Service Corporation International

NYSE:SCI

Earnings Call Analysis

Lower Funeral Volumes Impact Earnings but Positive Outlook Ahead

In Q2 2024, the company reported adjusted EPS of $0.79, down from $0.83 last year due to lower funeral profits from decreased service volumes, slightly offset by increased cemetery profits. Funeral revenues dropped by $5 million (1%), driven by a 2.7% decline in core funeral volume. Cemetery revenues, however, increased by $12 million (3%). For 2024, the company expects full-year EPS at the lower end of $3.50-$3.80 range, with stronger revenue and margins in H2, particularly in Q4. Looking to 2025, the company anticipates EPS growth at the higher end of its 8-12% historical range as interest rate impacts and operational changes subside.

Overview of Q2 Performance

In the second quarter of 2024, the company experienced a slight dip in performance compared to the previous year. Adjusted earnings per share came in at $0.79, down from $0.83. The primary cause of this decline was a larger-than-expected decrease in funeral profits, driven by a 2.7% decline in funeral service volumes. However, cemetery profits saw an uptick, helping to mitigate some of the downside .

Funeral Segment Insights

The funeral segment faced several challenges during the quarter. Total comparable funeral revenues fell by $5 million, roughly 1% lower than the previous year. This decline was mainly due to a $7 million drop in core funeral revenues, affected by a reduction in service volumes. Interestingly, during the first four months, the volumes met expectations, but May and June saw an unexpected drop, which the management attributes to the receding effects of COVID-19 and lower excess mortality rates .

Cemetery Segment Performance

The cemetery segment, on the other hand, performed well. Comparable cemetery revenues increased by $12 million or about 3%. This gain was primarily driven by a $10 million rise in recognized preneed merchandise and service revenue. Additionally, endowment care fund income increased by $4 million. Despite this, preneed cemetery sales production saw a slight dip of $7 million or 2%, although this was attributed more to timing rather than a lack of long-term demand .

Cash Flow and Capital Investments

Cash flow remained solid, showing an adjustment operating cash flow of $220 million, marking an increase of $62 million over the prior year. This was primarily due to lower cash tax payments resulting from changes in tax accounting methods. The company invested over $300 million in the quarter, with notable investments in high-return cemetery inventory, facilities maintenance, digital systems, and growth capital for new funeral home constructions. Additionally, $23 million was spent on acquisitions in Illinois, Kentucky, and Western Canada .

Guidance for 2024 and Beyond

Looking ahead, the company anticipates that full-year results will fall at the lower end of the adjusted earnings per share guidance range of $3.50 to $3.80. Revenue and margin growth are expected for both the Funeral and Cemetery segments in the latter half of 2024, leading to significant earnings per share growth in the fourth quarter. The company is optimistic about returning to higher earnings growth in 2025, targeting an 8% to 12% increase, partly due to the positive impact of a new preneed funeral insurance agreement with Global Atlantic .

Strategic Initiatives and Future Outlook

The long-term strategy of focusing on preneed sales and bolstering operational efficiencies is expected to drive future growth. With a solid North American network, a strong workforce, and a robust preneed backlog, the company is well-positioned to capture more market share. Moreover, expectations of a decrease in interest rates and operational changes are anticipated to positively impact earnings in 2025 .

Earnings Call Transcript 2024-Q2

[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.

[Alanna O'Connor, executive]

Good morning. This is Allie O'Connor, AVP of Investor Relations and Financial Reporting. Welcome to our second quarter earnings call. We will have prepared remarks about the quarter from Tom and Eric in just a moment. But before that, let me quickly go over the safe harbor language. Any comments made by our management team that 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 might 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, executive]

Thanks, Allie. Hello, everyone, and thank you for joining us on the call today. This morning, I'm going to begin my remarks with some high-level color on our business performance for the quarter, and provide some greater detail around our funeral and cemetery results. I will then 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 attributable to lower funeral profits from a larger-than-anticipated decline in services performed. This decline was slightly offset by an increase in cemetery profits and better-than-expected results from recent acquisitions. Below the line, the favorable impact of a lower share count was offset by the negative impact of higher interest expense, and a higher tax rate. Now let's take a deeper look into the funeral results for the quarter. Total comparable funeral revenues declined $5 million or about 1% over the prior-year quarter. Comparable core funeral revenues accounted for this shortfall as it declined almost $7 million. Core funeral volume declined 2.7%, versus our expectation of flat to slightly higher volume. Funeral volumes tracked our expectations during the first 4 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 trend 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 effects of a 60 basis point increase in the cremation mix. SCI Direct, non-funeral home preneed 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, while the gross profit percentage declined from about 21% to about 18%. This decrease is primarily due to the decline in revenue and an increase in annual incentive compensation costs reflecting the timing of incentive compensation accrual adjustments over the prior-year quarter. Preneed funeral sales production increased by $7 million or about 2% over the second quarter of 2023, led by a $10 million or 4% increase in core preneed funeral sales production. Now shifting to cemetery. Comparable cemetery revenue increased $12 million or about 3% compared to the prior-year second quarter. The increase was due to a $7 million increase in core revenue and a $5 million increase in other revenue. The $7 million core revenue increase was primarily the result of a $10 million or 11% increase in recognized preneed merchandise and service revenue. Robust increases in contract averages being delivered out of the backlog favorably impacted 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 endowment care fund income. Comparable preneed cemetery sales production decreased by $7 million or 2%, which was less than our flat to slightly up 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 and 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 and an increase in annual incentive compensation costs, again reflecting the timing of incentive accrual adjustments 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. 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 6-month period as well as compared to sequentially to the first 6 months of 2024. We would anticipate a more challenging funeral volume comparison and 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, and the positive impact of our new Global Atlantic preneed funeral insurance agreement takes effect. Beyond that is where I truly 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 the demographic trends impact our industry. 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. And with that, operator, I'll now turn the call over to Eric.

[Eric Tanzberger, executive]

Thank you, Tom, and good morning, everybody on the call. I guess I'll start off the same way you just ended your comments, Tom, and really just start by thanking all of our 25,000 associates here at SCI for the 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 providing some commentary on our outlook similar to what Tom just did. 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 that 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 atneed operations. So specifically for the second quarter, we reported adjusted operating cash flow of $220 million, It's just 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 will result in the deferral of cash taxes in the future years when these installment payments for the cemetery property are received. We've talked about that now for several quarters. But 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 of these 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 preneed installment sales, they were more than offsetting the operating income decline that we talked about and slightly higher cash interest payments. And while we're on the topic of cash interest, assuming the 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 $5 million to $10 million, and that really relates to higher floating rate debt balances compared to prior year. That's really not new, but I just want to remind you of that. So shifting now to capital investment activity during the quarter. We invested just over $300 million of capital to grow our business and return value to our shareholders. Let's look at the components. First, let's start with our maintenance capital. We invested $40 million into high returning new cemetery inventory, development projects, again, to benefit future preneed sales growth. $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, one was in Kentucky, and one was in Western Canada, for a total spend of about $23 million. That brings our first half acquisition spend to about $38 million. And as kind of how I alluded to last quarter, we continue to remain very optimistic about our momentum here and investment opportunities that are expected to end the year above our targeted range of $75 million to $125 million of capital invested in mergers and acquisitions. In addition to acquiring businesses, we also spent $15 million purchased in real estate, including $8 million for expansionary cemetery land in 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 purchased about 2.4 million shares at an average price of about [ $70 ]. This resulted in just over 144 million shares outstanding for our company as of June 30. 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 have proven resilient as I've already mentioned, due to the continued support of cash receipts on both preneed installment sales and the underlying cash receipts from our funeral and cemetery atneed businesses. Accordingly, as reflected in our press release yesterday, it is important to note that we are reiterating today, our adjusted cash flow from operations guidance range of $900 million to $960 million with the midpoint of $930 million. So in closing our prepared remarks, I'd like to just do a couple more items and highlight about 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. Our leverage at the end of the quarter increased slightly to about 3.7x. And 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 SCI team for their invaluable contributions each and every day to the communities and the client families we are so lucky to serve. So with that, this concludes our prepared remarks. And with that, operator, I'd now like to turn this call over to questions.

[Operator]

[Operator Instructions] The first question comes from Joanna Gajuk from Bank of America.

[Joanna Gajuk, analyst]

So I guess on your comment, if I may, around next year outlook. So sounds like you think this June, weakness in the funeral was sort of temporary drop because you alluded to July tracking better. So just to confirm, I guess, first, you're reducing your guidance essentially for the Q2 results, right? And your expectations for second half of this year unchanged, right?

[Thomas Ryan, executive]

Yes, they're predominantly the same, Joanna. 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 in 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 in the back half.

[Joanna Gajuk, analyst]

Okay. Great. And then yes, that leads me to the question -- original question I was thinking about for next year comment that you just made. So say if Q2 was sort of viewed as a temporary issue, so to speak, and you expect to grow right at the higher end of the typical range. So I guess what gives you confidence in ability to grow towards 12%, I guess, off of maybe somewhat the [ post ] 2024 number?

[Thomas Ryan, executive]

Yes. So as you think about -- as I mentioned before, when you think about the '24 number, two things stand out as it's going away. One is we have a unfavorable interest rate comparison as you think about '23 to '24. We believe that will subside in 2025. The other thing is, Joanna, you'll remember in the first quarter, we talked about some operational changes we made to SCI Direct, that we thought these were very favorable for the long-term business, but we're going to cause some temporary pain. And the first half of the year, we had 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 that relates to selling away from home insurance. So those two negative effects kind of go away in the back half of the year and also go away in 2025. So out of the gates, you have two 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 that funds our preneed insurance. And with this new agreement and some of the terms that are in it, we believe we can generate higher general agency commission. So we would anticipate the positive effects of that to lift us up in 2025. And then having said that, the core business itself, we feel, again, very good about. We feel like volume 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, and 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, analyst]

So if I may follow up on this new contract with the Global Atlantic insurance. So you said that commissions will be higher. But when you negotiated, did you also adjust your sort of the predetermined returns that you expect to get on this contract? Or is it largely kind of reflective in the commissions being higher?

[Thomas Ryan, executive]

Well, it's predominantly going to be in the commissions and then it's also in the product mix. You get real technical in some of these terms. But to give you an example, we'll have a better ability to write for our customers guaranteed insurance product. The way we had to do it under our old agreement, it was more difficult to get people underwritten, and you therefore, give protection to our customer, which also happens to generate a higher commission for us. And we worked really well with Global Atlantic in finding ways to onboard more people. And I won't 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 it's allowed us to kind of think through a better way to serve our customers, which also should, again, if we execute correctly, generate higher commission rates.

[Joanna Gajuk, analyst]

Great. If I may, a very last one on the quarter itself, [ because, call it, ] the Funeral segment, right? The gross margin there was very low. So it sounds like the revenue essentially was surprise to you, right? So it sounds like you kind of -- we're heading into the quarter with different kind of cost structure and then things surprised you in June, right? So there was sort of, call it, mismatch between the cost and revenue. That's how to think about this quarter in general?

[Thomas Ryan, executive]

Yes. I think sometimes, Joanna, I think if you -- because quarters are such short periods of time and you have adjustments to accruals and things that can happen, maybe a better way to look at funeral is step back and look at the 6 months. For the 6-month period, our funeral margins were 19.9%, which are, I think, about 280 basis points below last year when you think about gross margin percentages. One thing to keep in mind is that anticipated and forecasted SCI Direct change. And we're missing about $20 million of not delivering merchandise predominantly on the SCI Direct side. So if you add back $20 million in the profits associated with it, it takes that 19.9% back up to 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 explain it. We've got a little bit of, I'd say, cost creep associated with a couple of categories, but nothing material. So it's kind of where we thought it would be, not to say we can't do a 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 we feel better about getting our arms around that. We're going to lose the negative comparison on SCI Direct. So that's going to help us. And again, I feel a lot more positive about the funeral margins as I think about the back half of 2024.

[Operator]

The next question comes from Parker Snure with Raymond James.

[Parker Snure, analyst]

This is Parker on for John Ransom. Maybe just talk about the preneed cemetery sales. I know you mentioned lower high-end sales, but the core actually improved. That seems to be a divergence from what you guys have noted in recent quarters. So maybe just kind of pull on that thread a little bit more. Are there any common themes that you're seeing that's driving that trend? Or is it purely just kind of timing related or some one-off in certain markets? And then generally, how are you thinking about the lower-end consumer. Has that changed at all? And then also maybe just remind us the percent of your preneed cemetery sales that comes from the kind of core consumer versus that high-end consumer?

[Thomas Ryan, executive]

Sure, Parker. So first of all, I think you hit the nail on the head. It is a reversal. We feel very good about the core. We saw growth in the core, and that's different. It's been a while since we've seen the high-end sales dip down. But as I think we've tried to explain over and over, the high-end sales are just very hard to predict when they fall. 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 in the back half of the year. So I wouldn't get to -- we're not worried about that. We're going to continue to work hard. If you step back and look at the whole year, actually high-end sales are about flat. And so I think you got to -- again, as you move out periods of time, it probably normalizes. So we feel very good about the back half of the year. And I think the reminder is that from a preneed cemetery perspective, high-end sales generate, I believe, 15% to 20%. Is that probably right?

[Eric Tanzberger, executive]

It's probably 13% to 15%, in that ballpark over the year.

[Thomas Ryan, executive]

So that -- but again, I think that's the piece that's always going to be a little more volatile as you try to predict quarter-to-quarter.

[Parker Snure, analyst]

Okay. And then maybe I could 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 selling. Maybe just talk about some of the tools that you have in your kit for kind of driving more preneed cemetery in an environment where you're kind of having to maybe work a little bit harder?

[Thomas Ryan, executive]

Yes. I think a lot of the tools that we've talked about before, a lot more of our leads now are coming from outside the location. So from a digital perspective, when you think about seminars that we put on, when you think about digital leads that we'll generate through the website and other means, so those are where we're seeing a lot more leads, Parker. And so we're executing on those very differently. But you correctly say, I mean, if you look at our core volume, we generally write 55% of our funeral volume is the percentage that you can almost predict within a band of between 53% and 57%. That's the number of contracts core that we'll [indiscernible] in any given. So it shows you that there's still a high correlation of people that are coming through our funeral homes are a tremendous lead source for preneed cemetery. I do think that, over time, we'll trend more towards other sources, and that's where we're working really hard at how could 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 and understanding and getting in front of those customers. So we feel very good about the trends in that business. But you can't -- it's still such a core reason for cemetery sales. Funeral volume still has a material impact on our ability to generate those leads and then turn them into sales.

[Operator]

The next question comes from Tobey Sommer with Truist Securities.

[Jasper Bibb, analyst]

This is Jasper Bibb. on for Tobey. I want to ask how are you managing the sales force in the current demand environment? I think it's the Investor Day 2 years ago, you showed how you've been able to drive pretty impressive productivity gains even with lower headcount. So curious if you see those productivity levels hold up this year?

[Thomas Ryan, executive]

Sales force.

[Eric Tanzberger, executive]

Well, what we are doing now is that, just to refresh everybody's memory, as you asked. When you look back 4 or 5 years, and again, you referenced the May '22 Investor Day, so I did this by memory, but we had about 4,300 to 4,400 counselors to produce total preneed sales of somewhere around $1.7 billion, $1.8 billion at the time. Now that's funeral and cemetery when I say that, okay? So that's the entire preneed sales function. Today, fast forward now, now you're looking at $2.7 billion to $2.8-ish billion area in terms of [ billion ] for the preneed sales force, and we're doing that with 3,700 counselors as opposed to the 4,300 counselors. Not to get repetitive, but it's kind of what Tom had already answered during 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 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 a less distraction on recruiting and such. And then let's don't forget that we're continuing to invest capital into our cemeteries. I mean if you do use the same time frame back to 2018, you're not spending $165 million of capital to build inventory. It would be much, much less than that, and probably the $80 million to $100 million, if I remember correctly. But we are going in there with the tiering strategy that we have led the industry in doing and putting our money where our mouth is and spending the capital, which has wonderful returns to those capitals for those high-end projects all the way down to the mid-tier projects, all the way down to that beginning entry-level type price points of these cemeteries. So it's not one magic bullet. All of the above that we talked about back in '22, which continues to come to fruition as we speak today.

[Jasper Bibb, analyst]

And I think earlier, you mentioned 150 basis points headwind this year on the SCI Direct changes for first half gross margin and then that's going to help you next year. Is the right way to think about that as being, let's say, like 70 to 80 bps gross margin tailwind for '25 versus '24?

[Thomas Ryan, executive]

I think -- no. I think your negative comparisons should begin to flatten out to '25. So I wouldn't anticipate it to have any kind of material effect on margins in '25, just '24.

[Operator]

The next question comes from A.J. Rice with UBS.

[Albert Rice, analyst]

Just a couple of things maybe. I think you're saying you expect a little more challenging comparison in the third quarter in the preneed cemetery related to lower revenue recognized from completed cemetery construction projects in Q3 versus prior year. Their overall comments seem to be for more at least flat in the second half. 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?

[Thomas Ryan, executive]

Yes, I think my comment was more about not production but about completed contracts. Remember, we're -- I think our sales 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 too is the timing of completed construction projects that have already been sold into. And last year, we had a pretty decent-sized number in the third quarter. And I think what we're trying to highlight a little bit that it could be as big as, let's say, a $20 million difference of revenue recognized from completing those contracts, think of [ mausoleum ]. So it has nothing to do with production, but more about when the revenue gets recognized and that comparison is much more favorable when you think about the fourth quarter. So if 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.

[Albert Rice, analyst]

Okay. And on the larger, higher-end properties I know sometimes it can be just when the construction is completed and then you can recognize it. And sometimes, there's consumer behavior. Are you saying the softness a little bit to the high end that you saw in the second quarter is more about projects and when they got completed? Or are you actually saying that you've seen a little softness in the consumer behavior in the high end?

[Thomas Ryan, executive]

Yes. So when we talk about production, that's just consumer behavior. 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 highlight you to you, the first quarter was a really nice upside surprise. We had a very strong high-end sale. So again, looking at the 6 months, it's kind of flat. I think as we think of the back half of the year, we see no reason we can't generate high-end sales we're not seeing pushbacks from consumers or anything like that. Sometimes, as you know, A.J., it's just getting in front of people, somebody deciding they want to pull the trigger, not pull 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 and then again in 2025.

[Albert Rice, analyst]

Okay. And then on the funeral side, I know that the core funeral array per service was up about 1.3% in a quarter where you didn't have very much growth in cremation rates, which can 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. Anything you see?

[Thomas Ryan, executive]

Really not. I think at the atneed level, it was closer to 3% from a contractual year-over-year. If you remember, you got the cremation mix change, which negates some of that. And then lastly, I think it was more of a tougher comparison as it relates to the preneed backlog comparison versus the atneed walk-in. And so again, that's going to vary from time to time depending when those contracts come in. So at the customer level, we're still seeing kind of 3% increases, which may not be 4%. But some of that [ 1.3% ] is because of the mix and because of trust income from the contracts that are coming out of the backlog.

[Albert Rice, analyst]

Okay. And then just a last question. On the deal pipeline, I know you said in the prepared remarks, you'd be above the high end of your target -- normal target range. Do you think you're just seeing it more properties? Is it the competitive landscape has gotten better as 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? How would -- give us a little more on that? And is there anything new about the economics of the deals you're seeing?

[Thomas Ryan, executive]

Sure. I think, first of all, probably all of the above, but the predominant reason I think we feel is interest rates spiking up and again, I'm just using history as a gauge. A lot of our competitors had variable rate debt structures. And we've got a little bit of that, but very little. And so I think our -- back to Eric's point, our financial stability, our cost of borrowings is very different. So I think as those went up, those competitors really had to pull back. And I think it's allowed us to more deals to flow directly to us and not be in the competitive stage. I think -- I don't see a drastic difference in pricing, no. I mean, I think it's pretty much the same. It's just we're the choice. And we've got a lot of stuff working in 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 opportunities to deploy some capital and create some future profitability and growth for SCI.

[Operator]

The next question comes from Scott Schneeberger with Oppenheimer.

[Scott Schneeberger, analyst]

Just going back on the Funeral segment profit underperformance in the quarter. Tom, could you kind of break out what the drivers are there and in magnitude and maybe mix? Because the revenue, I know there was maybe some timing in the quarter, and this was discussed on an earlier question, but it was not much of a difference on revenue year-over-year, yet this significant drop. And you had mentioned in the prior answer, some cost creep. So I heard some SCI Direct incentive comp just the leverage and then this cost creep. And I think that may be as people concerned is that something that's going to persist in the back half even though you did talk about some stabilization. So if you could break that out a little bit more, it would be appreciated.

[Thomas Ryan, executive]

Sure. [ In it, ] Scott, see what I was trying to say is in the quarter sometimes and you guys know how these things work, you adjust estimates and accruals. So I'll give you an example. If you had an 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." It may or may not begin to show its head in the first. So it's really hard. Sometimes you got a credit going one way and debit another way, and that's why I say a quarter can have noise. And if you step back and look at the 6 months, we went from 19.9% -- we're at 19.9% funeral margin for the 6 months versus 22.7% in the 6 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, continue to go down 150 basis points. That's just pure volume calculation on the core. Then you 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, which would have dropped, say, $14 million to the bottom line. So now I've explained another 150 basis points and now I'll explain another 80 basis points. So 230 basis points of my 270 basis points, whatever it is difference is explained by SCI Direct and throughput, and the 0.4% is higher expenses. And again, I think you can take away some of the quarter-to-quarter noise if you do it that way. And I look at those numbers and say, Okay, I've got slightly higher incentive comp because, again, back to timing of when you adjusted those incentive comp accruals, which recall are not just based on EPS, they're based on production. They're based on cash flows. So we don't think there's any big boogie man in the cost, I guess, what I'm saying. Having said that, there are things we can do. We clearly have had wage inflation for the last couple of years, rightfully so. And so we're seeing that subside and some of those trends. So if I 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 general agency agreement, which should generate higher commissions which are going to enhance the funeral margins when you think about 2025. So that's why I feel better is we're going to manage this tighter. We've got a good G&A revenue story coming in 2025. And we don't have the drag of SCI Direct operational changes on a year-over-year basis. And remember, the thing that should get exciting about SCI Direct, we're deferring a lot of revenue that we're still selling. And one day that money is going to come out of trust and the margins on SCI Direct's operational business are going to go way up. So this is a timing thing and the business itself is very healthy. The consumer is very healthy. And so long term, I love our trend. Short term, we're having to stomach a little bit of earnings in digestion.

[Scott Schneeberger, analyst]

And just on the new partner, the new insurance company partner, you alluded to '25. So it sounds like you think that maybe you get some better fee flow by that time. Could it come as early as the second half? Or is it going to take a few quarters before it's discernible?

[Thomas Ryan, executive]

We will get some in the second half for sure. 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 insurance, and we believe, we now have the right type of products to put in front of our customers. So it 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 an insurance license. So as they sound simple, but they're not, and we need to get more people licensed, we need to get people understanding the product mix. And like I said, what I'm excited about is we're going to have more of our customers that are protected by underwritten insurance than we ever historically have. So it's a better product for the consumer. So our [ counselor ] should feel really good about providing that protection. And if we do it right, we're going to generate higher commissions.

[Scott Schneeberger, analyst]

I just have two more, and they're separate, but I'll ask them both upfront. We can wrap. One is consumer behavior in the lower-priced tiers. If you could just delve into that a little bit. Are you seeing inflection better? Is it inflecting a little worse? Just curious about the contract velocity volume. So that's question number one. Just that trend and how you think about that? And number two is the funeral rule update FTC, anything on that?

[Thomas Ryan, executive]

I'm going to let Eric talk about the funeral rule. But as it relates to the consumer, I think I would say this, we saw a while back that I think the lower-end consumers were being challenged. And 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 through our sales leadership to stay, let's get people on board by having better financing terms for them to be able to get that first down payment and get them started. And so we saw a little bit of a positive reaction to that. And I think we continue to. So we've not really seen any further deterioration. I do believe that consumer is still challenged, mainly because of what I see in other, again, retailers as opposed to ours. So we want to do what we can to make sure we can accommodate them. If that means stretching out terms a little bit, making the payments a little easier. We're going to try to do that to accommodate that consumer.

[Eric Tanzberger, executive]

Scott, on the FTC, 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 a very good relationship with the staff 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 down the pipe that we know about, such as pricing online, we do not expect that to have any material effect to our company. And as you know, we have a tremendous amount of our funeral homes already that have pricing online in different forms and fashions, whether it's starting at prices or just complete full premium pricing experiences digitally where you can really dive deep into that particular funeral homes offering and kind of everywhere in between. Ultimately, we think, we will continue to go down that path. We'll continue to test. We'll continue, most importantly, to optimize the websites. According to the tier of customer spend that we are dealing with at one particular funeral home in one particular market, and we'll go from there.

[Operator]

The next question comes from Joanna Gajuk with Bank of America.

[Joanna Gajuk, analyst]

I just want to clarify on the cemetery preneed sales production commentary. So do you still expect to grow low single-digits for the year? And then has anything changed in your kind of long-term view of growth for the preneed cemetery sales production?

[Thomas Ryan, executive]

Yes, Joanna. We do expect to end the year in the low single-digits. And again, as we think about the outer year is '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, we anticipated stabilization in funeral volume, we expect to be able to get there.

[Operator]

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

[Eric Tanzberger, executive]

Thanks, everybody. 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.