Service Corp International (SCI) Q2 2022 Earnings Call Transcript

Good morning and welcome to the SCI Shared Second Quarter 2022 Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to SCI management. Please go ahead.

Thank you, and good morning. This is Debbie Young, Director of Investor Relations. Today, we're going to be providing an overview of our business results for the second quarter. As usual, I'll quickly cover our Safe Harbor language before the prepared remarks. 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. In today's call, we'll also discuss certain non-GAAP financial measures. A reconciliation of these measures to the appropriate GAAP measures can be found in the tables at the end of our earnings release and also on our website under the Investors sections, Webcast and Events. To begin our prepared remarks, I will hand it over to Chairman and CEO, Tom Ryan.

Thanks, Debbie. Hello everyone and thank you for joining us on the call today. First of all, I want to express my heartfelt thanks to our entire SCI team. It is your perseverance and commitment that positioned us for the results we posted this quarter. More importantly, we've continued to stay relentlessly focused on what we do best: helping our client families in our communities gain closure and healing through the process of grieving, remembrance, and celebration. Now, to the business at hand. This morning, I'm going to begin my remarks with a high-level overview of the quarter, followed by some further color on our business performance for the quarter, including some detail around our solid funeral and cemetery results. For the second quarter, we generated adjusted earnings per share of $0.84, an $0.08 decrease over the prior year quarter of $0.92, which experienced a more significant pandemic impact. For a better perspective of this quarter's performance, we delivered earnings per share growth 45% above 2020 and 79% above our pre-pandemic 2019 second quarter. Compared to the 2021 second quarter, the funeral results were relatively flat, but well ahead of our expectations as we continue to see elevated levels of funeral services with a strong funeral average. On the cemetery side, profitability was below prior year as preneed cemetery sales production, while still historically very strong, was down about 3% versus the 2021 second quarter. Additionally, Cemetery Trust Fund income declined as it was impacted by steep declines in the equity and debt markets during the second quarter. So, for the quarter, we saw a $0.03 decline in earnings per share from operations, both comparable ups and acquisitions and a $0.05 decline below the line as higher general and administrative costs, primarily impacted by the timing of incentive accruals and a higher tax rate, were somewhat offset by the favorable impact of a lower share count. Now, let's take a deeper look into the funeral results for the quarter. Total comparable funeral revenues grew nearly $10 million or about 2% over the prior year quarter, exceeding our expectations, as growth in core revenues in recognized preneed revenue were slightly offset by reduction in general agency revenue. Comparable core funeral revenues grew over $3 million led by an impressive 3% increase in the comparable funeral sale average. Our percentage of families selecting to have funerals and Celebrations of Life services has essentially returned to pre-COVID levels. In conjunction with the rollout of our Celebration of Life initiative, we have seen families selecting upgraded facilities and a higher propensity to select catering and flowers. This increase in average was achieved despite a 170 basis point increase in the core cremation rate. Comparable core funeral volume declined about 2% compared to the prior year quarter, slightly offsetting the positive impact of the funeral sales average. Keep in mind, the 2022 second quarter volume is still over 6% higher than the pre-COVID 2019 second quarter. We're continuing to serve elevated levels of client families above and beyond COVID deaths, which is consistent with our commentary around this topic during our Investor Day presentation in May. Recognized preneed revenue increased over $9 million or 28% as increased digital leads and a more effective direct mail strategy successfully drove more contract velocity within our talented SCI Direct team. From a profit perspective, general gross profit increased almost $4 million, while the gross profit percentage increased 30 basis points to 21.6%. Revenue growth of $10 million resulted in about $4 million of incremental profit. Lower margin growth from flowers and catering, as well as higher merchandise costs, slightly reduced our expected profitability. Preneed funeral sales production grew over $7 million or nearly 3% over the second quarter of 2021. Our SCI Direct production was particularly strong, posting an increase of almost 20% over the prior year quarter. Increased contract velocity driven by a new and more effective targeting strategy for our direct mail and seminar programs, as well as increased digital leads were the primary drivers of our growth. Now, shifting to cemetery. Comparable cemetery revenue decreased $18 million, or about 4% in the second quarter. In terms of breakdown, core revenue was down by $12 million compared to the prior year. Atneed revenues were flat, so recognized preneeds cemetery revenues accounted for the decline. Other revenue decreased by about $6 million over the prior year quarter as Endowment Care Trust Fund income was negatively impacted by prior year capital gains distributions that did not reoccur. Preneed cemetery sales production declined by $11 million or about 3% in the second quarter. We must keep in mind, we're comparing against a 2021 second quarter that grew by 36%. Said another way, our second quarter 2022 sales production is 45% above our pre-COVID second quarter 2019 sales production. As we referenced in our Investor Day presentation, we believe we have enhanced our sales and marketing productivity and cemetery sales from learnings achieved during the pandemic. We're experiencing a slight decline in sales velocity, that is for the most part being offset by increases in the core sales average. Large sales have remained robust but down slightly by $2 million as compared to the prior year. We have seen a slight decline in appointments held as this discretionary consumer diverted their attention to increased travel and societal engagements this year after post-COVID-related lockdown and also felt the impact of general inflationary consumer pressures. The good news is our close rates continue to improve year-over-year and with the strength of both our sales team and our customer relationship management system, these opportunities are not lost, but rather deferred and should bode well for future sales production. Cemetery gross profits in the quarter declined by about $14 million and the gross profit percentage dropped 170 basis points to 33.7%. Declines in high margin merchandise service and Eternal Care Trust Fund income accounted for most of the gross profit decline. As you saw in our earnings release, we reaffirmed our 2022 adjusted earnings per share range of $3.30 to $3.70, or a midpoint of $3.50. We remain very confident in the range that we've provided you. On the cemetery segment, we're continuing to see volumes above our expectations with a continued strong average revenue per case. Preneed funeral sales are trending slightly below our expectations, as the discretionary consumer seems to be slowing down a bit. We're experiencing some inflation wage pressure that we had anticipated, and are for the most part recovering with inflationary pricing. On the cemetery segment, our atneed revenue is trending higher than expectations due to stronger volumes. While our preneed sales production is slightly behind our expectations, due to a slight decline in velocity. We believe this is attributable to diverted consumer attention and general inflationary pressures. The good news is that we have quite a bit of completed construction scheduled to occur, particularly in the fourth quarter, that have a very healthy backlog of sales that will be recognized as revenue upon completion. We also are experiencing some elevated labor maintenance costs in our cemeteries, both internally and with third-party vendors. However, these are not material to the company as a whole and for the most part, are being recovered with inflationary pricing. Below the line, we saw and continue to expect variable interest rates to move up. The tax rate expense incurred in the second quarter had a $0.03 incremental negative impact on earnings per share. This was associated with the sharp decline in the financial markets, so we do not anticipate this reoccurring in the back half of the year. With that operator, I'll now turn the call over to Eric Tanzberger.

Thanks, Tom. Good morning everybody. I really want to start with the most important thing, and that's really thanking our 24,000 plus associates that have helped us produce these impressive financial results this quarter. Everybody in the field has continued to provide exceptional service to our customer families and all of our communities during these exceptional circumstances, while also managing through the COVID era and taking us beyond that era. So, hear me very loud and clear, thank you for everything that you do for our company. So, with that being said, I'd like to discuss the rest of the color; our cash flow results, capital investments for the quarter, some of the market effects on our trust funds, and then provide some comments on our cash flow outlook for the remainder of this year. So, we generated operating cash flow of $141 million in the second quarter. This is in line with our expectations. It was about $50 million lower than the second quarter last year, that again was impacted by COVID-driven positive activity similar to our adjusted earnings per share. These current cash flow results are significantly higher than pre-COVID activity levels, such as the $84 million of adjusted cash flow we generated in the second quarter of 2019. So, for this quarter, though, versus second quarter last year, our cash flow was reflective of the $18 million decline in operating income, which excludes gains on divestitures, $15 million of higher interest and cash taxes, as well as about $17 million or so of an increased use of working capital. The cash interest payments were on target, increasing expected $10 million, predominantly associated with debt restructuring transactions, which we did in the second quarter of last year, as well as a smaller impact from increases in our floating rate debt. Additionally, the cash taxes slightly increased in the quarter over the prior year, which was in line with our expectation, and this increase is only about $5 million for a total of about $95 million. The net use of working capital in the quarter was really related to the timing of some payable outflows, really between the first quarter of this year and the second quarter of this year. So, think of that as really just timing. Now, let's shift gears and talk about the impacts of the trust funds. Obviously, as you've seen, the volatility of financial markets has impacted the market value of our trust funds that support future revenues tied to contracts in our preneed backlog. I'd like to most importantly remind everybody that this is a muted effect on our near-term earnings and our near-term cash flows. So, given the 10 to 14-year average life of the customer contracts, only about 8% of those contracts in the trust backlog mature in any given year. Therefore, the effect on the reduction in trust fund market value allocated to each individual contract is really reflected in our earnings and cash flows over a 12-year period, or about 8% per year, hence the muted effect that I'm referencing. More specifically, at June 30th, our trust funds had decreased about 15% year-to-date, and ended this quarter with a $23 billion net unrealized loss in the totality of the funds. However, the trust funds have recovered significantly this month since June 30th after the quarter, and we are currently in a net unrealized gain position of just over $200 million. We are currently modeling our trust to be down in the mid-single-digit percentage range. Now, I want to touch on our capital investment activity. During the quarter, we invested $245 million into our existing businesses, new build opportunities, and accretive acquisitions, as well as returning capital to our shareholders. Let's talk about the breakdown. We invested about $84 million into our businesses, consisting of $53 million of maintenance capital, which by the way was higher than both our expectations and the prior year, as we really accelerated the completion of several field technology and other field infrastructure projects into this quarter. Additionally, we invested just over $30 million into cemetery development projects during the quarter. This was higher than the prior year primarily due to the COVID-related delays that were experienced last year. We view these higher investment levels in both maintenance and cemetery development as timing-related, and we are reiterating today our $270 million to $290 million maintenance and cemetery development annual investment guidance for the full year of 2022. From a growth capital perspective, we deployed $50 million towards the purchase of real estate, construction of new facilities, and expansion of existing funeral homes and cemeteries across our footprint. On the acquisition front, we had a small transaction close in the Mid-Atlantic region for only about $2 million. However, after June 30th, we closed on another transaction on the West Coast. Currently, though, we have several pending transactions in various stages, and we anticipate having what we would call a robust second half of acquisition activity this year. We remain very pleased with the acquisition pipeline, and we believe we will end the year at the higher end of our range of $75 million to $125 million of investment and accretive acquisitions. Finally, we continue to return capital to shareholders, with nearly $144 million being returned this quarter alone through dividends and share repurchases. Now, I'd like to shift a few comments about our financial position. We continue to have a strong balance sheet with a favorable debt maturity profile and great liquidity of just over $930 million at the end of the quarter. That consisted of about just over $200 million of cash on hand, plus almost $730 million available on our long-term bank credit facility. Additionally, our leverage at the end of the quarter was just under 2.7 times net debt to EBITDA. We will continue in the second half to invest capital in high return opportunities such as the acquisitions I just mentioned, new builds, and our share repurchase program. We will also compare higher EBITDA quarters from the prior year that were positively impacted by COVID activity. The result is our expectation for leverage ratio to increase from this level today, ending 2022 in the lower end of our targeted leverage range of three and a half to four times. Now, let's talk about the outlook for the remainder of 2022. We remain very comfortable and we reiterate our annual guidance for adjusted operating cash flow of $750 million to $800 million again for the full year of 2022. We've already generated $473 million of adjusted cash flow towards this annual target in the first half alone, partially boosted by the COVID activity in the first quarter. Our annual guidance incorporates an anticipated decrease in COVID-related activities for the remainder of this year, resulting in lower cash flows when compared to both this first half momentum I just mentioned, as well as the second half of the prior year. Included in this confirmed guidance is a slight adjustment to our previous cash tax payment estimate of $180 million to now be in a range of $180 million to $190 million. And while we're on the topic of taxes, from an effective tax rate standpoint, we now expect a range of 25% to 26% for the full year compared to previous guidance of 24% to 25%. Our rate expectations changed primarily due to non-deductible losses incurred from the negative financial returns on cash surrender value of certain life insurance policies we hold. This caused our effective tax rate percentage to increase in the quarter. Finally, I would also like to make some comments on our corporate G&A during the first half of the year. This corporate G&A has been trending higher than our normal quarterly run rate as a result of higher annual ICP accruals linked to current operating results, as well as our long-term compensation plans that are tied to increases in our total shareholder return that have been pretty healthy. As we look to the second half of this year, we expect to return to our usual quarterly G&A trajectory of $37 million to $38 million per quarter, which I mentioned during the February call earlier this year. In summary, we are very pleased with our financial results for the first half of the year and are excited about our ongoing momentum as we move into the second half. I also want to extend my gratitude to all of our 24,000 plus SCI associates for their contributions to achieving these impressive results and for their dedication to serving the client families effectively. With that, I'll pass it back to you and open the call up for questions.

We will now begin the question-and-answer session. Our first question is from Joanna Gajuk of Bank of America. Please go ahead.

Good morning. Thanks so much for picking questions here. So, I guess, you mentioned the cemetery preneed sales rate declining over the year, but still running pretty healthy versus the pre-pandemic levels. So, I guess two questions: first, when you talk about the 45% above the pre-coronavirus pandemic levels, is there a way to think about the breakdown for this number, how much is due to high velocity and how much is from high average price?

Yes, Joanna, while I don't have the specific breakdown, speaking generally, all three trends appear to be very positive. Our growth rate is likely in the high single digits, and we've experienced significant increases in average sales as we've invested in and upgraded our cemeteries. Additionally, our large sales activity has risen by more than double digits. Overall, we're performing very well. It's worth noting that we anticipated last year would be peak performance due to high COVID-related activity and a consumer base that was largely restricted in their options. Currently, we haven't observed any inflation signals in the economy, creating an ideal situation. However, we're starting to notice that some consumers, particularly those in the lower and middle socioeconomic brackets, are pulling back a bit. We speculate this is influenced by gas and electricity prices. They might hesitate to commit to long-term payments for cemetery property until they feel more certain about the economy. The positive aspect is that we maintain relationships with these leads, and once conditions stabilize, we expect to finalize those contracts. Moreover, consumers are now increasingly active, traveling, attending events, and participating in various activities despite some recent COVID outbreaks affecting our sales team and customers in certain regions. As a result, we've faced some challenges, but we anticipate overcoming them soon. Importantly, once we engage with customers, our closing rates are at record highs for the company, so we're feeling very optimistic. We just wanted to highlight that consumer attendance has been somewhat lower compared to the very engaged second quarter of last year.

I also wanted to ask about the dynamic regarding preneed cemetery sales and if there are any impacts to note. In the last quarter, sales were down year-over-year, which is understandable given the tough comparisons. However, last time you mentioned that preneed cemetery sales could still increase by low single digits for the year despite these challenges. Is this outlook still valid for the full year?

Yes, I think we believe we're going to get back to slightly positive for the year when you look at the cumulative effect, or right around there. I mean, surely, we still feel pretty good about getting back to levels for the whole year because we had a really solid first quarter as you'll remember. I think we're up over 10%. We're going to eat away at that. I think if you think of the back half year, we'll probably be slightly down, but a cumulative year that achieves the same level as 2021 or thereabouts.

And I guess this also is linked to the recognized cemetery revenue. So, you mentioned last quarter this 50 projects that have been developed across the country, and that you expect record $35 million revenue over the rest of the year and maybe into early next year. So, are these on schedule, timing for when you might expect these revenues to come through, is it, kind of, tracking as you were expecting things when we last time talk about it?

Yes, Joanna, particularly in the fourth quarter, we expect to have many completed construction projects. As I mentioned earlier, we have been actively selling these projects. Therefore, the recognized preneed revenue will be quite significant in the fourth quarter, and we will likely recognize more than we sell during that time. The situation will be different in the third quarter, but we will still have some completed contracts then as well.

Okay. So, there are no delays in terms of some other things you mentioned, but it sounds like these are.

You're right. I think we feel good about the timing on all this.

Okay. If I could ask one last question. You mentioned delays related to labor because you cover healthcare services, which are facing a lot of shortages. You also mentioned salespeople being on vacation or out sick. Can you discuss the current situation regarding your labor force and whether the unavailability of staff is causing any issues? Additionally, what are you observing in terms of wage increases given the current inflationary environment? Thank you.

Sure. So, if I bifurcated by funeral, the funeral front, we're probably seeing overall wage increases in the 4% to 4.5% type of levels. Now, what that composed of is two different things. One is, because we have more, I'll call it, robust funeral services, this quarter versus last year, second quarter, remember, you still had a little bit of a lockdown effect, and not as celebratory on a general level. So, we'll probably have more hours of labor when you think about overtime and things like that servicing a similar level of cases. But we're also seeing a little wage inflation, particularly in certain markets. And our philosophy, like I said before, led by Jay Waring, our Chief Operating Officer, is as we experience those, our local teams are sitting down and saying we've got issues, let's give these wage increases. Now, let's find a way to put this on the price list. Because again, we do a fantastic job, and we want to be able to charge appropriate rates for our great people. So, we're managing that away, I'd say we're not seeing the same level, as you're probably hearing about, but it is a little higher than normal, inflation is creeping into that. On the cemetery side, expenses are likely a bit higher. We have both internal maintenance and third-party contracts, and on both fronts, we're experiencing some inflationary increases that we've absorbed, likely in the higher single-digit range. This inflation has been present for a couple of quarters, so it's not brand new. We're trying to manage this as best as we can and plan to pass along those costs to consumers through our annualized pricing. We feel confident that we'll be able to cover these increases through pricing, although we're noticing some gradual pressure, as you would expect. However, it's not significant enough to impact our operations.

Thanks all. Thank you.

Thank you, Joanna.

The next question is from John Ransom of Raymond James. Please go ahead.

Good morning. I hope everyone is doing well in Houston. Excuse my voice, it's a bit affected by COVID. Eric or Tom, do you think there could be a structural increase in M&A activity, or is it just a typical strong year?

It could be either, John, as I believe we have a 12 to 18-month period to be optimistic about or not. We have previously communicated our enthusiasm for the upcoming 12 to 18 months, and I maintain that stance. I lean towards your first point, as I think we are entering a new era. If you recall from Investor Day when John presented, we increased our projections for annual performance, not by a large margin, but enough to indicate our confidence, especially considering factors like post-COVID developments, regulatory changes, the aging baby boomer population, and family transitions. We are actively engaged in this space, and at this moment, we feel very optimistic about our pipeline.

Okay. And I probably know the answer to this question, but have you heard anything at all from the SEC?

No, we have not received any updates from the SEC regarding our response from back in 2019. We are still waiting to hear back from them. However, I want to emphasize that we continue to address the main issue of varying pricing levels and are testing them in different ways. We believe we are likely to be ahead of the curve, and regardless of the outcome, we don't think it will have a significant impact on the long-term health of this business.

And then, like, I know you've done a little bit of this, but is there a future where you do a higher number of de novos than what you're doing now? And what did ever move the needle?

It's possible. The de novos are going to have, as we all know, just stating the obvious, just a slightly less return, because you're kind of building up EBITDA for the first two or three years as you're building the brand new business. So, it's always nicer to be able to go in and not only have well-established EBITDA streams, but established businesses and most importantly, partnering with the management teams and the owners that are in place with some of the wonderful businesses that we just purchased, for example, in the last year alone. Ultimately, that's just an advantageous effect and with us having only 15%, 16% market share and call the entire consolidation universe, kind of, in the 20% range, I just think that there continues to be opportunity out there subject to other market conditions, John, that acquisitions are just going to continue to be a little bit more lucrative. That being said, we've continued to ramp up the de novo spend, and we'll continue to do that as well.

Okay. I forgot my question. Thanks, everyone. I appreciate your time.

Thanks, John.

The next question is from Scott Schneeberger of Oppenheimer. Please go ahead.

Thanks very much. Good morning all. Just following up on John's question on M&A. Eric, you mentioned closing something after the end of the second quarter, just curious on the West Coast and then this illusion to guide to being a strong year in M&A? Could you give us a sense of how large that acquisition is that you already closed?

The acquisition that we closed was not tremendously large acquisition, it was less than $10 million of a spend. What we're talking about in terms of the excitement is the things that are in the pipeline right now that we expect to close that we're very excited about. So, more to come on that, Scott.

All right. Thanks. Appreciate that. I came on a little bit late, my apologies if this has been covered. But funeral pricing growth remains pretty strong and I'm just curious how inflation works into that. And when I came on, I think you said something about flowers and ancillary services being soft. And that's the part I missed, which flies contrary to the strength in the numbers. So, could you just elaborate on I guess the way to address it is going forward? How do you see funeral pricing growth? Is that going to step up to cover costs? Or is that something that may just steady state from here or even go backwards? Thanks.

Yes, Scott, we believe we can pass on inflationary costs. Earlier, we discussed how things are changing. After COVID, particularly at the beginning, we experienced a significant decline in full-service funerals due to lockdowns and access to vaccines, leading to smaller ceremonies and reduced purchases of flowers and catering. Now, we're witnessing a strong recovery in that area. One of our strategies has been to upgrade many of our facilities to offer different pricing options for rooms. More people are opting for premium rooms and purchasing additional flowers and catering for their services. Our teams have excelled in third-party flower sales through our website, allowing friends and family to easily order flowers after viewing obituaries, which is contributing to higher average sales. At the same time, we believe we can pass on the increased pricing due to inflation. However, the ongoing shift towards cremation presents an annual challenge for pricing, which we expect to continue. Interestingly, this quarter, the impact of currency exchange rates, particularly the strong dollar affecting Canadian conversions, has been just as significant for us as the cremation mix. Fortunately, this currency conversion generally does not negatively affect our bottom line. Overall, we are positive about pricing and aim to continue promoting meaningful celebrations of life with our enhanced facilities, along with catering and flowers to make these events special.

Thanks. Appreciate that. And just quick answer if you already covered it, but done in the release a cremation rate ticked up a little bit in the quarter, just comments on that sustainability or if that was a blip? Thanks.

I think Scott, as you remember, we saw a bit of the cremation rate back up last year and we even saw a little bit of it in the first quarter. And we always thought the trend pre-COVID was 100, 150 basis points a year, we went to less than 100 basis points, I think it was for many quarters last year. So, I think you're just seeing a little bit of a reversion to the mean; it's 170 this quarter. I wouldn't get excited about that. But I do think we anticipate getting back to that annual trend of 100 to 150. And our excitement is we have so much more to offer the cremation customer today and we think in the future that's a real opportunity for what is now 55% of our customers. So, we're just thinking about how can we do more? How can we serve them better, and get excited about it.

Understood Tom. Thanks. And just one last one. It, kind of, I think a good overview was provided from Joanna's questions with regard to cemetery preneeds. But if I could just summarize and you could add a little color on this, we saw a slowdown in the second quarter, maybe a little bit more than you expect. It sounds like it was a bit of the consumer and maybe just delay and maybe some unique items, but you still sound confident in achieving, let's call it flattish to slightly positive for the full year in premium cemetery. Is it because you just, how are your leads looking? What gives you that confidence and any commentary as to the cadence of second half this year, next year of premium cemetery? Because I think you're trying to smooth that pretty well. Just want to understand how comfortable you feel on handling the reversion from a potential pull-forward? Thanks.

Yes, I believe we still feel very optimistic. To summarize, when considering the current consumer landscape, we are observing a strong high-end consumer segment. Large sales have remained stable, despite the stock market downturn in the first half of the year. We saw a slight improvement in July, which is encouraging. Consumer confidence is intact. Additionally, even the average sales outside of that segment are performing well. The main focus now is on the sales velocity. From our lead generation perspective, we are still doing well and receiving a significant number of leads. However, we are facing temporary challenges with appointment cancellations, which could be due to vacations or other commitments, as well as rising gas prices leading some to postpone decisions. We've also noted some COVID cases among consumers, which, while not as severe, still result in missed appointments. We believe that as we navigate through these issues, our counselors will return to normal follow-up routines, appointment rates will improve, and our close rates remain strong. Apart from any inflationary concerns that might cause people to hesitate, we are confident because of our robust lead generation and the effectiveness of our counselors. We anticipate an increase in leads too. Overall, I continue to feel positive about our situation. The only point to mention, which you are likely aware of from the news, is that inflation has increased. If someone is budgeting for a long-term purchase, they might be prioritizing immediate expenses, like gas bills, and delaying other purchases. However, we believe that as inflation eases, consumers will re-engage, providing us with opportunities in our sales channels.

Got it. Thanks Tom. Appreciate that summary.

Thanks, Scott.

The next question is from A.J. Rice of Credit Suisse. Please go ahead.

Hi, everybody. Just to clarify, as we move toward normalcy, do you think COVID-related cases this month or quarter are settling down, or do you believe they remain somewhat elevated? I recall you mentioned a decrease of 50 million year-over-year, if I got that correct.

A.J., I believe that COVID cases nationally are around 300 deaths a day. I expect this trend will likely continue for a while. While this figure is low compared to previous periods of COVID, it doesn't significantly affect our numbers. As we noted on Investor Day, we are currently seeing elevated consumer engagement. You might wonder what that entails. We suspect there are still excess deaths associated with a lack of healthcare, along with issues like excessive drinking, smoking, speeding, depression, and access to mental health services. Additionally, we seem to be gaining market share, particularly in the West, with states like Arizona, Nevada, Colorado, and California showing decent increases in our market presence. Hence, we believe COVID will not have a lasting impact. However, we anticipate continued excess deaths in the short term over the next few years. I genuinely hope the nation becomes healthier and healthcare access improves, but the current trends do not support that expectation.

Now, for some time, there's been discussion about your emphasis on pre-arranged funerals. As that book matures and you started really ramping that up post the credit crisis, that would drive some market share gains, is that what you're seeing? Or is it something else that you think is driving those market share gains?

I believe that plays a role, A.J., because if you consider the markets I've mentioned, they are primarily high combination facility markets. Specifically, in places like Colorado, Arizona—particularly in Phoenix, Denver, Los Angeles, and throughout California, as well as Las Vegas, Nevada—we are making significant strides. We have excellent cemeteries and strong sales teams in those areas, which have effectively penetrated those markets. This is certainly a contributing factor, though not the sole reason, which is why we've strategically focused on these regions.

Okay. Do you have any updated thoughts on how much of the impact was near-term versus long-term? Have you reevaluated this as time has gone by? Also, what does the pull-forward of COVID deaths mean for the upcoming years?

Well, Eric has got a medical degree, and he's a professional demographer. I'm going to pass that to him. He's been studying this A.J.

Yes, A.J., the short answer is that we don't have new data. At Investor Day, we shared our estimates indicating there were about 15,000 cases pulled forward in 2022, likely the same in 2023, and then a sharp decline after that. As we've analyzed the situation further, it appears we're still aligned with those estimates based on the visibility we have now. So, there are no significant updates to report.

Okay. And obviously, you commented on the acquisition pipeline and your optimism about that, is there anything that you're seeing? I know, it ebbs and flows, but is there anything that seems to be driving a bit of an uptick in activity? And any comments you can make on whether pricing on potential deals is relatively stable or moving around or competition for deals, if there is any?

Yes. First of all, we believe more people are looking to sell now. This seems to be linked to aging owners who lack succession plans, as many are baby boomers seeking more free time and liquidity events. This trend is further influenced by the COVID pandemic, which created a period of intense pressure with staffing challenges. Consequently, there are strong reasons for owners to consider selling. In terms of pricing, we have maintained a solid position. Many sellers come in expecting to receive values based on their 2021 figures, but we view those numbers as unsustainable and attempt to evaluate the business's true performance. While this initial expectation might start conversations at a higher level, the overall outcome is generally favorable. Regarding competition, we see the same groups active in the market, with fewer new entrants compared to five years ago, when there was more competitive pressure relating to acquisitions. John, do you disagree? John concurs with me, which is a rare occurrence, so make a note of that.

Okay. Thanks a lot.

Thank you.

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

Thank you, everybody, for being on the call today. We appreciate you and we look forward to speaking to you again, I believe, in late October, early November. Talk to you soon.

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