Thanks so much for joining the BofA Healthcare Conference. My name is Joanna Gajuk. I'm the Healthcare Facilities and Management Analyst here, and it's my pleasure now to host this session with Service Corp , which is the largest operator of funeral homes and cemeteries. It's not necessarily healthcare, but I guess it fits well with my coverage universe. Today with us is Eric Tanzberger, who's the CFO. I guess the plan is to go right into Q&A, right, Eric?
Sure.
You're good with that? All right. I guess maybe first, big picture question. One of the topics we've been talking about for many years now, but COVID, excess deaths, pull forward effect. Kind of bring us up to speed where we are right now in terms of, is there still more of that headwind? Are you expecting to grow maybe next year the funeral volumes? Maybe we should start there.
OK. Let me give you a little bit of background of what happened to us in COVID. As Joanna already mentioned, we're the largest owner of funeral homes and cemeteries. We own 1,500 funeral homes, about 500 cemeteries, about a $4.5 billion revenue company, about a billion four-ish of EBITDA per year. Ultimately, we touch about 700,000 families a year. 350,000 of those families have, unfortunately, had an event in their life where they need our services in our funeral segment. The other 150,000 essentially do the same thing. It's the same type of environment, but in our cemetery segment, one of our 500 cemeteries. Then we touch another couple hundred thousand families in the prearranged environment.
That is when people are signing up early in terms of generating their wishes contractually and funding funerals that are prearranged or buying cemetery property and merchandise and services on a pre-need basis. During COVID, as Joanna was introduced in and asking about, during a two-year period, we performed about an extra 130,000 funeral services, unfortunately. Those are tough times for everyone in the industry and everyone, as we all know, across the globe. What happened, though, is like other industries, those 130,000 were pulled forward from future years. A lot of it was acute. In other words, it would have been situations that occurred in 2021 that would have occurred in 2022, for example, in terms of events. We are, several years later, feeling the effects of what we call the COVID pull forward effect.
We expect to have our funeral volumes this year be generally flat compared to prior year, which means that we believe we are kind of in the period of normalizing out what we call the COVID pull forward effect. Your second question was, can you grow from here? The answer is really twofold. In the short term, as we continue to work through the COVID pull forward effect and normalize the company, we think we will have a year or so of what I would characterize as volume, but we expect it to start inching up. Over the longer term, we expect to have a macro effect to our industries as well as our other industries that are related in terms of the baby boomer generation.
The baby boomer generation will be a demographic play, a demographic tailwind to this particular industry, like it is affecting other industries today. We think that is still a couple of years away in our models. I would actually say it is more like at least four to five years away in terms of seeing that type of volume. In the meantime, we are working with those families to document their wishes and prearrange their funerals and such. Essentially, that has resulted in a backlog of deferred revenues on our balance sheet that amounts up to $16 billion, or at least four times our annual revenues. It bodes well for us in the future in terms of demand, in terms of incremental funerals that are coming out of that backlog that we will be servicing. Where we are today is kind of a flattish environment.
To answer your question, I think 2026 will probably be somewhere around that. Maybe we'll see some growth. We'll have to see as we get later in the year, and we'll give specific 2026 guidance at that point in time. There is a demographic play where there is what we've called a tailwind coming to this industry that we believe is going to create incremental margins with that incremental volume and be a nice growth scenario for our company that's incremental than what it exists today.
Specifically on Q1 volumes, right? We're better than expected, but I guess you still expect kind of flattish for the year. Can you walk us through the thought process there and how much, I guess, was volumes were related to flu? Because obviously, we've seen a higher flu activity early in the year.
Yeah, volumes were up about 1.8% in the quarter. I will tell you that it was a little bit of a softer comp compared to the prior year. You have to take that into account. As you said, Joanna, it was above our expectations. It could have been a lot of things when you look at 90 days in our particular industry. We have visited with our field management, and obviously, there was some anecdotal feedback as it relates to the flu season. We are cautious on that, although we think that was a piece to that equation.
The reason why I say we're cautious and we're saying we could end up flattish compared to prior years is because what happens in a flu season, as a general statement, is that you pull forward volume that would have occurred, funeral services that would have occurred in the second and third quarter into the first quarter. Until that really pans out and we understand it a little bit better, how much was flu, how much was not, which will pan out in the next couple of quarters, our advice was always, hey, be careful about adjusting your annual. We're not adjusting our annual guidance, and be careful about adjusting your annual model as it relates to our company, as it relates specifically to funeral volumes, because a good amount of that could have been flu. Anecdotally, we had some feedback that it was.
Ultimately, that could be a pull forward that's intra-year among quarters and such.
Another interesting dynamic in the funeral segment, specifically I guess we started last year into this year, is the new contract with the insurance vendor.
Yes.
Can you talk about that, sort of the reasons why you changed the vendor and the benefits that you expect from that into this year?
Right. What Joan's referring to is what I referred to earlier, which are we have a sales force that's about 3,500 individuals that are out into communities that are selling to families, both cemetery products and services and property and funeral products and services. The split is about $2.6 billion a year of sales production right now. About $1.4 billion-ish is in the cemetery segment, about $1.2 billion is related to the funeral segment. Ultimately, there's a component of that, let's call it $800-$900 million, where we are selling to a family. Instead of taking money from that family and putting it into a state-mandated trust fund, we're having that family in a relationship that we have buy a life insurance product to support that and to give that family the financial assurance that they have related to those funds.
We've been working with a company for 20-plus years and have put that out to an RFP a couple of years ago and have made a transition to a new insurance company that had better economics is the way to describe it. Part of that is when we sell that, we are an agent of that insurance company for that life insurance policy, and we get a general agency commission. In the prior economics, it was something that could have been in the high 20% area. It could have been 28%, 29%, even 30% in certain areas. Under this new arrangement, looking at so far as we move forward, it's more on the lines of the mid-30%, maybe even in some instances the higher 30% of it. That depends on the specific product that you're selling geographically and where and what your sales force is selling.
A lot of that is rolled out kind of mid-year in 2024. We are seeing the effects of that tailwind of selling that production, but at a higher general agency rate, which is both cash flow and revenues to us right away. We are going to lap that probably for the most part for our core operations, which are the 1,500 funeral homes, probably mid-year this year. We also have a smaller segment, which we have called SEI Direct, which is a direct cremation lease front asset-light business, which is just not a service component in terms of celebration of life like a funeral home would do, but ultimately just the cremation itself and the urn.
From that perspective, we're changing that business as well, but it's going to take longer to go through this metamorphosis because that business and that sales force was just selling products and services that were supported by the trust funds. Now you're taking those particular salespeople and you're transitioning them away from somewhat of an easier pitch and interaction with a family and selling insurance products, which means you have to get educated, get up to the systems, understand the products, get licensed in many of the states. That's a lot longer-term process. In the big scheme of things, that's $250 million of production of that $1.2 billion. It's not overly material, but that will not lap itself, and that will go well into the year.
I do think that will continue to grow our prearranged funeral sales in the core business. From that perspective, I think you'll continue to see more general agency revenue be produced and be a growth factor, but we'll kind of lap the immediate rate increase that we've experienced for the last, let's call it nine months now, and we're getting into one of the last quarters of that in the core business.
Would you say, given the improved economics on that contract, would you expect to also grow the base as in like the use of insurance going to be higher versus the trust funding?
Yeah, but that's already, I do believe that, but it's already occurring as we speak. I don't think there's another play there where we're still using trust funds is where we still have to use trust funds. The easiest example to understand is the state of New York. You can't sell insurance to support the prearranged funeral product. Under New York laws, you have to sell the trust fund mechanism. So we're kind of maxing that out, Joanna, already. I do think there's movement in SEI Direct, and there's movement to continue to grow prearranged funeral maybe in the low to even someday in the mid-single-digit type % range.
Maybe switching gears to prearranged but cemetery sales production, which was actually down in the quarter. There is also some talk during the conference about the economy and where things are shaking out there. There are some implications for healthcare, but I guess for your business even more so. Can you talk about that? Are you seeing sort of the reduction in propensity for people to transact based on just when they think the economy is headed and that is what is happening and that is what you see in the cemetery pre-need?
We haven't seen that yet. To give you a more thorough answer, we have to bifurcate that production of pre-need cemetery, which is roughly about $1.4 billion a year. You have to split that into the less than $80,000 price point, which we call core, which is the vast majority. That's 85% of the sales as it relates to production dollars. North of $80,000, which we call large sales, those are the private family estates, the private mausoleums for the families, the semi-private, that type of thing. If you've seen us tier our cemeteries, you'd see some very high-end property, kind of like a real estate play, if you will. From that perspective, that's about 15% of the production. When you take what we call core, which is the $80,000 or less, or the 85%, that could be subject.
That's a discretionary purchase as a general statement, or at least roughly half of it is at least. There are situations where a family member needed our services because there's been an event, that family member has been interred in our cemetery, and the family, because of adjacency issues, are going to want to buy cemetery property around their loved one. That's pre-need, and that's kind of less discretionary. As a general statement, there is a discretionary component to this, and that could be affected by macroeconomic events. When you start getting into the price of energy, the price of food, the price of other staples, et cetera, et cetera, that could take away discretionary dollars from that consumer. We've seen that happen before. It's not really happened so far in the first quarter, as we talked about on our call.
We also mentioned on our call for the first quarter that April was still a good month, and we'll see what happens the rest of the year. At the time of the call, which was late April, the tariffs were blowing a go, and it was a little bit darker outlook than what it was, than what it is as we sit here today. We thought, okay, if we can grow it low to mid-single digit, maybe we can only grow it low single digit. Now, the higher end of the spectrum, the 15% of the sales that are north of $80,000, which we call the large sales, which are some of the larger estate properties that I just described, that's a little different dynamic. It could be discretionary as well. Ultimately, it is not necessarily the daily price of gasoline that's affecting that consumer.
Those are high-net-worth families that are doing it as a general statement. That is where you start looking at what is the stock market doing? What is the real estate market doing? Both can be moved to some degree by discretionary forces. To some degree, both are a little bit more stable than most people realize because a death can occur. When that happens, the family is going to do something in a cemetery, and they may buy pre-need property around it from an adjacency perspective. There are also a little bit different forces when you got it. You really got to understand the difference between that high-end sale and that core sale.
Talking about this, what gives you confidence that you can grow, like you said, I guess, low single digits for the year in pre-need cemetery sales production? Curious to know if there's any updates since April. How are things, I guess, going in May so far?
I think that funeral volumes is a big component of it. If funeral volumes ended up being flat, which last year they were down 2.5%, and again, I already described to you the formula where there's adjacent pre-need sales from those events, that's going to be a natural driver to this. That's going to get you from something that would have been flattish to something more positive in terms of low single-digit growth. We also have a unique asset in our 500 cemeteries, and that allows us to continue to tier and develop new higher-end property offerings, I should say, within the cemeteries. We also have decent pricing power. Within those cemeteries, there's unique assets is the way I'm going to describe our 500 cemeteries that have pricing power in communities and such.
For all of those reasons, and I think you are just one more year out of the COVID pull forward effect, frankly, which again is generating funeral volumes, which is your number one lead source for your pre-need cemetery sales force. I think for all those reasons, I think we are confident we can grow cemetery. Right now, we are hedging because of the macroeconomic outlook that changes daily almost. From that perspective, we have kind of declared it low single-digit % growth for the rest of the year, but we will see what happens.
I guess your long-term outlook for the pre-need cemetery sales production is more like mid-single digits?
Yes. Long-term, yes.
Yeah. Do you think you can grow this way, I guess, in 2026 and after? Because also the pre-need, the pull-forward effect applied to the pre-need cemetery as well, right? Because there was a lot of activity, a lot of cemetery properties were purchased in a short period of time on a pre-need basis too. I wonder how much there is, I guess, to be sold.
Yeah. I think at the end of the day, in terms of penetration, there's a ton of room on penetration. I don't think we're worried about that. There is a huge amount of customers out there near our cemeteries that will eventually interact with us sometime in the future, and we'll sell pre-need cemetery property associated with that. So we're not too concerned about it. For 2026, we'll have to wait and see. I mean, we have to really get 2025 underneath us and see where all this macroeconomic events on the core, as well as some of the high-end stuff as well, in terms of where it landed before we comment on 2026.
Ultimately, what I'm saying is there are demographics that are going to affect this industry to the positive in the funeral volume, which, as you linked them correctly, is going to also create a situation with better leads and more leads in the pre-need cemetery world. We believe that we will be able to grow mid-single digit % of pre-need cemetery for all those reasons that we've described today. I just can't comment yet on 2026 yet until we get through 2025.
No, exactly. A couple of these macro topics and such, but one of them is tariffs.
Yes.
Right? Maybe we can talk about that, your exposure. You guys alluded to the idea you have a multi-year contract. Some of them sounds like they have some caps in there. Maybe walk us through. I know things change daily, but I guess just high level, right? If there was something to be said about cost inflation and some of these items, like how this would impact you and what are some of the things you can do to try to mitigate if that was to happen.
Yeah. I'd start foundationally by making the statement that the vast majority of our supply chain, especially in these situations that you're referring to, are associated with long-term supply contracts that have cap stipulations in them and such that we're very comfortable with. We got to be very careful about talking specifically about which vendors and what levels and such. As a general statement, we feel very good about our supply chain, longer-term production contracts, and our partner contracts that we have. When you talk about what's eligible, when you think about it that way, you're talking about caskets, some of which are assembled outside the U.S. You have granite that comes in for the markers in the cemeteries. You have urns, which are used for cremations. You have bronze, which are other types of markers in certain of our cemeteries.
That whole spend is north of a couple hundred million dollars for us. Of that spend, at least 60% of that right now, even as we speak, is domestically sourced. You are talking about, okay, 40%. In that, we think a lot of it is covered by certain tariffs, especially some things that are assembled down in Mexico. You are getting to a small piece of the puzzle. I think the other thing that now you are talking about, what could you do? What I would say is we feel very confident about our flexibility. We have already actively managed it. We have already proven that we can actively manage it. What do I mean by that? You can source from India versus China. You could also source from U.S. versus India for a lot of these products.
We're already doing it in the 60% that I've described to you. Whether you do that long-term or short-term depends on, well, what happens with all this noise that's changing daily. We haven't made any type of long-term decisions, but we've certainly done a very good job working actively and understanding what we can do, what we've already done in certain situations. Of course, again, going back to the foundation that we have long-term contracts that are protecting us right now. For all of those reasons, I don't think Service Corp is the one to turn to in terms of the tariff exposure. Could we have some stuff rounding on the sides? It's possible. We'll have to wait and see how 2025 plans out. Right now, we feel very comfortable with our guidance out there for 2025.
We do not anticipate any type of modification of anything with the word tariff in it, at least with the existing guidance in 2025.
Just since we're talking about costs, maybe we can talk about margins by segment. I guess cemetery kind of had at some point said something along the lines of after the COVID, it should normalize at a higher level than it was pre-COVID. I guess there's some funeral discussions now. I guess it depends on how the volumes play out. Maybe walk us through kind of how we should be thinking about this, what needs to happen to see margin expansion in funeral versus cemetery and the other, I guess, items that go into the calculus for the margins, how we should think about it?
Yeah. So the basis for all of this is that both segments are a 60-70% fixed cost structure. When you put more throughput through that, you're talking about 60-70% incremental margins, which is going to create the nice margin expansion as we continue to have more throughput through our system, which again, I'm circling back to the demographics that are coming to this industry in the near to medium term in terms of years. When you see that, you should see margin expansion for our company. Now, what has happened today? The baby boomer generation has affected the cemetery segment already. It has because of the pre-need cemetery sales that we've been describing today. When we describe that, the average age of a family or a consumer that's coming to us is in their early to mid-60s.
The baby boomers have already kind of crossed over that. That has created a nice trajectory upward over the past few years of pre-need cemetery sales production. When you do that, you have more volume, incremental margins, et cetera, et cetera. To just wrap it up and say this more succinctly, many years ago, a decade ago or 15 years ago, it was a mid-teen type margin business, the cemetery segment. Today, it is a low 30- to mid-30% range. What grows from here when you start seeing more throughput? When you get through the COVID pull-forward, things start normalizing, and you actually start growing throughput. You will notice that through funeral volumes.
When that does start occurring, I think you're going to continue to see some decent margin expansion, whether that's 50 basis points a year, 80 basis points a year, but that should be the formula. That's what it looked like pre-COVID. I think you'll continue to see that as we get out of this normalization in the COVID pull-forward post-COVID effect. Funeral segment is very similar, except for the revenues to be recognized, you have to perform the services, which means that we still have a few years to go before the baby boomers really, the demographics affect the throughput to the funeral segment. When it does, you should see again some margin expansion because of the incremental margins that I just described to you as you put more volume through that funeral segment. Today, it's a 20-21% area in terms of funeral margins.
I would love to see that expand. I'd love whereas the baby boomers affect us years from now, I'd love to see that more mid-20s. It is going to take throughput for us to go through and see those types of incremental margins fall to the bottom line.
What about cemetery? How do you think about cemetery margins?
You know, I think cemetery could get to the mid or maybe even the high 30s. Again, it's the same thing. You need throughput. We run a pretty efficient cost structure and a pretty efficient company already. There's not a tremendous amount of cost that you can take out to help expand our margins. This is going to end up being a throughput play as the demographics affect us. It's going to end up a situation where you're performing more funeral services, you're performing more cemetery services, and you're getting this more incremental margins, and that falls to the bottom line and creates expansion.
I guess we have only a few minutes left. Part of your growth algorithm also includes acquisitions, right? You clearly accelerated the spending in 2024. I guess it was like $180 million and then $60 million in real estate. I guess should we expect something comparable? I know you have this target per year on average, right? Is this an indication of changing dynamics in the marketplace where you have more, I guess, sellers and fewer buyers? Maybe in that context, also talk about any pressure on multiples and how you're paying for these assets.
Yeah. We generally spend about $100 million a year. The target or the range or the guide is $75 million-$125 million on the acquisitions. There's no pressure on multiples right now. We're generally spending 8-10 times EBITDA on a pre-synergy type basis. We're getting post-synergies, which could be a couple turns. You're generally getting in the low double 12%-15% after-tax type IRRs in those situations. The pipeline, Jenna, that we have that we talk long-term for what I would call major independents is quite strong. It continues to be strong. That's not the issue. The issue is it ebbs and flows because what we're not going to do is force a 3rd, 4th, 5th generation family to sell based on price. We've been very disciplined as an executive management team for the last 20 years not to do that.
We're not going to do it. Ultimately, that means that we have long-term relationships and we need that family to be ready. A lot of times, there's, believe it or not, a lot of family dynamics that these independents have to work through. When they get there and they raise their hand, we're fast. We can go very fast. We get very nice returns. It's a wonderful use of our capital. I expect that to continue. I don't know if it's going to end up being $180 million like it was last year. I hope it is. The pipeline would allow for that. The question is, would the family dynamics allow for that for them to raise their hand?
Right. What about real estate purchases?
Real estate, we're just opportunistic. When we see things that make sense to build funeral homes on Greenfield, we'll go ahead and do that. We have a team that's out there looking each and every day. Periodically, much less, maybe one time a year, maybe two times a year, we're also looking for larger swaths of land that you can actually build cemeteries on. That is fewer and far between.
Are there still markets where there's potential for cemetery purchases?
Absolutely.
Okay. It sounds like you're the only one to do that in the.
Yeah. We haven't seen it takes a lot of capital to start a cemetery, but they have wonderful returns. It's just longer-term capital.
Got to be patient. All right. That's all the time we have. Thank you so much, everyone.