Parker Snure

Parker Snurre asked about any impacts from Q1 winter storms or poor weather on pre-need sales activity and the broader business, given the tough Q1 comparable. He also inquired about Carlos Quezada's view on the 'next strategic frontier' for the business, beyond the current rebuilding phase, and sought clarity on the capital allocation priorities for the projected $40-$50 million free cash flow in 2026, specifically the split between M&A and other uses, considering the current leverage.

Answer

Carlos Quezada, CEO and Vice Chairman, stated that January 2026 saw a volume decline due to a strong January 2025 comparable, but continuous cemetery performance and strong sales average per contract led to positive financial results. He outlined that the next strategic frontier involves capitalizing, maximizing, and optimizing existing changes, delivering Trinity, enhancing field engagement, and focusing on M&A. Quezada emphasized an opportunistic view on capital allocation, allowing flexibility for significant deals while adhering to a disciplined framework, considering all opportunities on behalf of shareholders.

Parker Snurre asked about any impacts from Q1 winter storms and poor weather on pre-need sales activity and the overall business. He also inquired about the company's next strategic frontier after transitioning from the rebuilding to the compounding phase, seeking insights into future initiatives. Finally, he questioned the capital allocation priorities for the projected $40 million-$50 million in free cash flow for 2026, considering the M&A focus and leverage targets.

Answer

Carlos Quezada, CEO and Vice Chairman, noted that January 2026 saw a volume decline year-over-year due to a tough comparable from January 2025's flu season push, but positive financial results were maintained through strong cemetery performance and sales average. He stated that the next strategic phase involves capitalizing, maximizing, and optimizing existing changes, with a primary focus on delivering Trinity, enhancing field engagement, growing pre-need sales (10%-20% production rates), and M&A. Regarding capital allocation, Mr. Quezada emphasized an opportunistic approach to deals, maintaining flexibility within the balance sheet to make decisions that best serve shareholders, including potential large deals or stock buybacks.

Parker Snure questioned why General Agency (GA) commissions in the funeral segment were down despite a 12% increase in core pre-need funeral production, asking about drivers like commission rates and the flex product. He also inquired about the magnitude and nature (one-time vs. ongoing) of the cancellation rate impact and sought clarification on the 2026 perpetual care trust revenue expectations and accounting treatment.

Answer

Chairman and CEO Tom Ryan explained that the GA commission rate was impacted by the new insurance contract, specifically by the introduction of a flex product with a lower commission rate, higher early payoffs, and varying rates for single versus multi-pay options. He also cited an increase in cancellations from older contracts and a slightly higher cancellation rate with the new insurance provider, attributing the latter to new plan learning and process adjustments. Mr. Ryan estimated a 200 basis point catch-up impact from the cancellation rate in Q4 2025, which is factored into the mid-thirties percentage rate expected for 2026, with hopes for operational improvement. CFO Eric Tanzberger noted a 15% return on trust funds for the year, compared to a modeled 7%. He clarified that the endowment care fund's Q4 2024 performance was pressured by a $4-$6 million loss from a portfolio manager liquidation, making the current year's performance appear stronger by comparison.

Parker Snure sought further explanation on the decline in General Agency (GA) revenue in the funeral segment, despite a 12% increase in core pre-need funeral production, specifically asking about the impact of commission rates and the flex product. He also inquired about the magnitude and ongoing nature of the cancellation rate's impact on revenue, and requested clarification on the perpetual care trust income, including the $8 million year-over-year increase, 2026 guidance, and accounting treatment.

Answer

Tom Ryan, Chairman and CEO, explained that the GA commission rate was impacted by the new insurance partner contract, the introduction of a flex product with a lower commission rate, a higher early payoff rate, and varying rates for single versus multi-pay options. He also cited increased cancellation rates from the previous supplier and a slightly higher rate with the new provider due to 'new plan learning,' guiding for a mid-30s percentage rate going forward. Ryan estimated a 200 basis point impact from catching up on cancellation rate estimations in the quarter, which is factored into future guidance, and expects operational improvements over time. Eric Tanzberger, CFO, noted a 15% return across trust funds in 2025, with a typical model of 7%. He clarified that the Q4 2024 perpetual care trust income was pressured by a $4-$6 million loss from a portfolio manager liquidation, making the Q4 2025 performance appear stronger by comparison.

Parker Snure asked for more details on the non-insured Flex product offered on the West Coast, specifically its rationale and appropriateness for that market.

Answer

Tom Ryan, Chairman and CEO, Service Corporation International, explained that the non-insured Flex product is similar to a trust product, offering affordability without the insurance protection of an insured product. It was introduced in certain markets, particularly California, to meet consumer needs where the insured product was too expensive, and is not expected to expand significantly. Parker also inquired about the funeral volume pull-forward becoming negligible, its implications for slightly increased volumes next year, and the knock-on effect on the preneed cemetery business as a lead source. Tom Ryan stated that the diminishing effect of the pull-forward is real and no longer a material factor. He highlighted positives like prime locations, demographics, a large preneed backlog, and higher-value contracts, all pointing to future EPS growth. Finally, Parker asked about the SCI Direct insurance transition's impact on production declines, expectations for returning to pre-transition levels, and any changes in sales force turnover. Tom Ryan acknowledged the drastic change requiring licensure and predicted growth off the new base in 2026, though returning to pre-change levels might take a couple of years. He noted the importance of hiring, licensing, and product familiarity for the sales force, anticipating impressive long-term earnings growth for SCI Direct due to higher general agency revenues and a valuable backlog.

Parker Snure asked for a deeper explanation of the non-insured Flex product offered on the West Coast and its rationale. He also inquired about the diminishing funeral volume pull-forward effect, its impact on the preneed cemetery business, and the SCI Direct insurance transition, including expectations for returning to pre-transition sales levels and sales force turnover.

Answer

Tom Ryan, Chairman and CEO, Service Corporation International, explained the non-insured Flex product as an affordability-driven alternative to insured products, similar to a trust product, introduced in specific California markets to meet consumer needs. He stated the funeral volume pull-forward effect is becoming negligible, expecting positive trends from demographics and the preneed backlog to drive future growth and positively impact cemetery sales leads. For SCI Direct, he acknowledged a temporary decline due to the insurance transition and licensure requirements, anticipating growth off a new base in 2026, though returning to pre-change levels may take a couple of years, emphasizing the long-term value of the backlog.

Parker Snure of Raymond James inquired about the expected seasonality of funeral volumes in the second half, any changes to preneed cemetery payment terms, the sustainability of the long-term 8-12% growth algorithm, and any lingering business impact from recent fires near Rose Hills.

Answer

Chairman, President & CEO Thomas Ryan acknowledged that Q3 presents a tough year-over-year comparison for funeral volumes but an easier one for preneed cemetery sales. Executive VP & CFO Eric Tanzberger confirmed no material changes to cemetery payment terms, noting strong installment receipts. Ryan also expressed confidence in the 8-12% long-term growth algorithm, citing positive underlying trends, and stated there is no noticeable ongoing business disruption from the fires.

Parker Snure inquired about the risk of consumer trade-downs in at-need funeral services due to macro pressures and asked for clarification on the earnings and volume impact from M&A activity.

Answer

CEO Thomas Ryan stated that historically, the company has not seen significant trade-downs on at-need funerals during tough economic cycles, as it's an emotional purchase. CFO Eric Tanzberger clarified that reported volume growth is on a same-store basis, adjusted for M&A. He estimated that acquisitions typically contribute 1-3 percentage points to the company's overall 8-12% annual earnings growth framework, depending on the timing and scale of deals.

Parker Snure, on for John Ransom, asked about the drivers of stability in the lower-end preneed cemetery consumer segment, the impact of recent hurricanes in Florida on operations, and the integration process and synergy realization for newly acquired businesses.

Answer

Executive Vice President and CFO Eric Tanzberger stated that stability in the core cemetery business is not due to loosening payment terms or unusual incentives but is related to lead flow from funeral volumes. Chairman and CEO Thomas Ryan added that the Florida hurricanes caused a temporary shutdown of about a week to 10 days, creating a minor headwind of perhaps $0.01-$0.02 for the quarter, but business has since bounced back. Regarding acquisitions, Tanzberger explained that synergies are realized quickly through national and local scale, with purchase multiples of 8-10x EBITDA pre-synergies. He emphasized that the acquired businesses are fundamentally solid and that former owners often stay on, which aids in a smooth, accretive integration.

Parker Snure of Raymond James asked for details on Encompass Health's outlook for provider taxes and supplemental payments, including their total exposure, the 2026 outlook, and potential upside from pending programs like one in Florida.

Answer

EVP and CFO Doug Coltharp stated that the EBITDA impact from net provider taxes for 2025 was approximately $21 million, with over $3 million being out of period. He anticipates this impact to remain relatively flat for 2026, comparing it to $15.5 million in 2024.

Parker Snure asked for details on Encompass Health's outlook on provider taxes and supplemental payments, including total exposure, the outlook for 2026, and potential upside from pending programs, particularly in Florida.

Answer

Doug Coltharp (EVP and CFO) stated that the EBITDA impact from net provider taxes for 2025 was approximately $21 million, with a little over $3 million being out of period. He assumed this would remain relatively flat as they move into 2026, comparing it to an EBITDA contribution of $15.5 million in 2024 with a comparable out-of-period amount.

Parker Snure of Raymond James inquired about the key factors in the earnings bridge from 2024 to 2025, beyond public company costs. He also asked for an update on discussions with PBM partners regarding the Inflation Reduction Act (IRA) and queried the potential Q1 business impact from a longer-than-usual flu season.

Answer

Executive David Morris explained that the 2025 outlook is based on high single-digit organic growth combined with M&A, describing it as "steady as we go." Regarding the IRA, Morris stated that management is comfortable with the progress of discussions and confident in their ability to mitigate any headwinds. He also clarified that a severe flu season doesn't materially impact their business, as they aim to vaccinate nearly all residents regardless. Executive Fred Burke added that any related prescription impact would be marginal.