SERVICE CORP INTERNATIONAL Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Business Performance: For the fourth quarter, adjusted earnings per share were $1.06, compared to $0.93 in the prior year. Revenues, gross profit, and comparable margin percentages increased in both funeral and cemetery segments.
• Funeral Details: Total comparable funeral revenues increased over $5 million or about 1% y-o-y. Core general agency and other revenue grew by $19 million. General gross profit increased by about $4 million, gross profit percentage up 40 basis points. Preneed funeral sales production decreased by $27 million or 9%.
• Cemetery Details: Comparable cemetery revenue increased by $20 million or 4%. Recognized preneed property and merchandise/service revenues contributed to growth. Cemetery gross profits increased by $14 million, gross profit percentage up 150 basis points.
• 2025 Outlook: 2025 normalized earnings per share guidance $3.70 to $4, midpoint $3.85 (5%-13% growth). Funeral volume flat to slightly down, average revenue per case growing at inflationary rates. Cemetery preneed sales production growth low to mid-single digits, revenue growth 2%-3%.

Segment Performance

• Funeral Segment:
  • Comparable funeral revenues increased over $5 million or about 1% y-o-y. Comparable core funeral revenues decreased by $9 million or 2%, with core funeral services performed down 4.4% but core average revenue per service up 2.7%. SCI Direct non-funeral home revenue decreased over $4 million. Core general agency and other revenue grew by $19 million. General gross profit increased by about $4 million, gross profit percentage up 40 basis points to 22%. Preneed funeral sales production decreased by $27 million or 9%.
• Cemetery Segment:
  • Comparable cemetery revenue increased by $20 million or 4%, core revenue up $21 million. Recognized preneed property revenues up $14 million, recognized preneed merchandise and service revenue up $5 million. Comparable preneed cemetery sales production up $7 million or 2%. Cemetery gross profits increased by $14 million, gross profit percentage up 150 basis points to 36%.

Guidance

• 2025 normalized EPS guidance: $3.70 to $4, midpoint $3.85 (5%-13% growth, midpoint 9%).
• Effective tax rate expected 25.5% in 2025, 180 basis points higher than 2024.
• Funeral segment: Flat to slightly down volume, average revenue per case growing, gross margin percentage up 80-120 basis points.
• Cemetery segment: Preneed sales production low to mid-single digits growth, revenue growth 2%-3%.
• 2025 adjusted operating cash flow guidance: $830M-$890M, midpoint $860M.

Risks

• Volatility in funeral volumes due to post-COVID effects and macro factors.
• Impact of operational changes on SCI Direct non-funeral home preneed sales revenue.
• Uncertainty around the funeral rule and its potential impact.
• Labor and inflationary cost pressures in cemetery operations.

Question and Answer

Q: Looking forward to seeing you guys in a couple of weeks in Orlando, but Tom, the spending teacups are down, so you might -- Eric might be disappointed. The -- look, I'm going to try to do some math, which is always dangerous, but we're getting -- between the general agency good guy next year, this year, '25 and then the acquisition timing, we're getting something like a $40 million to $45 million pretax benefit from those two. Is that in the ballpark?

A: I think look at the numbers, it's probably a little high, John, but not dramatically off. Probably a little higher than what we had at our midpoint.

Q: And then just looking at the long-term funeral pricing algo, I mean you've got stuff coming out of the backlog at a higher price point, you got cremation mix, you've got other stuff. Is that -- is this just kind of settling into a CPI-like price increase when you net all that stuff together? And are you seeing -- were you implying -- and I don't know that you were, but is there some sign that maybe the cremation mix effect is starting to taper off a little bit?

A: Take off in a higher rate, you're saying? Yes, I think it will definitely begin to slow. I mean, that's what we're kind of experiencing in the last couple of years. It's probably -- more likely it could be closer to the 100 basis points than 150. And again, that's just math. But yes, that is fair to say. And I think on your pricing question, the same, I do think CPI is a fair way of how we look at pricing from a backlog perspective. And I think the real opportunity to step on the gas a little bit is as we're selling more preneed now with a general agency commission of the way they are that that's an ability for us to drive future profitability.

Q: You had some volatility again on the funeral volumes and comparable cases year-to-year, and we saw that in the second quarter as well. I wonder if you've been able to drill down and -- is this just the ebb and flow you get from month to month? Or is there anything going on there? And it sounds like maybe you backed off a little bit in your expectation for '25 case growth to now sort of flat to slightly down versus flat to slightly up. Is that because of what we've seen this year?

A: Yes. I think that's correct. We're just seeing a lessened impact, what I'll call the ripple effect of COVID. The good news for the United States and everybody is the life expectation numbers are going back up. And so all the categories that were indirectly affected, going back to driving desks, suicide, overdose, a lot of those numbers are going the other way, thank goodness. And so I think that's got a little residual effect has got us to thinking we could still definitely achieve flat volume for 2025. But there's also a pretty good -- there's probably a good expectation that could be slightly down. So that's -- we have changed it. It is kind of a month-to-month and we see some volatility within months. I think if you take the fourth quarter this year, I think we were -- October was like down two. December was down two, November is down six, right? So you get some lumpiness as you get through these quarters. And I think that's actually just a continued factor of this disruption from COVID that makes it a little less predictable than it has been in circle.

Q: Hey, good morning. Thanks so much for taking in the questions here. So a couple of -- same topics. So I guess, first, maybe a little more color on this funeral volume outlook. I appreciate it could be very lumpy month-to-month. But I guess any comments you might be able to give us in terms of January? Because it sounds like you don't think that this is some sort of like a higher headwind from the pull-forward effect. It could be just like some other bigger factors going on. But is there anything else you might be able to glean into when you look at these numbers in terms of like why this November was such a weak month or is it some sort of like you said, volatility? Or is it more like the macro stop and the pull forward?

A: Sure. January, on the funeral volume side is down just about 3%, which wasn't very far off our expectation, quite honestly, but we expected a tough comparison. So that's where we are, and we're too early to sell. Yes. I think it's a little of a pull forward. And like I said, it's not -- I guess, it's not technically the pull forward when I say we saw extended periods of excess deaths that had occurred maybe longer than other people anticipated. And you couldn't explain why, right? You just had -- you knew these categories of deaths are down, there could be cancer screenings, it could be overdose, all these different things, mental health issues. And now I think categorically, all the data that we're looking at is saying that the country is kind of healing, which is a good thing. And so maybe normalizing back. And that's the piece that's probably moved us a little bit is to say, hey, in a good way, those things are normalizing again. And now the factors that we would anticipate to contribute to our growth, which would be our strong preneed backlog, our competitive position in the markets to grow market share. And then just the general aging of America, that those three things will begin to be the more dominant talking point as we go forward, and we'll see less and less COVID impact, less and less excess deaths conversation.

Q: Could you elaborate a little bit, please, on the outlook for cemetery preneed sales in terms of how you think about large sales activity versus the volume component?

A: Sure. I think for next year, what we've been looking at, again, we've guided to kind of this low single-digit percentage growth. And the way we're thinking about that is we'd anticipate the large sales that are hard to predict, as you know. So our anticipation is those would be relatively flat compared to the prior year. And so the growth is really going to come from the core production component of cemetery sales.

Q: Can you just give us an update on your expectations for the funeral rule and kind of what you're hearing from your government people?

A: Well, there's -- there's so much going on in that world, I don't quite know what to say. I don't know anything that you don't know with the volatility that's happening right now with the change out of the situation in Washington. What I will tell you is we haven't heard anything specific related to the funeral rule since November or since the change out of the administration. We continue to think be supportive of the funeral rule, but we as you know, do not think some of the things that were proposed are going to have a material effect in any way to our company. And a lot of the things we think are good business practices perhaps, and we're well on the way of implementing those intelligently by market and uniquely based on what we think the value proposition is for certain prices online and experiences online. Our focus is on the customer. And our focus is on the customers' digital experience and maximizing that. And that's the good business practice, and we'll continue to do so. And if the FTC does something that changes that, I still don't think it's going to materially affect our business model as we move forward.