Service Corporation International (SCI)
Q2 2012 Earnings Call
July 26, 2012, 10:00 a.m. ET
Debbie Young – Director, IR
Thomas Ryan – President and CEO
Eric Tanzberger – CFO, SVP and Treasurer
A.J. Rice – UBS
Robert Willoughby – Bank of America Merrill Lynch
Clint Fendley – Davenport & Company
Chris Rigg – Susquehanna Financial Group
Nick Jansen – Raymond James & Associates, Inc.
Duncan Brown – Wells Fargo Securities
Previous Statements by SCI
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Hello, and welcome to the Q2 2012 Service Corporation International Earnings Conference Call. My name is Maisha and I’ll be your operator for today’s call. (Operator Instructions)
I would now like to turn the call over to the SCI senior management. You may begin.
Hi and good morning. This is Debbie Young, Director of Investor Relations for SCI. Thanks for joining us today as we talk about our second quarter results. Our comments today will make statements that are not historical fact and are forward-looking. These statements are based on assumptions that we believe are reasonable, however there are many important factors that could cause our actual results in the future to differ materially from these forward-looking statements. For more information related to these statements and other risk factors, please see our filings with the SEC that are available on our website.
Also, today on the call, we will use the terms “normalized EPS,” “adjusted operating cash flow and “[inaudible] cash flow,” all of which are non-GAAP financial terms. For reconciliation of these terms to the appropriate measures calculated in accordance with GAAP, please see our press release [inaudible] yesterday. We have also posted a presentation on our website containing each of these non-GAAP reconciliations, and you can find that presentation on our website under the subheading “webcasts and presentations.” With that, we’ll begin with remarks from Tom Ryan, SCI’s president and CEO.
Thanks, Debbie, and welcome everybody to the call. I’m very excited to report to you a solid quarter, with significant increases in both funeral and cemetery profits, and an impressive 20% growth in normalized earnings per share that exceeded both external, as well as our own internal expectations.
Our team really performed, particularly our sales force, who delivered double-digit growth in our pre-need cemetery sales production for the sixth time in the last seven quarters. Based on our performance through the first six months, we’re increasing our full-year 2012 outlook for normalized earnings per share, and free cash flow, which I will talk about more later in my remarks.
Now for an overview for the quarter. Our normalized earnings per share increased $.03 to $.18 versus $.15 in the prior year quarter. Most of this increase came from operating earnings growth from pre-need cemetery sales production growth combined with operating efficiency, as the impact of fewer shares helped offset the higher G&A expenses, as well as a $2 million foreign currency loss.
Free cash flow produced during the quarter was $42 million, which was up slightly from last year. We continued to be active buyers of our stock during the second quarter, and we also completed two acquisitions, which added six funeral homes to our network in the San Diego market, as well as the province of British Columbia.
Consolidated revenues grew $20.6 million. Increased revenues from our acquisition of Neptune, solid growth in the average revenue per funeral and strong cemetery performance were partially offset by lower funeral pace volumes. Consolidated profits grew $13.2 million and the higher revenues and gross margin improved 160 basis points to 21.5%.
We did an excellent job at managing costs in both segments, and I want to thank our teams in the field for their leadership, particularly in light of the challenging funeral volume environment.
Now for an overview of comparable funeral operations. For the quarter, comparable funeral revenues declined about $2 million, or around .5%. Funeral volumes continued to be soft; they were down 2.9% for the quarter. On a year-to-date basis, same store volumes are down 3.7%, which is generally in line with our forecast. We have modeled our comps to get easier in the back half of the year, resulting in volume for the year down in the low single-digit percentage range, probably somewhere between 2 and 3%. Partially offsetting this softness was a solid increase in comparable average sales, 3.1%, excluding the impact of trust fund income and currency. This was consistent with the growth we experienced in the first quarter. Keep in mind, this increase also takes into account that our cremation mix grew by 80 basis points to 45%.
We are continuing to see the positive impact from initiatives we have mentioned before that are enhancing the effect of our inflationary pricing. First and foremost, the Refresh Dignity packaging is centered around the consumer choice, better consumer choice, and flexibility, and the associated training that goes along with it, is now in place in approximately 900 locations, and is scheduled to be rolled out to all locations by the end of September. In addition, our recessions and event sales, otherwise referred to as catering, added a little more than $3 million in the second quarter, or about $50 to total comparable funeral average. Not only is that affecting our at-need average, but we’re seeing success in this initiative on the pre-need front as well. During the second quarter, we sold $1.3 million of recessions and event sales that will go into the backlog and benefit future quarters.