Service Corporation International (SCI) Q1 2013 Earnings Report, Transcript and Summary

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. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note, that this conference is being recorded. I'd now like to turn the call over to SCI management. Please go ahead.

Hi and good morning. This is Debbie Young, Director of Investor Relations for SCI, thanks 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 of the SEC that are available on our website. Today's comment may also include certain non-GAAP measurements such as normalized EPS, adjusted operating cash flow and free cash flow. Reconciliations of these measurements to be appropriate measures calculated in accordance with GAAP is provided on our website, and in our press release and 8-K that was filed yesterday. With that other way I would like to now turn the call over to Mr. Tom Ryan, SCI's President and CEO.

Thanks, Debbie and good morning everyone, thanks 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's not often you have so many things go your away so I would like to thank the entire SCI organization for both their historical and most recent efforts and allowing us to obtain these results. By the way let's keep it coming. Broadly speaking our first quarter performance highlight 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 revenues. We executed well on our strategies and we're well positioned to respond to the demand created by the strong flu season that occurred during the 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 expectation we had set in February based upon January volume. Now the breakdown of our earnings per share growth for you. Operations contributed about $0.09 of growth over the prior year quarter. Funeral operations produced about 6 of those cents, led by the increase in funeral volume, funeral sales average growth and a more than 30% increase in Neptune revenues added almost a penny of this $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 based compensation…

Good morning, everybody and thanks 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 and our thoughts about capital deployments. So let's start with cash flow, and as you saw in the yesterday's press release, adjusted operating cash flow in the quarter was very strong and 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 color on this. First our cash receipts were higher due to the strong December and January funeral case volume activity and which the corresponding cash was received predominately during this quarter. Secondly not only where our pretty sales production levels up from last year, but we also experienced an improvement in preneed cash collections. This is primarily result of higher down payments and an increase in cash collections related to the installing sales sold in prior years. And lastly, as that I've described in prior calls, we implemented a new accounts payable system in late 2012. That cause significant variability in our cash payments to vendors end of third and fourth quarters of last year. We completed this implementation during this quarter, as a result though we experienced to returns to more normalize levels of cash payments to vendors that resulted in a onetime benefit to working capital this quarter. Now maintenance CapEx and cemetery development CapEx and remember those are the two components that we consider our current recurring CapEx those items for the quarter came in at $21 million, which was in line with…

(Operator Instructions) And our first question comes from Robert Willoughby from Banc of America. Please go ahead.

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

Yeah, I think, Bob, there's definitely some impact from that, you know, because I think traffic is the lead source for preneed as you're pointing out. So we were very excited about the preneed production even in the first quarter. I think, it was higher than we anticipated when you think about a comparable year-over-year. So we feel pretty good about again even though on the funeral side, even we don't talk about it as much because of its deferral that our 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 can't predict to you what's going to happen with that, there's some if we clearly are taking the position that we're going to get 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 three months a year behind us I think we’re better suited, let's see what happens, April, May and June and we'll be in a better position to know that half way through the year.

Okay. And maybe on that front, I mean we do -- would expect to drop off sequentially from an earnings standpoint in absolute 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 really come crashing back down; has there been any repurchases to date I guess that's not possible as yet but other pros and cons on the quarter itself?

Yeah, I mean I think what I tell you in April again it’s preliminary, we get daily data but we haven’t closed it out, that generally you know, April's okay, I mean it's not, that the levels of the first quarter we haven't seen some significant deterioration, it's pretty good but we still haven't closed it out, and I think you mentioned, you said repurchase?

Yeah I guess you can't do that as yet, but…

So we have -- we have not opted to repurchase anything to date.

Okay, any comment on capital market's performance et cetera for you in the quarter to date maybe that has slowed a bit as well.

Yes it has, you saw mid single-digit growth rate in the first quarter, Bob, and yeah, it’s going to move to the market and what we are modeling is more or like April I mean slowdown performance. We're still at our annual guidance, which is kind of a lower to maybe the middle single-digit percentage range in terms of the increase and the trust fund portfolio.

That's great. Thank you.

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

Hi, good morning. A couple of things you guys have done great -- put up great numbers despite you know, negative volume trends. Has there been any change you think in your volume performance relative to the industry, have you kind of bottomed through the cycle of running off of bottom 20% of market that you don’t want, are you starting to get more market share because of Neptune or the cycle running through it, thanks?

Yeah, I think I'll answer that in a couple of 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 is a growing market, it's a market we haven't participated in before and we believe Neptune is the most effective at participating in that market mainly because of the preneed strategy they have deployed -- so that part of the bucket I'd say, we're gaining share. I think the best way to gain share and I'm going to [not] [ph] correlate it back to SCI, is the preneed, and so I would tell you today because of our recent efforts over the last three, particularly the last three to five years that because we've grown preneed in such a significant way that we are sustaining (Inaudible) market share. Also we do a great job locally, I believe, and so it is tiny but my personal opinion is we're more effective because of our [efforts] [ph] at 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 is there something else to think about there?

A little of both John I mean the one thing the first quarter had the one time working capital source from the accounts payable that I mentioned

Yeah.

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's 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 in the back half of the year, John.

Okay. And just a usual question about acquisition supply, acquisition pricing, competition private equity public company competitors any change there?

Not really, John I think the acquisitions are still out there, I wouldn't say there's a big robust pipeline, Eric [to touch on] [ph] a couple, but at the same time there's 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're having good luck with Neptune but is the EBITDA comparison at Neptune in 2013 over 2012 is that getting close to being material or is still immaterial at this point?

Well, I think again I think if you look at the first quarter '13 to '12 I kind of highlighted in my comments, it added almost a penny so Neptune had a fantastic first quarter, relative to prior year and so we feel really, really good about the direction there and we're really kind of hitting on all cylinders but again--

Is there some spillover in your funeral business that wouldn't be picked up in that penny.

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

Great, thanks.

Okay.

Our next question comes from Clint Fendley 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 released 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're going to open another 6 to 8 this year. So I think by the end of this year we're approaching I think today we're sitting at 36 it may not be the exact number but close to that so you look at it heading towards mid 40s to 50 locations maybe by the end of this year.

Okay. Any idea, I mean I think at the time if my notes are right that the backlog for Neptune was about $125 million I mean is that so that's still for I guess from what you've been saying pretty robust growth in contributor to your backlog then?

Yeah, I think remember, Clint, this is a little that's why we're trying to give you more data because it's a little trickier than our traditional funeral business, Neptune sales think of Neptune as two different things one is they're selling a service the cremation service where and that is all triggered by death. So we're going to perform the cremation service later that goes into backlog, that give sold most of time concurrently with the fact that we're selling a keepsake and that we're selling insurance to that consumer and those few components are going to get recognized at the time of sale because we're delivering the merchandise in that category. So you get profits and cash upfront from a merchandise fees and the service fees 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 hard and selling that travel protection to the consumer and in the meantime later when we deliver we're going to recognize more profits when we deliver that service, but that gets deferred into the backlog that you're referring and that's what's going to go into be funded by the insurance contract and the likes.

And is it - do you guys still have the same management team there that you did when you bought it back in I guess the summer of 2011?

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

Okay. And last question I wondered, just switching to the cemetery for a minute any idea what the cemetery margins would advantage excluded the benefit of that $1.9 million for the property insurance claims did that drop right through to the bottom-line.

Yeah. Think of it, it's normalized margins would be around 20%, you know maybe just above 20%. So that's -- there's another, problem of trying to go from last year's quarter to this quarter, remember last year's quarter I think we're a pretty elaborate in describing this, we had a bunch of sales production a lot of which guys have heard for unusual reasons and if you remember, we incurred the selling costs no matter whether recognize or not. So, the 15 to 21 jump was a lot to do with lower margins in last year's [quarter] to explain but you're exactly right 21 would be closer to 20 it took out that reimbursement.

Okay. Thanks guys and nice quarter.

Thank you.

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

Good morning and I apologize if I missed this. But could you give us monthly what the quarterly -- monthly volume progression was in the quarter, so January year-to-year, February year-to-year et-cetera?

You know, Chris, I don't have that right in front of me, but I'd tell you from a monthly basis, you know, January was very robust, you know, kind of surprisingly, and I think that's why we anticipated what we did in the first quarter, and it kind of tapered off, and we're still positive in February but it's still kind of impressive and then the last -- by March it was back to kind of flat to slightly down.

Okay. And then I was also hoping you could help us better understand sort of the core pricing in the funeral business I know you sort of normalized it for Neptune, but on an aggregate basis, it seems like it's down a little bit in the quarter. I'm just trying to get a sense for how should we should think about that I noticed the cremation impacting that, et cetera, but sort of where -- what's the core inflation in the pricing right now?

I think what we're experiencing remember our average price is going to be impacted by mix but what you right with pointing out. So, when you strip out you know [cleaning] currency impact and (Inaudible) impact, we're up 1.1%, if you break that let's say, take away the mix change, I think what you'd see is both on the cremation and burial side, that we're getting somewhere approaching 2%, type of growth. And again I don't have those in front of me, but it's just to give you an idea some of that is our pricing, some of that is discounting and some of that's impacted by whether people are buying packages or not. So I think where we sit today, today where we sit today, we're getting inflationary pricing and about where we thought it would be.

Okay. And then lastly just I know it's next year but can you remind us how you think cash taxes will change, in over the next 12 months or so.

Well. Over this period, it's 2013, it's the guidance of $35 million to $45 million, I just said as our earnings are trending upward we're probably at the upper end of that Chris that compares to $17 million that was paid and in the prior year. And you're talking about beyond '13, I guess.

Yeah guess, I was just trying to figure out -- I know you're not, you don't want to give guidance for next year but just some sense for how we should think about cash taxes.

Well. As I told you, as I've mentioned before for the most part most of our NOLs are going to run out in 2013, we still have some NOLs there such as example, (Inaudible) 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 kind of be out there for next two years. But predominance of it is we're going towards becoming a full cash tax payer in 2014. And you still have some timing differences and such and you have some tax planning opportunities. So, as I've said it doesn't mean that your cash debt -- your expected cash tax rate if you will is going to approach the 37% to 38% provision, it's on the income statement. I think it's more going to get in there into the low 30% type range in the low 30s ultimately when we absolutely in 2014 become a full cash tax payer. Now if we figure our more tax planning opportunities to defer that we will. We've obviously done that the last couple of years but that's probably the best outlook I can give you right now, Chris.

No. But that's great color. Thanks, so much.

You're welcome.

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

This is [Brandon Fraser] for A.J. I was wonder if you can just update us on the new vendor management system you mentioned beyond and beyond those sort of one time catch-up on the accounts payable that you mentioned. Is there some additional upside there longer term as we have this now kind of fully implemented?

Yes, it was fully implemented this quarter there was a one-time and a kind of normalization of cash vendor payments because simply the third and fourth quarter were 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 benefited is that it's given us visibility on the spend that's out in the field locations that we really couldn't efficiently and very effectively get to in terms of that visibility. So those synergies are associated with this and I would characterize those 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'll see some of that coming in 13 and probably some of that comes to 14 as well.

Okay and on the teen age side during last quarter there was couple unusual items that were in there that kind of closer to spike up a bit, was there anything unusual in this quarter?

No, I think only thing that really that was is 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 versus that pool of other companies that it's compared to you're 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's really the only thing that I would say you now it was anything out of the ordinary during this quarter.

Okay, thank you.

(Operator Instructions). And with the question from Duncan Brown from Wells Fargo. Please go ahead.

Hey, good morning just two from me in the past you've talked a little bit about the reception events initiative and given some steps on penetration that help us sort of seize the opportunity going forward, can you maybe provide an update on where you stand there?

Yeah, I think again we talk a lot more about it when it was new and rolling out and that become a more of maturing initiative and became part of the - core of what we do. So it's continuing to grow I would tell you that from a spend perspective we're very, very pleased it's actually done better than what we have always anticipated I'd say from a margin perception, and say from a customer satisfaction perspective and the one thing we struggled a little bit with is the penetration rate it kind gets back to everything the people that have adopted it have done a tremendous job and take it to the next level and then it's getting people to be comfortable with offering these options making sure we get the vendors there. So we still think there's upside in getting more penetration through more locations but that's going well ahead of plan and we'll continue to see some growth but again, year-over-year that's not going to drive a lot of enhanced profits from an external perspective that you've got with it.

Okay that's fair and then just a numbers question, can you tell me how much is out on the revolver please?

About just under $90 million, Duncan.

Thank you, guys.

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

We want to thank everybody for participating with us today and we look forward to speaking to you again in July. Thanks everyone.

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