Service Corporation International

Good day, and welcome to SCI's third 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 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 FCI Management. Please go ahead.

Good morning. This is Allie O'Connor, AVP of Investor Relations and Financial Reporting. Welcome to our third quarter earnings call. We will have 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 are or the future are forward-looking statements. These forward-looking statements are subject to risk 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 relief and in our filings 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 on our website. With that out of the way, I will now turn it over to Tom Ryan, Chairman and CEO.

Thanks, Allie. 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, then provide some greater detail around our funeral and cemetery results. I will then close with some thoughts regarding our earnings expectations for the rest of 2024 and preliminary thoughts about 2025. For the third quarter, we generated adjusted earnings per share of 79 cents, which compared to 78 cents in the prior year. Gross profit from both the funeral and cemetery segments was relatively stable. Below the line, the favorable impact of a lower share count and a lower tax rate was nearly offset by increased corporate general and administrative expense caused by changes in our total shareholder return and its corresponding effect on our long-term incentive compensation plan, as well as increased interest expense resulting in a net one cent increase in earnings per share. We also had a very active quarter on the business acquisition front. We invested $123 million during the quarter into top-tier businesses in growing major metropolitan markets, adding 10 funeral homes and two cemeteries. We are excited to welcome our new teammates into the SCI family. We also invested an additional $31 million in real estate transactions for the expansion of our footprint of funeral homes and cemeteries in our existing markets. Now let's take a deeper look into the funeral results for the quarter. Total comparable funeral revenues increased $7 million, or about 1% over the prior year quarter. Comparable core funeral revenue provided $4 million of the $7 million revenue increase, as core average grew by 2%, absorbing a 30 basis point increase in the core cremation rate. This growth was attained even with the core funeral volume decline of 1%, which was better than we had expected for the core. SCI direct non-funeral home pre-need sales revenue decreased by $5 million, primarily due to a decline in sales production, as we transition from trust to insurance-funded contracts, and by the effect of operational changes in certain markets with respect to the timing of merchandise deliveries. General agency and other revenue grew $8 million, primarily due to growth in general agency revenue driven by higher average commission rates, resulting from our new pre-need insurance marketing agreement, as well as the effect of selling a heavier mix of underwritten insurance products, which carry higher commission rates, versus a flex or non-underwritten product. Funeral gross profit declined slightly by about $2 million, while the gross profit percentage declined 50 basis points to just over 19%. This decrease was in line with our expectations as inflationary increases in our fixed costs slightly outpaced our 1% revenue growth. Pre-need funeral sales production decreased by $22 million, or about 7% over the third quarter of 2023. Core pre-need funeral sales production decreased by $14 million, or 6%, primarily due to the transition to our new pre-need insurance provider during the quarter. We anticipate comparable core pre-need sales production to normalize over the coming months. Non-funeral home pre-need sales production decreased $8 million, or 10%, as SCI Direct transitions from trust to insurance-funded contracts. This transition required many of our sales counselors to obtain insurance licenses, which caused a temporary slowdown in sales but this too should stabilize and grow again in the coming quarters. Now shift into cemeteries. Comparable cemetery revenue was flat as compared to the prior year quarter as a $5 million increase in other revenue was offset by a $5 million decrease in core revenue. The $5 million decline in core revenue was primarily the result of a $4 million decline in ad need revenue combined with a $1 million decline in total recognized pre-need revenue. Breaking the components of recognized pre-need revenue apart, recognized pre-need merchandise and service revenue growth of $10 million from higher quality contract sales averages being delivered out of the backlog was offset by a decline of $11 million in recognized pre-need property revenue. Other revenue grew by $5 million compared to the prior year quarter, primarily from an increase in endowment care trust fund income, as we continued to expand our total return investment strategy through successful industry and legislative efforts. Comparable pre-need sales production decreased by $8 million, or about 3%, primarily due to a decline in large sales, while our core production was relatively flat. For each of the last three quarters, we've generated around $40 million in large sales. Prior to 2023, we had only achieved this milestone once in our history. Last year, we averaged about $48 million per quarter in the second, third, and fourth quarters. In the face of these very challenging comparisons, our sales results remain very strong. At our largest location, Rose Hills, our customer access to some of our new premium sections has been limited this year due to ongoing development activities. We anticipate we will return to low to mid single-digit growth in 2025 as we continue to see long-term strength in our premium cemetery inventory and sales production. Cemetery gross profits in the quarter increased by $1 million and the gross profit percentage increased by 10 basis points, generating an operating margin of 32%. While revenues were flat, growth in higher margin trust fund income and managing our fixed cost expense growth below 3% allowed us to grow gross profits modestly. Now let's shift to discussion about our outlook for the remainder of 2024. Our current outlook for the fourth quarter of 2024 for adjusted earnings per share is $1 to $1.10, representing expected growth of 8% to 18% compared to $0.93 of adjusted earnings per share in the fourth quarter of 2023. We expect to grow both comparable funeral and cemetery margins in the fourth quarter, primarily from the impact of higher general agency revenues from our new pre-need marketing agreement on the funeral side, then on the cemetery segment from the favorable impact stemming from the servicing of our merchandise and service pre-need backlog, coupled with endowment care fund trust income. Increased profits from recent acquisitions and lower corporate general and administrative costs will be somewhat offset by a higher tax rate. As we think about 2025, we are optimistic that we can return to earnings per share growth towards the higher end of our historical annual guidance of 8% to 12%. We anticipate funeral volumes to stabilize as compared to 2024 levels and pre-need cemetery sales production to return to low to mid-single-digit percentage growth. We are highly confident we can grow general agency revenues impressively with our new pre-need insurance marketing agreement. The negative effects of comparably higher interest rates and lower SDI direct profits from operational changes in 2024 should trim positive in 2025. And finally, the contributions from the fantastic class of acquisitions in 2024 should provide another positive trend for 2025. Beyond that is where I truly get excited. With our vast North American network containing market-leading brands and businesses, a world-class workforce, and a robust $16 billion pre-need backlog. We are poised to capture incremental value for our shareholders as future demographic trends have a very positive impact on our industry. In conclusion, I want to acknowledge and thank the entire SCI team for their daily commitment to our customers, our communities, and one another. Your dedication is the foundation of our success. Thank you for making a difference every day. With that, operator, I'll now turn the call over to Eric.