Service Corporation International (SCI) Earnings Call Transcript & Summary

Service Corp, I'm kind of making this up, but that -- has come to every single Raymond James conference. So before a lot of you were born, they've been coming to our conference. And Eric, this is probably your 20th?

Yes.

At least. Yes. So we're always happy to welcome back Service Corporation [indiscernible] company. 12% share in the United States. So we're just going to kind of do a -- Eric didn't want to do any slides he made me do all the work -- we're just going to have a nice -- we'll let see time to gain for questions from this back room.

So the first question is, can you just kind of take us through the whole pyramid carried your earnings piece, you're on the back end of weakening some of the seasonal demand which spilled over to cemeteries. We use the baseball analogy Where are we going to think we are in terms of normalizing that trend and before we started.

Perfect. Perfect. Thanks, John. Thanks for having us again. For those of you that are new in the room, largest owner of funeral homes and cemeteries in the world, 1,500 funeral homes.

Didn't I just say that?

I don't know, did you?

Yes, I did. That's fine.

1,500 funeral homes, 500 cemeteries. You did say 12% market share, which is the funeral market share. The cemetery market share is about 28% to 30% from a revenue perspective. Baby boomers have already started to affect in a positive way our preneed cemetery property sales, which has driven a good amount of growth for us over the past 5-plus years and a baby boomer demographic effect that's going to positively affect this industry and our company coming in the future. You're right, though, that we've had quite the movement in terms of COVID from our particular industry. Pre-COVID, we're about $1.90 per share. I think we went to $2.90, and then up to $4.80 and then we came back down the other side of it from that $4.60, I think it was down to about $3.80 to about $3.47 last year. And I think to answer your question, we're kind of on the back half of that now because we think we've kind of hit the trough, and we expect to grow from about $3.45 to about to $3.65 is the midpoint of our guidance. Not the 8% to 12% growth of bottom line earnings per share that we've been able to produce over a long period of time, but about half that as we still have some hangover effect from the COVID effect. We performed about an extra 120,000 to 130,000 funerals during COVID over a kind of a 2-year period. And obviously, that got pulled forward from '23, '24, '25 and '26. After 26, it gets pretty material. To show that we've kind of leveled out. Last year, we did about 350,000 funeral services. I think this year, we'll do about the same, about 350,000 general services. So what's happening is you have a natural population growth well within M&A program that is positive, but being kind of washed by a little bit of the tail end of this COVID effect of this pull-forward effect that I just described to you. But I think moving forward into next year into 2025, I do think you're going to start seeing some positive trends come back in funeral volumes, which will affect the entire company, including the cemetery segment as well. So we went through the peak. We're coming down. We're in the later innings, we're flattening out. And I think you'll start seeing us grow during '24, but not to the 8% to 12% level, kind of mid-single-digit percentage levels, but I do think that's near time on the horizon in '25 and beyond.

And just to be clear, if you took the $1.90 and annualized it, your earnings are still running above kind of a 10% compounded baseline. So you found some earnings, took advantage of COVID and found some earnings. So maybe kind of talk about that.

Yes. I think we learned a lot during COVID. Some of the positive things we learned is that when you have an acute event, is your associate base, your employee base large enough to do it or if you have to add a lot of cost there. Can the facilities handle it, and we were very pleasantly surprised when these funeral homes are built in the '70s, '80s and 60s probably in some cases, they're really quite large. Something that needs to be 7,000 square feet is probably 15,000 square feet just because of the way it was built many decades ago. And so we did not have any type of physical capacity issue during COVID when we were serving an extra 125,000 families. And the truth to it is because it kind of came in pockets, we're able to move our associates around by using our national scale, and really didn't add any labor costs as well. So our expectations are as there's more throughput going forward, as the baby boomer generation naturally affects this industry in terms of throughput in a positive way that we're not going to have to add capital in terms of the facilities. And I think we could probably handle it with the labor we have, if not at least maybe adding some small part-time labor. But when the high fixed cost business that this is, which is a 70% to 80% fixed cost business, what we're looking forward to are very high incremental margin business coming in through the additional throughput. So we expect to see margin expansion over a period of time as the baby boomers affect this particular industry into the future.

So you Sherlock Holmes fans will remember the famous dog that didn't bark that's how he solved the crime, you can look that up. So English major. So I'm always kind of fascinated by the dogs that we think are going to bark that don't bark. And 1 of those was years ago, it became clear that if you wanted to, you could buy your casket at Costco or something and have it shipped to the funeral home. That never really happened. And you still are in good casket margins, although it's a declining part of the business. Why do you think that is?

Well, I think we adjusted prices in a way that took the casket down to those type of pricing levels. And so there's really not really a pricing arbitrage there for doing that, much less the fact of the headache of handling that and getting that to your particular funeral home as a family, I mean the truth to it is, in the atneed environment, the families need one thing, they need help. And we are very well trained as an industry, and particularly, our company as well to immediately step in and to handle that family's loved one and a compassionate and respectful way. And then what they really need at that point is just guidance. And once they kind of figure it out, there's like this natural progression to say, these people are doing a great service for me because I haven't been through this. And if I have, it's been maybe one other time in my life at max, and it just kind of gives its own trust relationship develops and then that develops into what are the offerings that I could do. Now there's plenty of good, better, best caskets that are out there that they could select. And they certainly have a right to do something different and bring a casket into 1 of our funeral homes. But I just think it's just the trust that we're able to establish very, very early on in the touch point with that particular grieving family, and I think that just kind of carries on through the process, John, over the next 3 to 4 days in this hypothetical event. And that lends itself to just not really be in a being a disruptor. And I don't think there's really much of a price differential anyway in the first place. There could have been 20 years ago. And we had to go in as a management team we're a management team since 2002 as executive management. We had to go in and kind of tweak the service versus merchandise type of mix in terms of where our pricing was, but I think that was an issue that was 15, 20 years ago.

So people who want to shoot at your stock point to some pricing surveys, and they point to the FTC transparency rule. So this is kind of a big fat pitch. You've swatted it a couple of times pretty well, I think. But for people who haven't heard you talk about that, maybe if you could bring us up to speed on your latest and greatest there?

So let me talk about pricing in the market for our company, and then I'll come back to the FTC as the second part of the equation. So when you think of our market, we're very tiered since we're sitting in a Ritz across where I'm sure John stays out of suite and the rest of...

[indiscernible]

I don't believe that. But since we're sitting in a JW Marriott, Ritz facility, I'll use that as the analogy. We're playing in the Ritz-Carlton, the upper end. We're playing in the JW Marriott kind of the upper middle. We're playing in the Marriott kind of the middle. We're really not playing in the price points much beneath that.Until you get to a very low-end part of our industry, which is kind of a commodity, asset-light direct cremation model, which we have about $300 million of production a year for that particular model. And so when you go into one of our markets, and you say, "I want to take this particular home for Service Corp, which analogizes to the Ritz and you compare it to something else downstream in terms of the pricing tiers, yes, you're going to see a difference in those particular situations, but what you're not going to see market by market, look at by location is us disconnected with the true competition that we have with each tier in each market. So if there is a high-end independent in a market and there's our high-end location, the prices are going to be very comparable. And as you go down tiers, are going to be the same. If that wasn't the case, then I think you'd see some leakage in market share as opposed to kind of the modest growth in market share that we've been able to have and maintain over a period of years. Second part of the equation is the Federal Trade Commission. So for those of you, I'll give a little bit of background here. The Federal Trade Commission instituted what was called a funeral rule 30, 40 years ago, I guess. It was a positive step in our industry, frankly. I think the Federal Trade Commission did a good job at this rule. I think we're in favor of this rule, and I think they've done a good job, frankly, evaluating the rule as we've gone through time. And I think we view them more as a partner in these situations to make sure that the industry is held to a high standard, which is important to our culture for our company and, frankly, the culture of the industry as well. So going to the specific question that's more real time is about every 10 years, the Federal Trade Commission has to open up the rule and take a look at it, so to speak. And they've done that. And there was some type of consumer advocacy brought into the equation at some point in time relating to, does there need to be more pricing transparency? And does there need to be, for example, pricing online or what is called our GPLs are a general price list placed online. To step back and say how do we feel about that? Well, we think in some cases, it's very strategically important. In fact, of our 1,500 funeral homes we have about 1,000 to 1,100 of those funeral homes that have pricing online and GPLs online as we sit here today. Ultimately, I think we'll work through the tiering and we'll get to the full amount regardless of what's happening with the Federal Trade Commission. But I think that's going to be maybe the big push to it. And I think when people originally heard that, there was a little bit of a knee-jerk reaction that this business is really a commoditized price-sensitive business, and it really isn't. It's a service component that's based on the compassion that the industry presents and the solutions that the industry presents in real time when a family is at a very difficult point on a particular day of a particular week. And so I don't -- whatever happens where the Federal Trade Commission rules and puts out the new rule or a vision of the existing rule I don't think there's going to be anything out there that we're not aware of or anything that we think is going to affect our business one way or the other. When we have tested this, to put the GPLs online and put pricing online, we did it from a strategic perspective, from a digital marketing perspective. And we're always trying to tweak it among these tiers and get it right. And as John knows, it takes us a while to get things right, but we're trying. And at the same time, I think what you're seeing is not in effect on our business at a particular location in a particular market. If anything, there may be a slight positive effect kind of prearranged funerals in that particular market that has some of the new pricing dynamics that we're testing and putting online. But for the most part, this is not going to be a material event to our company or the industry, in my opinion. And again, we're supportive of this particular regulation. I think the FTC has done a good job with the industry over a period of years.

That's very diplomatic. One more on -- a couple more on funeral, then we'll switch to cemetery, roughly. It's about a 50-50 split almost between funerals, so we're going to divide our time equally. If you were doing 100 funerals 10 years ago and 100 funerals today, what percent of those are the service is being held at the funeral home versus today, you're doing a celebration of life in some third-party location? What's the -- what kind of economics do you believe when you have to chase the funeral into the country club or to the -- scattering the ashes over the Pacific and bearing the Harley or something. I'm thinking of a classic baby boomer sort of vanity funeral. But how does that work for you?

Well, it's interesting. It's a great question because it could be quite different of an answer that what I'm going to give you that we just don't see a material effect in these situations. There's out of doubt that there is a trend where someone is going to do something in a park or at a beach or the Harley-Davidson whatever you just mentioned. But what we find is in the immediate event that they are utilizing our facilities to getting an immediate closure. They are doing a celebration of life with us at our particular facilities, and what we're finding is then they're doing more of a secondary event over the summer where the families can kind of coordinate for example, in this hypothetical to -- everyone can get their calendars together and meet at the beach and have kind of a secondary event. We're really not seeing it leak into the amount of celebrations that we have are decreasing, and that's the cause of it. The 1 piece that we are, as you know, have seen is an increase in the cremation rate. and the cremation rate will be growing 100, 125 basis points per year. So you're looking at 1,000 basis points in your 10-year example. That cremation consumer is doing 2 things. They're generally spending probably about 50% to 60% of the traditional funeral. So you do have a little bit of a headwind in your EBITDA every year as that moves 100 to 125 basis points. But at the same time, what we've seen over the past 4 to 5 years or even 6 to 7 years because I don't want to say that COVID's a cause of this, but we're seeing the cremation consumer say something very clearly to the industry. Hey, just because I don't want to go get her into a cemetery, doesn't mean I don't want to celebrate the life of my loved one. And we really had to pivot as an industry and as a company about 10 years ago and really embrace that. And it is not unusual at all when you walk into 1 of our funeral homes that there is going to be a celebration of life in 1 of our good, better, best event centers. And when you walk in, maybe half of them are cremation and half of them are traditional as well. and it's something that's continuing to be a trend. I also think to take that 1 step further, which I think that strategically, we are starting to focus on more and better is how do you get that the cremation consumer into the cemetery differentially. They are going into cemetery today. We have cremation gardens and we have cremation products such as Mausoleum niches and stuff. There's new products called glass-front niches where you have an urn and keep sakes and pictures and things along those lines that are getting more and more popular. But I think that is an organic growth play that we hope to get better in the near term, in the next few years, about getting more of those cremation consumers into our cemeteries. And I think we're kind of excited about that.

Great. So good segue into cemetery. Qingming is a big holiday for you guys. You had some weather last year. So let's talk about this year versus last year. What's going on with that?

Yes. The weather last year that John was talking about was first quarter last year, and everyone's read about what occurred on the West Coast. And we're heavy on the West Coast. I mean, if you take the West Coast, 70%, at least of our cemetery production is going to be generally towards the West Coast and a significant amount is going to be in California itself. And you've heard some of the same weather about it this year. But last year was unique. I mean, if you have weather this year, okay, it's raining, et cetera, et cetera, in L.A., unusual, people don't really travel around L.A., when it's raining, believe it or not. But ultimately, that's going to cost you 2 to 3 days, 3 to 4 days, and that sale is not going away. That sale is going to be scheduled on Friday, instead of whether we'll schedule on Monday in my example. Last year was different. Last year, we had some very significant sizable inventory in some of our parks, particularly our largest park outside of Los Angeles that was simply washed away. And when you invest in capital, you almost got it to a point where it was self-sustainable and wasn't going to slide down a hill and that event occurred and a good amount of that slid down a hill and a good amount of that started over. So this is a consumer predominantly in California that I'm referring to in this particular example that's dominated by the Asian consumer. And the Asian consumer wants to physically be there sometimes with a feng shui master and wants to see it, step on it, see what it's like, et cetera, et cetera. And that has to happen before the sale will occur. Well, it couldn't happen, in this situation. And then it crossed over a festival called Qingming, as John said, which is somewhat of a material event for our industry, especially with our Asian consumer on the West Coast. Well, when that crossed over at Qingming. Qingming was kind of done. It's almost like, hey, Christmas washed away, let's do Christmas in February. That's not going to happen. So we kind of permanently lost those sales at that particular time until we could get that inventory up and running again and spend the capital, which we were feverishly doing. And I think that's a lot of the stuff that you potentially saw as 1 of the tailwinds that you saw, particularly in the fourth quarter when preneed cemetery sales were up about 9%.

A couple more. The one thing I was hoping you'd say so I'm going to give you another bat here. One of your changes through COVID was to have a leaner, more productive sales force. So maybe talk about the numbers there, number of salespeople, production, et cetera.

Yes, that's a great point, John. Pre-COVID, let's call it, 2018, 2019-ish our prearranged funeral and cemetery sales were somewhere in the ballpark of $1.7 billion, $1.8 billion. Today, as we speak, during the ballpark of $2.6 to $2.8 million. But back in 2018, the number of sales counselors that we had were approaching 4,400, 4,500 sales counselors. Today, as we speak, there's 3,700 sales counselors. So we're doing $800 million more than we were back then with 600, 700 less sales counselors. The answer to that clearly has to be technology. And a lot of this had to do with customer-facing technology that we utilize, where we were doing sales real time virtually. So you're coupling it with a Webex or Zoom presentation, sharing screens go through it that way. You're also going out to those individuals' homes like as normal in this particular industry, and you're doing a presentation, but the technology allows it to be done real time. It's not manual. You're not going back to the office afterwards and spending 3 to 4 hours, processing a contract, filling it out, maybe driving back to that family's home a couple of days later, getting wet signatures. All of this has happened in real time within a tablet-based system, payment is made, signatures are made, and that allows you to open up a tremendous amount more of productivity of the individual sales counselor. And that's the technology that we used at the time, coupled with the back-office technology, which is just your CRM system, getting better and better and better. And I do think we have a nice runway to go to continue to improve our CRM system that makes the actual appointment that much more valuable and productive as well, and more to come as time progresses.

So your partners are Salesforce and DocuSign? Who are some of your technology partners today?

It is DocuSign, but we've more recently done it in-house, instead of using DocuSign. But yes, the CRM system is a Salesforce system, and we continue to use them as a strategic partner.

So point being, this isn't exactly leading edge. This is using some fairly established tools and getting into the 21st century, away from the brochure and the sitting in the living room. Just have a little fun with you. You had a little fun this year.

Okay. Well, Raymond James used to make $300 on [ to cases and ]

We had to move away from that.

And Jeff laughing too.

Jeff has bought a lot of stock for Eric. That's the inside joke there. Just lastly, the consumer, you guys were pretty bearish, mid-'23. I understand you're running kind of some consumer conferences and Parker did some great work on some correlations, and we were seeing kind of down mid-single-digit. We were trying our best to find what's the right analogy for somebody buying a funeral home. I'm not a funeral home guy, I'm a cemetery guy. Yes. So what you think explains the rebound in the fourth quarter when the indicators we were looking at would not have suggested that rebound that you saw it. Have you been able to pull on that thread anymore since you talked to the market?

Well, I think part of it that differentiates is what I said before. I think you had some slowness that occurred because of the situation of the inventory during the first quarter that went into the second quarter and really in the third quarter before we can get the inventory up and running. And I think we saw some velocity, specifically on the West Coast associated with those specific properties. But generally, other than that, we haven't seen anything that makes us makes us unique or certainly nothing I can point to, John, other than that inventory situation being rectified and being back open for business. And when you do that, sometimes you can market it that way and you get a nice little bump in flood of people that want to more immediately come. During that year, last year, we saw like what a lot of other discretionary or purchases or retail customer facing companies or industries were seeing. And that is the high end, which we call north of $80,000 purchase, of which we probably have $150 million to $200 million of those a year we saw that being really robust, frankly. And when inflation was hurting, it was hurting that core customers of ours, which are below that $80,000 level purchase obviously. And in the fourth quarter, we saw that core customer below $80,000 come back. So the 9% growth, which equates to about $30 million of preneed cemetery sales of growth is what I mean by that. About half of that was from the core customer and half of that was from the high-end customer. And we saw that velocity come back for that core customer below $80,000. I do think, as I said, some of that is the inventory was ready to be sold again and there's some pent-up demand in California at some of our largest parks and are clearly our largest market. But other than that, we haven't cracked the code and said, this is why we're different than anything else that we're seeing out there.

So relative to the one you did in the fourth quarter, just remind folks what your guidance implies at the midpoint for preneed cemetery in '24.

Yes. Generally, on an ongoing basis, we should see preneed cemeteries grow like mid-single digits. So call it , 4% to 6%, 3% to 6%, something in that area. We think it's going to be less -- slightly less than that. It's going to be positive, but slightly less than that in 2024. I think we're calling it 2% to 4% or 2% to 5%, so lower single digits. And the reason is, as I said earlier today is that the funeral volume is the #1 lead for preneed cemetery. We've essentially taken a loved 1 even turned that loved one. And then the family wants adjacent property around that loved one. So that's the #1 lead. And with funeral volumes being flat for the reasons we've already about that's what's still creating a little bit of dampening effect to getting back to kind of the pure normal growth rate that we hope to see next year in 2025.

We have a couple of minutes. Any questions from the group? All right. Well, then I had a brilliant question, and it's a senior moment here.

That's what a break out session is for.

I know and it was really a good question too, I'm sad. Yes sir.

Your market share like in your slide you feel like 16% [indiscernible].

The question is about market share.

The question is about market share and our 16% market share is a combination of the 2 segments. As I said, cemetery is probably 28% to 30% share, very large cemeteries even though there's only 500 of them compared to thousands and thousands across North America. Funerals the 11% to 12%. And frankly, we have seen it move to some degree. Our minimal was 14%, 15% and now 16%. During COVID, the funeral segment gained call it, 150 to 200 basis points of share. I didn't really think any of that was going to be sticky to be frank, because ultimately, the independents got overwhelmed and had to shut down, and we had the scale and the capital and the wherewithal to keep going. So I thought that would be more temporary. But probably about half to 3/4 have gone back to normal, but we still have a good 25 basis points or even up to 50 basis points in some markets of that incremental share that has remained sticky post COVID.

All right. With that, we will head to break