Service Corporation International

Good day and welcome to the SCI fourth quarter 2025 earnings conference call. All participants will be in 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 a 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 SDI management. Please go ahead.

Good morning. This is Trey Bokaj, AVP of Treasury and Investor Relations. I'd like to welcome everyone to our fourth 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 go over our 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. I will now turn the call over to Tom Ryan, Chairman and CEO. Thank you, Trey.

Hello, everyone, and thank you for joining us today on the call. 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 2026 business and financial outlook. For the fourth quarter, we generated adjusted earnings per share of $1.14, which was an 8% increase compared to $1.06 in the prior year. We saw moderate increases in revenues and gross profit in both the funeral and cemetery segments, driven by strength in comparable and non-comparable operations, as well as slightly lower adjusted corporate general and administrative expense, which when combined resulted in $0.04 of earnings per share growth from operating income. Below the line, the favorable impact of a lower share count contributed an additional 4 cents of earnings per share growth. For the year, we generated adjusted earnings per share of $3.85, which was a 9% increase compared to $3.53 in the prior year. We saw solid increases in revenue, gross profit, and comparable margin percentages in both the funeral and cemetery segments, contributing 26 cents to adjusted earnings per share growth from operating income. Below the line, the favorable impact of a lower share count and slightly lower interest expense was somewhat negated by a higher effective tax rate, resulting in a net 6 cents favorable impact on earnings per share growth for the year. If the effective tax rate had remained constant, we would have had an additional 7 cents in earnings per share for the year resulting in $3.92, or 11% earnings per share growth over the prior year. Now let's take a deeper look into the funeral results for the quarter. Total comparable funeral revenues increased $3 million, or just less than 1%, over the prior year quarter, as growth in core and non-funeral home revenue was somewhat negated by lower core general agency revenue. Comparable core funeral revenue increased by $6 million, or just more than 1%, primarily due to a healthy 3.2% growth in the core average revenue per service. This core average growth was achieved despite a modest increase of 30 basis points in the core cremation rate. The favorable impact from the average revenue per service growth was muted by a 1.9% decrease in core funeral services performed for the quarter. For the full year 2025, comparable funeral volume declined less than 1%, as we believe the impact of the COVID pull-forward effect continues to diminish. Non-funeral home revenue increased by $3 million, primarily due to a more than 11% 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. And more recent pre-need contracts written will mature with higher value in the backlog due to our operational decision to no longer deliver pre-need merchandise at the time of sale. Non-funeral home pre-need sales revenue increased over $2 million, or more than 11%, as increased sales production with a higher percentage underwritten on insurance-funded pre-need contracts generated more than an $8 million increase in general agency revenue. This was partially offset by a $6 million reduction in revenue recognized from merchandise deliveries in the prior year quarter. Core general agency and other revenue declined by $8 million, or almost 13%, primarily due to a lower general agency commission rate versus the prior year quarter that was impacted by changes in product mix and higher cancellations resulting from the impact of our insurance partner transition. We believe the general agency commission rate to be stabilized now in the mid-30s percentage range moving forward. Funeral gross profit declined by almost $4 million, while the gross profit percentage declined by 70 basis points to just about 21%. A modest increase in revenue was more than offset by a $5 million increase in recognized selling compensation costs. While the cash rate expended for selling costs was flat versus the prior year, recognized selling costs increased for both the core and non-funeral home segments. For core, we have shifted our sales counselor compensation to more fixed versus variable, resulting in less being deferred for pre-need trust sales production. On the SCI direct front, our conversion from trust-funded products to insurance-funded products compels the immediate recognition of the general agency commission and the related selling costs. This has the effect of replacing high-margin merchandise revenues in the prior year with lower-margin general agency commissions, therefore putting downward pressure on SCI Direct's margins as we compare to the prior periods. The team managed fixed-cost growth to less than 1% for the quarter, which had the effect of moderating the impact of the recognized selling cost increase. Pre-need sales production increased by $29 million, or about 11% over the fourth quarter of 2024. Core pre-need funeral sales production increased by $25 million, or 12%. Non-funeral home pre-need sales production increased by over $4 million, or 8% over the prior year quarter. We feel great about our momentum in both channels. now having had the time to work out the kinks of the insurance partner transition in the core segment, and as of the end of 2025, we have now rolled the insurance product into 100% of our SCI direct locations. Now shifting to cemetery. Comparable cemetery revenue increased by $5 million, or about 1%, primarily due to an $8 million increase in other revenue slightly offset by a $3 million decline in core revenue. The core revenue decline was primarily due to a $3 million decline in at-need revenue. Total recognized pre-need revenue was essentially flat as a $6 million increase in pre-need merchandise and service revenue was offset by a $6 million decline in recognized pre-need property revenue. Pre-need merchandise and service sales production was up $15 million over the prior year number, growing the pre-need sales backlog by over $9 million. Other revenue was higher by $8 million compared to the prior year quarter, primarily from an increase in endowment care trust fund income. Comparable pre-need cemetery sales production increased by $8 million, or about 2%. Core sales accounted for a $13 million sales production increase, powered by impressive velocity growth, which was slightly offset by a $5 million decline in large property sales, which was comparing against a very strong prior year large property sale quarter. For the full year 2025, pre-need cemetery sales production grew by about 4%. We feel very good about the momentum our team carries into 2026. Cemetery gross profit in the quarter grew by $5 million, or about 3%. And the gross profit percentage increased by 70 basis points, generating an operating margin percentage over 36%. While recognized revenue growth was 1%, high margin trust income was slightly offset by lesser margin core revenue declines. And when combined with our team managing fixed cost growth slightly higher than 1%, this resulted in gross profit growth and margin percentage expansion. Now let's shift to a discussion about our outlook for 2026. As you saw in our earnings release, we provided a normalized earnings per share range of $4.05 to $4.35 for 2026, or a midpoint of $4.20. The 2026 range is 5% to 13% growth, with a 9% growth at the midpoint. Within our funeral segment, we expect flat to slightly down funeral volume compared to 2025, with the average revenue per case growing at inflationary rates, slightly negated by the effect of a modest cremation mix increase. We do expect to see higher general agency revenue from increased pre-need sales production, as well as slightly higher selling costs recognized, not cash, from the effect of the shift to a higher percentage of fixed compensation that does not get deferred. Finally, we believe we can continue managing fixed costs slightly below inflationary levels with higher productivity, which all in should drive profit growth for the funeral segments. increasing the gross market percentage by 20 to 60 basis points. We expect pre-need funeral production for both the core and SCI direct businesses to grow in the low to mid-single-digit percentage range. For the cemetery segment, we anticipate that we can grow pre-need cemetery sales production in the low to mid-single-digit percentage range, resulting in cemetery revenue growth of about 2% to 5%. This combined with our continued focus on managing inflationary costs should result in impressive segment profit dollar growth, expanding our gross margin percentages by 30 to 60 basis points as compared to 2025. Below the line, we expect a net favorable impact on earnings per share as the positive effect of a lower share count is slightly offset by higher interest expense and a slightly higher tax rate. as compared to 2025. For our shareholders, know that we are laser focused on growing your great company as best we can for the long term, growing revenues, leveraging our scale, and deploying capital to its highest and best use. In conclusion, I want to acknowledge and thank the entire SEI team for their daily commitment to our customers, our communities, and to one another. Your dedication is the foundation of our success. Thank you for making a difference every day. With that, operator, I will now turn it over to Eric.