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spk08: Let's talk about that. The primary contributor of that increase was expected in the form of lower cash tax payments of about $60 million. That's due to the tax accounting method change related to the timing of recognition of cemetery property revenue for tax purposes. And as a reminder, this tax accounting method change will result in the deferral of cash taxes in the future years when these installment payments for the cemetery property are received. We've talked about that now for several quarters. But as we look forward to 2025 and perhaps beyond 2025, we expect cash taxes to revert toward a more normalized trend that you'd expect from us with an anticipated increase of $150 million in cash tax payments going forward compared to 2024 levels. So if you get outside of these cash taxes though, in terms of cash flow, cash flow is generally flat to the prior year with net favorable working capital. And that was primarily associated with premium installment sales that were more than offsetting the operating income decline that we talked about and slightly higher cash interest payments. And while we're on the topic of cash interest, assuming the rates remain at the current levels, we continue to expect an increase in cash interest in the second half of this year of about $5 to $10 million. And that really relates to higher floating rate debt balances compared to prior year. That's really not new, but I just want to remind you of that. So shifting now to capital investment activity during the quarter, we invested just over $300 million of capital to grow our business and return value to our shareholders. Let's look at the components. First, let's start with our maintenance capital. We invested $40 million into high returning new cemetery inventory development projects, again, to benefit future pre-need sales growth. $29 million of maintenance capital into our facilities and $18 million into digital systems and initiatives. We also invested about $9 million in growth capital towards the construction of new funeral homes and expansion of some existing funeral homes and cemeteries. From an M&A perspective, we're successful in closing three transactions. One was in Illinois, one was in Kentucky, and one was in Western Canada for a total spend of about $23 million. That brings our first half acquisition spend to about $38 million. And that's kind of how I alluded to last quarter. We continue to remain very optimistic about our momentum here and investment opportunities and are expecting to end the year above our targeted range of $75 to $125 million of capital invested in mergers and acquisitions. In addition to acquiring businesses, we also spent $15 million purchase in real estate, including $8 million for expansionary cemeteries and land in the Western United States. Finally, in terms of capital invested or deployed to shareholders, we returned nearly $170 million of capital to our shareholders in the court through $43 million of dividends and just under $130 million of share purchases. So speaking of that, year to day, we have purchased about $2.4 million shares at an average price of about $70. This resulted in just over 144 million shares outstanding for our company as of June 30th. Now moving on to our cash flow outlook for the full year. Even with the lower than anticipated volumes impacted our earnings during this quarter, our cash flows have proven resilient, as I've already mentioned, due to the continued support of cash receipts on both premium installment sales and the underlying cash receipts from our funeral and cemetery at-knee businesses. Accordingly, as reflected in our press release yesterday, it is important to note that we are reiterating today our adjusted cash flow from operation guidance range of $900 to $960 million with a midpoint of $930 million. So in closing our prepared remarks, I'd like to just do a couple more items and highlight about our solid financial position. We continue to have a favorable debt maturity profile and liquidity of just under $800 million at the end of the quarter. This consists of $185 million of cash on hand plus just over $600 million available on our long-term bank credit facility. Our leverage at the end of the quarter increased slightly to about 3.7 times and again that's on a net debt to EBITDA basis. And cash flow continues to be our strength and together with our silent balance sheet position, we are well positioned to continue delivering value to our shareholders. Once again, I want to express my gratitude to our entire STI team for their invaluable contributions each and every day to the communities and the client families we are so lucky to serve. With that, this concludes our prepared remarks. And with that, operator, I'd now like to turn this call over to questions.
spk04: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble a
spk06: roster. The first question comes from Joanna
spk04: Gadjic
spk06: from
spk04: Bank of America. Please go ahead.
spk01: So much for taking the question here. So I guess on your comment, if I may, around next year outlook, sounds like you think this June weakness in the funeral was sort of temporary drop because you alluded to July tracking better. So just to confirm, I guess first, you're reducing your guidance essentially for the Q2 results and your expectations for second half of this year are
spk09: pretty much the same. They're predominantly the same, Joanna. We do believe and again, you never know with volume. It's very difficult to predict. We did say July is a positive trend. But again, we've got many things we can do to execute the back half of the year and then as we get into 2025. So we'll be ready both delivering the revenue and managing the expenses back out.
spk01: Okay, great. And then yeah, that leads me to the question, the original question I was thinking about for next year comment that you just made. So if Q2 was sort of viewed as a temporary issue, so to speak, and you'd expect to grow right at the higher end of the typical range. So I guess yeah, what gives you confidence in ability to grow towards 12% I guess off of maybe somewhat of the press 2024 number?
spk09: Yes, so as you think about, you know, as I mentioned before, when you think about the 24 number, two things stand out as going away. One is we have a unfavorable interest rate comparison. As you think about 23 to 24, we believe that will subside in 2025. The other thing is Joanna, you'll remember in the first quarter, we talked about some operational changes we made the SCI direct that we thought these were very favorable for the long term business, but we're going to cause some temporary pain. And the first half of the year, we had, you know, essentially $20 million of revenue that were not recorded because of changes in the way we deliver merchandise on the SCI direct side and some changes that relate to selling away from home insurance. So those two negative effects kind of go away the back half of the year and also go away in 2025. So out of the gates, you have two, you know, negative trends that kind of disappear. The other positive thing, and there's been an announcement, you know, we switched partners as it relates to our general agency agreement, the insurance company that funds our pre-need insurance. And with this new agreement and some of the terms that are in it, we believe we can generate higher general agency commissions. So we would anticipate the positive effects of that to lift us up in 2025. And then having said that, you know, the core business itself, we feel again, very good about. We feel like, you know, volume should stabilize in 25 from funeral side. We feel good about our cemetery prospects as we look out into 2025. And again, I think as you see inflation subsiding, you'll begin to see, you know, our expenses. We have a lot of people. We have a lot of great people. We need to pay them appropriately, and we have. But I think we're seeing wage inflation subside a bit and all the other pieces that go into it. So we're excited about 25 and think it could be a really exciting year for the company.
spk01: So if I may follow up on this new contract with the Global Atlantic Insurance. So you said commissions will be higher, but when you negotiated, did you also adjust your sort of, you know, the predetermined returns that you expect to get on this contract, as it's largely kind of reflective in the commissions being higher?
spk09: Well, it's predominantly going to be in the commissions, and then it's also in the product mix. You get real technical in some of these terms, but to give you an example, we'll have a better ability to write for our customers, you know, guaranteed insurance product. The way we had to do it under our old agreement, it was more difficult to get people under written and therefore get more protection to our customer, which also happens to generate a higher commission for us. And we worked really well with Global Atlantic in finding ways to onboard more people, and I won't get into all the technical aspects of that. So we really think we'll have a higher percentage of underwritten product as you think about our customer base, which is better for them, better for our commissions, better for Global Atlantic, quite honestly. So it's allowed us to kind of think through a better way to serve our customers, which also should, again, if we execute correctly, generate higher commission rates.
spk01: Great, thank you. If I may, a very last one on the quarter itself, because clearly the funeral segment, right, the gross margin there was very low. So it sounds like the revenue essentially was surprised to you, right? So it sounds like you kind of were heading into the quarter with different kind of cost structure, and then things surprised you in June, right? So there was sort of, called mismatch between the cost and revenue. That's how to think about this quarter and funeral. Thank you.
spk09: Yeah, I think, you know, sometimes, Joanna, I think if you, because quarters are such short periods of time and you have adjustments to accrual things that can happen, maybe a better way to look at funeral is step back and look at the six months. You know, for the six month period, our funeral margins were 19.9%, which are, I think, you know, about 280 basis points below last year, when you think about gross margin percentages. One thing to keep in mind is that, you know, anticipated and forecasted SEI direct change. You know, we're missing about $20 million of not delivering merchandise predominantly on the SEI direct side. So if you add back $20 million and the profits associated with it, it takes that 19.9 back up to around, I think it's 20.7, 20.8. So I think your explanation of, you know, margin throughput is about 200 basis points. And, you know, 150 would explain it. We've got a little bit of, I'd say, cost creep associated with a couple of categories, but nothing material. So it's kind of where we thought it would be, not to say we can't do a better job of managing expenses, we will. But as I think about the funeral margins in the so we feel better about getting our arms around that. We're going to lose the negative comparison on SEI direct. So that's going to help us. And again, you know, I feel a lot more positive about the funeral margins as I think about the back half of 2024.
spk06: Thank you so much.
spk09: Thank you.
spk04: The next question comes from Parker's NERV with Raymond James. Please go ahead.
spk07: Hey, good morning. This is Parker on for john ransom. Maybe just talk about the pre need cemetery sales. I know you mentioned lower high end sales, but the core actually improved that seems to be a divergence from what you guys have noted in recent quarters. So maybe just kind of pull on that thread a little bit more. Are there any common themes that you're seeing that that's driving that trend? Or is that purely just kind of timing related or some one off certain markets? And then generally, how are you thinking about the lower end consumer? Has that has that changed at all? Or and then also maybe just remind us the percent of your pre need cemetery sales that comes from the kind of core consumer versus that high end consumer?
spk09: Sure, Parker. So first of all, I think, you know, you hit the nail on the head. It is a reversal. We feel very good about the core. We saw growth in the core and that's different. It's been a while since we've seen, you know, the high end sales dip down. But, you know, as I think we've tried to explain over and over, the high end sales are just very hard to predict when they fall. I would tell you that we were having a lot of conversations with people at the high end that probably didn't close at the end of June. We feel like there's still a lot of interest, a lot of ability to execute in the back half of the year. So I wouldn't get to, we're not worried about that. We're going to continue to work hard. If you step back and look at the whole year, actually high end sales are about flat. And so I think you got to, again, as you move out periods of time, it probably normalizes. So we feel very good about the back half of the year. And I think the reminder is that from a pre need cemetery perspective, high end sales generate, I believe, 15 to 20%. Is that probably right? It's probably 13 to 15. And that fall far. But again, I think that's the piece that's always going to be a little more volatile as you try to predict quarter to quarter.
spk07: Okay. And then maybe I can just do one more just kind of higher level question. As you just talk about just managing the pre need selling cemetery in an environment where you have maybe tougher funeral volumes, which is typically a lead source for the pre need cemetery selling, maybe just talk about some of the tools that you have in your kit for kind of driving more pre need cemetery in an environment where you're kind of having to maybe work a little bit harder.
spk09: Yeah, I think a lot of the tools that we've talked about before, a lot more of our leads now are coming from outside the location. So from a digital perspective, when you think about seminars that we put on, when you think about digital leads that we'll generate through the website and other means. So those are where we're seeing a lot more leads Parker. And so we're executing on those very differently. But you correctly say, I mean, if you look at our core volume, we generally write, you know, 55% of our funeral volume is the percentage that you can almost predict within a band of, you know, between 53 and 57. That's the number of contracts core that will write in any given. So it shows you that there's still a high correlation of people that are coming through our funeral homes are a tremendous lead source for pre need cemetery. I do think that over time, we'll trend more towards other sources. And that's where we're working really hard at, you know, how can we do better at identifying people that are ready to purchase cemetery. And again, from a digital perspective, there's a lot of data out there we're mining and understanding and getting in front of those customers. So feel very good about the trends in that business. But you can't, you know, it's still such a core reason for cemetery sales. funeral volume still has a material impact our ability to generate those leads and then turn them into sales.
spk05: All right, great. Thank you so much.
spk06: Thank you. The next question comes from Toby Summer
spk04: with Trust
spk06: Security.
spk04: Please go ahead.
spk02: Hey, good morning, guys. This is Jeff. We're a bit of on for Toby. I want to ask, are you managing the sales force in the current demand environment? I think the investor two years ago, he shows how you've been able to drive pretty impressive productivity gains even with lower headcount. So if you've seen that activity levels hold up
spk08: here. Salesforce. Well, what we're doing now is that just refresh everybody's memory. As you asked, when you look back four or five years, and again, you reference the May 22 investor day, so I'm doing this by memory, but we had about 4300 to 4400 counselors to produce total pre need sales somewhere around 1.7 $1.8 billion at the time. And that's funeral and cemetery when I say that, okay, so that's the entire pre need sales function. Today, fast forward now, now you're looking at, you know, 27 to 28 ish area in terms of billion for the pre need Salesforce. And we're doing that with 3700 counselors as opposed to the 4300 counselors. Not to get repetitive, but it's what Tom had already answered during the call today, you're talking about, you know, better technology in terms of what we're using in terms of in front of the customer that's helping us be more efficient. Tom already mentioned the quantity and quality of the leads. That's not just digital leads, although that's a big piece to that improvement, but it's also how we're handling direct mail and seminars differently than before. We're getting a lot more effective and productive in terms of utilizing the CRM system, and which is helping us reduce turnover, which we can all talk about, you know, has a huge benefit and less distraction on recruiting and such. And then let's don't forget that we're continuing to invest capital into our cemeteries. I mean, if you do use the same timeframe back to 2018, you know, you're not spending $165 million of capital to inventory. It would be much, much less than that. It'd probably be $80 to $100 million, if I remember correctly. So we are going in there with the tiering strategy that we have led the industry in doing and putting our money where our mouth is and spending the capital, which has wonderful returns to those capitals for those high-end projects all the way down to the mid-tier projects, all the way down to that, you know, beginning entry-level type price points in these cemeteries. So it's not one magic bullet. It's kind of all of the above that we talked about back in 22, which continues to come to fruition, you know, as we speak today.
spk02: Thanks. And I think earlier you mentioned 150 base points headwind this year on the SEI direct changes for staff, you know, gross margin. That's going to help you next year. Is the right way to think about that and seeing, let's say, like 70 to 80 bips, you know, gross margin tailwind for 25 versus 24?
spk09: I think no. I think your negative comparisons just begin to flatten out in 25. So I wouldn't anticipate it to have any kind of material effect on margins in 25, just 24.
spk05: Okay, understood.
spk04: Thanks.
spk06: The next question comes
spk04: from AJ Rice with UBS. Please go ahead.
spk10: Hi, everybody. Just a couple of things maybe. I think you're saying you expect a little more challenging comparison in the third quarter in the pre-need cemetery related to lower revenue recognized from completed cemetery construction projects in Q3 versus prior year. Their overall comments seem to be for more at least flat in the second half. I just want to make sure we walk away with the right assumption about what you're thinking of for the pre-need cemetery production in the third quarter.
spk09: Yeah, I think my comment was more about not production but about completed contracts. Remember, we're, I think our sales production will be fine in the third quarter and good in the fourth quarter not a lot of big differentiation. What I was referencing more to is the timing of completed construction projects that have already been sold into. And last year we had a pretty decent size number in the third quarter. And I think what we're trying to highlight a little bit that it could be as big as, let's say a $20 million difference of revenue recognized from completing those contracts. Think of a mausoleum. So it has nothing to do with production but more about when the revenue gets recognized and that comparison is much more favorable when you think about the fourth quarter. So you think about cemetery revenue recognized for the third quarter you're going to have a little bit of a hill to climb just because of that. We still feel very good about production for the third quarter.
spk10: Okay and the larger higher end properties, I know sometimes it can be just when the construction is completed and then you can recognize it and sometimes there's consumer behavior. Are you saying the softness a little bit in the high end that you saw in the second quarter is more about projects and when they got completed? Are you actually saying that you've seen a little softness in the consumer behavior in the high end?
spk09: Yeah when we talk about production that's just consumer behavior. So yeah we saw less contracts close in the second quarter as it relates to last year's second quarter. But again I'd kind of highlight you too the first quarter was a really nice upside surprise. We had a very strong high end sale. So again looking at the six months it's kind of flat. I think as we think of the back half of the year we see no reason we can't generate high end sales. We're not seeing pushbacks from consumers or anything like that. Sometimes as you know AJ it's just getting in front of people somebody deciding they want to pull the trigger not pull the trigger. So we still feel very positive about our ability to sell you know the high end inventory large sales in both the back half of the year and then again in 2025. Okay
spk10: and then on the funeral side I know the core funeral rate per service was up about 1.3 percent in a quarter where you didn't have very much growth in cremation rates which can put some pressure on that. Anything as you drill down there it just seemed like that might have been a little stronger in a normal environment. Anything you see?
spk09: Really not you know I think at the at need level it was closer to three percent from a contractual year over year. Remember you got the cremation mix change which negates some of that. And then lastly I think it was more of a tougher comparison as it relates to the pre-need backlog comparison versus the add need walk-in. And so again that's going to vary from time to time depending when those contracts come in. So at the customer level we're still seeing kind of three percent increases which you know may not be four but some of that you know 1.3 is because of the mix and because of you know trust income from the contracts that are coming out of the backlog.
spk10: Okay and then just the last question on the deal pipeline I know you said the preparator marks you'd be above the high end of your target normal target range. Do you think you're just seeing more properties? Is it the competitive landscape has gotten better? Some of the smaller competitors are having their own financial issues? Is it the consent decree going away? Are there deals in those markets? Is that what we're seeing? Give us a little more on that and is there anything new about the economics of the deals you're seeing?
spk09: Sure I think first of all probably all the above but the predominant reason I think we feel is you know interest rates spiking up and again I'm just using history as a gauge. A lot of our competitors had variable rate debt you know structures and you know we've got a little bit of that but very little and so I think our back to Eric's point our financial stability, our cost of borrowings is very different. So I think if those went up those competitors really had to pull back and I think has allowed us to you know more deals to flow directly to us and not be in the competitive stage. I think I don't see a drastic difference in pricing no I mean I think it's pretty much the same it's just we're the we're the choice and we've got you know a lot of stuff working in the pipeline and like Eric said I think we feel highly confident you never want to you know declare something until it's signed and done but there's enough out there in sizable deals that we're really excited about so great great opportunities as a political capital and create some future profitability and growth for for SEI.
spk05: Okay thanks a lot.
spk04: The next question comes from Scott Schneiderger with Oppenheimer please go ahead.
spk03: Thank you good morning. Just going back on the funeral segment profit under performance in the quarter Tom could you kind of break out what the drivers are there in magnitude and maybe mixed because you know the revenue I know there was maybe some timing in the quarter and this was discussed on an earlier question but it was you know not much of a difference on revenue year over year yet this significant drop and you'd mentioned in that prior answer some cost creep so I heard some SCI direct incentive comp just the leverage and then and then this cost creep and I think that maybe as people concerned is that something that's going to persist in the back half even though you did talk about some stabilization so if you could break that out a little bit more it'd be appreciated thanks.
spk09: Sure and it's got something what I was trying to say is in the quarter sometimes and you guys know how these things work you adjust estimates and accrual so I'll give you an example if you had an AR reserve in one period and you decided hey I'm over reserved or under reserved I'm going to hit that accrual in the second quarter and it may or may not have you know begin to show its head in the first so it's really hard you know sometimes you got a credit going one way and a debit going another way and that's why I say a quarter can have noise and if you step back and look at the six months you know we went from 19.9 percent we're at 19.9 percent funeral margin for the six months versus 22.7 in the six months of last year that's 280 basis points if you do the volume throughput it would tell you that I would have expected based upon your volumes to go down 150 basis points that's just pure volume calculation on the core then you take SCI direct and say okay I knew that I was going to stop delivering merchandise and a couple of other items that's 20 million which would have dropped you know say 14 million to the bottom line so now I've explained another 150 and now I've explained another 80 so 230 basis points of my 270 whatever it is difference is explained by SCI direct and the throughput and the 0.4 percent is higher expenses and again I think you can take away some of the quarter to quarter noise if you do it that way and I look at those numbers and say okay I've got slightly higher incentive comp because again back to timing of when you adjusted those incentive comp accruals which recall are not just based on EPS they're based on production they're based on cash flows so we don't think there's any big boogeyman in the cost I guess what I'm saying having said that there are things we can do we clearly have you know had wage inflation for the last couple of years rightfully so and so we're seeing that subside in some of those trends so that think about 2025 we'll have less wage inflation we'll be more efficient in how we are running the operations and we don't have the drag of SCI direct on top of that we've got a better general agency agreement we should generate higher commissions which are going to enhance the funeral margins when you think about 2025 so that's why I feel better is you know we're going to manage this tighter we've got a good GNA revenue story coming in 2025 and we don't have the drag of SCI direct operational changes on a -over-year basis and remember the thing that should get exciting about SCI direct we're deferring a lot of revenue that we're still selling and one day that money is going to come out of trust and the margins on SCI directs you know operational business are going to go way up so this is a timing thing and and the business itself is very healthy the consumer is very healthy and so long term I love our trends short term we're having to stomach a little bit of earnings and digestion thanks
spk03: Tom and just on the on the new partner the new insurance company partner you know you allude to 25 so it sounds like you think that maybe you get some better fee flow by that time it could it come as early as the second half or is it going to take a few quarters before it's discernible
spk09: yeah we will get some in the second half for sure I think the full effects are going to you know come in 2025 because again remember there's a lot of operational change here as it relates to you know what type of products we're selling you know the most robust commission rates get around you know underwritten insurance and we believe we now have the right type of products to put in front of our customers some of it is getting people you know insurance licenses so as you transition to this new agreement and you know the real opportunities in insurance we have to make sure that our our salespeople have a insurance license so you know they sound simple they're not and we need to get more people licensed we need to get people understanding the product mix and like I said what I'm excited about is we're going to have more of customers that are protected by underwritten insurance than we ever historically have so it's a better product for the consumer so our counselors can feel really good about providing that protection and if we do it right we're going to generate you know higher commissions
spk03: thanks I just have I just have two more in there they're separate but I'll ask them both up front we can wrap thank you the one is consumer behavior in the lower price tiers if you could just delve into that a little bit are you seeing inflection better is it inflecting a little worse just curious about the contract velocity volume so that that's question number one just that trend and and how you think about that and number two is is the the the funeral rule update fdc anything on that thanks so much
spk09: I'm going to let eric talk about the funeral rule but as it relates to the consumer I think I would say this you know we saw a while back that I think the lower end consumers were being challenged and again I think it correlates with a lot of other retailers that are out there with inflation impacting other pieces of their lives it's harder at the lower end and we made some adjustments through our sales leadership to say let's get people on board by having better financing terms for them to be able to get that first down payment and get them started and so we saw a little bit of a positive reaction to that and I think we continue to so we've not really seen any further deterioration I do believe that consumers still challenged mainly because of what I see in other again retailers as opposed to ours so so we want to do we can to make sure we can accommodate them if that means you know stretching out terms a little bit making the payments a little easier we're going to try to do that to accommodate that consumer
spk08: got on the fdc I guess the short answer is there's really no update to give to you so I'll just remind everybody where we are you know we continue to to work with the staff we have a very good relationship with the staff of the fdc we're ready to go at any point in time to adopt anything that we have we're not expecting anything to surprise us and ultimately we don't think anything that's coming down the pipe that we know about such as pricing online we do not expect that to have any material effect to our to our company and as you know we have a tremendous amount of our funeral homes already that have pricing online in different forms and fashions whether it's starting at prices or just complete full premium pricing experiences digitally where you can really dive deep into that particular funeral homes offering and kind of everywhere in between ultimately we think we will continue to go down that path we'll continue to test we'll continue most importantly to optimize the websites according to the tier of customer span that we are dealing with at one particular funeral home and one particular market and we will we'll go from there
spk03: all right great thanks thank you both
spk05: thanks guys
spk04: the next question comes from Joanna Gajuk with Bank of America please go ahead
spk01: oh yes hi thanks for the follow-up i just want to clarify on the cemetery pre-need sales production commentary so do you still expect to grow low single digits for the year and then has anything changed in your kind of long-term view of growth for the pre-need so cemetery sales production thank you
spk09: yes Joanna we do expect to to end the year in the low single digits and again as we think about the outer year 25 26 i think we feel better about getting back to that you know low to mid single digit because again with the stabilization of funeral volume anticipated stabilization of funeral volume we expect to be able to get there
spk01: great
spk06: thank you
spk05: thank you
spk04: this concludes our question and answer session i would like to turn the conference back over to CI management for any
spk06: closing remarks
spk05: thanks everybody thank you for thank you for joining us and we will see you again at the end of october thanks everybody
spk06: the conference has now concluded thank you for attending today's presentation you may now disconnect
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