Q4 2022 Service Corporation International Earnings Call
[music].
Good morning, and welcome to the CGI fourth quarter 2022 earnings Conference call.
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After todays presentation, there will be an opportunity to ask questions.
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I would now like to turn the conference over to S. C. I management. Please go ahead.
Thank you I appreciate that and good morning. This is Debbie young.
Actor of Investor Relations.
Today, we're gonna be providing an overview of business results for our fourth quarter as well as some thoughts about our outlook for 2023.
First as usual I'll quickly go over the Safe Harbor language any comments made by our management team that's doing 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.
During this call, we'll also discuss certain non-GAAP financial measures.
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 Investor webcast events section.
With that let me now I'll turn it over to Tom Ryan, Our chairman and CEO for opening remarks. Thanks.
Thanks, Debbie Hello, everyone and thank you for joining us on the call today.
Before I begin I want to express my sincere appreciation to our entire Sci family.
Dedication and commitment to helping our client families gain closure in Q1 through the process of grieving remembrance celebration or what makes our company great.
And so our preneed change your efforts to provide peace of mind for families. Securing final arrangements has never been more important at times like these thank you.
This morning, I'm going to begin my remarks, with some color on our business performance for the year and for the quarter with some detail around our funeral and cemetery results. I'll, then provide some thoughts about our 2023 financial outlook.
First in terms of the full year 'twenty. Two results. We are proud to report adjusted earnings per share of $3 80, which was at the high end of our most recent guidance range.
While this is below our prior year.
That was meaningfully impacted by COVID-19, it's an incredible 26% earnings per share compounded annual growth rate from our pre Covid 2019 base year of $1 90.
This accelerated growth was achieved by a combination of the incremental COVID-19 learnings and efficiencies we highlighted at our Investor Day last may.
Increased volumes driven by excess deaths.
And the net positive impact from COVID-19.
In the funeral segment.
<unk> was down four 6% for the year, but well exceeded our expectations and represents a 5% compounded annual growth rate from 2019 levels.
We continue to be impacted by excess deaths, which we have consistently defined pre and post COVID-19 as depths of problem in approximate half to one 5% annual compounded growth.
These excess deaths are identified officially as Covid heart disease and diabetes among other causes.
Some percentage of these tests could be the impact early impact of baby boomers SDI specific market share gains or temporary fluctuations caused directly by COVID-19 or the ripple effects on health from the pandemic Lockdown.
Funeral sales averages remained strong for the year and we experienced some inflationary cost increases associated with labor and energy.
In the cemetery segment revenues were down slightly by $39 million or 2% versus the prior year.
Preneed recognized revenues.
Group, primarily due to a two 4% increase in Preneed cemetery sales production, which we havent dissipated based upon our incremental COVID-19 learnings around sales and marketing, which we touched upon at Investor day.
Our Preneed cemetery sales production has grown by an impressive 14, 5% compounded annual growth rate from 2019.
This premium growth was offset by a 7% decline in at need revenues as well as the $31 million decline in merchandise and service and Endowment care Trust Fund income.
Timely meaningful action and our share repurchase program of over $660 million throughout the year more than offset higher interest expense and a slightly higher tax rate.
Just as importantly, we delivered these results while at the same time, making strategic investments in our facilities, our cemetery inventory, our digital platforms, our customer experience and engagement.
Most importantly, our people.
For the fourth quarter, we generated adjusted earnings per share of 92 cents, which was ahead of our expectations, but down from prior year, which benefited from a significant pandemic impact.
Most of this decline in earnings can be attributable to lower operating results on a reduced impact from Covid, some increased inflationary costs as well as the decrease in Trust fund income.
Below the line the favorable impact of lower share count.
The higher interest expense and a slightly higher tax rate.
Now, let's take a deeper look into the funeral results for the quarter.
Total comparable funeral revenues declined $30 million or about 5% over the prior year quarter, primarily due to a decline in comparable core funeral revenues.
Although comparable core funeral volume declined over 6% during the quarter.
Earnings were higher than we anticipated and about 12% higher than the fourth quarter of 2019 levels.
Our core average revenue per service grew over the prior year by about 1%.
However that does not reflect the true success and enhance value being delivered to our customers.
The negative effects of currency translation Trust fund income information mix almost equally diluted the four 6% organic growth rate into the reported 1%.
From a profit perspective.
General gross profit decreased about $35 million, while the gross profit percentage declined to about 23%.
The revenue decline due to the lower volume versus 2021 accounted for the preponderance of the profit decline.
We also experienced increased inflationary growth rates in our employee and energy related costs.
Preneed funeral sales production grew over $13 million or more than 5% over the fourth quarter of 2021.
Both the core and the Sci direct channels showed impressive growth in contract velocity and increased sales efforts.
Now shifting to cemetery.
Comparable cemetery revenue was essentially flat in the fourth quarter.
A breakdown core revenues increased 3 million compared to the prior year as recognized preneed revenue growth of about $18 million, which absorbed a $6 million merchandise and service Trust fund income decline was partially offset by a $15 million decline in at need cemetery.
Revenue.
Other revenue consisting primarily of endowment care Trust fund income decreased by about $4 million over the prior year quarter due to lower capital gains.
Preneed cemetery sales production declined by $9 million or 3% in the fourth quarter.
This was in line with our expectations for the quarter as the comparison quarter was a very strong one more acutely impacted by COVID-19.
To better understand the level at which our sales teams are operating our fourth quarter preneed sales production was about 28% above our 2019 fourth quarter, representing an eight 6% CAGR over the three year period.
Cemetery gross profit in the quarter declined by about $18 million and the gross profit percentage dropped to 33% from 37% in the prior year quarter.
While revenues were essentially flat the $11 million decline in high margin Trust fund income from both merchandise and service and Endowment care Trust had a more pronounced effect on profits.
Inflationary increases in merchandise labor and maintenance expenses also put some downward pressure on the gross profit line.
Yes.
Now, let's shift to discussion about our outlook for 2023.
As you saw in our earnings release, we confirmed our 2000 22023 guidance that we introduced to you last quarter of an adjusted earnings per share range of $3 45 to.
The $3 75.
For a midpoint of $3 60.
I think the easiest way to understand what we're assuming for 2023 is to compare the $3 60 projected midpoint for 'twenty three to the $3 80 to that earnings per share result for 2022.
While the impact from Covid is not an exact science we.
We do our best to quantify it for you.
We believe there is <unk> 45 per share attributable to Covid in the 2022 earnings per share.
30, <unk> in general and call it 15 and cemetery.
That results in an adjusted 2022 base of $3 35 per share.
It is our belief that in 2023, we can grow off that adjusted base at the high end of our historical earnings per share growth range of 12%.
We expect higher recognized Preneed cemetery property revenue from completed inventory projects in 2023.
Lower share count from accelerated share repurchases made in 2022.
We will more than offset the declining impact from COVID-19 and other excess deaths projected in 2023.
This 40 <unk> per share growth results in a $3 75 per share base for 2023.
Finally increase interest expense is projected to have a 25.
Negative impact on 2023 earnings per share.
Well, we would typically assume interest expense to grow accordingly, with the increased debt levels of the company grows.
We attribute approximately 15% of this increase is a unique year over year headwind associated with the aggressive fed hikes impacting our variable rate debt.
Removing this 15 cents from the $3 75.
We arrive at our $3 60 midpoint.
This $3 60 midpoint is a 17% compounded annual growth rate from our pre pandemic 2019 base of $1 90.
As you think about the cadence of the earnings for the year, we expect a meaningful decline in the first quarter.
As early last year was still being impacted acutely by Covid.
However, this decline is anticipated to be mostly offset by year over year growth in each of the remaining quarters.
Now as you think about some of the segment assumptions for this year.
Our funeral segment, we are anticipating a comparable volume decrease in the mid single digit percentage range.
This reflects the waning of effect from Covid and other excess deaths, which should be more pronounced in the first quarter comparisons.
Meanwhile, we expect the average revenue per case to continue to compare favorably growing in the low single digit percentage range.
We expect to see inflationary pressures lessen but still be above our recent historical trends in the 3% to 4% range, resulting in funeral margins of around 20%.
Finally, we're forecasting pretty funeral sales production growth in the 3% to 5% range for the year.
On the cemetery side of the business cemetery at need revenues to correlate somewhat with funeral volumes and we expect them to be down in the mid to high single digit percentage range.
For Preneed cemetery, given our success in 2022, creating a new higher base and the expected lack of cobot lead activity in 2023.
We expect Preneed cemetery sales production to grow a little less than historical trends, but still grow in the low single digit percentage range.
We have enjoyed tremendous success during 2022 and selling into unconstructed inventory projects, which should continue into early 2023.
As these projects are completed throughout the year. This should result in favorable preneed property revenue when compared to 2022.
We expect inflationary pressures to lesson around labor and maintenance.
<unk> exceed recent historical trends and anticipate margins in the low to mid 30% range.
As we look to 2024, we would expect to return to normalized earnings per share growth off of this 2023 price.
Finally, I'd like to thank the entire SDI 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 transfer.
Thanks, Tom Good morning, everybody.
Kind of as Tom mentioned in his remarks before I address the quarter I think it's most appropriate to first just say thank you to all of our 25000 plus field and home office associates.
Continued hard work and efforts have reduced our impressive financial results that were talking to them.
The compassion and dedication you always provide to our client families and our communities is second to none in this industry and we truly appreciate all that you do.
So with that in my comments today.
I will discuss our cash flow results and capital investments for the quarter and for the full year and provide some brief commentary on our trust funds as well as our corporate G&A expenses.
And then provide some color on our cash flow and capital investment outlook for 2023, as we move forward now end the call with some comments about our financial position.
So during the quarter, we generated adjusted operating cash flow of $170 million, which is at the high end of our guidance range, we talked about last quarter, but $20 million lower than the prior year.
This decline was driven by a year over year of $52 million decline in operating income and again, that's normalized for gains on divestitures and the impact of estimated legal charges as the prior year was impacted by more pronounced COVID-19 activity. Additionally.
Additionally, we had a headwind of $21 million of payroll tax payments in the current quarter related to the deferral of about $42 million of payroll taxes under the care acts the cares act for the full year of 2020.
And we've talked about this for a couple of quarters. So with this payment we've repaid all deferred amounts at this time.
Cash interest payments were also higher by about $10 million with higher rates driving the predominance of that driving about $9 million of the increase and the remainder due to anticipated higher debt balances.
Somewhat offsetting these headwinds were $60 million of lower cash taxes, primarily due to the lower earnings that we just mentioned.
As we step back and look at the full year of 2022, we generated $826 million and adjusted for any cash flow, which is almost $200 million are 30% higher than our 2019 pre COVID-19 results.
This enabled us to invest capital to grow our company as well as to enhance shareholder value.
So speaking of capital investment activity during the quarter, we invested $330 million into our current businesses first.
The newbuild opportunities and accretive acquisitions. In addition to continuing to return capital to our shareholders specifically during the quarter, we invested $117 million in total capital expenditures, which is $9 million lower than the prior year.
The timing of growth projects drove an $8 million decline in gross capital, while our maintenance Capex is generally flat at about $109 million.
For the full year 2022, as it relates to our maintenance Capex, we invested about $75 million more in 'twenty two compared to 2021 the breakdown in the $75 million consists of three components first $25 million of the increase is <unk>.
Even in large part by increased technology infrastructure spend as well as capital improvements to maintain our best in class locations. This technology infrastructure spend relates to upgrading the hardware wireless network capabilities at all of our funeral homes and cemeteries to common.
<unk> current as well as planned digital enhancements.
Bulk of this spend now is now complete which I'll speak to in a moment when I discuss our 2023 outlook.
Second $30 million of the increase relates to our cemetery development spend as we continue to replenish our cemetery property inventory that our sales team sold during the Covid pandemic.
Finally, the remaining $20 million of the increase relates to our digital investments and corporate spend.
And we've really been discussing this spend for several years now and have now broken it out separately from field maintenance capital expenditures to really just give better visibility.
This spend relates to ongoing support for and enhancements of existing systems like Salesforce ancient minus plus became and our 2000 plus websites, which continue to enable sales growth in our pre need and at need sales areas as well as new digital initiatives.
To improve our future customer experiences and field operations.
From a gross capital perspective, we deployed $16 million during the quarter towards the purchase of real estate construction of new facilities and expansion of existing funeral homes and cemeteries across our footprint.
This brings the total of 22 spend on new builds and real estate to about $52 million, which will also help drive additional earnings and cash flow growth for the company with low double digit to mid teen IRR.
On the acquisition front, we're excited today to report that we had a very active fourth quarter invested almost $90 million in acquiring three combination operations and 11 Standalone funeral homes in four separate transactions, bringing our full year spend to just under 100.
$5 million. These businesses acquired during the quarter are located in California, Pennsylvania, and Ontario, Canada. We're excited to welcome all of our new associates to the Sci family.
Finally, we continue returning capital to shareholders with nearly $116 million to be returned this quarter alone through $42 billion of dividends and 74 million towards share repurchases for the full year, we returned an impressive $821 million to share.
So, let's shift gear and talk about our trust funds a little bit we saw some improvements to the value of our trust assets in the fourth quarter, but again year to date, they declined about $800 billion to $5 7 billion in total at year end.
Deposits on the new sales that go into the trust funds and withdrawals from maturities generally offset offset each other during 2022 so.
So the decline is primarily associated with the change in market value of our trust assets really reflects an 11, 5% decline in trust performance that we've disclosed year to date.
As of today, our trust assets have increased by just over $250 million and 23 keep in mind. This market volatility has a muted effect on our near term earnings as well as our cash flows and again I'd also like to reiterate we have an accounting white paper and a one page some.
Murray on preneed in the investors section of our website, which I think will really help illustrate the cash flows associated with these trust funds.
So now let's talk about corporate G&A after.
After adjusting for the $64 million pre tax estimated charge for certain legal matters corporate G&A of $43 million in the current quarter was about $2 million higher than the prior year and slightly higher than our expectation, primarily due to workers compensation and general liability insurance.
Costs that were a little bit higher than what we expected.
As I mentioned on our last call as we look forward in 2023, we continue to expect corporate G&A to be lower than we experienced in 2022, and approximately $38 million to $40 million per quarter as incentive compensation is expected to be lower than our COVID-19 impact 2022.
The actual results within this quarterly range will depend on company performance during the year, which will affect our incentive compensation plans.
So now let's move to a few comments about our cash flow outlook about 2023, and our press release, our guidance for adjusted operating cash flow for full year of <unk> 23 is a range of $740 to $800 million with a midpoint of $770 million.
As Tom just mentioned, while we're expecting some nice normalized growth in our businesses in 2023, the headwind from lower expected Covid volumes generally offset this growth and lead to modest growth in 2023 EBITDA there.
There are a couple of items I'd like to highlight when thinking about our adjusted cash flow in 2023.
First as we've said previously we'll have higher interest cost on our floating rate debt.
Last quarter, we mentioned it could be a headwind of about $50 million, but I don't think it will be closer to about $55 million, primarily on higher expected rates and somewhat higher balances.
Cash tax payments in 'twenty, three are anticipated to be about $165 million at the midpoint of our guidance, our $15 million lower than 2022 on the lower earnings and by the way from an effective tax rate standpoint, we continue to model in the range of 24% to 25%.
For 2023.
From a working capital perspective, we're expecting 20% to $25 million incremental use of working capital as uses from strong Preneed cemetery sales and strong incentive compensation cash payments are partially offset having to know cares act payments and 23 that I've mentioned.
Before is now behind us.
So if you look about investing capital in 'twenty three our first investments will be as usual back into our businesses.
We expect maintenance Capex will drop from $335 million to $300 million, which is primarily due to the declines in technology infrastructure spend at our field locations that I already mentioned at the midpoint and investments in our locations make up about $120 million Cemetery development.
<unk> Capex comprises about $130 million and the remaining $50 million is being deployed towards digital investments and corporate needs in.
In addition to this maintenance Capex that I, just described we expect to deploy $75 million to $125 million towards acquisitions, and roughly $45 million of new funeral home construction and real estate opportunities, which together will drive low to mid teen after tax IRR, which again is.
Well in excess of our cost of capital.
We feel we have the financial flexibility and liquidity to continue much of the same successful capital investment strategy in 'twenty three as you've seen us do over the past few years, we will continue to follow a disciplined and balanced approach investing to the highest relative value for our shareholders.
And of course this strategy is predicated on our stable free cash flow, our strong liquidity as well as our favorable debt maturity profile.
So in closing I'd like to provide some commentary on exactly that our liquidity and financial position.
I'd first like to highlight that in January of this year, we entered into a new $2 $1 75 billion Bank credit agreement, which consists of a $675 million term loan and a $1 5 billion revolving credit facility. Both maturing now in January $2000.
28 this.
This transaction increased our liquidity by over $600 million. So today that stands at about $1 $2 billion in liquidity and it also improved our debt maturity profile substantially.
Finally, our leverage at the end of the quarter was about three and a quarter net debt to EBITDA.
EBITDA continues to normalize as Covid activity wanes, and we expect to enter our targeted leverage range of three and a half to four times by the end of this year.
So in conclusion 2022 was a really great year for US we began this year with a very strong financial position.
Most importantly, I Echo Tom's comments that none of this would have been possible without the hard work and compassionate caring of all of our dedicated frontline associates. We appreciate all of your all of your efforts and again say thank you.
So with that operator, we will now conclude our prepared remarks, and we'll now open and back to you for questions.
Thank you.
Our sports.
Answer session.
To ask a question you May Press Star then one on your Touchtone phone.
You're using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question will be from Joanna Gagik from Bank of America. Please go ahead.
Hi, good morning, Thanks for taking the question so I guess first though.
Maybe clarify the comments you made on 'twenty 'twenty four did I hear you say you expect to grow.
Our normal lives.
So I don't know did you mean from at least 16 with borne out there was another number.
Yes, what I was referencing to US we think there is $3 60, as kind of a level up year or with all the COVID-19 impact.
The wide and so based on what we know today I know 'twenty four is still a ways off we would expect to get back to that growth range of 8% to 12% ROE and office 360 basis.
Obviously, we'll update you as year goes on and be in a better position to talk about that a year from now.
Okay that makes sense I just wanted to clarify that.
And I guess on the quarter and I guess as it relates to 'twenty three guidance.
So clearly Q4 was.
Stronger and you said.
Those services were.
The area that payments were stronger. So can you is there a way to think about.
How big were those exits that number in Q4 and also what do you assume in your guidance with grade three and it did anything change.
How do you think about when he comes from that angle versus how you were thinking about three months ago.
Yes, I think three months ago, Joanna if you really look at what's happened we've been able to maintain our guidance and when you compare back to 'twenty, two and I'd say the big upside surprises. The funeral segment is performing more cases than we would've anticipated that's somewhat being offset by.
A couple of things like Trust fund income.
Interest expense is going up so being able to absorb those things that a year ago, we wouldn't have anticipated it being so impactful so so really positive about.
Our funeral volumes and our ability to service those I think on the excess deaths I mentioned that what we can do is we can go to the death certificate and see what why somebody's been deceased and normally we'd expect let's say a 1% compound in undergrowth of word five.
So you begin to say well, what's causing that and I think some of it could be the beginning of the baby boomers. So it could be our market share and I think I believe most of it is either COVID-19 related and a lot less of that and more of this concept of excess that they remember the concept of excess death is really around <unk>.
Society are we less healthy mentally and physically than we were going into the COVID-19.
The ramifications of that lack of access to health care for some period of time. So it is our belief and I think there is other data supporting this that those trends will continue, albeit the lesson. So as we think about these excess deaths will continue into 'twenty three there'll be less comparatively as you think about 2002.
'twenty two is the way, we're thinking about it but again not an exact science just our belief.
So we can say, it's like one 2% a funeral.
San Francisco.
You know, it's not worth it would have been otherwise.
Yeah, we would expect that base to grow somewhere around call it rounded 1% 2%.
And again, I'd say that base.
A variety of reasons is growing a little bit more.
Again compared to last compared to 2022, we expect 'twenty three to go down, but I still think we'll be operating at elevated levels. If you compound growth off that 2019 numbers. So.
We feel good about.
The revenue streams that we're projecting for 2023.
Okay, that's that's how I understood and.
And I guess on that topic you mentioned.
This settlement.
Almost $65 million that was.
Excluding G&A G&A any are excluded from the cash flow our cash flow outlook. So can you give us more detail on this.
Quite comfortable actually what exactly has been alleged in the Rd.
Keith it's really in those two states, Florida, and California, or do different things and I guess, what that you know should we think about this.
Vacation that similar issues.
And you got it right.
Hi, Julian I'll take that this is Eric.
It's already is there are two cases in California, and Florida that had been previously disclosed as we said in the press release as well you know the first thing I'd, probably give a little bit color on is to say this relates to our Sci direct segment that is delivering to the direct cremation consumer products and services.
And are doing it very well that's a segment of ours is just over about $200 million of revenues on our total of about $4 billion in revenues just to give you kind of a relative size perspective, what's really unique about this business is what we love about this business though.
As you know, we're really delivered exactly what a direct consumer wants in terms of products and services. This is one of our segments that has some of the highest customer satisfaction surveys that we received.
Google stars as well as we measure it I think it's something like almost 90% of the Google Star feedback, we get are actually five stars as it relates to so it's a great business, it's high customer satisfaction and we'd really like to continue.
Serving that consumer in such a positive way as we are as we have done we've said in our press release, we've kind of broken it out for you. It's a pre tax charge. It is very much estimated at this point in time about two thirds of that relates to customer cancellations and a third of it relates to some investigative costs and other.
Legal expenses in California.
When someone cancels one of these contracts first of all any consumer has the ability to cancel anything that we've done that it's been undelivered. So the undelivered service offerings could always be be canceled. These specific cancellations, though relate to what some products and services such as merchandise such as in our kit.
<unk> already been delivered and in those situations. We're going to go ahead and open that up for a certain period of time and allow these customers if they choose to do it to cancel it and Thats. Our best estimate at this time it could be bigger than this it could actually be a lot smaller than this but this is our estimate for now and turn.
In terms of customer.
Cancellations you know when you think about the business then going forward I think we may rethink some of the things that we do to deliver prior to the at need event and.
In this particular line of business as we move forward.
Doing that it could have an effect on some of the revenue recognition. It could have some the fact, where we trust more monies as we as we move forward, but again just to put that in perspective as we move forward. Those are not very material I think that's probably worth maybe five to seven cents a share in the total.
$3 60 guidance and Thats included in that included in the model. So going forward, we may tweak our policies or how we interact and consumer.
A little bit going forward in terms of the pre delivery of merchandise at such but again, a very happy customer is what you have to get from this and we want to continue delivering to a very satisfied customer that finds value in the products and services that this particular segment delivers in terms of the cash flow.
<unk> and 'twenty three the outflows. This is still a moving target. We don't have this settlement one of the settlement and Florida has not been completely approved yet.
We're still in discussions with the state of California on a settlement and the other ones as well. So you know just in terms of timing. That's why we chose not to include it and again the cancellations is our best guess at this point it could be a little bit heavier or it could be a lot lighter than this as well, but for all of those.
Reasons, we'll keep you informed.
But we don't think this is ultimately going to have a material effect. It's a really good business and we look forward to providing great service to that customer that appreciates it moving forward.
Thank you and our next question will be from John Ransom from Raymond James. Please go ahead.
Hey, good morning, maybe.
Maybe an unfair question because it would involve math and I know that's challenging for the team.
If you were to look at our 2019 to 2023, obviously.
Yeah, we compounded 2019, you know a 10%.
Yeah versus where your 360 is where a lot lower than 360.
Did you give your best guess as to how much of that is just the elevated volumes on the funeral side.
How much of that is cost and then how much of that is pre need cemetery, another and just trying to get a sense of.
Yeah kind of detailing out the outperformance.
Yeah versus controllable versus.
This higher than expected volumes.
Yes, John .
I think when you go to the $3 60, theres not a lot of higher than expected volumes left obviously in the 380 theres still soft so.
As we think about it if you remember at Investor Day last year, we had that slide that showed a 65 cents of improvements the new base that we're operating on.
75% of that was.
The cemetery sales related to marketing and sales improvements and then we had another 10.
10%, 15%, which related to cost efficiencies related to the accelerated share buyback. So as we sit here I'd say, that's the preponderance of the improvement combined with that to your point. There is probably another 10 or 15 cents worth of I'll call it excess debt impact.
And that's where I go back to I don't know if that whole 2015, just goes away in one day, because it all related to ripple effects of Covid and how much of it stays because it's a market share gain or it's the baby boomers beginning to impact the projections. So so the most of it I think we would identify.
Before youre right Theres, a theres a little bit of excess does still in that 2023 projection, but but not as much as we saw in 'twenty two or as much as we saw in 'twenty one.
Well I mean, it's kind of remarkable because you would also add and the higher interest expense.
Been contemplated that was really the basis, even a little better than that.
Okay.
And then.
A squishy question on the.
Consumer I mean, you know pre need cemetery the ultimate.
Apparently large ticket item that can be deferred.
So are you seeing kind of as you went through 'twenty two with the ebbs and flows with the stock market. In 2023, you mentioned the lower end consumer some changes, but what are you seeing in your core.
Kind of 73 year old Boomer relatively affluent when you approach him or her about a preneed.
They tickets pre need cemetery, what are you seeing in terms of behavior changes if any from the peak.
I'd say generally John seeing very favorable I mean, we're still seeing good stuff at the high end.
Seeing good stuff.
Generally in the core and you touched upon it I'd say, we're still seeing kind of that lower entry point sale, a little more difficulty in getting people to like you said.
Sign on the dotted line versus differ so so that segment continues to be a little bit challenging.
But I think by the results Youre seeing were overcoming it with a lot of other things, which are you know.
More political leads more effectively as we take these marketing.
Leads and have learnings and be able to test.
No.
And then leveraging the utilization of our technology to do enhanced kind of real time training and productivity. So I think a lot of those were overcoming and still feel very strong about it and you know my thought is if we don't and enter into a recession.
And inflation begins to tamper back down we will see that customer to come back in.
Feel really good about back half of 'twenty, three and particularly as we get into 'twenty four.
And then you know you've touched in the past on sales productivity.
So you know in short you're selling more stuff with fewer people but.
Do you have like you again take a point in time 2019, maybe as our baseline what's the what's.
That's a useful way just to think about the average productivity per salesperson, you know today versus pre COVID-19 and how much of that would you say is just huge.
More modern tools like contact.
Management and moving.
Moving inventory online and streamlining your product was.
It's just good old fashion kind of more rigorous kind of top down management.
And that's it for me. Thank you. Thank you.
You bet, Jon so as far as head count of salespeople I'd say, we're down about three or 400 head count from Nike.
19, pre Covid and if you look at the productivity I think I referenced where 28% higher than we were back then so we're able to be 20.
8% higher with the <unk>.
All at 7% to 8% less head count so quite a bit of efficiency.
I would tell you that.
Quite a bit of that the majority of that is probably being able to leverage the tools we've invested in.
Beacon to be at Salesforce, and the waiver utilize those things and then combining that with I think.
Marketing leads growth if you look at the lead sources, we've had the traditional channels that generally follow a pretty predictable pattern and the real increase in leads has been through the digital lead to the marketing leads and those would become more political more effective so so I'd give it again.
Jerry or does better than me, but but I'd say over 50%.
Probably approaching $60 70 is the productivity of these tools and the rest of it.
Better lease and good old fashion like you said, great sales teams that execute.
I just want you to know I keep getting mail or from you guys. You know I'm, a little young and its one of the points about.
Yeah, you can take me off your list for few years.
You're actually our target dose.
Someone else.
[laughter]. Thank you.
Thank you and our next question is from Scott Schneeberger from Oppenheimer. Please go ahead.
Thank you it's Daniel on for Scott Good morning.
Please elaborate a little bit on the on the cemetery preneed sales production expectation for 'twenty three.
As it comes to the indicators as well as how you think about velocity versus sales average and our sales activity. Thank you.
Sure. So as you look at our the way we're guiding on here is we believe that again, we're back up and running and growing of what you would expect us to do so on a normalized basis. We would say mid single digit growth is what we would expect with slightly different about 'twenty three is recall, particularly in the <unk>.
First quarter, there was a lot of COVID-19 activity. When you have COVID-19 activity, there's a lot of acne.
Arrangements are variables that are taking place and that's a pretty productive preneed sale, because there'd be a companion sale. So when we think about the cadence in the first quarter, while we expect the first quarter to be great. It's not gonna look as favorable compared to the first quarter of 2022 because of that COVID-19 activity. So as we think about.
That's the toughest sales productivity quarter, I should say sales the production.
Production quarter, and then as you get to the rest of the year the comparisons become a little more normalized so overall instead of thinking about it growing in the mid single digit.
We're projecting it to be in the low single digits and that's the slight difference being that the first quarter comparison.
Got it thank you and on the average funeral for service.
Average revenue per service.
How do you think about the components of that as we look into 2023.
And you're talking about particularly with cemetery correct no.
On the funeral side average revenue per service.
Okay.
Yeah, I think on the average rep.
Revenue side, we expect that to be in the low single digits. We had kind of an unusual thing happened towards the end, where we had currency translation issues as it relates to the Canadian operations. Obviously the trust performance of the Trust Fund income was down in 2022.
So those types of things as you think about <unk>.
<unk> 23, I think our expectations are.
Income is still going to have some challenges because of the carryover impacts.
What happened in 2022.
And who knows on the translation side, but we feel very comfortable asset that we're going to grow.
At the organic level in the low single digits and feel really good about pricing, we're not seeing really any pushback at all in passing along some of these inflationary impacts that we're seeing in our business.
Got it thank you.
Helpful. One final one from us I mean, so the last couple of years.
Cmos side of funeral assistance program and it sounds like that's going to come through now in May.
For example, the public health emergency declarations.
Have you seen any impact from this program.
No not in any material way I'm sure we've seen some but I couldn't even tell you.
Collectively what that number is we're not seeing that in any material.
<unk>.
Okay got you. Thank you so much.
Okay.
The next question is from Tobey Sommer from <unk> Securities. Please go ahead.
Hey, good morning. This is Jasper bibb on for Tobey.
Just one clarification on the trust income assumptions in your EPS guidance.
Obviously, it's been a pretty decent start to the year for equity returns. So are you assuming any higher trust returns now relative to the initial gains range. You gave back in November or would you say no change there.
No I'd say, it's a great start, but it's too early to think anything right. Now. So we have said from the beginning that we think there'll be a rebounded we speak there'll be high single digits, maybe even get to about 10% in terms of the return. It's a great start in January but we havent changed anything at this point in time.
So jesper just to clarify we think we think the.
We think we will have positive results in 2023. So as you think about trust income and its impact because of the cadence of the market are declining last year, we're going to have some tough <unk>.
First half year comparisons when you think about it so to Eric's point, we're gonna earn well in the first quarter, but I still anticipate trust income to be down because you've got the last nine months of last year, you've got to overcome.
Right that makes sense and then I wanted to ask about some of the cost inflation pressures decided in the prepared remarks are you seeing any kind of easing of on.
Wage inflation or other input costs early this year and how are you thinking about managing those those inflationary trends in the guidance.
Sure I mean.
The primary ones that we saw last year, where wages and then energy related predominantly utilities. So fuel so take the easier one first on the utilities and fuel side I think things are trending better.
Obviously, we saw a lot of increases in 2022, we've seen a dampening effect that should begin to show up in the comparisons.
On the wage front, we definitely are seeing some pressure.
Going away, we did experienced probably about a 5% wage inflation when you think about.
You know what we encountered in 2022 and so as we think about 'twenty three we would expect that the lesson.
And like I said, I don't think it's back to 1% to 2% inflationary cost, though is probably more a three 4% but again.
I did make a passing grade and economics, but.
Okay with that.
[laughter].
I appreciate the detail there thanks for taking the questions guys.
Yeah.
The next question is from a J rice from credit Suisse. Please go ahead.
Oh, Hi, everybody just a couple of questions if I could.
Cremation rate up 150 basis points year to year. This quarter, it's been running sort of at that pace for awhile.
Do you think that's sort of the new normal I know you typically had a range of $100 50 50 to 150.
Thoughts on what you're seeing out there with respect to cremation.
Yeah, Yeah, I think I think youre right I think probably in the 120 to 150 is a fair way to think about it it will ebb and flow.
Yeah.
Obviously, COVID-19 time period was a little unique but I'd say based upon what we're seeing we would expect in that 120 to $1 50 right.
Okay. It seems like the larger cases higher end of the market in the cemetery side has come back.
Do you think we're sort of at a normal pace or is are we seeing some reflection of pent up demand that makes it sort of above average at this point.
I don't know that it is pent up demand because we saw a pretty strong throughout I think it could be a combination of two things.
No.
One we've built a lot of fabulous inventory out there and really across the entire country and so having more availability.
Going to lead to more higher end sales. So I think some of our continued growth when you think about the market being down 20% and all that and all the things you'd expect to happen some of that could be the fact that hey look we've got it in more places than it wasn't there and maybe more spectacular stuff than we had before and thats going to entice people into that.
At that high end category. So we feel good there's a lot of available inventory, we're going to as we mentioned flip a few of those projects are bigger projects across the country and in wood.
I would anticipate selling into those projects.
At a high rate.
Okay.
Obviously like last couple of years are you ended up on a strong note with the <unk>.
Acquisitions in the fourth quarter is that the way you think acquisitions are just going to be really skewed to the fourth quarter getting ahead of the year.
Year end taxes, and maybe just comment on your pipeline that youre seeing now.
Theres definitely you know people trying to get you in and I think theres some facts associated with that the pipeline looks good we don't there's not a lot of huge huge deals, but I'd say that deal activity is very good we're seeing a lot of.
People that were talking to and so we expect to have a really good 2023, and hopefully get a few more in the in the first three quarters of the year, but it is pretty typical like I said for people. They really don't want to cross that you're in threshold. So theres, a real mad rush to get it done.
So.
Goodyear coming up we believe in.
A lot of a lot of things going on.
Anything different on pricing for deals that you are saying.
No not really I think I think the whole you know what's your normalized volume discussion was always interesting.
Think that's actually getting more clarity as we get into this year versus let's say two years ago, where you're arguing about was 2021 are a good base year to grow off of which we never believed so so I'd say that part is getting easier and I'd say the pricing expectations. There are still a little.
Higher than they were three or four years ago, but manageable.
Okay, maybe last question any update on the discussions around the funeral rule, what's you're hearing from the FTC or otherwise any commentary there.
So we you know the com.
Comment period was up in January this year, we submitted a very similar response to reiterate.
Our position.
But we had you know there's about 700 750 responses that they think they have to go through at this point in time today Jay the timing is this open we really don't know I mean this started three years ago that we started talking about it.
Someone said the last time that we had to change 20 years ago or so it took eight to 10 years to even make that change. So I think the timing is very uncertain. I think you should read the papers yesterday and today. The FTC has got a lot on their plate I'm not sure that with the quality of the industry in total.
We're dealing with its customer and getting very very high marks I'm not sure. If this is any type of a burning platform for the FTC to deal with.
Sooner rather than later, so we'll just have to wait and see.
Okay, great. Thanks, a lot.
Thanks, David.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Sci management for any closing remarks.
We want to thank everybody for being on the call today, we look forward to speaking to you again on our earnings call I believe is on the <unk>.
First April 30th early May early minutes so.
So we'll we'll talk to you then everybody be careful.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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