Service Corporation International - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered broad-based beats: revenue $1.074B (+2.8% YoY), GAAP EPS $0.98 (+10% YoY), and adjusted EPS $0.96 (+8% YoY); all exceeded S&P Global consensus (Rev $1.061B, EPS $0.91) as funeral strength and higher general agency commissions offset cemetery softness. Estimates from S&P Global*.
• Adjusted operating cash flow surged to $316.0M vs $220.1M YoY, driven by higher operating income, lower cash interest, and favorable working capital timing; GAAP cash from operations was $311.1M.
• Management confirmed 2025 guidance (adjusted EPS $3.70–$4.00; adjusted operating cash flow $830–$890M; maintenance capex $315M), with an expected adjusted ETR of ~25–26% and corporate G&A averaging $39–41M per quarter for the rest of the year.
• Capital return accelerates: quarterly dividend declared at $0.32 and share repurchase authorization increased to $600M, enhancing buyback capacity and potential stock support.
• Key catalysts: funeral segment margin expansion (+240 bps same-store), strong cash generation supporting buybacks/M&A, and insurance-funded preneed transition setting up sustained average revenue per service uplift in future periods.

What Went Well and What Went Wrong

• What Went Well

  • Funeral segment outperformance: total funeral revenue $639.5M (+$34.8M YoY) and gross profit $154.0M (+$22.1M YoY), with comparable funeral gross margin +240 bps to 24.3% on higher average revenue per service and services performed.
  • General agency revenue tailwind: core general agency and other revenue grew $8.3M YoY on higher commission rates and a greater mix of underwritten insurance products under the new preneed agreement.
  • Cash flow strength: adjusted operating cash flow rose to $316.0M (+$95.9M YoY) on working capital benefits (cemetery installment receipts and payroll timing), higher operating income, and lower cash interest.
  • Management quote: “Adjusted EPS growth of 8% and strong adjusted operating cash flows… driven by strong performance in our funeral segment… and margin expansion” — Tom Ryan.

• What Went Wrong

  • Cemetery softness: cemetery revenue declined to $434.7M (−$5.9M YoY) and gross profit to $137.4M (−$4.9M YoY), with comparable cemetery gross margin down 80 bps to 31.6% on lower recognized preneed property revenue.
  • SCI Direct preneed headwinds: non‑funeral home preneed sales revenue decreased by $6.8M YoY amid operational changes deferring merchandise deliveries and expected administrative challenges from trust-to-insurance transition; non‑funeral preneed production fell $19.9M (−25.5%).
  • Higher tax rate: GAAP effective tax rate rose to 26.1% (adjusted 25.9%) vs 22.9% prior year, tempering below-the-line benefits from lower interest and share count.
  • Analyst concern: large cemetery sales were at the lower end of the quarterly range (~$30M) due to timing and development constraints (e.g., Rose Hills), though management expects recovery in subsequent quarters.

Transcript

Operator (participant)

Good day, and welcome to the SCI First 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 your telephone keypad. To withdraw your question, please press star, then two. Please note, this event has been recorded. I would like to turn the conference over to SCI Management. Thank you, and over to you.

Trey Bocage (Director of Investor Relations and Strategic Finance)

Good morning, everyone. This is Trey Bocage, Director of Investor Relations and Strategic Finance. Welcome to our First Quarter Earnings Call of 2025. 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 make certain non-GAAP financial disclosures.

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.

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 current outlook for the year 2025. For the first quarter, we generated adjusted earnings per share of $0.96, which compares to $0.89 in the prior year.

We saw impressive increases in funeral revenue and gross profit, partially offset by slightly lower cemetery revenue and gross profit, which when combined resulted in $0.07 of earnings per share growth from operating income. Below the line, the favorable impact of a lower share count and a slightly lower interest expense was effectively offset by a higher effective tax rate. The higher tax rate was the result of the non-deductibility of certain excess tax benefits from the settlement of stock option awards. If the tax rate had remained constant, we would have had an additional $0.04 in earnings per share, resulting in 12% 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 increased over $23 million, or about 4% over the prior year quarter, as strong core revenue and core General Agency revenue growth exceeded declines in SCI Direct non-funeral home pre-need sales revenue. Comparable core funeral revenue increased by $18 million, or about 4%, primarily due to a healthy 2.5% growth in the core average revenue per service and a 1% increase in core funeral services performed. This core average growth was achieved despite a modest increase of 40 basis points in the core cremation rate. SCI Direct non-funeral home revenue decreased by $3 million, driven primarily by a $7 million decline in non-funeral home pre-need sales revenue, resulting from the anticipated negative effect of operational changes to defer merchandise deliveries. This was partially offset by growth in General Agency commissions, as we are in the process of switching from a trust to an insurance-funded pre-need model.

This net decline from pre-need sales revenue was partially offset by a $4 million increase in non-funeral home revenue, generated by an impressive 6% increase in non-funeral home services performed and a 10% improvement in the average revenue per service from the effect of higher value contracts maturing from the backlog. Certain of these contracts now include merchandise or travel protection that more recently was deferred from the time of sale into the backlog. This healthy average revenue per service growth should continue as more contracts with merchandise and travel protection mature over the coming years.

Core General Agency and other revenue grew by an impressive $8 million, primarily due to growth in General Agency revenue driven by higher average commission rates derived from our new pre-need insurance marketing group, as well as the effect of selling a larger percentage of underwritten insurance products, which carry a higher commission rate versus a flex or a non-underwritten product. Funeral gross profit increased by about $21 million, while the gross profit percentage increased by 240 basis points to over 24%. This gross profit increase was the result of the solid 4% revenue increase, combined with managing fixed costs to about a 1% increase for the quarter. Pre-needs funeral sales production decreased by $32 million, or about 10% over the first quarter of 2024.

Core pre-need funeral sales production decreased by $12 million, or 5%, primarily due to the transition to our new pre-need insurance provider during the back half of 2024. We anticipate comparable core pre-need sales production to normalize later in the back half of 2025. Non-funeral home pre-need sales production decreased $20 million, or 26%, as SCI Direct transitions from the sale of trust to insurance-funded pre-need contracts. This transition required many of our sales counselors to go through extensive training and obtain insurance licenses and change the payment terms for customers financing their pre-need, all of which contributed to a temporary slowdown in sales. As of today, we've made the transition in markets that represent 80% of our production, so this too should stabilize over the next few months and begin to grow again probably sometime during the fourth quarter of 2025.

Now shifting to cemetery, comparable cemetery revenue decreased by $8 million, or about 2%. The core revenue decline of $10 million was partially offset by a $2 million increase in other revenue. The core revenue decline over the prior year quarter was primarily attributable to a $12 million decrease in recognized pre-need property revenue due to lower sales production. Within recognized pre-need property revenue, the negative effect of lower recognition rates on the new construction and pre-need merchandise was offset by higher merchandise and service trust income. Remember, this deferred sales production enhances our backlog and will be recognized in future periods. The $12 million decline in recognized pre-need property revenue was partially offset again by a $2 million increase in internal care fund income.

Comparable pre-need cemetery sales production declined by $8 million, or about 3%, as a modest increase in core production was more than offset by a decrease in large sales. We believe the decline in large sales is a timing issue that could be recovered in future quarterly periods. While we have not yet closed the books, April pre-need cemetery sales production looks very good. Cemetery gross profit in the quarter decreased by $6 million, and the gross profit percentage declined by 80 basis points, generating an operating margin of 32%. Our 2% revenue decline was somewhat mitigated by a less than inflationary 1% growth in our fixed costs. Now let's shift to discussion about our outlook for 2025. As you saw in our earnings release, we are confirming our normalized earnings per share guidance range of $3.70-$4 for 2025, or a midpoint of $3.85.

The current midpoint of the range represents a 9% year-over-year growth in earnings per share. Again, neutralizing the increased tax rate caused by the loss of deductibility of certain excess tax benefits from the settlement of stock options would result in the midpoint generating 12% earnings per share growth. For the full year 2025, within our funeral segment, we expect flat to slightly down funeral volume compared to 2024, with the average revenue per case growing at inflationary rates, slightly negated by the effect of a modest cremation mix increase. While we're still absorbing the temporary negative financial effects of our SCI Direct transition, we do expect to see higher General Agency revenue generated from the favorable impact of our new insurance agreement. When combined, this should result in healthy profit growth for the funeral segment, increasing the gross margin percentage by 80 to 120 basis points.

Transitioning to pre-need funeral, we expect pre-need funeral sales production to be slightly lower in 2025 as we continue the transition of SCI Direct to an insurance-funded model and we adapt to the new policies and products from our new insurance partner in our core channel. While sales production may be down for the year, for some perspective, the $1.2 billion of pre-need funeral sales production we expect for 2025 is 27% higher than 2019, or a 4% compounded growth rate over the last six years. As we think out to 2026, we would expect pre-need funeral sales production to return to a low to mid-single-digit % growth rate. From a cemetery perspective, we anticipate that we can grow pre-nee cemetery sales production in the low single-digit % range, resulting in cemetery revenue growth of about 1-2%.

The volatility in the equity markets and the potential impact on trust income for the rest of the year has caused us to dial back our expectations a bit. Continued focus on managing inflationary costs should result in some segment profit dollar growth while maintaining our impressive gross margin percentages in the 32-33% range. Below the line, we expect favorable impacts from slightly lower interest expense and a lower share count that will be negated for the most part by the higher effective tax rate caused by the loss of deductibility of excess tax benefits from stock option exercises. 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, and attention to detail is the foundation of our success. Thank you for making a difference every day.

With that, Operator, I'll now turn the call over to Eric.

Eric Tanzberger (CFO)

Thank you, Tom, and good morning. Thank you to everyone joining the call today. As I usually do, I want to start to take the first moment to express my deepest appreciation to each of our 25,000-plus dedicated associates. The exceptional service that you provide continues to make a meaningful and lasting impact on the lives of the families and communities that we are so proud to serve. I'm truly proud of the work that you do each and every day and want to say very clearly, thank you. With that, today I'll begin my remarks by providing highlights on our cash flow results and our capital investments in the quarter. I'm going to make a few comments on corporate G&A and then conclude the remarks by an update on our overall financial position.

Starting with cash flow, we generated very solid adjusted operating cash flow of $316 million in the quarter. This did exceed our expectations and was a substantial improvement, a little over $90 million improvement over the prior year. Let's break this down a little bit. Adjusted operating cash flow was supported by higher operating income, and that was about $20 million, which again highlighted the sustained strength and the underlying business during the quarter that Tom just walked through and addressed. Cash interest had a timing issue so it was lower by about $15 million. The timing issue associated with the bond financing that we did in the fall of last year coincided with the reduction of our bank credit facility that we completed this past September, as well as a little bit lower rates on our floating rate debt.

Offsetting these items, cash taxes of $5 million was slightly higher than the prior year by about $3 million. Finally, working capital provided a significant source this quarter of $65 million from $37 million of higher cemetery installment receipts and other pre-need working capital timing, as well as a favorable $28 million source of cash as a result of one less payroll cycle when you compare this current quarter to the prior year quarter. Now let's talk about capital investment. In the first quarter, we invested $95 million into existing locations, new build and expansion opportunities, business acquisitions, and real estate.

Breaking this down, in line with expectations, we invested about $67 million of maintenance capital back into our current funeral homes and cemeteries, with $41 million allocated to high-returning cemetery development projects, $21 million into our current funeral and cemetery locations, and $5 million into digital investments and some other miscellaneous corporate spend. We also invested $13 million of growth capital in the first quarter towards the purchase of real estate, construction projects of new funeral homes and crematories, and the expansion of existing funeral homes and cemeteries. Finally, we invested $15 million towards business acquisitions during the quarter. We again remain optimistic about the deal pipeline that is currently out there in the industry, and we do expect to achieve our $75-$125 million of acquisition investment, which is our target for the full year of 2025.

Moving to distributing and investing this capital, we returned a substantial $176 million of capital to shareholders in the first quarter, which was done through $46 million of dividends and $130 million of share repurchases. To dive in a little bit deeper on that, we repurchased just under 2 million shares, about 1.6-1.7 million shares, at an average price of $79 during the quarter, bringing the number of shares outstanding to approximately 143 million shares at the end of the quarter. Subsequently, we have completed another 900,000 shares purchased for about $71 million, which works out to an average repurchase price of about $78. I'd like to now shift gears a little bit and make a brief comment about our corporate G&A expense during the quarter.

G&A expenses increased about $3 million quarter over quarter, primarily due to higher worker compensation claims as well as higher expenses related to the timing of some of the incentive compensation accruals. As we look forward for the rest of the year and the next three quarters, we continue to expect that corporate G&A expense will average probably about $39-$41 million a quarter for each of these quarters for the remainder of the year, although, as you've seen before, we do expect some variability in this due to our long-term incentive compensation plans that could push us above or below this kind of range during a particular quarter based on how the company is performing in the future during the year. Now shift to further more information of the outlook.

As you may have seen in the release, we confirmed our 2025 adjusted operating cash flow guidance range of $830 million-$890 million, with a midpoint of $860 million. After deducting $315 million, which is the expected maintenance capital, we expect impressive adjusted operating free cash flow of almost $550 million for the full year of 2025. As we have addressed several times in the past, seems like numerous quarters, cash taxes will revert to a more normalized level in 2025 following a change in tax accounting policy that has benefited our cash flows since really the mid or third quarter of 2023.

As federal cash tax payments are generally not made in the first quarter, the headwind, which is about $150 million, to remind you, year over year, that we've discussed will be more pronounced beginning next quarter or the second quarter as we're in right now as we speak. As we've addressed in prior quarters, we also expect our effective tax rate in 2025 to be about 25-26%. Again, it's as Tom mentioned, as excess tax benefits are no longer recognized on the settlement of certain executive employee share-based awards. I'd like to now conclude my comments with an update on our financial position. We continue to have a very attractive and manageable debt maturity profile with substantial liquidity.

We ended the quarter with liquidity of about $1.6 billion, consistent of approximately $230 million of cash and approximately $1.35 billion available on our long-term bank credit facility. Our leverage declined during the quarter. It went from about 3.65 times, that again is net debt/debt/dot, at the end of the year, to 3.59 times at the end of this first quarter, which again is toward the lower end of our long-term leverage target range of three and a half to four times. In conclusion, our strong balance sheet position we just walked through, our liquidity combined with substantial robust cash flows really continue to underpin the continuation of a very strong capital investment program, which again provides us tremendous flexibility to invest opportunistically for the long-term benefit of our company, our associates, and our shareholders.

Finally, I just want to again reiterate how extremely proud we are of the entire SCI team. The way you continue to serve the families in need at their greatest time is truly inspiring. Again, thank you for everything that you're doing. Operator, with that, that concludes Tom and myself's remarks, and we'll go ahead and turn it back to you, and we'll open the call up to questions.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Joanna Gajuk with Bank of America. Please go ahead.

Joanna Gajuk (Equity Research Analyst)

Hey, good morning. Thanks so much for taking the question. Maybe first on the cemetery pre-need sales production being down, it sounds like some of it was worse, right? Now you're kind of guiding to a little bit slower growth. Can you maybe talk about what you assume for the largest versus core? It sounds like large was worse, but maybe core was a little bit better. In that context, can you also talk about your, I guess, experience at the Rose Hills location? I guess that the community or the communities around Rose Hills were impacted by the wildfire. I just wonder if there's any slowdown there.

Tom Ryan (Chairman and CEO)

Yeah, thanks, Joanna. Good to hear from you. As it relates first to the first part of your question around production and large sales, it's probably good to remind everybody kind of the cadence of large sales. In 2019, on an annualized basis, we had about $90 million of production. For the last three or four years, we've probably averaged about $180 million. On an average basis, we'll sell $45 million a quarter. What we've seen is kind of a lot of volatility between quarters, really just about the timing of when they close. We've seen a range of $30 million in a quarter to $57 million in a quarter. Again, they tend to kind of level out. The first quarter was towards that $30 million number. It isn't a place that we haven't seen before.

I think our expectations right now, at least based on what we're seeing out there and the appointments being set, we see a pretty strong pipeline. April's turning out to be a really good sales quarter, both on a core and on a large sales. From what we see in the business today, we feel confident that sales look pretty good as we go forward. We're not blind to what's going on outside. There's a lot of pressure right now, and I think discretionary purchases in other industries, you're seeing it in retail and others. What I want to remind people is we've been through this movie before. In 2008 and 2009, and then again in 2020 and 2021, discretionary purchases really kind of fell off the map in a lot of industries.

The nice thing about us that I see in our business is we're viewed as a mature sale or call it a taking care of business type of sale. We're not a big screen TV. We're not a sports car. This is a responsible decision. We always saw these sales tend to come back very quickly relative to other discretionary purchases. We feel pretty good about the rest of the year and feel like the large sale pipeline, we're still seeing a lot of interest and activity there. As it relates to Rose Hills, again, I think, of course, there was some distraction as it relates to these fires. Regionally, we're going to have that quarter to quarter. Our team's done a fantastic job, I think, selling through that and taking care of their community.

We feel good about the rest of the year as it relates to Rose Hills. There are a lot of exciting things happening and a lot of new projects that are scheduled to open later in the year and in early 2026. Hopefully that answers your question, Joanna.

Joanna Gajuk (Equity Research Analyst)

Yeah, no, thank you. Rose Hills in particular, or the West Coast, in terms of the Qingming festivities, I guess it sounds like, at least in Rose Hills, based on your response when you said you feel good about things there, it sounds like those kind of progress as normal in terms of just the product that's available and the foot traffic around those festivities.

Tom Ryan (Chairman and CEO)

Yes, I would say we've had a very good Qingming in the various markets around the country where that's strong. We feel good about that and through the first quarter and the momentum into April. We're not seeing anything that concerns us right now, but we're very aware and we're on top of the fact that there's a lot of uncertainty out there. We're trying to manage people through it as best we can. I think it was a pretty solid first quarter. In April, again, it's only a month, but looks to be really solid.

Joanna Gajuk (Equity Research Analyst)

If I may, another, I guess, item that's quite topical outside of this questionnaire, obviously the tariffs. Maybe you can walk us through how you're thinking about this. Obviously, things are very fluid, but based on what you know, how would you think about any incremental costs? This year, are you including anything in your guidance? Also, if you can, give us some sense in terms of the exposure for your purchases to China specifically and other markets. Thank you.

Tom Ryan (Chairman and CEO)

Thanks, Joanna. We feel pretty good about it in this particular category. We do have, when you think about things that would logically maybe be affected by this, you're going to talk about the merchandise that we're selling both in our funeral segment and our cemetery segment. That's primarily going to relate to caskets on the funeral side. It probably relates to some urns for cremated remains on both the funeral and cemetery side. On the cemetery side specifically, it's going to relate to granite and bronze and those types of products that are used in terms of celebration at the cemeteries themselves. Ultimately, that's a couple hundred million dollars for us in terms of costs when I lump all of that as a very general category. I got to tell you, there's a good 60% or two-thirds that we already source within the U.S.

The things that we're sourcing externally, I'd give you two comments, really. One, as a very general statement, we have entered into long-term production-type contracts with our business partners. Those, without getting into too much detail, I think are going to generally protect us from a lot of these situations in the near term. The other thing is our teams here are doing a really good job of just actively managing it. There's flexibility here where you don't have to take things from China or India and you can source it here in the U.S. We don't want to overreact to that because we do have some long-term protection in some of our contracts. We do think that we will continue to actively manage it and keep our pulse on it, so to speak, so we understand it as we move forward.

To talk specifically about it, we have not really affected our guidance or affected our model in a way that I should mention that would be material because of all these situations that I just described to you.

Joanna Gajuk (Equity Research Analyst)

Okay. You are saying immaterial and you do not assume anything incremental in the guidance as in you can manage this year. I guess we will see how things go and talk about next year later. Yeah, thanks for taking the questions.

Tom Ryan (Chairman and CEO)

You bet, Joanna.

Operator (participant)

Thank you. The next question comes from Scott Schneeberger with Oppenheimer. Please go ahead.

Scott Schneeberger (Managing Director)

Thank you very much. Good morning, all. I'd like to start off asking about funeral volume. It's a pretty big swing from down 3.8% in fourth quarter to up 1.8% year over year in the first quarter. Could you speak to the drivers of that in the first quarter, just maybe the top three by degree of magnitude? And then I'll follow up on that. Thanks.

Tom Ryan (Chairman and CEO)

That's good. I think sometimes because of the volatility between quarters, it's tough. You got one quarter that was weak last year and you're comparing it to a strong one this year. It's much easier to kind of evaluate over annual periods versus quarter. I would say as we track these things, we feel really good about the fact that it's not perfect science, but we are continuing to slightly grow our overall market share, I think, is a belief that we have. Obviously, that's different in each market. Some of that's probably because of our strong pre-need program historically. I think a lot of the efforts that we've put in in the past are bearing fruit today. Those may be the biggest drivers as you think about the year. Quarter to quarter, again, you just have some of this volatility.

The pull forward effect continues to have a more diminished effect, but it is still out there. I think it is harder and harder to compare and predict. We feel very good about the first quarter and feel like, again, between pre-need and competing more effectively, we are enhancing our national market share.

Scott Schneeberger (Managing Director)

Thanks. When you referenced pull forward, you were speaking to the longer-term COVID trend and reversion, or perhaps I think this was a heightened flu season. Just if you could clarify that. Thanks.

Tom Ryan (Chairman and CEO)

Yeah, I'm sorry, Scott. That was really more about the COVID pull forward and, again, kind of that diminishing effect as time goes on. It is still out there, right? I mean, we still have early deaths that may or may not have occurred in this period. I think that's the way we think about it. I've heard some things around the flu season. I don't think we saw anything too dramatic there. I have heard some statistics that that is up and probably has some effect.

Scott Schneeberger (Managing Director)

Thanks. The takeaway here is that it could be, I think the full year expectation was flat to slightly down. Sounds like you're trending, obviously you're trending well against that out of the gate. Just curious kind of how you see that shaping over the end of the year and any change to that specific outlook. Thanks.

Tom Ryan (Chairman and CEO)

Sure. I think we're taking the approach of one quarter does not a year make. We are very pleased with the first quarter. It was ahead of our expectations. We have not altered our annual guidance because, again, it is the first quarter. I would say that we feel a lot better now about that than probably we did as we start the year. Yeah, I am optimistic that it could be a really good, solid funeral volume year as it relates to market share and continue to compete in our marketplace.

Scott Schneeberger (Managing Director)

Thanks. Appreciate that. Just for my follow-up, curious on the cremation mix shift. It's been a little bit below historical average for a while now, over a year, I believe. Just comments on what you're seeing there if you think a new trend is shaping.

Tom Ryan (Chairman and CEO)

It's hard to answer that, but I guess I would say this. When you get to these highest numbers, as you get close to 60%, it just becomes harder and harder to move the needle, I think, if you look at other demographics, different countries as their cremation mix change. You got a lot of Northern Europe and Canada and Australia with high cremation rates. I don't think it's unlike that. I'm not surprised. I think it can still, we used to say 100 to 150 basis points. I don't think we think 150 basis points is in the cards anymore. I don't think 100, if that snuck up in a quarter, would surprise me either. Yeah, I think as you think about that, less than 100 basis points is very, very possible as we move forward.

Scott Schneeberger (Managing Director)

Understood. Thanks very much.

Tom Ryan (Chairman and CEO)

Okay.

Operator (participant)

Thank you. The next question comes from AJ Rice with UBS. Please go ahead.

A.J. Rice (Managing Director)

Of your pre-need funeral volume to insurance. I think when you inked the contract last summer, the discussion was around $700 million-$800 million of core plus a couple hundred million of SCI directs, so it's sort of roughly $1 billion of premium. I may have those numbers wrong. Correct me if they're wrong. It sounds like now with this push, you're going to have meaningfully more premium that comes under this agreement. Do you sort of have a target as to where you think you'll end up as to how much insurance annual premium you're going to generate from pre-need funeral contracts?

Tom Ryan (Chairman and CEO)

Yeah, I think we're still kind of figuring that out because you mentioned two things. One is we're transitioning completely on SCI Direct. That was a 100% trust. We're now converting to effectively almost 100% insurance. As that transition occurs, how quickly can you do it? How many people can you get on board? You're seeing the production levels drop because it's a lot harder to transition from a trust to an insurance product. It's really more about the timing and when that can get back. The other thing is what type of insurance commission can you drive? What would drive that? A single-pay insurance product doesn't pay nearly as much as a multi-pay. What's the mix between the two? You can begin to appreciate why it's hard to completely predict.

I will tell you that you're right in your thinking in that that number is probably going to be north of what you originally thought once we get through the noise. Same thing on the core side. Even though it's still an insurance product, we've got different policies and procedures as it relates to these things. You can take into account Social Security numbers or not having Social Security numbers. That can be a difference as an example of a policy that one insurance provider may have versus a previous insurance provider. As you think again about the products that we sell that are slightly different, the Salesforce has to understand it, convey the value.

I think we're in a little bit of a lull, but as we come out of this, the back half of this year, I really expect us to be hitting on all cylinders in 2026. Again, assuming that all your SCI direct for the most part will come under this insurance product, and we'll go back to call it 3-5% growth on the core as it relates to pre-need funeral. Those numbers are the ones I'd be dialing in as you get into 2026.

Scott Schneeberger (Managing Director)

Okay. I just want to also go back to the comment that I think Eric made about more of the cases coming out of the backlog have merchandise and travel associated with them. I know, obviously, the cases coming out of the backlog, you got the investment income buildup and so on. I wonder incrementally how much do those two things tend to contribute to revenue per case if there is more of that coming out? Is that fully reflected in the run rates you are seeing now, or do you think the percentage of cases that have those two dynamics will continue to increase for a while?

Tom Ryan (Chairman and CEO)

It's going to increase very consistently, very dramatically for a long period of time. Because remember, the function here is we used to sell merchandise and deliver it. We used to sell away-from-home protection and provide it. In both those cases, we had a revenue recognition event. Now what you're seeing happening for the most part is all of those being deferred and being put on, for the most part, an insurance product. We're going to get a G&A revenue now, and that's why we've got the diminished profits as we're losing some of that immediate delivery of merchandise and immediate recognition of away-from-home. They're going into a contract in the backlog. Long-term, think about today or previously, if we sat around $1,400-$1,500 a contract, SCI direct, one day, that average should go to north of $3,000.

That is the path that it is on. It takes those new loaded contracts to become at-need to drive it. It is going to be a trickle at first, and it is going to get bigger and bigger and bigger. As you think about the average on SCI Direct from a service perspective, it has been growing at 10% each quarter so far. I would be surprised if it varies much from that for a very long time.

A.J. Rice (Managing Director)

Is the average life on the SCI direct pre-need contracts the same as in the core funeral business?

Tom Ryan (Chairman and CEO)

I think for the most part, maybe slightly shorter, but I think not dramatically different than the backlog.

A.J. Rice (Managing Director)

All right. I just might ask one last thing on your capital deployment. It sounds like you're expecting the deal activity to be about, which it budgets, $75 million-$125 million. I know you stepped up buybacks in the quarter, share repurchases. Any comment on that? Do you think you'll see elevated share repurchase activity as you progress through the rest of the year?

Eric Tanzberger (CFO)

Yeah. I think we'll have to wait and see in terms of the valuation of each one of those options, AJ. I mean, that's how we've always done it as you've known us. Let's talk about shares first. I mean, the shares were a very nice return as we were buying shares in the high 70s. We think that's a very nice value return for us to continue to invest capital in. We went probably a little heavier in the quarter than what we originally expected, based on what we were seeing. As we saw the quarter month to month get better, we got a little bit more confident. As you know, April was a very good month, as Thomas said as well. From a deal perspective, it's going to ebb and flow.

The important thing is to say we have numerous discussions at any point in time going on, including as we speak. As you've heard me say many, many times, I'm pretty excited about the pipeline. I think 75-125 is generally a good number. Last year, I was wrong. If you remember, it was about $180 million that we ended up investing in. If we have those opportunities, they're normally a really nice return that could be in the almost low teens type after-tax IRRs, which, as a general statement, may be share repurchases depending on where things are trading. Quarter to quarter, we're going to put the capital to the highest relative return opportunity. This quarter, it was shares. That does not mean we are passing up high return opportunities for M&A.

It just means that we continue to develop very long-term relationships with independents and the timing of which kind of ebbs and flows. We are very excited about the future in terms of M&A over the long term.

A.J. Rice (Managing Director)

Okay. Thanks a lot.

Operator (participant)

Thank you. The next question comes from Toby Sommer with Truist Securities. Please go ahead.

Tobey Sommer (Managing Director)

Thank you. I wanted to start out asking you a question about the Salesforce. And maybe you could highlight for us what new initiatives and focus you have for this year, sort of headed into next, and what you think the resulting impacts can be on the financials of the business.

Tom Ryan (Chairman and CEO)

Sure. I'll take that one. I think right now, obviously, a lot of the traditional things that we do as it relates to, for instance, developing high-end cemetery property and making sure we have the right product on the field, if you will, to get that going. What's a little bit different now too is we are very acutely focused on the lead pipeline, how we're getting leads in, how we're working the leads, all the efficiencies around doing that. We currently have a project we're working to that we believe is going to enhance our ability to close sales, to work the sales more effectively. Again, utilizing technology to help us get better in how we're approaching the sales process and enhancing the ability of our salespeople to be successful. A lot of Salesforces have trouble retaining. There's a lot of high turnover.

One of the focuses we're having now is working with our people to make sure we can ensure their success. We believe that's going to bear some fruit. It's going to take some time. Our focus now is really on that retention, making our people successful, and utilizing better data and knowledge around how we bring a lead that comes in the door and how it ends up as a contract.

Tobey Sommer (Managing Director)

I appreciate that. How do you enter this late spring, early summer period from a pre-need delivery and RevRec perspective on cemetery? Could you give us a little bit of the buildup of sales production over the last couple of quarters as we look to the better weather quarters ahead of us?

Tom Ryan (Chairman and CEO)

Yeah. I think as you think about the typical cadence, we tend to have stronger delivery of cemetery construction in the back half of the year. It is typically lighter in the first and second quarters. It gets a little better in the third and then fourth quarter is typically the bonanza quarter. Now, that seasonality is consistent, right? You are comparing against a quarter that had the same characteristics. I think as we think about it, the second quarter, we would anticipate it probably being slightly down as we think about the cadence. Third quarter, year over year, should be a good one, I think, as we think today. Again, these projects can slip. Fourth quarter will be very strong, but so was last quarter. I think that is probably the way to think about it.

Again, with the idea that sometimes things can typically, they're going to come late, not early, right? I guess it could be the other way around.

Eric Tanzberger (CFO)

Toby, I'll add to that too, just by the recognition rate specifically. Last year, it ended up being about 95% of production. It's been like that now for a couple of years. I just want to say that we probably expect nothing different. Despite the quarterly volatility, I think annually, you're probably looking at that recognition rate of somewhere between 95-97% like you did last year.

Tobey Sommer (Managing Director)

That's helpful. I don't think we talked about it here. Anything on the Funeral Rule or anything from a regulatory perspective that you're anticipating this year?

Eric Tanzberger (CFO)

There is a lot going on in Washington, so we do not have an update. Again, it is the same update that is out there. I think a lot of things are changing as we all read the paper together and understand it. I do not know where this is going to exactly shake out. Again, we feel very good about where we are from a regulatory standpoint. If anything comes out, we will adapt very quickly.

It kind of sounds like we are ahead of the curve in some of the cases that you have heard us talk about over several quarters in terms of if there is anything that needs to be posted online or anything along those lines. Ultimately, whatever it is, there is nothing that has been out there to be very clear that appears to have any type of material effect on our company or our financials.

Tobey Sommer (Managing Director)

Thank you.

Tom Ryan (Chairman and CEO)

Yep.

Operator (participant)

Thank you. The next question comes from Parker Snook with Raymond James. Please go ahead.

Parker Snure (Associate Analyst)

Hey, good morning. Yeah, this is Parker on for John Ransom. Maybe just going back on the macro pressure. I mean, I understand the pressure on the pre-need cemetery production with the tough environment, but do you expect any trade down on the at-need funeral side for the funerals that are kind of truly at-need, not coming out of the backlog? Would you expect any trade down there, maybe accelerating shift to cremation, maybe trading down on the catering or the flowers? Is that something that you expect, or is that something that has historically happened under other tough macro cycles?

Tom Ryan (Chairman and CEO)

Yeah, Parker, I can only speak to experience, right? I’d say as I look back over the last 20, 25 years I’ve been involved in all this, I typically would tell you that we have seen not much. In other words, I think it’s an emotional purchase. I think it’s one that people find very important. Of course, on the fringe, you could have some trade down. I’d say for the most part, people want to do what they want to do, and it’s important to them. Yeah, we do not tend to see any kind of big trend downs as it relates to funeral. Cemetery, as we talked about, is a little different because it’s a discretionary purchase. That can have a different impact, right?

I think in the immediate need, people want what they want, and we try to help them deliver that.

Parker Snure (Associate Analyst)

Okay. That's helpful. Maybe just on the impact from M&A, looks like there was a few points of help on the funeral volume side from the non-same store. Looks like roughly 2% good guide of volumes. Is that a good way to think about it for the rest of the year? Maybe just remind us how you're thinking about the M&A benefit you're getting this year from the bulks of M&A that you did last year, maybe just on total earnings and also on funeral volumes.

Tom Ryan (Chairman and CEO)

Yeah. When you think about total earnings, you go back to the original formula of the 8-12%. The midpoint of our guidance is about 9%, as we've talked about before this quarter and the prior quarter. I mean, M&A is going to ebb and flow, as I keep saying. Generally, when you look historically, Parker, M&A can be a couple percentage points. Call it, bless you, call it 1-3% of the 8-12% over complete formula. It just depends on what you did in the prior year. We had a good year in investment last year. Maybe that M&A is going to be in that kind of 2% of the 8-12% kind of area. I can't say it enough.

It just depends on when the deals come and timing of those particular deals, what kind of impact it's going to have. Of course, the volume numbers that we give are same store. So they're being adjusted for that. So they're not influencing the 1.8% that we said in volume for the quarter. That's purely an apples-to-apples same store scenario. It depends on what you buy. If you have a heavy acquisition year that's heavy in the cemetery, that really doesn't matter for the funeral volume model. There are all kinds of different plays back and forth. Generally, I would call M&A maybe a 1-2%, 1-3% growth driver if you have some solid years behind you.

Parker Snure (Associate Analyst)

Okay. Great. Thank you.

Operator (participant)

Thank you. This concludes our question and answer session. I would like to turn the conference back over to the SCI management for closing remark.

Tom Ryan (Chairman and CEO)

Thank you, everybody, for being on the call today. We appreciate you. We'll talk to you again after our second quarter results. Thanks so much.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.