Service Corporation International (SCI) Earnings Call Transcript & Summary

Good morning, everyone. I'm Scott Schneeberger, the Senior Business Services Analyst at Oppenheimer. Thank you all for joining us today. It's our pleasure to have from Service Corp., Chief Financial Officer, Eric Tanzberger, to speak on the company's investment story. We're drawn to Service Corp's leading position in the funeral services and cemetery offerings industry, its opportunity to capitalize on the favorable demographics of an aging baby boomer population and its strategy of providing pre-need contracts to gain advanced market share and garner a backlog to build its trust fund portfolio. We'll be using a fireside chat format today. I'll ask Mr. Tanzberger some high-level questions upfront, get us an overview of the business. Later in the session, I'll facilitate audience questions. So please feel free to send those in to me throughout, and I'll make sure that we get them to the CFO before we end the session. But in the meantime, let's get started with the fireside chat.

Starting off, could you please discuss your overall business model and strategy?

Yes. Sure, Scott. First of all, thanks for having us and everyone at Oppenheimer as well. I'd also like to note that's the first time in our lengthy relationship that Scott has ever called me Mr. Tanzberger. So let's let the record show that, if that's how we're going to kick this off.

Might happen again.

Yes. So we are the largest owner of funeral homes and cemeteries in North America. The history of the company in 30 seconds or less was an EPS accretive roll-up model that started back in the '70s. The bad news is those former management teams in the '70s and '80s and even in the early '90s kind of lost sight of return on invested capital, instead drove the EPS accretion, ended up overpaying for acquisitions, and there was a pivot or an event in 1999, 2000. We became senior management team in 2002. We sold 21 of those 23 countries. We are in the United States and Canada. Canada is about 10% of our business. We own about 1,500 funeral homes and 500 cemeteries. The funeral business has overall market share approaching kind of 14%, 15%. The cemetery has market share approaching 28% to 30%. So the good news, back in the '60s, '70s, '80s and '90s, are the former management teams really bought an unparalleled group of assets in terms of cemeteries. In terms of 35,000 acres that are really in the middle of major markets. So it's this unprecedented, the barriers to entry because those cemeteries are huge. The funeral business is kind of a slow growth business, which is a play that we've been strategically staying up with the consumer in terms of criteria, which has changed over time to less of a formal process and formal service to really a lighter celebration of life. We've really become party planners and event centers and that type of thing. There is a nice future material play to our industry and to our company. When the funeral business experiences an expected increase in demand, in the sense of the baby boomer generation turning to what would be an average age of 82 to 84 years old when people need our at-need services in our funeral segment in our industry. The cemetery segment is a little different because it's more driven from a pre-need perspective, which means selling merchandise property and services before people need it. The average age of that is about 65 years old. The baby boomers, by definition, have already crossed over that. And so we've had some really nice growth at our company related to our cemetery segment. To wrap up the introduction, the algorithm is about an 8% to 12% earnings per share growth that we've been able to maintain pre-COVID for, God, at least 10 years or so. That primarily is about 5% to 6% of that is coming for organic growth, primarily driven by the cemetery pre-need sales that I just mentioned. Then we have about 2% to 3%, what I characterize as inorganic growth, meaning capital deployment in the industry itself. So that's M&A and new build construction opportunities. And lastly, another 1% to 2%, 2% to 3% is going to be our share repurchase program, which we believe heavily in. We started this journey back in the mid-2000s with 345 million shares outstanding. Today, we have just over 140 million shares outstanding. So we bought well over half of the company back over this period of time. So Scott, that's your -- that's kind of the answer to your introduction in the first 5 minutes or so.

All right. Great job, very thorough. I appreciate it. It certainly earns you another Mr. Tanzberger. So looking closer at your at-need funeral and cemetery businesses, growth was elevated during the pandemic, followed by a pull-forward stabilization period. Please share funeral volume trends as well as perspective on the broader timing of demographic tailwinds.

So to start at a big picture, we interact with about 700,000 families a year. A couple of hundred thousand of that is on the pre-need side, where we're selling products, merchandise and services, both on funeral and cemetery on a pre-need basis I've described earlier. 150,000 of that are actual interments into the 500 cemeteries. That's when a death has occurred, and you are entering a loved one or a family member into one of our cemeteries and 350,000 of that are the actual funeral services that we perform on average. And that's a good number for today's volume, for example. During the pandemic, though, as Scott has mentioned, we performed about an extra 130,000 funerals during a, let's call it, a 2.5-year period at the peak of pandemic. Those funerals had to come from somewhere. And ultimately, we had first thought that it would be a very acute pull forward from -- if we're in '22 or '21, it would be from '22 and '23 maybe. As it turns out, it's been a longer tail in terms of the pull-forward effect, especially as we got halfway through in the later half of the pandemic, which we were servicing primarily people that were in their 40s, were in their 50s, were unvaccinated. That's a long pull forward, as you could imagine, on average. And so what has happened is we had this big spike in volume, up mid-teens, type percentages in volumes during the COVID pandemic. And then the subsequent, so to speak, hangover from that demand has come in mid-single to low double-digit declines in funeral volumes. That has now all, for the most part, stabilized. We thought it would stabilize a little bit better than it was in '24. It was still down about 2%, 2.5% in terms of volumes. We are hoping to be more flattish. But our current guidance in 2025 is more flattish in terms of funeral volumes, and we're off to a very good start. We had almost 2%, I think it was 1.8% to be exact, growth in funeral volumes during the first quarter of 2025. But that has been something that's been, Scott, as you know, very material to our business, very material to our model. And we're glad to say that we are talking about it less and less as what we call the pull-forward effect becomes less and less material to our company and to our industry.

Great. All right. Staying with funeral, it's funeral revenue per service. That's been steadily growing in the low single digits since the pandemic. Please discuss the drivers and provide long-term perspective there.

Yes. I think as a general statement, as long as you're delivering in a relevant fashion to your consumer, you're going to have inflationary type price increasing in the funeral segment. What I mean by that is we've gone through a metamorphosis over the past 15 years where you walk into a funeral home, it was dark, it was traditional. It was a chapel. Now we've spent a tremendous amount of capital over the last 10 or 15 years, reformulating the actual infrastructure of those assets where they are more open, they're lighter. There's really not chapels anymore. They're more event centers with roundtables and such. And it's really, again, as I said, it's turned into a celebrant leading a celebration of life for those consumers. So we've been very, very key in staying relevant. And with that, our pricing has really hung in there. But the most important thing you should get from that is the consumer finds value in the service component, which has allowed us to continue to have inflationary type increases in the particular funeral segment from an ASP perspective. I think long term, to answer your question, Scott, I think we would continue to see that. During the inflationary period in the last couple of years, something that we normally raise prices 2% to 3%, we are raising prices 4% to 6% in that funeral segment to stay ahead of inflation. We're back down to kind of the former now as inflation has come down. But I still see that path as a relevant path as we move forward for several years.

All right. Let's go to funeral pre-need sales. They have the potential impact revenue market share in future periods. Could you address recent developments impacting the category as well as provide a long-term perspective on its potential growth at Service Corp.?

Yes. So when we're selling these prearranged and pre-need contracts to these consumers, what are we doing? In the cemetery segment, we're selling actual cemetery property and the interment rights to go into that property, whether that's a mausoleum or bound burial -- ground burial, as you would expect. We're also selling cemetery merchandise, which are markers, granite markers, bronze markers and then the graveside services. On the funeral side, people are actually prearranging their funerals. And they do that not from a financial perspective. It's purely a peace of mind issue. It's purely a -- the average age is 72 years old. They started going to some funerals. I didn't know you could do that. Could we do that for me? I don't trust my kids to do it. I don't want to pass the burden on to my kids, et cetera, et cetera. So we sell about $2.6 billion a year in pre-need merchandise and services. About $1.2 billion of that is on the funeral side and about $1.4 billion of that is on the cemetery side. Now the funeral has been going through a metamorphosis over the last year or 18 months or so. And that is that when we sell that under the law, you have to either take the money from the consumer and put it into a state-mandated trust fund or you have to have the consumer buy a life insurance policy, which we will arrange. And ultimately, we become the beneficiary or the signee of that policy. When we did that, so we have a $16 billion backlog, about half is in trust funds and half is in life insurance policies. And we've used the same life insurance company now for 25 years. And we've just gone through an RFP, a process, and we changed it to Global Atlantic, which is a wholly owned subsidiary of KKR. With that, because of the rise in interest rates, frankly, and timing it correctly, which is a lot of luck, we ultimately got economics that are substantially better than what we've had over the last 25 years. So a general agency commission that we would receive, which would be both revenue and cash flow from day 1, has gone from 25% to 30% of a sale -- face value sale to probably 35%, 38% of a face value sale. And that's had a nice tailwind for us, Scott, over the -- as we've been implementing that in our core operations. And we look forward to that. We'll eventually lap that, but there'll still be a little bit of that tailwind left for '26 as well.

Great. Let's go over now to pre-need cemetery sales, yes, cemetery.

Yes. Okay.

Historically, it's been, in our view, a major P&L growth driver for the company and for some reasons that we can get into. But could you please discuss drivers of the growth you've experienced in this category, how it's trending here at the start of 2025, outlook over the balance of the year as well as longer term? And maybe some specifications on the timing of recognition.

So there are about 5 parts to that. So just keep me going as we go and remind that I hit all of your 5 parts. I guess starting off the year, we've done well, and we were down about a couple of percentage points in the first quarter, quarter-over-quarter. That has to do with large sales versus our core sales, which I'll get into in a second. But let me start with the bigger picture. We sell about $1.4 billion. About 10% to 15% of that every year in the pre-need cemetery space are what we call large sales, which are north of $80,000, and that's a couple of hundred million, $150 million to $200 million a year. And that generally is, like I said, 10% to 15% of the total, let's call it, 13% on average of the total, it's been somewhat consistent. What we call core is the other remaining 80% to 85% to 90%, which is everything below $80,000. And there are different consumers when you see that. So to understand this sale, you have to understand a couple of things that have been driving it. The first thing is the average age of the consumer that raises their hand and says, I want to buy pre-need cemetery property is generally in their early 60s. Essentially, as a very general statement, they have just perhaps buried a loved one, perhaps a parent. And when they bury a loved one like a parent, they want to buy the adjacent property around their loved one, and that's what creates the pre-need environment. And when you have baby boomers that has a larger generation, so more of them crossing over that 60 to 65, that has created a nice situation for us in terms of having more people to market to and it has been a big growth driver for us in terms of the number of contracts that we've been able to sell over a period of time. The second piece to this, which is very material that we need to mention is that when we started this journey back in the early 2000s, like I described earlier as the executive management team, you would walk into a cemetery, and it was not really a real estate play. It was a very homogenous situation. It was walk in, there's 1,000 plots per acre, which one do you want? Just pick them. They're all the same. They're all priced the same. Fast forward 15 years later, 20 years later, you walk into one of our cemeteries and you're going to see kind of a real estate tiering strategy that took effect where you're going to still have that beginning homogenous offering. And let's call that $5,000 in the Midwest and let's call that $10,000 to $15,000 on the West Coast. But then you're going to go all the way up to the top, which is a private family estate and a semi-private family estate and a lake with lakefront property. I mean you can tell we became kind of real estate developers. And what that has done is really brought up that ASP to the extent that you could walk into a cemetery in California and buy a high-end family space for $2.5 million to $3 million. That's the part that makes up those large sales. You can walk into Denver and that same piece of property may only be $200,000 to $300,000. You walk into Houston, and it may be $600,000 to $700,000. So a lot of it is a real estate play and localized pricing and such, but you get the idea. But those two things, the baby boomers, the size of it, allowing us to market to a lot more people that want to have the conversation, coupled with the 10- to 15-year progress of tiering the cemeteries with high-end, medium type inventory is what has allowed us to be a big growth driver. And by the way, is essentially when we started this, has taken a 12% to 13% margin cemetery segment business to a 30% to 35% margin business. So it's been a tremendous growth driver and driving that earlier 8% to 12% EPS algo that I've described to you before.

Great. We did cover it all. I think, obviously, great margin expansion there, as you discussed over the history, it was a 5-part question. I think the only thing we didn't cover is what's the growth rate of that? What's it been historically? What do you foresee going forward?

It was pre-COVID, it was low single to mid-single-digit type growth is how I would describe it. And it was a combination of the two factors, not to repeat it, that we've already described earlier. During COVID, it had a huge spike to it. Why? Because the -- about 1 out of 2 sales or what we characterize as the #1 driver or lead to these pre-need sales is the at-need event. And I've already described to you what happened in COVID with an extra 130,000 funeral services being performed. So just like funeral went like this during COVID, pre-need cemetery went like this during COVID, and there's a little bit of a pull-forward effect associated with pre-need cemetery. So we've had declines in pre-need cemetery, not as bad as you saw the volume, but we started off the year again with kind of below 2% down-ish, but we hope to get to low single-digit percentages during 2025. Now as we get further into it, we fully expect without -- I'll give you long-term guidance. We fully expect to get back to mid-single-digit percentage type growth in the pre-need cemetery environment. When you take that as the baby boomers start to continue to affect the at-need environment, you can't also -- you have to also remember, you're going to have all of a sudden this tailwind coming in both the at-need funeral and at-need cemetery type revenue streams, which again will have a multiplier effect, hopefully, to the pre-need cemetery revenue stream. So the whole thing, the whole strategy for the last 20 years are stay relevant to the consumer and the funeral segment and get set up for the baby boomer generation, sell pre-need cemetery and sign everybody up as well, but at-need cemetery is going to have a positive long-term effect with the baby boomers, which will radiate to pre-need cemetery getting back to mid-single-digit type percentage growth. In the meantime, shrink the equity, buy back 50%, 60% of the company, so it's that much more valuable when the baby boomers don't affect the top line of this company and this industry in a few years from now.

And just real quick, Eric, following on that. You mentioned large sales, which I think have held up very well consistently. The lower end, though, that -- it's a little bit more of a discretionary spend. So do you anticipate a pickup, perhaps lower interest rates or other drivers?

Well, it's been somewhat solid. We saw a pickup in the first quarter, where we had some growth. Even though we were down about 2% in total, core was up and large sales were down. And there's different factors to that. As you said, Scott, correctly, the core is worrying about discretionary purchase, let's start with that on both ends. But as a general statement, the core consumer that we're selling to on a pre-need basis being discretionary, they care about the price of eggs, and they care about the price of gasoline. The large end doesn't. The large end cares about what the market is doing and what real estate is doing. And so there are two different kind of differentiators there. But the other thing that I would describe to you on the high end is that it ebbs and flows. People don't walk in and spend $3 million at their first visit. It's a long-term 2-month, 3-month, 6-month process to get that family across the finish line in those large type sales. Generally, you're going to sell about 13% of your sales, you're going to be in that high end, but it can be a little volatile in terms of timing. Fourth quarter of '24 was 16%. That's a very strong high-end quarter. First quarter of 2025, 9%. Now some of that could have been pulled in from January into December and such like that. But it does ebb and flow as a general statement, regardless of what the macroeconomic factors are related to those high-end situations. But as a general statement, we're seeing -- we continue, like other companies, not really trying to explain it, but we're continuing to see a nice core consumer, less than that $80,000 spend that really kind of hangs in there. We have a really nice pipeline, as we told you on the conference call in April, of those large end sales, it's just that the first quarter kind of ebbed. And you see that, and it will go like this. But generally, we feel pretty good about it for the remainder of '25.

Great. Appreciate that. I snuck that one in because the next question on the prepared list, I think we covered in all that discussion. I'm going to go over it again, maybe just a quick answer if we missed anything. But we're fortunate to be conducting a field trip with Service Corp. to Rose Hills Memorial Park in Los Angeles. It's not only the largest cemetery park in the company's portfolio. It's actually the largest in North America, possibly the world. Could you please discuss some interesting attributes of that property, maybe draw some parallels to your entire portfolio? You mentioned Denver, Houston, just kind of bouncing any parallels?

Yes. There are two things that I would probably mention about that. Well, the first thing is we hope a lot of people sign up because when people get out there and do this tour of it, it all kind of comes together visually. And people are like, wow, I understand the tiering now. And I understand this, and I understand that. And I would encourage as many people on this call to get with Scott and sign up for that. I think we redid in August, some date in August, if I recall correctly. The first thing I'll mention about Rose Hills is the sheer size of it. I mean it's 10% of our EBITDA with one location. It is just -- it's massive. It's in L.A. It does a tremendous business. It will never be duplicated in the history of the company or the industry, in my opinion, whether it's in North America or somewhere else, as you've described. The second key point, I think, is how we have continued to change who we are serving. And again, this again relates to our -- we have to remain relevant to the consumer. So if you go back 20 years ago, it was a very high Caucasian consumer that was in there. Today, it's probably at least pre-need sales metrics, it's probably 40%, 50% Asian and 30%, 40% Hispanic. That's great for us. We love that because those are segments that value the celebration of life and value the recognition of the cemetery process, the property, the markers, the services, same thing on the funeral side. We have a separate Asian-specific funeral home that we built there that we would be able to tour, which is very interesting. But that is a consumer that's high spend, both of them, Asian and Hispanic that we really love and has really solidified the growth for many, many, many years for Rose Hills. So you'll see a different consumer when you go there, you'll see the sheer size of it, you see a different consumer, and you'll understand the tiering effect as well. It would be anyone that's interested in the industry, not just our company, but in the industry that would get a lot of, in my opinion, benefit from taking the tour with us.

Great. Really appreciate that. And yes, I've seen it once before. It is massive. It is impressive. And again, everyone, yes, that's in mid-August. Please contact me if you have interest. And with that audience, there are a lot of folks on, Eric, but pretty shy with the questions. So we have about 6, 7 minutes left. I have a few more questions. But audience, if you have anything you want to ask Mr. Tanzberger, please send it to me, and we'll get it in there. So next, I'm going to go to cemetery segment margins. We have touched on this, how much they've expanded. Let's just maybe talk about the drivers. It sounds like the main driver really has been the high-end sales. But just anything you can elaborate and what should be -- what we should watch as levers, good or bad for those margins?

Yes. I think the large sales as it ebbs and flows are going to move it. I think we're expecting not a lot of growth and margin expansion during cemetery during '25 versus '24. Why? Because we had some really nice margins, for example, when we had that fourth quarter at 16% or the high end. These are high-margin situations with those high-end sales. But generally, you're going to see a very stable 33%, 32%, 34%, 35% type margins for the cemetery segment. As sales increase and of course, as the at-need events stabilize, that's going to help your margins. But we think that margins are going to be somewhat stable. But over a period of time, as you grow pre-need cemetery sales for the reasons I've already described to you, it's not unusual to see 50 to 80 basis points of margin expansion per year as we move forward. And we saw that and even higher ends of that come through in the last 20 years as we've gone from 13% to 33%.

Great. I guess my prompting helped because I have one from the audience I'm going to ask now because we only have 5 minutes left. What have been the biggest drivers of pre-need cemetery over the past 3 to 4 quarters? Third quarter '24 and the fourth quarter was very strong, then first quarter '25, a little bit of a pullback. Any color on the drivers of movements like this?

I think we've really kind of answered the question, to be honest with you. I mean I think the third and fourth quarter were very strong in terms of the higher end of sales. I don't remember the third quarter specifically, but I remember the fourth quarter, and it was 16%. And yes, it's going to ebb and flow, and it ended up 9% last year. But what was important to understand is that we weren't seeing some kind of macro pullback during the first quarter from that. It was more of the natural ebb and flow of that consumer when you measure things on a 90-day basis because we've said it very clearly in April on our call that we continue to have a very nice pipeline in those large end sales. But there's nothing really else going on in the cost structure, and there's nothing really going on in the core. I mean it was just kind of that large end sales that affected margins and had them ebb and flow, but we continue to be positive with that.

Yes. And I think actually that did come in earlier. I had missed it. So I think that was -- that came in while you were discussing it. The 2025 EPS profile, how will that look compared to the company's longer-term expectations?

I think we're in the lower end of the 8% to 12% is our expectations of the current guidance of the $3.85. We have a tax rate difference, which is at least 100 basis points. That has to do with the law that went through in 2017, where any options that were issued after that, no longer tax deductible from a high-end executive perspective. And that has eliminated a benefit that we had related to exercising of stock options, which have held our tax rate from [ 24 ] to [ 25 ], which is now [ 25 ] to [ 26 ]. If you add that back, you'd be at the higher end of that 8% to 12%. And that's why it's worthy to mention. So I think we're back into that 8% to 12% from our perspective. I think the more funeral volume is more flattish like our expectations compared to leaking still down 1% to 2% is going to make a difference. The more we can get cemetery sales despite the slower quarter to start off the year, get them back to growing again on the high end, then that's going to help us get us annual growth of cemetery sales back into the low single digits. And when you get that, that's going to all come together into hopefully that $3.85 midpoint of the guidance, which will get us back into our algorithm 8% to 12%.

Great. And we're basically at time, and that was everything from the audience. So I'm going to wrap up, but just one 30-second answer, Eric, if we could. We haven't really touched on the strong free cash flow here and the application of capital. Can you hit on that real quick, how you consider it?

Yes. We have very strong cash flow. We expect it in the guidance of about $550 million. The highest best use is M&A, which will spend, let's roughly, call it, $100 million at the midpoint. We do about another $50 million to $75 million of construction greenfield, then we'll go ahead and pay a dividend, and we'll reduce shares accordingly. And the shares will ebb and flow based on our opinion of the intrinsic value, but that's generally the algorithm that we have deployed for many, many years at our company and will continue in 2025.

Excellent. Perfect summary at the end there. Great overview, Eric. Thanks so much. We really appreciate it. Audience, thanks for the questions. Thanks for listening in. Let us know if you have interest in that Rose Hills Memorial Park field trip. And with that, we're going to wrap it up.

Thank you, Mr. Schneeberger.

Thank you, Mr. Tanzberger.