Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Adjusted earnings per share of $0.79, despite a slight decline from the previous year.
- Cemetery segment showed a $12 million increase in comparable revenue, driven by a $7 million increase in core revenue.
- Year-to-date preneed cemetery sales production is up $17 million or about 3%.
- Cash flow remained resilient with an adjusted operating cash flow of $220 million, a $62 million increase over the prior year.
- Successful M&A activity with three transactions closed in Illinois, Kentucky, and Western Canada, totaling $23 million.
Negative Points
- Total comparable funeral revenues declined by $5 million or about 1% over the prior year quarter.
- Funeral gross profit declined by $16 million, with the gross profit percentage dropping from 21% to 18%.
- Higher interest expense and a higher tax rate negatively impacted the bottom line.
- Comparable preneed cemetery sales production decreased by $7 million or 2%, missing the flat to slightly up expectation.
- Leverage increased slightly to about 3.7 times on a net debt-to-EBITDA basis.
Q & A Highlights
Q: Your comment around next year's outlook suggests that the June weakness in the funeral segment was temporary. Are you reducing your guidance due to Q2 results, and are your expectations for the second half of the year unchanged?
A: Yes, our expectations for the second half of the year remain predominantly the same. We believe the decline in June was temporary, and we are seeing a positive trend in July. We are prepared to execute and manage expenses effectively in the back half of the year and into 2025.
Q: What gives you confidence in your ability to grow towards the higher end of your typical range next year, especially after a somewhat depressed 2024 number?
A: Several factors contribute to our confidence. The unfavorable interest rate comparison and operational changes to SCI Direct that impacted 2024 will subside in 2025. Additionally, our new Global Atlantic preneed funeral insurance agreement is expected to generate higher commissions. We also anticipate stabilization in funeral volumes and positive trends in our cemetery business.
Q: Can you elaborate on the new contract with Global Atlantic insurance and its impact on commissions and returns?
A: The new agreement predominantly impacts commissions and product mix. We expect a higher percentage of underwritten insurance products, which provide better protection for our customers and generate higher commissions for us. This transition will enhance our ability to serve customers and improve our financial performance.
Q: The funeral segment's gross margin was very low this quarter. Was this due to a mismatch between costs and revenue?
A: Yes, the revenue decline was unexpected, leading to a mismatch with our cost structure. However, looking at the six-month period, our funeral margins were 19.9%, which is about 280 basis points below last year. The decline is primarily due to the SCI Direct operational changes and volume throughput. We expect margins to improve in the back half of the year.
Q: Can you discuss the preneed cemetery sales, particularly the lower high-end sales but improved core sales?
A: The core sales showed growth, which is a positive reversal. The decline in high-end sales is likely due to timing rather than a lack of interest. High-end sales are inherently volatile, but we remain optimistic about our ability to generate these sales in the back half of the year and beyond.
Q: How are you managing the preneed cemetery sales force in the current demand environment?
A: We have improved productivity through better technology, effective lead generation, and optimized CRM systems. We continue to invest in our cemeteries, which enhances our ability to offer a range of products from high-end to entry-level. These efforts have allowed us to maintain productivity even with a smaller sales force.
Q: What is your outlook for preneed cemetery sales production for the rest of the year and beyond?
A: We expect to grow low single digits for the year and anticipate returning to low to mid-single-digit growth in the coming years. This outlook is based on the stabilization of funeral volumes and continued strength in our cemetery business.
Q: Can you provide more details on the funeral rule update from the FTC and its potential impact?
A: There are no significant updates from the FTC. We are prepared to adopt any changes, such as pricing online, and do not expect any material impact on our company. We already have a significant number of funeral homes with online pricing and will continue to optimize our digital presence.
Q: How are you addressing consumer behavior in the lower-priced tiers?
A: We have seen some challenges with lower-end consumers due to inflation. To address this, we have adjusted financing terms to make it easier for these consumers to make initial payments. We have not seen further deterioration and continue to monitor and adapt to their needs.
Q: What is driving the increased deal pipeline, and are there any changes in the economics of these deals?
A: The increased deal pipeline is driven by higher interest rates impacting competitors with variable rate debt structures, making us a more attractive choice. We have not seen significant changes in deal pricing but are confident in our ability to capitalize on these opportunities to create future profitability and growth.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
