Service Corporation International

Good day and welcome to the SCI Third Quarter 2026 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 and one on your telephone keypad. 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. Please go ahead.

Good morning. This is Trey Bokaj, AVP of Treasury and Investor Relations. 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, I will quickly go over our safe harbor language. Any comments made by our management team that state our plans Walsh. These 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 the call over to Tom Ryan, Chairman and CEO.

Thanks, Trey. Good morning, and thank you for joining us, everyone. I'll 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, and I will then close with some thoughts about our earnings expectations For the third quarter, we generated adjusted earnings per share of $0.97, which was more than an 11% increase as compared to $0.87 in the prior year. Higher revenues and profits from both the funeral and cemetery segments were further bolstered by lower general and administrative costs, resulting in an $0.08 earnings per share increase in operating income. Below the line, the favorable impact of a lower share count was partially offset by a higher effective tax rate, resulting in a $0.02 increase in earnings per share for the quarter. Comparable pre-need cemetery sales production grew by 5%, and comparable pre-need funeral sales production grew by 6% for the quarter, while adjusted cash provided by operating activities increased by $29 million to $297 million, helping fund our business capital needs and growth capital investments while affording us the flexibility to be opportunistic, returning capital through share buybacks and through consistent dividend increases. While year-over-year comparisons delivered impressive quarterly earnings per share growth, revenues and earnings were below our internal expectations. as lower than anticipated funeral volumes, lower general agency commission rates, higher fixed costs, a higher selling compensation rate, and larger deferrals of cemetery sales production put downward pressure on revenues and earnings versus our expectations. Now let's take a deeper look into the funeral results for the quarter. Total comparable funeral revenue increased by $19 million are just over 3% compared to the prior year quarter. Comparable core funeral revenues increased by $11 billion, or about 2.3%, primarily due to a healthy 2.8% growth in the core average revenue per service. This core average revenue growth was achieved despite a modest increase of 60 basis points in the core cremation rate. Comparable core funeral volume Declined by 0.5%, which was below our internal expectations. Year to date, our comparable core funeral volumes declined 3.1%, predominantly due to a difficult first quarter comparison. Based on our nationwide internal analysis, we believe we have maintained our market share throughout 2026. Non-funeral home revenue increased by almost $3 million, primarily due to an 8% increase in the average revenue per service. We expect this impressive growth in the average revenue per service to continue, as the older pre-need contracts that are maturing out of the backlog have higher cumulative trust earnings, and the more recent pre-need contracts written will mature with an average revenue per service that is higher. Non-funeral home pre-need sales revenue decreased by $2 million. Half of this decline was due to an operational shift to defer the delivery of urns on pre-need contracts to the time of need. And $1 million of the decline was due to lower general agency revenues generated from pre-need sales production. While we saw healthy growth in our non-funeral home pre-need insurance sales production, of over 9%, our general agency rate declined as we saw a shift in product mix away from multi-pay to single-pay contracts, accompanied with a higher cancellation reserve effect as we build it for our new stream of insurance-funded contracts. Comparable funeral gross profit increased by approximately $4 million on our $19 million revenue increase, with the gross profit percentage Flatt at about 18%. Fixed costs grew at 3% or by $10 million, which was in line with our expectations. In addition, gross profit was negatively impacted by higher selling compensation and promotion costs associated with supporting strong insurance-funded pre-need sales production in both the core and SCI direct channels. Our transition to a sales compensation plan with increased guaranteed hourly wages added 40 basis points to our selling compensation rate, negatively impacting expected gross profit by about $1 million. Pre-need funeral sales production increased by $19 million, or about 6% over the third quarter of 2025, driven by healthy growth from both core and SCI Direct. Now shifting to cemetery. Comparable cemetery revenue increased by $19 million, or about 4%, primarily due to higher core revenue complemented by an increase in other revenue. Core revenues increased by $12 million, primarily due to a $14 million increase in total recognized pre-need revenue, of which $3 million resulted from higher property revenue and $11 million from higher merchandise and service revenue. Merchandise and service revenue also reflects the positive impacts from increased merchandise and service trust fund income. Other revenue was higher by $7 million compared to the prior year quarter, primarily from an increase in endowment care trust fund income based on market performance and higher total return distributions. Comparable pre-need cemetery sales production grew an impressive $17 million or 5% in the quarter. Four sales contributed $13 million supported by continued strong underlying sales velocity growth of about 3%. Large sales accounted for the remaining $4 million increase. For the nine-month period ended in September 2026, pre-need cemetery sales production is higher by 7.5% versus the prior year. This performance reflects the strength and effectiveness of our sales strategy and execution, generating mid to high single-digit percentage sales growth in both pre-need funeral and cemetery by focusing on our four pillars, sales counselor headcount growth, driving lead effectiveness, seminars, and large sales. Dimitary growth's profit in the quarter grew by $1 million on our $19 million growth in revenue, with margins declining by 110 basis points to approximately 33%. Fixed costs grew by 4%, or about $7 million, slightly higher than our 3% expectations. This was primarily due to increased healthcare costs and media spend and training around our cemetery cremation memorialization project. Gross profit was impacted by higher selling compensation, reflecting the strong pre-need sales production growth of 5%. In addition, our transition to a higher fixed cost guaranteed hourly wage sales compensation plan focused on councilor retention, added 100 basis points to our selling compensation rate, negatively impacting expected gross profit by almost $5 million. Finally, our pre-need property sales production grew by 4% versus revenue recognition of 1% for the quarter, which has deferred an additional $6 million of revenue into our backlog With little or no incremental selling costs associated with it. While this had a dampening effect on the quarter, it will benefit future quarters when it converts to revenue and profit. Now let's shift to a discussion about what we've experienced year to date in our outlook for the fourth quarter of 2026. We have provided an earnings per share guidance range of $1.10 to $1.20 for the fourth quarter. This reduction in our full-year earnings per share guidance is a reflection of unfavorable expense trends we experienced more acutely than anticipated during the quarter, lower funeral volumes than anticipated during the third quarter, and an expectation of lower funeral volumes based on our October experience versus our original assumption for volume growth during the fourth quarter. As we look at our full year 2026 results, we now expect normalized earnings per share at the midpoint of our guidance range to be approximately $3.99, compared with our original midpoint of $4.20 when we provided guidance in February. There are several factors that explain this change. First, funeral volumes were weaker than we originally anticipated back in February. with full year volumes now projected to be approximately 200 basis points below our initial expectations. This represents an estimated 18 to 20 cents in earnings per share headwind. On the positive side, growth in cemetery trust fund income beyond our expectations delivered 12 cents per share, offsetting a meaningful portion of the financial impact from lower funeral volumes. providing an important source of earnings resilience. Second, our pre-needs cemetery sales production is expected to grow six to 7% for the year, surpassing our four to 5% original expectation, which we estimate will contribute roughly eight to 10 cents per share of earnings growth. However, this benefit has been predominantly offset by an approximate 100 basis point decline in our cemetery revenue recognition rate. A larger portion of our sales growth has come from merchandise, services, and undeveloped property for which revenue is deferred until the associated performance obligations are satisfied. At the same time, a greater portion of our related selling compensation is fixed and recognized immediately. creating an unfavorable timing mismatch between the recognition of selling costs and the associated revenue. Keep in mind, this is an issue of timing. This increase in cemetery sales production will be recognized in future periods. Finally, we've experienced approximately 100 basis points of additional fixed cost percentage growth impacted by higher than anticipated healthcare, Walsh, and many more. We are disappointed that our 2026 earnings performance has fallen short of our original We remain encouraged by positive underlying trends in our business. We continue to see healthy operating cash flow growth for 2026, which we anticipate continuing into next year. Additionally, we are experiencing mid to high single digit sales production growth in both our funeral and cemetery pre-need businesses. Continuing to grow our massive $18 billion backlog, which will benefit future periods when recognized delivering even higher margins with less selling costs being recognized due to our sales compensation plan changes. As we look ahead to 2027, we expect continued strength in pre-need sales production and expect our comparable funeral volumes to be flat to slightly higher. We will remain focused on enhancing our general agency commission rates, increasing the mix of cemetery products that are recognized as revenue as the time of sale, and improving our related selling costs. We will also focus on appropriate pricing of our products and services in a higher inflationary environment while managing the rate of increase in our fixed cost structure. In closing, we remain firmly focused on building long-term value for our shareholders, growing revenue, leveraging the strength of our scale, and allocating capital with discipline to the highest and best use. As we move into a period of meaningful demographic tailwinds, we're exceptionally well positioned to expand our reach, serve more families, and deliver sustained growth over time. In closing, I'd like to recognize and thank our entire SEI team for their ongoing commitment to our customers, Our communities and each other. Your dedication continues to be the foundation of our success. With that, I'll turn the call over to Eric.