Q3 2022 Service Corporation International Earnings Call
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 and 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 events section.
With that out of the way I'll now hand, it over to Tom Ryan Chairman and CEO for opening remarks.
Hello, everyone and thank you for joining us on the call today.
First of all I want to express my heartfelt, thanks to our entire Sci team.
Does your continued commitment dedication and execution that positioned us for the results we posted this quarter.
We've continued to stay relentlessly focused on what we do best helping our at need client families gain closure and healing through the process of grieving remembrance and celebration and helping our preneed coil.
<unk> peace of mind by securing their final arrangements.
This morning, I am going to begin my remarks, with a high level overview of the quarter followed by some further color on our business performance for the quarter, including some detail around our solid funeral and cemetery results.
Then I'll provide some year to date observations on 2022 that establish a baseline for our preliminary thoughts about 2023.
For the third quarter, we generated adjusted earnings per share of <unk> 68.
Which outperformed both our internal forecast as well as analyst consensus compared to $1 16 in the prior year quarter, which benefited from a significant pandemic impact.
Most of the anticipated decline in earnings can be attributable to lower operating results on a reduced impact from COVID-19 as well as the decrease in trust fund income from declines in the global equity and fixed income markets.
Inflationary fixed cost also impacted the quarter's performance.
Below the line the favorable impact of a lower share count offset higher interest expense and a slightly higher tax rate.
For a better perspective of this quarter's performance, we delivered earnings per share growth of 84% above our pre pandemic 2019 third quarter, resulting in an impressive 22% compounded annual growth rate and earnings per share over the three year period.
While down from the prior year funeral results were well ahead of our expectations on continued elevated levels of funeral services.
On the cemetery side overall cemetery profits were in line with our expectations. Our preneed sales production results were very strong and ahead of our expectations. However, those strong results were tempered by lower recognition rates and lower Trust fund income.
Now, let's take a deeper look into the funeral results for the quarter.
As anticipated total comparable funeral revenues declined against the prior year quarter that benefited from a significant pandemic impact.
This decline of $48 million or about 8% over the prior year quarter includes a $41 million reduction in comparable core funeral revenues.
Although comparable core funeral volume declined about 10% compared to the prior year quarter.
The 2022 third quarter volume is still over 15% higher than the pre Covid 2019 third quarter, resulting in an impressive 5% compounded annual growth rate over the three year period.
So we're continuing to serve elevated levels of client families above and beyond COVID-19 deaths, which is consistent with our commentary around this topic during our investor day presentation in May.
Our core average revenue per service continued to grow over the prior year quarter by one 8% Org.
Organic growth for the quarter was an impressive four 7%. However, it was negatively impacted by a 190 basis point increase in the core cremation rate of decline in Trust fund income and to a lesser extent from currency translation and our Canadian operations.
From a profit perspective funeral gross profit decreased $67 million, while the gross profit percentage declined 19% from 29% in the prior year quarter.
The revenue decline due to lower volumes versus 2021 accounted for the preponderance of the profit decline.
We also experienced higher than historical increases in employee related costs as well as in utilities and fuel due to current inflationary pressures compared to the prior year.
Additionally, we are seeing slightly higher technology costs, both from depreciation and maintenance of the highly impactful systems, we've developed around our sales and marketing functions over the last several years.
Preneed funeral sales production grew over $6 million or 2% over the third quarter of 2021.
Our Sci direct production was particularly strong posting an increase of almost 10% over the prior year quarter.
Increased contract velocity was generated from Leeds driven by new targeting strategies for our direct mail and community seminar programs as well as a shift in focus on digital leads.
Now shifting to cemetery.
As expected cemetery revenue also decreased against the Covid affected prior year quarter.
However, preneed cemetery sales production exceeded our expectations.
Comparable cemetery revenue decreased $21 million or about 5% in the third quarter.
In terms of a breakdown core revenues were down by $17 million compared to the prior year.
That need revenues accounted for $15 million of this decline in recognized preneed accounted for $2 million.
Recognized preneed revenue actually was higher by $6 million before accounting for an $8 million decline in merchandise and service Trust income.
Other revenue decreased by about $3 million over the prior year quarter as Endowment care Trust fund income was negatively impacted by changes in capital gains and losses.
Preneed Cemetery sales production grew a solid $16 million or 5% in the third quarter.
Even more impressive is when you consider we are 67% higher than the third quarter of 2019.
So growing preneed sales production at a 19% compounded annual growth rate over the three year period.
As we referenced in our Investor day presentation. We believe we have enhanced our sales and marketing productivity and effectiveness and cemetery sales from learnings achieved during the pandemic.
We saw a slight decline in sales velocity that was more than offset by inflationary increases in the core sales average.
Large sales have remained robust growing $10 million over the prior year quarter.
So cemetery gross profits in the quarter declined about $41 million and the gross profit percentage declined to 31% from 38% in the prior year quarter.
The profit decline from revenues was further impacted as $12 million of the decline was from trust income, which falls straight to the bottom line.
Inflationary pressures drove higher than historical increases in employee and cemetery maintenance costs.
We also experienced slightly higher costs associated with technology, such as systems amortization and maintenance costs.
So as you saw in our earnings release, we increased our 2022 adjusted earnings per share range by 20.
To $3 60.
To $3 84.
Or a midpoint of $3 70.
This implies a range of <unk> 73 to <unk> 93.
In the fourth quarter compared to a COVID-19 impacted fourth quarter 2021 of $1 17.
Once predictable very predictable business model was turned upside down beginning in 2020 with the uncertainty around COVID-19 mandatory and voluntary lockdowns changes in consumer wallets and sentiment.
So at our Investor day in May we made our best attempt to outline for you where we thought we were from an operating platform, what COVID-19 impacts might be and what to expect going forward.
We described a new earnings per share base, which had been established through accelerated learnings and actions taken during the pandemic.
The new base was $3 18 per share for 2022, and we communicated that we anticipated an incremental 32.
Of nonrecurring impact from Covid for a total guidance midpoint of $3 50 for 2022.
Our base assumptions anticipated a pronounced decline in funeral volumes and at need cemetery revenues as compared to 2021, particularly in the second half of 2022.
We projected that these levels would normalize back towards 2019 pre COVID-19 levels.
We also assume that preneed cemetery sales levels will be relatively flat to slightly up versus 2021 levels.
And we anticipated that the fed would raise rates pretty aggressively increasing the interest expense on the variable rate debt from our balance sheet.
Based on what we've seen over the last five or six months for 2022, we now believe with higher than we anticipated levels of non Covid funeral services and at need cemetery revenues that our original base assumption of $3 18.
Would be more like $3 50.
We believe these excess services are more permanent in nature and are a combination of aging demographics higher risk less healthy lifestyle developed during the pandemic as well as certain geographic market share gains.
Preneed Cemetery sales are strong and tracking with what we originally assumed back in May.
Unfortunately, we did not anticipate back in May the combined historic downturn in both equity and fixed income markets that will reduce trust fund income for 2022 by about 20 per share.
This would result in an earnings per share base of $3 30 for 2022, So when you add the nonrecurring COVID-19 impact which increased to 40 from.
From the original 32, we discussed in May it results in a 2022 revised midpoint of $3 70.
In determining our preliminary guidance for 2023, we utilized $3 30 earnings per share base applied our historical earnings per share growth assumptions.
<unk> and slightly higher interest expense as well as slightly lower Trust fund income results in determining our 2023 earnings per share guidance range of $3 45.
To $3 75 per share.
I want to thank say, thanks to all of my more than 24000 teammates for all that you do every day for our families. You are what makes this company great.
With that operator, I'll now turn the call over to Eric <unk>, Our Chief Financial Officer.
Thanks, Tom Good morning, everybody, thanks for joining us again.
Kind of how Tom just left it off a fire really address the quarter I really want to first just want to say thank you to all of our 24000 plus funeral homes and cemetery Crematoriums personal care Center Associates. Now. These are the associates, who make this company go and continue to work tirelessly.
<unk> to take care of what's most important our client families and our communities and in turn these are the people that have produced these impressive financial results. We truly appreciate all of your hard work and efforts. Please hear that very clearly.
So with that said and get into the business at hand kicking off my comments this morning.
Im going to discuss our cash flow results and capital investments for the quarter and the financial market effects on our trust funds I will then provide some comments on our increased cash flow outlook for the balance of this year 2022, and also give you some preliminary thoughts for 2023 in terms of cash flow.
So starting with the quarter, we generated adjusted operating cash flow of $183 million in the third quarter. This was higher than our expectations, but it was about $49 million lower than the prior year, which as we've discussed to know was heavily impacted in a positive way by the pandemic Act.
Pivoting.
The declining cash flow quarter over quarter aligned with the $107 million decline in operating income, which excludes gains on divestitures.
And was somewhat offset by 22 million of lower cash taxes as a result of the lower earnings as well as about $41 million of favorable working capital in the quarter. This net source of working capital is first related to the timing of Preneed cemetery cash receipts from strong sale.
Production during the quarter as compared to the corresponding revenue recognition.
Secondly, working capital was favorably impacted by the payment of roughly $21 million in the third quarter. The prior year of deferred payroll taxes as allowed under the cares Act. So just to refresh your memory. We remember that we were able to defer quarterly payroll taxes under this cares act totaling.
Actually $42 million for the full year of 2020.
And then we repaid the first half of this amount the $21 million in the third quarter of last year, and we will be paying a second remaining $21 million next quarter. The fourth quarter of this year 2022.
Finally cash interest payments were on target, increasing an expected $5 million due to increases in the balance and interest rate of our floating rate debt.
Now shifting to our trust funds now I made some comments about our trust funds last quarter, but I think it bears repeating to make sure everyone understands the impact of the financial markets on our near term and longer term cash flows as we've discussed in the past the volatility of financial market influences the market value of our <unk>.
Funds, but again has a muted effect on our near term earnings and cash flows. So given the 10% to 14 year average life of the underlying customer contracts only about 8% of those contracts to the trust backlog really mature in any given year. Therefore the.
Effect on the reduction in Trust fund market value allocated to each individual contract is reflected in our earnings and cash flows really over a 12 year period or about 8% per year.
So with that said, let's talk about the balances we began the year with about $6 5 billion in total trust assets and currently today that balance is about $5 6 billion slightly higher than the $5 3 billion at the end of this quarter that we reported to you.
The deposits on the new sales and withdrawals from the maturities generally have offset each other during the first nine months of this year. So the $900 million change is primarily associated with the change in market value of those trust assets and again. This reflects the 17 five.
5% decline in trust performance year to date, which has been impacted by historical inflation the speed of the central bank tightening and uncertainty in the geopolitical space.
This has led to somewhat of a what we call a black Swan event, where we have seen 15% to 20% declines in both the equity and fixed income markets, which is something we have not seen and at least the last 30 years.
This decline in our Trust fund asset balances is expected to result in about a $35 million to $40 million cash flow headwind for the full year of 22, all of which is considered in our increase in R. 22 earnings and cash flow guidance that we talked about this morning, and the press release.
So with that next I'd like to shift gears and touch on corporate G&A expenses, which were $42 million in the current quarter and slightly higher than our expectations due to inflationary salary and wage pressures as well as some workers compensation and general liability insurance cost increases.
Looking forward to 'twenty, three we expect corporate G&A to trend a little bit higher due to these inflationary labor pressures and be in the ballpark of $38 million to $40 million per quarter.
So now I'd like to touch upon our capital investment activity. So during the quarter, we invested $382 million into our funeral homes, our cemeteries newbuild opportunities and accretive acquisitions and we also returned capital to shareholders, Let's talk about the breakdown first is it.
Relates to these investments in our businesses, we had $59 million of maintenance capital.
Which was higher than both our expectations and prior year during the third quarter, we accelerated our investments in our funeral home and cemetery technology infrastructure and this really prepares our locations for the utilization of both customer and non customer facing technology that is currently being developed.
To create a more contemporary experience for all involved.
These costs were also higher due to inflationary cost pressures and supply chain constraints with the associated hardware be installed at all of these locations. Additionally.
Additionally, we invested $34 million into cemetery development projects during the quarter. This is higher than the prior year, primarily due to the pandemic related delays experienced last year and has also trended slightly above our expectations as we continue to replenish inventory to meet the <unk>.
Sumer demand fallen elevated preneed selling activity as well as future customer opportunities considered.
Considered the increased investments in technology infrastructure and cemetery development, we just discussed.
I believe our recurring Capex will be about $10 million higher for 'twenty, two which was reflected in the updated guidance range that we gave you in the press release.
So now shifting to growth capital.
<unk> invested $12 million towards the purchase of real estate construction of new facilities and expansion of existing funeral home in cemeteries across our footprint.
On the acquisition front, we closed two funeral home transactions on the east and west coasts totaling about $12 million subsequent to the quarter, we purchased multiple funeral home and cemetery locations on the West coast for about $40 million. So our year to date spend for acquisitions include.
In this recently closed transactions is about $55 million.
All of which were done at our usual targeted IRR.
We again remain optimistic about the acquisition pipeline and believe we will end the year well into our range of $75 million to $125 million.
Finally, we continue returning capital to share shareholders with nearly $265 million and turn this quarter, which is really about $40 million of dividends and about $225 million towards share repurchases.
And on that topic year to date, we have invested close to $590 million and these investments and share repurchases in the first nine months of the year has already exceeded the full year spend we did in each of the last two full years.
These opportunistic investments demonstrate our confidence that we have in this business and our strategy and our commitment to returning value to shareholders.
Shifting quickly to our financial position.
We continue to have a strong balance sheet with a favorable debt maturity profile robust liquidity of approximately $720 million, which was at the end of the quarter, which consisted of $170 million of cash on hand, plus almost $550 million available on our long term bank credit facility.
On Leverages an in quarter was just above three times net debt to EBITDA, we will continue over the coming quarters to invest capital in high return opportunities such as acquisitions, new builds and the share repurchase program. In addition, our EBITDA is currently normalizing from the prior year that was <unk>.
Impacted by the pandemic activity. So we expect our leverage ratio at the end of 'twenty two.
Below the low end of our targeted range to be at the low end of our targeted leverage range of three five to four times and we expect to enter that low end of that range in 'twenty three.
So now, let's just shift to an outlook and talk about the remainder of 'twenty, two and into 'twenty three and.
In our press release, we increased our guidance for adjusted operating cash flow for the full year by $40 million to a range of $795 to $835 million or the midpoint of $815 million. This implies a range of $140 million to $180 million in the fourth quarter.
We also anticipated continued pressure from rising interest cost on our floating rate debt, which could be $10 million to $12 million cash flow headwind in the fourth quarter, which has also been considered and this updated cash flow guidance.
So looking ahead to 2023.
We're currently working through our cash flow, our cash taxes, and our working capital models and we'll give you better guidance more specifically in February which is what we normally do I did want to mention a few items. This morning to give some direction as it relates to this 23 cash flow expectations. So first when we think.
About the adjusted EPS guidance of 2023, which was $3 60 at the midpoint of the range that Tom just mentioned.
This 10 cent difference from 'twenty two levels is expected to result in about a $20 million net decrease in cash flows for 'twenty three.
Included in this $20 million net change is higher EBITDA expected from growth in our cemetery operations that will be more than offset by about $50 million of higher interest costs associated with higher interest rates on our floating rate debt.
Additionally, we expect to have a couple of working capital items that could pressure 23 cash flow really related to strong incentive compensation cash payments as well as the timing of preneed cemetery cash receipts as compared to the corresponding revenue recognition year over year.
But remember these working capital items should be considered temporary for 'twenty three it would not be expected to affect cash flows in 2024 and beyond on a more normalized level.
So in closing thanks for joining us. This morning, we're proud of this performance year to date, our expectations are to now finished 22 with a very strong fourth quarter and with that operator that concludes Tom <unk> prepared remarks, and I'll shift it back to you and open the call up to questions.
<unk>.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Thank you. Thank you. Thank you sang please pickup your handset before pressing the keys.
Your question. Please press Star then two.
The first question comes from AJ Rice of Credit Suisse. Please go ahead.
Hi, everybody, maybe a couple of questions. If I could ask just following up on your final comments there.
You called out some items like incentive comp.
And the.
Other items that are impacting our cash flow and I know you want to refine this further in the working capital, but can you give us some flavor of the order of magnitude and why would you consider those to be.
One time.
And then revert back in 24, what's unusual about them in 'twenty three.
Yes, good question, a J again and Directionally will ask.
Sharper in our models and such to get you get your exact numbers in February like we always do but ultimately what has occurred is we've obviously had some very strong performance in 'twenty two.
That's going to revert to.
Cash outflows related to ICP payments across the entire company in February .
That would be close to close to two times, even the targeted ranges and so if you think of working capital will probably be accruing during 'twenty three on the income statement.
At one times and paying in February an unusually large payment and so thats going to create that working capital drag.
During during February .
That could.
And that could then flip again in 'twenty four to be more normalized it just depends on the timing of how we're doing during 'twenty three and what the accrual looks like on the income statement versus the actual cash flow payment that's going to be pretty strong.
Thats paid in February .
The other thing Thats really happening as you saw I mentioned kind of a $40 million.
Think of a tailwind or a positive working capital during this year and 20 of that is the cares Act, which I talked about is payroll, but the other 20 really relates to preneed cemetery and it really has to do with some of the things that Steve Sidwell, Jerry heard in and their teams really did to drive sales.
At the lower end portion of the spectrum kind of the entry level price point and the entry level customer that we talked about last quarter. Some of that had to do with customer incentives some of that had to do with lowering.
Downpayments and so if you don't get 10% down youre not going to recognize that revenue. So essentially what I'm, saying is we're receiving cash this back half of this year and the revenue recognition may come next year. So there's like this one time timing difference, where we're going to have a little bit of a source of working capital at the end of this year.
And that will flip to a use of working capital as the revenue recognition comes where a lot of the cash may have come late this year as well so more to come on that.
I think that that the.
The bonus could be as much as that cash flow working capital could be as much as maybe $30 million $40 million I think the working capital flip can be 10 to 20. So I'm just kind of directionally kind of giving you somewhere in that $50 million ballpark.
Some working capital that I think will pop right back up in 'twenty, four and should be considered temporary in nature.
Okay great.
Also just maybe I'll ask Bob.
You had mentioned.
This excess debt issue.
We don't think it's related to Covid.
More.
We're obviously looking at a period, where the baby boomers start to hit in 2026 I'm assuming.
The step up and that will be a bell curve it won't be all in one year, there's a big stair step.
What do you think you are seeing is there something else going on or is it maybe we just haven't fully normalize do you think this is a normalized rate.
<unk>.
We can sort of see normal at nee grow from here.
Yes.
The three things that I kind of identified in my comments. The first one was exactly what you said call. It the baby Boomers I do believe we're beginning to see lift as it relates to that demographic is a component of what's happening and you are right I think it's more like a bell curve.
We would anticipate that to kind of continue to steadily climb. The second one is probably the trickiest of all and I've mentioned, it I think I called it and I get a lot of <unk>.
Back on the way, we described this but im going to call it lifestyle and what I mean by that is we're seeing people being impacted in almost every category of death were seeing more guests from car accidents more drug overdoses more suicides more murders more cancer deaths and I guess I would say it was the.
Pandemic disruption.
So what we kind of come into conclusion now is when does that go away. It's my belief that at some point.
Society heals itself and we get better I don't think thats going to happen for some time I think when people are impacted by their mental health and physical health. These trends are hard to reverse quickly. So I think we're seeing some of that but to your point.
Three or four or five years from now will subside a bit.
I don't think it's anytime soon and then the last piece that I mentioned that impacts US. We believe is market share and again, we try to track that it's not perfect, but we're seeing an.
A variety of markets, and probably particularly where we've got big combo facilities and.
An increase in our share as we measure it over time, so really three things impacting that but I don't think go away over the next couple of years and the only one that at some point I think dimming.
Diminishes as the unhealthy America comment.
That I've talked about.
Okay.
Maybe one final question, obviously your cemetery production preneed production rebounded nicely after a somewhat sluggish second quarter in the second quarter, you were somewhat cautious about the macro backdrop.
Maybe affecting some purchasing decisions.
Can you say whether that dynamic is still there.
Was the increase in production more a function of.
Claude sold or was it the average price on the block any color on that would be interesting as well.
Sure.
So as it relates to that the one area that really was robust and it hasnt changed is let's call. It the large sale. So large sales were up $10 million year over year against a.
Pretty impacted by pandemic last quarter.
Sales at the high end of the consumer spectrum is continuing to shine, even with the market's down which is a little surprising but again. If you go back to time I would say high end sales, probably correlate better with housing prices and.
Although we've seen some slowdown I don't think were seeing that backtrack, yet so I guess that shouldnt surprise us too much and we feel really good about the thing we were concerned about was for.
Our other customers.
What would happen with selling price and what would happen with velocity and we've got some concerns Eric touched upon this but our sales leadership team.
Steve and Jerry sat down and said our impression from getting feedback when we have a consumer that when you think about our fixed income consumer that that.
Going to have to pay over time, what can we do too.
Not have a resistance point as it relates to closing these deals and so they came up with some things about laurens a downpayment some interest.
Interesting price points, and then also identifying inventory that may be a more reasonable transaction for that consumer. So we took those three things and said we're going to give you inventory that we can maybe take out that we want to move let's finance that for you at a reasonable rate and also give you some some real.
Leaf as it relates to down payment so by doing that what we saw is almost flat. It was only slightly down velocity for the third quarter and in the second quarter. We had seen some more disturbing trend. So our belief is that worked really well what we try to do as we tie those.
Those those sales to things like.
Getting automatic payments and things like that but no, but again assure us that we shouldn't see a big dip in cancellations or anything like that and this is the first time. We've done. It is just something that I think works at a moment in time and we saw in the third quarter and I would say, we continue to see it working in the fourth quarter so far.
Okay, great. Thanks, a lot.
The next question comes from Tobey Sommer.
Please go ahead.
Thank you.
If you could dig into the.
The higher than expected funeral.
Funeral.
Sales in events in the quarter, a little bit more.
Sure.
What is the.
Matt if you could refresh us because we get questions about the ongoing but lower level of direct COVID-19 deaths and then.
The other.
Sort of related factors and maybe offshoots of the pandemic that actually.
Drive that's higher than other categories.
Sure Tobey.
It kind of builds upon a J S question, but let me put it into some some longer term perspective on this if you go back in this industry and particularly with Sci year to year, you would see the numbers of deaths probably.
One year, you may be down to one or 2% in the next year Youre up one or 2%, which you could predict with pretty good accuracy over a year and over a big footprint like ours, what was probably going to happen and it's impacted by seasonal flu, so and a heavy flu season with a lot of that you might be up and then you got a comparable that's tough and you might be down slightly.
We live that way forever as an industry 2020 comes along Covid game.
<unk> changes, we're having to do at one point, probably 20% more funerals.
Which is unheard of in a year versus versus let's say a year or two before.
So what we're trying to identify as we know what is COVID-19 and we can carve it out and we believe that's very diminished now and should continue to diminish and so what we would've expected as why Wouldnt. We go back towards let's say, a 2019 level, maybe you get a percent or so growth off 2019, I would expect that so.
That would be a reasonable level that we think would stabilize and that's kind of what we anticipated and I guess, what I'm, telling you can look at the call Thats why we compare back to 19, but we're telling you is the third quarter of this year, we did 15% more calls than we did in the third quarter of 2019 that is.
Not what anybody would have anticipated and that has just a very de minimis amount of COVID-19 deaths.
So then you say is that sustainable well I don't think 15%, but I guess, what I'm, telling you is I don't think we're going back to 2019, I think and the reason for that is there as more baby boomers dying.
There is an impact from this call it unhealthy America concept, which really is.
The best way to say it is probably we lacked access to getting help and that would be.
From from.
Mental health issues as well as physical health issues go into Doctor screenings diabetes. So many things are dragging and again I'd love to believe that we're all going to get a Jane Fonda tape and go work out tomorrow and everybody's mentally healthy, but the truth is it takes time and these things are long term issues.
That is having an impact and then finally I think through this pandemic and because of the way as a company our teams reacted.
We gained a lot of favor with our local communities we gave identified.
<unk> contact with a lot of people. If you think about what we've been doing on the preneed side as it relates to.
Leveraging our digital communications with consumers, we're just in a higher profile higher interactive mode that I think has allowed us to gain some share, particularly in certain geographic markets. So so I guess, what I'm, saying is go back to those 19 levels, we're not going there we're going to be.
Significantly higher I think trending out from here and Thats the big.
Moment that I don't think we anticipated.
Perfect. Thanks, and we'll all have to go dropdown of EHS machine to watch that video.
Yeah.
Could you kind of double click on that geographic market share.
Again, Kevin.
Where.
Where is that concentrated in.
There are some sustainable sort of momentum behind that your opinion.
Well again, I'll generalize Tobey because I think we gained market share in a lot of different places and a lot of different markets, but I'd say, it's more noticeable in areas, we probably saw more pronounced in the west more pronounced in places we have combo facilities and I believe some of that really just has to do with the fact.
Do you think about Covid and we had to do out people didn't want to go inside again, right. We were inviting people to our cemeteries to have a service.
And they've got to see our beautiful grounds in and so a lot of consumers.
<unk> got a glimpse as to what that is and I believe that triggered some identification to say boy that was a beautiful I like that places people were good and I think you had because of our people were able to pivot and serve client families in unique ways and develop relationships and again a lot more people were impacted by death over the last two.
Years.
That really allowed us to shine and we had situations in regions of the country, Both California, and New York, where we were so inundated with.
Client families and needed help we shift people from across the country and I think it's extraordinary things like that that.
Build your reputation and brand that allowed us in certain markets. So I'd say, it's a little bit everywhere, but we surely saw it in places like Arizona, and Nevada, California.
You have those great weather in outdoor facilities in Texas So.
We feel very good about our position as it relates to market share.
Thank you if I could sneak in a third question how big is.
High end within Preneed cemetery sales could.
Could you expand upon that correlation with housing prices too to say sort of historically when you look at that is it leading lagging or sort of coincident with changes in pricing.
I think it's probably.
It's probably lagging is what we've seen before.
Yes, I'll give you. An example about because I think people forget is a lot of times I think about our company they think Oh yeah.
You are a consumer staple business now where consumer discretionary as it relates to preneed, particularly cemetery preneed.
I'd go back to 2008 2009.
And what happened we saw in the third quarter, our comparable sales go down and the conservatives than in the first quarter of 2009. They stayed down in a concern to us in April of 2009, and you will remember Tobey.
That was the low point was March our sales were up 10% now they weren't large sales they were customers taking care of business and so what we learned is.
Our consumer were impacted by the economy, but we're one of the first things people turn back on they don't buy the big screen TV, but they take care of their family and insurance and these types of deals.
What took a longer bit of time back then was large sales really struggled I think in 2009 and even into 2010, because that again correlated with my feeling of well so theres a little bit of if I'm, particularly at the high end im going to spend more than $80000, where the stock market going down 20% doesn't make me feel it.
Well, but I guess the bigger correlation is are people buying high end houses because they are buying hyatt houses, they're probably buying high in cemetery inventory and that could be regional could be national.
So that's the way I would correlate it and I think it's a slightly lag.
And again that could happen, we'll manage through it but.
<unk> sales have become a significant.
<unk> component of our of our sales.
Yeah.
Our next question comes from Scott Schneeberger of Oppenheimer. Please go ahead.
Thanks, very much good morning.
Just wanted to stay on the topic of cemetery preneed.
Sales growth.
Our strong third quarter after.
Second quarter that that wasn't as strong in.
You all just touched on.
<unk> question a bit on.
The what you did with the sales force.
To invigorate in third quarter and it sounds like you believe that can persist in the fourth could you delve into that a little bit more or is it something that can persist in fourth quarter and through next year or are these just measures that you're taking that are that are really more short term.
In fact thanks.
Yes, Scott Great question I do think we view these as more of a temporary assist for the consumer I think we're just looking out there and getting feedback from the people that are actually interacting with families and what we found is there was there was a growing portion of families that says I am interested but.
This is a big ask right now gasoline prices are going up on utility is going up.
I don't know that I can afford it yet so I think this is a response to say, let's find a way to get you what you want and Thats really what this was so I view it is as economic conditions get better.
That debt.
These are types of things that we won't need to do and we've pulled back and go back to more traditional because you got to anticipate as you lower some of these entry points youre going to have a little bit higher or a cancellation rate, it's going to happen I don't we don't believe its going to we've modeled it we don't think its going to be significant but you want again.
Satisfied family that gets what they want and so youre talking about these cases. These are sales that are less than $15000.
And it may be pays over 48 months 36 months with finding a way to accommodate a price point that they feel comfortable with.
And.
That's the real.
The end game and I would tell you that as the economy improves those are probably things that we would.
Ill turn back.
Okay, Thanks, and just along those lines.
On cemetery preneed sales growth.
Production.
You would anticipate slightly positive for the full year by my math, you are trending up mid single digits.
I guess is there any change to that outlook with with this final quarter to go.
It looks like you could achieve your guidance easily if you if you are down mid single digits.
Is that what we should be expecting in fourth quarter with maybe some some drop off in large value sales into more dropoff in velocity.
Should we think about that as we end the year and any commentary.
You can share about 2023, along the lines of that question.
I'd like to Optimistically, you think Scott.
Yes, so so I think youre probably right.
We want to get a little further before we.
Declare victory at the end of 2022.
If trends continue we could be a little higher than you anticipate we just don't know we don't know.
As we think about 2023.
We believe that we now will go back to the kind of growth rates you'd anticipate off this new base and the only quarter that I would say there may be a little tough compare if you go back to the first quarter of last year, we had a really great quarter and again that was from a from a COVID-19 perspective it was.
Heavily impacted which can generate more leads and you're probably not going to have that same level of lead generation.
So I think the first quarter is a tough comp, but as we think about 'twenty three we're going to grow it we're probably going to grow it in the low single digits. If we're lucky it might be mid single digits as the way we think about that so we think we are.
Got to this plateau, and we're going to grow off of it.
Very very pleased with our <unk>.
Our sales and ops teams and what they've done for our families and what they've done for <unk>.
For STI.
Thanks appreciate that one more I'm going to sneak in here M&A. It sounds like you are pretty active here in the fourth quarter. It sounds like Youre not at your annual target spend but think youll get there. So Eric maybe just some thoughts comments is there are there are some very ripe things in the pipeline.
And.
If not here in fourth quarter, It will 2023, b, perhaps a higher than expected year for M&A.
Yes, I think we feel good about it Scott is the same thing I've said last quarter I mentioned the deal that closed does about $40 million that was just after year after after quarter and I thought that would close prior to quarter end. So there is always timing that get accelerated and timing as we get pushed by weeks is how many <unk>.
Scribe it and that's fine.
It's important for us to work with.
Work with the sellers as best as we can in those situations, but to answer. Your question is we still think it's a robust pipeline.
We still believe in the guidance that we've given you out there in that $75 million to $125 million and we feel that we will end the year being in it. So clearly telegraphing to you a good fourth quarter.
Thanks, and anything policy wise regulation wise that would make <unk>.
Three different in 'twenty two on that.
That buy and sell side approach to M&A. Thanks.
No nothing nothing that we know about from a policy perspective.
Okay. Thanks, I'll turn it over thank you.
The next question comes from John Ransom of Raymond James. Please go ahead.
Tom What you are saying is you haven't looked at our workout videos since 1982.
Yeah.
Yes.
Yes, I guess.
Okay.
Because I make my own videos.
Rob about subscribers.
Hey, Manny.
And that's what the law muni level.
Cheaper than Netflix or Youre not yes.
Im ready to give full guide on 'twenty three the range, but could you kind of help us with.
Kind of the low end versus the high end assumptions and then just what's the.
Income swing factor you are contemplating kind of full year 2018 versus 'twenty three.
Sure So I'll start with kind of the assumptions.
As you think through the volumes of next year, we expect to see volumes down I'd.
I'd say, probably low to mid single digits as it compares to 2022.
And that's predominantly probably going to happen again in the first quarter, maybe even some into the second quarter, where you still have a little bit of that call. It COVID-19 impacted numbers. So overall slightly down but again back to that 2019 comparison, well above 2019 trends on the on the sales side.
As you would expect.
We feel really good we think we're back to normal growth levels, which would be.
All at mid single digit type of growth that you would expect us to be able to do year over year.
And the one I would say the other thing to think about clearly.
Every company I know is seeing some wage inflation, we've seen it this year and again the way we've tried to manage that is I'll call. It.
<unk>.
<unk> managed an assistant.
By Us, which is saying if we have wage pressures, let's fix those and get our people right and then let's find a way to get it back in pricing because again, we're a service business and of our services costs more than we will be able to pass those loan to our consumers and so we've been very pleased with our ability to do that and feel good about.
<unk>.
Sides.
So the.
The headwinds that Erik sorry identified we've got some variable rate debt is now it's not a significant.
Ponant, but variable rate have gone up pretty aggressively so we've got to factor that in.
And to your point, which really unique about this if you go back in history, we've seen 20% declines in equity markets before but never combined with a 20% decline in fixed income market. So it's a very very unique dip down.
So trust income getting whacked down if you will now if you look at any other cycle, we would expect that at some point it may be 23, maybe 'twenty four 'twenty five.
Salary and get some of that back. So I don't think we want to play guests on the timing, but we do I think we would anticipate 23 being a favorable year for our trust returns.
And that's the way, we think about 2023 guidance.
But what was.
Whats your Ultimate Boscastle Trust fund drag this year.
And for the protocol.
Yes, I think we said this year is it impacted us by call. It 2025.
Is the decline year over year.
For those of you who haven't been around long time Trust income as a concept is really difficult because.
When we described trust income is accumulative income that was on that contract over 10 years. So it's.
We're always generating trust income is just a lower level because of what happened to the market.
So.
That's the way we think about it so what would you anticipate for 'twenty three of them starting from that lower base and also probably have a little bit of.
Indigestion in the early part of 'twenty, three because I didn't buy early contracts of 2022.
Didn't get impacted by what happened in the third quarter either in the second quarter, So youre going to have that unfavorable.
Impact rollout, so maybe think about another six or seven that could roll into 'twenty three.
A little bit of us.
Got some wind in your face.
Thank you.
Yes.
The next question comes from Joanna.
Bank of America. Please go ahead.
Alright. Thank you thanks for taking.
Questions here so again.
One follow up.
Okay.
I think in terms of Delaware Trust Fund returns. So is there any way to think about the headwind to sales on average this quarter.
Thanks Rachel.
Yes.
So is there a way to quantify the headwind there.
Yes, I think Joanna.
My remarks, I'm doing a little bit despite estimation so forgive me.
We reported a one 8% in our funeral average I think what I pointed out in the comments was our actual year over year increase was four 7% I mean, a pretty robust big beat now what happens is you have 190 basis point decline in what I'll call burial.
Funerals drivers the cremation rate mix change so that puts.
Or.
100, or so or 150 bps of pressure on you. The second thing the trust income.
Identified correctly it is going to flow through that line item. So that decline in interest income is going to impact the average and the last one it really doesn't impact profits very much but it's worth calling out when I was looking at the <unk>.
Results, we do have Canadian operations, and when you translate of what's happened with the strength of the U S. Dollar it puts another call it.
I think it's 50 $80 pressure on the average when you translate back into it. So we had three things that not $4 seven down to <unk> and again I think those trends will go back the other way.
I do think the market will improve at some point I think the U S. Dollar at some point, we will stop.
Stop railing against everything else and.
It was an unusually high cremation rate change but.
Joe is looking at the numbers and said if you go back to last year, we had a really small it was less than 100 basis point change. So this is going to ebb and flow I don't think anything's changed we still think 100 to 120 basis points a year is probably a good.
Way to think about the cremation mix change.
Okay. Thank you, yes, because that was my second follow up in terms of the commission. So you view it more at that.
Year over year kind of.
Dynamic versus just the changing.
And that market dynamics in terms of people.
Shifting cremations all playing out.
Exactly it could really kind of ebbs and flows. It's it was unusual I think if you looked at.
Really 2020 one the information we had a couple of quarters, where it actually went the other way.
And that is again highly unusual so.
I guess every 100 year pandemics disrupt tradition.
Sure, Yes, thanks, Jennifer.
Great.
Different topic here.
So on the FCC.
Issued this advance notice of proposed rulemaking.
Or are they actually seeking additional comments on how to modify that.
This does conclude the proposal we think of that data.
I wanted to ask a question, but what is your staffing that does it change anything or Dan.
The public session that they host it does it change your view around what they might actually consider including the changes that they might be considering including here and also any sense of the timing of.
<unk>.
Hello.
I'll take that Joanna and good morning.
Just to refresh everybody's memory, because theres a lot of new people on the call as well the initial.
Submission was done two years ago back in June and that's public information you can go look at.
What we submitted in terms of some of those questions on whether the funeral rule should continue or not continue.
We believe it's working and we believe it should continue but.
As part of that what's important to know as we submitted independent J D power customer comments and feedback in fact, we submitted our five years of 100000 per year. Each so we submitted a 500000 individual customers responding J D powers on these topics and to refresh everybody's memory.
<unk> about 91% of the customers.
Rank <unk>.
Nine out of 10.
Our higher and clarity of pricing so our first message at that point in our submission in June was transparency and pricing exists secondly, the high point was probably 75% of the customers believe our prices.
<unk> were lower than expectations. So that's just the groundwork that went away for you now fast forward to October they have issued the advanced notice of proposed rulemaking. They want to keep the FTC funeral rule in place, which makes sense that as part of that at a NPR advanced notice of proposed rulemaking they've asked to 40.
Questions. It was actually published this morning believe it or not to the Federal Register So the 60 day comment period starts today and ends January 3rd.
And you can go online and see what the questions are but theyre very similar I mean really where they're going is should gpl's. The price list be online and what format should that be in line and such.
The one thing that I guess, we would say that were disappointed in is that.
To change the rule and to regulate it.
Under the codification do you think that you need to have.
Some damage to consumers or something happening and it just appears that in our data that we submitted independently from customers through J D powers.
Telling a different story to where theyre going and Thats, a little bit disappointed and we just simply don't believe that it's a one size fits all commodity in fact, we think it's the opposite.
The funeral business is highly customized celebration of life forgetting, even more customized and that's where the trend is going and such and so.
Does this solve any problem it doesn't appear that it does but we will simply respond.
Respond accordingly.
Like we have before with with data in terms of the effect of Sci, which is a great question. We've kind of are our thoughts havent changed to what we said before we do different things online we tier our customers a lot of our funeral homes are tiered as well in terms of spending I.
I think we have over 450 plus of our funeral homes online that have starting at type prices.
We have premium experiences for our more high end tiers as well that's probably for another 400 of our funeral homes. We are somewhere between 300 to 400 GPL online ourself. So we're already going down this path. We the most important thing for us is giving clarity transparency to our.
<unk>, but most importantly, given the tomb in the form that they want based on the tiers of those individual funeral homes, and such which could be different.
Of course, we strongly believe that meeting with them to help customize their celebration life is very important but the punch line is in all of this we just haven't seen any type of effect that we would consider materials. So if this A&P or went into effect and it went down that path.
We've been consistent for a couple of years and fast forward today. We continue to believe that we just don't think thats a material effect to our business going forward from an EPS or cash flow or market share or anything along those lines perspective Joanna.
No I appreciate the comments and thanks.
The question.
This concludes our question and answer session I would like to turn the conference back over to Sci management for closing remarks.
I want to thank everybody for being here today.
Have a great into the year be careful out there and we look forward to seeing you next year in February to talk about our full year 2022 in the fourth quarter results. Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.