Service Corporation International

Good day and welcome to the SCI First Quarter 2024 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 1 on a touch-tone phone. To withdraw your question, please press star, then 2. 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. We appreciate you joining us today as we talk about our first quarter results. We're going to have some prepared remarks about the quarter 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 also in our findings with the SEC that are available on our website. Today, we might 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 and also on our website. With that out of the way, I will now turn it over to Tom Ryan, Chairman and CEO.

Thank you, 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 on our outlook for the rest of 2024. For the first quarter, we generated adjusted earnings per share of 89 cents, which compared to 93 cents in the prior year, or a decline of 4 cents per share. We had anticipated a decline in earnings per share from operations for the quarter due to lower funeral volumes, lower non-funeral home revenues, and lower cemetery revenues recognized from completed construction projects. While these trended as we had anticipated, stronger-than-expected pre-need cemetery sales and a slightly better funeral sales average allowed us to reduce the operating shortfall, resulting in a better-than-expected $0.06 per share decline in operating earnings per share over the prior year quarter. Below the line, the favorable impact of a lower share count and a lower income tax rate more than offset the impact of higher interest expense. producing a net favorable increase in earnings per share of 2 cents, resulting in a combined net 4 cent decrease in earnings per share for the quarter. Now let's take a deeper look into the funeral results for the quarter. Total comparable funeral revenues declined $9 million, or about 1% over the prior year quarter. As an increase of $4 million in core funeral revenue, was more than offset by an expected $12 million decrease in non-funeral home pre-need sales revenue. Although core funeral volume declined 3% compared to the prior year quarter, we believe due to the COVID pull-forward effects, volumes were in line with what we'd anticipated. Our core average revenue per service grew over the prior year by an impressive 4%. even after absorbing the negative effects of a modest 70 basis point increase in the cremation mix. SCI direct non-funeral home pre-need sales revenue decreased by $12 million, primarily due to operational changes in our California market with respect to the timing of merchandise delivery. We would anticipate the quarter over quarter net revenue decline to diminish over the coming quarters as compared to the first quarter of 2024. It is our intention over the next several quarters to implement this and other operational changes across the remaining non-funeral home markets as we begin offering an insurance-funded product for SCI direct service and merchandise sales. as well as shifting certain travel protection sales to an insurance-funded product where it makes sense. While these changes will defer recognition of these revenue streams until the at-need cremation service is performed, it will also generate significant general agency revenue upon the sale of the pre-need contracts, which we expect to mitigate the effect of the revenue decline from these operational changes. Over the coming years, we would expect to grow general agency revenues at a very healthy and sustainable growth rate. And when combined with organic growth and the number of contracts maturing from the pre-need backlog for SEI Direct, should result in very impressive revenue and profit growth rates for SEI Direct. From a profit perspective, Funeral gross profit declined $18 million, while the gross profit percentage declined by 270 basis points to about 22%. This decrease is primarily due to the decline in revenue and an increase in annual incentive compensation costs over the prior year quarter. Pre-need funeral sales production decreased by $8 million, or about 2% over the first quarter of 2023. This was primarily due to a decline in our core sales production as non-funeral home sales production was relatively flat over the prior year quarter. Now shifting to cemetery. Comparable cemetery revenue increased by an impressive $21 million, or about 5% compared to the prior year first quarter. Recognized pre-need revenue accounted for the preponderance of the increase. growing by $20 million, or 7%. Growth in pre-need cemetery sales production of $24 million, or almost 8% over the prior year quarter, delivered $8 million of the $20 million of recognized revenue increase, as the preponderance of our sales production increase was deferred and will be recognized in subsequent quarters. Pre-need merchandise and service revenue delivered $12 million of the recognized revenue increase as robust increases in contract averages favorably impacted by increased merchandise and service trust income, combined with a slightly higher delivered units, delivered 14% growth as compared to the prior year quarter. $17 million of the $24 million increase in pre-need cemetery sales production was generated from a 6% growth in core cemetery sales over the prior year quarter. Large sales accounted for the other $7 million of the increase, which was a 19% increase over the prior year total. Cemetery gross profits in the quarter increased by $3 million from increased revenues, and the gross profit percentage declined by 100 basis points still generating margins over 32%. This decline in gross profit percentage was primarily due to an increase in annual incentive compensation costs as compared to the prior year quarter. Now let's shift to discussion about our outlook for 2024. As you saw in our earnings release, we're confirming our normalized earnings per share guidance range of $3.50 to $3.80 for 2024, or a midpoint of $3.65. Remember, the first quarter was our most challenging year-over-year comparison because we had expected the most difficult comps to occur in the quarter in both revenue recognized from cemetery-completed construction projects and non-funeral home pre-need sales revenue. We also knew our most challenging comparison variable interest rates on our floating debt would occur in the first quarter. As we think about comparing the rest of 2024 earnings per share expectations against our last nine months of 2023 normalized earnings per share, we would expect year-over-year growth in earnings per share in each of the subsequent quarters, driven by increased profitability in both the funeral and cemetery segments. We would expect low single digit increases in funeral revenues, and we would anticipate increased sales production and increased revenue recognized from completing construction projects combined to drive mid single digit increases in cemetery revenue over the coming nine months. In conclusion, I'd like to thank the entire SEI team for all that you continue to do every day for our customers, our communities,