Service Corporation International

Good day, and welcome to the SCI fourth quarter 2023 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.

Good morning. This is Debbie Young. Welcome today to our fourth quarter earnings call. We're going to have some prepared remarks about the quarter as well as our outlook for this year 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. During this call, we will also discuss certain non-GAAP financial measures. A reconciliation of these measures can be found on the tables at the end of our earnings release and also on our website. And with that, I'll 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 provide some greater detail around our solid funeral and cemetery results. I will then close with some thoughts about our 2024 financial outlook. For the fourth quarter, we generated adjusted earnings per share of 93 cents, which compares to 92 cents in the prior year. We were able to generate growth in earnings per share over the prior year as higher cemetery revenues, driven by a 9% increase, in pre-need cemetery sales and a strong funeral sales average together more than overcame the effects of the anticipated funeral volume decline, resulting in a 4 cent increase in earnings per share from operations. Below the line, the 280 basis point rise in interest rates on our variable rate debt and a higher debt balance increased our interest expense, reducing earnings per share by 8 cents. This higher interest rate expense was partially offset by a lower tax rate and the favorable impact of a lower share count, as we accelerated our share purchase cadence during the fourth quarter, utilizing $204 million to repurchase some 3.6 million shares at an average price of just above $57. Now let's take a deeper look into the funeral results for the quarter. Total comparable funeral revenues declined $13 million, or about 2% over the prior year quarter, primarily due to an expected decrease in core funeral volume. Although core funeral volume declined 6% compared to the prior year quarter, we believe due to the COVID pull-forward effects, volumes were in line with what we'd anticipated. Notably, funeral volumes were about 10% higher than fourth quarter 2019 levels. Our core average revenue per service grew over the prior year quarter by an impressive 4%, even after absorbing the negative effects of a modest 50 basis point increase in the cremation mix. From a profit perspective, funeral gross profit declined by $8 million, while the gross profit percentage decreased by 100 basis points to about 22%. Lower fixed costs and reduced incentive compensation expense over the prior year quarter slightly negated the negative impact from the revenue decline. Pre-need funeral sales production grew an impressive $12 million, or about 4%, over the fourth quarter of 2022. Both the core and the SCI direct channels experienced impressive sales production growth. Now shifting to cemetery. Comparable cemetery revenue increased by an impressive $35 million, or about 8% compared to the prior year fourth quarter. Recognized pre-need revenue accounted for the preponderance of the increase, growing by $33 million, or 11%. This growth is primarily due to the growth in pre-need cemetery sales production of $30 million, or more than 9% over the prior year quarter. We also saw increased pre-need merchandise and service revenue generated from higher delivered units and contract averages as compared to the prior year quarter. The $30 million increase in pre-need cemetery sales production was generated from both large sales and from core cemetery production, each contributing about half of the pre-need cemetery sales production growth. While sales contract velocity was slightly down over the prior year quarter, we are still 8% higher than 2019 levels, and production is being generated by a smaller, more effective, and efficient sales team. Cemetery gross profits in the quarter increased by $17 million, and the gross profit percentage grew by 110 basis points to over 34%. primarily due to the increase in cemetery revenue. Now let's shift to a discussion about our outlook for 2024. As you saw in our earnings release, we provided a normalized earnings per share guidance range of $3.50 to $3.80 for 2024, or a midpoint of $3.65. As we explained last quarter, this is slightly ahead of our projections that we provided at our investor day in May 2022, after accounting for the unanticipated material increase in interest rates on our variable rate debt. At the time, we had assumed the 2% rate would grow to 3.5% in 2023 and continue into 2024 based on the Fed dot plot at the time. Our current rate approximates 7.5%, So we were very wrong, but we did have a lot of company. As we think about comparing 2024 expectations to our 2023 normalized earnings per share, the midpoint we are guiding to is closer to 5% growth versus the standard 10% historical midpoint expectation. The waning effect of excess deaths, including COVID, impacts not only funeral volume, but at-neat cemetery revenues, and slightly reduces the normalized growth expectation in pre-need cemetery sales production, as we talked about last quarter. This, coupled with a higher year-over-year interest rate backdrop, particularly in the early part of the year, will have a dampening effect on our annual earnings per share growth expectations for 2024. We believe that in 2025, we should return to our normalized earnings per share growth expectation of 8 to 12%. We expect to capitalize on opportunities during 2024 by further utilizing our scale that should enhance the margins in both our funeral and cemetery segments into 2025 and beyond. We're also excited about continuing to invest capital to grow our network. We're investing in our existing funeral locations, renovating and modernizing our venues to create a more celebratory and contemporary setting. We're increasing our cemetery inventory options with both the cascaded and cremation consumer to accommodate an increasingly diverse customer base that values a variety of unique memorialization offerings. The acquisition pipeline looks very good at this point, and we continue to increase new market share opportunities through the construction of new funeral home facilities, and in certain establish new cemeteries in our existing high-growth areas across North America. Finally, we expect to continue to enhance shareholder value through growing our dividend and continuing our opportunistic approach to shrinking our equity base, while protecting our strong balance sheet by managing the debt maturity profile and leverage ratios. In conclusion, 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 are what makes our company great. With that, operator, I'll now turn the call over to Eric.