed sales from what they call their non-funeral home channels increased 43.4%.  While not defined in the report, we believe that “non-funeral home channels” include such SCI operations as the Neptune Society, SCI Direct,  and other similar cremation facilities.   At Funeral Director Daily we feel those increases bode well for the profession as consumers seem to be willing to get out and mingle a little more which will lead to these increases.  As a matter of fact, here is part of the reason SCI gives for those increased numbers, “The increase in comparable preneed funeral sales production was primarily driven by the significant growth in digital and direct mail leads, an increase in location traffic due to higher services performed, and the gradual return of in-person seminars.”

If there was one bit of negative news Funeral Director Daily saw in the report it was that the “Core Average Revenue per Preneed Contract” had dropped about 1.5%.  It was an actual dollar amount of $88 per contract and could be an indictor that future clientele is choosing less costly cremation services over funeral services at a higher rate than today’s at-need consumer.

In relation to that and also the idea of “pull forward” deaths that may have happened during the Covid-19 pandemic and the fact that revenue per call may level off or drop, here is a quote for CEO Ryan from the earnings call, “. . .true earnings growth from funeral will require increased funeral services, so think baby boomers. However, keep in mind that a very significant learning from the COVID experience was that when we get volume in the related revenue, 70% to 80% will drop to the bottom line.”

That last quote gives some indication how important growing death call numbers will be to funeral homes in a expected environment of revenue per call dropping.  To that point, here’s what SCI CFO Eric Tanzberger said in the earnings call concerning acquisitions, “We’re excited about the pipeline. There’s definitely deals that are out there that we and our teams are looking at, and we’re somewhat excited about it, frankly. . . . .  which means that, that activity should pick up from a capital deployment perspective, as we go through the remainder of 2021.” 

You can access the SCI 1Q 2021 Report here.

You can access the SCI 1Q 2021 Earnings call here.

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