Service Corporation International ($SCI)

Good afternoon, 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. Senior President and Treasurer, Aaron Foley, to speak on the company's investment story. We're drawing a Service Corp.'s leading position in the funeral services and cemetery offerings industry, it's opportunity to capitalize on the favorable demographics of an aging baby boomer population, and its strategy providing preneed contracts to gain advanced market share and garner backlog to build its trust potent portfolio. We'll be using the fireside chat format today. I'll ask Mr. Foley some high-level questions upfront and give us an overview of the business. And later in the session, I'll facilitate Adient's questions. So getting started, Aaron, could you please discuss your overall business model and strategy?

Sure. Thanks, Scott. Thanks for having me. As you mentioned, we are North America's largest debt care provider. We've got about [ 1500 ] funeral locations, 500 cemetery locations. On the funeral side, I would say that generally, there are low barriers to entry. On the funeral side, they are probably close to 20,000 operators in space. We've got about 12% to 13%, I'd say, by revenue market share on the funeral side. Conversely, on the cemetery side, the 500 cemeteries that we have high barriers to entry on that side. We're probably closer to 28% to 30% by revenue market share. And so combined, we have about 18% revenue market share in the death care space. As I mentioned, funeral, low barriers to entry, cemetery, high barriers to entry over the last years, we've really grown through consolidation and third clustering strategy, really leveraging the resources in kind of more tighter urban areas, for the most part, be able to leverage our scale. That's one leg of our 3-leg strategy really focusing on: one, growing our revenue, leveraging our scale and then deploying that capital from that free cash flow. I would say, really, over the last 25 years, we've followed the same sort of strategy over that time, that 3-pronged strategy. And for the most part, that's been targeting an 8% to 12% earnings growth framework, about 5% to 7% from organic growth from our existing businesses and then 3% to 5% coming from deploying the capital, whether it be acquisitions, new builds or through share buybacks. And obviously, during COVID, that kind of threw a wrench into certain things. But from 2005 to 2019 we were able to grow on a compounded basis by about 14%, so exceeded that. Since Covid we went -- in 2019, we had $1.90 earnings per share grew to $4.57 in 2021. And since then, with the pull-forward dynamic, we've pulled back on that -- those earnings per share. In 2025, we kind of rebased to a certain degree at $3.85. And as we sit here today, we generally have the midpoint of our guidance of around $4.20. But to your point, we've got about a $17 billion backlog, which is a little more than 4x our current revenue. So really, strategy in driving growing that revenue is putting our shoulder behind the preneed strategy, spending the capital, training the counselors to secure and build that market share on that front.

Great. Digging now a little bit on atneed funeral and cemetery, growth was elevated during the pandemic. It was followed by a pull-forward reversion period, which you've outlined pre-share recent atneed funeral volume trends as well as perspective on the broader timing of demographic tailwinds .

Sure. So you're exactly right. We saw somewhere along the lines of 13% and 4% type growth in 2020 and 2021, respectively, in funeral volumes. And then '22, '23 saw a drop of 5% to 6% each year. '24 we were down 2.5%. And as we entered 2025, we kind of expected that we'd be in this flat to slightly down type period. And we ended up being down 0.8%. And so we kind of came into 2026, expecting that we were fully back into our 8% to 12% earnings growth framework, which on the funeral side, really expects a flat funeral volume with low single-digit growth on average. And so we came into the year expecting flat, maybe slightly down volumes. And as we got into the first quarter, as Tom mentioned on the call back in February, we did see sluggish volumes as we got into January. And as we exited the first quarter, and as honestly the first quarter was transpiring, I don't -- I think hindsight 2020, we gained a greater appreciation for just how strong the '24, '25 flu season was and that it spiked really in January and February[indiscernible] , -- and then conversely, as you look at the '25 and '26 flu season, just how weak the '25 and '26 flu season has been and how there was really just a very short acute spike that occurred really toward the end of of December of 2025. And so those 2 factors combined really drove more of a downside performance, if you will, on volume, essentially getting us to a 6% decline in volume. As Tom mentioned on the call, we went back 20 years of history, looking at a same-store basis in each individual year to get a sense for how have we seen other years similar to this transpire? And we picked 5 years where we've seen volume declines of over 4% and in those situations, we watch that cadence for the balance of each of those years. And in each one, we saw an improvement from what that first quarter decline had been. So let's say, in our scenario right now, the 6% decline based on that analysis, we're expecting to be closer to a 2% decline on a full year basis. Tom mentioned on the call, 1% to 3%. So we looked at it with our own personal experience for our own location type data. We also looked at it from a broader CDC perspective, kind of doing a similar type analysis correlating the volume trends and trajectories following the years and other week for quarter type years. We did some time series type forecasting analysis, analytics where we brought in different factors, including COVID and other dynamics in to look at volume trends. And then we also utilize AI, chatGPT and Claude and basically said, "Look, I'm a mortality statistician or an actuary. These are the dynamics using historical data, knowing we've had this experience as we kind of unfold and see some of these dynamics play out, what does it look like? All of those models spit out between 1% and 3% and on a weighted basis kind of got us to the midpoint there. And so I think for the full year, we're relatively comfortable with the 1% to 3% down. I would say anything could obviously happen to the good or to the bad anytime you're trying to model mortality. But in the past, when we've looked at this experience, the actual quarterly cadence, and Tom mentioned this, but a 6% down first quarter, you're likely to expect about half that down second quarter. Third quarter, we're at this point kind of expecting maybe about flattish. And then in the fourth quarter, seeing some growth in the low single-digit type growth perspective. And so that's a big long explanation for kind of how we are thinking about volume and trying to get comfortable with it as we're kind of planning out our business.

Thanks, Aaron. And yes, that's logical, and it's uncommon to have large swings in at-need funeral, but it does happen quarter-to-quarter. And as you mentioned, you had the flu comp. So a kind of a reversion to a status quo seems logical. A second part to that question is just what do you see for the atneed funeral level on a longer-term basis? We obviously were just talking about the near term. So just some thoughts on that and then we'll move on.

Yes. I mean, I would say in the near term, for the duration of this decade. As we think about the baby boomer demographic, the oldest baby boomer this year is 80 years old. And so they're getting closer to that more normalized atneed period unfortunately, but that's just a dynamic. But our view is that we're probably until the latter part of this decade going to be in a flattish type volume experience until we start seeing more of a pronounced impact from that baby boomer demographic impacting the industry. Now once that occurs, that flattish is probably in the next 2, 3, 4 years in the early 2030s going to grow to 0.5% to 1% up. And then as we get beyond that, kind of the mid-2030s to probably mid-2040s -- mid- to late 2040s we're expecting to see a 1% to 2% type growth in that volume over that time period as more of the bolus of the demographic really is impacting the industry.

Yes. It seems logical. And just real quick for the audience, I apologize for the late start. We had a bit of technical difficulty. So I'm unable to see questions from the way I entered this. So if you do have questions, please send it to my e-mail, it's scott. Schneberopcoopco.com. Next question is, Aaron, we just talked about funeral atneed volume. Let's talk about funeral revenue per service it's been solid, growing above 3% year-over-year. If you can speak to the drivers and the sustainability there.

Yes. I mean, as I mentioned before, when I was talking about the industry, it's a very highly competitive with 20,000-plus locations that are competing for business. And prior to 2022, 2023, I've been in the industry for 18 years, but I've always been told that the funeral business has inflationary-type pricing power. Now pre-COVID, pre '22, '23 when we did see inflation grow, that really kind of been in that low single-digit type range. Come '22, '23, when inflation was high, and we started seeing interest rates increase we as well as the other 20,000 or so participants out there in the industry started getting pressure, and we did see the dynamic of the ability to pass on more inflationary-type pricing increases. I think that, that is going to continue. Obviously, inflation for the most part, has come down from those significantly elevated levels that we saw. But in the first quarter, we continue to see strength from the base business growth from the products and services pricing that we have. That was nice coming through. Another source of strength came from the trust fund income. If you look over the past 12 months, the market returns have generally been pretty high, even though the first quarter came out 70 basis points down the last 3 quarters of 2025 were strong, and that helped support the year-over-year growth in trust fund income, the cremation mix. We now are guiding to 50 to 100 basis points of cremation mix shift in any given year. In the first quarter, we saw 40 basis points of growth. So the suppression that might come from that has been moderated some. And then specifically on the nonfuneral home side, what we're seeing now is more -- are more contracts maturing out of the backlog where we deferred the earned it. Keep in mind, 2 to 3 years ago, we would deliver the earned kit at the time of sale and recognize those earnings at that point. Over the last 2 years, we've been transitioning the business to now defer the earn kits we're not recognizing it at the time of sale only at the time of maturity when we're providing. And we've seen over the last 3 or 4 quarters, the average in that nonfuneral on business growing at this first quarter was at 9%. Last year, we saw 12%, 13% over the last 2 or 3 years. And we expect that aspect of the growth to be somewhat outsized over the next few years until that backlog really kind of fills itself in.

Appreciate that. Lastly, we're going to round out funeral and then move over to cemetery. But funeral preneed sales, could you discuss how they have the potential, the impact of revenue and market share in future periods. Additionally, please address recent developments impacting this category and long-term perspective on the potential growth.

Sure. So we've got about $17 billion, $18 billion of backlog right now. And actually, 70% or so of that is on the funeral side. And when you look at the maturities coming out of the backlog today, about 40% of all of our services that we perform have some type of preneed contract backing them up. If you go back 10 years, that would be closer to 30% to 35%. So we are putting our shoulder behind this strategy. to go in, and we expect to, at the very least, secure market share to make sure that those consumers stay within our network. But then on the fringes, we do think that there are opportunities to see market share expansion by us going into the backyards of our competitors and locking those consumers up for the future. And so as we are driving this production on the funeral side, now that we have our transition from True State to Global Atlantic complete, now that we have the SCI direct transition from trust insurance as well as from delivering the earn kit to deferring it. We've got this new stable base. And as we continue to grow funeral production, we're going to not only get the general agency commission benefit in the year of sale. But as we continue to grow and see that improve that backlog, we're expecting future continued revenue growth on that side as well.

Great. Over to cemetery. -- recognized cemetery preneed sales have historically been a P&L growth driver for Service Corp. Please discuss the drivers of growth that you've experienced in this category as well as -- how is it trending here at the start of 2026 and your outlook for it over the balance of the year? And then for the longer term, for that matter?

Yes, I'd say coming into the year, we had expected kind of a low to single low to mid-single-digit percentage growth in cemetery preneed. And the first quarter came through, that was an outperformance from our expectations. I'd say [ Audio Gap ] an easier comp, but we were able to blow through that as well as teams continued to execute well. On the core side, the other $12 million of increase, that really continued to be driven in large part by the velocity or number of contracts that are coming through. So that's really the fourth year in a row that we -- or I'm sorry, fourth quarter in a row that we've seen velocity as a positive driver to cemetery core reduction. Again, that's splitting core from our large sales. If you take our in the first quarter, it was $330 million of cemetery production or so. About 90% of that is our core business. And then 10% is that large sales. So around $40 million of large sales in the balance was our core business. Now in the past, we've talked about how the number of deaths as those transpire on the funeral side are highly correlated with the number of contracts that -- the velocity of contracts that we're selling. And so for us, over the last 4 quarters, to witness increasing velocity of sales in light of weaker volume environments, to me, that shows that, one, I think that the 4 initiatives to really drive sales, not only on cemetery but funeral as well are going well. So one, the marketing team is doing a good job of developing and generating more and better leads for our sales counselors to work off of. That includes seminars. That includes online offerings and advertising to make sure from a preneed perspective, they're being considered. Also, from a head count perspective, on the sales side, making sure that we're doing some tweaks we've talked to you about over the last couple of quarters, shifting a little bit more of the salary from variable to fixed. And what we're finding there is that's increasing the retention and the longer tenured counselors have better production metrics than the shorter tenure counselor and they also have a better quality of contracts, so less likely for cancels to occur. So you've got those dynamics. You've got us utilizing the tools within our CRM system to -- as it relates to those leads and shift those and make sure that they're pointed to the more productive counselors and making sure that our sales teams are affecting those. And then on the large sales side, this is kind of the fourth leg of our strategy to drive the preneed sales really making sure that the teams and parks that we operate have the inventory available, have this large sale type inventory available. So when people come in, we can show it as an option, and they know what the art possible, if you will, is to be able to affect those sales. So I think as we've really put our shoulder behind those strategies over last year and into this year, we're seeing the benefits of those and a little bit of a divergent from that correlation to atneed volume. And as we look to the balance of the year, I think we're expecting continued strength on that velocity side, granted, as I talked about earlier, with funeral volume in the second quarter, expected to be about half or 3% down that could be closer to flattish from a velocity perspective and it may be a little bit more of a comp comp-type headwind, if you will. So I'd expect cemetery preneed likely in the second quarter, somewhat flattish. And then as you look to the second half of the year, probably in that low to mid-single-digit type growth range.

Just wrapping up on the sales side of cemetery. We were fortunate enough to conduct a field trip with Service Corp last summer to Rose Hills in Los Angeles, not only the largest Memorial Park in the company's portfolio, but the largest in all of North America, possibly the world. Could you please discuss some of the interesting attributes of that property. And I think you did a good job speaking about the seminars and the retention for your staff. But a lot of focus there on large and small. I kind of want to key in them the large and tied it into Rose Hills as well and just kind of discuss the aspect of some of your larger properties with with really nice features.

Sure, sure. No, thank you for that and really appreciate hosting you out there. It really is a beautiful park and I'd encourage the participants given the opportunity to make it out there because it really helps to kind of crystallize a lot of the strategies that we do talk about highlighting the tiering of our cemetery property from the homogenous all the way up to private Maslins that you'll see multimillion dollar type beautiful Mazalims that you see. But to your point, Rose Hills makes up about $100 million of our $1.3 billion, $1.4 billion of the EBITDA. So a very significant proportion of our EBITDA. We serve a large proportion of both Hispanic and Asian consumers at the Rose Hill Cemetery, and those are consumer groups who greatly value the services and products and property offerings that we provide. Their cultures very much appreciate memorialization and having a place to remember their loved ones, and I think Rose Hills has done a fantastic job of cadencing out development opportunities across the park to make sure that we continue to have the large sale inventory available. Again, it's one of the main focus areas of our sales and marketing teams to continue to drive that large sale opportunity. And I don't think Rose Hills is really going to be different than much of the rest of our footprints. We're going to be focusing all around granted they are a larger proportion. So we will make sure that they have that inventory to offer to those consumers. But I think that we're continuing to ideate great ideas and great plans in working our community outreach to make sure that they know that they're going to have a great place to go to.

Excellent. One more. When we go down to the margin line, Aaron, in cemetery -- and that can have a meaningful impact on Service Corp's reported EPS. Could you please discuss some of the primary drivers in cemetery margins and particularly what investors should be watching as we progress over 2026 and beyond.

Yes. I think, honestly, Tom did a really great job of kind of highlighting for both funeral and cemetery, the margin dynamics. So on the funeral side, he basically indicated, look, if you assume essentially 80% of any incremental or decremental revenue coming through and then normalized type inflationary type growth rates on our fixed cost structure, you should generally be able to own in on the margin dynamics on cemetery. It's about 75% hitting the incremental decremental bottom line and then, of course, a little bit higher fixed cost expectation on the cemetery side. But in the first quarter for cemetery, when you have a 6%, 7% growth in revenue coming through and then putting on top that 75% margin dynamic and then the fixed cost growth, kind of what we saw we witnessed about 120 basis points of growth in that cemetery margin for the first quarter. And I think as you look forward, kind of, as I mentioned, with flattish preneed expected for the second quarter with that fixed cost growth you're likely to expect probably some contraction as you look at the second quarter, but then the third and fourth quarter where we're expecting low to mid-single type growth, you're probably really kind of in our normalized framework if you will, as it relates to margin opportunity where we generally expect a 50 basis points or so type growth with that production type dynamic backing it up. And so as we take cemetery as a whole for the full year, at this point, given kind of a lot of the outperformance that we saw in the first quarter and then understanding the trends looking to the back part of the year, probably in that 80, 90 basis points of growth type area for cemetery margins coming through.

Great. Appreciate that. We're -- we only have about 2 more minutes and because of the time crunch at the front end. I'm probably not going to be able to get through. But we do have a question coming in, and it's on this theme. So I'm going to pop it in here, Aaron. It's on basically managing profitability. What are some of the activities that you do or levers you pull to manage the cost side of the business. And please discuss how technology is used to manage margins.

I would say that we have a wealth of data now that we have never had before and broken down into more detail than we've ever had before to help affect intelligence about what things are going well and what things are not going well and how do we expand on the things that are going well and try to correct the things that are not going well. And so over the last 40 years that this company has 50 years that has operated as a consolidator, both the funeral and cemetery segments have had these large fixed cost structure. So it's really embedded in the culture of the organization to be focused on continuous process improvement. We have margin committees that have both corporate as well as field representatives that help dig into these business trends to really understand and wrap our heads around what the dynamics are and how we can affect any change [indiscernible] .