Service Corporation International

Good day and welcome to the SCI Third Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to SCI management team. Please go ahead.

Good morning. This is Trey Bocage, AVP of Investor Relations and Treasury. Welcome to our third quarter earnings call. We will have some prepared remarks about the quarter from Tom and Eric in just a minute. But before that, let me quickly go over the Safe Harbor language. Any comments made by our management team that state our plans, beliefs, expectations, or projections for the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such statements. These risks and uncertainties include but are not limited to those factors identified in our earnings release and in our filings with the SEC that are available on our website. Today, we might also discuss certain non-GAAP financial measures. A reconciliation of these measures can be found in the tables at the end of our earnings release and on our website. With that out of the way, I will now turn it over to Tom Ryan, Chairman and CEO.

Thanks, Trey. Hello, everyone, and thank you for joining us on the call today. This morning, I'm going to begin my remarks with some high-level color on our business performance for the quarter, then provide some greater detail around our funeral and cemetery results. I will then close with some thoughts about our earnings expectations for the rest of 2025. For the third quarter, we generated adjusted earnings per share of 87 cents, which is more than 10% increase compared to the 79 cents in the prior year period. We saw impressive increases in cemetery revenue and gross profit, as well as lower corporate general and administrative expense, which was partially offset by slightly lower funeral revenues and gross profits, which when combined resulted in 10 cents of earnings per share growth from operating income. Below the line, the favorable impact of a lower share count was more than offset by a higher tax rate and a slightly higher net interest expense, resulting in a negative 2 cent decline in earnings per share. The higher tax rate was the result of the non-deductibility of certain excess tax benefits from the settlement of stock option rewards. If the tax rate had remained constant, we would have had an additional 4 cents in earnings per share, resulting in 15 percent earnings per share growth over the prior year quarter. Now let's take a deeper look into the funeral results for the quarter. Total comparable funeral revenue declined by almost $2 million or less than 1% compared to the prior year quarter. Comparable core funeral revenue declined by $3 million, or just under 1%, primarily due to a 3.5% decrease in core funeral services performed, partially offset by a 3% increase in the core average revenue per service. The core cremation rate increased modestly by 50 basis points, to 57.3%. Non-funeral home revenue increased by $3 million, primarily due to a 13.4% increase in the average revenue per service. We expect this impressive growth in the average revenue per service to continue, as older pre-need contracts that are maturing out of our backlog have higher cumulative trust earnings. In more recent pre-need contracts written, will mature with higher value in the backlog due to our 2024 operational decision to no longer deliver pre-need merchandise at the time of sale. Non-funeral home pre-need sales revenue decreased by $4.6 million, primarily due to our decision to stop delivering pre-need merchandise at the time of sale, as I previously mentioned. This quarterly decline should cease later in 2026 as we anniversary the date of not delivering merchandise prior to need. And the non-funeral home average revenue per service will have a meaningful compounded growth in the coming years as each year a higher percentage of contracts with higher value mature out of the backlog. The decline in merchandise revenue this quarter was partially offset by higher general agency revenue due to our conversion from selling a trust-funded pre-need product to an insurance-funded pre-need product. Core general agency and other revenue grew by $3 million, or 6%, primarily driven by higher pre-need insurance sales production. This positive impact from higher sales production was slightly offset by a modestly lower average general agency rate, as we decided to offer a non-insured flex product in several West Coast markets, which generates a lower general agency commission rate in the current period. Funeral gross profit decreased by $9.5 million, while the gross profit percentage declined by 170 basis points to about 18 percent. This gross profit decrease was attributable to the slight decline in revenues for the quarter, coupled with higher selling costs and a moderate fixed-off increase. Declines in higher margin merchandise revenue were somewhat offset by increases in general agency revenue. This general agency revenue is substantially offset by a higher portion of our selling costs being recognized currently for GAAP purposes. We continue to manage our fixed costs below inflationary trends to about a 1.4 percent increase for the quarter. As we continue to focus on leveraging our scale, both in the field operations through staffing metrics and in our overhead support functions. Pre-need funeral sales production increased by $6 million, or about 2%, over the third quarter of 2024. Core pre-need funeral sales production increased by $20 million, or 9%, as we have now lapsed the anniversary date of the transition to Global Atlantic, and we experienced growth in both insurance and trust-funded sales production. Non-funeral home pre-need sales production decreased $14 million, or almost 20%, as SCI Direct transitions from the sale of trust to insurance-funded pre-need contracts. This transition has required many of our sales counselors in certain states to go through extensive training, obtain insurance licenses, both of which contributes to the temporary reduction and the number of contracts written. We expect, in early 2026, we will experience year-over-year sales production growth again for SCI Direct as a whole. Now shifting to cemetery. Comparable cemetery revenue increased by $31 million, or almost 7%. Higher core revenue was the primary driver, complemented by higher other revenue. Our core revenue increase of $27.5 million, or 7% over the prior year quarter, was primarily due to a $27 million increase in total recognized pre-need revenue, of which $21 million resulted from higher property revenue and $6 million from higher merchandise and services revenue, which includes recognized merchandise and service trust fund income. Other revenue primarily internal care fund trust income, increased as well by $3.5 million, or 10%. Total recognized pre-need revenue benefited from growth in comparable cemetery pre-need sales production of $30 million, or almost 10%. Large sales grew by an impressive $8 million, or 19% over the prior year quarter. Maybe more impressively, Core sales accounted for $22 million of the sales production increase, as solid velocity growth was complemented by higher sales averages. Cemetery gross profit in the quarter grew by $18 million, and the gross profit percentage increased by 160 basis points, generating an operating margin percentage of 34%, primarily due to the strong growth in cemetery revenues. Now let's shift to a discussion about our outlook for the remainder of 2025. As you saw in our earnings release, we are confirming the midpoint of our normalized earnings per share guidance and narrowing the range to $3.80 to $3.90 for 2025. And we are slightly raising our cash flow outlook due to stronger working capital trends in the business, as well as anticipated lower cash taxes. Therefore, the fourth quarter range would be $1.09 to $1.19 in normalized earnings per share. In the funeral segment, we expect volumes to range in the slightly down 1% range to the slightly up 1% range, bringing the 12-month volume for 2025 in its slightly below flat. This is 200 basis points better than 2024, and we believe now the pull-forward effect going forward will be negligible and can begin to see the effects of demographics, our premier locations and outstanding people, and the impact of our tremendous pre-need funeral backlog affect volume growth in the years to come. We would expect the sales average in the quarter to continue to see solid growth. We expect our core general agency revenues to slightly decline. Even though we anticipate pre-need funeral sales production growth, as the average commission rate should decline due to certain markets having the ability to sell non-insured flex products this year that carry a lower commission rate. Overall, we expect modest funeral revenue and gross profit growth as compared to the fourth quarter of 2024. In the cemetery segment, we would expect to see low- to mid-single-digit cemetery pre-need sales production growth. but a lower construction revenue recognition rates, as we should have a slightly muted effect on the recognized cemetery revenue growth. Overall, we expect flat to low single-digit revenue growth, resulting in flat to slightly down gross profits as compared to the fourth quarter of 2024. Below the line, we expect the impact from our share repurchase program to have a favorable effect on earnings per share as compared to the prior year, which will be somewhat negated by a slightly higher tax rate in the fourth quarter. We feel very good about our momentum that we will carry into 2026. We expect favorable trends in funeral volume, funeral average, SCI direct, pre-need cemetery sales, and lower interest rates, and believe that we can achieve earnings per share growth within our long-term growth framework of 8% to 12%. In conclusion, I want to acknowledge and thank the entire SCI team for their daily commitment to our customers, our communities, and to one another. Your skill, dedication, compassion, and attention to detail are the foundation of our success. Thank you all for making a difference every day. And with that, operator, I will now turn it over to Eric.