Service Corporation International

Good morning and welcome to the SCI fourth 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 touchtone phone. 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 SCI management. Please go ahead.

Thank you. I appreciate that. Good morning. This is Debbie Young. I'm the Director of Investor Relations. Today, we're going to be providing an overview of business results for our fourth quarter, as well as some thoughts about our outlook for 2023. But first, as usual, I'll quickly go over the safe harbor language. 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. During this 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 Webcast Events section. With that, let me now turn it over to Tom Ryan, our chairman and CEO, for opening remarks.

Thanks, Debbie. Hello, everyone, and thank you for joining us on the call today. Before I begin, I want to express my sincere appreciation to our entire SDI family. Your dedication and commitment to helping our client families gain closure and healing through the process of grieving, remembrance, and celebration are what makes our company great. And to our pre-need teams, your efforts to provide peace of mind for families, securing final arrangements, has never been more important than at times like these. Thank you. This morning, I'm going to begin my remarks with some color on our business performance for the year and for the quarter, with some detail around our funeral and cemetery results. I'll then provide some thoughts about our 2023 financial outlook. First, in terms of the full year 22 results, we are proud to report adjusted earnings per share of $3.80, which was at the high end of our most recent guidance range. While this is below our prior year that was meaningfully impacted by COVID-19, it's an incredible 26% earnings per share compounded annual growth rate from a pre-COVID 2019 base year of $1.90. This accelerated growth was achieved by a combination of the incremental COVID learnings and efficiencies we highlighted in our investor day last May by increased volumes driven by excess deaths and the net positive impact from COVID-19. In the funeral segment, volume was down 4.6% for the year, but well exceeded our expectations and represents a 5% compounded annual growth rate from 2019 levels. We continue to be impacted by excess deaths, which we have consistently defined pre- and post-COVID as deaths above an approximate half to one and a half percent annual compounded growth. These excess deaths are identified officially as COVID, heart disease, and diabetes, among other causes. Some percentage of these deaths could be the impact early impact of baby boomers, SCI-specific market share gains, or temporary fluctuations caused directly by COVID or the ripple effects on health from the pandemic lockdown. Funeral sales averages remain strong for the year, and we experienced some inflationary cost increases associated with labor and energy. In the cemetery segment, revenues were down slightly by $39 million, or 2% versus the prior year. Pre-need recognized revenues grew primarily due to a 2.4% increase in pre-need cemetery sales production, which we had anticipated based upon our incremental COVID learnings around sales and marketing, which we touched upon at Investor Day. Our pre-need cemetery sales production has grown by an impressive 14.5% compounded annual growth rate from 2019. This pre-need growth was offset by a 7% decline in at-need revenues, as well as a $31 million decline in merchandise and service and endowment care trust fund income. Timely, meaningful action in our share purchase program of over $660 million throughout the year more than offset higher interest expense and a slightly higher tax rate. Just as importantly, we delivered these results while at the same time making strategic investments in our facilities, our cemetery inventory, our digital platforms, our customer experience and engagement, and most importantly, our people. For the fourth quarter, we generated adjusted earnings per share of 92 cents, which was ahead of our expectations, but down from prior year which benefited from a significant pandemic impact. Most of this decline in earnings can be attributable to lower operating results on a reduced impact from COVID, some increased inflationary costs, as well as a decrease in trust fund income. Below the line, the favorable impact of lower share count offset higher interest expense and a slightly higher tax rate. Now let's take a deeper look into the funeral results of the quarter. Total comparable funeral revenues declined $30 million or about 5% over the prior year quarter, primarily due to a decline in comparable core funeral revenues. Although comparable core funeral volume declined over 6% during the quarter, volumes were higher than we anticipated and about 12% higher than fourth quarter 2019 levels. Our core average revenue per service grew over the prior year by about 1%. However, that does not reflect the true success in enhanced value being delivered to our customers. The negative effects of currency translation, trust fund income, and cremation makes almost equally diluted the 4.6% organic growth rate into the reported 1%. From a profit perspective, funeral gross profit decreased about $35 million while the gross profit percentage declined to about 23%. The revenue decline due to the lower volume versus 2021 accounted for the preponderance of the profit decline. We also experienced increased inflationary growth rates in our employee and energy related costs. Pre-need funeral sales production grew over $13 million or more than 5% over the fourth quarter of 2021. Both the core and the SCI direct channels showed impressive growth in contract velocity and increased sales averages. Now shifting to cemetery. Comparable cemetery revenue was essentially flat in the fourth quarter. In terms of breakdown, core revenues increased $3 million compared to the prior year as recognized pre-need revenue growth of about $18 million, which absorbed a $6 million merchandise and service trust fund income decline was partially offset by a $15 million decline in at-need cemetery revenue. Other revenue consisting primarily of endowment care trust fund income decreased by about $4 million over the prior year quarter due to lower capital gains. Pre-need cemetery sales production declined by $9 million or 3% in the fourth quarter. This was in line with our expectations for the quarter as the comparison quarter was a very strong one, more acutely impacted by COVID-19. To better understand the level at which our sales teams are operating, our fourth quarter pre-need sales production was about 28% above our 2019 fourth quarter, representing an 8.6% CAGR over the three-year period. Cemetery gross profits in the quarter declined by about $18 million, and the gross profit percentage dropped to 33% from 37% in the prior year quarter. While revenues were essentially flat, the $11 million decline in high margin trust fund income from both merchandise and service and endowment care trusts had a more pronounced effect on profits. Inflationary increases in merchandise, labor, and maintenance expenses also put some downward pressure on the gross profit line. Now let's shift to discussion about our outlook for 2023. As you saw in our earnings release, we confirmed our 2023 guidance that we introduced to you last quarter of an adjusted earnings per share range of $3.45 to $3.75 for a midpoint of 360. I think the easiest way to understand what we're assuming for 2023 is to compare the $3.60 projected midpoint for 23 to the $3.80 earnings per share result from 2022. While the impact from COVID is not an exact science, we do our best to quantify it for you. We believe there is 45 cents per share attributable to COVID in the 2022 earnings per share, about 30 cents in funeral and call it 15 cents in cemetery. That results in an adjusted 2022 base of $3.35 per share. It is our belief that in 2023, we can grow off that adjusted base at the high end of our historical earnings per share growth range of 12%. We expect higher recognized pre-need cemetery property revenue from completed inventory projects in 2023 and a lower share count from accelerated share purchases made in 2022 will more than offset the declining impact from COVID and other excess deaths projected in 2023. This $0.40 per share growth results in a $3.75 per share base for 2023. increased interest expense is projected to have a 25-cent negative impact on 2023 earnings per share. While we would typically assume interest expense to grow accordingly with increased debt levels and company growth, we attribute approximately 15 cents of this increase as a unique year-over-year headwind associated with the aggressive Fed hikes impacting our variable rate debt. Removing this 15 cents from the $3.75, we arrive at our $3.60 midpoint. This $3.60 midpoint is a 17% compounded annual growth rate from a pre-pandemic 2019 base of $1.90. As you think about the cadence of the earnings for the year, we expect a meaningful decline in the first quarter. as early last year was still being impacted acutely by COVID. However, this decline is anticipated to be mostly offset by year-over-year growth in each of the remaining quarters. Now, as you think about some of the segment assumptions for this year, in our funeral segment, we're anticipating a comparable volume decrease in the mid-single-digit percentage range. This reflects the waning effect from COVID and other excess deaths, which should be more pronounced in the first quarter comparisons. Meanwhile, we expect the average revenue per case to continue to compare favorably, growing in the low single-digit percentage range. We expect to see inflationary pressures lessen, but still be above our recent historical trends in the 3% to 4% range, resulting in funeral margins of around 20%. Finally, we're forecasting pre-needs funeral sales production growth in the 3% to 5% range for the year. On the cemetery side of the business, cemetery at-need revenues should correlate somewhat with funeral volumes, and we expect them to be down in the mid to high single-digit percentage range. For pre-needs cemetery, given our success in 2022, creating a new hire base and the expected lack of COVID lead activity in 2023, We expect pre-need cemetery sales production to grow a little less than historical trends, but still grow in the low single digit percentage range. We have enjoyed tremendous success during 2022 in selling into unconstructed inventory projects, which should continue into early 2023. As these projects are completed throughout the year, this should result in favorable pre-need property revenue when compared to 2022. We expect inflationary pressures to lessen around labor and maintenance, but still exceed recent historical trends and anticipate margins in the low to mid 30% range. As we look to 2024, we would expect a return to normalized earnings per share growth off of this 2023 race. Finally, I'd like to thank the entire SCI team for all that you do every day for our families, our communities, and each other. You are what makes this company great. With that operator, I'll now turn the call over to Eric Tanzberger.