Good morning, 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 Chief Financial Officer Eric Tanzberger to speak on the company's investment story. Now, we're drawn to Service Corp 's leading position in the funeral services and cemetery offerings industry, its opportunity to capitalize on the favorable demographics of an aging Baby Boomer population, and its strategy of providing pre-need contracts to gain advanced market share and garner a backlog to build its Trust Fund portfolio. We're using a fireside chat format today. I'll ask Mr. Tanzberger some high-level questions upfront, get us an overview of the business. Later in the session, I'll facilitate audience questions, so please feel free to send those in to me throughout, and I'll make sure that we get them to the CFO before we end the session.
But in the meantime, let's get started with the fireside chat. Starting off, could you please discuss your overall business model and strategy?
Yeah, sure, Scott. First of all, thanks for having us and everyone at Oppenheimer as well. I'd also like to note that's the first time in our lengthy relationship that Scott has ever called me Mr. Tanzberger. Let's let the record show that, if that's how we're going to kick this off.
Might happen again.
Yeah. We are the largest owner of funeral homes and cemeteries in North America. The history of the company, in 30 seconds or less, was an EPS accretive roll-up model that started back in the 1970s. The bad news is those former management teams in the 1970s and 1980s, and even in the early 1990s, kind of lost sight on return on invested capital, instead drove the EPS accretion, ended up overpaying for acquisitions. There was a pivot or an event in 1999, 2000. We became a senior management team in 2002. We sold 21 of those 23 countries. We are in the United States and Canada. Canada is about 10% of our business. We own about 1,500 funeral homes and 500 cemeteries. The funeral business has, you know, overall market share, you know, approaching kind of 14%-15%. The cemetery has market share approaching 28%-30%.
The good news back in the 1960s, 1970s, 1980s, and 1990s is the former management teams really bought an unparalleled group of assets in terms of cemeteries, in terms of 35,000 acres that are really in the middle of major markets. It is just unprecedented, the barriers to entry, because those cemeteries are huge. The funeral business is kind of a slow-growth business, which is a play that we have been strategically staying up with the consumer in terms of criteria, which has changed over time to less of a formal process and formal service to really a lighter celebration of life. We have really become party planners and event centers and that type of thing.
There is a nice future material play to our industry and to our company when the funeral business experiences an expected increase in demand in the sense of the Baby Boomer generation turning to what would be an average age of 82 - 84 years old when people need our at-need services in our funeral segment in our industry. The cemetery segment's a little different because it's more driven from a pre-need perspective, which means selling merchandise, property, and services before people need it. The average age of that is about 65 years old. The Baby Boomers, by definition, have already crossed over that. We've had some really nice growth at our company related to our cemetery segment.
To wrap up the introduction, the algorithm is about an 8%-12% earnings per share growth that we've been able to maintain pre-COVID for, at least 10 years or so. That primarily is about 5%-6% of that is coming from organic growth, primarily driven by the cemetery pre-need sales that I just mentioned. Then we have about 2%-3% what I characterize as inorganic growth, meaning capital deployment in the industry itself. That is M&A and new build construction opportunities. Lastly, another 1%-2%, 2%-3% is going to be our share repurchase program, which we believe heavily in.
We started this journey back in the mid-2000s with 345 million shares outstanding. Today, we have just over 140 million shares outstanding. We have bought well over half of the company back over this period of time. Scott, that's kind of the answer to your introduction in the first five minutes or so.
All right. Great job, v ery thorough, appreciate it. It certainly earned you another, Mr. Tanzberger. So looking closer at your at-need funeral and cemetery businesses, growth was elevated during the pandemic, followed by a pull-forward stabilization period. Please share funeral volume trends as well as perspective on the broader timing of demographic tailwinds. Thanks.
To start at a big picture, we interact with about 700,000 families a year. A couple hundred thousand of that is on the pre-need side, where we're selling products, merchandise, and services both on funeral and cemetery on a pre-need basis I've described earlier. 150,000 of that are actual interments into the 500 cemeteries. That's when a death has occurred and you are interring a loved one or a family member into one of our cemeteries. 350,000 of that are the actual funeral services that we perform on average. That's a good number for today's volume, for example. During the pandemic, though, as Scott has mentioned, we performed about an extra 130,000 funerals during a, let's call it a two-and-a-half-year period at the peak of the pandemic. Those funerals had to come from somewhere.
Ultimately, we at first thought that it would be a very acute pull-forward from, you know, if we were in 2022 or 2021, it would be from 2022 and 2023, maybe. As it turns out, it has been a longer tail in terms of the pull-forward effect, especially as we got halfway through and later half of the pandemic, which we were servicing primarily people that were in their 40s, were in their 50s, were unvaccinated. That is a long pull-forward, as you could imagine, on average. What has happened is we had this big spike in volume up, you know, mid-teens-type percentages in volumes during the COVID pandemic. The subsequent, you know, so to speak, hangover from that demand has come in mid-single to low double-digit declines in, you know, in funeral volumes. That has now all, for the most part, stabilized.
We thought it would stabilize a little bit better than it was in 2024. It was still down about 2%-2.5% in terms of volumes. We were hoping it'd be more flattish. Our current guidance in 2025 is more flattish in terms of funeral volumes. We're off to a very good start. We had almost 2%, I think it was 1.8% to be exact, growth in funeral volumes during the first quarter of 2025. That has been something that's been, Scott, as you know, very material to our business, very material to our model. We're glad to say that we're talking about it less and less as what we call the pull-forward effect becomes less and less material to our company and to our industry.
Great. Thanks. Starting with funeral, it's a funeral revenue per service. That's been steadily growing in the low single digits since the pandemic. Please discuss the drivers and provide a long-term perspective there. Thanks.
Yeah, I think it's a general statement. As long as you're delivering in a relevant fashion to your consumer, you're going to have inflationary-type price increasing, you know, in the funeral segment. What I mean by that is we've gone through a metamorphosis over the past 15 years where you walk into a funeral home, you know, it was dark, it was traditional, it was a chapel. Now we've spent a tremendous amount of capital over the last 10 or 15 years reformulating the actual infrastructure of those assets where they're more open, they're lighter. There's really not chapels anymore. They're more event centers with round tables and such. It's really, again, as I said, it's turned into a celebrant, leading a celebration of life for those consumers. We've been very, very key in staying relevant. With that, our pricing has really hung in there.
The most important thing you should get from that is the consumer finds value in the service component, which has allowed us to continue to have inflationary-type increases, you know, in the particular funeral segment from an ASP perspective. I think long-term, to answer your question, Scott, I think I'll, you know, we would continue to see that. During the inflationary period in the last couple of years, you know, something that we'd normally raise prices 2%-3%, we're raising prices, you know, 4%-6% in that funeral segment, you know, to stay ahead of inflation. We're back down to, you know, kind of the former now as inflation has come down. I still see that path as a relevant path as we move forward for several years.
All right. Thanks for that. Let's go to funeral pre-need sales. They have the potential impact, revenue, market share in future periods. Could you address recent developments impacting the category as well as provide a long-term perspective on its potential growth at Service Corp ?
Yeah. When we're selling these pre-arranged and pre-need contracts to these consumers, what are we doing? In the cemetery segment, we're selling actual cemetery property and the interment rights to go into that property, whether that's a Mausoleum or, you know, a ground burial, as you would expect. We're also selling cemetery merchandise, which are markers, Granite markers, Bronze markers, and then the graveside services. On the funeral side, people are actually pre-arranging their funerals. They do that not from a financial perspective. It's purely a peace of mind issue. It's purely a, the average age is 72 years old. They started going to some funerals. I didn't know you could do that.
Could we do that for me? I don't trust my kids to do it. I don't want to pass the burden, you know, on to my kids, et cetera, et cetera. We sell about $2.6 billion a year in pre-need merchandise and services. About $1.2 billion of that is on the funeral side and about $1.4 billion of that is on the cemetery side. The funeral has been going through a metamorphosis over the last year or 18 months or so. That is that when we sell that under the law, you have to either take the money from the consumer and put it into a state-mandated Trust fund, or you have to have the consumer buy a Life insurance policy, which we will arrange.
Ultimately, we become the beneficiary or the signee of that policy. When we did that, we have a $16 billion backlog, about half is in trust funds and half is in life insurance policies. We have used the same life insurance company now for 25 years. We have just gone through an RFP process, and we changed it to Global Atlantic, which is a wholly owned subsidiary of KKR. With that, because of the rise in interest rates, frankly, and timing it correctly, which is, you know, a lot of luck, we ultimately got economics that are substantially better than what we have had over the last 25 years.
A general agency commission that we would receive, which would be both revenue and cash flow from day one, has gone from 25% - 30% of a sale, a face value sale, to probably, you know, 35%-38% of a face value sale. That has had a nice tailwind for us, Scott, as we have been implementing that in our core operations. We look forward to that. We'll eventually lap that, but there'll still be a little bit of that tailwind left for 2026 as well.
Great. Thanks, Eric. Let's go over now to pre-need cemetery sales. Or yeah, cemetery.
Got it.
Historically, it's been, you know, in our view, a major P&L growth driver for the company.
Nice.
For some reasons that we can get into. Could you please discuss drivers of the growth you've experienced in this category, how it's trending here, the start of 2025, an outlook over the balance of the year as well as longer term, and maybe some specifications on the timing of recognition? Thanks.
There are about five parts to that. Just keep me going as we go and remind me that I hit all of your five parts. I guess starting off the year, we've done well. We were down about a couple percentage points in the first quarter, quarter over quarter. That has to do with large sales versus our core sales, which I'll get into in a second. Let me start with the bigger picture. We sell about $1.4 billion. About 10%-15% of that every year in the pre-need cemetery space are what we call large sales, which are north of $80,000. That is a couple of $100 million, $150 million-$200 million a year. That generally is, like I said, 10%-15% of the total. Let's call it 13% on average of the total. It's been somewhat consistent.
What we call core is the other remaining, you know, 80%-85%-90%, which is everything below $80,000. You know, there are different consumers when you see that. To understand this sale, you have to understand a couple things that have been driving it. The first thing is the average age of the consumer that raises their hand and says, "I want to buy pre-need cemetery property," is generally in their early 60s. Essentially, as a very general statement, they have just perhaps, you know, buried a loved one, perhaps a parent. When they bury a loved one like a parent, they want to buy the adjacent property around their loved one. That is what creates the pre-need environment.
When you have Baby Boomers that are a larger generation, so more of them crossing over that 60 to 65, that has created a nice situation for us in terms of having more people to market to. It has been a big growth driver for us in terms of the number of contracts that we have been able to sell over a period of time. The second piece to this, which is very material that we need to mention, is that, you know, when we started this journey back in the early 2000s, like I described to you earlier as the executive management team, you would walk into a cemetery and it was not really a real estate play. It was a very homogenous situation. It was walk in, there are 1,000 plots per acre. Which one do you want? Just pick them. They are all the same. They are all priced the same.
Fast forward 15 years later, 20 years later, you walk into one of our cemeteries and you're going to see kind of a real estate tiering strategy that took effect where you're going to still have that beginning homogenous offering. Let's call that, you know, $5,000 in the Midwest and let's call that $10,000-$15,000 on the West Coast. You are going to go all the way up to, you know, the top, which is a private family estate and a semi-private family estate and a lake with property. I mean, you can tell we became kind of real estate developers. What that has done is really brought up that ASP to the extent that you could walk into a cemetery in California and buy a high-end family space for $2.5 million-$3 million. That's the part that makes up those large sales.
You can walk into Denver and that same piece of property may only be $200,000-$300,000. You can walk into Houston and it may be $600,000-$700,000. A lot of it is a real estate play and localized pricing and such, but you get the idea. Those two things, the baby boomers, the size of it, allowing us to market to a lot more people that want to have the conversation, coupled with the 10-15 year progress of tiering the cemeteries with high-end medium-type inventory is what has allowed us to be a big growth driver. By the way, essentially when we started this, has taken a 12%-13% margin cemetery segment business to a 30%-35% margin business. It has been a tremendous growth driver in driving that earlier 8%-12% EPS algo that I've described to you before.
Great. Thanks. We did cover it all. I think, you know, obviously great margin expansion there, as you discussed over the history. It was a five-part question. I think the only thing we didn't cover is what's the growth rate of that? What's it been historically? What do you foresee going forward?
It was pre-COVID, it was low single to mid-single digit type growth is how I would describe it. It was a combination of the two factors, not to repeat it, that we've already described earlier. During COVID, it had a huge spike to it. Why? Because about one out of two sales, or what we characterize as the number one driver or lead to these pre-need sales, is the at-need event. I've already described to you what happened to COVID with an extra 130,000 funeral services being performed. Just like funeral went like this during COVID, pre-need cemetery went like this during COVID. There is a little bit of a pull forward effect associated with pre-need cemetery. We've had declines in pre-need cemetery, not as bad as you saw the volume.
You know, we started off the year, you know, again with, you know, kind of below 2% down-ish. You know, we hope to get to low single digit % during 2025. Now, as we get further into it, we fully expect, without, you know, I'll give you long-term guidance, we fully expect to get back to mid-single digit % type growth in the pre-need cemetery environment. When you take that as the baby boomers start to continue to affect the at-need environment, you can't also, you have to also remember, you're going to have all of a sudden this tailwind coming in both the at-need funeral and at-need cemetery type revenue streams, which again will have a multiplier effect hopefully to the pre-need cemetery revenue streams.
The whole thing, the whole strategy for the last 20 years are stay relevant to the consumer in the funeral segment and get set up for the baby boomer generation. Sell pre-need cemetery and sign everybody up as well. At-need cemetery is going to have a positive long-term effect with the baby boomers, which will radiate to pre-need cemetery getting back to mid-single digit type percent growth. In the meantime, shrink the equity, buy back 50%-60% of the company so it's that much more valuable when the baby boomers do affect the top line of this company and this industry in a few years from now.
Just real quick, Eric, following on that, you mentioned large sales, which I think have held up very well consistently. The lower end, though, that's a little bit more of a discretionary spend. Do you anticipate a pickup, perhaps lower interest rates or other drivers?
It has been somewhat solid. We saw a pickup in the first quarter, you know, where we had some growth. Even though we were down about 2% in total, core was up and large sales were down. There are different factors to that. You know, as you said, Scott, correctly, you know, the core is worrying about, you know, it is a discretionary purchase. Let's start with that on both ends. As a general statement, you know, the core consumer that we are selling to on a pre-need basis being discretionary, you know, they care about the price of eggs and they care about the price of gasoline. The large end does not. The large end cares about what the market is doing and what real estate is doing. There are two different kind of differentiators there.
The other thing that I would describe to you on the high end is that it ebbs and flows. People do not walk in and spend $3 million, you know, at their first visit. It is a long-term, two-month, three-month, six-month process to get that family, you know, across the finish line in those large-type sales. Generally, you know, about 13% of your sales are going to be in that high end. But it can be a little volatile in terms of timing. Fourth quarter of 2024 was 16%. That is a very strong high-end quarter. First quarter of 2025, 9%. Now, some of that could have been pulled in from January into December and such like that. It does ebb and flow as a general statement regardless of what the macroeconomic factors are, you know, related to those high-end situations.
As a general statement, we're seeing we continue, you know, like other companies, you know, not really trying to explain it, but we're continuing to see a nice core consumer, less than that $80,000 spend that really kind of hangs in there. We have a really nice pipeline, as we told you on the conference call in April, of those large-end sales. It's just that, you know, the first quarter kind of ebbed and, you know, you see that and it will go like this. Generally, we feel pretty good about it for the remainder of 2025.
Great. Thanks, Eric. Appreciate that. I snuck that one in because the next question on the prepared list, I think we covered in all that discussion. I'm going to go over it again, maybe just a quick answer if we missed anything. We are fortunate to be conducting a field trip with Service Corp to Rose Hills Memorial Park in Los Angeles. It's not only the largest cemetery park in the company's portfolio. It's actually the largest in all of North America, possibly the world. Could you please discuss some interesting attributes of that property, maybe draw some parallels to your entire portfolio? You mentioned Denver, Houston, just kind of bouncing around. Any parallels? Thanks.
Yeah. There are two things I would probably mention about that. The first thing is we hope a lot of people sign up because when people get out there and do this tour of it, it all kind of comes together visually. People are like, "Wow, I understand the tiering now. I understand this and I understand that." I would encourage as many people on this call to get with Scott and sign up for that. I think we redid it in August, some date in August, if I recall correctly. The first thing I'll mention about Rose Hills is the sheer size of it. I mean, it's 10% of our EBITDA with one location. It is just, it's massive. It's in L.A . It does a tremendous business.
It will never be duplicated in the history of the company or the industry, in my opinion, whether it's in North America or somewhere else, you know, as you've described. The second key point, I think, is how we have continued to change who we are serving. This again relates to our we have to remain relevant to the consumer. If you go back 20 years ago, it was a very high Caucasian consumer that was in there. Today, it's probably, at least pre-need sales metrics, it's probably 40%-50% Asian and 30%-40% Hispanic. That's great for us. We love that because those are segments that value the celebration of life and value the recognition of the cemetery process, the property, the markers, the services, same thing on the funeral side.
We have a separate Asian-specific funeral home that we built there that we would be able to tour, which is very interesting. That is a consumer that is high spend, both of them, Asian and Hispanic, that we really love and has really solidified the growth for many, many, many years for Rose Hills. You will see a different consumer when you go there. You will see the sheer size of it. You will see a different consumer and you will understand the tiering effect as well. It would be anyone that is interested in the industry, not just our company, but in the industry that would get a lot of, in my opinion, benefit from taking the tour with us.
Great. Thanks. Really appreciate that. Yes, I've seen it once before. It is massive. It is impressive. Again, everyone, yeah, that's in mid-August. Please contact me if you have interest. With that, audience, there are a lot of folks on, Eric, but pretty shy with the questions. We have about six, seven minutes left. I have a few more questions. Audience, if you have anything you want to ask of Mr. Tanzberger, please send it to me and we'll get it in there. Next, I'm going to go to cemetery segment margins. We have touched on this, how much they've expanded. Let's just maybe talk about the drivers. Sounds like the main driver really has been the high-end sales. Just anything you can elaborate and what should be what we should watch as levers, good or bad, for those margins?
Yeah. I think the large sales, as it ebbs and flows, are going to move it. You know, I think we're expecting not a lot of growth in margin expansion during cemetery during 2025 vs. 2024. Why? Because we had some really nice margins, for example, when we had that fourth quarter at 16% or the high end. These are high margin situations with those high-end sales. Generally, you're going to see a very stable, you know, 33%, 32%, 34%, 35% type margins for the cemetery segment. As sales increase and, of course, as the at-need events stabilize, that's going to help your margins. You know, we think that margins are going to be somewhat stable.
Over a period of time, as you grow pre-need cemetery sales for the reasons I've already described to you, it's not unusual to see 50-80 basis points of margin expansion per year as we move forward. You know, we saw that and even higher ends of that come through in the last 20 years as we've gone from 13% to 33%.
Great. Thanks. I guess my prompting helped because I have one from the audience I'm going to ask now because we only have five minutes left. What have been the biggest drivers of pre-need cemetery over the past three to four quarters? Third quarter 2024 into fourth quarter was very strong. Then first quarter 2025, a little bit of a pullback. Any color on the drivers of movements like this? Thank you.
I think we've really kind of answered the question, to be honest with you. I mean, I think the third and fourth quarter were very strong in terms of the higher end of sales. I don't remember the third quarter specifically, but I remember the fourth quarter and it was 16%. Yeah, it's going to ebb and flow and it ended up 9% last year. What was important to understand is that we weren't seeing some kind of macro pullback during the first quarter from that. It was more of the natural ebb and flow of that consumer, you know, when you measure things on a 90-day basis because we've said it very clearly in April on our call that we continue to have a very nice pipeline in those large-end sales. There's nothing really else going on in the cost structure.
There is nothing really going on in the core. I mean, it was just kind of that large-end sales that affected margins and had them ebb and flow. We continue to be, you know, positive with that.
Yeah. I think actually that did come in earlier. I had missed it. I think that came in while you were discussing it. The, okay, 2025 EPS profile, how will that look compared to the company's longer-term expectations?
You know, I think we're in the lower end of the 8-12% is our expectations of the current guidance of the $385. We have a tax rate difference, which is at least 100 basis points. That has to do with the law that went through in 2017 where any options that were issued after that, you know, no longer are tax deductible from a high-end executive perspective. That has eliminated a benefit that we had related to exercising of Stock Options, which have held our tax rate from 2024 to 2025, which is now 2025 - 2026. If you add that back, you'd be at the higher end of that 8-12%. That's why it's worthy to mention. You know, I think we're back into that 8-12% from our perspective.
I think the more funeral volume is more flattish, like our expectations compared to leaking still down 1-2% is going to make a difference. The more we can get cemetery sales despite the slower quarter to start off the year, get them back to growing again on the high end, that's going to help us get us annual growth of cemetery sales back into the low single digits. When you get that, that's going to all come together into hopefully that $385 midpoint of the guidance, which will get us back into our algorithm 8-12%.
Great. Thanks. We're basically at time. That was everything from the audience. I'm going to wrap up, but just one 30-seconds answer, Eric, if we could. We haven't really touched on the strong free cash flow here and the application of capital. Can you hit on that real quick, how you consider?
Yeah. We have very strong cash flow. We expect it in the guidance of about $550 million. The highest best use is M&A, which will spend, let's roughly call it $100 million at the midpoint. We do about another $50 million-$75 million of construction, greenfield. We go ahead and pay a dividend and we will reduce shares accordingly. The shares will ebb and flow based on our opinion of the intrinsic value. That is generally the algorithm that we have deployed for many, many years at our company and will continue in 2025.
Excellent. Perfect summary at the end there. Great overview, Eric. Thanks so much. We really appreciate it, audience. Thanks for the questions. Thanks for listening in. Let us know if you have interest in that Rose Hills Memorial Park field trip. With that, we're going to wrap it up.
Thank you, Mr. Schneeberger.
Thank you, Mr. Tanzberger.