Title

Presentation

Service Corporation International beats earnings expectations. Reported EPS is $0.93, expectations were $0.91.

Operator: Good morning, and welcome to the Service Corporation International First Quarter 2023 Financial Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to SCI management. Please go ahead.

Debbie Young: Good morning, everyone, and welcome. This is Debbie Young, Director of Investor Relations. And today, we’re going to be providing an overview of our business results for the first quarter. Before we begin with prepared remarks, let me quickly go over the safe harbor language. Any comments made by our management team that states 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 will also discuss certain non-GAAP financial measures. A reconciliation of these measures to the appropriate GAAP measures can be found in the tables at the end of our earnings release and also on our website under the Investors Webcast and Events section. Now that that’s out of the way, let me turn it over to Tom Ryan, Chairman and CEO, for opening remarks.

Tom Ryan: Thank you, Debbie. Hello, everyone, and thank you for joining us on the call today. Before I begin, I want to take a moment to honor our Founder and Chairman Emeritus, Bob Walter. He passed away at the age of 92 on February 27. Without Bob’s vision and tenacity, there would be no SCI. He was a tremendous mentor in the consummate funeral service professional. We will all be forever grateful for this company he created and we’re all better for having known and learned from such a great man. He will be missed immensely. This morning, I’m going to begin my remarks with some high-level color on our business performance for the quarter and then provide you with some greater detail around our solid funeral and cemetery results.

For the first quarter, we generated adjusted earnings per share of $0.93, which was in line with our expectations, but down from the prior year, which benefited from a significant pandemic impact. We continue to see significant earnings per share growth over pre-pandemic results. Compared to our first quarter of 2019 of $0.47 per share, we have effectively doubled earnings per share from 4 years ago, growing at a compounded at annual rate of 19%. Funeral metrics were strong and performed at or above our expectations while cemetery preneed sales production fell short of our internal expectations as we experienced unusual weather events on the West Coast, which temporarily affected cemetery sales activity at some of our largest properties. Below the line, the favorable impact of a lower share count in a slightly lower tax rate offset the impact of higher interest expense incurred on our variable rate debt.

Now let’s take a deeper look into the funeral results for the quarter. Total comparable funeral revenues declined $46 million or about 7% over the prior year quarter primarily due to a decline in comparable core funeral volume. Although comparable core funeral volumes declined by 12% compared to the prior year quarter, volumes were higher than we had anticipated and about 10% higher than comparable first quarter 2019 levels. Our core average revenue per service grew over the prior year by an impressive 2.5%, even after absorbing the negative effects of cremation mix change, currency translation and reduced trust fund income. From a profit perspective, funeral gross profit decreased $48 million while the gross profit percentage declined to about 25%.

The revenue decline due to lower volumes versus 2022 accounted for the preponderance of the profit decline. We saw moderating growth in fixed costs year-over-year and slightly higher selling costs correlating with the solid growth in preneed funeral sales production for the quarter. Preneed funeral sales production grew an impressive $24 million or more than 8% over the first quarter of 2022. Both the core and the SCI Direct channels showed growth in both contract velocity and sales averages. We continue to see consumers’ awareness and openness to preplanning elevated with continued strength in marketing leads and preneed funeral sales production. Now shifting to cemetery. After coming off a record-setting prior year quarter, we saw comparable cemetery revenue decline, almost 10% or $45 million when compared to the prior year first quarter.

Core revenue accounted for the preponderance of this decline as it decreased by $42 million compared to the prior year as recognized preneed revenue declined by $29 million or 9% and atneed revenue accounted for the remaining $13 million decrease. The preneed core revenue decline of 9% compares favorably to the 16% decline in preneed cemetery sales production as we sold a higher percentage of developed property versus the prior year quarter. We would expect that trend to continue over the next few quarters as more recently constructed property is available for our families to purchase versus 2022. Preneed cemetery sales production declined by $57 million or 16% in the first quarter, primarily due to a decrease in preneed property sales production.

While we anticipated a decline compared to the prior year quarter, which was heavily impacted by the COVID-19 pandemic, we also experienced unanticipated geographic impacts to property sales production. Multiple severe rain events on the West Coast and particularly California, adversely affected both foot traffic into our properties and our ability to showcase our premium and custom design cemetery property inventory. The last wave of storms had a direct impact on our Ching Ming celebrations, events and related selling activities. We saw a similar impact on core sales velocity as our California businesses experienced a disproportionate decline versus the rest of our markets. Over 80% of our preneed cemetery sales production decline occurred in California and other major West Coast markets.

On the good news front, these are sales deferred, not lost, and we’ll work diligently to get those customers back into our impressive parks over the coming months. Still, to put Preneed sales production in its proper perspective, even with the negative effects from the weather, our first quarter preneed cemetery sales production was about 41% higher than our 2019 first quarter, representing a 9% compounded annual growth rate over the 4-year period. Cemetery gross profits in the quarter declined by about $41 million and the gross profit percentage dropped to 34% from 39% in the prior year quarter. The revenue decline accounted for the preponderance of the profit decline. We experienced higher cemetery maintenance expense, but for the most part, we saw moderating growth in all other fixed costs year-over-year.

Now let’s shift to a discussion about our outlook for the rest of 2023. We believe the dramatic tough comparison quarters are over as the first quarter of 2022 was the last when impacted meaningfully by COVID-19. From an earnings per share perspective, we would expect to be able to deliver year-over-year growth in the coming quarters as the favorable impact of higher year-over-year cemetery revenues and the impact of our share repurchase program will more than offset the negative effects of slight volume declines and higher interest expense from our variable rate debt. Finally, I’d like to thank the entire SCI team for all that you do every day for our families, our communities and each other. You are what makes this company great. With that, operator, I’ll now turn the call over to Eric.

Eric Tanzberger: Thanks, Tom, and good morning, everybody. I’m going to start kind of where Tom just left off because I want to thank all of our 25,000 SCI associates for really their unwavering commitment to serving the client families and all the communities that they do so well with excellence, which is truly second to none in this industry. So this morning, I’m also going to walk you through our first quarter cash flow results, our capital investment during the quarter, talk a little bit about the remaining fiscal year outlook and finally, our financial position. So recall that in the prior year quarter, we reported the highest cash flow from operations we had seen in recent history as our cash flow continued to be positively impacted by strong COVID activity at that time.

So while we expect the cash flow to be lower during this quarter, we still generated impressive operating cash flow of $220 million. It’s about $110 million lower than the prior year quarter, and there are 3 items that are really driving these cash flow results. First, the quarter-over-quarter decrease in cash flow was primarily due to lower operating income. And when you exclude the impact from divestitures that equates to about $90 million as the prior year quarter continued to benefit from the impacts of COVID, as I just mentioned. Next, interest payments also increased an expected amount of about $12 million due to the impact of higher interest rates on our floating rate debt. Finally, working capital during the quarter resulted in a net use of just under $10 million, primarily associated with incentive compensation cash payments made due to our strong 2022 results and paid in February of this year.

So now I want to shift to our capital investment activity. And during the quarter, we invested $310 million into our current businesses, new funeral and cemetery growth opportunities and accretive acquisitions. We also continue to return capital to our shareholders. So let’s break that down a little bit. We deployed $70 million back into our current businesses, which was comprised of $23 million of maintenance capital for our first-in-class facilities, $14 million of investments primarily for the enhancements and support of existing and future digital systems and initiatives and $33 million towards cemetery development, again, creating new and relevant cemetery inventory for our counselors to sell at our cemetery parks. So in total, we continue to expect our total maintenance capital expenditures to be in our guidance range of $290 million to $310 million for the full year of 2023.

In terms of growth capital, we invested $25 million towards the purchase of real estate, the construction of new facilities and expansion of existing funeral homes and cemeteries. Specific to real estate, we invested $17 million this quarter. This was primarily associated with the purchase of real estate adjacent to one of our high-producing cemeteries, which will allow for further expansion of that park. On the acquisition front, we closed on 3 transactions for a total of $9 million in Connecticut, Louisiana and Pennsylvania, and we’d like to welcome all of those tremendous businesses to the SCI family. Based on the current transactions under LOI and other acquisition pipeline activity, we remain confident about our acquisition investment full year target of $75 million to $125 million.

Finally, we returned nearly $207 million of capital to our shareholders. during the quarter through $41 million of dividends and $166 million of share repurchases. So shifting gears, I’d also like to briefly touch on corporate G&A of about $44 million in the quarter, which is about $2.5 million higher than the prior year and maybe about $4 million higher than our expectations. This increase was due to compensation-related expenses primarily related to both our long-term compensation plans, which remember, are tied to total shareholder return as well as deferred compensation plans. Going forward, we maintain our expected range for corporate G&A of approximately $38 million to $40 million per quarter. However, the actual results within this quarterly range will depend on company performance during the year, which will affect the short and long-term incentive compensation plans.

Just I want to shift now to our financial position, and again, we’ll talk a little bit about our outlook. Similar to Tom’s comments that I just said on our EPS outlook, we also remain confident in our existing 2023 adjusted operating cash flow guidance, which was a range of $740 million to $800 million with a $770 million midpoint. We continue to be financially positioned very well with a favorable debt maturity profile and liquidity of just over $1.1 billion at the end of the quarter, which consists of approximately $160 million of cash on hand, plus approximately $975 million available on our long-term bank credit facility. Our leverage at the end of the quarter, net debt to EBITDA as defined in the credit facility, was about 3.5x. And as anticipated, after the past 3 years, our EBITDA has now normalized with COVID activity now waning, resulting in a leverage being consistent or at the low end of our target leverage range of 3.5 to 4x.

However, we also believe we’ll have a near-term bias towards managing our leverage towards the lower end of our target leverage range as a result of the environment and specifically the interest rate environment that we are currently in. So in closing, our strong cash flow, our strong balance sheet continues to position us well to invest capital to the highest and best use to maximize shareholder value, which has been our track record, which we believe will continue through the remainder of 2023. So with that operator, this concludes our prepared remarks. I again would like to thank all of our SCI team for their contributions to these great results during the quarter. But with that, operator, I would now like to open the call up for questions.

Operator: The first question comes from Scott Schneeberger with Oppenheimer.

Scott Schneeberger: Gentlemen, I guess I would just start out with the cemetery preneed sales production I understand the dynamic of weather on the West Coast. And I guess I’m curious, how should we anticipate the cadence over the balance of the year? You’ve maintained all guidance. So I think guidance for preneed cemetery for the year was low single digits. Should we think low end of that range now? Or are you still firmly comfortable? What might we see in April or what have you seen in April perhaps tied to the Ching Ming Festival. Just a little bit more color on that because even with the weather dynamic, it seems like it was a bit soft in the first quarter. Just wondering what’s going to get that accelerated again…

Tom Ryan: Sure Scott. One, I think it’s good to step back. And if you just take it large sales as an example, in 2019, our large sales were $36 million. In 2020, they were $30 million. In ’21, they were $30 million. In ’22, they were $66 million. And in ’23, they’re $37 million. So this is the second best first quarter of high-end sales we’ve had in the last 5 years. It just happens to compare back to Godzilla. So I think that’s probably the first way to think about cemetery sales and what happened. So as we think about our guidance, clearly, we didn’t hit the targets that we wanted in the first quarter. I think we generally think we can get back some of that miss in the quarters to come. I don’t know that we can get it all back.

So I think as we think about annual guidance, you’re probably right. We’d probably point you towards the middle of the lower part of that annual range. But there are a lot of other levers there. One is how much are you going to sell a developed property. That’s one thing that I think I pointed out for our first quarter. We’ve built all this great inventory and now we’re able to sell into it and recognize it versus last year where we were selling it and it gets deferred and recognized upon completion. So there’s a nice mix of what I’d call better recognized revenue streams that are coming in the coming quarters that will help us achieve that earnings per share guidance. On Ching Ming , it’s, again, been a good year. It wasn’t as good as last year.

I think we see trends in April that are a little better than March, but, again, we’re going to be comparing it back against a pretty solid Ching Ming when you think about those markets. So overall, I feel very good. I just kind of step back and point to everybody, we’re 41% higher than we were 4 years ago. And I think if we’d have said that to ourselves in 2019, we’d be super excited about these results. And it just so happens we’re comparing back to a really, really difficult comparison.

Scott Schneeberger: Got it. Appreciate that. I’m going to swing it over to average funeral revenue per service, that was quite strong in the quarter. It looks like pricing was the meaningful contributor there. Could you speak to the sustainability of these price increases that apparently occurred in the first quarter? And is it broad-based? Is it in specific areas? Is there more to come? Obviously, you’re maintaining the guidance for the year, again, but a little bit more color on the sustainability of the prices.

Tom Ryan: Sure, Scott. Yes, it is broad-based. I think we’re seeing it across the country. If you look at the kind of the organic growth year-over-year, it actually approaches about 5%. And I mentioned there were 3 negative trends going in our face. One is Canadian currency, probably the smallest. And then you have trust income, which we all understand what happened to that piece. And then you have the cremation mix change, which was about 200 basis points. We think the cremation mix change as we get throughout the rest of the year is going to lessen. So we’d expect that to normalize as you think about the coming quarters, so it would be less of a pushback on average. . And then same thing with trust income, I think we generally would anticipate the year-over-year comparisons to get better.

I think the bad stock market moves and bond market moves occurred in the second and third quarters of last year. So you’re going to begin to compare against something that’s going to be less of a drag. So we think the average is in good shape and should continue to be in good shape throughout the rest of the year.

Scott Schneeberger: And I am going to sneak one last one in quickly for Eric. The commentary about now getting to 3.5x leverage, low end of the range and the bias to manage it there. The elevated share repurchases and everything, should we anticipate that to slow? Or are we going to see debt reduction? Just want to dig a little bit more, Eric, into what you were foreshadowing there?

Eric Tanzberger: Well, we’re always going to be consistent, Scott, and we’re going to deploy capital to the highest relative return opportunity. You haven’t seen us do a lot of debt reduction, although we’ve picked off some open market transactions over a long period of time of a note that’s due in 2027 because of the 7.5% debt. But this year, last time, we had 1% floating rate debt. As we sit here today, you have 6%, 6.5% floating rate debt. So when you think of what is the highest relative return? We still have acquisitions that are going to trump that and such, but 6.5% of return to take out debt on a pretax basis is something I think that’s a lot better of a return than what we’ve had on the menu in the past. So I think from that alone, it would be something that probably goes up the ladder a little bit in terms of your choices.

With that being said, it’s an obvious headwind of $55 million or $0.25 a share. Now as we’ve said before, we were going to take on more debt as we grew and about $0.10 of that was expected in terms of balance. But it would be nice to work that down to some degree, and so we will look to do that. We don’t have a set plan exactly. We always are looking day-to-day and week-to-week on the menu and what’s the best thing to do with our free cash flow. We have a substantial amount of free cash flow to invest. But I do think that you’ll see us have this bias as we move forward towards the low end of the range. I’m not trying to dramatically tell you anything or say you should expect something dramatic in the way we deploy capital. But I do think it’s worthy to mention it.

Operator: The next question is from John Ransom with Raymond James.

John Ransom: Can you just update us on what’s going on with the FTC?

Tom Ryan: Okay. The FTC in the quarter, in January, we submitted our responses in early January to what was called the advanced notice of proposed rulemaking, which was the 40 questions that they sent out. We did that. We were very consistent with our responses before. Our responses before have been anchored in two facts with the data that we’ve submitted to them. That relates to pricing, and that is that 91% of our customers, for the last 5 years with the J.D. Power surveys, rank us 9 out of 10 or higher in clarity of pricing and 75% of our customers believe our prices either met or were lower than expected. So that’s the data. That’s what we submitted to the FTC. I think our answers to those 40 questions in their are pretty consistent with that.

The next step after that, John, is going to be that they will go through all the questions and answers that have been submitted by various people in the industry, in various constituents, and they will digest that. And our guess is, is that they will then have to put out a proposed rule, which again gives us a seat at the table for another round of items as it relates to that. We’ve been expecting this. I mean, John, you and I have talked about this in a lot of depth before. Independent of this FTC situation, we continue to do a great job in terms of initiating pricing initiatives through our Dignity Memorial websites, for example, given visibility and testing them across all of our just under 1,500 locations. And maybe I’ll take a moment here and give you updated stats so we can.

When we’ve looked at what we’ve been testing, we’ve had some websites and some funeral homes have what are called kind of starting at prices on the website, and you can kind of go out and look at that in certain locations. We had other locations that we call more in-depth exploring the products themselves and the services. So that’s a totally different way of kind of delivering a richer, best-in-class type customer experience that allows the customer to evaluate the products and services through these websites. And of course, the objective of that is to give them more color on pricing on all the individual components of the products and services. And those kind of skewed to kind of the combination facilities and kind of the larger funeral homes.

But to kind of give you an update on the statistics, out of our 1,415 — 1,400 to 1,500 funeral homes, we have just over 500 now that have some sort of starting at prices. We have about 400 that have this deeper, richer explored in the products and services. So right there, you have 900 or so funeral homes out of 1,500 that have something out there. Additionally, which is probably new news for you is that we now have over 1,100 of our funeral homes now have general price lists that are out there. Now some of that is newer in the past probably 4 to 5 months, but just about 75% in that ballpark of our funeral homes have general price lists that are out there at this point in time on the website. What we have seen in the past 4 to 6 months and even longer when we’ve done that is consistent with what we’ve said before.

We see a little bit of activity around the preneed, which is positive. But from an atneed perspective, we’re just not seeing that being a lever that kind of moves the needle for consumer behavior. That’s kind of what we expected. And that’s what we’re seeing so far with these 75% of the locations that have GPLs out there on the website. So John, that’s probably the update for today as it relates to the FTC. A lot more to come. This is going to take a while. It’s been a while, and it’s going to take a longer period of time before this really does come to fruition with the new rule.

John Ransom: So Eric, you sound pretty fired up this morning. Did you — are you trying like a stronger brand of coffee or something?

Eric Tanzberger: Actually I am. I do have some caffeinated coffee. Normally have the decaf with you, John, but — thanks for asking.

John Ransom: I think this is Red Bull and coffee, maybe some other thing or . Yes, just going back to the topic to your preneed cemetery. We know the comp peaked in 2Q, so you got easier comps in the back half of the year. So that looks optically good. But just to be clear, are you seeing now that we’re not having monsoons in California. Are you seeing any evidence that that’s getting better this quarter? Or is that you hope to see in the back half of the year?

Tom Ryan: It’s — I think it’s getting better, John, because clearly, the weather has gotten better. But keep in mind on some of these high-end sales, the process is pretty elaborate in the sense of really wanting to get out to the parks and understand from having a functional master come out and decide what’s the right property, what’s the right feel. Can you walk out there yet? Is it safe? Because there’s still some spots in California where it’s not safe for people to walk around. So at the high end, there’s still some issues I think one garden in particular was going to open in March is going to open until May now. So there’s some specifics there. But I’d say the general traffic to your point, is coming back. So we feel better about that.

And really, like I said, weather was a big part, and I think the weather part is going to take care of itself and then now you’re just back to a tough comparison, you’re back to a generic consumer discretionary world where you’ve got inflation, you’ve got higher interest rates and you got volatile — at least historically volatile stock markets, and those things always play into consumer behavior, and we’ll manage through those things. And as those things get better, I’d expect our customers to be a little ready to purchase willingly.

John Ransom: And then just last one for me. Just the perpetual care gains and losses are a little tough to model. So can you just kind of level set at least the historical gains and losses that you’re looking at for the rest of the year, so we can kind of think about the comparison.

Eric Tanzberger: Yes. I mean I think from an ECF standpoint, starting back in 2021, we almost approached a $90 million to $100 million of income from that fund that obviously came down in 2022 to about $80 million, $85 million. And I think we’re probably in the ballpark of being consistent with that, John, in 2023. When you talk about ECF, you’re talking about portfolio managers independent completely of us, obviously, in their own fruition are maybe realizing gains periodically on their portfolio, and that causes in certain states to have some distributions. And that’s always created lumpiness for ECF. It’s very difficult to forecast. But generally, I think you should model it kind of flat ECF specific in that kind of mid-80s million dollar range for the full year.

Operator: Yes. Next question is from Joanna Gajuk with Bank of America.

Joanna Gajuk: I guess, first, a follow-up. So it sounds like you expect the cemetery preneed sales production to be slightly lower than your prior view? And I guess that flows through to the recognized revenue on the cemetery side, but you kept your full year EPS guidance the same. So what is offsetting the cemetery being a little bit lower? Is it funeral case sounds like that was stronger in this quarter?

Tom Ryan: Yes, Joanna, I think it’s a combination of a few things. One would be funeral volumes appear to be strong, a little stronger than we had anticipated. To your point, like I said before, I think we’ll get back some of these cemetery sales that we didn’t have in the first quarter. And then it’s going to be a function too of which property are we selling. Like I said, we have projects that we completed. We spent a lot of money and a lot of time last year developing new gardens and projects that are now available for sale. So a higher percentage of what we sell to get recognized when you compare to the prior year. So those things probably are going to weigh towards the fact of our ability to push back and gain back some of the earnings per share that you would have anticipated getting in the first quarter.

So those would be my drivers. And then I think, again, we’re managing costs as effectively as we can. I feel really good about our ability to manage those fixed costs as I look at the first quarter. And particularly as you look at other businesses and what they’re incurring, so we feel good about where we are.

Joanna Gajuk: All right. And then on the funeral services side, so this quarter, clearly, the volumes came in much better. And what are your expectations for the rest of the year? Are you changing your view for the full year? I guess last time you were talking about services being down — or the number of services being down mid-single digits for the year. So is it still in this ballpark? Or now we’re talking about a higher number?

Tom Ryan: I think it’s in that ballpark. I think, again, I would skew it as kind of the opposite of cemetery. I think we’ll be at the higher end of our expectations. I think as you — I don’t have the numbers in front of me, but as you think about the cadence, and I said it in my comments, we would expect slightly down funeral volumes the rest of the year is kind of the way it would probably play out. And then cemetery revenues, and again, that’s a function of what the property that we’re selling is ready for sale and sales, we’d expect those revenues to be up on a quarterly cadence for — as we go. So that’s going to allow us to drive slightly higher earnings per share quarter-by-quarter, I think, for the rest of the year. And then you think about our share repurchases over the last year and this year, that’s a very favorable impact.

Unfortunately, as Eric pointed out, we got $50 million more in interest expense because of rates and what have occurred there. So the shares should more than offset that, but that’s another thing that just kind of flies in the face of your earnings year-over-year.

Joanna Gajuk: And if I may, on the funeral segment still. So good to hear that, I guess, you effectively talking about the price increase in the 5% range, but I guess that’s been essentially offset by the cremation shift higher and then, I guess, some trust fund income changes and currency a little bit. But how should we think about the rest of the year when it comes to the average sales for service in the funeral segment. Would you expect the cremation to stay at his level or kind of moderate and we should see kind of a higher flow-through of this 5% increase, less of — kind of offset by these other items?

Tom Ryan: I think so, Joanna. I think the organic growth should maintain that kind of level, call it, 4% or 5% and then you — now you’re subject to trust income. And like I said, I think from a year-over-year perspective, because we’re always comparing to the prior year quarter, that’s going to be a more favorable comparison as you get to the back half of the year. because we had the markets take a downturn last year. And the other thing on cremation mix change, while I would expect it to continue to grow because we always do, on a year-over-year comparison, I think the comparison gets better. I think we would expect instead of a 200 basis point change, we go back to, let’s call it, 100 to 150 basis points depending on the quarter. That’s the kind of thing. So to your point, we had 5% organic growth, offset by 2.5% of negative trends. That negative trend should trend downward. And so maybe more of the organic growth gets to the top line and then to the bottom line.

Joanna Gajuk: All right. That’s helpful. And if I may, sorry, just a follow-up also on the discussion around the cement cemetery preneed sales production, right? So this year, some slowdown because I guess those things — I guess these properties being delayed into rest of this year but also sounds like maybe into next year. And in the past, you talk about kind of growth in the mid-single digits after that in outyears notes ’24, ’25 and so on. So is that still your expectation? And I guess what drives the confidence you can grow at that level in these outyears.

Tom Ryan: Absolutely. I think we feel very confident that we’ll be able to do that. And so yes, we’re going to get back to those normalized levels. And I think you’ll begin to see that in part to this year and for sure in ’24 and ’25.

Joanna Gajuk: And if I may, just — the very last question, sorry, because I guess you didn’t comment, but I guess maybe there’s nothing to comment. In terms of the settlement that we talked about last quarter, any change there or any update to the estimated cancellation rate or any indication of the timing of announcement from the states?

Eric Tanzberger: Nothing really new on that other than, if you are member, the charge was related to Florida and California and the Florida on early March the court issued the final approval of that settlement that we described to you last quarter. That’s really the only material update. We continue to work through everything else that we’ve described to you, so I really don’t have an update on the charge. We still feel good about that number and those estimates at this point in time.

Operator: The next question comes from Tobey Sommer with Truist.

Tobey Sommer: I mean inflation perhaps starting to normalize, let’s hope, how would you characterize the interplay between inflation and your cost of sales, including merchandise or whatever components you think most relevant and the company’s ability to raise prices in the market?

Tom Ryan: Again, Tobey, I would say that compared to other businesses, I feel really, really good about that. And the reason I say it is a lot of our big — number one, labor is a big cost. I think we’re seeing that subsiding a bit compared to prior year periods. We’re starting to see some normalization as it relates to that. When you think about our supplier agreements, the big things that we purchase, we’re the largest purchaser of things that go into the cemetery when you think about granite or you think about bronze or you think about caskets, and we have long-term agreements that have inflationary caps. So as you think about our ability to manage that cost relative to other industries, we feel really, really good about it.

A lot of our pricing, when you think about cemetery and particularly, it’s such a unique business in the sense of the variety of things that we have out there. So we’re able to pass along cost pretty effectively relative to others. And I think we’re able to contain those costs, and therefore, you don’t see us having to put up price increases that you’re seeing at consumer product companies and things of the like. We’re able to manage those for our consumers better because of the long-term agreements we have in place.

Tobey Sommer: We’ve heard from other companies reporting this earnings season that internal corporate employee retention has improved pretty markedly year-to-date. Has that occurred in your business? And could you contextualize it with retention rates sort of in recent periods?

Tom Ryan: I think definitely so, Tobey. I mean, compared to the last couple of years, you’re seeing a lot more of that at the corporate level. Some of that’s regarding working away from home and some of the optionality that you have now in some of these corporate jobs. And I think we’ve been flexible in that regard, which has allowed us to retain a higher level than you’re seeing others. But definitely, you’re seeing the worm turn a little bit as it relates to corporate staffing. The still challenging parts are out in the field. And I think when you look at cemetery maintenance and some of the like, those are still challenging positions to fill and maintain, and we want to make sure we’ve got the highest quality employees that are interfacing with our customers and families.

Tobey Sommer: If I could sneak one more in. What’s your feel for the high-end consumer now and now Republic and maybe focusing in on outside of the discrete experience that you have in the California market where things have been sort of more normal over the period. Has there been a change since that time in March that you’ve been able to see and perceive in your sales activity?

Tom Ryan: I think there’s a feeling — it’s hard to really pinpoint. But at the end I would put it this way, we’ve been doing this a long now. You’ve seen a variety of recessions and things that occur. And I always look at the high-end sales and correlate it to what’s going on, interest rates are up, inflation is out there. Probably most importantly, the stock market was down in 2022, some 20%. Housing prices are finally starting to crest and trend down the other way. When you see those things, you tend to see high-end purchases stall. The good news is they tend to come back very quickly once people feel confident again. But at the very, very high end, if you’re asking somebody to spend $0.5 million or $1 million, what the macro environment does have an impact.

And so we would expect it to be a little bit of a drawback. But again, operating at very high levels. I think I said, we sold $37 million of large sales, which was the second highest in our company history for the first quarter, right? It just so happened $ 66 million if it was last year. So we’re still being able to put out and print some big numbers. And so I think the consumer is out there and they’re willing. And the good news is, we’ve got the inventory to sell them. It’s just a matter of when we’re going to close that sale. Is it going to be second quarter, third quarter ’24? But we feel confident we have the right inventory, the right people and plenty of consumers that want what we have.

Operator: The next question is from A.J. Rice with Credit Suisse.

A.J. Rice: Couple of things. Maybe to that last question, looking at it in a different way, potential tightening of credit from regional banks having any impact on the sellers of properties? Do you sense that, that may add incrementally to some of the people that are on the fence thinking about whether it’s time to sell their property. Are you seeing any activity there? I know you reiterated your $75 million to $125 million target for the year. maybe just broadly comment on the pipeline as well.

Tom Ryan: Sure. So A.J., good to hear from you. The pipeline is healthy. We have a number of deals in various stages and feel really good about our ability to execute this year. I guess, generally, I would tell you it’s too early. I haven’t noticed anything noticeably different related to what’s going on with regional banks. I think you raised a great point, though. If you go back and look at the history of this company and when you had your most productive years, it generally happened when rates went up. I’m thinking particularly in 1994, the company had some really big acquisitions, one of which we bought Mike Webb in that transaction, and that’s pretty me. But I think as you look at these periods when rates rise, a lot of these particularly consolidators that are financing are looking for exits.

So we’re aware of that. We’re ready to pounce. And that kind of plays into a little bit of what Eric is talking about. With the uncertainty that’s out there with interest rates, with inflation, we kind of want to see how this thing plays out. We want to maintain flexibility. If a number of deals come along, we’re going to do them. And we’re also going to be buying back our stock, but we’re going to manage that balance sheet through this kind of uncertain period and this is when you — opportunity knocks will be there.

A.J. Rice: Right. You had about $33 million, I think it was of cemetery development purchases this quarter. I know there’s cemetery development that’s looking 15, 20 years out, and then there’s cemetery development that opportunistically happens because our property becomes available near a current cemetery. And I would assume the returns on those are more immediate because you’re adding on to an established property. Can you just comment on where the spending is going for the cemetery development that we saw you do in this quarter and if you see more opportunities?

Tom Ryan: Yes. A lot of that, it’s all cash driven, A.J. So what you’re really seeing is kind of an acceleration in the first quarter where we spent a lot of money on some of the bigger parks and some of those are in some places that — where we’ll sell a lot of buying property. And that’s one of the reasons, as I point out, as we sell things throughout the year, it is more likely to be recognized into earnings because these projects are ready and waiting and developed. And therefore, if we get 10% down at the sale. And what you saw last year, which was on the heels of, I’d say, the COVID impact. And when COVID happened, a lot of things shut down, a lot of projects got delayed. And so a lot of things got put in place in ’22 and a lot of the cash has been spent in the first half of this year. So I expect that spend level to level off and allow us to sell more recognized property in coming quarters.

A.J. Rice: And I think in the release or maybe in prepared comments, you highlighted in the cemetery business seeing some maintenance expense uptick. What — can you just comment a little more on what that was all about?

Tom Ryan: Yes. I think that’s really driven a lot of that by labor. So, one, we have internal labor costs; two, we outsource maintenance in a lot of our cemeteries to lawn care companies, and they’re seeing a lot of inflation in their business, probably the #1 is just maintaining labor pools, right, that they’re making sure they’re taking care of their employees at a level that allows them to have retention in those parks. So we’re just seeing a little pressure as it relates to land care, cost, pass-through both internally and through third-party vendors. Then when you think about water and you think about energy, all those things kind of roll into that and then bad weather. If you have bad weather like you do on the West Coast, and a lot of mud and things going on, you’re going to spend extra money to get those parts back up and running, so we can get the Salesforce out there.

So a lot of contributing factors, but number one is really tied to labor as it relates to cemetery maintenance in your competition for instance, with the construction industry historically. These are really the options cemetery maintenance workers have to go elsewhere.

A.J. Rice: Right. And then just finally, we talked around maintaining flexibility and so forth on the capital fire power. You were active in the buyback in the first quarter. Any commentary about pacing for the rest of the year? I know it’s probably somewhat dependent upon market conditions, but any commentary on what you’re thinking relative to the updated guidance, et cetera, for the guidance?

Tom Ryan: No, I think it’s exactly what we told you. We’re just — we’ll see how it all plays out. We will be active in the market. We think our shares are a great return on investment. So really no difference. Like Eric said, I just think because of the — more of the uncertainty around the general economic conditions, we’re going to be a little cautious in, let’s say, stepping up and hitting 4x EBITDA on our — we’d rather stay flexible and see how this year plays out. And then as we get into a more robust recovery, have a lot more confidence to use that balance sheet a little more.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to SCI management for any closing remarks.

Tom Ryan: I want to thank everybody for being on the call today. We look forward to speaking to you again in early August. Thanks so much.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.