Service Corporation International ($SCI)

[Audio Gap] Conference. My name is Joanna Gajuk. I cover health care provider companies, but also some other companies. So now it's my pleasure to have Service Corp with us and Eric Tanzberger, who's the CFO. It's not healthcare company, but there are a lot of actually common themes we want to talk about.

And actually, I want to start about that because there's still a lot of debates around the death rate and the call it, post-COVID overhang. So kind of bring us up to speed in terms of your latest thoughts. Are we kind of done with the overhang and kind of how we should think about the death rate going forward?

Yes. If you go back to COVID, just to lay the groundwork here, I just want to talk about SCI just for 1 second. largest in the industry. We are 1,500 funeral homes and about 500 cemeteries, a little under $4.5 billion of revenues, about $1.4 billion, $1.5 billion of EBITDA and predominantly in the U.S. and Canada. We're not -- in fact, we're not outside U.S. and Canada any longer. So we perform about 350,000 funeral services a year as a very general statement. So what Joanna is asking about is in COVID, we obviously performed about an extra 130,000 above and beyond that 350,000, 130,000 more funeral services that were performed by us during the COVID, and that's over maybe a 2-year period, 2.5-year period, if you will. Ultimately, those were pulled forward from future years, and it kind of not by us, but kind of the COVID pull-forward effect by a lot of companies that have been -- that were impacted similarly to the way I just described to you. In addition, though, during COVID, we had additional deaths or excess deaths that weren't specifically related to COVID itself, but related to the environment that was going on at the time. So that's the type of things that we all saw a spike in, unfortunately, in our country related to drug overdoses and pentanol and went to suicide rate of young persons and et cetera, et cetera. So the COVID specific, the COVID virus pull forward -- we generally think, Joanna, this is a very long answer to your short question, we generally think that, that's kind of been built in at this point, and we've lapped it. and is not really something material enough that we should talk about. What we do think, though, is there's still a little bit more to go as it relates to what we dubbed at the time as those excess deaths. Good news for everyone in our country, it sounds like that suicide rates in young persons is not necessarily coming down, but kind of reverting back to the mean is the best way to say it. Same thing with maybe some increased elevated levels as it relates to fentanyl and drug overdoses and those types of things. That's all good news. But that is still something that's putting a little bit of pressure on us. Our guidance at the beginning of the year prior to the first quarter was more like flat funeral volumes to maybe slightly down, call it, down 1%. But what I'm sure has been the 1 question today is the first quarter started slower than that. So we've altered that guidance in the last few weeks.

Right. And I guess talking about the quarter, I know on the call, you kind of mentioned April, right, that it was not as bad as Q1. So any number you can put out what it meant was that in terms of like where it's tracking -- and I guess, as you compare this through the month or through the quarter, like one-to-one in like March and then April. So if you don't give us a specific number kind of relative .

Yes. What I would say is -- let me ask your question very specifically, and then I'll step back and say how do we give guidance in an environment like that? So our first quarter ended up down about 6%. It was something that was across the board for the industry. This is not any type of market share situation or anything along those lines. The vendors were down, the competitors are down, very similar amounts. It was a little heavier than that, frankly, in January and February to start off. and it got a little bit better than that, maybe more in the mid-single digits type declines as it relates to the month of March. And I think that April has kind of continued that pattern. So to be helpful what we were trying to do is point to this situation in saying that this occurs in our industry every 4 to 5 years. And we pointed to 2 years -- 5 years in total, -- but we pointed to 2009, which is kind of the book end analysis in 2019, which is the other side of the bookend, then there's 3 years in between 2012, 2014 and 2016 as a general statement, when we start off the year in the 6% range, we get back in the following subsequent quarters, about 2/3 of that. So what we said is we think we're going to get about 400 basis points of this down 6% back in the second, third and fourth quarter combined. And we believe that then funeral volumes will end up by definition through that math based on historical data, down to, and we called it officially kind of down 1% to down 3%. 2009 was a little bit of an anomaly, which is 1 of the 5 years that I mentioned was kind of a book end of that analysis. That started off very slow, like down 9%, and it really didn't recover much. It recovered about 6% down for the full year of 2009. 2019 is the other side of that analysis. It started off down 5%, 6%, and funeral volumes ended flat. So what we're trying to say is we've seen this before. What we tried to do as a management team is really drive the levers that we could drive, which is the cost structure, hold cost during the quarter and the soft volume environment, which we did. -- and drive preneed cemetery sales, which really performed well given the credit to all of our sales force and all the sales initiatives that we have underway currently to really create a quarter that was flat to slightly up from prior year with down 6% volumes. And it's the small victories, I guess. But we're pretty proud that we were able to post that quarter, but we want to get back to more reasonable volume numbers so that we can continue on the growth trajectory, which is generally 8% to 12% from an earnings per share bottom line basis that we've been able to produce for significant many years under our management.

And when it comes to this branch for the year, minus 1% to minus 3%, Help us understand the EPS sensitivity in terms of what the impact will be if this ends up being minus 3% versus ...

As a very general role, the first thing we do is give you a math sure as a very general rule down 1% from an annual basis is about $0.10 a share. And the guidance -- the midpoint of the guidance is $4.20 just to kind of balance that in terms of how material this is. The guidance itself is $4.05 up to $4.35, which is the midpoint of $420 million. If we end up -- the original volume was going to be flat to down 1%, let's call it. So if we end up down 1, we're not far off from the midpoint of our guidance at all. In fact, though, if cemetery continues to perform, we'll be solidly in that midpoint, if not maybe even starting up in the upper part of the range. So that's why we didn't really adjust guidance because a lot can happen in 9 months. when we're just dealing with a subset of data of 3 months or the first quarter. So if we end up down 3% we still feel that we will be at the low end of that guidance range that I just mentioned to you. So it's not time to say to adjust that guidance. It's not time to panic by any stretch of imagination. If we end up less than that 1% to 3% down, we'll probably fall beneath that guidance. If we end up better than that, we may end up at the upper echelons of that guidance. More to come, but that's the math.

That's helpful. Thank you. That's very clear. And then specifically, so we were trying to talk about how you were exiting the quarter and such. And I don't think we -- anybody brought it up on the call, but the Ching mine festivities how things were going. And I guess maybe talk about the role Hills, that's your premier location, and I guess those facilities are big there. And entire peers, there was some disruption to that kind of very active selling season. I just want to hear how things were going around that?

In a lot of our cemeteries, but in most of our cemeteries in the western part of the U.S. and Western Canada, there's a heavy Asian consumer that values what we do and the celebration of life and the memorialization. And that's a great consumer for us. One of the festivals that they have annually, which is generally late March, early April, it frankly crosses over quarters in a lot of the cases, is called Ching Ming. And that's when the families come out and they honor their loved ones and such. And that's a time where the families are very receptive and in fact, approach us at the parks to buy preneed cemetery property for other family members at that point in time. So that is what Joanna was asking about. We had a pretty normal good Chingming season in the United States. A lot of the Canadian stuff may come more into April, frankly. But we had a normal good season, not just frankly, headquartered in California and up the West Coast where some of the Asian influence is more prominent. But even in places like Houston and other areas where we have large cemetery footprints, Chingming did quite well. What Joanna was asking about specifically was a very large cemetery and funeral home in Woodier, California, which is essentially East L.A. called Rose Hills. That is a very large park that is a very high-producing park and in fact, can be anywhere from 8% to 10% of our annual EBITDA at one location. That's a park which you haven't seen. I'd highly suggest if you're interested in our company, going to see it. I believe Joanna is going to be your tour guide in a couple of weeks. Is that right? Exactly. Right. So Joanna is to some investors at Rose Hills. We've done that before quite successfully, and it helps pull everything together in terms of memorialization, celebration of our life, the preneed strategies, the differentiation between perhaps the Hispanic customer versus the Asian customer and those traditions. We have a stand-alone funeral home at Rose Hills, which is purely oriented to the Asian consumer and Asian customs. So it's very interesting for you to see that. And Rose Hills has done very well. They're right on plan. And I think so far, from what I understand, they're continuing their momentum from the first quarter into the second quarter. So more to come, but you'll be there. Definitely in action. And then you mentioned funeral lo is obviously out of your control in a way that the deaths are what they are, but then you mentioned the preneed cemetery sales. This is really more in your control. And that quarter was actually exceptional, right, up 10% year-over-year. Comps get tougher later in the year, right? So that's why the question is like what gives you essentially confidence you're going to get -- because I guess now you're talking about what like mid-single digits for the year or low single digits. Mid-single. The guidance was -- that's actually guidance that we actually raised in the last call. and that is low to mid-single-digit growth in preneed cemetery sales is probably more like mid. Now that's because we're coming off of a very strong 10% quarter -- quarterly growth over the prior year. And I think we have a lot of momentum, though, that we've been working on for a couple of years. I mean when you dive into some of our initiatives, I would say that we're getting a lot more into Salesforce CRM and those types of technology systems and using those to our advantages as it relates to leads. So I think at this point, the leads are coming in a way where we could now start adding more people power. We could start adding more, whether we add 200, 300, 400 more sales counselors. This is a rough number. We probably have 3,700 to 3,800 sales counselors just as a feel for that. So if we could add net 5% to 10% more counselors, we have the leads now, in our opinion, to get to in a very efficient manner and in an effective manner. And that people power, we think, is going to help us continue to move this needle in a very positive way. Another initiative we have that's kind of back, which is a pre-COVID initiative is 7 hours. These are going into retirement communities and such, and you're going to restaurants and you're putting on presentations, but obviously feeding people at restaurants. And as we all know, during COVID, that just absolutely evaporated. And that really took us some time to get some momentum back as it relates to those seminars. And I'm glad to say that we can mention that now that we have some momentum back related to the seminar sales, kind of putting our shoulder behind that and moving it forward. I already kind of talked to you about some of the technology we're using. But ultimately, what matters to us is taken friction out of the sales funnel, which is a way to say how do we get our lead to sale rate to continue to turn positive and move positive quarter-over-quarter, year-over-year. And a lot of the things we're doing as it relates to technology within the CRM system and forcing behavior through that CRM system is really something that is starting to gain traction even though we've been working on it for a year or 2 at this particular time. And the last piece that I mentioned that, in a way, Joanna, kind of decoupling, as you saw in the cemetery in the quarter, pre-new cemetery sales from the atneed environment. Atneed volume will always be probably the #1 lead to preneed cemetery cells, because the family has just performed and intermined perhaps at 1 of our cemeteries, and then the family has a desire for the adjacent property around their loved one, and that's where the preneed sales come in. But what we're trying to do is not just have that be the number -- the only lead, but really develop more and more as we go forward, utilizing that technology. But going back to large sales, admittedly, large sales have been about $45 million a quarter for the past 4 sequential quarters. And that was a nice bump, but we had an easier comp in the first quarter of 2025, where large sales are about 15% of our total sales defined as greater than $100,000. And they can ebb and flow with high net worth families and individuals and the things that you would naturally think would affect that particular behavior, which is more in line with is there -- how is the real estate market doing? Is there a real estate bubble. How is the stock market doing? Is there a bubble there perhaps? Those are the types of things that will continue to drive our large sales that we saw continue over the last 4 sequential quarters to be very positive, frankly.

Right. And just maybe staying on that breakdown, right? So you're talking about the large sales, but obviously, the vast major of the loss of the volume comes from what you call the core -- so maybe walk us through kind of the performance -- and also how you think what are your expectations for the large sales versus the core for the rest of the year?

Yes. So I think the way to think about it is -- let me step back and let's talk velocity and average sales price. We obviously have the ability through our tiering approach at our cemeteries, which are very high-end properties all the way down to the basic offering to be able to push through pricing that's reasonable for our consumers. There are a lot of barriers to entry in our cemeteries because these were started 50, 60 years ago in major metropolitan areas. And now you have hundreds and hundreds of acres in the middle of very large markets, which is an incredible asset that we have with, by the way, decades and decades and decades of land left for this particular type sale. But what we do want to do coming out of COVID is get to the point where we have positive velocity again in the number of contracts that we are selling on a preneed basis in our cemeteries for the core consumer, which is the less than $100,000. And that's what Joanna was asking me about. And we've probably posted several quarters in a row -- in fact, last year's velocity was up low single digits. This year, what we want to make sure is that we can come off of that comp and maybe have positive velocity for the rest of the year. We started that way in the first quarter. I think you're right. I think the comps get a little bit tougher in terms of velocity as the year goes by. But we generally, to give you the guide we generally think that we could go through the entire 2026 and end up with a situation with another year of positive velocity and you couple that with 4% to 6% type pricing that we have in our parks that's related to not just raising prices, but how you sell from a top-down perspective, turns out that we think we can get mid-single-digit growth that we talked about in terms of the revenue, and that's going to lead to margin expansion. When you can push through 4% to 5%, 4% to 6% type growth in your preneed cemeteries -- in your cemetery revenue growth, you're starting to get to 60 to 100 basis points per year of margin expansion. If you really, really, really want to go back just to see the powerful effect of that over a long period of time, I mean I remember, 20 years ago, 15, 20 years ago, when the cemetery margin was in the teens. And now it's generally 33% to 35% cemetery margins, and we think that will continue to expand as we're able to put throughput through these preneed cemetery sales in our cemeteries.

And you mentioned the seminars, right, and also your technology, and it sounds like including the increases in head count on sales force, right? And we are looking at the velocity, yes. It sounds like things were actually growing pretty robustly. So is there anything else I was also thinking like did you make any other changes in terms of your territory or maybe comp structure or kind of sounds like these sales people are doing a really good job.

Yes. I think the metrics -- kind of the metric-driven philosophy that we started probably a couple of years ago, has been a heavy lift. Anytime you're working with 3,500 to 4,000 sales counselors. It's going to be -- change does not come overnight. It takes buy-in and it takes time to get that buy in. But I think a lot of these initiatives continue to work well. Now look, can it ebb and flow on a quarter? Absolutely. I mean, we're a long-term management team with long-term guidance trying to get our company to the positive effect that's going to occur to this industry in the next 3 to 5, 3 to 6 years, whatever you think it is in terms of the baby boomer generation, but more throughput through this but it can ebb and flow by the quarters. There's no doubt and large sales could ebb and flow by the quarters. But as a general statement, as we look out over the next 3 to 5 years, in preparation for the baby boomers affecting this and creating a really positive incremental margin environment. We're very excited about that over the long term.

And that was my other question on couple of things based on what you said. On the baby boomers, right, kind of what's your latest thinking there? Because obviously, there are some implications for both businesses, but in terms of just the atneed business we're talking about.

Yes, a new cemetery is huge. People forget about that. I mean it's not just the atneed funeral volume, but it's the atneed symmetry business that is going to be positively impacted. Mean the oldest baby boomer is a long generation. It's 18, 20 years of generation. The oldest baby boomers generally have entered their 80s now. And so the average number, the average age, I should say, of when we are working with families because the death has occurred, is generally around 83%, 84%. So that generally tells you that you're going to see something in the next 3 to 4 years. But in terms of just solidly being in it, and seeing the type of growth parameters where instead of saying funeral volumes are going to be flat to slightly down, where we could say funeral volumes are flat to slightly up and perhaps at 1 point, solidly in it into the 2030s say maybe federal volumes are up 1% to 2%. I think that's probably somewhere in the early 2030s or mid-2030s. What can move things our advancements in health care. And generally, at SCI, we are working with kind of middle to upper end, middle spend, upper spend middle to upper middle to upper spend type offerings to our consumers in these particular market. So as a general statement, when you think of our company, which I'm not trying to speak for the entire industry. But if you think of our footprint and who we market to and who we service there are families that could probably afford advancements in healthcare if those advancements come. And that is the type of thing that could maybe push a needle a few years out or not. And I'm not here to predict that by any stretch of imagination. You're the health care analyst, I'm not. But you do -- that is the type of thing where it's just not a perfect science in terms of throughput for SCI.

And you said that you have -- in terms of the cemented property availability, you have decades -- and then -- is there a stat or have you guys looked at this in terms of just like your market share with the senior population, Like, I guess, what percent percentage of people over 65 have a cemetery property? .

Well, I don't know the answer to that, but there's a tremendous amount of room is how we feel about it. I mean we have mid-teens type market share in the funeral market shares in the low teens and the cemetery market share is kind of in the high 20s, and we have 1,500 funeral homes of 500 cemeteries when you kind of weighted average that calculation. But we have a nice $17 billion backlog of future revenues because we've signed that many people up early. It's been our #1 organic strategy for our company. What we hope happens years from now is that we differentially have perhaps have a market share play well into the future because we have gone out and tried to sign as many families up as we possibly could. And I think that bodes well for us into the future.

And since you mentioned the $17 billion, obviously, that's great to have because you have visibility in your market share in secure the business going forward. The other dynamic around this dollars, right, is the trust funds Right? And recognition of that returns. So maybe remind because that comes up sometimes in conversations, remind sensitivity right when things kind of change in terms of the market returns and such. And also remind everyone kind of the average length of the contracts in the backlog.

Yes, the average length of the contracts of the backlog are about 12 years, 10 to 12 years. Let me back up with the $17 billion or so, about half of it is in life insurance policies and half of it is more in the market that we're managing, we're not. -- professional institutional money managers are managed that with fiduciary trustees. But ultimately, that creates and accretive trust fund earnings over a long period of time where you put the original Corpus into the trust fund. And on average, 10 to 12 years later, when those families need our service because the contract turns that need, then at that point in time, we go to the trustee and say, "Give us the original corpus and then give us all the accretive earnings. Ultimately, the return that we've averaged over a long period of time is about 7% to 8% in terms of that. And with on average 3% to 4% inflation over a long period of time, you have a nice positive rule return that essentially is incremental cash flows and incremental margin to SCI at that time. So it really works well -- most importantly, it gives that consumer and that family peace of mind. It's not really a financial decision that they're doing. It's a peace of mind decision that they've taken care of it and they funded it, and they're not passing the burden of that whether it's financially or having their children or loved ones try to figure out what mom or dad wanted in that hypothetical situation. And for all that, it's a real positive thing. When you recognize those earnings, you recognize them at that 12-year mark when that contract comes out of the backlog that's been invested for 12 years. So what Joanna was saying, for example, if you have a real tough down market, it's a very muted effect to our company in our EBITDA stream for that particular year or that particular quarter. Remember, you may have had 1 bad year, but you also had 10 years that you had a real nice 7% to 8% return on average. So it ends up being a real muted effect in terms of what the market does to our EBITDA stream over a long period of time. And that really was tested to the nth degree, so to speak, during the '08, '09, 2010 financial crisis and proved out very, very well for us.

And maybe the very last question because as of this business of the company, we like the free cash flow generation right? So maybe talk about the priorities in terms of using that kind.

So free cash flow will be somewhere around $700 million a year after $300 million of CapEx and $1 billion of cash flow. So a wonderful 125%-ish conversion, a wonderful 6% yield on our free cash flow. We'll have a couple of hundred million of that $700 million go to our dividend. And then of the $500 million, it's going to be divvied up among M&A activity. new construction activity ourselves, both of which enjoy a really nice low to mid-teens type after-tax IRRs, and then we'll continue to shrink the equity with the share repurchase program. So for those of you that don't know our history to that, in 2005, we had about 340 million shares outstanding. And today, we have about 138 million shares outstanding. So we've been very aggressive with our share repurchases over the years to really shrink the equity of our company to make our company that much more valuable as the baby boomer generation affects it with a large incremental margin activity that we would expect.

Great. This is all the time we have. Thank you so much, Eric. Thank you. .

Thanks, Joanna. Thank you.

Thank you.