Service Corporation International (SCI) 2013 Q1 法說會逐字稿

Welcome to the Q1 2013 Service Corporation International earnings conference call. My name is John, and I will be your operator for today's call. (Operator Instructions). I would now like to turn the call over to SCI management. Please go ahead.

Hello, good morning, this is Debbie Young, Director of Investor Relations at SCI. Thank you for joining us today as we discuss our first quarter 2013 results. Before we begin, let me remind you that the comments that will be made by our management today will include statements that are not historical and are forward-looking. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.

These risks and uncertainties include but are not limited to those factors identified in our press release and in our filings with the SEC that are available on our website. Today's comments may also include certain Non-GAAP measurements such as normalized, EPS, adjusted operating cash flow, and precash flow. Reconciliation of these measurements to the appropriate measures calculated in accordance with GAAP is provided on our website and in our press release in 8-K that were failed yesterday. Withthat out of the way, I would now like to turn the call over to Mr. Tom Ryan, SCI's President and CEO.

Thank you, Debbie, and good morning, everyone. Thank you for joining us today. As you saw in our press release yesterday, we announced a truly outstanding first quarter. We saw success across the board in funeral and cemetery operations, preneed funeral and cemetery sales, significant growth from Neptune, and on top of all that, the financial markets performed well. It is not often you have so many things go your way. So I would like to thank the entire SCI organization for both their historical and most recent efforts in allowing us to attain these results.

Oh and by the way, let us keep it coming. Broadly speaking,our first quarter performance highlights the operating leverage we have in our business model. As we produced a 40% increase in normalized earnings per share on about an 8% increase in revenue.

We executed well on our strategies, and we were well positioned to respond to the demand created by the strong flu season that occurred during early part of the quarter. Normalized earnings per share in the first quarter grew by $0.08 to $0.28 which is ahead of our internal expectations we had set in February based upon January volume. Now to break down our earnings per share growth for you. Operations contributed about $0.09 of growth over the prior year quarter.

Funeral operations produced about $0.06, led by the increase in funeral volume, funeral sales average growth, and a more than 30% increase in Neptune revenue added almost a penny of the $0.06. The remaining $0.03 came from strong cemetery preneed sales performance and higher cemetery trust fund income.

We also benefited by about a penny from a lower share count. Offsetting this $0.10 improvement I just discussed was about $0.02 of higher G&A expenses related to long term total shareholder return compensation in an unfavorable foreign currency impact from inner company Canadian notes.

Now shifting to a overview of the funeral segment. Comparable revenues increased about $30.4 million or 7.2%.

This was ahead of our expectations generating gross profit in margin percentages, higher than we had anticipated. Let us talk a little bit about the key drivers. Same-store funeral volume grow an impressive 4.3% for the quarter.

As most of you know, we experience a strong flu season early this year, resulting in flu-related deaths above normal levels for nearly the entire quarterstarting out very strong in January, and tapering off somewhat in March. While this growth is impressive, it is generally in line with what we had modeled and told you about in our mid quarter call in February.

We are still modeling volume for the year to be down in the low single digit percentage range until we have more than three months of data. Complimenting the volume growth, we also saw an increase in the average sale of 1.6%. Isolating the currency and trust fund impacts the averaging grew 1.1%.

This was accomplished by a 60 basis point increase in the mix of cremation. You may have also observed that our sales average dollars are lower then what we have historically reported in both quarterly periods presented for our comparable operations in the press release. This is a result of including Neptune cremation fulfillments in our same store results for the first timewhich carries a significantly lower average. General agency revenue in the quarter increased $1.7 million on increased preneed insurance funded productionwhich helps cash flow which is generally offset by selling expense for reporting GAAP margins.

Lastly, you may have noticed a new category of revenues in our press release called Funeral Recognized Preneed revenues. This primarily represents preneed sales of Neptunethat are delivered at the time of sale. Examples would include a Keepsake Urn Memorial Kit, or Travel Protection Insurance.

We previously included these revenues in our Other Revenue category. In the quarter these sales grow by $4.3 million to about $18 million. Keep in mind, the cremation service component of the preneed sale is deferred and recognized at the time of need as funeral case volume, and is included in the funeral sales average at that time.

We are very excited about Neptune's performance, and expect to see a continued growth and value creation. Therefore, on the funeral revenue increase of about $30 million, to boil it all down, we grew comparable funeral profits nearly $18 million, and the margins increased 230 basis points during the quarter. So from an operating leverage perspective, the incremental revenues produced a 59% gross margin which approximates our lower 60% expectation.

On a preneed basis, we grew preneed funeral sales by 5.2% in the quarter, of which Neptune was a key driver, with a 20% increase in contract count, and a 7.6%increase in sales average.

Now for a overview of cemetery operations. Comparable cemetery revenue increased $12.4 million or 7% for the quarter. This increase was primarily due to impressive preneed sales production growth for 6.7% of the quarterparticularly against a high hurdle rate set in the prior year quarter when we were up some 14%.

The revenues and profits were also positively impacted by a $2.7 million increase in cemetery trust fund income. Comparable cemetery profits grew $12.5 million as well for the quarter and margins increased 560 basis points to 21%.

As a reminder, last year's margin of 15.4% was unusually low as we discussed at that time due to $10 million of sales revenues that were deferred due to construction and delivery constraints,but we had incurred this selling expense in the quarter. So this quarter's margins are more normalized for what you would expect this level of production to produce in a 20% to 21% range. With the first quarter behind us, we remain confident in our earnings per share and cash flow target, and we believe we will be in the upper range for annual 2013 guidance communicated to you back in February.

While we benefited from increased funeral volume in the first quarter due to the flu season, we are hesitant to put this in the bank as incremental for the year. In our experience many of these flu-related deaths or an acceleration of deaths that would have otherwise occurred later in the year. We are now entering into our fifty-first year of being in business in SCI, and I am very very proud to be a part of this organization working right alongside the man who created it, Bob Walterand to help celebrate the more than 50 years of delivering high quality and compassionate service to families who turn to us at a most difficult time. With that call, I will turn the call over to Eric.

Good morning, everybody, and thank you for joining us. This morning I am going to walk you through the details of our cash flow for the quarter and then I am going to provide some color in our thought about capitol deployment. So let us start with cash flow. As you saw in yesterday's press release, adjusted operating cash flow in the quarter was very strongand it grew $58 million over the prior year to $154 million exceeding our expectations.

Cash flow growth during the quarter was predominately driven by higher cash receipts from improved operating performance that Tom just mentioned as well as improved working capital. Let me give you a little bit more color on that.

First, our cash receipts were higher due to the strong December and January funeral case falling activity in which the corresponding cash was received predominately during this quarter. Secondly, not only were our preneed sale production levels up from last year, but we also experienced an improvement in preneed cash collections. This is primarily a result of higher down payments and an increase in cash collections related to the installment sales sold in prior years.

And lastly, as I have described in prior calls, we implemented a new accounts payable system in late 2012 that caused significant variability in our cash payments to vendor in the third and fourth quarters of last year. We completed this implementation during this quarter. As a result though, we experienced a return to more normalized levels of cash payments to vendors that resulted in a one-time benefit to working capital this quarter.

Now maintenance CAPEX and cemetery development CAPEX and remember those are the two components that we consider our recurring CAPEX, those items for the quarter came in at $21 million, which was in line with our expectations. When you deduct these recurring capital spending items from our adjusted cash flow, we calculate our precash flow for the quarter to be $133 million. Now let us talk about our cash flow for the remainder of 2013.

Our outlook for full year cash flow from operations of $375 million to $425 million remains unchanged. Although, we now believe we will be in the upper end of this range as a result of our strong first quarter operating results. Now a few comments on our assumptions for this outlook. First, remember, that our first quarter cash flow is seasonally high due to cash interest payments that primarily occur in the second and fourth quarters.

During this quarter, we only paid $2.5 million in cash interest. We expect to pay about $59 million in the second quarter, and about $63 million thereafter in 2013.

Secondly, to reiterate what Tom said, we believe our funeral volume for the remainder of the year will return to more normalized levels. For the full year of 2013, we are still modeling funeral volumes to be down in the low single digit percentage range. Also the working capital benefit I just mentioned from accounts payable is one time in nature, and it is not expected to continue throughout the remainder of 2013.

Lastly, we now believe that our cash taxes will trend to the upper end of our guidance range previously communicated of $35 million to $45 million of cash taxes, this as a result of our earnings currently trending higher. And again, we continue to be proud that our cash flow guidance of 2013 implies significant growth over 2012 despite this approximate $25 million headwind of increase in cash taxes.

Now let us talk about the deployment of this free cash flow in the quarter, and as I discussed in our February conference call, and as seen today in our financial statements, we have been rebuilding our cash balance during the first quarter following the acquisition spend of about $50 million late in December of 2012. Once we reached our targeted cash level during the quarter, we had entered into a quiet period, which generally prevented us from any share repurchase activity. Therefore, we did not repurchase any shares in the open market during the first quarter.

However, we still have approximately $190 million of share repurchase authorization remaining today. We do not have any acquisition activity that closed during our first quarter which again was expected following a very busy fourth quarter acquisition activity that I just mentioned. Remember, last year most of our activity occurred in the back half of the year. However, we did just close on a small acquisition in April, and we have another small acquisition under contract and expect it to close sometime in the second quarter.

Lastly, we bought an additional 10% of Neptune during the quarter for $8.3 million. This cash deployment is reflected in finance activities on our cash flow statement and brings our total ownership percentage of Neptune to 80%. So in conclusion, we are obviously off to a great start in 2013.

We are proud to continue our long history of strong free cash flow generation despite a variety of economic and other challenges. This robust cash flow coupled with the strength of our balance sheet, continues to provide us with a tremendous amount of financial flexibility to continue to deploy our capital to increase shareholder value. And as always, we will continue to look at the best uses of deploying our free cash flow. This includes reinvested in our core strategies which primarily relates to continuance of build our preneed backlog. We believe this is a high return, low risk strategy.

Secondly, investing in strategic acquisitions at the appropriate returns. Third, return in value to shareholders through share repurchasesas well as a strategy of increasing our cash dividend over time. And lastly, managing our debt liquidity profile by managing cash flows,credit facility availability, and near term debt maturities this in order to maximize our financial flexibility.

So we appreciate you joining us this morning. And now Operator, we will go ahead and open it up for investor questions.

Thank you. (Operator Instructions) And our first question comes from Robert Willoughby from Bank of America, please go ahead.

Good morning, Tom and Eric. Glad to see you were able to eke out some upside here on the quarter. Obviously the flu season volumes won't continue here, but is there any experience -- can you speak to maybe what you are able to pick up subsequent to that from a preneeds standpoint or preneeds standpoint? Do you leverage those experiences in Q1 for some successes over the year on the preneed side?

Yes, I think Bob, there is definitely some impact from that. Because traffic is an lead source for preneed as you were pointing out. We were very excited about the preneed production, even in the first quarter.

I think it was higher than we had anticipated when you think about a comparable year over year. So we feel pretty good about again even though on the funeral side we don't talk about it as much because it is deferral, but out momentum on the preneed funeral and both the preneed cemetery is very good as we enter the back half of the year. And like we said, we cannot predict to you what will happen with deaths. There's some -- we are clearly taken a position we will give back a lot of the volume, that may or may not happen and to what extent we don't know. But at this point, with 3 months of the year behind us, I think we are better suited. Let's see what happens April, May, June, and we will be in a better position to know that halfway through the year.

Okay, and maybe on that front, we would expect to drop off sequentially from an earnings standpoit in absolutely terms. Any comment that you can make whatsoever on April to date just to help us understand the magnitude of the drop off as the death rate rally come crashing back down? Has there really been any repurchases to date? I guess that is not possible as yet, but other pros and cons on the quarter itself?

Yes. I think what I would tell you on April, and again it is preliminary. We get daily data, but we have not closed it out. It is generally - - April is okay. It is not at the level of the first quarter. We have not seen some significant deterioration. It is pretty good, but we still have not closed it out. I think you mentioned you said repurchase?

Yes. I guess you cannot do that as yet.

So we have not repurchased anything to date.

Any common on capital markets performance, etc... for you in the quarter to date? Maybe that has slowed a bit as well.

Yes, it has. You saw med single digit growth rate in the first quarter, Bob. And yes, it is going to move to the market and what we are modeling is more like the April -- I mean the slow down performance. We are still at our annual guidance which is kind of the lower to maybe the middle single digit percentage range in terms of the increase and the trust fund portfolio.

That is great. Thank you.

Our next question comes from John Ransom from Raymond James. Please go ahead.

Hello, good morning. A couple of things. You guys have done great put up great numbers despite negative volume trends. Has there been any change, do you think in your volume performance relative to the industry?

Have you kind of bottomed through the cycle of running off bottom 20% of the market that you don't want? Are you starting to get more market share because of Neptune, or is the cycle running through? Thanks.

I would answer that a couple different ways. I do believe that the Neptune opportunity and strategy is one that when you take into account overall market share is going to help us because we believe that at a growing market. It is a market we have not participated in before, and we believe Neptune is the most effective at participating in that market mainly because the preneed strategy that is deployed.

So that part of the bucket I would say we are gaining share. I think the best way to gain share, and I am now going to correlate it back to SCI, is through preneed. So I would tell you today because of our recent efforts over the last -- particularly the last three to five yearsthat because we have grown preneed at such a significant way that we are competing for market share. Honestly, we do a great job locally, I believe. So it is tiny, but my personal opinion is we are more effective because of our approach through preneed at competing for market share.

Okay, and then a numbers question. If you Look at your guidance, you are not guiding for any growth in cash flow from OPS for the succeeding three quarters if you take the first quarter into account. Is that just conservatism, or is it the taxes or something else to think about there?

A little of both, John. For one thing, the first quarter had the one time working capital source from the accounts payable that I mentioned. For the quarter we paid about $5.5 million of cash taxes, and as you heard me say this morning, the guidance is $35 million to $45 million, but it is going to be at the upper end if the earnings continue to trend at this higher. So a lot of that has to do with cash taxes that are coming in the back half of the year, John.

Okay. Just the usual question about acquisition supply, acquisition pricing, competition private equity, public company competitors any change there?

Not really, John. The acquisitions are still out there. I would not say there is a big robust pipeline. Eric touched upon a couple, but at the same time there is activity. We feel good about it, a lot of relationship building, and so we feel confident that we will be able to report more acquisition activity throughout the year.

And I know you are having good luck with Neptune, but is the EBITDA comparison in Neptune in 2013 over 2012 is that getting close to being material or is it still immaterial at this point?

Well, again if you Look at the first quarter 2013 to 2012, and I kind of highlighted in my comments. It added almost a penny. So Neptune had a fantastic first quarterrelative to prior year. And so we feel really really good about the direction there. And we are really kind of hitting on all cylinders.

Is there some spill over in your funeral business that would not be picked up in penny?

No, I think there is a little bit of that because again we are delivering -- we are providing services for them, but really small. I think the biggest impact from Neptune is what we are going to discuss, and it is going to be driven by the fact how much sales production are we going to have in that category of preneed items that we deliver. That is going to be what is going to carry the day and as long as that is growing we will see continued growth and profits from Neptune.

Great, thank you.

Okay.

Our next question comes from Clint Findley from Davenport. Please go ahead.

Thank you. Good morning, guys. Nice quarter, I also had a couple of follow up questions on Neptune. Obviously you guys release a lot more data on them in the quarter. How many locations do you have for Neptune currently?

I believe now I don't have the -- in 2012 we opened nine new locations. We are going to open another six to eight this year. So I think by the end of this year, we are approaching I think today we are sitting at 36. It may not be the exact number but close to that. So in look at us heading toward mid 40's to 50 locations maybe by the end of this year.

Okay, and any idea -- I mean I think at the time if my notes are right that the backlog for Neptune was about $125 million. So that is still pretty robust growth and contributor to your backlog then.

Yes, I think remember, Clint, this is a little -- that is why we are trying to give you more data, because it is a little trickier than our traditional funeral business. Neptune sales -- think of Neptune as two different things. One is they are selling a service, the cremation service and that is all triggered by death. So we are going to perform the cremation service later, that goes into a backlog.

That gets sold most of the time concurrently with the fact that we are selling a keepsake, and that we are selling insurance to that consumer and those two components are going to get recognized at the time of salebecause we are delivering the merchandise in that category. So you get profits and cash upfront from the merchandise piece, and the service piece goes into the backlog and gets delivered just like every other funeral.

So when we talk about generating profits, the bigger piece now is going to be selling that keepsake urn, and selling that travel protection to the consumer. And in the meantime, later when we deliver it we are going to recognize more profits when we deliver that service. But that gets deferred into the backlog that you are referring to, and that is what is going to go into to be funded by an insurance contract and the like.

You still have the same management team there that you did when you bought it back in the summer of 2011?

We do. We have the same leader we have had slight changes in some of the other categories. We have added some talent there as well. But our leader is the same one, and we are very very pleased to have him.

Last question. I wonder just switching to the cemetery for a minute. Any idea what the cemetery margins would have been if you excluded the benefit of that $1.9 million for the property insurance claims. Did that drop right through to the bottom line?

Yes. Think about it as normalized margins would be around 20%, maybe just above 20%. So that's -- the problem trying to go from last year's quarter to this quarter, you remember last year's quarter I think we were pretty elaborate in describing this. We had a bunch of sales production a lot of which got deferred for unusual reasons. If you remember, we incurred the selling costs no matter whether we recognize it or not. So the 15% to 21% jump was a lot to do with lower margins in last year's quarters that can be explained, but you are exactly right. 21% would be closer to 20% if you took out that reimbursement.

Okay. Thank you, guys nice quarter.

Thank you.

Our next question comes from Chris Rigg from Susquehanna Financial. Please go ahead.

I apologize if I missed this, butcould you give us what the monthly volume progression was in the quarter? So January year-to -year, February year-to-year, etc...?

You know Chris I don't have that right in front of me, but I tell you from a monthly basis, January was very robustkind of surprisingly, and I think that is why we anticipated what we did for the first quarter. And it taper off, and it was still positive in February, but still kind of impressive. And by March it was back to flat to slightly down.

And then I was hoping that you could better help us better understand the core pricing and the funeral business? I know you sort of normalize it for Neptune, but on an aggregate basis it seems like it is down a little bit in the quarter. I am trying to get a sense for how we should think about that. I know there is the cremation impacting that, etc.... but what is the core inflation in the pricing right now?

Remember, our average price is going to impacted by mix, but which you are rightly pointing out. So when you strip out Canadian currency impact and trust fund impact, we are up 1.1%, if you break that out and say take away the mix change, what you see is both on the cremation and burial side that we are getting somewhere approaching 2% type of growth.

And again, I do not have those in front of me, but just to give you an idea, some of that is our pricing. Some of that is discounting. Some of that is impacted by whether people are buying packages or not. So where we sit today, we are getting inflationary pricing in about where we thought it would be.

Okay, and then lastly, I know it is next year, but can you remind us how you think cash taxes will change over the next 12 months or so.

Well, over this period, 2013 is the guidance of 35 to 45. As I said as our earnings are trending upward we willprobably be at the upper end of that. Chris, that compares to $17 million that was payed in the prior year. You are talking about beyond 2013?

I am just trying to figure out -- I know you do not want to give guidance, but just some sense for how we should think about a cash taxes.

As I have told you before, for the most part, most of our NOLsare going to run out in 2013. We still have some NOLsthere. Such as the Alderwoods NOLs are still there.

And you can only use a certain amount of those due to the acquisition per year. So some of those will always be out there for the next few years,but the predominance of it is we are going towards becoming a full cash taxpayer in 2014. You still have timing differences and such, and you have some tax planning opportunities. So as I have said, it does not mean that your -- that your effective cash tax rate if you will is going to approach the 37% to 38% provision that is on the income statement.

I think it is more getting -- going to get in there into the low 30%, type range. In the low 30sultimately when we absolutely in 2014 become a full cash taxpayer. Now if we figure out more tax planning opportunities to defer that, we will. We have obviously done that the last couple of years, but that is probably the best outlook I can give you right now, Chris.

But that is great color, thanks so much, Chris.

You are welcome.

Our next question comes from A.J. Rice from UBS. Please go ahead.

Hello, this is [Brendan Fesser] for A.J. I was wondering if you can update us on the new vendor management system you mentioned? And beyond the one time catch up on the accounts payable that you mentionedis there some additional upside there longer term as we have in now fully implemented?

Yes. It was fully implemented this quarter. There was a one time kind of normalization of cash vendor payments because simply the third and fourth quarter are just rocky during the implementation. When we first introduced this system, and talked about it openly on the previous calls, we talked about what the benefit is that it is giving us visibility on a spend that is out in the field locations that we really could not efficiently and very effectively get to in terms of that visibility. So those synergies are associated with this, and I would characterize us as if you allow me the sports analogy, very early innings of that visibility in terms of capturing those synergies, and I do think you will see some of that come in this 2013 and probably some of that come to 2014 as well.

Okay. And on the G&A side. Last quarter there was a couple of unusual items that were in there that caused it to spike up a bit, was there anything unusual in this quarter?

No. The only thing that really there was was that we have a long term compensation plan with key individuals that is tied to total shareholder return. And when our share price moves up verses that pool of other companies that it is compared to, you are going to see higher compensation. And I think that was about $2 million to $3 million during the quarter, and I think we mentioned that as well. But that is really the only thing I would say is anything out of the ordinary during this quarter.

Okay. Thanks you.

(Operator Instructions). We have a question from Duncan Brown from Wells Fargo. Please go ahead.

Hello, good morning. Just two from me. In the past you have talked a little about the reception of events and initiative and giving some stats on penetration there to help us size the opportunity going forward. Can you maybe provide a update on where you stand there?

Yes. We talk as lot more about it when it is new and rolling out. Now it has become more of a maturing initiative, and become part of the core of what we do. So it is continuing to grow. I would tell you that from a spend perspective we are very very pleased. It has done better than what we have always anticipated. I would say from a margin perception, I would say from a customer satisfaction perspective, and the one thing we struggle a little bit with is the penetration rate.

And it gets back to everything, that people that have adopted it have done a tremendous job, and take it to the next level, and then it is getting people to be comfortable with offering these options making sure we have the vendors there. So we still think there is upside in getting more penetration through more of the locations. But that is going well ahead of plan, and we will continue to see some growth. But again, year over year that is not going to drive a lot of enhanced profits from an external perspective that you guys can see.

Okay, that is fair. And then a numbers question. Can you tell me how much is out on the revolver, please.

Just under $90 million, Duncan.

Thank you, guys.

And I will now turn the call back over so SCI management for closing remarks.

We want to thank everybody for participating with us today, and we Look forward to speaking to you againin July. Thanks everyone. Take care.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.