Service Corporation International (SCI) Earnings Call Transcript & Summary

All right. Good morning. This is John Ransom. I'm happy to have back once again. We hope this is forever thing. The Service Corp team. I'm here with Eric Tanzberger, Tom doesn't think we're worth coming anymore, does he? So we didn't see Tom in a few years. So we got to make do with Eric, CFO. So this is going to be 100% fireside. So I'll run out of questions. So hopefully, you guys will have some snappy questions here at the end. I'll start asking about Alabama football or something. So let's just start with -- you guys have reported and guided. I don't think there are any big surprises, but just kind of a high level take a step back, what's the state of the union for the industry for Service Corp? Are we finally through all the COVID distortions? What are some of the key things that you're working on now that maybe you weren't focused on during the emergency. And just kind of where we are in this stage of the company and the industry.

Coming out of COVID is where we are, what I would say, John, first of all, thanks for having us. It's been -- I don't know how many. I think we're embarrassed to say how many years.

I think it was a Reagan administration well. Second term.

Yes, second term makes us feel a little bit better, a little younger. Generally as a Service Corp, we've proven over a decade now at least that we can grow the company at 8% to 12% earnings per share bottom line. I think if you take the trailing 10 years, we're like 12% to 13%. That's a combination of our organic growth through the funeral segment and through the preneed cemetery sales growing significantly over the years as well as new field, greenfield-type buildings and such, both on the funeral home and cemetery side and also M&A activity, which is pretty significant. So at the we're obviously interrupted as we all know, during the COVID experience, where we normally perform about 350,000 funeral services per year, and we performed an extra 130,000 funeral services over about a 2 to 2.5-year period. That obviously had an effect where it pulled forward funeral services from future years into that COVID period. And I think as John just said, I think we're finally getting to kind of the last year in '25 that we probably need to talk about that and that it's -- that it would have any significance to us as we move forward. Right now we expect funeral volumes for 2025 to be flat to slightly down. But ultimately, what we're excited about is where we are in the industry in terms of the baby boomer generation affecting our industry and our company into the future. And specifically for us, as you look to future generations, whether it's going from the silent generation to the baby boom generation to Gen X, which are also seeing, particularly in our cemetery segment is an increase in the Asian consumer and the Hispanic consumer, which is something that we have marketed to and really changed our business to market to in the cemetery segment to the point where that's been very profitable, and we're very excited about those demographics. So I think we can continue to expect growth in the company as we move forward in that 8% to 12% algorithm. I do think that it slowed us down in the past couple of years because of that COVID pull-forward effect that we talked to. But we're already back in with the center of the guidance back into that 8% to 12%, and we're excited about moving forward. And I think more to come as the baby boomer generation affects that algorithm, which with a 60% to 70% fixed cost structure should be nice incremental margin growth and nice incremental growth in profits as we put more volume, more through put through that fixed cost structure over a period of time.

So I promise we're not going to -- we're going to save the agency switch to the end. You're already sure tired of talking about that. So we're going to keep it sort of high level here. So you don't have to work that hard yet. What strikes me having look watch this industry for a bit, is it never was "run by private equity. And what I mean by that is you didn't have 6,000 start-up funeral homes and a mass marketing strategy of something. So why do you think it has some attractive aspects to it in terms of predictability and cash flows. Why do you think outsiders have kind of stayed on the sidelines and not try to make a go of it here?

Well, I think they're now finally getting into the business, though. I really do. We have a couple of consolidators, one is called Park Lawn that is now owned by -- partially owned by private equity. We have another one called North Star, which is owned by private equity and has been for the last 10 years. But ultimately, for you to invest in this space, it's going to be very difficult for a private equity firm to come in and just build greenfield locations. So they're going to have to buy greenfield -- they're going to have to buy existing M&A activity and locations. And the truth to it is, is that when you go in and look at our scale as a strategic we should be able to buy those funeral homes and cemeteries because of our scale and because of our economics. And it's the old saying that the strategic should be the financial. In that situation, it's somewhat true, especially in a normalized interest rate environment. With the type of scale that we have on the national level, we immediately have a turn of EBITDA of synergies day 1 just through our national supply chain contracts. And then furthermore, when you're buying a new business where we already have that scale, which generally is what we want to do and what we do, do, you're going to have other synergies related to automobiles and personnel and things along those lines that over a period of time in sales practices and such will give you maybe another turn. And so for the most part, the strategics can kind of have an advantage in these situations, and that may be an impediment for private equity coming to come in fast and roll it up for them to really come in and make an impact they're going to have to buy a larger consolidator that's already there and is willing to do that. And that's really how those 2 previous transactions that I just referred to came about. But again, we're very active in the M&A market. We're spending $100 million a year. Last year, we almost spent $200 million a year. It ebbs and flows. But as a general statement, we and the industry has been very disciplined in terms of the multiples. And I think private equity is somewhat attractive to the industry because of the cash flow dynamics of the industry, but it's not going to be something they're going to have to come in. They would be able to come in and have like a big bang effect and roll it up instantaneously unless they cut a deal with one of the other smaller consolidators.

Great. So as you think about the boomer, there's the obvious potential uptick in volumes. Maybe we've been waiting on that. But kind of the boomers 80, all those members are 80. But is there also a corollary of a slightly bigger wave of funeral homes for sale as that generation retires and the kids don't want to continue with the calling?

Yes. I think we've seen that lately. And when we gave guidance of $75 million to $125 million of M&A spend last year, and we ended up at $180 million. I think what we saw out of COVID is a larger independent that went through a very significant trying period of time over a couple of years. And there's definitely spots where the COVID activity was where it was very acute -- where the independent, for lack of better words, really just had to shut down. They were overwhelmed by the situation where what we were able to do with our scale is move hundreds of our associates around and move them to those hotspots and maintain the businesses open for the benefit of those communities. But what came out of that, John, in all reality was probably you're right, is some fatigue. And that's why we have seen, and you've heard me say now for a couple of years, that I've been very excited about the M&A pipeline. And when I say that, what do I mean by that? I mean that these are larger independent businesses. I mean that they're probably in major markets and they're probably in markets where we already exist. Now you're talking about tuck-in type major market activity with some scale, where we already have scale, and now you're starting to see acquisitions that can approach almost mid-teen type after-tax IRRs, which is a tremendous use of our capital that we're excited about. The patient part of that process is that these could be third, fourth and even believe it or not, sometimes fifth-generation businesses. And so the equity holders are somewhat scattered within those families, and you can do the math. That's a headache when you say that, and it's more of a headache to try to get everyone on the same page and get a purchase agreement. We choose to be -- have long-term relationships with those families. We choose to be patient. We choose to be an advocate for those families in terms of the M&A transaction. But we're not going to come in and be undisciplined and force the family to sell because of price. That occurred in the industry 30 years ago. It didn't end well in this industry. And as a general statement, not just Service Corp, but all of the larger consolidators have been somewhat disciplined over the last 20 years, and I expect that to continue. I don't see any signs of that changing in any direction. But ultimately, we're excited about the M&A activity. And as you said, we're seeing some fatigue perhaps, and we're seeing some -- the potential of some larger independents more chunkier which would really benefit us and our IRRs in those situations.

I don't think this is lost but it could be maybe emphasize more. You guys again, during COVID, took that opportunity, if you will, to look pretty hard at your sales team and productivity. So maybe just kind of wind back the clock a few years and talk about Beacon, talk about Sales force and talk about the productivity. And then just how you've tried to solve for the fact that the turnover is usually pretty high, and you've got the old 80-20 rule. So what are we doing to make all that less of a drag or a friction point for you?

Yes, it's a great question. I mean technology is the key to those efficiencies. And let me put some numbers to it just to give you a feel for it.

I'll tell there'll be no numbers.

I'm going to break our own rule then. Back in pre-COVID, 2018, 2019, we were generally selling between prearranged funeral and preneed cemetery we were selling about $1.8 billion of preneed sales a year, utilizing a sales force in the, I'm going to call it, 4,300 to 4,400 in terms of FTEs in that situation. When you roll forward to post-COVID, the $1.8 billion is more like $2.8 billion and the 4,300 is more like 3,700. And so the only way that math works is utilizing technology. Now prior to COVID, we had already invested in technology. We already invested in the Salesforce CRM system. We invested in a much more simplistic point-of-sale system that was tablet-based in front of the consumer, customer-facing technology to make something more efficient, quicker, easier. We started investing in virtual technology, whether it be Zoom, WebEx, et cetera, et cetera, et cetera, to do this more virtual with families. But what did COVID do? COVID forced the issue. There was no way to go about continuing that preneed sales activity without that technology. That forced those sales counselors into the CRM system. That forced sales counselors to use Beacon, forced those sales counselors instead of driving 45 minutes to somebody's home and driving back and et cetera, et cetera, that force them to use virtual technology to do those types of sales calls with the customer-facing technology of Beacon. And that's what brought that about and brought those efficiencies about that I described to you. We want to obviously, continue that evolution as we go forward. I think we could get probably a lot more out of our Salesforce CRM system and use better technology and continue to go down that path. I also think we could take some of that preneed technology of Beacon and bring it into probably a more efficient atneed arrangement process as we move forward. So all of these things that we are investing in. And we've even gone out in our guidance that from a digital perspective, we're going to invest upwards of $20 million to $25 million this year alone in terms of continuing that technological path. But that was the key to the efficiency and we will continue to look for ways to make it more efficient as we move forward.

And what about the turnover is that you've made it out there?

We really have. I mean the turnover of that sales force, if we talk 10, 15 years ago, it was 100%, it was significant. Now it's probably half that right now. You're still going to have some turnover. I think the turnover statistics are a little skewed right now because we continue to change the way we are doing things in SCI Direct and with a new general agency agreement that we said we talked about at the end. So that's a little bit of skewing some of the turnover right now. But as a general statement, we've made leaps and bounds in terms of settling that statistic down and investing in our sales force and our -- particularly our personnel.

I got a question that kind of stumped me, so I'm hoping you can help me out. It's kind of a fine point, but I thought it was interesting. So -- let's say you buy the issue with funeral home is the preneeds all deferred. It was and your deal is making that bringing more of that forward. But let's say you buy a typical funeral home that's not doing any preneed. How long does it take when you layer in your preneed for that to show itself in the financials? And what kind of lift do you get like 5, 10 years down the road, like volume that you're capturing that otherwise wouldn't have been captured without that kind of program in place?

Yes. It's rare for us to come across that M&A activity. And if we do come across that, it's usually not in a larger metropolitan market, it's more in type of a rural area. And as you know, we would pass on that deal in a lot of those situations. Generally, when you sell preneed, the average life of the contract is 12 years, but that's an average. You're going to start seeing a little bit of lift. My guess in years 3 and 4 in that situation where you start seeing some things come out of the backlog in that particular case. But as a general statement, we don't come across that very often. The type of business that we're going to buy as a larger -- it's independent, but it's a little bit institutional to the extent where they'll have upwards of 5 to 10 locations in a market and a lot of these situations, and they have an active preneed programs. Some of them are backed by trust funds, some of them backed by insurance. It just depends on how that particular family grew up and what they believed in and et cetera, et cetera.

Building what they have versus.

Exactly, it really is.

What are you able to do there, like in terms of building?

We're able to significantly change it. We're very good at selling preneed, as I've already mentioned, with the statistics even though we're not allowed to use numbers today. But we're very good at it, and we're able to come in and effect change pretty dramatically, pretty quickly. However, as I just described to you, you may not see that coming out of that business for -- to start to come out for 3 to 4 years. It's not an instantaneous effect. You'd have much more of an instantaneous ramp-up early on in, let's call it, year 1, year 2 of a pro forma in the cemetery business. But that takes a little bit while as well because what we're doing is we're coming in and investing capital into the inventory and tiering a symmetry a lot of times or doing it a little differently or a little better than maybe what the independent was able to do just because of the size of our capital that we're able to do it. And that takes a little bit of time as well. So a little quicker ramp-up in a cemetery acquisition than the funeral segment as we talk about preneed, but still a little bit of delay. It's not necessarily day 1 in cemetery because we want to invest some capital, tier it into the high end, medium tier, et cetera, et cetera.

All right. Now time to eat our spinach. So recently, the company did an agency switch in the funeral side, we labored over a note. So if you want to look at that, we estimated by the time it was fully baked and this will be a few years, it was about a $0.50 good guide to EPS and so our numbers would be, it's about a $0.15 to $0.20 lift this year versus last year because you started at the middle of the year last year. And so when we looked at that and we looked at the assumptions around the core business look pretty conservative because you're getting that lift. So yes, if you want to look at some work we did on that, I would point you to that. But let's just kind of take it from the top and describe this as somebody who's never looked at this before.

So you used some numbers before on preneed, $2.8 billion and such. But let's talk about funeral because this is a funeral situation. Of that amount, about $1.2 billion of sales is the prearranged funeral. That's the peace of mind. That's someone, a consumer that's coming in and wants to prearrange their own funeral and make their own arrangements. There's 2 ways for that consumer to fund it, either buying a life insurance policy or give us the money that's placed into a state-mandated trust fund. So that $1.2 billion, we're going to start by splitting it $900 million is related to our core 1,500 funeral homes that we have at SCI, 300 of that is related to a different model that we call SCI Direct, which is a lower price point cremation lease model that's not very capital-intensive at all. So the first thing that you're going to know about the 900 is that we're going to -- we sell about 2/3 of that amount are insurance contract and about 1 out of every 3 as a general statement or trust contracts. That mix is not going to change much. There's some state laws. There's some other situations. It's not going to allow us to change that mix very much. What you are getting, though, on that 2/3 of that $900 million are better economics in the new deal as we have described it. We used to get something in the commission on an average in the mid-to-high 20s. It's still being baked. We're still moving through the transition. These are new products for our sales force, we can get deeper into that if you want to. But ultimately, we hope that, that gets into more like the mid-30s is probably what we've seen and what we've disclosed in our 10Qs as public information. The other piece to the pie is the $300 million related to SCI Direct. That was 100% trust that we're trying to move to 100% insurance to the extent that we can. Now that model is changing overall. As we've said before, we used to deliver earned products right then and there, and we've ceased doing that. And so any incremental general agency revenue that's coming in for SCI Direct is really washing a decrease of recognized revenue because we are no longer delivering some of these products and merchandise and they're going into the backlog of future revenues. We will recognize those revenues when we deliver those products and services into the future. But what that does mean is that what's coming out of the backlog at SCI Direct is going to have a higher average sale price, and that's going to be lucrative into the future for the models. In fact, as Tom said on the call, what came out of the backlog for SCI Direct in this quarter alone was 10% higher in Q4 '24 versus Q4 '23, and you can expect better economics as we move forward. So the real bump that John was talking about is related to the $900 million of core prearranged funeral sales that I described to you and 2/3 is actually insurance that has a better economic factor. You mentioned you thought that was about $40 million. I think Tom said that may be a little bit high, and I agree with that for '25.

So you agree with your boss.

Yes, I do. I think that could be somewhere between $30 million and $35 million or $30 million and $40 million perhaps. But that's kind of generally what it is. It's a play on a new vendor. We're going to continue to work through the first half of this year in terms of getting it all up and running. There's some complexity related to the new products, which I don't know if you want to get into or not, but we'll get it up and running probably by midyear as we described and as Tom described on the last conference call.

Maybe a simplifying way to think about it. If we looked at the SCI Direct price point today, once you fully capture the backlog of earned sales, where does the price point move from times a year to say, year 7 or whatever it is.

Yes. I think it could be significant. I think it could go from a $2,500 price point to maybe a $3,500 price point coming out. It's over a long period of time.

Very little, no incremental costs. That's just pure -- so $2,500 goes to 30 and I think the number we use, we are also trying to back into acquisition we were getting, I think, 40 Parker correct me if I'm wrong, we were trying to get the total good guy of a full year of the agency deal plus the full year of what you bought because some of the acquisition stuff was in the back half of the year.

The way I describe it again, if we want to talk numbers. We have a little over $4 billion in revenues, and our revenues are going to grow about 5%, and let's just call out a couple of hundred million dollars. I think from the same-store comparable operations driven by average sale price in the funeral segment and preneed cemetery sales and in the cemetery segment, you're going to get close to probably half of that growth just from the organic business. So where does the other $100 million come from? Well, it comes from M&A and it comes from that general agency agreement. And if that general agency agreement is 30% to 40%, then you expect that the non-comp, which is the M&A and greenfield location, revenues coming up to par or $60 million to $70 million of that piece. But that's kind of how I very simply break up the revenue growth.

I can't make it too simple. For me its impossible. Just lastly, and this is a little bit in the weeds, but this gets -- it's funny. We've done Parker and I and so we've probably done 1 million SCI calls over our career and like 1/3 of them, people just can't help themselves. They get into the accounting weeds, and they never -- we never find them again. We have to sit out a flare and they're down here. And like we had -- I think we did 12 calls with 1 investor, and they just could never. But one of the things we try to steer people away from, but maybe you could help simplify this. So when you sell a preneed funeral into the trust, there's no revenue until the funeral happens. So the revenue recognition, there's -- you got to pay the sales personnel. Yes, I got to pay salesperson cash commission. You get the money over a period of time, 4 to 5 years, then 12 years, the funeral happens. But maybe talk a little bit, but that's not a static thing. So between year 1 and year 12, what sort of Cash is the company able to extract from a trust either through management fees or other that keeps the funding minimums there, but maybe not -- it's in the cash flow, but it's not in the revenue line. And so if we started theoretically year 4 with $5000 in the trust, what does that look like in year 12 kind of with your average returns, but then accounting for the fact that you pull some cash out along the way.

Well, I mean, as a general statement, we invest those funds and it fluctuates, but we generally think we earn about 7% a year. So that 5,000 will grow 7% per year and come out of those trust funds accordingly. Now in the atneed environment, we're raising prices, call it, 2% to 3% a year. So what you should see over a period of time if that entire equation works is you should see something that was sold 10 years ago, come out of the backlog at a higher average and therefore, cash coming out at what your atneed sale price is today. And as a general statement, if you go look at the releases and such, that has occurred. What's coming out of the backlog is a few hundred dollars out of it.

5,000 compounding at 7 -- but as you pull out 1% for.

Yes. We pull out about 1%, 1.25% as a management fee for all the back office of managing all of the $16 billion backlog. That's a tremendous amount of contracts when you think the average price is about $5,000, $6,000. So we have a huge administrative burden much less reporting on each individual state that's audited in each individual state. So we're not necessarily making money on that fee that we pull out, but it's helping cover some of our overhead costs.

That's beats in the return. And then also if a trust gets overfunded, what are the rules about let's say, the minimum is 7,000, you got 13,000 in the trust. What are the rules about that?

You're not going to pull that out as a general statement. So the contract turns atneed. This is there to protect the consumer. The rules are pretty clear to protect the consumer at least in our situation, we don't -- we're not very aggressive at all on this. We're not going to try to go in and pull out funds that are of any material that I should mention to you. I'm sure there are some here or there in certain states. But as a general statement, that's not going to be something that's going to...

States don't require 100%. There's some states that require 100%.

California requires 100%. There's some Texas is 90%. I mean it just depends. But that's just retainage that we get to keep day 1 to help offset the selling cost of the sales count centers.

All right. We got 2 minutes. Anybody out there have a burning question. Really come on. You guys make me sad. Well, we'll finish up 2 minutes early. Thanks, everybody.

Thank you.