Service Corporation International (SCI) Earnings Call Transcript & Summary

All right. Thanks so much, everyone. Thanks for sticking around here and for joining this meeting. So now it's my pleasure to host this session with Service Corp. International. They are the largest owner-operator of cemeteries and funeral homes in the U.S. And today, we have Eric Tanzberger, the CFO. And also in the audience is Aaron here, representing.

So yes, I guess, First question is the big question for this industry and for the company around the pull-forward effect and the excess debt and kind of -- can you kind of talk about big picture, how you think this is going to impact the growth going forward for the company?

Okay. I'll give you a little bit of background for those of you out there that are new in the audience. So pre-COVID, I would say, our company was $1.90 per share full year in 2019. And then we obviously had a positive impact as it relates to revenues during COVID, unfortunately. We normally generally serve about 315,000 to 325,000 families a year in our funeral segment. And ultimately, during kind of, I'd call it, second quarter 2020 through the first quarter of 2022, we served probably an extra 110,000 families at their time of need in the form of funeral services, and that's unfortunate. But ultimately, that's really what Joanna is asking us about is Obviously, that 110,000, there was a component of those individuals that would have been served anyway. And there's a component of individuals that would have been served a few years to many, many years in the future during that situation. And it was pretty significant to our earnings because, obviously, that $1.90 went all the way up into the mid-4s and then back down to $3.80 and then back down to $3.60. One thing we can talk about a little later because I want to get to your question, though, is if you CAGR-ed out at our 8% to 12% growth rate from 2019, pre-COVID, we really should be at about $2.80 a share, and our guidance is $3.60. So we learned a lot and utilized technology for our benefit to become a more efficient company as well, which is another story we can talk about. But in terms of the pull-forward effect, ultimately, it's -- the beginning parts of that 110,000 were pretty significant COVID effects. That's the stuff that were the elderly individuals in the homes and such and in the care centers that were primarily in the Northeast for the most part which is very different then later in the pandemic, that kind of moved to the West Coast. And ultimately, those individuals, towards the end of the pandemic were more younger, unvaccinated individuals that would have been pulled forward not just maybe 5 years from now, but maybe 10, 15, 25 years from now. So when you pull all that together, it's an effect that we think, during 2023, of that 110,000, we probably would have done somewhere around 10% of that, maybe a little bit more than that. Maybe 10% to 15% of those deaths that occurred during 2021 and '22 would have occurred in 2023. And then there's this tail. So you kind of go to that 10% to 15% down to 10%, 8%, 7%, and there's a very, very long tail. We're like, in our opinion, after like 3, 4 years from now, Joanna, there's still probably 60%, 65%, call it, 2/3 of that 110,000 that hadn't even been pulled forward yet. So it's a much more muted long-term effect with a tail than what we originally anticipated. Of course, we could be wrong, let's be honest about it. Our crystal ball isn't better than anybody else's. But so far, the modeling that we've had in terms of pull-forward deaths have kind of hung in there. We still have robust volume even in the post-COVID environment versus expectations, as you look back to 2019 and just pull it forward, call it a growth of 1% to 2% in volume. And we're seeing other things as well. For one thing, we're seeing what you're calling excess deaths which is the CDC's term from that perspective. But ultimately, you're seeing mental health and you're seeing physical health crisis continue in the U.S., and that's affecting our bonus -- our company. It is coming down more than the levels we saw last year in terms of excess deaths. Less is what we expect, and we've been kind of right on that mark so far in terms of the excess deaths. The other thing that's interesting is we gained a little bit of market share during COVID pandemic as a company. And that ultimately really comes from the fact that we have the resources and the capital and the scale to remain open during the pandemic. And the independents, which is 80% of the market, really were just unbelievably overwhelmed. Whereas we would, if we had a real problem in New York City, for example, we would move 200 to 300 people out of our 25,000 associates into New York and really be able to use our scale and our capital to remain open. So from that perspective, we may have gained 100 to 200 basis points in funeral of market share. We probably gained the same in cemetery. I think the cemetery market share may be a little bit more sticky than the funeral market share, frankly, primarily because if you drive past 3 or 4 independents to get to our funeral home, in an example, then I'm not sure, 5 years from now, you're going to keep driving past those and go to the [ Dignity Memorial home ] if it was geographically far away in my hypothetical example. If you did the same thing and interred a loved one of your family into that cemetery, you're coming back to that cemetery. And so a little bit different dynamics when you think of market share from that perspective. But if you put the market share, the excess deaths, a little bit -- there's still some COVID deaths that are happening in the U.S., with the pull-forward effect, you're still going to get pretty healthy volume, but it is going to be down year-over-year kind of mid-single digits, and that's primarily because you had a very strong COVID in the first quarter of last year that still exists. So you still have a little bit of a COVID dynamic, and not quite fully normalized yet when you have your prior year comp numbers.

And how would you think things will play out outside of this year, into '24 and '25? Like would you expect the growth? Or would you expect kind of tough comps because of the excess death that continued this year? How should we think about that?

No, I think you're going to see low single-digit percentage type growth in the volume beyond this year, which is good. We went through a period of time where the demographics were not in the favor. And we had mid-single-digit percentage declines in same-store volumes that went to low single digits, it went to flat, flat to slightly up. And now we're kind of maybe in the 1% to 2% type normalized range as we move forward. That potentially has the ability to do a little bit more than that when the baby boomer generation really kind of affects the throughput of our funeral segment, which we -- I personally don't really think that, that's affected us yet. There's some anecdotal evidence that's out there that says maybe there's a few of that happening. But ultimately, the oldest baby boomer is about 77. It's a very large and long generation. But the average age that we're providing atneed services is more like 82 to 84. So I think we're still 4, 5, 6 years away from seeing the beginning portions where we could start modeling maybe some additional throughput, which, again, through our fixed cost structure is going to create some pretty healthy incremental margin sales that ultimately will help create a little bit of margin expansion in total as it relates to the funeral segment and the cemetery segment as well.

And another topic that came up with the latest quarter was the cementer preneed sales production declining year-over-year. Obviously, there's some tough comps, but then you also talk about the weather impact on the sales process. So can you talk about what does it mean for the full year when it comes to the sales production, would you expect? And I guess, any update on where the things are tracking so far this quarter? And I guess, what gives you confidence, I guess, that most of it, sounds like you expect to come back. Because I also -- I think also you brought up the big festivities around the Ching Ming holiday. So how has that kind of impacted this production activity? And what does it do, I guess, for the year?

Yes. So we still have a strong comp versus prior year, as we talked about. So we normally would grow preneed cemetery sales in the mid-single-digit percentage growth range, is probably low single digits is where we started out the year. Now that we've had these events, and I'll walk you through in a little bit more detail, I think it's more like flattish to up single -- low single digits. And ultimately, what happened is that we had -- our company, for the most part, when you think of our cemetery footprint, is pretty much dominated by a West Coast type cemetery footprint. California is huge for us. As you know, we have our -- some of our largest cemeteries. We have numerous parks. We have the largest cemetery probably in North America, if not other places the world too, it would rival that is in California as well. And unfortunately, it's an outdoor business, selling cemetery property, for the most part. And particularly, the type of consumers that we market to are the Hispanics or Asians, or specifically Asian, there's a lot of beliefs in such to where they want to be there with the Feng Shui master or something along those lines and see it. And it just simply the weather didn't permit that and even post weather, the safety of the grounds didn't permit that in terms of -- think of these as canyons and some pretty rocky stuff and very wet and some of it washed away at Rose Hills, for example. So some areas where we're used to 9 to 10 inches of rain a year, got 22 inches in the first 3 months. And so when you think of what we originally expected because of the comp of last year, we probably expect a mid-single-digit percentage down, like I said, and ended up being about 15% down. That difference between the two is really related primarily to weather. Ultimately, about half of that was in California and half of California was at one location, at Rose Hills, which you've seen and been to. Ultimately, what we are -- what we also saw is kind of a normalization of the high spend area, and that was totally expected, and I don't mean that to mean that it declined. What I mean is that we had an anomaly of a very, very strong Q1 of last year that we are comparing against. And where the large sales came in for this quarter was not only expected, but somewhat normal in terms of the levels that you would expect. So it really ended up being kind of a velocity slow in terms of the number of people that are coming into the parks and attending appointments. And in reality, that's a combination of the weather. And we really hadn't -- it's possible that we're seeing a little bit of an effect of interest rates and recessions and inflation and those types of things, but it's hard to pinpoint. But in our opinion, the vast majority of that during the quarter was related to the weather on the West Coast.

And just a follow-up on that. So this Ching Ming festivities right, that you said that was somewhat disrupted because of the weather. But I think it's more like April. So I don't know like how things -- were you able to hold some of these events? Like are they happening just later because of the weather?

They're really not. It is early April, I agree with you, but it's similar to the holidays. If you think about it here, if you have a holiday of December 25, you're really kind of celebrating that in the first weeks of December in a lot of different ways, whether it's parties or family get togethers or what have you. Well, even if Ching Ming is in early April, all those festivities are really occurring kind of in March at our parks and such, with the throughput of the consumer coming in for those particular festivities. So I think that, we believe, that some of that will come back in future quarters in Q2 through Q4. But I do think it's realistic that, that is a big marketing event. And essentially, it was not able to be -- to have those festivities like we would have expected or would have hoped. So that's why we kind of say, "Look, at the end of the day, we think low single digits growth could be more like flat to low single digits." And the fact that Ching Ming came and went without us having the ability to host, like we host the families in the cemeteries and have leads that way, it could be a component of it.

And I guess just talking about -- staying with the cemetery preneed sales production. So I guess you're talking about flattish to growing a little bit this year. And I guess it grew very nicely. That number grew over the last couple of years because of the pandemic. So can you talk about the kind of the pull-forward effect in that part of the business? And how do you expect this to play out as we look out '24, '25 and so on?

Yes. A lot of that's in the guidance, obviously. That was in the low single digits. But a great source of leads for us is rating off of atneed events in the cemetery. So as COVID slowed down, somewhat at funeral, your throughput to be able to have those leads is slowing down on the cemetery side as well. We kind of baked that in, as we said. But ultimately, we're pretty confident that we get through this year and think of this year is more like a little bit of a transition year as it relates to this, still comping off of COVID comps last year. And we think that we will be able to return to that mid-single-digit percentage type growth that we will have in the future, including 2024. I just think we have a lot more leads than just COVID leads. We have all the money we've -- all the capital that we spend on digital leads that continue to flourish. We're getting smarter in terms of utilizing digital technology in terms of leads. There's a lot of things we're doing in that arena and continue to put capital behind that to create leads, especially on websites and everything that we're doing, utilizing modern technology to create that. And so we remain confident even though there probably is a little bit of a headwind related to COVID waning and those types of leads not creating the growth that you'd see it. But again, you're kind of seeing that in 2023.

And you mentioned some of these new ways of doing business in terms of utilizing digital technology and whatnot. And I guess this also relates to one of the questions on -- when it comes to margins, right, for both businesses. And can you talk about your confidence of where these margins will settle down after we kind of normalize? Because obviously now we comping off of very strong margins. But then as you think about going forward, where those margins -- the gross margins for each segment is expected to land.

Yes. So I think funeral traditionally has been a 19% to 20% type margin business. It certainly depends on the throughput. That throughput -- that margin was up to high 20s during COVID. It's now settled more around 21%, 22%. As throughput slows, which it does during the year, it's seasonal in our business, believe it or not. And as it slows during the summer months, you may see margins leak down, as normal, to the high teens. But we generally are comfortable with funeral margins being that 19%, 20%, 19% to 21% and that we've normally seen. Cemetery is a little bit better because we learned so much. When we -- as I said before, if you CAGR-ed out the whole business from $1.90 through today, you'd be somewhere around $2.80 at our growth rates that we expect, and we're at $3.60. So the EPS went all the way up and came down and stopped at $3.60. And that incremental value that we've created is really in the preneed sales area, and it's all the things that we utilize. We utilized technology, which is our Beacon point-of-sale systems become more efficient. We've utilized all the technology for better lead sources that hold their appointments and maybe even close a little bit better. Our sales force has become more effective dramatically using the Salesforce CRM system. We're getting better and better and better at that as we go along. We talked about in one of our one-on-ones, Joanna earlier today, is like I remember 7, 8 years ago, where we had kind of $1.5 billion of preneed cemetery and prearranged funeral sales in total, with 5,000, 5,200, 5,500, somewhere in that ballpark, say, at 5,000 or just north of 5,000 counselors. Today, as we speak, we probably have $2.5 billion of sales with 3,700 counselors versus that 5,000, 5,200 arena. That's technology. That's getting better, That's getting more effective, It's getting more productive using Salesforce CRMs and stuff. The other thing that's better is the inventory. We continue to do very well in our cemeteries 20 years ago, where it was a very homogenous play in terms of how many lots on an acre of land. Now it's a real estate top-down selling tiered approach, where you're going to see very high-end property family estates, private family estates, semi-private family estates, lakefront property. I mean, just like real estate, believe it or not, that tiers all the way down to the beginning levels. So that has really affected the ASP, which has helped us. All of those reasons created this incremental base between an expectation based on a CAGR off of $1.90 in 2019, pre-COVID, of about $2.80 all the way up to that $3.60. That is also translating into a little bit better margins on the cemetery side. I mean, the cemetery traditionally was more of a 28% to 30% type margin business. It grew to probably 38%, some in the high 30s during COVID with the throughput. And it's probably going to fall back into the lower to mid-30s, call it 33%, 34%, and not all the way back down to 28% to 30%. And that, again, is because of -- not to be repetitive, but kind of those learnings that I just described to you that we had coming out of COVID, which is creating the higher earnings base for us as well.

Right. That makes sense. So higher funeral and higher cemetery margins, I guess it sounds like more incrementally accruing on the cemetery side of...