Service Corporation International (SCI), a leading provider of deathcare products and services, reported an adjusted earnings per share (EPS) of $0.79 for the second quarter of 2024, a slight decrease from the previous year's figure. The company, trading under the ticker SCI, attributed the decline to lower funeral volumes, which fell by 2.7% due to a decrease in excess deaths and the impact of the COVID-19 pandemic. Despite this, SCI remains optimistic about its financial future, expecting revenue and margin growth in the latter half of 2024 and projecting a return to EPS growth in 2025.
Key Takeaways
- SCI reported a Q2 2024 adjusted EPS of $0.79, down $0.04 year-over-year.
- Decline in funeral volumes was partially offset by increased cemetery profits.
- Funeral gross profit declined by $16 million, while cemetery gross profit rose by $5 million.
- Full-year EPS guidance for 2024 is at the lower end of the $3.50 to $3.80 range.
- Adjusted operating cash flow increased by $62 million from the prior year to $220 million.
- The company's leverage ratio slightly increased to 3.7 times net debt to EBITDA.
- Approximately 144 million shares were repurchased as of June 30th.
Company Outlook
- SCI expects growth in revenues and margins for both funeral and cemetery segments in the second half of 2024.
- The majority of EPS growth is anticipated in Q4 2024.
- For 2025, SCI projects EPS growth towards the higher end of its historical annual guidance range of 8% to 12%.
- The company remains confident in its North American network and its potential for incremental value capture.
Bearish Highlights
- Funeral volumes declined 2.7% due to lower excess deaths and the COVID pull forward effect.
- Pre-need sales revenue decreased by $7 million.
- Funeral gross profit declined primarily due to reduced revenue and increased incentive compensation costs.
Bullish Highlights
- Positive funeral volume trends observed in July.
- Core average revenue per service increased by 1.3%.
- Signature's comparable cemetery revenue increased by $12 million, driven by recognized pre-need merchandise and service revenue.
Misses
- Full-year EPS results for 2024 expected at the lower end of guidance range.
- Pre-need cemetery sales production decreased by $7 million.
Q&A Highlights
- The company is generating more leads for preneed cemetery sales through digital channels and seminars.
- SCI is investing in technology and CRM systems to improve sales force productivity.
- The company expects a headwind in cemetery revenue recognition in Q3 due to completed construction projects.
- Management expects low single-digit growth in cemetery preneed sales production for the year.
SCI's financial performance in Q2 2024 reflects the ongoing challenges and opportunities within the deathcare industry. Despite the decline in funeral volumes, the company's strategic initiatives, including digital lead generation and investments in technology, signal a commitment to adapting to market conditions and driving future growth. With a solid financial position and a focus on enhancing shareholder value, SCI is poised to navigate the evolving landscape and capitalize on emerging trends in the sector.
InvestingPro Insights
Service Corporation International (SCI) has demonstrated a notable track record of consistent dividend payments, having maintained dividend distributions for 20 consecutive years. This consistency is further emphasized by the company's achievement of raising its dividend for 10 straight years, reflecting a commitment to returning value to shareholders even amidst market fluctuations.
InvestingPro Data highlights a current market capitalization of $10.6 billion and a Price/Earnings (P/E) ratio of 21.46. While the company's P/E ratio is high relative to near-term earnings growth, suggesting a premium valuation, it's important to note that SCI has been profitable over the last twelve months, which may justify investor confidence. The company's gross profit margin stands at 25.95%, indicating a solid ability to control costs and generate earnings above its direct expenses.
An InvestingPro Tip to consider is that SCI is trading at a high Price/Book multiple of 6.88 as of the last twelve months leading up to Q2 2024. This metric can be important for investors assessing the company's valuation relative to its net asset value.
For those interested in further insights, there are additional InvestingPro Tips available, which can be found at https://www.investing.com/pro/SCI. These tips may provide investors with a broader perspective on SCI's financial health and future outlook.
Full transcript - Service Corporation International (SCI) Q2 2024:
Operator: Good day, and welcome to the SCI Second Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to SCI management. Please go ahead.
Allie O'Connor: Good morning. This is Ali O'Connor, AVP of Investor Relations of financial reporting. Welcome to our second-quarter earnings call. We will have prepared remarks about the quarter from Tom and Eric and just a moment of. Before that, let me quickly go over the Safe Harbor language. Any comments made by our management team that state our plans, beliefs, expectations or projections for the future are forward looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such statements. These risks and uncertainties include, but are not limited to, those factors identified in our earnings release and in our filings with the SEC that are available on our website. Today, we may 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 and on our website. With that out of the way, I will now turn it over to Tom Ryan, Chairman and CEO.
Thomas Ryan: Hello, everyone, and thank you for joining the call to the shore that up, we will begin my remarks with some high-level color or business performance for the quarter and provide some greater detail around our funeral and cemetery results. I will close with some thoughts regarding our earnings expectations for the rest of 2024. For the second quarter, we generated adjusted earnings per share of $0.79, which compared to $0.83 in the prior year. The decline of $0.04 from the prior year was attributed merger anticipated decline in services performed. This decline was slightly offset by an increase in cemetery profits in better than expected results from recent acquisitions. Below the one. The favorable impact of a lower share count was offset by the negative impact of higher interest expense for the higher tax rate. So let's take a deeper look into the financial results for the quarter. Total comparable funeral revenues declined $5 million were about 1% over the prior year quarter. Comparable core funeral revenues accounted for this shortfall is it declined almost 7 million. For fuel volume declined 2.7% versus our expectation of flat to slightly higher volumes. Funeral volumes tracked our expectations during the first four months of the year, and we saw an unexpected decline in May and June. We believe the COVID pull forward effect combined with lower excess deaths across our markets contributed to the decline in services for the quarter. However, we are seeing a more positive funeral volume trends in the month of July with comparable case volume trending positively versus the prior year. And our modeling expectations. Our core average revenue per service grew over the prior year quarter by 1.3% after absorbing the negative effect of a 60 basis point increase in the cremation mix. Betsy iDirect nonfuel pre-need sales revenue decreased by $7 million, primarily due to operational changes in our California market. With respect to the timing of merchandise deliveries, which we discussed with you on the first quarter call. This was offset by a $7 million increase in core general agency commissions and other ancillary revenues that were generated by the favorable impact from higher insurance funded sales production and higher general agency commission rates. From a profit perspective, funeral gross profit declined by 16 million for the gross profit percentage declined from about 21% to about 18%. This decrease is primarily due to the decline in revenue increased to annual incentive competition operation costs, reflecting the timing of incentive compensation accrual adjustments over the prior year quarter. Preneed funeral sales production increased by 7 million were about 2% for the second quarter of 2023, led by a $10 million or 4% increase in core preneed funeral sales. Production. Now shifting to Signature. Comparable cemetery revenue increased $12 million or about 3% compared to the prior year's second quarter. The increase was due to a 7 million increase in core, even in a $5 million increase in other. The $7 million quarter revenue increase was primarily the result of a CAD10 million or 11% increase in recognized preneed merchandise and service room. Robust increases in contract averages being delivered on the back of favorably backed by cumulative trust earnings were responsible for the impressive year-over-year increase. The other revenue increase was predominantly the result of a 4 million increase in and down with care fund income comparable preneed cemetery sales production decreased by 7 million were 2%, which was less than our flat to slightly above expectation. While we saw a $4 million increase in core sales production, we had an offset of an $11 million decline related to large sales. We believe this is purely timing as we continue to see long-term strength in our premium cemetery inventory and sales production. On a positive note year to date, preneed cemetery sales production is up $17 million or about 3%. Cemetery gross profits in the quarter increased by 5 million in the gross profit percentage increased by 30 basis points, generating an operating margin percentage of 33%. The profit from higher revenues was slightly offset by higher maintenance costs, increase in annual incentive compensation costs, again reflecting the timing of incentive accrual adjustment as compared to the prior year quarter. Now let's shift to a discussion about our outlook for 2024. As you saw in our earnings release, we now believe our full year results will be in the lower end of our adjusted earnings per share guidance range of $3.50 to $3.80 for 2024. Sure. For the back half of 2024, we would expect growth in revenues and margins for both the funeral and cemetery segments, resulting in impressive earnings per share growth versus the prior year's six month period. As well as compared to sequentially to the first six months of 2024. We would anticipate a more challenging funeral volume comparison in lower revenue recognized from completed cemetery construction projects in the third quarter as compared to the prior year, and therefore, would expect the preponderance of the earnings per share growth to occur in the fourth quarter. As we think about 2025, we would expect to return to earnings per share growth towards the higher end of our historical annual guidance range of 8% to 12% as the negative effects of comparably higher interest rates and SCI Direct operational changes subside in the positive impact of our new Global Atlantic preneed funeral insurance agreement takes effect. Beyond that is where I had to really get excited with our vast North American network containing market-leading brands and businesses, a world-class workforce and a robust preneed backlog. We are poised to capture incremental value for our shareholders as a demographic trends impact or interest. In conclusion, I want to acknowledge and thank the entire SCI. team for their daily commitment to our customers, our communities, and one another. Your dedication is the foundation of our success. Thank you for making a difference every day. With that, operator, I'll now turn the call over there.
Eric Tanzberger: Thank you, Tom, and good morning, everybody on the call. I guess I'll start off the same way. You can just send to hear your comments, Tom, and really just start by thanking all of our 25,000 associates here in SCR for their dedication to the communities, the client families, especially those client families during their greatest times of need. Again, you're inspiring commitment and exceptional efforts do not go unnoticed. And most importantly, we say thank you for everything that you do for our company. So with that important thing mentioned today, I'm going to first discuss our cash flow results before moving to capital investments during the quarter, I'll end with provided some commentary on our outlook, similar with what Tom just said, and I'll also talk a little bit about our financial position. Our cash flow remained resilient in the quarter despite lower than anticipated funeral services performed, as we've mentioned this morning and yesterday and was primarily aided by strong cash receipts from not only preneed installment sales but our underlying funeral and cemetery at the operations. So special. Typically for the second quarter, we reported adjusted operating cash flow of 220 million is an increase of 62 million over the prior year. Let's talk about that. The primary contributor of that increase was expected in the form of lower cash tax payments of about $60 million. That's due to the tax accounting method change related to the timing of recognition of cemetery property revenue for tax purposes. And as a reminder, this tax accounting method change, Joel resolved and the deferral of cash taxes in the future years. With these installment payment for the cemetery property are received, we talked about that now for several quarters. As we look forward to 2025 and perhaps beyond 2025, we expect cash taxes to revert toward a more normalized trend that you'd expect from us with an anticipated increase of $150 million in cash tax payments going forward compared to 2024 levels. So if you get outside is cash taxes, though. In terms of cash flow, cash flow was generally flat to the prior year with net favorable working capital, and that was primarily associated with premium installment sales. There were more than offsetting the operating income decline that we've talked about and slightly higher cash interest payments. And while we're on the topic of cash interest, assuming there remain the rates remain at the current levels, we continue to expect an increase in cash interest in the second half of this year of about five to $10 million. And that really relates to higher floating rate debt balances compared to prior year. We're certainly not new, but I just want to remind you on that. So shifted now to capital investment activity. During the quarter, we invested just over $300 million of capital to grow our business to return value to our shareholders. Looking at the components. First, let's start with our maintenance capital. We invested $40 million into high returning do cemetery inventory development projects, again to benefit future pre-need sales grew $29 million of maintenance capital into our facilities and $18 million into digital systems and initiatives. We also invested about $9 million in growth capital towards the construction of new funeral homes and expansion of some existing funeral homes and cemeteries. From an M&A perspective, we are successful in closing three transactions. one was in Illinois was the Kentucky and wellness in Western Canada for a total spend of about $23 million. That brings our first half acquisition spend to that about $38 million. And that's kind of how I alluded to last quarter. We continue to remain very optimistic about our momentum here and investment opportunities and are expected to end the year above our targeted range of 75 to 125 million of capital invested and mergers and acquisitions. In addition to acquiring businesses, we also spent $15 million purchase in real estate, including $8 million for expansionary cemetery land and the Western United States. Finally, in terms of capital invested or deployed to shareholders, we returned nearly $170 million of capital to our shareholders in the quarter. Through $43 million of dividends and just under $130 million of share repurchases. So speaking of that year to date, we have we have purchased about two points to $70. This result in at just over 144 million shares outstanding for a company as of June 30th. Now moving on to our cash flow outlook for the full year, even with the lower than anticipated volumes impacted our earnings during this quarter. Our cash flows that proved proven resilient, as I've already mentioned, due to the continued support of cash receipts on both premium and installment sales and the underlying cash receipts from our funeral and cemetery at-need business. Accordingly, as reflected in our press release yesterday is important to note that we are reiterating today our adjusted cash flow from operations guidance range of $900 million to 960 million with a midpoint of nine $130 million. So in closing our prepared remarks, I'd like to just do a couple more items and highlight our solid financial position. We continue to have a favorable debt maturity profile and liquidity of just under $800 million at the end of the quarter. This consists of $185 million of cash on hand, plus just over $600 million available on our long-term bank credit facility. For leverage at the end of the quarter increased slightly to about 3.7 times that again, that's on a net debt to EBITDA basis. And cash flow continues to be our strength. And together with our solid balance sheet position, we are well positioned to continue delivering value to our shareholders. Once again, I want to express my gratitude to our entire SDI team for their invaluable contributions each and every day to the communities and the client families were so lucky to serve first that this concludes our prepared remarks. And with that, operator, I'd now like to turn this call over to questions.
Operator: We'll now begin the question and answer session. [Operator Instructions]. The first question comes from Joanna Gajuk from Bank of America (NYSE:BAC).
Joanna Gajuk: So I guess some color on your comment, if I may have our next year outlook. So it sounds like you think this June and weakness in the Pheno was sort of temporary drop, as you alluded to July tracking better. So just to confirm, I guess, first on reducing your guidance since you put a Q2, Brazil, 20, any expectations for for second half of this year and change rate?
Thomas Ryan: They're predominantly the same genre of we do believe and again, you never know with volume. It's very difficult to predict. We did say July is a positive trend. But again, we've got many things we can do to execute the back half of the year and then as we get into 2025. So we'll be ready both delivering the revenue and managing expenses back half.
Joanna Gajuk: Okay, great. And then that leads me to add to that. The question I think your question I was thinking about for next year comment that you just made that same theme is Q2 was, you know, sort of viewed as a temporary issue, so to speak, and we expect to grow again at the higher end of the typical range. So I can tell you what gives you confidence. So in ability to grow Tolentino 12% against some of maybe somewhat depressed 2024 number?
Thomas Ryan: Yes. So as you think about you, as I mentioned before, when you think about the 24 and number two things stand out as going away, what is we have a unfavorable interest rate comparison. As you think about 23 to 24, we believe that will subside in 2020. The other thing is, Joanna. You'll remember in the first quarter, we talked about some operational changes we made yesterday. I direct that we thought these were very favorable for the long term business, but we're going to cause of some temporary pain in the first half of the year. We have essentially $20 million of revenue that were not recorded because of changes in the way we deliver merchandise on the SCI Direct side and some changes it relates to selling Away From Home insurance. So those two negative effects kind of go into the back half of the year and also go away 2025. So out of the gates, you have to, you know, negative trends that kind of disappear. The other positive thing. And there's been an announcement. We switched partners as it relates to our general agency agreement, the insurance company to fund our pre-need insurance. And with this new agreement and some of the terms of the rent, and we believe we can generate higher general agency commissions. So we would anticipate the positive effects of that have to lift us up in 2025. And then having said that, the core businesses. So we feel again, very good about we feel like volumes should stabilize in 25 from the funeral side. We feel good about our cemetery prospects as we look out into 2025. And again, I think as you see inflation subsiding, you'll begin to see our expenses. We have a lot of people. We have a lot of great people. We need to pay them appropriately. We have. But I think we're seeing wage inflation subside a bit and all the other pieces that go into it. So we're excited about 25. I think it could be a really exciting year for the Company.
Joanna Gajuk: So if I may follow up on this new contract with several of our current thinking insurance and so you set up commissions will be higher. But when you negotiated that, you also adjust your sort of the predetermined returns that you expect to get on the contract. And it's largely kind of reflective vendor in the commissions being higher?
Thomas Ryan: Well, it's predominantly going to be in the commissions and then it's also in the product mix you get real time ago and some of these terms. But to give you an example, we'll have a better ability to write for our customers, um, guaranteed insurance product, the way we had to do it in our old agreement, it was more difficult to get people underwritten, therefore give more protection to our customer, which also happens to generate a higher commission for us. And we worked really well with Global Atlantic and finding ways to onboard more people out, and we'll get into all the technical aspects of that. So we really think we'll have a higher percentage of underwritten product as you think about our customer base, which is better for them, better for our commissions, better for Global Atlantic, quite honestly. So so it's allowed us to kind of think through a better way to serve our customers, which also should begin if we execute correctly, generate a higher commission rates.
Joanna Gajuk: Sorry, if I may have very last one on the quarter itself could claim that the funeral segment made the gross margin there was very low. And so sounds like the revenue essentially it was too pricey, right? So it sounds like you kind of we're heading into the quarter with different kind of cost structure. And then think surprisingly in June, right. So there was sort of code mismatch between the customer may be better to think about this quarter, P&O. Thank you.
Thomas Ryan: Yes, I think you sometimes do enough to give you because quarters is such a short period of time and you have adjustments to accruals, things that can happen. Maybe a better way to look at fuel is step back and look at the six months. For the six month period, our funeral margins were 19.9%, which are, I think, you know, about 280 basis points below last year. When you think about gross margin percentages, one thing to keep in mind is that we anticipated and forecasted SCI Direct change. You're missing about $20 million of not delivering merchandise predominantly on the U.S. The direct side. So if you add back $20 million in the profits associated with it, it takes that 99 backup around, I think it's 20.7, 20.8. So I think your explanation of margin throughput is about 200 basis points and 150 would expire. Blaine. It we've got a little bit of, I'd say, a cost creep associated with a couple of categories, but nothing material. So it's kind of where we thought it would be not. So we can do better job of managing expenses. We will. But as I think about the funeral margins in the back half of the year, I would expect them to be higher. So so we feel better about getting our arms around that. We're going to lose the negative comparison on a direct. So that's going to help us. And again, I feel a lot more positive about the funeral margins that I think about the back half of 2024. Thank you so much.
Operator: Thank you. Next question comes from Farquhar Murray with Raymond James. Please go ahead.
Parker Snure: Hey, good morning. Ms. Parker on for John Ransom. Maybe just talk about the preneed cemetery sales. I know you mentioned lower high in sales, but the core actually improve. It seems to be a divergence from what you guys have noted in recent quarters. So maybe just kind of pull on that a little bit more. Are there any comment themes that you're seeing that's driving that trend more? Is that purely just kind of timing related or some one-off in certain markets? And I generally, how are you thinking about the lower end consumer as that? Has that changed at all? Or and then I'll close. Maybe just remind us the percentage of your preneed cemetery sales that comes from the kind of core consumer versus that high end consumer here?
Thomas Ryan: So first of all, I think you hit the nail ahead of it is a reversal. We feel very good about the core. We saw growth in the core, and that's different. It's been awhile since we've seen the high end sales dipped down. But as I think we've tried to explain, overdose are the highest sales are just very hard to predict when they call. I would tell you that we were having a lot of conversations with people at the high end. It probably didn't close at the end of June. We feel like there's still a lot of interest, a lot of ability to execute on the back half of the year. So I wouldn't get too. We're not worried about that. We're going to continue to work. Are you step back and look at the whole year, actually, higher sales are about flat. And so I think you got to again issue formal on. We feel very good about the back half of the year. I think the reminder is that from a preneed cemetery perspective, higher sales generate, I believe, 15% to 20%.
Eric Tanzberger: Probably it's probably 13 to 15 here and in that ballpark.
Thomas Ryan: So here. So that again, I think that's the piece that's always going to be a little more volatile as you kind of predict quarter over quarter.
Parker Snure: Okay. And then maybe I can just do one more. Just kind of a higher level question. If you just talk about just managing the preneed selling cemetery in an environment where you have maybe tougher funeral volumes, which is typically a lead source for the preneed cemetery preneed selling. Maybe just talk about some of the tools that you have in your in your kit for kind of driving more preneed cemetery in an environment where you're kind of having been maybe work a little bit harder.
Thomas Ryan: Yes. I think a lot of the tools, you know that we've talked about before, a lot more of our leads now are coming from outside of the locations. So from a digital perspective, when you think got seminars that we put on, when do you think about digital leads that will generate through the website and other veins. So though, as you're aware, we're seeing a lot more leads, Parker. And so we're executing on those very differently, which you correctly say. I mean, if you look at our core volume, we generally right, you know, 55% of our funeral volume is the percentage that you can almost predict within a band of of between 53 57. That's the number of contracts core that will in any given. So it shows you that there's still a high correlation of people that are coming through our funeral homes are tremendous lead source for preneed cemetery. I do think that over time will trend more towards other sources. And that's where we're working really hard at how to we do better at identifying people that are ready to purchase cemetery. And again, from a digital perspective, there's a lot of data out there that we're mining understanding and getting in front of those customers. So feel very good about the trends in that business. But you can't you know, it's still such a core reason for cemetery sales. Funeral volumes still has a material impact, our ability to generate those leads and then turn them into sales.
Operator: Your next question comes from Tobey Sommer with Truist Securities. Please go ahead.
Tobey Sommer: Hey, good morning, guys. This is Jasper Bibb on for Tobey. I wanted to ask, are you managing the sales force in the current demand environment? We'll think about Investor Day two years ago, we shared why you've been able to drive pretty impressive productivity gains even with lower headcount. So curious if you've seen us productivity, local pullback here sales force.
Eric Tanzberger: But what we are doing now is that just to refresh everybody's memory, as you asked when you look back four or five years that again, you referenced the May 20th to Investor Day, some business by memory, but we had about 43 hundred to 44 hundred counselors to produce total pre-need sales of somewhere around 1.7, 1.8 billion at the time. And that's funeral and cemetery when I say that. Okay. So that's the entire property sales function today, fast forward. Now now you're looking at to seven to eight ish area in terms of 1 billion for the previous sales force. And we're doing that with 37 hundred counselors as opposed to the 43 hundred and cancers, not to give repetitive, but it's kind of what Tom had already answered the call today, you're talking about better technology in terms of what we're using in terms of in front of the customer. That's helping us be more efficient. Tom already mentioned the quantity and quality of the leads. That's not just digital leads, although that's a big piece to that improvement. But it's also how we're handling direct mail and seminars differently than before. We're getting a lot more effective and protein productive in terms of utilizing the CRM system and which is helping us reduce turnover, which we can all talk about as a huge benefit and the less distraction on recruiting and such. And then let's don't forget that we're continuing to invest capital into our cemeteries mean, if you do use the same timeframe back to 2018, you're not spending 165 million of capital to build inventory and would be much, much less than that and probably 80 to $100 million, if I remember correctly, we are going in there with the with the tiering strategy that we have led the industry is doing and putting our money where our mouth is and spending the capital, which has wonderful returns to those chemicals for those high end projects, all the way down to the mid-tier projects are way down to that, Vik Kini entry level type price points in the cemeteries. So it's not one magic bullet out of all of the above that we talked about back in 22, which continues to come to fruition as we speak today.
Tobey Sommer: Thanks. And I think earlier you mentioned a 150 basis point headwind this year on SECI. direct changes for H1 fuel gross margin. That's going to help the next year is a great way to think about that and seeing, let's say, like 70 to 80 bps fuel works margin tailwind for 25 versus 24.
Eric Tanzberger: Sure. I think I think no, I think your negative comparison should begin to flatten out 25. So with anticipated to have any kind of material effect on margins and 25 just 24.
Operator: Next question comes from A.J. Rice with UBS. Please go ahead.
A.J. Rice: Feel better higher by just a couple of things. Maybe home, I think you're saying you expect a little more challenging comparison in the third quarter and the preneed cemetery related to lower revenue recognized from completed cemetery construction projects in Q3 versus prior year. I had their overall comments seem to be for more at least flat in the second half from what I just want to make sure we walk away with the right assumption about what you're thinking of for the preneed cemetery production in the third quarter yet again.
Eric Tanzberger: I think my comment was more about non-production, but about completed contracts per member were I think with our sale of cells, production will be fine in the third quarter and good in the fourth quarter and not a lot of big differentiation. What I was referencing more to is the timing of completed construction projects that have already been sold into last year. We had a pretty decent sized number in the third quarter. I think what we're trying to highlight a little bit that it could be as big as you know, let's say, at $20 million difference of revenue recognized from completing those contracts thinkable models allow. So it had nothing to do with production, but more about when the revenue gets recognized in that comparison is much more favorable when you think about Q4. So you think about cemetery revenue recognized for the third quarter, you're going to have a little bit of a hill to climb. Just because of that, we still feel very good about production for the third quarter.
A.J. Rice: Okay. On the larger or higher in Properties Inc. I know sometimes it can be just win. The construction is completed and you can recognize it sometimes there's consumer behavior. Are you saying the softness a little bit at the high end as you saw in the second quarter is more about projects? And when they got completed, are you actually say that you've seen a little softness at that consumer behavior in the high end?
Eric Tanzberger: Yes, that when we talk about production, that's juice consumer behavior. So so yes, we saw less contracts closed in the second quarter as it relates to last year's second quarter. But again, I'd kind of highlighted to the first quarter was a really nice upside surprise. We had a very strong high end sale. So again, looking at the six months, it's kind of flat. I think as we think at the back half of the year, we see no reason we can't generate high end sales were not seeing pushback from consumers or anything like that. Sometimes as you know, Jason is just getting in front of people, somebody deciding they want to pull the trigger. We're not pulled the trigger. So we still feel very positive, but our ability to sell the high end inventory, large sales in both the back half of the year that began in 2025.
A.J. Rice: Okay. And then on the funeral side, I know the core funeral got a rate per service was up about 1.3% in a quarter where you did now very much growth in the cremation rate at which you put some pressure on that. Anything as you drill down there, it just seemed like that might have been a little stronger in a normal environment where any anything you see really nice I think at the at the at-need level and it was closer to 3% from a contractual year over year.
Eric Tanzberger: Remember, you've got the cremation mix change with negate some of that. And then lastly, I think it was more of a tougher comparison as it relates to the pre-need backlog comparison versus the admin walk in. And so again, that's going to vary from time to time depending when those contracts come in. So the customer level, we're still seeing kind of 3% increases, which may not be for, but some some of that 1.3 is because of the mix and because of trust income from the contracts that are coming out of backlog.
A.J. Rice: Okay. And just a last question on the deal pipeline, and I know you said the prepared remarks you'd be above the high end of your target normal targeted range. You say you're just seeing more properties. Is it the competitive landscape has gotten better? Some of the smaller competitors are having their own financial issues? Is it the consent decree going away? Or are there deals in those markets? Is that what we're seeing and why we give us a little more on that? And is there anything new about the economics, six of the deals you're seeing?
Thomas Ryan: Sure. I think first of all, probably all the above, but the predominant reason I think we feel is if interest rates spiking up and again on disease in history as a gauge, a lot of our competitors had variable rate debt, no structures, and we've got a little bit of that, but very little. And so I think are back to Eric's point, our financial stability of our cost of borrowings, very different. So think of those went up. This competitors really had to pull back in. I think it has allowed us to do more deals to flow directly to us and not be as competitive stage. I think I don't see a drastic difference in pricing. Melamine. I think it's pretty much the same is just where the where the choice and we've got a lot of stuff working on the pipeline. Like Eric said, I think we feel highly confident you never want to declare something until it's signed and done, but there's enough out there and sizable deals that we're really excited about. So great, great opportunities as a blizzard capital and create some future profitability and growth for us.
Operator: Next question is from Scott Schneeberger with Oppenheimer. Please go ahead.
Scott Schneeberger: Thank you. Good morning. I'm just going back on on the funeral segment. And profit, Dell (NYSE:DELL) underperformance in the quarter. It. Tom, could you could you kind of break out what the drivers are there a in mail in magnitude and maybe mix on because the revenue I know there was maybe can timing in the quarter, Tom, and this is discussed on an earlier question, but it was not much difference on revenue year over year, yet this significant drop. And you'd mentioned that in a prior answer, some cost creep. So I heard some SCI Direct, the incentive comp leverage and then this call discrete. And I think that maybe had people concerned. Is that something that's going to persist in the back half on even though you did talk about some stabilization on? So if you could if you could break that out a little bit more be appreciated. Thanks.
Thomas Ryan: Sure, Scott seven, what I was trying to say is in the quarter sometimes and you guys know how these things were, you adjust estimates and accrual. So I'll give you an example. If you had in AR reserve in one period and you decided, hey, I'm over reserved or under-reserved, I'm going to hit that accrual in the second quarter and it may or may not to begin to show its head in the first. So it's really hard. Sometimes you get to critical in a long way to debit one another with. And that's why I say a quarter can have noise. And if you step back and look at it, the six months ago, we went from 19.9% were 19.9% funeral margin for the six month versus 20 to seven of six months of last year. It's 280 basis points. If you do the volume throughput, it would tell you that I would have expected based upon your volumes go down 150 basis points of that's just pure volume calculation of the core venue to take SCI Direct and say, okay, I knew that I was going to stop delivering merchandise and a couple of other items. That's 20 million of which would have dropped, you say, for 15 million to the bottom line. So now I've explained another 150 inoculant, another 80 to 230 basis points of minus 270. Whatever it is a difference is explained by SCI Direct and the throughput in the 0.4% is higher expense. And again, I think you can take away some of the quarter-to-quarter noise if you do that well, and I look at those numbers and say, okay, I've got slightly higher incentive comp because again, back to the timing of when you adjusted the incentive comp accruals, which were call are not just based on EBS there based on production, they're based on cash flows. So we don't think there's any big boogie man and the costs. I guess what I'm saying, having said that, there are things we can do. We clearly have, you know, had wage inflation for the last couple of years rightfully so. And so we're seeing that subside. And some of those trends are that think about 2025, we'll have less wage inflation will be more efficient in how we are running the operations. And we don't have the drag of SCI Direct on top of that. We've got a better generally, I'd say agreement, which should generate higher commissions, which are going to enhance the market, the funeral margins as we think about 2025. So that's why I feel better, as you know, we're going to manage this tighter. We've got a good g & a revenue story come and enjoy five. And we don't have the drag of S. Yes, direct operational changes on a year-over-year basis. And remember that that should get exciting about of SCI Direct were deferring a lot of revenue that we're still selling in one day that money's going to come out of trust and the margins on SCI Direct operational business are going to go away. So this is a timing thing. The business itself is very healthy that consumers very healthy. So a long term, I love our trends of short term revenue stomachs a little bit of earnings.
Scott Schneeberger: Thanks, Tom. And just on the on the new partner on the new insurance company partner on it, you allude to 25. So it sounds like you think that maybe you get some better and he flow and by that time a clinic companies early in the second half or is it going to take a few quarters on before discernible so we will get some of the second half for sure.
Thomas Ryan: I think the full effects are going to come in 2025 because again, remember, there's a lot of operational change here as it relates to what type of products we're selling. The most robust commission rates get around underwritten nature, and we believe we now have the right type of products to put in front of our customers. Yes. So that is getting people insurance licenses. So as you transition to this new agreement and the real opportunities in insurance, we have to make sure that our salespeople have a insurance license. So it sounds simple. They're not and we need to get the more people license. We need to get people. So understanding the product mix. And like I said, when I'm excited about as we're going to have more of our customers that are protected by under the insurance than we ever historically have. So it's a better product for the consumer. So accounts or can feel really good about provide that protection. And if we do have the right, we're going to do generate higher commissions.
Scott Schneeberger: Thanks. I just have I have two more in there. They're separate, but I'll ask them both upfront and we can wrap. Thank you. Jan. one is consumer behavior in the lower-priced tiers of if you could just delve into that a little bit. Are you seeing inflections that are aged inflecting little was just curious about the contract roll-off, the volume on. So that's question number one, did that trend on and how you think about that? And number two is the of the Funeral Rule update on FTC. Anything on that? Thanks so much.
Thomas Ryan: So I'll let Eric talk by the Funeral Rule. But as it relates to the consumer, I think I would say this we saw a while back that I think in the lower end, consumers were being challenged. That again, I think it correlates with a lot of other retailers that are out there with inflation impacting other pieces of their lives. It's harder at the lower end and we made some adjustments. There are sales leadership to say, let's get people on board by having better financing terms for them to be able to get that first down payment and get started. So we saw a little bit of positive reaction to that, and I think we continue to so we've not really seen any further deterioration. I do believe that consumers still challenged mainly because of what I see in other again, retailers as opposed to ours. So we want to do we can to make sure we can accommodate them. That means you have stretched out terms a little bit of making the payments Lilly's year. We're going to trying to do that accommodate that, Scott.
Eric Tanzberger: On the NTC., I guess the short answer is there's really no update to give to you. So I'll just remind everybody where we are. We continue to work with the staff. We have very good relationship with the staff of the of the FTC. We're ready to go at any point in time to adopt anything that we have. We're not expecting anything to surprise us. And ultimately, we don't think anything that's coming out of time that we know about such as pricing online. We do not expect that to have any material effect to our to our company. And as you know, we have a tremendous amount of our funeral homes already that high have pricing online in different forms and fashions, whether it's starting at prices are just complete full premium pricing experiences digitally, where you can really dive deep into that particular funeral homes offering and content everywhere in between. Ultimately, we think we will continue to go down. That path will continue to test will continue, most importantly to optimize both the websites for according to the tier of customer spend that we are dealing with at one particular Funeral Home in one particular market. And we will we'll go from there. Could I think thinking about?
Operator: Your next question comes from Joanna Gajuk with Bank of America.
Joanna Gajuk: I just want to clarify on the cemetery preneed sales production commentary. Do you still expect to grow low single digits for the year and it has anything changed in your kind of long champion of growth for the preneed cemetery sales production? Thank you.
Eric Tanzberger: Yes, June. And we do expect to end the year in the low-single digits. And we think about the outer years, 25, 26, I think we feel better about getting back to that low to mid single digit because, again, with the stabilization of funeral volume anticipates evolution here, volume, we expect to be able to get there.
Operator: Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to SCI management for any closing remarks.
Thomas Ryan: Thanks, everybody, and thank you for thank you for joining us, and we will see you again at the end of October. Thanks, everybody.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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