Service Corporation International

Good morning and welcome to the SCI third quarter 2022 earnings conference call. All participants will be in a 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 telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to SEI management. Please go ahead.

Thank you, and good morning. This is Debbie. Today, we'll be providing an overview of business results for the third quarter, as well as some thoughts about our outlook for the fourth quarter and for next year as well. As usual, let me quickly go over the Safe Harbor language before we begin with 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. Today, we will also discuss certain non-GAAP financial measures and 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 events section. With that out of the way, I'll now hand it over to Tom Ryan, Chairman and CEO for opening remarks.

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 continued commitment, dedication, and execution that positioned us for the results we posted this quarter. You have continued to stay relentlessly focused on what we do best, helping our at-need client families gain closure and healing through the process of grieving, remembrance, and celebration and helping our pre-need clients gain peace of mind by securing their final arrangements. 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. Then I will provide some year-to-date observations on 2022 that establish a baseline for our preliminary thoughts about 2023. For the third quarter, we generated adjusted earnings per share of 68 cents, which outperformed both our internal forecast as well as analysts' consensus, compared to $1.16 in the prior year quarter, which benefited from a significant pandemic impact. Most of the anticipated decline in earnings can be attributable to lower operating results on a reduced impact from COVID, as well as a decrease in trust fund income from declines in the global equity and fixed income markets. Higher inflationary fixed costs also impacted the quarter's performance. Below the line, the favorable impact of a lower share count offset higher interest expense and a slightly higher tax rate. For a better perspective of this quarter's performance, we delivered earnings per share growth of 84% above a pre-pandemic 2019 third quarter. resulting in an impressive 22% compounded annual growth rate in earnings per share over the three-year period. While down from the prior year, funeral results were well ahead of our expectations on continued elevated levels of funeral services. On the cemetery side, overall cemetery profits were in line with our expectations. Our pre-need sales production results were very strong and ahead of our expectations. However, Those strong results were tempered by lower recognition rates and lower trust fund income. Now let's take a deeper look into the funeral results for the quarter. As anticipated, total comparable funeral revenues declined against a prior year quarter that benefited from a significant pandemic impact. This decline of $48 million, or about 8% over the prior year quarter, includes a $41 million reduction in comparable core funeral revenues. Although comparable core funeral volume declined about 10% compared to the prior year quarter, the 2022 third quarter volume is still over 15% higher than the pre-COVID 2019 third quarter, resulting in an impressive 5% compounded annual growth rate over the three-year period. So 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 Investor Day presentation in May. Our core average revenue per service continued to grow over the prior year quarter by 1.8%. Organic growth for the quarter was an impressive 4.7%. However, it was negatively impacted by a 190 basis point increase in the core cremation rate, a decline in trust fund income, and to a lesser extent, from currency translation in our Canadian operations. From a profit perspective, funeral gross profit decreased $67 million, while the gross profit percentage declined to 19% from 29% in the prior year quarter. The revenue decline due to lower volumes versus 2021 accounted for the preponderance of the profit decline. We also experienced higher than historical increases in employee-related costs, as well as in utilities and fuel, due to current inflationary pressures compared to the prior year. Additionally, we're seeing slightly higher technology costs, both from depreciation and maintenance of the highly impactful systems we've developed around our sales and marketing functions over the last several years. Pre-need funeral sales production grew over $6 million, or 2% over the third quarter of 2021. Our SCI direct production was particularly strong, posting an increase of almost 10% over the prior year quarter. Increased contract velocity was generated from leads driven by new targeting strategies for our direct mail and community seminar programs, as well as a shift in focus on digital leads. Now shifting to cemetery. As expected, cemetery revenue also decreased against the COVID-affected prior year quarter. However, Pre-need cemetery sales production exceeded our expectations. Comparable cemetery revenue decreased $21 million, or about 5% in the third quarter. In terms of a breakdown, core revenues were down by $17 million compared to the prior year. At-need revenues accounted for $15 million of this decline, and recognized pre-need accounted for $2 million. recognized pre-need revenue actually was higher by $6 million before accounting for an $8 million decline in merchandise and service trust income. Other revenue decreased by about $3 million over the prior year quarter as endowment care trust fund income was negatively impacted by changes in capital gains and losses. Pre-need cemetery sales production grew a solid $16 million or 5% in the third quarter. Even more impressive is when you consider we're 67% higher than the third quarter of 2019, so growing pre-need sales production at a 19% compounded annual growth rate over the three-year period. As we referenced in our Investor Day presentation, we believe we have enhanced our sales and marketing productivity and effectiveness in cemetery sales from learnings achieved during the pandemic. We saw a slight decline in sales velocity that was more than offset by inflationary increases in the core sales average. Large sales have remained robust, growing $10 million over the prior year quarter. So cemetery gross profits in the quarter declined about $41 million, and the gross profit percentage declined to 31% from 38% in the prior year quarter. The profit decline from revenues was further impacted as $12 million of the decline was from trust income, which falls straight to the bottom line. Inflationary pressures drove higher than historical increases in employee and cemetery maintenance costs. We also experienced slightly higher costs associated with technology, such as systems amortization and maintenance costs. So as you saw in our earnings release, we increased our 2022 adjusted earnings per share range by 20 cents, to $3.60 to $3.80, or a midpoint of $3.70. This implies a range of 73 to 93 cents in the fourth quarter compared to a COVID-impacted fourth quarter 2021 of $1.17. You know, a once predictable, very predictable business model was turned upside down beginning in 2020 with the uncertainty around COVID, mandatory and voluntary lockdowns, changes in consumer wallets and sentiment. So at our investor day in May, we made our best attempt to outline for you where we thought we were from an operating platform, what COVID impacts might be, and what to expect going forward. We described a new earnings per share base, which had been established through accelerated learnings and actions taken during the pandemic. The new base was $3.18 per share for 2022. and we communicated that we anticipated an incremental 32 cents of non-recurring impact from COVID for a total guidance midpoint of $3.50 for 2022. Our base assumptions anticipated a pronounced decline in funeral volumes and at-need cemetery revenues as compared to 2021, particularly in the second half of 2022. we projected that these levels would normalize back towards 2019 pre-COVID levels. We also assumed that Printing Cemetery sales levels would be relatively flat to slightly up versus 2021 levels. And we anticipated that the Fed would raise rates pretty aggressively, increasing the interest expense on the variable rate debt from our balance sheet. Based on what we've seen over the last five or six months for 2022, We now believe, with higher than we anticipated levels of non-COVID funeral services and at-need cemetery revenues, that our original base assumption of $3.18 would be more like $3.50. We believe these excess services are more permanent in nature and are a combination of aging demographics, higher risk, less healthy lifestyles developed during the pandemic, as well as certain geographic market share gains. Pre-need cemetery sales are strong in tracking with what we originally assumed back in May. Unfortunately, we did not anticipate back in May the combined historic downturn in both the equity and fixed income markets that will reduce trust fund income for 2022 by about 20 cents per share. This would result in an earnings per share base of $3.30 for 2022. So when you add the non-recurring COVID impact which increased to 40 cents from the original 32 cents we discussed in May, it results in a 2022 revised midpoint of $3.70. In determining our preliminary guidance for 2023, we utilized the $3.30 earning per share base, applied our historical earnings per share growth assumptions, factoring in slightly higher interest expense, as well as slightly lower trust fund income results, in determining our 2023 earnings per share guidance range of $3.45 to $3.75 per share. I want to say thanks to all of my more than 24,000 teammates for all that you do every day for our families. You are what makes this company great. With that, operator, I'll now turn the call over to Eric Tanzberger, our Chief Financial Officer.