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Service Corporation International (SCI 0.81%)
Q3 2021 Earnings Call
Oct 28, 2021, 9:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, ladies and gentlemen, and welcome to the SCI third quarter 2021 earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to SCI management. Please go ahead.

Debbie Young -- Director of Investor Relations

Thank you, and good morning, everyone. This is Debbie Young. Welcome to our company's review of business results for the third quarter of '21. I hope everyone has had the chance this morning to review our press release we issued yesterday.

Before we begin with the prepared remarks from Tom and Eric, let me remind you that we will be making some forward-looking statements. Any comments made by our management team that state our plans, beliefs, expectations, or projections for the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such statements. These risks and uncertainties include, but are not limited to, those factors identified in our earnings release and in our filings with the SEC that are available on our website.

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During this call, we will also discuss certain non-GAAP financial measures. A reconciliation of these measures to the appropriate GAAP measures can be found in the tables at the end of our earnings release and also on our website under the Investors Webcast and Events section. With that out of the way, I'll now pass it on to Tom Ryan, our chairman and CEO.

Tom Ryan -- Chairman and Chief Executive Officer

Thank you, Debbie. Hello, everyone, and thank you for joining us on the call today. This morning, I'm going to begin my remarks with a high-level overview of the quarter, followed by a more detailed analysis of our funeral and cemetery results, and finally, comment on our guidance for the fourth quarter as well as our updated thoughts and expectations now for 2022 and 2023. 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.

The institutional implementation of Beacon in our cemetery sales presentations has led to a reduction of discounting that is having a favorable impact on core sales revenues. 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. In closing, thank you again to our entire SCI team for your selfless dedication to our client families and the communities that place our trust in us. With that, operator, I'll now turn it over to Eric.

Eric Tanzberger -- Senior Vice President, Chief Financial Officer, and Treasurer

Thanks, Tom, and good morning, everybody. I think I'm going to start off the same way Tom just ended with the most important message of the day. And that's to first acknowledge and thank our great team of associates at all of our funeral homes and cemeteries that have been working tirelessly during these very busy, and let's face it, very challenging times. 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. So in my remarks this morning, I'll walk you through our cash flow results and capital deployment for the quarter, and then I'll provide some comments on our revised full year 2021 cash flow guidance and financial position. 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.

As you saw this morning, we are increasing our adjusted cash flow guidance for 2021 by about $150 million. 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 EPS 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. So finally, our results in the quarter as well as the first nine months have really been impressive, and I would like to once again thank all of our frontline associates for all of their efforts. We intend to finish the year strongly and we believe we are very well-positioned for future growth.

So with that, operator, that concludes our prepared remarks. I'd now like to turn it over to you for questions.

Questions & Answers:


Thank you, sir. [Operator instructions] We take our first question from John Ransom from Raymond James. Please go ahead.

John Ransom -- Raymond James -- Analyst

Hey. Good morning. Thanks for all the detail on 2022. One thing that's been a little challenging is to model segment margin with these big moves in revenue.

So if we think about the decline in deaths next year, how do we think about that in a couple of ways: one, just thinking about your funeral and cemetery gross margin? And secondly, how are you thinking about the knock-on effect of that to your cemetery preneed death plan?

Tom Ryan -- Chairman and Chief Executive Officer

OK, John. Thank you for the question. The reduction, John, once you experienced that reduction in deaths that we all hope for, obviously, is going to be more pronounced on the funeral side of the business. So as you think about margins historically on the funeral side have probably been closer to 20% and so as you think about these declines and the pull-forward effect, you'd probably expect those margins to dip down into the, I'd say, high teens as most likely while that's occurring.

On the cemetery side, really a lot less so. I mean, I think this quarter we reported 38%. I think we're comfortable even in models where we see the death rates decline because, again, our preneed sales, while that's a lead source for us, we feel like we've done a lot of things to enhance our ability to deliver that. So again, I think we're very comfortable seeing the cemetery margins if they're going to pull back into the low 30s, but that's probably an area that we feel pretty comfortable about.

John Ransom -- Raymond James -- Analyst

And what about the preneed -- the cemetery preneed knock-on effect, what do you think is going to happen?

Tom Ryan -- Chairman and Chief Executive Officer

Yes. I think -- I mean, that would be inclusive right into the margins of cemetery. But I think as we think about year over year, clearly, because of the success that we've had, we could experience some slight declines in our preneed production. But even in a terrible scenario that we'd anticipate, I don't see that going backwards very much.

I mean I see it declining year over year, but probably in single-digit type of area. And then, John, kind of building back on that newer platform because, again, as you look at year-over-year trends, once we establish that 2022 baseline, we get back to what we believe being able to grow that -- those in the mid- to high single-digit percentages and maybe better. I mean, we're still trying to measure the impact of the different things that we've done, be it from implementing Beacon on the cemetery side, be it from utilization of the Salesforce platform and the tools that we use now. And we really are driving better behaviors and we're utilizing fact to generate sales growth.

We've got better lead capabilities now, particularly on the digital side, and are getting better and better and more effective. So I just feel very confident that once we work through the issue with the pull-forward, we're going to continue to grow at very impressive rates.

John Ransom -- Raymond James -- Analyst

And just last one for me. Eric, just as a small point, but given the back end-loaded nature of M&A this year, do you have an estimate of sort of the full year EBITDA effect in '22 versus the partial year in '21 just from an accounting standpoint?

Eric Tanzberger -- Senior Vice President, Chief Financial Officer, and Treasurer

I don't think we do yet because we don't know which ones we're going to close. The guidance that gives you, John, if you wanted to model something is, I think, year to date, we're pretty low in terms of how these transactions have ebbs and flows. So we'd probably spend, call it, $10 million, $15 million. And ultimately, I think we're going to get well into that $50 million to $100 million and I'm more hopeful to get toward the high end of that.

And then you know the type of multiples that we're paying. I mean, the pre-synergy multiples are in that eight to nine times. And then you take a turn off immediately for some of the purchasing power we have and maybe another turn as we find other synergies depending on how well the acquisitions tuck in to the existing network. But these particular ones that we're talking about, I think we're somewhat pleased with the type of footprint that they have versus our existing network.

John Ransom -- Raymond James -- Analyst

So something like $5 million to $8 million wouldn't be crazy just sort of as a incremental contribution next year?

Eric Tanzberger -- Senior Vice President, Chief Financial Officer, and Treasurer

Yes. I would say so.

John Ransom -- Raymond James -- Analyst

OK. Thank you. That's all for me.

Eric Tanzberger -- Senior Vice President, Chief Financial Officer, and Treasurer



Thank you. The next question comes from Scott Schneeberger from Oppenheimer. Please go ahead.

Scott Schneeberger -- Oppenheimer & Co. Inc. -- Analyst

Thanks very much. I'm curious. I mean, Tom, you've covered it, but covered it seemingly at a high level about all the efficiencies in cemetery that are going to keep this margin elevated. Could you just give us, I guess, a taste of magnitude of these main drivers? I've heard sales support, a few other items.

Could you just talk about the biggest drivers degree magnitude of what's doing it? And maybe some anecdotes of areas directly that you've experienced that we could better comprehend how those efficiencies are occurring? Thanks.

Tom Ryan -- Chairman and Chief Executive Officer

Sure, Scott. I think some of the natural things that are in there, and part of it's market-driven so this isn't necessarily efficiency, but if you look at the trust income contribution that you're seeing across the spectrum, you still have merchandise and service on the cemetery side. And even on the funeral side, we've got a really good, I'd say, cumulative return that's beginning to flow into our margins, flow into our cash flow. So start with as long as that's still there, and again, you could even absorb a bad year or two because, remember, that's a cumulative performance over an eight- to 10-year period, are really strong.

The other things kind of across the board that I was mentioning because I think I mentioned that we're seeing it in operations, we're seeing it in sales, we're seeing it in the back office piece. For instance, on the operational side, we utilize a full-time equivalent operating metric. And through all this with trying to understand better how to utilize people and resources, we've implemented technology and found ways to reduce our part-time and overtime usage, as an example, within a market in managing staffing levels. So we're seeing that kind of play out and stick to a certain level and can utilize that as things change.

On the selling front, we've seen, as an example, digital leads. We've talked a little bit more about how we're leveraging that more. We utilize Webex and interacting with consumers, cutting down the amount of time that our salespeople are spending and making them more efficient. I talked about the two implemented technologies recently, both Beacon and Salesforce, as an example.

Because of the crisis, it forced our entire sales team to really dive deep into the Salesforce. And now Salesforce is a very, very effective tool. It reduces the amount of travel that we have to do. It allows us to train better off that platform.

Beacon has reduced the amount of discounting that's being done because it allows us some discipline around that. It's tied back into compensation. So really, it's the institutionalization of these great tools that were out there that COVID kind of forced us to do and now they're just part of the way that we do business. And then I think on the overhead front, again, we're utilizing Webex meetings.

We've cut back dramatically on travel that aren't going to return to the pre-COVID levels. We've onshored certain functions around the globe, understanding the impact of being a supply chain that's offshore, and found more efficient and effective ways to do that. So hopefully, that has there's a lot of little things that kind of add up and we're seeing those benefits and believe those benefits are going to stick over time.

Scott Schneeberger -- Oppenheimer & Co. Inc. -- Analyst

Appreciate that. That's helpful. I have a follow-up on that and then another question. To follow up real quickly, a lot of industries out there are enduring the labor shortage.

You guys are showing very nice margins and seemingly operating well in that environment. You just mentioned reducing part-time, overtime, items like that. But could you just touch real quickly on the labor dynamic? And if that should be disruptive at all or anything else on the labor front, particularly as we enter 2022?

Tom Ryan -- Chairman and Chief Executive Officer

Sure, Scott. Thank you. First of all, let me say this. I think generally, our labor, when you think about the business that we're in, it is something that is near and dear to people's hearts.

I feel like people view this as God's work, if you will. And so I analogize it to what goes on in the hospitals. I mean, people enter this profession because they want to help others at a different point in time. So I think we start off with we've got a unique workforce that is passionate about what they do.

Having said that, you're exactly right. There's labor tightness out there. We're seeing it in certain markets. I think we would anticipate that we're probably going to see a little bit of an impact as we move forward.

I kind of mentioned it in our comments, there's definitely wage inflation going on. We've tried to do everything we can by making those adjustments. We've, over the period of time, done some special bonuses, hero bonuses for our people. We've done a year-end bonus last year to reflect the hard work and dedication of our folks.

So we're trying to do everything we can both monetarily and also, I would say, just culturally to support particularly our field personnel that are out there in the trenches doing this hard work. So we're very keenly aware of the issue. And I do expect some wage pressures, but I do believe it's very manageable, particularly as you look at other industries. I mean, I don't think we're a trucking industry.

I don't think some of the things you're seeing on the restaurant side, there's not the same level of passion when you think about our workforce and what they're doing every day.

Scott Schneeberger -- Oppenheimer & Co. Inc. -- Analyst

I appreciate that follow-up. And just the other question, if I could. Funeral revenue per service is up over 2019 levels. Could you just speak to what has occurred for that to have returned so strongly?

Tom Ryan -- Chairman and Chief Executive Officer

Yes. I think what it's saying is we're seeing more and more people that are beginning -- if you remember, Scott, in 2019 to 2020, we had a pretty significant drop in the people choosing service, some form of service, whether cremation or burial, and we were a little concerned about it. And I think there is some industry pundits out there saying this is the end of the traditional funeral service and people are going to be more efficient. And we were pleasantly surprised that those levels have rebounded and rebounded to a point, I think, in October now, where burial is higher and cremations back to pre-COVID levels.

We're just seeing people that want -- that find what we do, remember and celebration, that they're choosing those things when they choose SCI. That's what they're coming to us for, and our people are great in giving that service. The other thing is some of the ancillary things that we do. As an example, we're selling a lot more flowers than we did two years ago, three years ago, four years ago.

And a lot of that, quite honestly, is being driven by a great digital strategy that Jamie Pierce and her team have helped us tap into. And we feel really good about that going forward. I mean if you look at the catering side, really the same thing. So a lot of ancillary products and services go into that.

The other thing that I would just mention is the preneed backlog. We spent a lot of time developing that preneed backlog with our sales force, and we're seeing averages coming out of the backlog now that are super impressive, the $6,400 level, and that's trust income buildup, selling good product that's coming out. So I think those are the things that are really probably over the edge, pushing us past 2019 levels. And we see those trends continuing.

Scott Schneeberger -- Oppenheimer & Co. Inc. -- Analyst

Great. Thanks very much for taking the question.

Tom Ryan -- Chairman and Chief Executive Officer

Thanks, Scott.


Thank you. The next question comes from Joanna Gajuk from Bank of America. Please go ahead.

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

Thank you. Just first, I guess, a couple of follow-up questions on the discussion around deal activity. So when you were talking about, I guess, pushing -- or still expecting those deals to be done this year, when you talk about your 2022 outlook, does that include that amount of deal contribution that you outlined?

Tom Ryan -- Chairman and Chief Executive Officer

Yes. I think 2022 would reflect that, Joanna. And again, I hesitate, there's so much uncertainty around what's going to happen. And so we're just trying to give you guys our best guess.

That assumption really would say that COVID kind of goes in a corner pretty quickly here and we're going to have a little bit of continued impact from that. The other thing that we're trying to wrap our arms around is what we're seeing in excess death is not all COVID. Again, we're beginning to see deaths related to a variety of other things, probably more tied to both physical health and mental health that we can't project what's going to happen with those numbers. I mean, people -- obviously, a lot less people went in for cancer screenings, for annual checkups and the impact of that is surely being reflected in the numbers.

And I don't think that's something that necessarily goes away. So there's a lot of uncertainty around what we think those volumes are. And in my opinion, we're probably being a little conservative to say, hey, if this went away, how are we going to manage our cost structure? What are we going to do with our excess cash? But again, I think as we get closer and hopefully, in February, we'll have a better idea of really what's going on, but -- so I feel pretty good about our 2022 guidance.

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

Sure. No. That's good. I just want to confirm that.

And the other one, to follow up on that discussion. When you talk about multiples, are you seeing multiples moving higher? I guess there are other players in the market also doing or consolidating the locations in the US. So is there some pressure on multiples? And I guess also, are you expecting kind of acceleration or slowing down of the deal activity into next year?

Tom Ryan -- Chairman and Chief Executive Officer

Yes. I think, first, let me speak to the accelerating. Clearly, the Biden tax plans that have been out there have motivated some people that were probably in the window of thinking about selling their business to get out there. So I do think we're seeing an influx of activity associated with that, and to Eric's point, is why I think we'd expect the fourth quarter to be a nice closing quarter as you think about acquisitions.

As far as pricing goes, I guess I'd say two things. There's clearly a little more robust activity that's probably putting a little bit of upward pressure. The other unique factor you have is COVID, right? So am I selling off my 2020 results, my 2021 results or '19 results? So I think that's one of the confusing aspects of trying to understand what are you paying a multiple off of that, again, probably puts some confusion and maybe a little bit of upward pressure. But overall, I mean, these are still deals that the ones that we're looking at and competing for, they're going to have meaningful internal rates of return that you and our other stakeholders would say, good use of capital, team.

So we feel good about it.

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

That's helpful. And one last follow-up. Because you also mentioned, I guess, it sounds like wage has obviously been on the rise. But I guess so far this year, it's being masked by the very strong revenue results.

But you also mentioned elevated fuel and energy costs. So how should we think about the magnitude of things there?

Tom Ryan -- Chairman and Chief Executive Officer

Sure. So the elevated energy costs, again, I'll really tie it back. If you think about it, we've got, what, 1,600 funeral homes that all have electricity, air conditioning, whatever it may be. Clearly, we operate a lot of vehicles when you think about the energy costs, particularly both in the cemeteries and at the funeral homes.

So those are really just correlating to what's going on with natural gas and oil prices, which, as we all know, were very, very low and we enjoyed that benefit. And they've really spiked. Oil's up over $85, gas is trading between $5.50 and $6. So those convert into usage in our homes.

Now the good news is for us is we're utilizing technology to manage those costs a little bit better. So we've got existing programs and improvements that we're working on today that I think will allow us to manage usage better, both from an environmental perspective as well as kind of lowering the cost. So we're on it, and I believe we'll manage that. But I think you can correlate that with what's going on with natural gas and oil prices pretty well.

It's not -- Joanna, it's not a meaningful enough number to move it. I just want to give a little bit of flavor. We sell -- on the funeral side, incremental revenue should deliver somewhere around 65% margins. And I think we saw 57%, 58%.

So explaining why didn't you get to 65%, a little bit of it is energy, a little bit of it is some of these other things. So we still feel very good and very able to manage those energy costs, staffing costs, and really whatever comes our way.

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

OK. That's very helpful color. Thank you so much.

Tom Ryan -- Chairman and Chief Executive Officer

Thank you, Joanna.


Thank you. This concludes our question-and-answer session. I would now like to turn the conference back to SCI management for any closing remarks.

Tom Ryan -- Chairman and Chief Executive Officer

Thank you, again, everybody, for being on the call today. We really appreciate your questions and your comments. And the only other thing I have to say is go, Astros. We'll talk to you in a few months.

Thank you very much.


[Operator signoff]

Duration: 49 minutes

Call participants:

Debbie Young -- Director of Investor Relations

Tom Ryan -- Chairman and Chief Executive Officer

Eric Tanzberger -- Senior Vice President, Chief Financial Officer, and Treasurer

John Ransom -- Raymond James -- Analyst

Scott Schneeberger -- Oppenheimer & Co. Inc. -- Analyst

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

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