Service Corporation International

Good day and welcome to the SCI First Quarter 2025 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 has been recorded. I would like to turn the conference over to SCI management. Thank you, and over to you.

Good morning, everyone. This is Trey Bokaj, Director of Investor Relations and Strategic Finance. Welcome to our first quarter earnings call of 2025. We will have some prepared remarks about the quarter from Tom and Eric in just a minute. 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 might also make certain non-GAAP financial disclosures. 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, Troy. 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 about our current outlook for the year 2025. For the first quarter, we generated adjusted earnings per share of 96 cents, which compares to 89 cents in the prior year. We saw impressive increases in funeral revenue and gross profit, partially offset by slightly lower cemetery revenue and gross profit, which when combined resulted in 7 cents of earnings for share growth from operating income. Below the line, the favorable impact of a lower share count and a slightly lower interest expense was effectively offset by a higher effective tax rate. The higher tax rate was the result of the non-deductibility of certain excess tax benefits from the settlement of stock option awards. If the tax rate had remained constant, we would have had an additional 4 cents in earnings per share, resulting in 12% earnings per share growth over the prior year quarter. Now let's take a deeper look into the funeral results for the quarter. Total comparable funeral revenue increased over $23 million, or about 4% over the prior year quarter, as strong core revenue and core general agency revenue growth exceeded declines in SCI Direct non-funeral home pre-need sales revenue. Comparable core funeral revenue increased by $18 million, or about 4%, primarily due to a healthy 2.5% growth in the core average revenue per service and a 1% increase in core funeral services performed. This core average growth was achieved despite a modest increase of 40 basis points in the core cremation rate. SCI direct non-funeral home revenue decreased by $3 million, driven primarily by a $7 million decline in non-funeral home pre-need sales revenue. resulting from the anticipated negative effect of operational changes to defer merchandise deliveries. This was partially offset by growth in general agency commissions, as we are in the process of switching from a trust to an insurance-funded pre-need model. This net decline from pre-need sales revenue was partially offset by a $4 million increase in non-funeral home revenue. generated by an impressive 6% increase in non-funeral home services performed and a 10% improvement in the average revenue per service from the effect of higher value contracts maturing from the backlog. Certain of these contracts now include merchandise or travel protection that more recently was deferred from the time of sale into the backlog. This healthy average revenue per service growth should continue as more contracts with merchandise and travel protection mature over the coming years. Poor general agency and other revenue grew by an impressive $8 million, primarily due to growth in general agency revenue driven by higher average commission rates derived from our new pre-need insurance marketing group, as well as the effect of selling a larger percentage of underwritten insurance products which carry a higher commission rate versus a flex or a non-underwritten product. General gross profit increased by about $21 million, while the gross profit percentage increased by 240 basis points to over 24%. This gross profit increase was the result of the solid 4% revenue increase combined with managing fixed costs to about a 1% increase for the quarter. Pre-need funeral sales production decreased by $32 million or about 10% over the first quarter of 2024. Core pre-need funeral sales production decreased by $12 million or 5% primarily due to the transition to our new pre-need insurance provider during the back half of 2024. We anticipate comparable core pre-need sales production to normalize later in the back half of 2025. Non-funeral home pre-need sales production decreased $20 million, or 26%, as SCI Direct transitions from the sale of trust to insurance-funded pre-need contracts. This transition required many of our sales counselors to go through extensive training and obtain insurance licenses and change the payment terms for customers financing their pre-need. all of which contributed to a temporary slowdown in sales. As of today, we've made the transition in markets that represent 80% of our production. So this, too, should stabilize over the next few months and begin to grow again probably sometime during the fourth quarter of 2025. Now shifting to cemetery. Comparable cemetery revenue decreased by $8 million, or about 2%. The core revenue decline of $10 million was partially offset by a $2 million increase in other revenue. The core revenue decline over the prior year quarter was primarily attributable to a $12 million decrease in recognized pre-need property revenue due to lower sales production. Within recognized pre-need property revenue, the negative effect of lower recognition rates on the new construction and pre-need merchandise was offset by higher merchandise and service trust income. Remember, this deferred sales production enhances our backlog and will be recognized in future periods. The $12 million decline in recognized pre-need property revenue was partially offset, again, by a $2 million increase in internal care fund income. Comparable pre-need cemetery sales production declined by $8 million, or about 3%, as a modest increase in core production was more than offset by a decrease in large sales. We believe the decline in large sales is a timing issue that could be recovered in future quarterly periods. While we have not yet closed the books, April printing cemetery sales production looks very good. Cemetery grows profit in the quarter decreased by $6 million, and the gross profit percentage declined by 80 basis points, generating an operating margin of 32%. Our 2% revenue decline was somewhat mitigated by a less than inflationary 1% growth in our fixed costs. Now let's shift to discussion about our outlook for 2025. As you saw in our earnings release, we are confirming our normalized earnings per share guidance range of $3.70 to $4 for 2025, or a midpoint of $3.85. The current midpoint of the range represents a 9% year-over-year growth in earnings per share. Again, neutralizing the increased tax rate caused by the loss of deductibility of certain excess tax benefits from the settlement of stock options would result in the midpoint generating 12% earnings per share growth. For the full year 2025, within our funeral segment, we expect flat to slightly down funeral volume compared to 2024, with the average revenue per case growing at inflationary rates slightly negated by the effect of a modest cremation mix increase. While we're still absorbing the temporary negative financial effects of our SEI direct transition, we do expect to see higher general agency revenue generated from the favorable impact of our new insurance agreement. When combined, this should result in healthy profit growth for the funeral segment, increasing the gross margin percentage by 80 to 120 basis points. Transitioning to pre-need funeral, we expect pre-need funeral sales production to be slightly lower in 2025 as we continue the transition of SCI Direct to an insurance-funded model and we adapt to the new policies and products from our new insurance partner in our core channel. While sales production may be down for the year, for some perspective, the $1.2 billion of pre-need funeral sales production we expect for 2025 is 27% higher than 2019, or a 4% compounded growth rate over the last six years. As we think out to 2026, we would expect pre-need funeral sales production to return to a low to mid single-digit percentage growth rate. From a cemetery perspective, we anticipate that we can grow pre-need cemetery sales production in the low single-digit percentage range, resulting in cemetery revenue growth of about 1% to 2%. The volatility in the equity markets and the potential impact on trust income for the rest of the year has caused us to dial back our expectations a bit. Continued focus on managing inflationary costs should result in some segment profit dollar growth while maintaining our impressive gross margin percentages in the 32% to 33% range. Below the line, we expect favorable impacts from slightly lower interest expense and a lower share count that will be negated for the most part by the higher effective tax rate caused by the loss of deductibility of excess tax benefits from stock auction exercises. In conclusion, I want to acknowledge and thank the entire SCI team for their daily commitment to our customers, our communities, and to one another. Your skill, dedication, and attention to detail 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.