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Text: This is Debbie Young.
With that out of the way, I'll now pass it on to Tom Ryan, our chairman and CEO.
As a broad overall comment, let me just say that 2021 has certainly exceeded our expectations.
What we have been able to accomplish in the last two years has been remarkable.
Our services and care for our communities has been needed more than ever.
And in these unprecedented times, our team has risen to the challenge with grace and unwavering commitment.
I am so proud of our team and continue to be amazed by their dedication and support.
Now for an overview of the third quarter.
Let's start by taking you back to our mindset the last time we spoke in mid-July.
We were seeing a declining trend of COVID deaths that began during the second quarter.
This downward trend, coupled with the IHME's outlook, was reflected in our earnings guidance for the back half of 2021.
Shortly thereafter came the impact of the Delta variant, and we saw an unexpected surge in COVID and non-COVID mortality that began in August and has continued into October.
Therefore, we have seen funeral volumes and cemetery revenues that have exceeded our previous expectations.
Now diving into the highlights of the third quarter.
We generated adjusted earnings per share of $1.16, a 47% increase over the prior-year quarter.
The primary driver of the earnings-per-share growth was high funeral results driven by increases in both volume and sales average.
The cemetery segment also delivered strong revenue growth, which was generated by both atneed cemetery revenue growth and continued strength in preneed cemetery property sales production.
At a high level, adjusted operating income grew $74 million and contributed over 85% of the increase in adjusted earnings per share.
The remaining increase was primarily the result of fewer shares outstanding.
Now let's take a deeper look into the funeral results for the quarter.
Overall, the funeral segment performed better than we expected.
Total comparable funeral revenues grew $70 million or 14%, primarily due to improvements in the sales average as well as continued strong volumes from the Delta variant COVID impact and from excess non-COVID deaths, which tended to skew younger and more pronounced in smaller markets.
Recall that third quarter 2020 volumes were up about 19% year over year, and we grew another of 3% on top of that this third quarter, which we had not anticipated in our guidance from the second quarter call.
Core funeral revenues grew by $48 million led by an impressive 8% increase in the funeral sales average and a 3% increase in funeral volume.
The sales average continued to climb sequentially and is up about 4% over the 2019 pre-COVID third quarter.
Our percentage of family selecting services has essentially returned to pre-COVID levels.
And the funeral sales average is also being positively impacted by an uptick in ancillary revenues such as flowers, catering, and by a lower discount rate.
The favorable impact of these positive trends has been slightly reduced by a modest 60-basis-point increase in the core cremation rate.
Preneed funeral sales production for the third quarter grew $50 million or nearly 22%, which exceeded our expectations.
Both our core funeral home and SCI Direct businesses posted strong production increases against an easier comparison quarter in 2020.
The higher insurance production component also generated a $7.5 million increase in general agency revenue.
We continued to see growth in marketing leads from both digital and seminars that have not only very successfully generated preneed sales production, but have done it at a lower cost.
On the core funeral home sales production front, we saw average revenue per contract increase by almost 8% to over $6,000 as an increasing percentage of our preneed customers are choosing some form of service.
From a profit perspective, funeral gross profit increased $40 million and the gross profit percentage grew 400 basis points to 28%.
The incremental margin percentage generated from the core revenue increase was slightly reduced by an increase in lower-margin ancillary revenues and elevated staffing and service levels as compared to the somewhat more limited service structure we operated under during the third quarter of 2020.
Additionally, we experienced elevated fuel and energy-related costs.
Now shifting to cemetery.
Comparable cemetery revenue increased more than $42 million or 11% in the third quarter.
In terms of the breakdown, atneed cemetery revenue generated $20 million or 47% of the growth, driven primarily this quarter by a higher quality core average sale, an impressive increase in atneed large sales; and by a modest increase in contract velocity.
Recognized preneed revenues generated about $16 million or 37% of the revenue growth, primarily due to higher-than-expected preneed cemetery property sales production as well as higher recognized preneed merchandise and service revenue.
Additionally, we achieved a $7 million increase in perpetual care trust fund income primarily due to the timing of capital gains.
Preneed cemetery sales production grew $25 million or 8% in the third quarter, which exceeded our expectations.
The higher-quality core sales average accounted for the majority of the increase, followed by growth in large sale activity.
Although we expected a tougher comp on the velocity side, the number of training contracts sold actually grew modestly in the quarter, which also contributed to the increase.
As I mentioned in my preneed funeral discussion earlier, we continued to see production growth from our marketing-generated leads program that very successfully generated preneed sales production.
Additionally, we are seeing improvements in key sales metrics such as appointment and close rates.
Cemetery gross profits in the quarter grew by approximately $28 million, and the gross profit percentage increased 300 basis points to 38%.
Similar to the funeral segment, the incremental margin percentage on the revenue increases was slightly reduced by elevated staffing and maintenance costs associated with operating full-service cemeteries as compared to the limited-service structure during the third quarter of 2020.
Now let's talk about our revised outlook for 2021.
Based upon better-than-expected results in the third quarter, we are again raising our guidance to an earnings per share range of $4.15 to $4.45 for the full year 2021.
This increases the midpoint by an additional $0.95 and represents a 33% increase from our 2020 results.
This raise in our guidance is primarily due to the earnings per share outperformance delivered in the third quarter.
Additionally, we have increased our projected earnings per share for the fourth quarter, primarily due to higher than originally anticipated funeral volumes and higher-than-anticipated atneed cemetery revenues, both being impacted by an increase in Delta variant morbidity and non-COVID excess death.
The midpoint of our fourth quarter guidance, $0.89 per share, would still be a decline in earnings per share as compared to the $1.13 earned in the fourth quarter of 2020.
Within our funeral segment, we are anticipating a comparable volume decrease in the high single-digit percentage range in the fourth quarter of this year versus a very strong prior-year quarter, which was up over 17%.
Meanwhile, we expect the average revenue per case to continue to compare favorably, growing at a mid-single-digit percentage range for the last quarter of the year.
Finally, we forecast preneed funeral sales production to grow in the high single-digit percentages for the fourth quarter versus the prior-year quarter.
On the cemetery side of the business, we expect atneed cemetery revenues for the fourth quarter to be relatively flat compared to the prior-year quarter.
This is comparing against a phenomenal 2020 fourth quarter that delivered a 30% increase in 2019.
As far as preneed cemetery sales production goes, we expect a flat to low single-digit percentage increase in the fourth quarter when compared to a very robust fourth quarter 2020, which was up over 16%, culminating in back-to-back years of impressive 20-plus percent growth in 2021 -- I'm sorry, in 2020 and 2021.
When looking out over the next couple of years, we expect COVID to have a negative pull-forward effect on revenues and earnings temporarily.
Like many other companies, we also expect to experience mild wage and supply chain cost pressures in the near term.
Having said all that, this crisis has accelerated the utilization of technologies resulting in enhancements, which improved our effectiveness and resulting cost efficiencies in our field operations, within our sales teams and our support functions.
We compound that with improvements in our capital structure through share buybacks and managing our debt maturity profile, and we expect to generate impressive earnings per share compounded annual growth rate both in the next two years and well beyond.
To emphasize the strength of our post-COVID operating platform and capital structure, I will again give you an example utilizing the $1.90 in earnings per share we reported in 2019 as our pre-COVID base.
In 2022, we expect the impact of COVID to begin to wane, thereby bearing the brunt of the pull-forward effect.
Even with funeral volumes down double-digit percentages and now we're thinking roughly 15,000 funeral cases less than we did in 2019, we believe at the midpoint of our model our 2022 earnings per share can reflect a 14% compounded growth rate over the three-year period, resulting in a $2.80 earnings per share for 2022.
Beyond 2022, we believe that the pull-forward effects should begin to wane and a trend of year-over-year growth should begin as we approach an aging baby boomer cohort with a leaner and more technologically efficient and effective operating model.
We continue to believe that we will see 2023 earnings per share approaching $3.25, which would maintain that 14% earnings per share CAGR over the four-year period.
I wish I'd never heard of COVID-19, but it is the reality of our company, country, and world have had to deal with and are dealing.
I am so very proud of our team, what they have done in helping our communities while finding a way to make our company an even better one in a post-COVID world, all the while generating such impressive earnings-per-share growth for our stakeholders.
I think I'm going to start off the same way Tom just ended with the most important message of the day.
The months of August and September were very busy months for us.
And I continue to personally be amazed, and I have to say also humbled, at how well our teams are able to take care of our client families and our communities when they need it the most.
I want you to know that we appreciate each and every one of you on the Dignity Memorial and SCI team.
And then just like Tom did, I'll briefly discuss our '22 and '23 outlook.
So let's start with the quarter.
Adjusted operating cash flow increased $37 million to $232 million, compared to $195 million in the prior year.
So the drivers for this growth were the impacts from the Delta variant that drove unexpected increase in COVID deaths, but we also did see unexpected increase in non-COVID deaths that were impacting both our funeral and our cemetery operations.
In addition to the strong adjusted EBITDA growth, which amounted to about $60 million, we also benefited by a decrease in cash tax payments of about $28 million.
So remember, in the third quarter of last year, cash taxes were unusually high.
We had to pay approximately $50 million of federal and state income taxes that were deferred from the second quarter of 2020.
So these positive cash flow items were somewhat offset by a net use of working capital in the quarter, which primarily related to an increase in payroll taxes.
And again, we'll have to remember this.
Remember, last year, they were able to defer quarterly payroll taxes under the CARES Act, which totaled approximately $42 million for SCI for the full year of 2020.
So in this current year quarter, we are required to pay half of that amount or about $21 million.
And keep in mind, the remaining half, the other $21 million, will be paid in the fourth quarter of next year of 2022.
So during the quarter, we also deployed about $280 million of capital, which is the second-highest quarterly capital deployment that we've seen really in recent history.
This capital went to reinvest it in our businesses first, then expanding our footprint and ultimately returning capital to our shareholders.
So now in terms of the breakdown.
We invested $65 million in our businesses with $40 million of maintenance capital and $25 million of cemetery development capital.
Our maintenance capital not only reflects improvements made to our facilities, but also investments in more contemporary customer- and noncustomer-facing technology.
For the cemetery development capital spend, we started this quarter making up some ground to our annual target, but continued to experience some construction delays, primarily on the permitting side for some of our larger development projects.
But at this point, I still believe we'll end the year with around $100 million of capital development spend.
From a growth capital perspective, during the quarter, we invested about $20 million consisting of $10 million to funeral home new-build opportunities, $5 million on business acquisitions as well as $5 million on real estate acquisition.
So just touching on that acquisition pipeline for a moment, we're excited as we look at the opportunities we are working on for the remainder of 2021.
And by the way, we remain confident that we'll be able to close several transactions during the fourth quarter that I believe will get us to our $50 million to $100 million annual acquisition target that we've been describing during the year.
Then, finally, we deployed just under $200 million of capital to shareholders through dividends and share repurchases.
The dividend payments in the third quarter totaled just under $40 million and this reflects the 9.5% increase to $0.23 per share per quarter that we announced in August.
So shifting to a few comments on our updated outlook.
So the guidance went from $775 million to a newly revised annual guidance range of $850 million to $925 million.
So when we compare back to 2020, this new midpoint of $888 million represents an increase of about 10% or $83 million over last year.
So let's talk about a little color on this $150 million increase.
It is primarily driven by an approximate $210 million increase in cash earnings, and these are associated with the $0.95 increase at the midpoint in today's revised earnings per share guidance.
And as noted earlier, this increase is primarily due to the outperformance in earnings during the third quarter on increased mortality as well as expected cash flow increases in the fourth quarter on higher funeral volume and atneed cemetery expectations.
The increase in cash earnings was partially offset by about $50 million increase in cash taxes and other working capital uses that are expected.
So we're now expecting closer to $260 million of cash tax payments in '21 or an additional $50 million over the $210 million that we talked about in August, again, because of these higher expected earnings.
So looking forward to 2022 next year, while there's still a lot of variables to try to predict, you should expect our cash flow to decrease in 2022, in line with the earnings expectations that Tom just described as the impact of COVID wanes.
However, our expected cash flow decline should be buffered by lower cash taxes on these lower cash earnings.
And then looking forward to 2023, we expect to be on an increasing growth trajectory as we approach an aging baby boomer cohort utilizing our services, and again, along with a leaner, more technologically efficient, and effective operating model.
So the underlying stability of our cash flows as well as the strong financial position we have gives us the confidence and flexibility to continue being opportunistic in deploying capital to the highest relative return opportunities for many years, at least for the next several years.
In closing, we continue to have a solid balance sheet bolstered by a tremendous amount of liquidity, consisting of about $400 million of cash on hand plus about $1 billion available on our long-term bank credit facility.
Early in the year, we completed a debt refinancing transaction that not only refinanced the notes that would have been done later this year in '21, but also allowed us to repay the outstanding balance on our revolver, which will provide us with plenty of flexibility to fund a future pipeline of acquisitions or other capital deployment for several years.
Additionally, this transaction reduced our interest rate risk as we increased our proportion of fixed rate debt now to just over 80%.
On the continued growth in EBITDA, our leverage ratio at the end of the quarter remains below three times.
It's actually about 2.4 times.
As we have noted in the past, looking beyond the impacts of this pandemic, we continue to expect to naturally lever back up to our targeted leverage range of three and a half to four times net debt-to-EBITDA, and I think this will happen toward the end of 2022.
We intend to finish the year strongly and we believe we are very well-positioned for future growth.

user
q3 adjusted earnings per share $1.16.
sees 2021 diluted earnings per share excluding special items $4.15 - $4.45.

assistant