Service Corp International (SCI) Q4 2022 Earnings Call Transcript

Good morning, and welcome to the SCI Fourth Quarter 2022 Earnings Conference Call. All participants will be in a 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. I appreciate that. Good morning. This is Debbie Young. I'm the Director of Investor Relations. Today, we are going to be providing an overview of business results for our fourth quarter, as well as some thoughts about our outlook for 2023. But first, as usual, 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. During this 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, Webcast & Events session. With that, let me now turn it over to Tom Ryan, our Chairman and CEO, for opening remarks.

Thanks, Debbie. Hello, everyone, and thank you for joining us on the call today. Before I begin, I want to express my sincere appreciation to our entire SCI family. Your dedication and commitment to helping our client families gain closure and healing through the process of grieving, remembrance, and celebration are what makes our company great. And to our preneed teams, your efforts to provide peace of mind for families, securing preplanned arrangements has never been more important than at these times. Thank you. This morning, I'm going to begin my remarks with some color on our business performance for the year and for the quarter, with some detail around our funeral and cemetery results. I'll then provide some thoughts about our 2023 financial outlook. First, in terms of the full-year 2022 results. We are proud to report adjusted earnings per share of $3.80, which was at the high end of our most recent guidance range. While this is below the prior year, which was meaningfully impacted by COVID-19, it's an incredible 26% earnings per share compounded annual growth rate from a pre-COVID 2019 base year of $1.90. This accelerated growth was achieved by a combination of the incremental COVID learnings and efficiencies we highlighted at our Investor Day last May, increased volumes driven by excess deaths, and the net positive impact from COVID-19. In the Funeral segment, volume was down 4.6% for the year, but it well exceeded our expectations and represents a 5% compounded annual growth rate from 2019 levels. We continue to be impacted by excess deaths, which we have consistently defined pre and post-COVID as deaths above an approximate 0.5% to 1.5% annual compounded growth. These excess deaths are identified officially as COVID, heart disease, and diabetes, among other causes. Some percentage of these deaths could be the early impact of baby boomers, SCI-specific market share gains, or temporary fluctuations caused directly by COVID or the ripple effects on health from the pandemic lockdown. Funeral sales averages remained strong for the year, and we experienced some inflationary cost increases associated with labor and energy. In the Cemetery segment, revenues were down slightly by $39 million or 2% versus the prior year. Preneed recognized revenues grew primarily due to a 2.4% increase in preneed cemetery sales production, which we had anticipated based upon our incremental COVID learnings around sales and marketing, which we touched upon at Investor Day. Our preneed cemetery sales production has grown by an impressive 14.5% compounded annual growth rate from 2019. This preneed growth was offset by a 7% decline in atneed revenues as well as a $31 million decline in merchandise and service and endowment care trust fund income. Timely, meaningful action in our share repurchase program of over $660 million throughout the year more than offset higher interest expense and a slightly higher tax rate. Just as importantly, we delivered these results while at the same time, making strategic investments in our facilities, our cemetery inventory, our digital platforms, our customer experience and engagement, and most importantly, our people. For the fourth quarter, we generated adjusted earnings per share of $0.92, which was ahead of our expectations but down from the prior year, which benefited from a significant pandemic impact. Most of this decline in earnings could be attributed to lower operating results on a reduced impact from COVID, some increased inflationary costs, as well as a decrease in trust fund income. Below the line, the favorable impact of lower share count offset higher interest expense and a slightly higher tax rate. Now let's take a deeper look into the funeral results for the quarter. Total comparable funeral revenues declined $30 million or about 5% over the prior year quarter, primarily due to a decline in comparable core funeral revenues. Although comparable core funeral volume declined over 6% during the quarter, volumes were higher than we anticipated and about 12% higher than the fourth quarter of 2019 levels. Our core average revenue per service grew over the prior year by about 1%. However, that does not reflect the true success in enhanced value being delivered to our customers. The negative effects of currency translation, trust fund income, and cremation mix almost equally diluted the 4.6% organic growth rate into the reported 1%. From a profit perspective, funeral gross profit decreased about $35 million while the gross profit percentage declined to about 23%. The revenue decline due to the lower volume versus 2021 accounted for the preponderance of the profit decline. We also experienced increased inflationary growth rates in our employee and energy-related costs. Preneed funeral sales production grew over $13 million or more than 5% over the fourth quarter of 2021. Both the core and the SCI Direct channels showed impressive growth in contract velocity and increased sales averages. Now shifting to cemetery. Comparable cemetery revenue was essentially flat in the fourth quarter. In terms of breakdown, core revenues increased $3 million compared to the prior year, with recognized preneed revenue growth of about $18 million, which absorbed the $6 million merchandise and service trust fund income decline. It was partially offset by a $15 million decline in atneed cemetery revenue. Other revenue consisting primarily of endowment care trust fund income decreased by about $4 million over the prior year quarter due to lower capital gains. Preneed cemetery sales production declined by $9 million or 3% in the fourth quarter. This was in line with our expectations for the quarter as the comparison quarter was a very strong one, more acutely impacted by COVID-19. To better understand the level at which our sales teams are operating, our fourth-quarter preneed sales production was about 28% above our 2019 fourth quarter, representing an 8.6% CAGR over the three-year period. Cemetery gross profits in the quarter declined by about $18 million, and the gross profit percentage dropped to 33% from 37% in the prior year quarter. While revenues were essentially flat, the $11 million decline in high margin trust fund income from both merchandise and service and endowment care trust had a more pronounced effect on profits. Inflationary increases in merchandise, labor, and maintenance expenses also put some downward pressure on the gross profit line. Now let's shift to the discussion about our outlook for 2023. As you saw in our earnings release, we confirmed our 2023 guidance that we introduced to you last quarter of an adjusted earnings per share range of $3.45 to $3.75, or a midpoint of $3.60. I think the easiest way to understand what we are assuming for 2023 is to compare the $3.60 projected midpoint for 2023 to the $3.80 earnings per share result from 2022. While the impact from COVID is not an exact science, we do our best to quantify it for you. We believe there is $0.45 per share attributable to COVID in the 2022 earnings per share, about $0.30 in funeral and call it $0.15 in cemetery. That results in an adjusted 2022 base of $3.35 per share. It is our belief that in 2023, we can grow off that adjusted base at the high end of our historical earnings per share growth range of 12%. We expect higher recognized preneed cemetery property revenue from completed inventory projects in 2023, and a lower share count from accelerated share repurchases made in 2022 will more than offset the declining impact from COVID and other excess deaths projected in 2023. This $0.40 per share growth results in a $3.75 per share base for 2023. Finally, increased interest expense is projected to have a $0.25 negative impact on 2023 earnings per share. While we would typically assume interest expense to grow accordingly with increased debt levels of the company growth, we attribute approximately $0.15 of this increase as a unique year-over-year headwind associated with the aggressive Fed hikes impacting our variable rate debt. Removing this $0.15 from the $3.75, we arrive at our $3.60 midpoint. This $3.60 midpoint is a 17% compounded annual growth rate from a pre-pandemic 2019 base of $1.90. As you think about the cadence of the earnings for the year, we expect a meaningful decline in the first quarter, as early last year was still being impacted acutely by COVID. However, this decline is anticipated to be mostly offset by year-over-year growth in each of the remaining quarters. Now as you think about some of the segment assumptions for this year, in our Funeral segment, we are anticipating a comparable volume decrease in the mid-single-digit percentage range. This reflects the waning effect from COVID and other excess deaths, which should be more pronounced in the first-quarter comparison. Meanwhile, we expect the average revenue per case to continue to compare favorably, growing in the low single-digit percentage range. We expect to see inflationary pressures lessen but still be above our recent historical trends in the 3% to 4% range, resulting in funeral margins of around 20%. Finally, we are forecasting preneed funeral sales production growth in the 3% to 5% range for the year. On the cemetery side of the business, cemetery atneed revenues should correlate somewhat with funeral volumes, and we expect them to be down in the mid- to high-single-digit percentage range. For preneed cemetery, given our success in 2022 in creating a new higher base and the expected lack of COVID-led activity in 2023, we expect preneed cemetery sales production to grow a little less than historical trends but still grow in the low single-digit percentage range. We have enjoyed tremendous success during 2022 in selling into unconstructed inventory projects, which should continue into early 2023. As these projects are completed throughout the year, this should result in favorable preneed property revenue when compared to 2022. We expect inflationary pressures to lessen around labor and maintenance, but still exceed recent historical trends and anticipate margins in the low to mid-30% range. As we look to 2024, we would expect to return to normalized earnings per share growth off of this 2023 base. Finally, I'd like to thank the entire SCI team for all that you do every day for our families, our communities, and each other. You are what makes this company great. With that, operator, I'll now turn the call over to Eric Tanzberger.

Thanks, Tom. Good morning, everybody. Kind of as Tom ended his remarks, before I address the quarter, I think it's most appropriate to first just say thank you to all of our 25,000-plus field and home office associates. This continued hard work and efforts have produced our impressive financial results that we are talking about today. The compassion and dedication you always provide to our client families and our communities is second to none in this industry, and we truly appreciate all that you do. So with that, in my comments today, I will discuss our cash flow results and capital investments for the quarter and for the full year, and provide some brief commentary on our trust funds as well as our corporate G&A expenses. I'll then provide some color on our cash flow and capital investment outlook for 2023 as we move forward, and I'll end the call with some comments about our financial position. So during the quarter, we generated adjusted operating cash flow of $170 million, which is at the high end of our guidance range we talked about last quarter by $20 million but lower than the prior year. This decline was driven by a year-over-year $52 million decline in operating income, which is normalized for gains on divestitures and the impact of estimated legal charges as the prior year was impacted by more pronounced COVID activity. Additionally, we had a headwind of $21 million of payroll tax payments in the current quarter related to the deferral of about $42 million of payroll taxes under the CARES Act for the full year of 2020. We've discussed this for a couple of quarters, but with this payment, we have repaid all deferred amounts at this time. Cash interest payments were also higher by about $10 million, driven primarily by higher rates, which accounted for about $9 million of the increase, with the remainder due to anticipated higher debt balances. Somewhat offsetting these headwinds were $60 million of lower cash taxes primarily due to the lower earnings I just mentioned. So as we sit back and look at the full year of 2022, we generated $826 million in adjusted operating cash flow, which is almost $200 million or 30% higher than our 2019 pre-COVID results. This enabled us to invest capital to grow our company as well as to enhance shareholder value. Speaking of capital investment activity, during the quarter, we invested $330 million into our current businesses, new build opportunities, and accretive acquisitions, in addition to continuing to return capital to our shareholders. Specifically during the quarter, we invested $117 million in total capital expenditures, which is $9 million lower than the prior year. The timing of growth projects drove an $8 million decline in growth capital, while our maintenance CapEx was generally flat at about $109 million. For the full year 2022, as it relates to our maintenance CapEx, we invested about $75 million more in 2022 compared to 2021. The breakdown of the $75 million consists of three components: first, $25 million of the increase is driven in large part by increased technology infrastructure spend, as well as capital improvements to maintain our best-in-class locations. This technology infrastructure spend relates to upgrading the hardware, wireless, and network capabilities at all our funeral homes and cemeteries to accommodate current as well as planned digital enhancements. The bulk of this spend is now complete, which I'll speak to in a moment when I discuss our 2023 outlook. Second, $30 million of the increase relates to our cemetery development spend as we continue to replenish our cemetery property inventory that our sales team sold during the COVID pandemic. Finally, the remaining $20 million of the increase relates to our digital investments and corporate spend. We have been discussing this spending for several years now and have now broken it out separately from field maintenance capital expenditures to provide better visibility. This spend relates to ongoing support for and enhancements of existing systems like Salesforce, HMIS Plus, Beacon, and our 2,000-plus websites, which continue to enable sales growth in our preneed and atneed sales areas, as well as new digital initiatives to improve our future customer experiences and field operations. From a growth capital perspective, we deployed $16 million during the quarter towards the purchase of real estate, construction on new facilities, and expansion of existing funeral homes and cemeteries across our footprint. This brings the total 2022 spend on new builds and real estate to about $52 million, which will help drive additional earnings and cash flow growth for the company with low double-digit to mid-teen IRR. On the acquisition front, we are excited to report that we had a very active fourth quarter, investing almost $90 million in acquiring three combination operations and 11 standalone funeral homes in four separate transactions, bringing our full year spend to just under $105 million. These businesses acquired during the quarter are located in California, Pennsylvania, and Ontario, Canada. We are excited to welcome all of our new associates to the SCI family. Finally, we continue returning capital to shareholders with nearly $116 million returned this quarter alone through $42 million of dividends and $74 million toward share repurchases. For the full year, we returned an impressive $821 million to shareholders. So let's shift here and talk about our trust funds a little bit. We saw some improvements to the value of our trust assets in the fourth quarter, but year-to-date, they declined about $800 million to $5.7 billion in total at year-end. Deposits on the new sales that go into the trust funds and withdrawals from maturities generally offset each other during 2022. So the decline is primarily associated with the change in market value of our trust assets, reflecting an 11.5% decline in trust performance that we've disclosed year-to-date. As of today, our trust assets have increased by just over $250 million in 2023. Keep in mind, this market volatility has a muted effect on our near-term earnings as well as our cash flows. I'd also like to reiterate that we have an accounting white paper and a one-page summary on preneed in the Investors section of our website, which I think will really help illustrate the cash flows associated with these trust funds. So let's talk about corporate G&A. After adjusting for the $64 million pretax estimated charge for certain legal matters, Corporate G&A of $43 million in the current quarter was about $2 million higher than the prior year and slightly higher than our expectation, primarily due to workers' compensation and general liability insurance costs that were a little bit higher than what we expected. As I mentioned on our last call, as we look forward in 2023, we continue to expect corporate G&A to be lower than we experienced in 2022 at approximately $38 million to $40 million per quarter, as incentive compensation is expected to be lower than our COVID impact in 2022. The actual results within this quarterly range will depend on company performance during the year, which will affect our incentive compensation plans. Now let's move to a few comments about our cash flow outlook for 2023. In our press release, our guidance for adjusted operating cash flow for the full-year of 2023 is a range of $740 million to $800 million, with a midpoint of $770 million. As Tom just mentioned, while we are expecting some nice normalized growth in our businesses in 2023, the headwind from lower expected COVID volumes generally offsets this growth and leads to modest growth in 2023 EBITDA. There are a couple of items that I'd like to highlight when thinking about our adjusted cash flow in 2023. First, as we've said previously, we will have higher interest costs on our floating rate debt. Last quarter, we mentioned it could be a headwind of about $50 million, but I now think it'll be closer to about $55 million, primarily on higher expected rates and somewhat higher balances. Cash tax payments in 2023 are anticipated to be about $165 million at the midpoint of our guidance, or $15 million lower than 2022 on the lower earnings. From an effective tax rate standpoint, we continue to model in the range of 24% to 25% for 2023. From a working capital perspective, we are expecting a $20 million to $25 million incremental use of working capital, as usage from strong preneed cemetery sales and strong incentive compensation cash payments are partially offset by the absence of CARES Act payments in 2023 that I mentioned before is now behind us. So concerning invested capital in 2023, our first investments will be, as usual, back into our businesses. We expect maintenance CapEx will drop from $335 million to $300 million, which is primarily due to declines in technology infrastructure spend at our field locations that I already mentioned. At the midpoint, investments in our locations make up about $120 million. Cemetery development CapEx comprises about $130 million, and the remaining $50 million is being deployed towards digital investments and corporate. In addition to this maintenance CapEx that I just described, we expect to deploy $75 million to $125 million towards acquisitions and roughly $45 million in new funeral home construction and real estate opportunities, which together will drive low to mid-teen after-tax IRRs, which again is well in excess of our cost of capital. We feel we have the financial flexibility and liquidity to continue the same successful capital investment strategy in 2023, as you've seen us do over the past few years. We will continue to follow a disciplined and balanced approach, investing to the highest relative value for our shareholders. This strategy is predicated on our stable free cash flow, our strong liquidity, as well as our favorable debt maturity profile. So in closing, I'd like to provide some commentary on our liquidity and financial position. In January of this year, we entered into a new $2.175 billion bank credit agreement, which consists of a $675 million term loan and a $1.5 billion revolving credit facility, both maturing now in January 2028. This transaction increased our liquidity by over $600 million. So today, that stands at about $1.2 billion in liquidity, and it also improved our debt maturity profile substantially. Finally, our leverage at the end of the quarter was about 3.25% net debt-to-EBITDA. Our EBITDA continues to normalize as COVID activity wanes, and we expect to enter our targeted leverage range of 3.5x to 4x by the end of this year. In conclusion, 2022 was a really great year for us. We began this year with a very strong financial position. Most importantly, I echo Tom's comments that none of this would have been possible without the hard work and compassionate care of all of our dedicated frontline associates. We appreciate all of your efforts and again, say thank you. So with that, operator, we will now conclude our prepared remarks, and we'll now open it back to you for questions.

Thank you. We will now begin our question-and-answer session. And the first question will be from Joanna Gajuk from Bank of America. Please go ahead.

Good morning. Thanks for taking the question. So I guess first, maybe clarify the comments you made on 2024. Did I hear right, you say you expect to grow at a normalized rate off of the earnings base? Did you mean from the $3.60 midpoint or was there another number?

Yes, Joanna, what I was referencing is that we think this $3.60 is kind of a level off year with all the COVID impacts and the like. Based on what we know today, and I know 2024 is still a way off, we would expect to get back to that growth range of 8% to 12% growing off that $3.60 base. Obviously, we'll update you as the year goes on and be in a better position to talk about that a year from now.

Okay. That makes sense. I just want to clarify that. And I guess on the quarter and as it relates to 2023 guidance, so clearly Q4 was stronger and you said funeral services were the area that came in much stronger. So can you—is there a way to think about how big were these excess death numbers in Q4? And also what do you assume in your guidance for 2023? Did anything change how you think about 2023 from that angle versus how you were thinking about things three months ago?

Yes. I think three months ago, Joanna, if you really look at what's happened, we've been able to maintain our guidance while comparing back to 2022. The big upside surprises in the Funeral segment is that it's performing more funeral cases than we would have anticipated, though this is somewhat offset by a couple of things like trust fund income and interest expense that's going up. So we are very positive about our funeral volumes and our ability to service those. On the excess deaths, I mentioned that what we can do is we can go to the death certificate and see why someone has deceased. Normally, we would expect, say, a 1% compounded annual growth, but we're at 5%. Some of this could be the beginning of the baby boomers, some of it could be our market share, and I believe most of it is COVID-related, with a lot less of that and more of this concept of excess deaths. Remember, the concept of excess death is really about whether, as a society, we are less healthy, mentally and physically than we were going into COVID, and the ramifications of that, like lack of access to healthcare for some period of time. So it's our belief, supported by data, that those trends will continue, albeit to lessen. As we think about these excess deaths, they will continue into 2023 but will be less compared to 2022.

So would you say it's like 1%, 2% funeral services being above where they would have been otherwise?

Yes. We would expect that base to grow somewhere around, rounded 1% or 2%. That base for various reasons is going a little bit higher. And again, compared to 2022, we expect 2023 to go down. But I still think we'll be operating at elevated levels if you compound growth off that 2019 number. So, we feel good about the revenue streams that we're projecting for 2023.

That's helpful. Understood. And I guess on another topic, you mentioned the settlement, the almost $65 million that was excluding G&A and you excluded it from the cash flow outlook. Can you give us more details on this amount? It's quite sizable, actually. What exactly is being alleged? Are these the same cases in those two states because you mentioned Florida and California, or are those two different things? Should we think about this as an indication that similar issues are happening in other states?

Hi, Joanna, this is Eric. These are two cases in California and Florida that have been previously disclosed as we said in that press release. The first thing I'd give a little color on is to say this relates to our SCI Direct segment, which is delivering to the direct cremation consumer products and services, and is doing it very well. This segment accounts for just over about $200 million of revenues on our total of about $4 billion. What's unique about this business is that we're delivering exactly what a direct consumer wants in terms of products and services. This is one of our segments that has some of the highest customer satisfaction surveys, with nearly 90% of the Google Star feedback we receive being five stars. In our press release, we've broken it out. It's a pretax charge, very much estimated at this point in time, with about two-thirds relating to customer cancellations and a third related to investigative costs and other legal expenses in California. When someone cancels one of these contracts, any consumer has the ability to cancel anything that we've done that has been undelivered, as undelivered service offerings could always be canceled. These cancellations relate to products and services such as merchandise in our kit that have already been delivered. In these situations, we're going to go ahead and allow these customers to cancel if they choose to do so for a certain period of time. This is our best estimate at this time. It could be larger or smaller. But this is our estimate for now in terms of customer cancellations. When considering the business moving forward, we may rethink some of the things we do to deliver prior to the event in this particular line of business as we move forward. It could have an effect on some of the revenue recognition and possibly impact where we trust more funds. Just to put that in perspective, this matter is probably worth about $0.05 to $0.07 a share in the total $3.60 guidance, and that is included in the model. As for future operations, we will continue to provide great service to customers who appreciate it moving forward.

Thank you. And our next question will be from John Ransom from Raymond James. Please go ahead.

Hey, good morning. Maybe an unfair question because it would involve math and I know that's challenging for the team. If you were to look at 2019 to 2023, obviously, if we compounded 2019 at 10% versus where your $3.60 is, we're a lot lower than $3.60. Could you give your best guess as to how much of that is just elevated volumes on the funeral side? How much of that is cost? And then how much of that is preneed cemetery and other? I'm trying to get a sense of detailing out the outperformance versus controllable versus just higher-than-expected volumes.

Yes, John. When you go to the $3.60, there's not a lot of higher-than-expected volumes left. Under the $3.80, there's still some. As we think about it, if you remember at Investor Day last year, we had that slide that shows $0.65 of improvement, the new base that we're operating on. About 75% of that was tied to cemetery sales related to marketing and sales improvements, and then we had another 10% to 15% related to cost efficiencies and accelerated share buyback. Most of what we identified before is tied to those numbers. You're correct; there's a little bit of excess deaths in that 2023 projection, but not as much as we saw in 2022 or 2021.

That's quite remarkable because you would also add in the higher interest expense, which wouldn’t have been contemplated. So, it's really the base is even a little better than that. Okay. Just one last question on the consumer; preneed cemetery is the ultimate fairly large ticket item that can be deferred. Are you seeing kind of, as you went through 2022 with the ebbs and flows of the stock market? What are you seeing in your core, kind of 73-year old boomer, relatively affluent? When you approach him or her about a preneed big-ticket item, what are you seeing in terms of behavior changes, if any, from the peak?

I'd say generally, John, we're seeing very favorable results. We're still seeing good activity at the high end. In general, we're seeing good activity in the core. However, I’d say we're still encountering a little more difficulty in getting the lower entry point sales, where people choose to defer. However, we're overcoming this with more plentiful leads, more effective leads, and better usage of our technology for real-time training and productivity.

You've touched in the past on sales productivity, so in short, you're selling more stuff with fewer people. What’s the useful way just to think about the average productivity for a salesperson today versus pre-COVID? How much of that is using more modern tools like contact management and moving inventory online versus just more rigorous management?

Fair, John. As far as headcount of salespeople, we are down about 300 to 400 headcount from 2019 pre-COVID. If you look at productivity, we're 28% higher than we were back then. We’re able to achieve that with about 7% to 8% less headcount. Quite a bit of efficiency, and the majority of that is likely due to the tools we've invested in, such as Beacon, Salesforce, and the way we utilize those tools. Combined with this, we're leveraging better marketing leads; we’ve had increased lead sources through digital channels, resulting in more effectiveness. I'd estimate over 50% of productivity increases can be attributed to modern tools, potentially even approaching 60% or 70%, with the rest coming from better leads and strong sales teams.

Thank you. And our next question is from Scott Schneeberger from Oppenheimer. Please go ahead.

Thank you. It's Daniel on for Scott. Good morning. Could you elaborate a bit on the cemetery preneed sales production expectation for 2023 concerning the cadence as well as how you think about the lost levers of sales average and large sales activity?

Sure. We're guiding that we believe that we're back up and running, expecting mid-single-digit growth. However, keep in mind that particularly in the first quarter, there was a lot of COVID activity, resulting in many atneed arrangements that are quite productive for preneed sales. When considering sales productivity in the first quarter, while we expect it to be great, we should not expect it to look as favorable compared to the first quarter of 2022 due to that COVID activity. So we anticipate overall, looking at the first quarter, we’ll see low-single-digit growth, with the rest of the year returning to more normalized comparisons.

Got it. Thank you. And on the average funeral per service, how do you think about the components of that as we look into 2023?

On the average revenue side, we expect that to be in the low-single digits. Towards the end of the year, we experienced some currency translation issues due to the Canadian operations. Obviously, trust performance was also down for 2022. Customs for income will have some challenges due to the lasting impacts of 2022. However, we feel comfortable that we will see organic growth in the low-single digits with no significant pushback regarding passing on some inflationary impacts that we've experienced.

Got it. Thank you. That's helpful. And finally, for the last couple of years, FEMA had a funeral assistance program. It sounds like that's going to come to an end now in May following the end of the public health emergency declarations. Have you seen any impact from this program?

Not in any material way. I'm sure we've seen some, but I couldn't quantify that collectively. We're not seeing that in any significant manner.

The next question is from Tobey Sommer from Truist Securities. Please go ahead.

Hey, good morning. This is Jasper Bibb on for Tobey. Just one clarification on the trust income assumptions in your EPS guidance. Obviously, it's been a pretty decent start to the year for equity returns. Are you assuming any higher trust returns now relative to the average initial gains range you mentioned back in November or would you say no change there?

I'd say it's a great start, but it's too early to think anything right now. We’ve said from the beginning that we expect a rebound and we speak there of high-single digits, and possibly getting about 10% in terms of return. It's a great start in January, but we haven't changed anything at this point in time.

Jasper, just to clarify, we think we will have positive results in 2023. However, regarding trust income and its impact, due to the market decline last year, we will have some tough first-half year comparisons. So, we anticipate earning well in the first quarter. But I still expect trust income to be down because we're comparing it to the last nine months of last year.

Right. That makes sense. I wanted to ask about some of the cost inflation pressure you cited in prepared remarks. Are you seeing any kind of easing of wage inflation or other input costs early this year? How are you thinking about managing those inflationary trends in your guidance?

Sure. The primary inflationary concerns we faced last year were wages and energy-related costs, primarily utilities and some fuel. On the utilities and fuel front, I think things are trending better; certainly, we saw a lot of increases in 2022, but we're witnessing some dampening effects. As for wages, we are sensing some pressures easing. In 2022, we experienced about 5% wage inflation. As we approach 2023, we continue to expect that to lessen, though I don't believe it will be back to the 1% to 2% range but rather in the 3% to 4% range.

I appreciate the detail there. Thanks for taking the questions, guys.

Hi, everybody. Just a couple of questions if I could. Cremation rate up 150 basis points year-on-year this quarter. It's been running at that pace for a while. Do you think that's the new normal? I know you previously had a range of 100 to 150; any thoughts on what you're seeing out there with respect to cremations?

A.J., I think you're right. I think probably 120 to 150 is a fair way to think about it. It will ebb and flow. However, COVID times were a little unique; I would say based upon what we're seeing, we expect in that 120 to 150 range.

It seems like the larger cases, higher end of the market and the cemetery side has come back. Do you think we're at a normal pace? Or are we witnessing pent-up demand that makes it above average at this point?

I don't think it's pent-up demand because we saw it perform strongly throughout. I think it could be a combination of two things. One, we built a lot of fabulous inventory, available across the entire country, which will entice people into that higher-end category. We feel good about the available inventory and anticipate good sales moving into the future.

You ended up on a strong note with the acquisitions in the fourth quarter. Is that how you see acquisitions being skewed? What’s the pipeline you see now?

There’s definitely a tendency for transactions to be year-end driven, with people wanting to get it done. The acquisition pipeline looks good; while there aren't too many huge deals, we see a lot of activity. We expect 2023 to be strong with several deals during the first three quarters. However, it is typical for people as year-end approaches to want to finalize their transactions.

Anything different on pricing for deals that you're seeing?

Not really. The discussion on normalized volume has gotten clearer this year compared to two years ago, where discussions around 2021 as a good base year caused confusion. Overall, I believe pricing expectations are still slightly higher than they were three to four years ago, but manageable.

Is there an update on the discussions around the funeral rule? What are you hearing from the FTC?

The comment period was up in January this year. We submitted a very similar response to reiterate our position. There are about 700 to 750 responses that the FTC needs to go through. The timing is uncertain; I would emphasize that this started three years ago. Historically, these changes could take eight to ten years to implement. The FTC has a lot on their plate, and I’m not sure this is a burning platform for them to address quickly, given our high customer satisfaction.

Thank you for your insights.

We want to thank everybody for being on the call today. We look forward to speaking to you again on our earnings call, which will be held in early May. Thank you, everybody. Take care.

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