Service Corporation International (SCI) Earnings Call Transcript & Summary

This is the 47th edition of this conference. My name is Parker Snure, health care service analyst here at Raymond James, and I'm pleased to be joined by the CFO of Service Corp., Eric Tanzberger. I think Service Corp. has been coming to this conference ever since I was in elementary school, I think. Historically, you've had JR up here with you. We're going to switch it up this year. I think he would say that we're switching over to the A team. I think the jury is still out on that. I'll try to be as handsome and charming and quick with it as JR, but I can't promise that, but I'll try my best. So, you're a well-known name, but I think just for people that are newer to the story, maybe just give a brief history lesson on the company. You have a long history some big changes. Maybe just kind of go through that and what got us to where we are today.

Sure, Parker. Thanks for having me. I anticipate that it's probably a good thing for me to put my bio that I got fired by Ransom, probably a badge of honor. We are trying to figure it out. I think we've been here -- coming here for probably 26, 27 years. So it's been a while, and we appreciate you having us every year. It's a great conference for us and has been really efficient for us and effective as well. Ultimately, the company, Service Corporate International, it's the largest in the funeral home and cemetery industry, about 2,000 locations in North America, just under 10% are in Canada. Everything else is concentrated in the United States, has a long history that goes back many years where we were in North of 20 countries. And it was an EPS accretive roll-up model that kind of stopped like a lot of those models do back in the late '90s. We took over as executive management in the early 2000s. And have really run a free cash flow-oriented return on investment type strategy. It's a great, stable cash flow stream with a growing business that is going to continue to get better grow and expand margins as the baby boomer generation affects this industry in the next coming few years. In the meantime, we have a very active program with about 4,000 sales counselors where we're signing consumers up early, and they're actually funding it either through a trust product or an insurance product. That's built a $17 billion, $18 billion backlog for our company of future revenues that we're very, very excited about as it relates to the future. In terms of the actual business itself and the properties, 1,500 of those 2,000 locations are funeral locations, they're generally is a very general statement concentrated in major metropolitan areas as opposed to rural areas and are targeting kind of middle to upper middle to upper spend categories as opposed to across the spectrum. We do have a smaller direct cremation business, which is about $250 million of production -- preneed production a year and the big scheme of things. On the cemetery side, we have a tremendous network that's just not going to be able to be duplicated with about 500 very large cemeteries, and those cemeteries are in major metropolitan areas, and were really built or purchased decades ago, which allows us to have a network that you just can't duplicate. A lot of times, we'll have 500 acres, 1,000 acres in the center of larger metropolitan areas, which are just impossible to duplicate and really give us some really nice economics as we move forward. The growth engine right now in the funeral segment is kind of flattish to slightly down type volumes. Obviously, we have a whole story going on with COVID there that we're pretty much through. Ultimately, the baby boomer generation will turn those same-store volumes into a positive situation, which will help us grow revenues. Right now we're growing revenues really from the ASP side, which are low single-digit percentage type growth from the average sale. On the cemetery segment, a lot of what we're doing in the meantime is selling cemetery property itself, which are the lots and the lawn crypts and the mausoleum crypts and such that are able to be delivered in the near term, and therefore, recognize those revenues. And prior to COVID, we still had a very strong sales program, but now we're up to selling about $1.4 billion of preneed cemetery a year. So that's really been a nice growth driver, which caused that revenue stream to grow more low to mid-single digits. And overall, our algorithm on an earnings per share basis has been about 8% to 12%. And from pre-COVID trailing 10 years, let's call it, 2019, trailing 10 years has been more of a 13% to 14% growth CAGR from a bottom line earnings per share perspective. COVID obviously created a situation where we performed an extra 130,000 funeral services over a 2-year period. Our norm is about 350,000 and funeral services per year through our network just as a data point. And that's obviously come down, and now we're kind of more normalized levels. So that's how I -- big broad picture of the industry and our company, specifically.

Yes. Okay. Great. And like you mentioned, COVID was obviously a big event for the industry. You took that time to realize some synergies, take out some costs, rationalize your sales force. Maybe just talk about implement some technology. Maybe just talk about some of the big changes that happened in that period and some of the earnings growth and cost synergies that you're able to realize through that period?

Yes. There's really 2 things that happened. One was kind of consumer and 1 was kind of what we did from a technology perspective in terms of consumer-facing technology. From the consumer perspective, there's a little bit of a fork in the road there for our funeral segment when -- during the lockdowns of COVID. And that situation, a consumer could have reacted in our marketplace is saying, I like the products, I need limited services, and that's how the business is going to move forward. That's not what happened. What we saw is a consumer in the funeral part of our business that really wanted closure, wanted to celebrate the life of their loved one and really enjoyed and value the service component, which is the defensible component of our particular industry and our particular company. And that boat that could have gone in a different way and it didn't. And it was a very loud signal that we're very excited about and profound from our consumer during the COVID period, which is a great situation. The other thing we did is we took the opportunity to really utilize technology for one thing we had to, right? During the lockdowns, if you're going to continue to preneed sales either the customer-facing application, which we built called Beacon, and you needed to get on Zoom calls, et cetera, et cetera, to continue that process. And what that allowed us to do is to build on that and just become really a lot more efficient than what we've ever been. And we kind of came out of COVID with a sales force that was probably, instead of 4,300 sales, counselors came out about 3,800 sales counselors, but yet was dramatically producing higher levels of sales production. And that's something that we've continued to build on as we move forward. But a couple of big lessons that came through, but the great thing about our industry and our company, in particular, is ultimately, they are very positive signals as we move forward towards the baby boomer generation, that this is going to be a very nice, healthy situation in terms of revenue growth.

And Eric, I know you love talking about this topic, so I'll just kind of tee you up and let you run with this. But M&A is a big part of the story here. Maybe just talk about some of the changes that have happened in the M&A environment. You did some large deals looking back, Alderwoods and Stewart back in the kind of 2013, 2007 time period. You had an FTC standstill that has been lifted. So that's kind of freed you up a little bit. So maybe just talk about how has the M&A environment changed over the recent time period? And I know private equity is trying to make a splash in the space, I think, a little bit. How has that maybe change that? And do you think they'll be successful or not?

Yes. I think we've done some larger consolidation. We built the company over many, many decades through consolidation, which included buying the #2 player a couple of times, as you mentioned, Parker. Ultimately, what has built this now from our company's perspective is a company that's -- the next largest is probably 10% of our size. So there's not really a transformative type situation for us to continue to go through that would have a higher return on investment than what we're currently doing through the more mid-level type M&A, independent deals in large markets that I described or other opportunities for use of our capital, such as building locations, which is very lucrative, which we love and the share repurchase program as we started. Just as a point of reference, we started this 25 -- 20 years ago with 340 million shares outstanding. Today, we have 140 million, just under 140 million shares outstanding. So we've almost bought back almost 60% of the company over that period of time. M&A is still very important to us. The guidance is last year, we spent about $100 million off of a $700 million free cash flow stream. And this year would be similar probably in our likelihood, we'd love for it to be higher. But what we want are major metropolitan areas, we want large independent businesses, cemeteries and funeral homes that are very much -- we'll have some -- not only be able to apply our national scale but be able to apply our local scale as well, which are taking a pre-synergy multiple of 8 to 10x EBITDA. And moving immediately down a turn with our purchasing power because of the scale and size of our company. And then over the next year or 2, the first year or 2 of an acquisition, taking another turn of synergies out of it because of the sharing of resources and some of the revenue streams that we're able to create. Private equity is always something that has been in and out of the industry over a long period of time. There are some very successful companies right now that are Park Lawn and North Star and those type of companies that are owned by private equity that are great situations. But ultimately, some of the private equity when they're entering the business and they're going into the more rural areas and some of the lower-volume smaller businesses, funeral homes or cemeteries, is just not where we're competing against in those situations. So I wouldn't necessarily say that there is a big wave of competition for the type of M&A environment that we're in. What we really are doing is developing very good long-term relationships with respected independents that have great businesses. And it's a lot of times is the third, fourth, fifth generation families. And we want to have that relationship. We have tremendous liquidity to move very, very quickly, but we want to give them a chance to raise their hand and say I'm ready for a liquidity event and let's make that a win-win situation. And the more we can make that a win-win situation with an independent family that's just going to be natural PR advertising for the next deal in the industry. And that's been the strategy. We'll continue that way during 2026.

And yes, like you've always talked about the timing of when these businesses come for sale, it's typically when there's a passing on of the business, it's the -- maybe the father and the mother that have run it, it's been in the family for multi-generations. And the new generation doesn't want to run it. It has the -- with the impending kind of demographic shift, has that changed that cadence at all? Are people maybe trying to hold on for a little bit longer? Or has that just been a nonfactor in your opinion?

No, I don't think it's moved the needle too much, to be honest with you. I think there's still tremendous independents that are out there that are contemplating that. I do think, frankly, COVID was hard on our industry, just like other industries as well. I mean people came out of that fatigued. And I think that may have been a little bit of a push to some degree. But when you start getting to the type of businesses that we're attracted to, which are large independents and major metropolitan areas, those are the fourth, fifth generation, and it takes those family members to get on the same page and raise their hand at the same time. So maybe it hasn't happened as quickly as we thought. But I have to tell you, we continue to have those relationships. The pipeline is strong, the deals that are coming to fruition and the pipeline behind it through our relationships is just as strong. So I'm very bullish on the M&A situation. And I'm also bullish that we have a significant amount of capital that will continue with our construction program. We're spending $60 million, $70 million, $80 million a year building new funeral homes building out in some events, to a lesser extent, cemeteries as well. But we get to pick exactly where they're going to be in those situations in the new markets that meet the growth parameters of where we really want to be, and we get to design that location perfectly the way we want it to be -- to allow that client family to celebrate the life of their loved one with the infrastructure that's needed to have that celebration of life.

Yes. Okay. And then just switching over to the preneed funeral side. The company went through a pretty large transition there over the last 1 to 2 years. maybe just level set us some of the big changes there as you change your insurance arrangement and also kind of move the SCI Direct business into an insurance model. maybe just level set us on some of the big changes that happened there? And how would you say that transition has progressed relative to your expectations?

Yes, I'll start at the top, maybe give you a waterfall and then answer your question. So preneed sales, cemetery and funeral is about $2.6 billion roughly about $1.4 billion of that is cemetery and about $1.2 billion of that is funeral. And of that $1.2 billion, I characterize it about $300 million is used in a trust-funded mechanism in those particular states, about $900 million is an insurance -- life insurance product. And as Parker mentioned, we had a very long-term relationship with an insurance partner for an almost 20-plus years. And we put that out for a bid process and looked at some value opportunities and went with a new partner, which is called Global Atlantic, which is a wholly owned subsidiary of KKR. It's been a great relationship so far. But with any type of relationship when you're shifting from 20 years, it brings some complexity, some bumps in the road that were expected some that maybe were not expected to some degree. We started that process in January -- excuse me, of July of '24. We're pretty much through that as we speak. It was new products. It was shifting some of our businesses, such as you mentioned, SCI Direct, which is about $250 million of that $900 million of production from the trust fund mechanism to the insurance. What does that mean? You need to get all your sales counselors licensed to sell insurance products in certain states. The Global Atlantic insurance products could have been slightly different as well. And so all of that were some growing pains that we expected. Some of it was maybe a little bit choppier than what we expected. But generally, it was in line. with what we had. Where we've landed is a really nice economic opportunity for our company where the general agency revenue we're getting from Global Atlantic is probably in the mid-30% area of the face value of the contracts that we're selling where the previous situation was more in the high 20s. And so it's going to be a really nice win-win situation as we move forward with this particular new situation. But yes, we did have some choppiness that we had to manage through. And for the most part, we've managed through it at this point.

Yes. And just to put some context around that, we had estimated that the whole transition in total with core SCI and SCI Direct was roughly $120 million, $130 million good guide of earnings, but you also had to go through the earned revenue that you were deferring. Now that's eventually going to come out of the backlog in 10 years whenever those contracts mature. So just to give a sense of some of the benefit that the company had through that time period. And like you mentioned, the SCI Direct transition was a little choppy. I think the production has declined a bit. What's kind of your outlook on that recovering towards kind of, let's say, a pre-transition type level.

I think we're there. I think we're going to grow from here now. We made some operational strategic decisions as it relates to SCI Direct, where we used to deliver some merchandise and now we don't. And so that was a loss of a revenue stream that's only a timing issue. It's deferred when they need our products and services because an event has occurred in a family's life, we will then deliver that merchandise and be able to recognize those revenues out of that deferred backlog to offset that headwind, as I just described to you, was moving the SCI Direct production of $250 million to $300 million from trust to insurance to generate that general agency revenue to help wash that. Did it occur perfectly in timing perfectly? No, it didn't. That's what you're referring to in terms of that. But it was a really good derisking strategy that we have done with the SCI Direct, it's generally behind us. It's generally stable at this point. And I think we're just going to start seeing that particular space that our company grow as we move forward in 2026 and beyond.

Yes. And then just moving over to the preneed cemetery side, that's a business that you guys have done a tremendous job of growing over the past decade or so. I look back, you guys in 2013, we're doing $560 million of production. This past year, you did about $1.4 billion. So about 2.5x in 10 years, so it's pretty good. Maybe just talk about some of the big stepping stones that you have kind of taken to kind of get to that point? And then just more on the forward-looking outlook. How do you think about that business going forward? And how do you think in just kind of context with the macroeconomic environment and how that might affect the consumer in that business because it is a large ticket kind of discretionary type purchase. And so just how are you thinking about business kind of going forward?

So a lot of pieces and parts of that question. You may have to remind me on parts of those as we move forward. But going back many years, we took a business that was selling an homogenous land product and turn it into a real estate play, meaning that we started tiering the cemeteries themselves with very high-end property call it, private family estate, semi-private family estates, we would build some lakes and make Lakefront property. I mean, truly kind of a real estate type play. That has been a very good positive situation for the growth of our preneed sales of our company. The next thing that's happening as we get closer to the baby boomer generation is we're starting -- and also, this is a technology play as we got more efficient through our CRM systems as well to give our management team a tremendous amount of credit in the sales area is ultimately making ourselves more efficient and ultimately doing more with less through technology. And that's been a component to the growth as we move forward in the cemetery as well. Volume is a component to this volume being the funeral services that are being performed sort of I'm referring to that. And I said before that it's generally flat to slightly down, call it, down 1% or so. When that starts being affected, that's probably 1 out of 2 lead sources. So when you look forward-looking, we're doing pretty well with some of the parameters that you just described in the growth from $600 million at 1 year, as you described to the $1.4 billion in preneed cemetery sales has been done in a flat to down volume environment, which is about half the lead sources. So once we get the volume coming in as well, it's not only going to affect the funeral segment, it's going to be a natural lead source tailwind that's going to come through in the preneed cemetery sales component. We're very excited about that. And that's going to have a double bang for our buck as it affects cemetery just like it's going to affect the funeral segment as well.

Yes. And I've asked you a lot of maybe flattering questions. I'll ask you a little bit of a harder one. We track the CDC data pretty diligently. If you look over the last 2 years, your same-store funeral service volume has maybe underperformed the CDC data by a point or 2. What would -- in your view, what is driving that? What's the company's explanation for that?

When you look at our markets and you cut our data, the punch line is we feel very, very comfortable with our market share. But you have to cut it, 2 things out of that data. For 1 thing, when you refer to the CDC data, that's about north of 3,000 counties that's being reported, call it, 3,100, I think, somewhere in that ballpark counties. We're in less than 500. We are not as a general statement in the rural areas of the United States is a very general statement. We are in certain places. But as a general statement, we're not. We're in just under 500 counties of 3,100 counties. So that's the first way you need to cut it. And as I said, we're in more urban areas, major branch metropolitan areas. And if you go in and study that, you're going to find that there is different life expectancy characteristics in the access the major metropolitan areas have to health care as well as perhaps the wealth that exists as well. And those situations versus rural areas. So that's the kind of the first thing that you need to cut, make the cut, to make that make sense. The second piece of the puzzle is what I just actually just kind of alluded to. When you go into our particular properties that we own. As a general statement, we are working with middle to upper middle to upper spend categories. And when you go back and look at that data and there's stuff out there in medical journals and stuff like that, but if you really look at it, you're looking at the upper spend and upper incomes in our country having life expectancy over a trailing many, many years, perhaps over a decade, expanded 2 to 3 years, whereas the lower spend and less income is generally flat. And so those 2 situations are what you have to go through. You have to cut the 3,100 down to 500-ish counties and you have to go into the data, which is hard to do. You have to do it separately and say, what is the life expectancy increases that are occurring in the upper incomes of our country versus not. And that's going to essentially get you to a point that we are at when we look at that on a market-by-market basis that we're very comfortable with where we are in our volume. Ultimately, though, what is differential is the size of our backlog, the penetration of our backlog, that $17 billion to $18 billion that we have of consumers that have signed up and have funded their prearrangements. That I do think maybe a differential share opportunity as that comes to fruition over the next to 10 years as baby boomers start affecting , et cetera, et cetera.

Yes, securing future market share.

That's right.

And I got to ask this question because it seems like all that people want to talk about nowadays. But AI, does that have any place to play in this industry? I know during the COVID period, you rolled out some very modern technology like Zoom and DocuSign and Salesforce. So but does AI have a place to play in this industry? Are there ways that Service Corp. is layering that in across your company?

Yes. I think what we really did is we used contemporary ways to present the products and services to the funeral and cemetery consumer. And ultimately, we'll continue to do that, and we'll continue to make that better. The place where AI can affect -- look, it can affect any industry and any company and it will, including our company and including our industry. Is it going to be a complete metamorphosis game changer? I guess it's possible, but I don't know where that would be if you pin me down right now, and I had to try to predict that or explain that.

So I won't have like an AI virtual assistant running my funeral service in the future. You're saying that's not going to happen?

It's possible, but I think people want to visit with licensed funeral directors has been our experience that understand what the offerings are. But it's possible that, that could have some component, but that would be a good ways from now at that time. Right now, where it's affecting us are places like where can we be more efficient. We're in the fixed cost structure can we be more efficient and utilize AI from an FTE perspective, both in the field as well as from a corporate perspective. And then ultimately, how can we get better and have another jump in efficiency in our preneed programs like we did during COVID utilizing technology, and that's where I think it will introduce itself. When you start getting into our CRM systems and you start saying, how can we move our lead to sale rates? How can we start smoothing out some of the friction in our sales funnels? That's where we -- that's a large initiative for us, not only starting in 2025, but also in 2026. And I think AI is going to be a component of it. And I think A&I is going to be more of a component of it than what we even thought last year. And I think that's exciting. And I think it will have an efficiency play for us at SCI and perhaps the industry, but certainly at our company.

Okay? So we have about 1.5 minutes. So I'll ask about some more near-term trends. certainly, everyone knows about the winter storms that have been rolling across the country over the first quarter. What has the company seen there? Have you noticed any impact in the first quarter? And would you see that impact more on the kind of atneed funeral services? Or would that affect some of your preneed selling activities? And just what have you seen there?

Yes. We really haven't seen anything material in either segment. I think that was a temporary thing. And when things happen over a temporary basis, maybe it defers some things a few days or a few weeks, but it comes back. So when you think of the '26 guidance, if we're going to talk short term for a second, we're pretty excited about where we are growing in that algorithm, 8% to 12%. It's going to be -- the guidance is somewhere around 9%. I think there's a -- I think we're starting off with the toughest comp, as we said very publicly with first quarter of last year being up almost 2% in terms of volumes. But we'll overcome that as the other 3 quarters come in. I think we feel very good about '26. Most importantly, long term, with our $17 billion, $18 billion backlog in the undeniable demographics that are going to affect this industry I think we feel very, very positive for a company that has $700 million of free cash flow with about 120% conversion rate. And I think we feel very comfortable in the meantime, continuing to do M&A, shrinking the equity to make the company more valuable as the baby boomer generation comes to fruition in a few years from now.

All right. I think that's all the time we have. We'll head to breakout. Thank you.