Service Corporation International

Good morning and welcome to the SCI Second Quarter 2023 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 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 SCI management. Please go ahead.

Thank you, and good morning. This is Debbie Young, Director of Investor Relations, and on behalf of the SCI team, thanks for joining us today. We're going to have some prepared remarks from Tom and Eric in just a moment, but before that, let me 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. Today we will also discuss certain non-GAAP financial measures. A reconciliation of these measures can be found in the tables at the end of our earnings release, as well as on our website. I'd like to now turn it over to Tom Ryan, Chairman and CEO.

Thanks, Debbie. Hello, everyone, and thank you for joining us on the call today. This morning I'm going to begin my remarks with some high-level color on our business performance for the quarter, and then provide some greater detail around our solid funeral and cemetery results. For the second quarter, we generated adjusted earnings per share of 83 cents, which was on par with our results from the prior year quarter. We were able to achieve this result despite absorbing a $19 million or 9 cent per share increase in interest expense, resulting from a more than 400 basis point rate increase in our variable rate debt. We continue to see significant earnings per share growth over pre-pandemic results. Compared to a second quarter 2019 of 47 cents per share, we have grown earnings per share at a compounded annual growth rate of 15% over the four-year period. Funeral metrics were strong and performed at or above our expectations. Cemetery pre-need sales production increased slightly quarter over quarter. However, they fell short of our internal expectations as we experienced a decline in in the number of contracts sold, primarily within the entry-level price-sensitive consumer segment. We believe this is predominantly attributable to a decline in discretionary consumer spending by this entry-level consumer due to the actual and perceived impact of inflation on our pre-need cemetery property sales and a variety of other discretionary purchases. Below the line, higher interest expense incurred from the spike in interest rates on our variable rate debt, reduced earnings per share by 9 cents, and was partially offset by the 4 cents per share 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 increased $11 million, or about 2% over the prior year quarter, primarily due to an increase in core funeral revenue. Although comparable core funeral volume declined 2% compared to the prior year quarter, volumes were higher than we anticipated and about 9% higher than comparable second quarter 2019 levels. Our core average revenue per service grew over the prior year by an impressive 4%, even after absorbing the negative effects of a 120 basis point increase in the cremation mix. From a profit perspective, funeral gross profit declined slightly by $2 million, while the gross profit percentage remained about 21%, well above our pre-pandemic second quarter margin of 19.5%. Inflationary fixed cost increases slightly outpaced our moderate funeral revenue growth. We encouraged slightly higher inflationary staffing and selling costs, which were mitigated in part by lower transportation costs and lower bonus incentive expenses, resulting in about a 4% increase in fixed costs. Pre-need funeral sales production grew an impressive $12 million, or about 4%, over the second quarter of 2022. Both the core and the SCI direct channels experienced sales production growth that was primarily driven by increases in sales contract velocity. We continue to see consumers' awareness and openness to pre-planning elevated with continued strength in marketing leads in pre-need funeral sales production. Now shifting to cemetery. Comparable cemetery revenue increased $5 million, or just over 1%, compared to the prior year second quarter. Core revenue accounted for the preponderance of the increase as compared to the prior year. As recognized pre-need revenue, increased by $6 million, or 2%, offset slightly by a $1 million decline in at-need revenue. Pre-need cemetery sales production increased by $1 million in the second quarter. While we did see a slight growth, it was below our expectations. We saw impressive increases in our large estate property sales, particularly in both the western and eastern regions, and we also saw healthy increases in our core average sale across the network. However, we did see a decline in our property sales velocity over the prior year quarter, a trend we also experienced in the first quarter. Again, keep in mind our second quarter contract velocity is still 15% above our pre-pandemic 2019 second quarter. As we bifurcated the sales data by price tiers, we noticed that our mid and premium level property price tiers had increases in velocity, while our more entry level price sensitive tiers saw some unanticipated declines. Based on examining a variety of consumer discretionary data sources and from feedback from our customers, as well as from our frontline sales teammates, we believe that a significant reason our sales velocity has been negatively impacted is due to a more cautious consumer particularly consumers that are more acutely impacted by the effects of accelerated inflation. Additionally, as we get further away from the acute impact of the pandemic, there seems to be a slightly diminished urgency for this specific entry-level consumer to transact at the pace we've experienced over the last three years. The good news is that we believe these consumers are deferred, not lost, so we're developing selective programs and payment terms to enhance this specific customer's ability to transact with us. Still, to put cemetery pre-need sales in its proper perspective, our second quarter pre-need cemetery sales production was about 47% above our 2019 second quarter, representing a 10% compounded annual growth rate over the four-year period. Cemetery grows profits in the quarter declined by about $4 million and the gross profit percentage declined slightly to 33%, still well above our pre-pandemic second quarter gross profit percentage of just above 30%. Expected inflationary increases in our cost structure exceeded our modest revenue growth for the quarter, putting pressure on comparable cemetery profits. Now let's shift to discussion about our outlook for the remainder of 2023. As you saw disclosed in our release, we have slightly reduced and narrowed the range of our annual earnings per share guidance, while slightly increasing our annual cash flow guidance, reflecting both favorable working capital trends and an expected decrease in cash taxes associated with a tax accounting method change. The primary reasons for the earnings per share change was a reduction in our pre-need cemetery sales production assumption for the year, as well as the higher interest expense assumption associated with our variable rate debt as the Fed continues to push short-term rates higher and communicating a willingness to maintain those rates for longer. This updated earnings guidance still reflects impressive growth within our 8% to 12% framework after considering the unique interest headwind this year and removing the beneficial COVID impact from last year. So for the rest of the year in the funeral segment, We would expect to see low to mid-single-digit declines in funeral volume as the impact of the COVID pull forward slightly outpaces increasing volume trends. We would expect healthy low to mid-single-digit growth in our funeral average, both from at-need cases as well as pre-need going at-need cases, as trust fund income increases from recent strength in the financial markets, which should favorably impact our funeral sales average. On the cemetery side, we would expect pre-need sales production to range from slightly down to low single digit growth in the back half of the year. Positive trends in large estate property sales and core averages should be tempered by lower velocity, particularly with our price sensitive consumers. It is our hope that our pivot to enhance the customer proposition for the entry level customer through more consumer-friendly payment terms on cemetery property, will have a favorable impact on velocity in late 2023 and into 2024. The impact from newly completed construction projects over the next two quarters should create favorable comparisons of recognized cemetery revenue for the third quarter and slightly negative comparisons in the fourth, as the 2022 fourth quarter impact from completed construction was quite significant. From an earnings per share perspective, we would expect to be able to deliver year-over-year growth in the back half of the year, particularly in the third quarter as the favorable impact of higher funeral sales averages, higher year-over-year cemetery revenues, and the impact of our share repurchase program will more than offset the negative effects of slight volume declines and significantly higher interest expense associated with our variable rate debt. Finally, I'd like to thank the entire SCI team for all that you continue to do every day for our customers, our communities, and each other. You guys are what makes this company great. With that, operator, I'll now turn it over to Eric.