Good morning. This is John Ransom. Happy to have back once again. We hope this is a forever thing, the Service Corporation team. I'm here with Eric Tanzberger. Tom doesn't think we're worth coming anymore, does he? So we hadn't seen Tom in a few years. So we got to make do with Eric, CFO. So this is going to be 100% fireside. So I'll run out of questions. So hopefully you guys will have some snappy questions here at the end, or I'll start asking about, you know, Alabama football or something.
So let's just start with, you guys have reported and guided. I don't think there are any big surprises, but just kind of a high level, take a step back. What's state of the union for the industry for Service Corp? Are we finally through all the COVID distortions? What are some of the key things that you're working on now that maybe you weren't focused on during the emergency? And just kind of, you know, where we are in the stage of the company and the industry.
Coming out of COVID, you know, is where we are. What I would say, John, first of all, thanks for having us. It's been, I don't know how many, I think we're embarrassed to say how many years you and I have been here.
I think it was the Reagan administration every time.
Very well been.
Second term, though.
Yeah, second term makes us feel a little bit better, a little younger. You know, especially as a Service Corp, you know, we've proven over a decade now at least, you know, that we can grow the company at 8%-12% earnings per share, bottom line. I think if you take the trailing 10 years, we're like 12%-13%. That's a combination of our organic growth through the funeral segment and through the preneed cemetery sales growing significantly over the years, as well as new build greenfield type buildings and such, both on the funeral home and cemetery side, and also M&A activity, which is pretty significant.
We were obviously interrupted, as we all know, during the COVID experience, where we normally perform about 350,000 funeral services per year, and we performed an extra 130,000 funeral services over about a two to two and a half year period. That obviously had an effect where it pulled forward funeral services from future years into that COVID period. I think, as John just said, we're finally getting to kind of the last year in 2025 that we probably need to talk about that and that it would have any significance to us as we move forward. Right now, we expect, you know, funeral volumes for 2025 to be flat to, you know, slightly down. Ultimately, what we're excited about is where we are in the industry in terms of the Baby Boomer generation affecting our industry and our company into the future.
Specifically for us, as you look to future generations, whether it's going from the Silent Generation to the Baby Boomer generation to Gen X, which are also seeing, particularly in our cemetery segment, an increase in the Asian consumer and the Hispanic consumer, which is something that we have marketed to and really changed our business to market to in the cemetery segment to the point where that's been very profitable, and we're very excited about those demographics. So I think we can continue to expect growth in the company as we move forward in that 8%-12% algorithm.
I do think that it slowed us down the past couple of years because of that COVID pull forward effect that we talked to, but we're already back in with the center of the guidance back into that 8%-12%. We're excited about moving forward. And I think more to come as the Baby Boomer generation affects that algorithm, which with a 60%-70% fixed cost structure should be nice incremental margin growth and nice incremental growth in profits as we put more volume, more throughput through that fixed cost structure over a period of time.
So I promise we're not going to, we're going to save the agency switch to the end. You're already sure tired of talking about that. So we're going to keep it sort of high level here so you don't have to work that hard yet. You know, what strikes me having watched this industry for a bit is, you know, it never was "ruined" by private equity. And what I mean by that is you didn't have, you know, 6,000 startup funeral homes and a mass marketing strategy of something. So why do you think it has some attractive aspects to it in terms of predictability and cash flows? Why do you think outsiders have kind of stayed on the sidelines and not tried to make a go of it here?
Well, I think they're now finally getting into the business, though. I really do. You know, we have a couple of consolidators. One's called Park Lawn that is now owned by, partially owned by private equity. We have another one called North Star, which is owned by private equity and has been for the last 10 years. But ultimately, for you to invest in this space, it's going to be very difficult for a private equity firm to come in and just build greenfield locations. So they're going to have to buy greenfield locations. They're going to have to buy existing M&A activity and locations. And, you know, the truth to it is that when you go in and look at our scale as a strategic, we should be able to buy those funeral homes and cemeteries because of our scale and because of our economics.
It's the old saying that the strategic should beat the financial. In that situation, it's somewhat true, especially in a normalized interest rate environment. You know, with the type of scale that we have on the national level, we immediately have a turn of EBITDA of synergies day one just through our national supply chain contracts. Then furthermore, when you're buying a new business where we already have that scale, which generally is what we want to do and what we do do, you're going to have other synergies related to automobiles and personnel and things along those lines that, you know, over a period of time and sales practices and such will give you maybe another turn. For the most part, the strategics can kind of have an advantage in these situations.
That may be an impediment for private equity coming in fast and roll it up. For them to really come in and make an impact, they're going to have to buy a larger consolidator that's already there and is willing to do that. That's really how those two previous transactions that I just referred to came about. Again, we're very active in the M&A market. We're spending $100 million a year. Last year, we almost spent $200 million a year.
It ebbs and flows. As a general statement, we and the industry have been very disciplined in terms of the multiples. I think private equity is somewhat attractive to the industry because of the cash flow dynamics of the industry. But it's not going to be something they're going to have to come in, they would be able to come in and have like a big bang effect and roll it up instantaneously unless they, you know, cut a deal with one of the other smaller consolidators.
Great. So as you think about the boomer, you know, there's the obvious potential uptick in volumes. Maybe, you know, we've been waiting on that, but kind of the boomer's 80, you know, the oldest boomers are 80. But is there also a corollary of a slightly bigger wave of funeral homes for sale as that generation retires and the kids don't want to continue with the calling?
Yeah, I think we've seen that lately. And, you know, when we gave guidance of $75 million-$125 million of M&A spend last year and we ended up at $180 million, I think what we saw out of COVID is a larger independent that went through a very significant trying period of time over a couple of years. You know, and there's definitely spots where the COVID activity was, where it was very acute, where the independent, you know, for lack of better words, really just had to shut down. They were overwhelmed by the situation where what we were able to do with our scale is move hundreds of our associates around and move them to those hotspots and maintain, you know, the businesses open for the benefit of those communities. But what came out of that, John, in all reality, was probably you're right, is some fatigue.
That's why we have seen, and you've heard me say it now for a couple of years, that I've been very excited about the M&A pipeline. When I say that, what do I mean by that? I mean that these are larger independent businesses. I mean that they're probably in major markets and they're probably in markets where we already exist. Now you're talking about tuck-in type major market activity with some scale where we already have scale. And now you're starting to see acquisitions that can approach, you know, almost mid-teen type after-tax IRRs, which is a tremendous use of our capital that we're excited about. The patient part of that process is that these could be third, fourth, and even, believe it or not, sometimes fifth generation businesses. And so the equity holders are somewhat scattered within those families. And, you know, you can do the math.
That's a headache when you say that, and it's more of a headache to try to get everyone on the same page and get a purchase agreement. We choose to have long-term relationships with those families. We choose to be patient. We choose to be an advocate for those families in terms of the M&A transaction, but we're not going to come in and be undisciplined and force a family to sell because of price. That occurred in the industry 30 years ago.
It didn't end well in this industry, and as a general statement, not just Service Corp, but all of the larger consolidators, you know, have been somewhat disciplined over the last 20 years, and I expect that to continue. I don't see any signs of that changing in any direction, but ultimately, we're excited about the M&A activity, and as you said, we're seeing some fatigue, perhaps. We're seeing the potential of some larger independents, more chunkier, which would really benefit us and our IRRs in those situations.
You know, I don't think this is lost, but could be maybe emphasized more. You guys, again, during COVID, took that opportunity, if you will, to look pretty hard at your sales team and productivity, so maybe just kind of wind back the clock a few years and talk about Beacon, talk about Sales force, and talk about the productivity, and then just how you've tried to solve for the fact that, you know, the turnover is usually pretty high and you've got the old 80/20 rule, so what are we doing to make all that less of a drag or a friction point for you?
Yeah, that's a great question. I mean, technology is the key to those efficiencies. And let me put some numbers to it just to give you a feel for it.
I was told there'd be no numbers.
I'm going to break our own rule then. You know, back in pre-COVID, 2018, 2019, you know, we were generally selling between pre-arranged funeral and pre-need cemetery. We were selling about $1.8 billion of pre-need sales a year, utilizing a Sales force in the, I'm going to call it 4,300-4,400 in terms of FTEs in that situation. When you roll forward to post-COVID, the $1.8 billion is more like $2.8 billion and the $4,300 is more like $3,700, and so the only way that math works is utilizing technology. Now, prior to COVID, we had already invested in technology. We already invested in the Sales force CRM system. We invested in a much more simplistic point of sale system that was tablet-based in front of the consumer, customer-facing technology to make something more efficient, quicker, easier.
We started investing in virtual technology, whether it be Zoom, Webex, et cetera, et cetera, et cetera, to do this more virtual with families, but what did COVID do? COVID forced the issue. There was no way to go about continuing that pre-need sales activity without that technology. That forced those sales counselors into the CRM system. That forced those sales counselors to use Beacon, forced those sales counselors, instead of driving 45 minutes to somebody's home and driving back and et cetera, et cetera, that forced them to use virtual technology to do those types of sales calls with the customer-facing technology of Beacon, and that's what brought that about and brought those efficiencies about that I described to you. We want to obviously continue that evolution as we go forward.
I think we could get probably a lot more out of our Sales force CRM system and use better technology and continue to go down that path. I also think we could take some of that pre-need technology of Beacon and bring it into probably a more efficient at-need arrangement process as we move forward. So all of these things that we are investing in, and we've even gone out in our guidance that, you know, from a digital perspective, you know, we're going to invest upwards of, you know, $20 million-$25 million this year alone in terms of continuing that technological path. But that was the key to the efficiency. And we will continue to look for ways to make it more efficient as we move forward.
What about the turnover? Have you made a dent there?
We really have. I mean, the turnover of that sales force, you know, if we talk 10, 15 years ago, it was 100%. It was significant. Now it's probably half that. Right now, you're still going to have some turnover. I think the turnover statistics are a little skewed right now because we continue to change the way we are doing things in SCI Direct and with a new general agency agreement that we said we'd talk about at the end. So that's a little bit of skewing some of the turnover right now. But as a general statement, we've made leaps and bounds in terms of settling that statistic down and investing in our sales force and particularly our personnel.
I got a question that kind of stumped me, so I'm hoping you can help me out. It's kind of a fine point, but I thought it was interesting. So let's say you buy, you know, the issue with funeral home is the pre-need's all deferred. It was, and you know, your deal's making that, bringing more of that forward. But let's say you buy a typical funeral home that's not doing any pre-need. How long does it take when you layer in your pre-need for that to show itself in the financials? And what kind of lift do you get, like five, 10 years down the road, like volume that you're capturing that otherwise wouldn't have been captured without that kind of program in place?
Yeah, it's rare for us to come across that M&A activity. And if we do come across that, it's usually not in a larger metropolitan market. It's more in type of a rural area. And as you know, we would pass on that deal in a lot of those situations. You know, generally, when you sell pre-need, the average life of the contract is 12 years, but that's an average. You're going to start seeing a little bit of lift, my guess, in year three and four in that situation where you start seeing some things come out of the backlog in that particular case. But as a general statement, we don't come across that very often.
The type of business that we're going to buy is a larger, it's independent, but it's a little bit institutional to the extent where they'll have, you know, upwards of five to 10 locations in a market in a lot of these situations, and they have an active pre-need program. Some of them are backed by trust funds. Some of them are backed by insurance. It just depends on how that particular family grew up and what they believed in and et cetera, et cetera.
It's more about building what they have versus something else.
Exactly. It really is.
What are you able to do there, like in terms of build?
We're able to significantly change it. You know, we're very good at selling pre-need, as I've already mentioned with the statistics, even though we're not allowed to use numbers today, but we're very good at it, and we're able to come in and affect change pretty dramatically, pretty quickly. However, as I just described to you, you may not see that coming out of that business for three to four years. It's not an instantaneous effect. You'd have much more of an instantaneous ramp-up early on in, let's call it year one, year two of a pro forma in the cemetery business.
But that takes a little bit while as well because what we're doing is we're coming in and investing capital into the inventory and tiering a cemetery a lot of times, or, you know, doing it a little differently or a little better than maybe what the independent was able to do just because of the size of our capital that we're able to do it. And that takes a little bit of time as well. So a little quicker ramp-up in a cemetery acquisition than the funeral segment as we talk about pre-need, but still a little bit of delay. It's not necessarily day one in cemetery because we want to invest some capital, tier it into the high-end, medium tier, et cetera, et cetera.
All right. Now, time to eat our spinach. So, you know, recently the company did an agency switch in the funeral side. We labored over a note, so if you want to look at that, we estimated by the time it was fully baked, and this will be a few years, it was about a $0.50 good guy to EPS. And so our numbers would be it's about a $0.15-$0.20 lift this year versus last year because you started at the middle of the year last year.
And so when we looked at that and we looked at the assumptions around the core business, it looked pretty conservative because you're getting that lift. So yeah, if you want to look at some work we did on that, I would point you to that. But let's just kind of take it from the top and describe this as somebody who's never looked at this before.
So I used some numbers before on pre-need, you know, $2.8 billion and such. But let's talk about funeral because this is a funeral situation. Of that amount, about $1.2 billion of sales is the pre-arranged funeral. That's the peace of mind. That's someone, a consumer that's coming in and wants to pre-arrange their own funeral and make their own arrangements. There's two ways for that consumer to fund it, either buying a life insurance policy or giving us the money that's placed into a state-mandated trust fund. So of that $1.2 billion, we're going to start by splitting it. $900 million is related to our core 1,500 funeral homes that we have at SCI. $300 of that is related to a different model that we call SCI Direct, which is a lower price point cremation lease model that's not very capital intensive at all.
The first thing that you're going to know about the $900 is that we're going to, we sell about two-thirds of that amount as insurance contracts and about one out of every three is a general agency or trust contracts. That mix is not going to change much. There's some state laws. There's some other situations. It's not going to allow us to change that mix very much. What you are getting, though, on that two-thirds of that $900 million are better economics in the new deal as we have described it. We used to get something in a commission on an average in the mid to high 20s. It's still being baked. We're still moving through the transition. These are new products for our Sales force. We can get deeper into that if you want to.
But ultimately, we hope that that gets into more like the mid-30s, which is probably what we've seen and what we've disclosed in our 10-Qs as public information. The other piece to the pie is the $300 million related to SCI Direct. That was 100% trust that we're trying to move to 100% insurance to the extent that we can. Now, that model is changing overall. As we've said before, we used to deliver earned products right then and there, and we've ceased doing that. And so any incremental general agency revenue that's coming in for SCI Direct is really washing a decrease of recognized revenue because we are no longer delivering some of these products and merchandise, and they're going into the backlog of future revenues. We will recognize those revenues when we deliver those products and services into the future.
But what that does mean is that what's coming out of the backlog at SCI Direct is going to have a higher average sale price. And that's going to be lucrative into the future for the models. In fact, as Tom said on the call, what came out of the backlog for SCI Direct in this quarter alone was 10% higher in Q4 2024 versus Q4 2023. And you can expect better economics as we move forward. So the real bump that John was talking about is related to the $900 million of core pre-arranged funeral sales that I described to you and two-thirds that's actually insurance that has a better economic factor. You mentioned you thought that was about $40 million. I think Tom said that may be a little bit high, and I agree with that for $25 million.
Do you agree with your boss?
Yes, I do. I think that could be somewhere between $30 million-$35 million or $30 million-$40 million, perhaps. But that's kind of generally what it is. It's a play on a new vendor. We're going to continue to work through the first half of this year in terms of getting it all up and running. There's some complexity related to the new products, which I don't know if you want to get into or not, but we'll get it up and running probably by mid-year, as we described and as Tom described on the last conference call.
Maybe a simplifying way to think about it, if we looked at the SCI Direct price point today, once you fully capture the backlog of earned sales, where does the price point move from time zero a year to say a year seven or whatever it is?
Yeah, I think it could be significant. I think it could go from a $2,500 price point to maybe a $3,500 price point coming out, and that's over a long period of time.
Very little, no incremental cost. That's just pure. So $2,500 goes to $30. And I think the number we use, we were also trying to back into acquisition. We were getting, I think, $40, Parker, correct me if I'm wrong. We were trying to get the total good guy of a full year of the agency deal plus a full year of what you bought because some of the acquisition stuff was in the back half of the year.
Well, the way I describe it, you know, again, if we want to talk numbers, you know, we have a little over $4 billion in revenues, and our revenues are going to grow about 5%. And let's just call that a couple of million dollars. I think from the same store comparable operations driven by average sale price in the funeral segment and pre-need cemetery sales and the cemetery, you know, segment, you're going to get close to probably half of that growth just from the organic, you know, business. So where does the other $100 million come from?
Well, it comes from M&A, and it comes from that general agency agreement. You know, if that general agency agreement is $30-$40, then you expect that the non-comp, which is the M&A and greenfield location, you know, revenues coming up to par, you know, are $60 million-$70 million of that piece. That's kind of how I very simply break up the revenue growth.
You can't make it too simple for me. You're not making it. It's impossible. Just lastly, and this is a little bit in the weeds, but this gets, it's funny. We've done, Parker and I, and so we've probably done a million SCI calls over our career. And like a third of them, people just can't help themselves. They get into the accounting weeds, and we never find them again. We have to send out a flare, and they're down here. And like we had one, I think we did 12 calls with one investor, and they just could never. But one of the things we try to steer people away from, but maybe you could help simplify this. So when you sell a pre-need funeral into the trust, you know, there's no revenue until the funeral happens.
So the revenue recognition, you know, you got to pay the salesperson out. You got to pay the salesperson cash commission. You get the money over a period of time, four to five years, then 12 years, the funeral happens. But maybe talk a little bit, but you know, that's not the static thing. So between year one and year 12, what sort of cash is the company able to extract from a trust, either through management fees or other that, you know, keeps the funding minimums there, but maybe not, it's in the cash flow, but it's not in the revenue line. And so if we started theoretically year four with $5,000 in the trust, what does that look like in year 12, kind of with your average returns, but then accounting for the fact that you pull some cash out along the way?
I mean, as a general statement, we invest those funds, and you know, it fluctuates, but we generally think we earn about 7% a year. So that $5,000 will grow 7% per year and come out of those trust funds accordingly. Now, in the at-need environment, you know, we're raising prices, you know, call it 2%-3% a year. What you should see over a period of time, if that entire equation works, is you should see something that was sold 10 years ago come out of the backlog at a higher average and therefore cash coming out at what your at-need sale price is today. As a general statement, if you go look at the releases and such, that has occurred. You know, what's coming out of the backlog is a few hundred million dollars.
But it's not quite as simple as $5,000 compounding at seven, because you pull out 1% for management.
Yeah, we pull out about 1 1/4 % as a management fee for all the back office of managing all of the, you know, it's a $16 billion backlog. That's a tremendous amount of contracts when you think the average price is about $5,000-$6,000. So we have a huge administrative burden, much less reporting on each individual state that's audited in each individual state. So we're not necessarily making money on that fee that we pull out, but it's helping cover some of our overhead costs.
But that beats in the return. And then also, if a trust, quote unquote, gets overfunded, what are the rules about, let's say the minimum is $7,000, you got $13,000 in the trust? What are the rules about?
You're not going to pull that out as a general statement until the contract turns at-need. This is there to protect the consumer. The rules are pretty clear to protect the consumer. At least in our situation, we're not very aggressive at all on this. We're not going to try to go in and pull out, you know, funds that are of any material that I should mention to you. I'm sure there are some here or there in certain states, but as a general statement, that's not going to be something that's going to.
But states don't require 100%. There's some states that require 100%.
There's California requires 100%. There's some Texas is 90%. I mean, it just depends. But that's just retainage that we get to keep day one to help offset the selling costs of the sales counselors.
All right, we got two minutes. Anybody out there have a burning question? Really? Come on. You guys make me sad.
Breakout session.
Yeah, we'll finish up two minutes early. Thanks, everybody.
Thank you.