All right. Thanks so much everyone. Thanks for sticking around here and for joining this meeting. Now it's my pleasure to host this session with Service Corp International. They are the largest owner-operator of cemeteries and funeral homes in the U.S. Today we have Eric Tanzberger, the CFO, and also in the audience is Aaron here representing. Yeah, I guess first question is the big question for this industry and for the company around the pull-forward effect and the excess deaths.
Yep.
Can you kind of, you know, talk about big picture, how you think this is going to impact the growth going forward for the company?
I'll give a little bit of background for those of y'all that are new in the audience. Pre-COVID, I would say our company was a $1.90 per share, full year in 2019. We obviously had a positive impact as it relates to revenues during COVID, unfortunately. We normally generally serve about 315,000-325,000 families a year in our funeral segment. Ultimately during kind of, I call it second quarter of 2020 through the first quarter of 2022, we served probably an extra 110,000 families at their time of need in the form of funeral services. That's unfortunate.
Ultimately, that's really what Joanna is asking us about, is obviously that 110,000, there was a component of those individuals that would have been served anyway. There's a component of individuals that would have been served a few years to many, many years in the future during that, during that situation. It was pretty significant to our earnings 'cause obviously that $1.90 went all the way up into the mid $4.00s and then back down to $3.80 and then back down to $3.60. One thing we can talk about a little later, 'cause I wanna get to your question, though, is if you CAGR out at our 8%-12% growth rate from 2019 pre-COVID, we really should be at about $2.80 a share, and our guidance is $3.60.
We learned a lot and utilized technology for our benefit to become more efficient company as well, which is another story we can talk about. In terms of the pull-forward effect, you know, ultimately it's the beginning parts of that 110,000 were pretty significant COVID effects. That's the stuff that were the elderly individuals, in the homes and such, and in the care centers that were primarily in the Northeast for the most part, which is very different than later in the pandemic. They kinda moved to the West Coast, and ultimately, those individuals, towards the end of the pandemic, were more younger, unvaccinated individuals that would have been pulled forward not just maybe five years from now, but maybe 10, 15, 25 years from now.
When you pull all that together, it's an effect that we think during 2023, of that 110,000, we probably would have done somewhere around 10% of that, maybe a little bit more than that. Maybe 10%-15% of those deaths that occurred during 2021 and 2022 would have occurred in 2023. Then there's this tail. You kinda go to that 10%-15%, down to 10%, 8%, 7%, and there's a very, very long tail where like, you know, in our opinion, after like three, four years from now, Joanna, there's still probably 60%-65%, call it 2/3 of that 110,000 that hadn't even been pulled forward yet. It's a much more muted long-term effect with a tail than what we originally anticipated.
You know, of course, we could be wrong. Let's be honest about it. you know, our crystal ball isn't better than anybody else's. So far, the modeling that we've had in terms of pull-forward deaths have kinda hung in there. We still have robust volume, even in the post-COVID environment versus, you know, expectations as you look back to 2019 and just pull it forward. You know, call it a growth of 1%- 2% in volume. We're seeing other things as well. for one thing, we're seeing what you're calling excess deaths, which is, you know, the CDC's term from that perspective. Ultimately, you're seeing mental health and you're seeing physical health crisis continue in the U.S., and that's affecting our bonus, our company.
It is coming down more than than the levels we saw last year in terms of excess deaths. Less is what we expect, and we've been kinda right on that mark so far in terms of the excess deaths. The other thing that's interesting is we gained a little bit of market share during the COVID pandemic as a company, and that ultimately really comes from the fact that we have the resources and the capital and the scale to remain open during the pandemic. The independents, which is 80% of the market, really were just unbelievably overwhelmed.
Whereas if we had a real problem in New York City, for example, we would move 200 to 300 people out of our 25,000 associates into New York and really be able to use our scale and our capital to remain open. From that perspective, you know, we may have gained 100 to 200 basis points in funeral of market share. We probably gained the same in cemetery. I think the cemetery market share may be a little bit more sticky than the funeral market share, frankly. Primarily because if you drive past three or four independents to get to our funeral home in an example, then, you know, I'm not sure five years from now you're gonna keep driving past those and go to the Dignity Memorial Home if it was geographically far away in my hypothetical example.
If you did the same thing and interred a loved one of your family into that cemetery, you're coming back to that cemetery. A little bit different dynamics when you think of market share from that perspective. If you put the market share, the excess deaths, a little bit extra, there's still some COVID deaths that are happening in the U.S.
Mm-hmm.
With the pull-forward effect, you're still gonna get, you know, pretty healthy volume, but it is gonna be down year-over-year, kind of mid-single digits. That's primarily because you had a very strong COVID in the first quarter of last year that still exists. You still have a little bit of a COVID dynamic and not quite fully normalized yet when you have your prior year comp numbers.
How would you think, you know, things will play out outside of this year, you know, into 2024 and 2025? Like, would you expect the growth, or would you expect, you know, kind of tough comps because of the excess death that continued this year? How should we think about that?
No, I think you're gonna see low single-digit % type growth in the volume, you know, beyond this year, which is good. You know, we went through a period of time where the demographics were not in the favor, and we had, you know, mid-single digit % declines in same-store volumes that went to low single digits, that went to flat to slightly up, and now we're kind of, you know, maybe in the 1%-2% type normalized range as we move forward. That potentially has the ability to do a little bit more than that when the baby boomer generation really kind of affects the throughput, you know, of our funeral segment, which I personally don't really think that that's affected us yet.
There's some anecdotal evidence that's out there that says maybe there's a few of that happening. You know, ultimately, the oldest baby boomer is about 77. It's a very large and long generation, but, you know, the average age that we're providing at-need services is more like 82-84. I think we're still, you know, four, five, six years away from seeing the beginning portions where we could start modeling maybe some additional throughput, which again, through our fixed cost structure, is gonna create some pretty healthy incremental margin sales that ultimately will help, you know, create a little bit of margin expansion in total as it relates to the funeral segment and the cemetery segment as well.
Another topic that came up with the latest quarter was the cemetery pre-need sales production declining year-over-year. Obviously, some tough comps, you also talk about the weather impact on the sales process. Can you talk about what does it mean for the full year when it comes to the sales production? What do you expect? Any update, you know, where the things are tracking so far this quarter, what gives you confidence, I guess, that, you know, most of it sounds like you expect to come back? You brought up the big festivities around the Qingming.
Yeah
... holiday. How has that kind of, you know, impacted this production activity, and what does it do, I guess, for the year?
Yeah. We still have a strong comp versus prior year, as we talked about. We normally would grow pre-need cemetery sales in the mid-single digit percentage growth range. It's probably low single digits is where we started out the year. Now that we've had these events, you know, and I'll walk you through it in a little bit more detail, I think it's more like flattish to up low single digits. Ultimately, what happened is that, you know, our company, for the most part, when you think of our cemetery footprint, is pretty much dominated by a West Coast type cemetery footprint. California is huge for us. As you know, we have some of our largest cemeteries. We have numerous parks.
We have the largest cemetery probably in North America, if not, you know, other places of the world too, it would rival, that is in California as well. Unfortunately, you know, it's an outdoor business, selling cemetery property for the most part. Particularly the type of consumers that we market to, the Hispanics or Asians, or specifically Asian, you know, there's a lot of beliefs and such to where they wanna be there with a feng shui master or something along those lines and see it, and it just simply the weather didn't permit that, and even post-weather, the safety of the grounds didn't permit that in terms of, you know, think of these as canyons and some pretty rocky stuff and very wet and some of it washed away at Rose Hills for, you know, for example.
You know, some areas where we're used to nine to 10 inches of rain a year got 22 inches in the first three months. When you think of what we originally expected, because of the comp of last year, we probably expected mid-single digit % down, like I said. It ended up being about 15% down. That difference between the two, you know, is really related primarily to weather. Ultimately, about half of that was in California, and half of California was at one location at Rose Hills, which you've seen and been to. Ultimately, what we also saw is kind of a normalization of the high spend area, and that was totally expected. I don't mean that to mean that it declined.
What I mean is that we had an anomaly of a very, very strong Q1 of last year that we are comparing against. Where, the large sales came in for this quarter was not only expected but somewhat normal in terms of the levels that you would expect. It really ended up being kind of a velocity slow in terms of the number of people that are coming into the parks and attending appointments. In reality, that's a combination of the weather. you know, it's possible that we're seeing a little bit of an effect of interest rates and recessions and, you know, inflation and those types of things, but it's hard to pinpoint. In our opinion, the vast majority of that during the quarter was related to the weather on the West Coast.
Just to follow up on that. This Qingming festivities, right? That you said that was somewhat disrupted because of the weather. I think that's more like April, so I don't know, like, how things... Were you able to host some of these events? Like, are they happening just later because of the weather?
They're really not. You know, it is early April, I agree with you, but it's similar to the holidays. You know, if you think about it here, if you have a holiday of December 25th, you're really kind of celebrating that in the first weeks of December in a lot of different ways, whether it's parties or family get-togethers.
Mm.
What have you. Even if Qingming is in early April, all those festivities are really occurring kind of in March at our parks and such, with the throughput of the consumer coming in for those particular festivities. I think that we believe that, you know, some of that will come back in future quarters, in Q2 through Q4. I do think it's realistic that that is a big marketing event, and essentially it was not able to be to have those festivities like we would have expected or would've hoped. That's why we kind of say, look, at the end of the day, you know, we think low single digits growth could be more like flat to low single digits.
The fact that Qingming came and went, you know, without us having the ability to host, like we host the families in the cemeteries and have leads that way, you know, could be a component of it.
I guess just talking about, you know, staying with the cemetery preneed sales production. I guess you're talking about flattish to, you know, growing a little bit this year, and I guess, you know, it grew very nicely. That number grew over the last couple of years because of the pandemic. Can you talk about the kind of the pull-forward effect in that part of the business, and how do you expect this to play out, you know, as we look out 2024, 2025 and so on?
A lot of that's in the guidance, obviously. That was in the low single digits. You know, a great source of leads for us is radiating now off of at-need events in the cemeteries. As COVID slowed down, you know, similar to funeral, you know, your throughput to be able to have those leads is slowing down on the cemetery side as well. We kind of baked that in, you know, as we said. Ultimately, you know, we're pretty confident that we get through this year and think of this year as more like a little bit of a transition year as it relates to this, still comping off of COVID comps last year. We think that we'll be able to return, you know, to that mid-single digit % type growth that we will have in the future, including 2024.
I just think we have a lot more leads than just COVID leads. We have all the capital that we've spent on digital leads that continue to flourish. We're getting smarter in terms of utilizing digital technology in terms of leads. There's a lot of things we're doing in that arena and continue to put capital behind that to create leads, especially on websites and everything that we're doing, utilizing modern technology to create that. You know, we remain confident, even though there probably is a little bit of a headwind, you know, related to COVID waning and those types of leads not creating, you know, the growth that you'd see it. Again, you're kind of seeing that in 2023.
You mentioned, you know, some of these new ways of doing business, you know, in terms of, utilizing, you know, digital technology and whatnot. I guess this also relates to one of the questions on my list, when it comes to margins, right? For both businesses. Can you talk about, you know, your confidence where these margins will settle down, you know, after we kind of normalize? Because obviously now we're, you know, comping off, very strong margins. As you think about, you know, going forward, where those margins, the gross margins for each segment.
Yeah.
Expected to land.
You know, I think funeral traditionally has been a 19%-20% type margin business. It certainly depends on the throughput. That margin was up to high 20s during COVID. It's now settled more around 21%-22%. As throughput slows, which it does, during the year, it's seasonal in our business, believe it or not. As it slows during the summer months, you know, you may see margins leak down as normal, you know, to the high teens. We generally are comfortable with funeral margins being that 19%, 20%, 19%-21% that we've normally seen. Cemetery's a little bit better, you know, 'cause we learned so much.
You know, as I said before, if you CAGR-ed out the whole business from $1.90 through today, you'd be somewhere around $2.80 at our growth rates that we expect, and we're at $3.60. The EPS went all the way up and came down and stopped at $3.60, and that incremental, you know, value that we've created is really in the preneed sales area, and it's all the things that we utilize. We utilize technology, which is our Beacon point-of-sale systems become more efficient. We've utilized all the technology for better lead sources that hold their appointments and maybe even close a little bit better. Our sales force has become more effective dramatically using the Salesforce CRM system. We're getting better and better and better at that as we go along.
You know, we talked about in one of our one-on-ones, Joanna, earlier today, is like I remember seven, eight years ago, where we had kind of $1.5 billion of preneed cemetery and prearranged funeral sales in total, with 5,000, 5,200, 5,500, somewhere in that ballpark, say at 5,000 or just north of 5,000 counselors. You know, today as we speak, we probably have $2.5 billion of sales with 3,700 counselors versus that 5,000 and 5,200 arena. That's technology. That's getting better. That's getting more effective. That's getting more productive using Salesforce CRMs and stuff. The other thing that's better is the inventory. You know, we continued to do very well in our cemeteries 20 years ago, where it was a very homogeneous play in terms of, you know, how many lots on an acre of land.
It's a real estate top-down selling tiered approach, where, you know, you're gonna see very high-end property, family estates, private family estates, semi-private family estates, lakefront property. I mean, just like real estate, believe it or not, that tiers all the way down to the beginning levels. That has really affected the ASP, which has helped us. All of those reasons created this incremental base between an expectation based on a CAGR of $1.90 in 2019 pre-COVID of about $2.80 all the way up to that $3.60. That is also translating into a little bit better margins, you know, on the cemetery side. I mean, you know, the cemetery traditionally was more of a 28%-30% type margin business.
It grew to probably 38%, something in the high 30s during COVID with the throughput. It's probably gonna fall back into the lower to mid-30s, you know, call it 33%, 34%, not all the way back down to 28%-30%. That again, is because of, you know, not to be repetitive, but kind of those learnings that I just described to you know, that we had coming out of COVID, which is creating the higher earnings base for us as well.
Right. That makes sense. So higher funeral and higher cemetery margins, I guess sounds like more incrementally accruing on the cemetery side.
Yeah, definitely. I think funeral normalizes back, I think.
Pretty much.
I don't think cemetery normalizes back to that pre-COVID 20%-30% like we said.
I guess we talk about the funeral volumes.
Yeah.
Can we talk about the funeral pricing?
Okay.
I guess there are obviously those built-in headwinds when it comes to cremation, obviously the trust fund income and...
Yeah
... concurrency. kind of talk about the underlying pricing power in the business.
Yeah
kind of the price increases you've been able to get and kinda is that sustainable and kinda how do you look out, when it comes, you know, say like the inflationary, you know, pressures kind of, you know, ease up and then, you know, what does that do with pricing?
Yeah. you know, you gotta look at it two segments, you're asking about funeral obviously, but cemetery has some really strong pricing power with, you know, just the nature of there's only so many cemeteries and no one wants new ones built in their backyard either, and there's not a lot of capital flow into that. more pricing power in cemetery traditionally than the funeral segment. The funeral segment has pricing power for inflationary type price increases. Normally, as you said, prior to this environment that we're in right now, you know, we may have raising prices 1% - 2%, similar to the environment with the rest of the industry and the independents. We have a great pricing team that goes out into markets once a year.
It hits each location of the 1,500 or so funeral homes, looks at it where their space is, because again, we play in kind of the middle, upper middle, and upper tiers in terms of the spend. Our locations, you know, need to have the capital behind it to look that way and to support, you know, whatever tier that they're particularly playing in in that market. Now that inflationary pressures have occurred, you know, we've probably had more like a 4%-5%, let's just say mid-single digit % type price increase in funeral. That translates down because you're pushing through 5% price, and then, as Joanna said, you have a cremation headwind, and unfortunately, a trust fund headwind right now as well, which gets it down into that 2%-2.5% range.
Ultimately, if inflation comes back down to what we have seen in our careers over the last 10 to 20 years, you know, I don't think we would be pushing through 4%- 5%, 6% price increases. We'd go back to that inflationary at the 1%- 2%. We have been able to push through that mid-single digits and really just not miss a beat in terms of volume or any type of adverse effect.
Mm-hmm
in terms of doing that. Again, we do the same thing on the cemetery segment, just a little bit different. I think there's more pricing power, and I think there's, you know, that whole tiering effect that adds to the ASP on the cemetery side as well.
Also during the conference, you know, there's, it's a healthcare conference, so we talk about labor. I guess you guys, you know, haven't seen that much of a shortage, I guess sounds like on the cemetery side, you know, on the maintenance workers. So can you know, touch maybe on where you, where you see the kinda inflationary pressures in your business? You know.
Yeah
it sounds like labor is the biggest one. kind of how do you expect this to play out?
Yeah. Labor for us is a $700 million-$800 million spend, which would be salary and wages and bonus, excuse me, and benefits along those times. It's a big spend. It's the largest category for us by far. Cemetery maintenance is about a $250 million spend, and some of that is double counting because some of that 250 has salary and wages in it as well. I'm just trying to give you a feel for it. You know, traditionally, the funeral fixed cost structure was kind of like a 2%-3% type growth to it. The cemetery is a little bit more than that.
It may have been 3%-4% in normal times. A lot of that has to do with some of that lower-end labor that, you know, let's be honest, prior to this inflationary environment, we've had a little bit of feel from pressure from that, you know, from our outsourced providers. During the peak of the inflation as it went, you know, funeral probably grew a little bit towards the mid-single digit. Cemetery grew towards the upper single digits. That is all moderated now. You know, funerals kind of backed down, you know, where we expected it into that 2%-3%, you know, range. Cemetery has gone back down, you know, not completely, but it's probably like more like 4%-5% instead of 3%-4%.
The biggest chunk of that, you know, kind of push that we're feeling in cemetery continues to be in that cemetery maintenance area, which is a high touch employee area that is going out into our 35,000 acres. Not all of those are developed and needed, but you get my point, are out there that are maintaining those grounds. You know, if you visit one of our cemeteries, you're gonna see grounds that are maintained to a much nicer level than what you could normally expect. You know, and that's really for marketing purposes from that perspective. At the end of the day, we're not cutting corners either.
Right.
On cemetery maintenance expense.
I guess we mentioned, cremation.
Yes.
I guess the last couple of quarters, you know, kind of the shift accelerated slightly. It sounds like you guys think that maybe there's some year-over-year comps. How do you expect this to kind of play out when it comes to cremation shift? Also, you know, what do you do to offset it? Because that's a built-in pricing headwind right there, just from that. What are the kind of levers you can pull, you know, to offset that?
I think cremation is continue over the long term to be about 100 to 150 basis points movement. That's a mix change from traditional burial towards cremation. Does create a headwind in terms of the spends a little bit less. It's probably a $12 million-$13 million EBITDA type headwind that mix change alone is creating. That's very manageable on a $1.3 billion EBITDA stream, though. You know, we want to embrace the cremation consumer. That's the answer to your question. You know, I think if you looked at it 20 years ago, that spend may have been, you know, $1,500, even in today's dollars or $1,000 even in today's dollars. Now that cremation consumer is probably spending $4,000-$4,500. Why?
Just because they chose a different path of disposition to take a left turn to go to a crematory as opposed to a right turn to go to a cemetery, doesn't mean that they don't want to celebrate the life of their loved one and memorialize. We've had to change the culture over a period of 10 to 20 years to really embrace that. Now, you know, if you take our core operations, you know, more than half, 55%-60%, is cremation now. That will continue going about 100 to 150 basis points per year. Ultimately, I think that tops out somewhere in that 70%-80% type area. That's what we saw in Western Europe and other cultures that are ahead of us, you know, in this particular game, so to speak.
That's where we think it will be. The other thing that I think is a great opportunity for us, though, which we have embraced and will continue to, in my opinion, embrace even more, is the cemetery consumer coming into this, excuse me, the cremation consumer coming into the cemetery parks. When you go in there, you used to saw there's a little cremation garden for our cemetery customer. Now you go in there, and there's a lot of inventory. There's cremation, there's unique ways to celebrate the life in a cemetery. There are, you know, glass front niches, if you've seen these, where you actually can have the urn and the ashes there, but you can also have pictures and drawings from grandchildren.
Of course, we allow you to go out and change that out periodically when you want to. There's a lot of unique things, and I think it's our next evolution is really doing better than how we're doing now, which is a lot better than would've been 10 years ago, of getting that cremation consumer to continue to embrace the celebration of life and the service component in the funeral segment, but then turn around and go to the cemetery and have a lasting place into perpetuity for their loved one, even if it's a cremation urn as opposed to.
Mm-hmm.
You know, a burial or a casket.
What would you say, the % of cremation customers that actually have a cemetery, location?
I don't think it's very high. I don't know the number off the top of my head, but I don't think it's very high, and I think there's a lot of opportunity.
Opportunity.
We're excited about that opportunity.
The very last question, I think we're running out of time, but another topic for the conference has been recession.
Yeah.
I guess, I know we only, we ran out of time. How would you describe the business, where the business is and how they position in a recession?
Well, if you go back to 2008, 2009, what you're gonna see is the funeral segment remains solid and continues to produce solid and stable cash flow even during a recessionary forces. There's not spend down of ASPs or anything along those lines. The cemetery segment will be affected depending on how deep it is and such. Buying cemetery property on a preneed basis is a discretionary purchase, and it will be affected. What we saw is one of the last things to fall off in 2008, one of the first things to come back, and in between there was a consumer that didn't walk away and come back 10 years from now in the A&E environment, just stepped to the sideline and came back very quickly in 2010 associated with that.
you could see some disruption, preneed cemetery being a discretionary purchase, but ultimately it would come back, in our opinion, it would come back very quick. That was our experience in 2008, 2009.
Great. Thank you. Thanks everyone, and thanks for the time, Eric. Good to see you.