Okay. I think we are ready to get going in the next session here. We are very pleased to have Service Corporation International with us at the conference again this year. Aaron Foley, Senior Vice President and Treasurer of the company is with us. Aaron, thanks for doing this again.
Thanks, A.J.
We are about 10 months into the year. Maybe you can give us an assessment of the company's performance year-to-date. What have been the challenges? What have been the positives? What is the setup look like as we move into We will talk about next year in a minute, but maybe just give us your assessment.
Sure. I mean, it has been somewhat of a roller coaster. We came out at the beginning of the year with an assumption of a $4.20 EPS midpoint. First quarter obviously threw us for a loop. We did not, I don't think, appreciate just how strong the first quarter 2025 flu season was, nor did we expect the first quarter 2026 to be as light as it was, and those compounded to a 6% decline in volume, which on a full year basis equates to about 1.5%-2% down.
That said, we were seeing some really great trajectory in our cemetery pre-need sales, which is an aspect of our business that we are able to control and drive and help to push top line. Trust fund income was coming in strong as well. The April returns were kind of screaming, if you will.
After that 6% down first quarter volume, we assessed what we expected the rest of the year to be. We expected essentially 3% down in the second quarter, flat to slight increase in the third, and maybe a 1% or so increase in the fourth quarter. July transpires, volume actually came in a little bit better than that 1.5% down versus the 3%. Cemetery pre-need continued strong, trust fund income continued strong as well. We had been pushing some amount of cost associated with some selling cost and selling comp type dynamics, but those were all kind of getting caught up. At the end of the day, with the trust fund income strength that we were seeing, we felt comfortable continuing pushing forth, and we still maintained that $4.20 midpoint. The third quarter obviously transpired.
Volumes, while they weren't down too tremendously, instead of being up, let's say 50 basis points, they were down 10 basis points. So instead of having a miss to the good like we saw in the second quarter, it was a miss to the bad in the third quarter on the volume side. The cost that I would term intentional, the selling comp and the advertising type costs, which relate to our seminars to drive funeral pre-need sales, as well as the cemetery cremation memorialization initiative to really drive more cremation inventory sales on our cemetery segment. We intentionally put our shoulder behind those and drove those, but the cost continued strong on that front.
We did get to see some surprises on the fuel side as well as some on the healthcare side, that we can dig into some.
As we saw the trust returns for the quarter, they ended up negative, and that really all occurred in September. As Tom mentioned on the call, we'd expected this 1% increase in volume in the fourth quarter. October volume perspectives on October 27th or 28th when we had the call, we were actually seeing down.
With those expected continued cost trends, with that lighter volume expectation looking into the fourth quarter, we just felt it was prudent to go ahead and right-size the expectations and bring forth that $4.20 midpoint down to about $4, which I kind of think about it, if you step back at the 30,000-foot level and just normalize for that volume dynamic, everything else would be just noise, and we would be back at that $4.20 perspective, but this is where we're at today.
Right. Okay. Well, thanks for that. You did call out your early read at the beginning of the quarter. I don't know whether today you have any further read of what you're seeing, because even with your fourth quarter, you need a little bit of a step up versus what you saw in the first week or two.
Yeah, it's still too early to say, 10 days into November, what the expectation might be. We do know November ends this year on Monday or Tuesday versus a weekend day, which is actually a benefit for us, but it's still too early.
Okay. I mean, I think the historic algorithm for growth has been 5%-7% organic business growth plus 3%-5% capital deployment producing the 8%-12% adjusted EPS growth target. Given how things have developed this year, is that the right way to frame normalized growth still for you? Is that the algorithm?
Yeah, no, I do think that that's still the normalized way to think about it. Some of these selling comp changes relate to our shifting from more of a variable cost, or I'm sorry, a fixed cost of about, let's say, 15% of the compensation and 85% variable to more like 30% fixed, 70% variable. That dynamic, while it doesn't necessarily change the pie of what gets paid out, it changes the accounting, because the accounting for us only lets us defer those costs that are variable cost until we provide the underlying products and services.
So we're seeing an increase in cost on that front that will get comped as we look forward. I don't think that that dynamic is a systemic kind of change that's going to create volatility as we look forward.
I just think that this year we've had some of these more unexpected costs that have popped up. Fuel, obviously, when we reported it in February, we didn't expect the Iran war to occur. That said, we are starting to see some moderation in some of those oil costs that affect our gas spend. Additionally, associated healthcare costs that we've seen. Really, we've kind of broken that down into three factors or dynamics. Two, knowable. One is kind of just the base increases, generally around 8%-10% increase in healthcare cost. We're also seeing a bit higher enrollments. Of course, again, those two are generally knowable. The component that's really kind of been a little bit higher anomalously, excuse me, and anonymously because due to HIPAA laws, we don't have a good sense.
What's driving that are these large dollar claims, and we term large dollar claims as those above $250,000. These are going to be things like cancer treatments, cardiovascular-type events that take a lot of money to treat. For the first five months of the year, we saw one or maybe two of those come through per month. As we've looked at June through September, which we just got the September data in the latter part of October, we've seen those come in about six to nine per month. That increase, because we're self-insured, we work with actuaries to assess the incurred but not reported and accrue for those expense dynamics. Given that we see it continuing into September, that's just another dynamic we're expecting to continue into the fourth quarter.
As we look forward to next year, I would wholly expect that those should subside. We annually incentivize our employees to take annual physicals to try to capture or catch some of these health conditions that, if caught early, can be treated a lot more easily.
Hmm. Interesting. I guess there's nothing on those high-cost conditions, just the random luck of the draw, I assume, is the way you guys, when you drill down. I don't know what else would explain it.
Yeah. I don't know. It's interesting. We've talked to some other investors, and they've noted that we're the second or third company that they've noted that that has occurred. We work with our healthcare provider, as well as Collective Health, to help evaluate, audit, and make sure that what is getting approved and done is appropriate. It just seems that we've got this higher incident rate, and again, we can't tell who these people are. We do assess and can see whether they're still employed with us or not, and several are no longer employed with us.
That unfortunately could mean that they've passed away.
Right. Right. You haven't given formal guidance for next year, but you made some initial comments about next year. You said, or the company said, it fully believes it can return to 8%-12% earnings growth next year. What are some of the key drivers behind that optimism, and maybe even just a general sense of tailwinds and headwinds for 2027 versus 2026?
Yeah. I'd say, like you said, we're still fine-tuning the model. Tom mentioned on the call, volumes and production, those are going to be the biggest kind of drivers that will make or break it to a certain degree. But coming into this year, we actually expected volumes to be normal. Again, we've seen these lighter volume periods associated with flu season comps that have caught us in the past.
So again, I think that that dynamic that occurred this year should create an easier comp as we look forward to next year. From an average perspective, this is a very competitive industry on the funeral side as well, so we're somewhat constrained to inflationary-type price increases. Excuse me. But that being said, with some of these cost increases that we're seeing, we're going to be evaluating the impact of those.
If we're feeling the impacts of these cost increases, you know that the rest of the other 20,000 players in the funeral industry are also feeling these cost pressures. So I would expect that we would see some potential cost increases associated or pricing increases associated with those, as our business does have high fixed costs underlying our business. Our industry over the past 30, 40, 50 years has had to remain disciplined on cost, and I can tell you after a quarter that we've just gone through and the expectation for the fourth quarter, all eyes at SCI are on our cost structure, so making sure that that is managed.
But looking forward, if you assume an inflationary 2.5%-3%, let's say, on the fixed cost structure for funeral, and then on cemetery, maybe 3%-3.5% increase on fixed costs, with production growing in a mid-single-digit type basis, and about 95%, mid-90% of that falling to the top line, that algo does build up to that 5%-7%. Then, of course, acquisitions, new builds, share buyback, kind of the strategy that we've taken or followed for the past 20 years or so, that's really been able to support and drive that.
Yep. And if you're thinking about what would likely make it challenged or what would create upside to that sort of initial assessment, is it mainly volumes or is it something else?
I think it's going to be volumes. I think if we do see outsized growth on trust fund income associated with trust returns, let's say we do see the markets come roaring back toward the latter part of this year, early next year, that's going to drive some growth. I think if our teams are able to, as they seem to be doing and have done, even with the lighter volumes, just continue to drive stronger pre-need cemetery production, I think you're going to see some strength continue on that front. But again, those are the bigger drivers, I would say, that can help us be at the top or the lower end of that.
Yeah. And I know a key component of the baseline is that funeral volumes will be flat to slightly higher next year than this year. I think you've talked about easier comparison, particularly in Q1, gradually improving demographic tailwind, and then alternatively lingering COVID pull forward should be relatively modest, but there's still a little bit of that. Can you comment on how much is the comparison dynamic? That's sort of something you can count on if you had a more normal first quarter. How much of the lift to the overall year would that provide just in and of itself?
Well, when you think about our business, generally the first and the fourth quarters are our strongest volume quarters, then the second quarter, and then the third. That 6% comp, I've not done the math, but that effectively, that 6% alone drove 1.5%-2% down for a full year expectation. If we can normalize for that, I think you would be able to see that type of growth. That being said, as we've talked even pre-COVID, whenever you have a lighter flu season, usually that means that those deaths are going to occur in the second, third, and maybe fourth quarters. Conversely, if you've got a stronger flu season, those are going to be pulled forward from the second, third, and fourth quarter.
But generally, on an average basis, if it is a weaker flu season, you're likely going to end the full year a little bit down, and if it's a stronger one, likely end up a little bit up. Our expectations now are likely, again, we're still fine-tuning the model, but you're going to have likely a 1Q that's an easier comp, maybe 2Q's a little bit easier, and then you could see a little bit of variability up or down in third or fourth, depending on what happens with the flu season this year.
Okay. How do we think about pre-need sales production in the cemetery side? That's been a bright spot. As you think about next year, could it be similar, or is there any reason to think that'll present a tougher comp?
I believe it should be similar. I think the teams have done a tremendous job at really focusing on the four pillars that we've talked about the last few quarters, that being focus on large sales, making sure that our counselors have the training to present these types of options to our consumers, as well as the media to show them the art of the possible, if you will, from large sales. Another component is seminars. These are basically events where we host a group of people, serve some food for lunch or dinner, present the products and services mostly on the funeral side, and those are some of our best leads to be generated.
Using AI to help minimize the lead to sale friction, making sure that our counselors are staying as effectively on top of leads as they can, and making sure that those higher producing counselors get those leads as quickly as they can to get them closed. Finally, working on, I guess, in a disciplined manner, intentionally increasing that headcount to really drive those pre-need sales.
I think the teams being able to focus on those four pillars have really been able to support this pre-need production on the cemetery side, even in light of the lower funeral volumes that we've seen. I think you've heard about us talk about how the velocity of cemetery contracts in the core cemetery, excluding the large sales, how that does have a correlation with our at-need funeral core volumes.
Even in light of these declines in volumes that we've seen, we've been able to see increases in velocity really helping to drive that cemetery production growth as compared versus the pricing increases. I think that's really a testament to how the sales team and marketing team are doing at helping to drive these. As we look forward, I think they're continuing to identify opportunities to push it forth.
That said, it is $2.6 billion of production that we're generating on an annual basis, and generally, the algo is a mid-single digit type growth in production. So you're looking at $100 million-$125 million or so of funeral and cemetery pre-need growth next year that, unless there's a big decline in consumer sentiment in any way, I think the team should be able to do that.
I was going to ask you about that. The pre-need cemetery plot sale is more of a discretionary purchase. Has the company seen any impact this year from the back and forth on the economy in the business?
No, we really haven't seen an impact this year. We do serve a middle, upper middle, and upper income demographics, particularly on the cemetery side. I say that because on the funeral side, we do have a non-funeral home, SCI Direct.
Right.
Part of our business that does serve a more price-sensitive consumer. On the cemetery side, we really, as we've all talked about and seen this K-shaped economy dynamic playing out over the last two years or so, our consumer hasn't been as impacted. Again, we've seen that velocity coming through in the face of not only the weaker volumes as well as these types of dynamics. I think that I'd expect to weather the storm absent a dynamic like the great financial crisis, which obviously we saw late 2008. We saw a decline in production, but that came back very quickly in early 2009.
I'd say the last time I really saw maybe some sensitivity in the consumer was really in 2022, 2023, when inflation was rising quite rapidly, and we were seeing, because of the COVID supply shocks, and then we were seeing interest rates also rising rapidly. But really since then, the consumers stayed pretty strong.
Okay. High-end sales in the cemetery side of the business has made a difference. They can be volatile from quarter to quarter. Is there anything to call out there in what you've seen this year? Are you back to sort of a normal amount of that volume, or is that still sort of in flux a little bit?
No, I'd say that it seems that we're on a pretty steady state right now. Large sales generally make up about 11%-12% of our total cemetery production, which is about $1.4 billion in total. We define a large sale as being anything above $100,000 in contract. It's going to be a very small number of contracts, but it's going to be a larger amount of our production. These transactions can take weeks, months, if not quarters, to kind of matriculate, to go through the design process, to go through the accounting and legal review by the consumer's attorneys and accountants and such, to get them to close.
Really, if you go back to since the second quarter of 2025, we've kind of been in this $42 million-$44 million type range as you looked at Q2, three, and four of 2025, as well as the first quarter of 2026. Second quarter, we were closer to $49 million. The third quarter, we were around $47 million-$48 million. Those are great. I love the stability, and obviously I love to see growth, but I don't want to lull myself to just kind of expect that that's the trend, as we know that they can be lumpy. As of now, again, as we're fine-tuning our models, I'd expect that that kind of growth in large sales on an annual basis would be in that low to mid single-digit type range as well.
Do those tend to be more economically sensitive, less economically sensitive because they're wealthy families, or how would we think about that?
We've tried to correlate a couple different ways those sales to how things are going, and we've sometimes said it could be driven by the balance sheets, the financial markets, how people are feeling. If they see a big downturn, that's going to affect large sales. That said, 2022, where the fixed income and the equity markets combined were some of the worst combined markets that we'd seen in decades, that was one of our largest years ever. That being said, COVID really kind of, I think, was at the back of everyone's minds as well. So even if you did see an impact, that may not have impacted you. We've also looked at kind of the real estate market, and if you see increases or decreases there.
If I had to pick one, I'd probably point to the financial markets, and if you do start seeing more volatility there, you might see some volatility on that large sale front.
Pivoting back over to the funeral side for a second, the volatility we have seen in volumes there, I do not think you can really explain that by economics in any way. As you guys have drilled down, any explanation for what we are seeing, why it has been a little bit softer than expected and taken longer to rebound in accordance with what you might think from demographics?
Yeah, it is hard to say exactly what it is. I think Tom mentioned, I think in response to a question that you had, to basically say, "Look, we believe that the COVID pull-forward dynamic, for the most part, has normalized." We know that there is likely a base of people who passed in their 40s, 50s, and 60s that was pulled forward that is going to be in there. But the more acute people who likely would have passed over the next three to five years, we have probably gotten, for the most part, behind that volatility.
Right.
We have seen some dynamics around excess deaths associated with overdoses, alcoholism, psychological illness, if you will, suicides. You have seen some of those start moderating as well. That said, as I think about the first quarter and that volatility there, it was 95% flu-driven. I do not see other dynamics and drivers in there that are pushing that one way or the other. As we then trended out the rest of the year, it was great to have missed on the good, the 1.5% versus 3% down in the second quarter. Conversely, we missed to the bad 40 basis points or 50 basis points in the third quarter. It is pretty close to those expectations.
As Tom mentioned on the call, as we look at the market share dynamics from the beginning of the year to now, again, the CDC data takes a little bit of time to mature and have a good perspective to look at. But it seemed that our market share has hung in there. It is just kind of this death trend dynamic.
Death, softness in deaths.
When you think about the margins in the two businesses, I guess the cemetery business has had this great run in margin. How do you think about that one going forward? I will come back and ask about the funeral side.
Yeah, I would say again, kind of going back to our 8%-12% algorithm, underpinning that, expecting mid-single-digit growth in production, 95% of that hitting the top line, fixed costs growing 3%-3.5%, I would expect margin dollars to expand, and I would expect margin percentages to grow 30, 40, 50 basis points. On the funeral side, generally in the near term, as we think about that algo, it is usually flat volume, low single-digit growth in average that helps drive a low single-digit growth in the top line, and then fixed costs growing 2.5%-3%. While gross margin dollars grow some, the margins stay flat.
As we look out over the next, let us say, 3-15 years or so, when we expect the baby boomers to have a more pronounced impact on the business, I would expect that that flattish volume expectation is likely going to grow to 1%-2% through the 2030s. During that time, that top line then should grow that low to mid-single-digit type basis. Managing those fixed costs, you should see that margin dollar growth as well as the margin percentage growth on the funeral side as well.
When you think about the demographic tailwind, the average life expectancy today, what does that sort of settle back into, 82- 83?
About 80- 81, yeah, somewhere.
There's a lot going on from COVID pull forward, from the flu dynamic you've talked about. Have you seen Is there any way to delineate that we're getting some of that yet, or you think that demographic tailwind's all still in front of you?
Yeah, I think that we've been seeing the baby boomers impact our industry since they were born, started being born. As we have modeled out our expectations and kind of looking at the zenith of their impact, we're looking at somewhere around the early 2040s, kind of when the baby boomers are going to have their biggest impact to the death care industry. That gives us 15, 16 years from now.
So I think we're kind of at the beginning stages of a more pronounced impact, if you will. That said, as we kind of look at over the next two to three years, I think our near-term expectation or guide is likely to be in that flattish type range until we start seeing a more pronounced type increase, kind of like with our cremation mix shift.
We've been at 100 basis points- 150 basis points for the last 20 years, but it took us about two years of seeing it in that mid-100s, let's say 50 type range for us to kind of bring our expectation to 50 basis points- 100 basis points. I think we do the same for volume.
I was going to ask you about the cremation rate. So where we settled out, 50 basis points- 60 basis points year-to-year increase versus the historical 100 basis points- 150 basis points, you think it's starting to feel like that's sort of where we're at at this point, given how high it's gotten in the penetration rate?
Yeah, I think as we look at other cultures where the cremation mix has seemed to stabilize, it's been that 75%-80% type range for cremation, looking at Canada, some Western European countries. We obviously have a chunk of our business in Canada that's already kind of near that range as well, and then a handful of markets on the West Coast and kind of Southwest that are out there too. You'd expect that that slope is slowing down as we get closer. I think that's where we're at. Our guide right now is that 50 basis points- 100 basis points of increase, and we've been, as you noted, closer to that 60 basis points.
I bet you we're going to be here for several years until we get closer to that flat to up 50, and then we're just going to kind of bounce around, I would expect, that plateau. But that's probably 15, 20, 30, 25 years out.
Yeah. When you look at cremation, I know 10 years ago, 15 years ago, there wasn't a lot of people using a service in combination with that. Then the company, the industry had an effort to build up the averages on the cremation to get more people to do the memorialization, or even on the back end of it, urns and other mementos. Where are we at in that? Is that still, if I was to look at the average revenue for cremation, is that moving up faster than the overall inflation rate of the company, or is it sort of stabilizing at this point?
Kind of what you're talking about, it's kind of back in the early 2000s. We had, for lack of better words, kind of fired that cremation consumer. That was back when our business model put a lot more value on the products, like the casket and the urns, versus the actual underlying services and facilities that we operate. But we made a transition back in 2005, 2006 kind of timeframe, after the realization that, look, the defensible part of our business is not the casket and the cremation. People can go online if they want to go buy those kind of things. The defensible part of our business is our people and our facilities, the CapEx that we spend.
I think it was around that time that we realized that we shouldn't have fired that cremation consumer, because just because you want a cremation doesn't mean that an individual doesn't want a memorial service. They don't want to have an event where they can remember, bring people together to remember their loved one. So we made that transition, and I think that we've done a very good job of making sure that we can do whatever we can to stay in front of that consumer, whether burial or cremation consumer.
Right.
Be part of that process and make it an economically feasible type transaction for us as well. As I mentioned earlier, the funeral industry and business is a very competitive business, 22,000 locations across the U.S. and Canada. So we don't have a tremendous amount of pricing power, always trying to identify other products and services that we might be able to offer to help drive that. That being said, the bulk of the pricing increase really is inflationary-type pricing, increased power that we do have. I wouldn't say it's stabilized. I would say, like the burial business, the cremation business continues to increase as well.
Okay. Acquisitions have been a big part of the SCI story over the years. I think you've been consistently in recent years looking for $75 million-$125 million of acquisition spend as your target. Any sense of how this year unfolded with respect to that, and will you be in those target ranges?
Yeah. I mean, as we exited September, we were already at $73 million, so right at the bottom end of that $75 million-$125 million. The pipeline remains strong. I wouldn't tell you that I think we're going to blow past the top end, but I think we're going to be firmly within that range. We're continuing to be patient. We're out there meeting with families and targets that we would love to have a conversation at the right time with them. We're excited and have that pipeline full. We've got several transactions under contract or LOI and just in different stages of getting closed.
Okay. As you look at next year and beyond, is there any reason, is it $75 million-$125 million sort of a stable outlook per year, or is there any reason to think that might accelerate at some point in the future?
Yeah. I mean, again, we're fine-tuning the models. If something were to pop up, a big chunky deal, potentially could note it in February. As of right now, it's likely going to be that $[75] million- $125 million. It's likely going to be the $70 million or $80 million for growth capital, new build type growth capital, and then continued execution on our share buyback program, where we see a bigger discount to what we view the intrinsic value at. We're going to buy back more, and conversely, if it's tighter, we'll buy back less.
We were talking a lot about the FTC updated Funeral Rule a few years ago. It seems like that's sort of fallen off the radar screen a bit, but is there any update on anything going on with that as far as you know?
Really, the last time there was a conversation was back in October 2023 when there was a symposium held. Really since then, it's not really had much dialogue. As you know, they review the Funeral Rule once every 10 years. That started back in 2017, 2018. We're coming pretty close up to another 10-year period, and so they may reopen it then. But we've not heard anything, and so as of right now with this administration, I don't expect many developments.
You mentioned just a second ago about share repurchases. When you think about broadly capital deployment, where you're at with leverage, what's happening with interest rates, give us a quick summary of priorities there and how that's likely to play out over the next year.
Sure. I mean, I'd say, as many of the other companies I'm sure say, we do all the acquisitions that we can with the right returns, targeting a low to mid-teen return, new builds, low double-digit to low teen returns. At the rates where they're currently at, we still feel comfortable executing on share buybacks. I think we'd have to see quite a bit of an increase in the debt or interest rates for us to be really wanting to right-size that to a certain degree.
That said, we do constantly have it in the back of our minds as we're modeling out and evaluating opportunities. If there aren't good enough opportunities on the share buyback front, you'll see us pay down chunks of our revolver that's currently drawn and outstanding.
Okay. I think with that, we are going to wrap up. I really appreciate Service Corp participating in our conference again this year. I am just looking at the schedule here. Next up in this room should be Myriad Genetics. Thanks, everyone.
Thank you, A.J. Really appreciate it.