Service Corporation International

Good day and welcome to the SCI Second 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 is being recorded. I would now like to turn the conference over to SCI Management. Please go ahead.

Morning. This is Trey Bocaj, Director of Investor Relations and Strategic Finance. Welcome to our second 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 filings with the FCC 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 the call over to Tom Ryan, Chairman and CEO.

Thanks, Trey. 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 earnings expectations for the rest of 2025. For the second quarter, we generated adjusted earnings per share of $0.88, which was more than 11% increase compared to the $0.79 reported in the prior year period. We saw impressive increases in funeral revenue and gross profit, partially offset by slightly lower cemetery gross profit and higher corporate general and administrative expense, which when combined resulted in $0.05 of earnings per share growth from operating income. Below the line, the favorable impact of a lower share count and a slightly lower net interest expense resulted in an additional $0.04 of earnings per share growth. Now let's take a deeper look into the funeral results for the quarter. Total comparable funeral revenue increased over $15 million, or about 3% over the prior year quarter, primarily due to solid growth from both core revenue and core general agency revenue. Comparable core funeral revenues increased by $8 million were about 2%, primarily due to a healthy .3% growth in the core average revenue per service, which was modestly impacted by a 20 basis point increase in the core cremation rate. The favorable impact from the core average growth was partially offset by a .5% decrease in core funeral services performed. Core general agency and other revenue grew by an impressive $7 million, primarily driven by higher average commission rates derived from our new pre-need insurance marketing agreement, which were partially offset by a decline in insurance-funded pre-need funeral sales production. Funeral gross profit increased by about $15 million, while the gross profit percentage increased by 210 basis points, or about 20%. This gross profit increase was the result of the solid 3% revenue increase, combined with managing our fixed costs below inflationary trends to about a 1% increase for the quarter, as we continue to focus on leveraging our scale, both in the field operations through staffing metrics, and in our overhead support funds. Pre-need funeral sales production decreased by $29 million, or about 9% over the second quarter of 2024. Core pre-need funeral sales production decreased by $18 million, or 7%, primarily due to the transition to our new pre-need insurance provider in July of 2024. We anticipate comparable core pre-need sales production growth in the back half of 2025. Non-funeral home pre-need sales production decreased $10 million, or 14%, as SCI direct transitions from the sale of trust to insurance-funded pre-need contracts. This transition has required many of our sales counselors in certain states to go through extensive training, obtain insurance licenses, and change the payment terms for customers financing their pre-need, all of which contributes to a temporary reduction in the number of contracts written. As of today, we have made the transition in markets that 95% of our production. We expect that in early 2026 that we will experience -over-year growth again for SCI direct as a whole. Now shifting to cemetery. Comparable cemetery revenue increased by $2 million, or almost 1%. Slightly higher core revenue and higher other revenue accounted for increase. Our core revenue increase of about $1 million over the prior year quarter was primarily attributable to a $3 million increase in at-need revenue, which was partially offset by a $2 million decline in recognized pre-need revenue. Within recognized pre-need revenue, higher pre-need merchandise and service revenues, which include recognized trust fund income, were more than offset by lower pre-need property revenue, which was negatively affected by a lower recognition rate on new construction compared to the prior year. While recognized pre-need cemetery revenue declined due to lower recognition rates, comparable pre-need cemetery sales production increased by almost $19 million, or over 5%. Driven by a healthy increase in large sales, as well as a modest increase in core sales. While these incremental sales were deferred for revenue recognition in the second quarter, they should benefit future periods as we achieve the required payment criteria and or complete construction of the project. Cemetery gross profit in the quarter decreased by $4 million and the gross profit percentage declined by 110 basis points, generating an operating margin percentage of 33%. Our modest revenue growth was offset by higher selling compensation on higher sales production. The profit decline was partially mitigated by less than inflationary fixed cost growth of 1% as we continue to focus on leveraging our scale, both in the field operations and in our overhead support functions. Now let's shift to discussion about our outlook for the remainder of 2025. As you saw in the earnings release, we are confirming our normalized earnings per share guidance range of $3.70 to $4 for 2025. And we are raising our cash flow outlook due to stronger working capital trends in the business, as well as anticipated lower cash taxes from recent legislative changes that were enacted. For the back half of 2025, we expect growth in revenues and margins for both the funeral and cemetery segments, resulting in impressive earnings per share growth versus the prior year six-month period, as well as compared sequentially to the first six months of 2025. We also expect both pre-need cemetery sales production, as well as pre-need funeral sales production to grow at low to mid-segual digit percentages over the prior year six-month period. Below the line, we expect a favorable impact from a lower share count will be substantially negated by a higher effective tax rate, particularly in the third quarter as we compare to a prior year rate reduced by the deductibility of excess tax benefits from certain stock option exercises, which is no longer deductible for us in 2025. In conclusion, I want to acknowledge and thank the entire SDI team for their daily commitment to our customers, our communities, and one another. Your skill, dedication, compassion, and attention to detail is the foundation of our success. What I know many of our professional team members help client families navigate painful loss every day, I would like to particularly recognize our Texas teams who have been caring for so many families impacted by the heartbreaking tragedy that occurred on July 4th in the Texas Hill Country. What I have witnessed and heard from countless friends and colleagues, including other independent funeral operators, is that our teams have performed above and beyond. Thank you for being a source of strength, respect, and peace. Your grace and compassion will never be forgotten. Thank you all for making a difference every day, and with that, operator,