Q2 2023 Service Corporation International Earnings Call
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Good morning, and welcome to the STI second quarter 2023 earnings Conference call, all participants will be in listen only mode.
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I would now like to turn the conference over to U S. T. I management. Please go ahead.
Thank you Ann Good morning. This is Debbie young director of Investor Relations and on behalf of the SDI team. Thanks for joining US today, we're going to have some prepared remarks from common Eric in just a moment, but before that let me quickly go over the safe Harbor language any comments made by our management team that say 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 FCC that are available on our website.
Today, we will also discuss certain non-GAAP financial measures. A reconciliation of these measures can be found in the tables at the end of our earnings release as well as on our website.
Now I'll turn it over to Tom Ryan Chairman and CEO .
Thanks, Debbie Hello, everyone and thank you for joining us on the call today.
This morning, I'm going to begin my remarks, with some high level color on our business performance for the quarter and then provide some greater detail around our solid funeral and cemetery results.
For the second quarter, we generated generated adjusted earnings per share of 83.
Which was on par with our results from the prior year quarter, we were able to achieve this result, despite absorbing a $19 million or <unk> <unk> per share increase in interest expense, resulting from a more than 400 basis point rate increase in our variable rate debt.
We continue to see significant earnings per share growth over pre pandemic result.
Compared to our second quarter 2019, a 47 cents per share we have grown earnings per share at a compounded annual growth rate of 15% over the four year period.
Funeral metrics were strong and performed at or above our expectations.
Cemetery Preneed sales production increased slightly quarter over quarter. However, they fell short of our internal expectations as we experienced a decline in the number of contracts sold primarily within the entry level price sensitive consumer segment.
We believe this is predominantly attributable to a decline in discretionary consumer spending by this entry level consumer due to the actual and perceived impact of inflation on our preneed cemetery property sales and a variety of other discretionary purchases.
Below the line higher interest expense incurred from the spike in interest rates on our variable rate debt reduced earnings per share by nine cents and was partially offset by the <unk> per share favorable impact of a lower share count.
Now, let's take a deeper look in the funeral results for the quarter.
Total comparable funeral revenues increased $11 million or about 2% over the prior year quarter.
Primarily due to an increase in core funeral revenue.
Although comparable core funeral volume declined 2% compared to the prior year quarter volumes were high higher than we anticipated and about 9% higher than comparable second quarter 2019 levels.
Our core average revenue per service grew over the prior year by an impressive 4% even after absorbing the negative effects of a 120 basis point increase in the cremation mix.
From a profit perspective funeral gross profit declined slightly by $2 million, while the gross profit percentage remained about 21%.
Well above our pre pandemic second quarter margin of 19, 5%.
Inflationary fixed cost increases slightly outpaced our moderate funeral revenue growth.
We encourage slightly higher inflationary staffing and selling costs, which were mitigated in part by lower transportation costs and lower bonus incentive expenses, resulting in about a 4% increase in fixed costs.
Preneed funeral sales production grew an impressive $12 million or about 4% over the second quarter of 2022.
Both the core and the Sci direct channels experienced sales production growth that was primarily driven by increases in sales contract velocity.
We continue to see consumers awareness and openness to preplanning elevated with continued strength in marketing leads in preneed funeral sales production.
Now shifting to cemetery.
Comparable cemetery revenue increased $5 million or just over 1% compared to the prior year second quarter.
Core revenue accounted for the preponderance of the increase as compared to the prior year as recognized preneed revenue increased by $6 million or 2% offset slightly by a $1 million decline and that need revenue.
Preneed Cemetery sales production increased by $1 million in the second quarter.
While we did see a slight growth it was below our expectations we.
We saw impressive increases in our largest state property sales, particularly in both the western and eastern regions and we also saw healthy increases in our core average sale across the network.
However, we did see a decline in our property sales velocity over the prior year quarter a trend. We also experienced in the first quarter.
Again keep in mind, our second quarter contract velocity is still 15% above our pre pandemic 2019 second quarter.
As we bifurcated the sales data by price tiers, we noticed that our mid and premium level property price tiers had increases in velocity, while our more entry level price sensitive tears saw some unanticipated declines.
Based on examining a variety of consumer discretionary data sources and from feedback from our customers as well as from our frontline sales teammates. We believe that a significant reason our sales velocity has been negatively impacted.
Is due to a more cautious consumer particularly.
Consumers that are more acutely impacted by the effect of accelerated inflation.
Additionally, as we get further away from the acute impact of the pandemic.
There seems to be a slightly diminished urgency for this specific entry level consumer to transact at the pace, we've experienced over the last three years the.
The good news is that we believe these consumers are deferred not lost so we're developing selective programs and payment terms to enhance this specific customers' ability to transact with us.
Still to put cemetery preneed sales in its proper perspective, our second quarter Preneed Cemetery sales production was about 47% above our 2019 second quarter, representing a 10% compounded annual growth rate over the four year period.
Cemetery gross profit in the quarter declined by about $4 million and the gross profit percentage declined slightly to 33% still.
Still well above our pre pandemic second quarter gross profit percentage of just above 30%.
Expected inflationary increases in our cost structure exceeded our modest revenue growth for the quarter, putting pressure on comparable cemetery profits.
Now, let's shift to discussion about our outlook for the remainder of 2023.
As you saw disclosed in our release, we have slightly reduced and narrowed the range of our annual earnings per share guidance, while slightly increasing our annual cash flow guidance, reflecting both favorable working capital trends and an expected decrease in cash taxes associated with a tax accounting method change.
The primary reasons for the earnings per share change was a reduction in our preneed cemetery sales production assumption for the year as.
As well as the higher interest expense assumption associated with our variable rate debt as the fed continues to push short term rates higher and communicating a willingness to maintain those rates for longer.
This updated earnings guidance still reflects impressive growth within our 812% framework.
After considering the unique interest headwind this year and removing the beneficial COVID-19 impact from last year.
So for the rest of the year and the funeral segment, we would expect to see low to mid single digit declines in funeral volume as the impact of the Covid pull forward slightly outpaces, increasing volume trends.
We would expect healthy low to mid single digit growth in our funeral average both from at need cases, as well as preneed going at need cases as Trust fund income increases from recent strength in the financial markets, which should favorably impact our funeral sales average.
On the cemetery side, we would expect preneed sales production to range from slightly down to low single digit growth in the back half of the year.
Positive trends in large estate property sales in core averages should be tempered by lower velocity, particularly with our price sensitive consumers.
It is our hope that our pivot to enhance the customer proposition for the entry level customer through a more consumer friendly payment terms on cemetery property will have a favorable impact on velocity in late 2023 and enter 2024.
The impact from newly completed construction projects over the next two quarters should create favorable comparisons of recognized cemetery revenue for the third quarter and slightly negative comparisons in the fourth as the 2022 fourth quarter impact from completed construction was quite significant.
From an earnings per share perspective, we would expect to be able to deliver year over year growth in the back half of the year, particularly in the third quarter as the favorable impact of higher funeral sales averages higher year over year cemetery revenues and the impact of our share repurchase program will more than offset the negative.
Facts of slight volume declines and significantly higher interest expense associated with our variable rate debt.
Finally, I'd like to thank the entire SDI team for all that you continue to do every day for our customers our communities and each other.
You guys are what makes this company great.
With that operator, I'll now turn it over to Eric.
Thank you Tom and good morning, everybody I guess I'll start the way that Tom just ended and really liked to.
Extend my sincere appreciation to all of our 25000 Sci associates.
Dedication to the communities and the clients families that you serve and let's face it in one of their greatest time of need is really truly inspiring. So thank you. Thank you for all that you do to go above and beyond.
So this morning.
I'll walk you through our cash flow results and capital investments during the second quarter. I also want to then make a few comments on our trust fund income and corporate G&A.
And then discuss our financial position and our recently raised cash flow guidance for 2023.
So starting with the quarter generated strong adjusted operating cash flow in the quarter of $157 million this exceeded our expectations as more than $16 million over the prior year. So let's talk about the factors that are driving this year over year increase first higher operating income of about 6 million.
And you saw that as noted in the press release <unk>.
Additionally, we had lower cash tax payments of about $23 million on lower book income during the quarter, which were able to more than offset about $20 million of higher interest payments, which as Tom mentioned is primarily related to our higher floating rates and slightly higher balance.
Finally favorable working capital changes during the quarter yielded a net source of about $7 million and this is primarily associated just to some timing issues as it relates to payables and other customer receivables.
So let me give you a little bit more color on the cash interest.
As I mentioned interest payments are about $20 million higher on a year over year basis. This was primarily due to higher interest rates on our floating rate debt, which slightly exceeded our projections and as an update for the full year 'twenty three we entered the year expecting a headwind of about 55.
Associated with both interest expense as well as cash interest. We now expect this will be closer to 60% to $65 million headwind and this primarily relates to floating rates are rising a little bit more than what we anticipated and looking forward. We believe we are effectively <unk>.
<unk> to manage this interest rate risk as we are targeting the lower end of our leverage range by eliminating the amount of floating rate debt that we are utilizing so as of quarter end approximately 29% of our total debt was floating with a current rate of just over seven.
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So now looking at capital investment activity during the quarter, we invested a total of $258 million. This included investments into our current businesses new growth opportunities accretive acquisitions. In addition to capital return to our shareholders.
So let's break this down a little bit further for you. This morning.
We deployed $70 million back into our current businesses with $38 million of cemetery development and 32 million of maintenance capital into our facilities. We also had $20 million invested into digital systems and initiatives.
Some cemetery development spend was accelerated in the quarter associated with large projects at our large Rosehill cemetery on the West Coast. We expect the back half of this year the spend on total maintenance capital will moderate and it will be within our guidance range of 290.
$310 million for the full year of 2023.
We also invested close to $10 million in growth capital related to the construction of new funeral home facilities in several states, including Virginia, California, Florida, as well as expansion some of our existing funeral homes, and cemeteries and Ohio, Louisiana and Texas.
On the acquisition front, we closed three transactions in Illinois, California, and Tennessee for a total of just over $30 million, which brings our first half acquisition spent almost $40 million.
We remain positive and very optimistic about our acquisition momentum and our full year acquisition investment target range of $75 million to $125 million, which we still firmly believe in.
Finally, we returned nearly $147 million of capital to shareholders in the quarter, which is really $41 million of dividends and about $86 million of share repurchases.
So now I'd like to touch briefly on both Trust fund income and corporate G&A.
And as we noted in the release Trust fund income was favorably impacted by favorable market returns over the past 12 months as well as Trust fund income retained associated with some unclaimed property process during the quarter.
Corporate G&A during the quarter was $35 million or $11 million lower than the prior year and slightly below our expectations. This decrease was primarily driven by lower incentive compensation expense versus the prior year quarter.
Going forward, we anticipate that G&A expenses for the remainder of the year will fall within our expected range that I've mentioned to you before of approximately $38 million to $40 million per quarter.
So let me shift to a few comments on our financial position, we continue to have a favorable debt maturity profile.
Liquidity of just over $1 billion at the end of the quarter. This consists of approximately $170 million of cash on hand, plus approximately $860 million available on our long term bank credit facility or.
Our leverage at the end of the quarter increased slightly to about three six times net debt to EBITDA number and we expect to continue to manage our leverage towards the lower end of our targeted range of three five to four times at least in the near term.
So now I want to address some changes to the full year cash flow outlook as our cash flow has continued to be resilient.
First primarily due to the net sources of printing working capital we are increasing the low end of our pre tax adjusted cash flow from operations.
Excluding special items the guidance range from 910 to 960 to 920 to 96 days, so a slight change there.
Secondly, we are now expecting a material reduction of cash taxes to be paid in 2023 and this is as a result of a change in tax accounting method related to the timing of recognition of cemetery property revenue for tax purposes, and the tax return.
Generally speaking this tax accounting method change will result in the deferral of cash taxes in the future years, when the delivery of cemetery property occurs versus at the point of sale, we estimate the impact in 2023 as we transition to this new mass.
<unk> will be about $80 million of lower cash taxes for 'twenty three.
So we are adjusting our full year cash tax guidance from $160 million to $170 million down to $80 million to $90 million as a result.
We're not really prepared to give any further guidance for 'twenty four but we would anticipate cash tax payments and 24 at this point to also to be lower before returning to more normal levels in 2025 and beyond.
So when you take that together, we are raising our 2023 adjusted after tax operating cash flow guidance range by $85 million from $7 40 to 800 to $830 to $880 million with a midpoint of $855 million.
This also represents a $30 million increase over the $825 million generated in 2022.
So our strong cash flow and balance sheet position will continue to position us well to allocate capital prudently to the highest and best use to maximize shareholder value.
I would again like to thank our entire Sci team for their contributions to achieving these strong cash flow and earnings results.
So operator this concludes our prepared remarks and with that I'd now like to open the call I'll turn it back to you and open the call up for questions.
Thank you.
We will now begin the question and answer session.
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Your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question comes from Tobey Sommer at <unk> Securities.
Yeah.
Thanks, Good morning.
I wanted to dig into that.
That change in buying behavior.
The more price sensitive customer.
Maybe could you set the stage by describing what it was like in recent years.
And maybe giving us some color around.
The either the price sensitivity sort of the price points at which this happens or what your what your field reps are learning in terms of interactions with those prospective customers.
Sure Tobey I'll give a shot at that.
Couple of things to I think be aware of when you think about price sensitivity in the in the cemetery consumers just let's look at the year over year comparisons I think what happened is we saw a lot more volatility in the consumers in the cemetery segment versus the funeral and I think Theres a reason for that.
The average consumer is younger and cemetery, we've talked about before they tend to transact earlier. So if you go back to kind of the Covid impact.
Younger people started getting concerned about what was happening and so we saw kind of a I'd say a surge in interest, particularly around the cemetery product. So we're really seeing is a is a harder comparison back lets say relative as an example to a funeral customer. So part of this is just.
The success that we've had and trying to compare back to it.
Other thing that we want to introduce is because again, we're seeing that this level and this is based on feedback based upon good consumer discretionary data got to give a shout out to John for his piece.
There is a lot of correlation in that and so.
I think what's happening is when you saw a lot of inflation, particularly.
[noise] around food and.
I'd say from a.
Consumer discretionary perspective, youre getting youre getting hammered by a consumer staple right. So so as those prices went up and people had to make choices. This is a discretionary purchase they're kind of backing away.
So that's a that's a factor that we think is impacting now that again should subside at some point.
But I also want to make sure everybody understands some of this is this surge of of volume that we saw particularly through the cemetery segment over the last few years and compare them back to that hard number.
I appreciate that.
As a follow up I was wondering what does the.
The cumulative surge over the last three years in this particular customer niche.
In cemetery sales, what does that total in and how long over what period of time might might demand need to normalize do you think.
Going forward.
I think it is normalizing now and if you look back there is a lot of again.
More volatility in the cemetery than on the funeral side, but if you take a compounded growth.
<unk> approach to cemetery were about 10% annually compounded from pre pandemic levels and Thats, what we saw in the second quarter.
And I think we're kind of stabilizing normalizing now so that's a pretty good level on the funeral side that same number is about 8% now the differences funeral didn't get nearly the spikes.
In 2000 22021, so if you go back and look at our cemetery sales, particularly Preneed cemetery sales and I don't have the numbers in front of me, but my memory is it was like 15% and 20% growth rates over a couple of years.
And now beginning to normalize in the back half of 2022, a little bit.
And really normalizing in 2023, so so I think we feel like it is stabilizing I do also think we.
We are dealing with inflation, which is a new a newer phenomenon.
But we feel really good about it and part of it is maybe we need to have some payment terms at this segment that.
Or make it more affordable for people to begin that process, because we still see an interest.
It's probably not the same interest you saw three years ago, but we still see an interest in people taking care of this.
We're there to help them.
Thank you.
The next question is from John Ransom at Raymond James.
Hey, good morning, Thanks for the Shout out on the research.
<unk> probably be the last one.
Parker Parker and they did all the work I just take credit.
We now have.
So, let's just for argument's sake say that cemetery Preneed cemetery production is going to be down 5% in the back half of the year.
What would be the two but I know this is simplistic, but if we had two buckets of revenue, let's say you're at the high end versus the low end.
What's the decline in the low and that's factored into that modest five versus whatever growth trend youre seeing in the high end just to think about the impact of the low end.
We will first of all on the Governor said it would be down 5%. So it's hard for me to quantify it for you but.
We feel a little more.
Excited about back half of the year than that but I.
I do think we would expect.
Our high end to continue to grow and probably.
In the in the low kind of double digits.
10, 15% type of growth John that that we would anticipate and I think again as this lower tier of the things that we're seeing.
We'd probably be looking at similar types of declines high single digit.
12% as you think about last year, but remember youre beginning to compare against periods that experienced some inflation and I think thats going to be the differences right now inflation second quarter last year hadn't kicked in as hard.
And I think we're going to see.
Some more favorable comparisons if you will as you get to the back half.
So okay. So.
And down the same what's the ratio as a percent of sales to the high end versus the low end on the production side.
Well I guess you would have to 70 30.
Well I think the high end is probably about 15%.
I don't have because again I think you'd have to decide where you would want to cut that low end to compare to it but I think at the high end is about 15% and those are the large state sales I think over we categorize them over $80000. So.
It's not a lot of volume.
But it's a good 15% of our revenue.
And so the low end it wouldn't be 85 would it be something like 20% over to Alexander.
I would guess.
Somewhere 15%.
Of the lower than if you added it was lower than Aaron lower than $10000 contract.
About 20%.
Okay, so kind of a similar numbers.
Yes, yes, I think at a high level.
Think about the high end growing below and shrinking and then that middle column being flat.
One thing to add somewhat to your guidance.
I think thats right the middle being flat is.
When you're talking about velocity wise, but again, you should get some inflationary pricing so think of that growing slightly.
Low to mid single digits.
Yes, and Youre, just kind of pointing to the lag effects of inflation.
And the behavior.
The second question. The recognition rate you guys are still pointing to is mid <unk>. This year is that right on cemetery.
Yes.
It was a little bit lower in the second quarter.
Anything to call out there.
Yes, I think if you remember we talked about particularly on the west coast with the range in the first half of the year.
We've got we had some delays.
Delays in damages going on in some of those construction projects, which delayed the completion.
So we do expect those obviously will get completed probably in the latter parts of this year or may push into the first quarter of next year, but thats part of the reason John is just.
Surprisingly theres, some pretty severe damage because of the the way the range.
Well and and so we're a little bit behind but again that will catch up.
Also hoping to get to stop thinking about rain, but we got to make me think about shlomo quarter, thus far.
So lastly, as you know there has been some yes.
Yes chatter in the marketplace again about pricing in your funeral and like for like have you been able to chop any more wood.
On your relative pricing and is there anything you could point to that would be <unk>.
<unk> are hard evidence that your prices are in line with your like for like competitors.
Hey, John This is Eric good morning.
I think as in.
As an update.
We continue to put.
Look at our prices continue to have pricing mechanisms online such as starting at prices in the premium price experience that I talked to you about last quarter just to refresh your memory.
It's about 500 locations at 1500, they kind of have starting at prices.
400, or so that have like a premium price experienced that walks you through a lot of things, including cemetery and those combination facilities.
And then our general price lists that are out there are probably around 1000 to 1100 and we continue to.
<unk> market share and get good feedback. So that's not really your question, but I want to reiterate that everyone knows that how we kind of have the level set that.
The second part of your what Youre, asking though is if you can.
Weighted decline kind of like the hotel chains as we've kind of talked about you and I have talked about this before and we say that we're really playing in the middle tier and the upper tiers. We obviously have sci direct at the very bottom, which is a different direct type business.
And in that situation as you know, but when you look at our homes, our combination facilities and you take like for like we're very comfortable with that with those pricing. If you take our Ritz Carlton and J W. Marriott's and compare it to a lower tier brand.
We're going to be able to identify a difference.
But that's not great analysis in our opinion are great analysis says you got to look like for like you got to look at the customer satisfaction surveys you got to look at market share and as we've been reiterating time and time again I think we're very comfortable with.
With that and with those situations.
So the last one for me just kind of going a little more level on that question. So.
Let's just take a typical urban market.
And.
You look at your competitors.
All real time as your competitor pricing data.
And then Albert and stuff online or how do you kind of suss out what your competitors doing unless the lag if any if they decided that although a big sale.
Do you find out about that.
We'll find out about it already.
Our <unk>.
Production. This area nationally it's two for one plots right I'll say I'll send you a picture from wells funeral home, yes. They were.
We're at all the special.
But if you think of that.
There are independents that have pricing online and there is a tremendous amount of independents that do not have pricing online same with some of the consolidators. So it's very market specific very funeral home spin.
Specific as as well, but even then we're always understanding where we are in the marketplace. So their use administered shoppers and we perhaps or he is administered shoppers as well.
But that's not an issue that.
We're very comfortable with our market management and how they understand where specifically they are within the markets.
Alright. Thank you that's it for me.
Yes.
The next question is from a J rice from credit Suisse.
Hi, Good morning, this is <unk>.
So my first question is are there any updated thoughts on the pull forward I think you've previously slides the add on June one.
Forward.
Maybe 10%, 15% and 23 and down slowly Antonio very long tail.
So are there any updated thoughts on that.
So we really don't have those updated thoughts other than to say that it is.
Here's to us that volume.
Where we expected it to slightly better than kind of what we've expected and.
When you say well, let's get very specific in terms of.
Pull forward and excess deaths and as you know with the data that's out there with COVID-19, it's increasingly difficult to really have any measuring stick that's out there that any one reports.
With any viability for us to compare to so.
There's a lot of moving pieces in terms of our same store volume or market share or acquisitions, which you've done a tremendous job at that in volume.
And then you have your pro Florida effect, you still have an effect thats key.
Clearly out there that perhaps less in 'twenty, three and 'twenty two as it relates to as the CDC defines excess deaths.
As it relates to heart strokes and those types of things, but when you put it all together, we're somewhat comfortable with our forecast if not maybe it's a little bit better than what we expected and for example, I think we told you in February in the original guidance that is.
They've got that funeral volume be down kind of mid to maybe high ish single digits call that 567% down it looks like it's more like 4% to 5% down. So it's not that much of a science or two we have a measuring stick from that perspective, but I hope that gives you an idea of where its trending.
Thank you maybe one follow up.
Is.
Gross margin on that low end sale prices.
Hi.
Okay.
Hi.
Ultimately we continue to think that cemetery is going to is going to end up into kind of the low thirties.
To mid Thirty's, I think thats consistent with what we expected we hope that as recognition continues for the rest of the year and.
Production as well.
That will end up being.
Where we think it will land I don't think thats not a change from what we expected based on the tweak of of this.
This guidance.
Thank you.
The next question is from Joanna <unk>.
Bank of America.
Hey, good morning, Thanks, so much Matt might have missed it but did you talk about the outlook for the cemetery sales.
Sales traction for the year, how are you thinking about this.
At the end of the day.
We think it's going to.
Grow obviously compared to prior year kind of flat to slight growth in the back half of the year, because we expect it to be the full year kind of flat to slightly down low single digits and when you put the 15% first quarter versus this year youre down already.
Kind of mid.
Mid to high single digit percentages for the first half of the year Joanna so for us to get to flat to slightly down in terms of mid single digits for the full year, we're going to have to have some growth purposes.
Versus the prior year I think you may see a little bit more of that growth maybe in the fourth quarter just sequentially as I think about 2022, but that's kind of generally how we see it playing out Joanna.
So for the year again may be slightly down year over year, and then how the how to think about this going forward in 'twenty four and beyond in terms of the production how long.
You are thinking about that you expect to grow next year or it's going to be continued to be a little bit depressed.
Or that's going to be some catch up.
My thoughts would be we will we will grow in 2024, I think the thing to kind of keep in mind.
The cemetery side, there should be a little bit of a drag is going to be the volume because again because of the pull forward a lot of our lead sources come from volume that are walking through our cemetery through our funeral homes and so if you have that pull forward effect that might put a little bit of damper on comparable volume youre lead sources.
Maybe a little less having said that I think if inflation comes down that could be a tailwind for us when you think about 2024 and that consumer coming back and feeling a little more.
Confident in their ability to transact with us in other consumer discretionary things Joanna. So so I think 24 is a growth year and there'll be.
Some things that probably help us in some things that we just need to be aware of.
Alright, and I guess staying on that for a little bit on the Preneed Cemetery sales.
Can you talk about the percentage breakdown.
When it comes to those transactions that you provide financing to customers and also what type of.
I guess, you're offering because I guess last year when you had experience.
Some slowdown in the lower end consumer it sounds like you had responded to.
That slower demand by offering better financing options and I guess.
Presenting a different product or different.
Properties too.
<unk> attract some of these customers. So can you talk about these dynamics that might be.
In terms of percent of these customers that actually use financing option.
Sure, we're still seeing about approximately 70% of our consumers are utilizing financing so to your point Joanna one of the things that Steve and his team are putting together now are looking at this segment of consumer and can we can we go with lower down payments can we start.
The payment terms over longer periods. So we're going to utilize that specific to this consumer.
Because again, we want them to be able to to have that peace of mind and and so we're hopeful that those type of incentives will work.
We typically are going to look at local markets and use different things, maybe lesser down payments more important or lower interest rates stretching out terms. So we really tried to.
Customize that to what we think the local market.
Need would be.
And then what kind of grades I guess in general.
Does he offerings Pam all these financing options related to customer so what kind of late I guess youre able to offer that if you can talk about that.
They are very reasonable I think theyre going to be.
They vary but I'd say in the low to mid kind of single digit percentage rates is the type of financing costs that are out there today.
And last one.
We are.
Yes exactly.
And I'm sorry, just.
Just last one on the on.
On that please.
Cemetery sales production, so I guess.
Talk about previously about.
The higher end consumer where you actually see.
Vote, there it sounds like it on the large sales.
And so are you seeing any any changes there like kind of continues to stay.
<unk> robust because I guess some data for the broader I guess consumer category.
It seems like on the high end, maybe there there was some slowdown but actually at the low end is improving I guess, maybe your industry is a little bit unique that it doesn't behave similarly, but.
Any indication like how I guess this high end is tracking in terms of any cracking down where it's kind of accelerating or staying kind of stable and when it comes to that consumer demand.
They are pretty stable I mean, we definitely saw growth in the year over year second quarter.
So feel really good about it and I just think the feedback from.
Talking to our salespeople that are dealing with those customers is there they are out there and they are willing to transact. So so a lot of activity.
And so we feel really good about the high end again, we're correlating that with Theyre not having one to borrow the money and two they are not competing with other consumer staples of their of their daily cash flow and so that's where we're really seeing.
The impact is and people that probably have been very impacted by inflation in those high end customers tend not to be in so other things will influence their behavior. We've even in the past said it correlate sometimes with the stock market right everybody at the high end feels a little Richard because the markets.
And that may be a bigger impact on people's willingness to transact at the high end and then things like inflation.
And I'm, sorry did you give a number for a large sales revenues in the quarter because I guess in Q1, you talk about like $37 million. So far this lifestyles.
I don't have those in front of me I can tell you that the growth was double digit growth.
<unk>.
But I think it's probably around my memory is it's just north of maybe $50 million in the quarter something like that.
Okay, and it will establish budgets year over year.
Yes, yes, it was and it was about $50 million.
Okay perfect. That's super helpful and if I may just squeeze the very last one perhaps to some other questions about that the price competition.
And discussions that are out there in the market. So on the funeral rule any day on that on the timing for when we might hear from the FTC for this proportion just I know the hosting.
Listening session.
No. We don't have any more insight Joanna than you do I mean, if you remember this started and what late 19 early 2020.
It's Ben.
Clearly three and a half years, so far youre right in saying that there is going to be.
Public workshop using their words.
On September seven we will have a seat at that table, obviously is along with everybody else that wants to participate.
They kind of build that as listening to the public comments and discuss and possible changes to the rules.
So we don't quite know what that entails, but all indications are it has to do with.
General price list disclosures on lines and those types of things and earlier in the call. If you have an opportunity to hear this or not I don't know if you're on from the beginning but I kind of gave you an update in the update was really not much has changed we continue to have pricing online on two thirds to three quarters of our funeral homes as we sit here today.
And Gpl's online from that perspective, and we continue to believe that.
We have price transparency for our consumers our consumers have told us that clearly in the J D. Power's surveys and we feel comfortable with where we are moving forward.
Great. Thank you so much I appreciate the color welcome Jonathan.
Yes.
The next question comes from Scott.
Scott.
Nathan at Oppenheimer.
Thanks, very much good morning.
Just have one more follow up on the many questions on Preneed Cemetery.
Well I guess, the two part or actually the high end is a big focus here.
Rose Hills, you had to delay.
Because of the weather could.
Could you talk about when that was completed so first part of the question is.
Recognition versus production how might we think about that location, specifically because I know that was a meaningful contributor and then the second part of the question is.
It sounds like you are very confident that the demand will remain there for the high end, how do you work with regard to capacity because I know things like Rose Hills.
Pop up and then you might have a wall, where before you have something new construction sites.
Yeah.
With potential consumers. So just curious on your capacity to keep that keep that going thank you.
Okay Scott good.
Good to hear from me so as it relates to production and particularly you mentioned the West Coast Rose Hills.
Think about the first quarter.
The thing that was really poor about the timing as Ching Ming. So ching Ming sales are going to occur typically in March and in April depending on the market but.
Unfortunately that weather event occurred during those periods and so you don't necessarily catch up let's say in June July August as you think about production. The good news is that I would look at it is if you don't have a rain event next year you ought to have a pretty good first quarter, maybe pretty good second quarter. When you think about this.
<unk> markets as far as capacity goes we're constantly developing new cemetery gardens, and we're not we're never going to be in a position, where we don't have that available for people. So really no concerns around it.
Your last piece I think you talked about was recognition and I mentioned this a little bit in my comments, but I'll be a little more specific for you. These can be lumpy and <unk>.
Eric talked a little bit about we're not getting the recognition rates, where we were so some projects have been pushed back.
As we think about the third quarter, we should see a pretty favorable comparison.
Of recognition rate.
And because again I think we've got some projects that pushed that will get done in the third quarter. When you get to the fourth quarter is still going to be good, but you're comparing back against a pretty monster fourth quarter 2022, we had a lot of projects pushed to the fourth quarter. So the comparison when you think about recognition, it's going to be down.
One year over year would be our guess at this point and again some of these projects, particularly on the West Coast, where we had the damage might even pushed into 2024.
Yeah.
Alright, great. Thanks.
Thanks for that.
The I want to swing it over the funeral side now because that that that helped out certainly in this quarter.
And then did.
Volume cadence down just low single digits, 1% that was that was a bit better than we expected. So you've seen I think a nicer tail. During this shop received reversion period.
But I heard and just I think it was response to questions earlier, you cited maybe some concern that that continue to or that could that could start to fall off a bit more so.
Just curious what youre seeing.
Excess death and.
And then how you see that trending over the back half of the year into next year.
Okay.
So I think the way that we model that someone was asking about the pull forward effect and again a lot of these are assumptions and it's really hard to track and know what it is but the way that we modeled pull forward think of it as you got into 2023 for our base of business it might be somewhere in the 15% to 20000 cases that.
Arent, there and that that would diminish over time, so again I don't want to get specific numbers, but so if you put that against this you'd say.
All in we would expect volumes to be down call. It 5% I think thats, there five years, 4% to 5% to 6%.
And then you say, okay, what's happening with the death rate other than that and so what we're experiencing is if we're right on our pull forward that we are seeing still continuing to see that.
Guests that are trending other.
Other than this pull forward effect and I would tell you that we continue the average age continues to skew a little higher so we're not seeing the younger desk like we did.
12 to 18 months ago, I would attribute that to baby boomers.
Potentially some market share for us. So those are kind of the three things that we think are I'd say driving the higher then.
Expected performance as it relates to funeral.
But again there is an assumption about pull forward this really hard to ever prove right. We can do it by age bands. We believe it's pretty accurate we've done a pretty good job of predicting but.
It's tough Scott.
That's where we are and so I don't expect a falloff I think over time that pull forward should diminish.
We'll still have an impact, but it'll be lesser in 'twenty four than it was in 'twenty three.
Alright, Thanks, Tom I appreciate that color just one more for Eric.
It sounds like the.
New accounting method change with regard that's impacting cash taxes.
It sounds discretionary why why now as opposed to a year ago, a year from now and thank you for the color on the call, saying that it should benefit this year and should probably benefit 'twenty four.
But those taxes would be covenants are payable in 'twenty five 'twenty six.
Is there is there something youre doing there Eric.
You wanted to increase cash.
In the current years and I guess thats transitioning into a question of what's what's your view on allocation is there something in the pipeline for M&A coming ripe or.
Want to be aggressive with buybacks.
Just curious on that thanks.
Yes, I think if you look at the history of this Scott we've always been through looking at accounting method changes to simplify our tax accounting methods to be honest with you and we've done this several times over the years, we did have some interaction with the IRS and seen some guidance that allowed us a couple of years ago.
To start looking at this but the truth to it is is that we have two to three different tax accounting methods for when we recognized for tax purposes. The revenue stream of cemetery property.
The one that.
That we're switching the other two.
Going to if you will T O.
Going to is one that's called the basis recovery method, which really is.
The method that you are going to result in an for our cash taxes, but these cash taxes will eventually be paid when installment payments when cash received from the consumers as installment payments are received so I don't know if thats, just muddy that up or not but I just tried to base.
<unk> sand two or three accounting methods are going to one we had a little bit of an interaction with some guidance is out there that allowed us to do it we've been working with our advisors.
Going to file our tax return to go from two to three to one and Thats what is going to precipitate this issue, where youre going to have a temporary deferral of cash taxes and you will eventually pay those cash taxes as the installment receipts come in it's really just good blocking and <unk>.
Tackling and getting better and being strategic as it relates to your tax accounting methods and how you maximize value in terms of the cash tax scenario, it's nothing more than that.
Understood. Thanks, and it is going to free up some cash so just any any new considerations, we should think about with use of cash.
No not at this time.
Alright, Thanks, that's all for me.
Okay.
Thank you everyone for taking the time today. We appreciate you and we will talk to you again for our third quarter.
We'll talk to you in I guess in early November early November Thank you.
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