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Service Corporation (SCI) Q2 Earnings Top Estimates, Rise Y/Y

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Service Corporation International (SCI - Free Report) posted second-quarter 2020 results, wherein both earnings and revenues improved year over year and surpassed the Zacks Consensus Estimate. Results were backed by higher funeral services performed due to COVID-19-related deaths, along with robust cost management. However, a decline in funeral average per case due to bans on big gatherings hurt results to an extent.

For 2020, Service Corporation envisions adjusted earnings per share of $1.78-$2. The company’s earnings came in at $1.90 in 2019.

Q2 in Detail

Service Corporation reported adjusted earnings of 58 cents per share, which came way ahead of the Zacks Consensus Estimate of 24 cents. Further, the bottom line jumped 23% from the year-ago quarter’s reported figure on the back of increased gross profit stemming from greater funeral services performed in the core funeral services business on account of the pandemic, along with solid cost management. Management stated that it saw a better-than-anticipated operating performance in its funeral and cemetery operations. Results were somewhat offset by reduced funeral average per case.

Total revenues of $820 million inched up 0.9% from $812.6 million in the year-ago quarter, backed by increased funeral and cemetery revenues. Moreover, the figure beat the consensus mark of $710 million.

Corporate general and administrative costs escalated $8 million to $37.2 million, while it grew $6.4 million on excluding last year’s legal expense adjustments. Apart from this, these costs increased due to a rise in incentive compensation costs, including bonuses for some front-line workers, along with costs related to community outreach efforts. The company’s interest costs fell $5.6 million to $41.8 million in the quarter.

Segment Discussion

Consolidated Funeral revenues grew 0.4% to $480.9 million on higher core revenues. Core revenues gained from a rise in atneed as well as matured preneed revenues. Further, non-funeral home revenues improved year over year, while recognized preneed revenue saw a decline of 30.2% to $27.7 million.

Comparable funeral revenues slipped 1.2% year over year due to a fall in recognized preneed revenues and other revenues, stemming from a decline in preneed funeral sales production. These were partly compensated by a rise in core funeral revenues, which was backed by increased core funeral services performed largely due to coronavirus-led deaths. This was somewhat negated by a fall in core average revenue per service, which results from social-distancing measures that led to smaller and lesser funeral memorial services. Moreover, the core cremation rate rose 210 basis points on account of a temporary shift toward direct cremation amid the pandemic.

Comparable preneed funeral sales production tumbled 27.3% due to a fall in preneed production in the non-funeral home channel as well as a decline in core funeral locations, both of which were affected by increased stay-at-home and social-distancing orders.

Comparable funeral gross profit elevated 23.4% to $112.9 million. Also, the gross profit margin increased 480 basis points to 24%, courtesy of core business growth and pandemic-led cost-containment efforts, partly negated by a fall in lower-margin revenue channels.

Consolidated Cemetery revenues rose 1.6% to $339.1 million, thanks to a jump in core revenues. Core revenues gained from higher atneed revenues, partly offset by a fall in total recognized preneed revenues stemming from lower recognized preneed merchandise and service revenues. 

Comparable Cemetery revenues improved 1.7% year over year on the back of higher atneed revenues, which stemmed from a rise in services performed. This was somewhat countered by a decline in recognized preneed merchandise and service revenues. Comparable preneed cemetery sales production grew 10.4%, thanks to productive virtual tools, increased sales incentives and greater leads from atneed services along with gradual relaxation of bans on gatherings in several states.

Comparable cemetery gross profit climbed 2.4% to $102.8 million and the respective margin expanded 10 bps to 30.3%. The upside can be attributable to higher cemetery revenues together with cost-curtailments undertaken in late March and early April due to the COVID-19 outbreak. This was partly countered by increased selling compensation-related expenses.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $222.2 million, long-term debt of $3,573.7 million and total equity of $1,754.3 million.

Net cash provided by operating activities amounted to $364.3 million in the first six months of 2020 compared with $262.9 million in the prior-year period. During the second quarter, the company incurred capital expenditures of $52.6 million. Further, the company expects net cash from operating activities to be $600-$660 million, on excluding certain special items. Expenditures associated with capital enhancements at current locations and cemetery development are anticipated in a band of $165-$195 million for 2020.

Outlook

Management expects continued effects of the pandemic to lead to higher funeral services performed, especially in the early third quarter. This is likely to be partly countered by lower average revenue per service, stemming from curbs on gatherings, together with self-quarantine measures in certain jurisdictions. Further, Service Corporation anticipates preneed sales to move somewhat in line with atneed services, partly due to family members who prefer to book cemetery properties close to their loved ones.

That said, management noted that the company might start witnessing a slowdown in funeral services as the spike in death cases (related to the pandemic) in the last five months is mostly ahead of time. While the company is focused on cost-containment measures, it expects a modest increase in costs and expenses, corresponding to stay-at-home orders as well as restrictions on gatherings.

We note that shares of the Zacks Rank #3 (Hold) company have gained 15.3% in the past three months compared with the industry’s growth of 13.4%.

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