Welcome to the Second Quarter 2015 Service Corporation International Earnings Conference Call. My name is Joe and I will be the operator for your call today. At this time, all participants are in a listen only mode and later we will be conducting a question and answer session. Please note that this conference is also being recorded. I would now like to turn the call over to SCI Management.
You may begin.
Good morning, everyone. This is Debbie Young from Investor Relations at SCI. We hope everyone is doing well today and we appreciate you taking the time to join us as we discuss our results for the Q2. Let me begin by covering the customary Safe Harbor language. The comments made by our management team 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, we may also refer to certain non GAAP measurements such as normalized EPS, adjusted operating cash flow and free cash flow. Reconciliation of these measurements to the appropriate measures calculated in accordance with GAAP is provided on our website and in our press release and 8 ks that were filed yesterday. With that behind us, let's begin with comments from Tom Ryan, SEI's President and CEO.
Thank you, Debbie, and good morning, everyone, and thank you for joining us on the call today. I'm going to begin my comments by giving you the highlights of the quarter, then a deeper dive into both funeral and cemetery operations. And finally, I'll give you some color on our outlook for the back half of twenty 15. Beginning with an overview of the quarter, we're very pleased to report normalized earnings per share of $0.28 which is a $0.05 or 22% growth over the prior year period that slightly exceeded our internal expectations. This growth is even more impressive when you consider that we lost a little more than $0.03 per share from the FTC ordered Stewart divested businesses that we owned in 2014, but we do not have the benefit of this year.
This impressive earnings growth was primarily driven by strong preneed cemetery sales production, the impact of our share repurchase program, lower interest expense and a slightly lower tax rate. I want to thank each and every one of my 24,000 teammates for all that they do every day not only to generate these results, but most importantly in helping our client families plan and assisting them on their most difficult days. While we are proud of our operating performance in the first half of twenty fifteen, we also never forget it is our responsibility to deploy your precious capital wisely. During the first half of twenty fifteen, we've invested $53,000,000 in new acquisitions and have 3 transactions under a letter of intent, which should close in the Q3. We've also returned over $40,000,000 to you through our dividend and have increased your effective ownership level by repurchasing approximately $152,000,000 of our outstanding common stock.
Now for an overview of funeral operations. Higher than anticipated volume. When compared to the prior year, our 2nd quarter funeral revenues increased by nearly $10,000,000 or 2.2%. This funeral revenue growth was primarily driven by a $6,900,000 increase in general agency commissions generated from our preneed funeral sales. We are experiencing higher commission rates from our new contract terms with Amelic as well as selling a higher value customer mix in our sales activity.
Additionally, we saw a $4,200,000 or 20 percent increase in recognized preneed revenue. The general agency and recognized preneed revenue growth was partially offset by a $1,200,000 reduction our core funeral revenue. Funeral volumes were essentially flat in the quarter, while average revenue per case was down $13 or 0.2%. Excluding the negative currency impact, the funeral sales average grew 0.8% during the quarter, driven by an increase in our at need sales average that was partially offset by a lower mature preneed sales average. Our atneed sales average actually grew about 3% as pricing and packaging had the anticipated positive effect, which was slightly offset by an increase in the cremation rate.
However, our matured preneed sales average was lower as a larger number of our maturing contracts are coming from the SCI Direct backlog. So with $9,900,000 increase in funeral revenues, we only put $1,700,000 into profit. So what gives? Think of funeral profitability as coming from 3 buckets. 1st, general agency revenue growth should have about a 30% margin after you reduce it for selling expenses.
So a $6,900,000 in revenue increase generates $2,000,000 in 2nd, SCI Direct revenue growth of $4,200,000 should generate about a 20% margin or $800,000 of profit. And finally, with core revenues down $1,200,000 at a 60% margin, the negative effect on profit should be about $700,000 Altogether, that would be about $2,000,000 profit increase, which is in line with our $1,700,000 number. So to summarize, increases in lower margin businesses were partially offset by a decline in high margin core revenue. As it relates to preneed, comparable funeral sales production, excluding terminally imminent situations in both periods, grew 3.4%. Year to date through the 1st 6 months, our preneed funeral sales production growth was about 4% and in line with our low to mid single digit percentage growth expectations.
Now let's turn to cemetery operations. Our cemetery segment had an impressive 2nd quarter performance and came in well above our expectations. Comparable cemetery revenue increased more than $26,000,000 or more than 10% over the prior year quarter, led by strong preneed sales and higher trust fund income. The largest component of the $26,000,000 revenue increase was $18,700,000 from recognized pre need cemetery revenue. While this 12.7% increase is impressive, our actual preneed sales production grew by $31,600,000 or almost 17%.
That means the net $13,000,000 we did not recognize in the 2nd quarter will get recognized in a future period when the revenue recognition trigger is completed, be it construction, delivery or 10% down payment occurs. These successes are being driven by higher productivity as our sales velocity or volume increased approximately 10% during the quarter. Baby Boomer demographics continue to fuel more sales opportunities, which our sales teams are able to capitalize on by further leveraging our investments in tools like our new customer relationship management platform. We continue to train and manage the right sales behaviors, which results in improved outcomes. In addition to increased velocity, we saw more than a 7% increase in average spend per contract as our tiered inventory strategy continues to expand and enhance the value of our product and service offering.
Trust fund income growth Our success in printing cemetery sales production is a real testament to the talent of our sales organization and the support from the rest of our team. Through the 1st 6 months of the year, total cemetery preneed production was up a remarkable 17.2%. On this strong performance, we would anticipate the comps to moderate somewhat in the back half of twenty fifteen, but still leading to a low double digit percentage growth for the full year. Comparable cemetery profits increased $18,400,000 in the quarter and margin percentage grew 450 basis points to 26.6%. Again like funeral, let's think of cemetery profits in 3 buckets.
First, we had a $21,000,000 revenue increase from core operations, which are at need and pre need recognized cemetery $5,000,000 increase in trust we had a $5,000,000 increase in trust income, which essentially has 100% margin. And finally, we backlogged $13,000,000 in cemetery sales for which we incurred and recognized the selling expense during the period. So at an approximate 20% cost, this had a negative $2,600,000 effect on profitability of cemetery. The net effect of these three items results in a $16,000,000 projected increase in cemetery profits, which approximates a reported increase of $18,400,000 So to wrap it up, we are very pleased about our performance thus far in the year. For the 1st 6 months, our same store funeral profits are up nearly $16,000,000 and funeral margins have increased by 90 basis points.
In the same period, comparable cemetery profits have grown $27,600,000 and margins have improved 3.50 basis points. We've sold more than $750,000,000 in combined preneed, funeral and cemetery sales, representing a growth of just over $70,000,000 or more than 10%. This all has resulted in a year to date normalized earnings per share growth of $0.08 or nearly 16% to $0.59 per share. Keep in mind, all of this was accomplished against the backdrop of losing the contribution from the FTC ordered Stewart divestitures. So on the heel of this strong year to date performance, we feel comfortable that we're trending towards the high end of our full year 2015 guidance range for normalized earnings per share that we have previously provided.
Our current expectation is that normalized earnings per share will range between $1.22 $1.28 versus our previous expectation of $1.16 to $1.28 This brings the mid point of our guidance up by $0.03 As we begin the second half of the year, we feel good about our ability to continue delivering solid performance and deploying capital for the benefit of our shareholders to enhance the long term value of the company. With that, I'll turn the call over to Eric. Thank you and good morning everybody. I first want to echo Tom's comments about how pleased we are with the performance in the quarter as well as the 1st 6 months of the year. So as usual, today I'm going to start by commenting on our cash flow results for the Q2 and then I'd like to talk a little bit about our cash flow outlook for the remainder of 2015.
I also want to touch on how we deployed our capital this quarter to continue to enhance shareholder value. As you saw in our press release that we issued yesterday, our adjusted operating cash flow grew $4,000,000 in the 2nd quarter to a total of $102,000,000 year to date, which exceeded our expectations, primarily due to the higher than anticipated very strong cemetery preneed sales production. So a little bit more color on this. Similar to what we said last quarter, this growth in cash flow from operations was accomplished despite contributions from FTC Divested Properties in 2014 that did not benefit us in 2015. And this was a headwind of about $12,000,000 when you talk about cash flow from operations.
Higher cash receipts, primarily on the strong preneed cemetery sales production and higher trust withdrawals, help to offset higher payroll payments. And then a little bit of color here as well. The higher payroll funding is simply a timing issue due to the way the July 4 holiday fell this year and we will see that timing benefit us next quarter. Also during the Q2, we paid about $15,000,000 more in cash taxes, which was expected and it was partially offset by a decline of $9,000,000 in cash interest payments due to our accretive refinancing that we completed in the prior year quarter. Maintenance and cemetery development CapEx for the quarter came in at approximately $36,000,000 which was about $8,000,000 higher than the prior year and a little higher than our expectations.
But we do believe this is only related to the timing of this capital deployment and does not change our opinion or affect our full year 2015 CapEx expectations. So when you deduct these recurring CapEx items, we calculate our free cash flow for the Q2 to be $66,000,000 a little bit lower than the prior year due to the higher CapEx timing I just noted above, but above our internal expectations. So at the end of the day, it was a really good quarter for us in terms of cash flow. So mid year through 2015 year to date, adjusted cash flow from operations has grown $38,000,000 or 14% to $300,000,000 resulting from growth that Tom has just highlighted as well as improved collections on our preneed sales. So based on our first half strong results, we feel comfortable that we are trending toward the high end of our original between $475,000,000 to $500,000,000 and this was previously $450,000,000 to 5 $100,000,000 Our cash tax estimate for 2015 based on the midpoints of our models remains unchanged at approximately $125,000,000 for the full year of 2015.
Our guidance for capital spending in 2015 for maintenance and cemetery development CapEx also remains unchanged at $130,000,000 to $140,000,000 as I just mentioned, gave you a little color on that. Deducting these recurring CapEx items from our 2015 adjusted cash flow from operation expectations will result in free cash flow in 2015 ranging from $335,000,000 to $370,000,000 which equates to $1.72 of free cash flow per share at the midpoint of this guidance using a fully diluted weighted average share count of about 205,000,000 shares. This is only 0 point 0 $4 less than the $1.76 free cash flow per share we reported on an adjusted basis in 2014, which is pretty impressive when you consider the expected $80,000,000 increase in cash taxes year over year and the headwind from the loss of cash flows from the Stewart FTC divestiture properties that I just previously So now let's talk about how we deployed this free cash flow in our capital in general during the quarter. So to begin with, we finished the quarter with healthy liquidity of a little more than $400,000,000 consisting of about $200,000,000 of cash on hand and $200,000,000 of availability on our credit facility. This liquidity positions us well to strategically execute our capital deployment plans.
During the quarter, we acquired a funeral cemetery accommodation facility in South Texas for a total investment of approximately $6,000,000 Our leverage, which is calculated as net debt to EBITDA in accordance with our credit facility was 3.55 at the end of the quarter. This is at the lower end of our current targeted leverage range as defined of 3.5 to 3.7, which we continue to believe is the appropriate range for our company and positions us well as we move forward in 2015. Now for what we gave back to our shareholders. We returned an impressive $100,000,000 of value to our shareholders during the quarter. In addition to $20,000,000 in dividend payments in the quarter, we also repurchased about $80,000,000 2,800,000 shares during this quarter.
Subsequent to the end of the quarter, we have also repurchased just over 1,400,000 additional shares for a total investment of approximately $42,000,000 Therefore, when you look at what we have done so far in 2015, we have repurchased about 7,200,000 shares through today for a total investment of over $190,000,000 Currently, we have just over 200,000,000 shares outstanding and about $46,000,000 of remaining share repurchase authorization from our Board of Directors. So in conclusion, we are proud of our performance in the first half of the year. And as we look forward, we continue to be excited about the remainder of 2015. And we've been on the road quite a bit this year with our Investor Day as well as meeting with investors. And a common theme we continue to hear is that SEI is somewhat of a boring story, but a great cash flow generator that deploys its cash flow back to its shareholders.
And by the way, we love being that boring cash flow generator. So I think that appropriately sums up the SEI story right now. And be assured that our management team will continue to work hard to increase the value of your investment in our company. So operator, that concludes our prepared remarks at this time. We'd like to go ahead and turn it over to you to take questions.
Thank you. We will now begin the question and answer session. First question here comes from Mr. Chris Rigg from Susquehanna Financial. Please go ahead.
Good morning, guys. On volumes, I think your annual guidance initially was down 1% to 2%. Obviously, at this point, you're tracking quite a bit better through mid year. Can you give us a sense of how you're thinking about volumes in the back half of the year and for the year overall? Thanks.
Yes, Chris. This is Tom. I think we're very pleased with the comparable volume statistics in the 1st 6 months of the year. I think I'd say it this way. I think we feel pretty good about the year ending on a positive note.
Having said that in most years where you see an advanced flu season like we have this year, it tends to see some follow-up on the back half of the year. The only other thing I would add in there is that since we created SCI Direct, the volume statistics on that business are different than I'd say the national trends. Because they're so preneed oriented as a company, we are in that segment. We are driving higher volume through the backlog. So as an example, I think in the first half of the year, SEI Direct is up almost 10%.
So that type of trend I would expect that could continue at those types of levels on the back half. I'd expect the core part of the business to retract somewhat. But again, I think at this point because what we've seen in the first half of the year, it's a positive year for volume.
Okay, great. And then just on the acquisitions, can you just clarify a little bit? I got a little confused. So you spent just under $37,000,000 through the 1st 6 months, but you've done some stuff after the quarter closed. Can you just help me better understand exactly what the moving pieces are at this point?
Thanks.
Sure. We actually I think Eric talked to this at the first in the Q1 we closed on some businesses in California. And the actual purchase price we had some tenthirty 1 was closer to a, I think, dollars 45,000,000 purchase price. In the Q2, as Eric mentioned, we purchased a business in South Texas, businesses around $6,000,000 We actually had 3 under letter of intent. I actually believe we closed one last night that was in South Carolina.
So what we've reported so far to date are the California and Texas pieces. We expect again more to come. The pipeline looks as we've said before pretty good. And we're excited about continuing to grow with businesses that fit our footprint and really some great people and some great businesses coming in the company.
Got it. And then just one last one not directly related to the quarter. When we were out on the road a few weeks back, the concept of having a white paper with regard to preneed accounting came up. Can you give us a sense for where that stands and when we might see something? Thanks a lot.
Sure, Chris. As you know, the accounting is somewhat straightforward on the atneed side, but there's some challenges in terms of its complexity on the preneed side. So we have taken our disclosures that are in all of our filings and just kind of taken that same information, no new additional information, but taking that same information and just trying to simplify some things in tabular format and use some examples and etcetera. So we have been working on that Chris after that request. And I anticipate that getting out onto our Investor tab of our website shortly.
When I say that, I'm going to say in the next few weeks. So everyone should look for that. And hopefully that's a document that would clarify some things, but most importantly simplify some things as well for our shareholders and investors.
Perfect. Thanks a lot. Sure. Thank you. Our next question oh, sorry.
Yes.
Yes. I'm sorry. Please continue.
No. I'm sorry. We'll take the next question.
No problem. Our next question here comes from A. J. Rice from UBS. Please go ahead.
Hello, everybody. Maybe just to follow-up on the acquisition question. Maybe stepping back a little bit further. A, is there any change in what you're seeing pricing wise competition for deals? And B, is there it seems like there may be a little bit of a pickup in activity.
Is that right? Or would you characterize this sort of steady state?
Sure, A. J. I'd say that we're really not seeing any real changes. I think where these deals are crossing the line are pretty much consistent. We have seen a lot more activity and it's hard to describe.
I think part of it we believe is related to the whole Stewart transaction because if you think about it, with us and Stewart talking, obviously, we were out of the market for acquisitions for a little bit. And then you get a lot of the divestitures that were going to come out. So a lot of our smaller competitors were raising money in order to buy those. And so I think there was a pent up number of deals that probably we're experiencing now. Having said that, I also think demographics plan to everything.
And we're just noticing kind of as an industry is generational businesses seem to be turning over more with this generation than the previous one. We're not seeing as many kids wanting to go into the business. And so there's probably more deals that are beginning to come out just because of the simple demographics. But that's a bit of speculation. We're pleased with the number of businesses that are coming available and we're excited about continuing to grow.
Okay. Maybe then switching over to the cremation. It sounds like the above average growth is happening with on the Neptune side and then maybe your legacy cremation business pre Neptune is more tracking what you saw with the Adney business side? A, is that right? And maybe second, is the Neptune growth being driven by new market entrants or sales incentives?
Or what's behind that would you say?
Yeah. I think it's 2 things A. J. We've studied this quite a bit when we entered the business and purchased Neptune back when we did. And we really saw these 2 businesses as 2 separate consumers that we're trying to drive penetration with.
And because remember we said that what Neptune was doing was aggressively pre need selling a consumer that was primarily driven by price. Right. And so I think that consumer is very likely to pre need. That consumer wasn't likely to come to one of our funeral homes before. So I think you're exactly right.
We're seeing more growth on that side of the business, partially because of the way we approach that consumer. I think on the SEI Direct side, probably 20% to 25% of our business is atneed walk in and 75% to 80% is preneed going atneed. You can almost reverse that for the core business. It's probably 30, 35 walk in and I'm sorry, 60, 65 walk in and 35 preneed going atneed. So that's the reason for seeing, I'd say, more market share pickup within that segment on SCI Direct.
So I'd say your hypothesis is correct as far as I'm concerned, AJ.
Okay. And then my last one maybe is, in the last year, a lot of things have been going on in the last 18 months in the organization, obviously, integrating Steward. You had the initiative last fall around your restructuring some of the preneed sales commissions. It seems like a lot of that is now in place. Is this just a time to sort of block and tackle and run the business?
Or are there some other initiatives looking out 12 to 18 months, 12 to 24 months that it will be worth maybe highlighting?
I think it's a constant challenge to wake up every morning and drive. And if you think about it, A. J, I'd say the biggest things on our plate right now really won't change. The tools we use may be different. One is relevance to the consumer.
We've got to remain relevant. We've got to provide products and services that people find value in. Life Well Celebrated is a campaign that we've rolled out and continue to emphasize the changing consumer wants and needs and making sure we're adapting to those. And then the big part of our strategy has always been preneed. We think preneed differentiates us from our competitors.
We think it's a real strategic advantage for us. And so we invest a lot of money and time and attention on continuing to go preneed cemetery as well as preneed funeral which we know will enhance our market share in the future as the baby boomers begin to impact the funeral segment. So really our strategies haven't changed. We may have new tools that we're introducing, But we're laser focused on the customer and laser focused on both the Aetna customer and on the 3 d customer.
Okay, great. Thanks a lot.
And thank you. Our next question here comes from Robert Willoughby from Bank of America. Please go ahead sir.
Thank you. Eric, did you mention what the expected divested Stewart facility hit might be in the 3rd quarter?
No, it didn't. In terms of cash flow, it was about $24,000,000 year to date. So if you think of an earnings per share perspective then it was about $0.035 1st quarter, dollars 0.035 2nd quarter and I think it's like another $0.01 in the back half. So it really moderates in the back half of the year, Robert. Okay.
And just thinking about the balance between the share repurchases and the deals, given where the stock is, is there a level in your mind where the deals will take greater precedence here? You've obviously stepped them up, but could we see the deal flow pick up more meaningfully and share repos come down a bit at some point
here? Well, I think the deals outrank the share repurchases today. I mean the IRRs that we've been doing as we've disclosed have been anywhere from 12% to 22%. And that's a tremendous value to our shareholders to deploy capital with that type of return. So frankly, growing the business as well on top of that capital deployment is a strong desire for ours that frankly has been outranking it.
But it's the time where you have to have the deals come to us in a meaningful way we've described before. Ultimately, when you shift then to deployment towards share repurchases, it's a function of various metrics and forming an opinion internally on what we think the intrinsic value of the company is. And there's plenty of different ways that we do that whether it's DCF calculations or other various quantitative means. But at the end of the day, we are comfortable at these levels continuing to repurchase our shares and deploy capital back to our shareholders.
Okay. And maybe lastly, just in terms of focusing on the deals and the returns that they can generate, have there been any renewed thoughts about looking overseas again?
We did a deeper dive on that a while back, Robert and I think included that the best thing we can do right now there's more than ample opportunity in the markets that we already are in here in the States and Canada. So that remains our near term focus to grow the business. We're constantly we'll look at things from a valuation and risk reward. And I'd say our best risk reward is right here in the U. S.
And Canada.
Perfect. Thank you.
And thank you. Our next question comes from John Ransom from Raymond James. Please go ahead. Hi, good morning. Did you guys say you were boring?
I think that's bad. I don't believe that.
Don, you told us we were boring if you remember.
Well, I embody the boring ethos. Let's talk a little bit, if you don't mind, about Canada. I think that market is maybe a little less known than the U. S. So could you talk about how I know you talked about your market share in U.
S. Plus Canada, but what's the Canadian opportunity? How many big lumpy assets are there? How does pricing compare? How does the fundamentals compare to the U.
S? And how do you rank the attractiveness other than obviously it's 1 tenth of the size of the U. S. In terms of number of people?
Yes. I guess, John, I'd say this. We I don't have the specific market share in Canada, but I'd say it pretty well reflects it's probably about the same or slightly above the U. S. Our market share.
We love Canada. We We Well,
let's not get carried away.
Well, I did. I love Canada. I mean, Rush is from Canada. I mean, there's a lot of great fans. So we'll continue to look at those markets and we're having conversations all the time in the Canadian markets.
I think the pricing is relatively similar. So we're excited about the ability to grow in Canada and particularly in Toronto and Vancouver and places where we've really got good infrastructure and can continue to grow in those markets.
Are there proportionally more sizable assets there than they are left in the U. S. Since you've done a pretty good job mopping up some of the opportunities in the U. S?
We've done a pretty good job there too. So I don't see it as any different. So again, we look at those opportunities through the same lens and I'd say they look about the same. We've seen a decent amount of activity and discussion in Canada and we're excited about
it. Okay. I'd remind you that Justin Bieber is also from Canada. So temper your enthusiasm. All right.
Thank you.
You know what? He's not boring.
And here it appears we have no further questions. I would now like turn the call back over to SCI.
We want to thank everybody for participating in the call today. We look forward to seeing you again for our Q3 release, which I believe Eric will be in the End of October. Thanks again. Appreciate it.
And thank you, ladies and gentlemen. This does conclude today's conference. Thank you for participating and you may now disconnect.