Service Corporation International

Good morning and welcome to the SCI Shared Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to SCI management. Please go ahead.

Thank you, and good morning. This is Debbie Young, Director of Investor Relations. Today, we're going to be providing an overview of our business results for the second quarter. As usual, I'll quickly go over our safe harbor language before the prepared remarks. 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. In today's call, we'll 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 Investor section events and webcasts. So to begin our prepared remarks, I will hand it over to Chairman and CEO Tom Ryan.

Thanks, Debbie. Hello, everyone, and thank you for joining us on the call today. First of all, I want to express my heartfelt thanks to our entire SCI team. It is your perseverance and commitment that positioned us for the results we posted this quarter. More importantly, you have continued to stay relentlessly focused on what we do best, helping our client families and our communities gain closure and healing through the process of grieving, remembrance, and celebration. Now to the business at hand. This morning, I'm going to begin my remarks with a high-level overview of the quarter, followed by some further color on our business performance for the quarter, including some detail around our solid funeral and cemetery results. For the second quarter, we generated adjusted earnings per share of 84 cents, an 8-cent decrease over the prior year quarter of 92 cents, which experienced a more significant pandemic impact. For a better perspective of this quarter's performance, we delivered earnings per share growth 45% above 2020 and 79% above a pre-pandemic 2019 second quarter. Compared to the 2021 second quarter, the funeral results were relatively flat, but well ahead of our expectations as we continue to see elevated levels of funeral services with a strong funeral average. On the cemetery side, profitability was below prior year as pre-need cemetery sales production, while still historically very strong, was down about 3% versus the 2021 second quarter. Additionally, cemetery trust fund income declined as it was impacted by steep declines in the equity and debt markets during the second quarter. So for the quarter, we saw a 3 cent decline in earnings per share from operations both comparable ops and acquisitions, and a five-cent decline below the line, as higher general and administrative costs, primarily impacted by the timing of incentive accruals and a higher tax rate, were somewhat offset by the favorable impact of a lower share count. Now let's take a deeper look into the funeral results for the quarter. Total comparable funeral revenues grew nearly $10 million or about 2% over the prior year quarter, exceeding our expectations, as growth in core revenues and recognized pre-need revenue were slightly offset by a reduction in general agency revenue. Comparable core funeral revenues grew over $3 million, led by an impressive 3% increase in the comparable funeral sales average. Our percentage of families selecting to have funerals and celebrations of life services has essentially returned to pre-COVID levels. In conjunction with the rollout of our Celebration of Life initiative, we have seen families selecting upgraded facilities and a higher propensity to select catering and flowers. This increase in average was achieved despite a 170 basis point increase in the core cremation rate. Comparable core funeral volume declined about 2% compared to the prior year core. slightly offsetting the positive impact of the funeral sales average. Keep in mind, the 2022 second quarter volume is still over 6% higher than the pre-COVID 2019 second quarter. We're continuing to serve elevated levels of client families above and beyond COVID deaths, which is consistent with our commentary around this topic during our Infestor Day presentation in May. Recognized pre-need revenue increased over $9 million per 28%, as increased digital leads and a more effective direct mail strategy successfully drove more contract velocity within our talented SCI direct team. From a profit perspective, funeral gross profit increased almost $4 million, while the gross profit percentage increased 30 basis points to 21.6%. Revenue growth of $10 million resulted in about $4 million of incremental profit. Lower margin growth from flowers and catering, as well as higher merchandise costs, slightly reduced our expected profitability. Pre-need funeral sales production grew over $7 million, or nearly 3% over the second quarter of 2021. Our SCI direct production was particularly strong. posting an increase of almost 20% over the prior year quarter. Increased contract velocity, driven by a new and more effective targeting strategy for our direct mail and seminar programs, as well as increased digital leads, were the primary drivers of our growth. Now shifting to cemetery. Comparable cemetery revenue decreased $18 million, or about 4% in the second quarter. In terms of the breakdown, core revenue was down by $12 million compared to the prior year. At-need revenues were flat, so recognized pre-need cemetery revenues accounted for the decline. Other revenue decreased by about $6 million over the prior year quarter as endowment care trust fund income was negatively impacted by prior year capital gain distributions that did not reoccur. Pre-need cemetery sales production, declined by $11 million, or about 3% in the second quarter. We must keep in mind we're comparing against a 2021 second quarter that grew by 36%. Said another way, our second quarter 2022 sales production is 45% above our pre-COVID second quarter 2019 sales production. As we referenced in our Investor Day presentation, We believe we have enhanced our sales and marketing productivity in cemetery sales from learnings achieved during the pandemic. We're experiencing a slight decline in sales velocity that is for the most part being offset by increases in the core sales average. Large sales have remained robust, but down slightly by $2 million as compared to the prior year. We have seen a slight decline in appointments held as this discretionary consumer diverted their attention to increased travel and societal engagements this year after post-COVID-related lockdowns, and also felt the impact of general inflationary consumer pressures. The good news is our close rates continue to improve year over year, and with the strength of both our sales team and our customer relationship management system, these opportunities are not lost, but rather deferred, and should bode well for future sales production. Cemetery gross profits in the quarter declined by about $14 million, and the gross profit percentage dropped 170 basis points to 33.7%. Declines in high-margin merchandise service and eternal care trust fund income accounted for most of the gross profit decline. As you saw in earnings release, we reaffirmed our 2022 adjusted earnings per share range of $3.30 to $3.70 for a midpoint of $3.50. We remain very confident in the range that we've provided you. In this segment, we're continuing to see volumes above our expectations with a continued strong average revenue per case. Pre-need funeral are trending slightly below our expectations as the discretionary consumer seems to be slowing down a bit. We're experiencing some inflationary wage pressure that we had anticipated and are, for the most part, recovering with inflationary pricing. On the cemetery segment, our at-need revenue is trending higher than expectations due to stronger volumes, while our pre-need sales production is slightly behind our expectations due to a slight decline in velocity. we believe is attributable to diverted consumer attention and general inflationary pressures. The good news is that we have quite a bit of completed construction projects scheduled to occur, particularly in the fourth quarter, that have a very healthy backlog of sales that will be recognized as revenue upon completion. We also are experiencing some elevated labor maintenance costs in our cemeteries, both internally and with third-party vendors. However, these are not material to the company as a whole, and for the most part, are being recovered with inflationary pricing. Below the line, we saw and continue to expect variable interest rates to move up. The tax rate expense incurred in the second quarter had a 3 cent incremental negative impact on earnings per share. This was associated with the sharp decline in the financial markets So we do not anticipate this reoccurring in the back half of the year. With that, operator, I'll now turn the call over to Eric Kansberg.