Service Corporation International (SCI) Q1 2026 Earnings Call Transcript
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Overview
The company presented strong growth initiatives in cemetery sales, with preneed funeral growth despite declining at-need volumes. The cremation cemetery strategy and acquisition pipeline show potential for sustained growth. Despite some uncertainties, such as funeral volume recovery and trust fund earnings volatility, the overall outlook remains positive due to strategic expansions and initiatives. The EPS guidance, although wide, suggests potential for higher performance if volumes recover. These factors, coupled with effective cost management and expanding initiatives, indicate a positive stock price movement over the next two weeks.
Key Financial Performance
Adjusted Earnings Per Share (EPS) $0.97, compared to $0.96 in the prior year. The slight increase was due to favorable impacts of a lower share count and a slightly lower effective tax rate, partially offset by higher interest expense.
Funeral Revenue Decreased by $17 million or just less than 3% year-over-year, primarily due to a 6.6% decline in core funeral services performed. The decline was attributed to a strong flu season in the prior year and broader first-quarter mortality trends.
Core Average Revenue Per Funeral Service Increased by 3.5% year-over-year, reflecting disciplined pricing execution and the strength of offerings.
Non-Funeral Home Revenue Increased by $2 million, driven by a 10% increase in the average revenue per service.
Funeral Gross Profit Declined by $23 million, with the gross profit percentage down 300 basis points to just over 21%. This was primarily driven by the $17 million decline in funeral revenues and a modest increase in selling compensation.
Preneed Funeral Sales Production Increased by $18 million or about 6% year-over-year, with core preneed funeral sales production up by $13 million (6%) and non-funeral home preneed sales production up by over $5 million (9%).
Cemetery Revenue Increased by $31 million or about 7% year-over-year, driven by a $28 million (10%) increase in recognized preneed revenue and a $6 million increase in other revenue, partially offset by a $3 million decline in at-need revenue.
Cemetery Gross Profit Increased by $15 million or 11%, with margin expansion of 120 basis points to approximately 33%. This was driven by higher-margin trust income, partially offset by above-inflation growth in fixed cemetery maintenance costs.
Adjusted Operating Cash Flow $335 million, an improvement of just under $20 million or 6% year-over-year. This was positively impacted by a $20 million source of working capital related to payroll tax timing and stronger preneed cash receipts, partially offset by lower adjusted operating income and higher cash interest.
Capital Investment $108 million, including $66 million in maintenance capital (e.g., $41 million in cemetery development, $20 million in funeral home and cemetery improvements, and $5 million in digital strategy), $17 million in growth capital, and $24 million in acquisitions.
Shareholder Capital Return $190 million, including $143 million in share repurchases and $47 million in dividends.
Corporate G&A Expense $44 million, down $1 million year-over-year but higher than quarterly guidance due to higher accruals related to long-term incentive compensation plans.
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Operating Highlights
Acquisitions: Invested $24 million into business acquisitions in the quarter, adding locations in Texas, Massachusetts, Alabama, and North Carolina. On track to achieve $75 million to $125 million acquisition investment target for 2026.
Preneed Sales Growth: Preneed funeral sales production increased by $18 million (6%) and preneed cemetery sales production grew by $32 million (10%) compared to the prior year.
Cost Management: Maintained strong control over cost structure, with fixed cost growth held to just over 1%, well below inflation.
Cash Flow: Generated adjusted operating cash flow of $335 million, a 6% improvement over the prior year.
Capital Investments: Invested $108 million in capital, including $66 million in maintenance capital, $17 million in growth capital, and $24 million in acquisitions.
Shareholder Returns: Returned $190 million to shareholders through $143 million in share repurchases and $47 million in dividends.
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Risk or Challenges
Funeral Revenue Decline: A mid-single-digit decline in funeral case volume led to a $0.02 reduction in earnings per share from operating income. This decline was attributed to a strong flu season in the prior year and broader first-quarter mortality trends.
Higher Interest Expense: Higher interest expenses partially offset the favorable impact of a lower share count and a slightly lower effective tax rate, impacting earnings per share growth.
Funeral Gross Profit Decline: Funeral gross profit declined by approximately $23 million, with the gross profit percentage down 300 basis points to just over 21%, primarily driven by a $17 million decline in funeral revenues.
Increased Selling Compensation: A modest increase in selling compensation, consistent with higher preneed funeral sales production and a greater mix of insurance-funded contracts, led to accelerated selling expense recognition.
Fixed Cemetery Maintenance Costs: Above-inflation growth in fixed cemetery maintenance costs partially offset higher-margin trust income, impacting cemetery gross profit margins.
Trust Fund Returns Volatility: A 0.7% decline in combined trust fund returns was observed in the quarter, though a recovery was noted in April. This volatility could impact financial stability.
Higher Cash Interest: Higher cash interest expenses, primarily due to higher average balances on floating rate debt, partially offset by lower floating rates, impacted adjusted operating cash flow.
Regulatory and Tax Rate Changes: Future regulatory changes or the absence of additional tax planning strategies could increase the normalized cash tax rate from 15%-16% in 2026 to 24%-25% beyond 2026.
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Guidance & Outlook
2026 Normalized Earnings Per Share Guidance: Reaffirmed guidance range of $4.05 to $4.35. Despite first-quarter funeral volume headwinds, the company expects year-over-year rate of decline to moderate, supported by strong preneed cemetery sales, average revenue per funeral, and disciplined expense management.
Funeral Volume Trends: Anticipates a 1% to 3% decline in funeral volumes for 2026, with expectations of improvement as the year progresses.
Preneed Cemetery Sales: Strong momentum expected to continue, driven by sales force retention and growth, particularly in community-based teams.
Capital Expenditures: Targeting $75 million to $125 million in acquisition investments for 2026, with continued investments in new funeral homes, cemetery development, and digital strategies.
Trust Fund Returns: Full-year expectation of approximately 7% trust fund return, supported by market recovery observed in April.
Adjusted Operating Cash Flow Guidance: Confirmed 2026 guidance range of $1.0 billion to $1.06 billion, with normalized cash tax rate of 15% to 16% for the year.
Effective Tax Rate: Full-year 2026 effective tax rate expected to align with 2025 at 25% to 26%.
Long-Term Cash Tax Rate: Anticipates a return to a normalized cash tax rate of 24% to 25% beyond 2026, barring additional tax planning strategies or regulatory changes.
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Shareholder Return Plan
Dividends Paid: $47 million of dividends were distributed to shareholders during the quarter.
Share Repurchases: $143 million was spent on share repurchases, reducing the number of shares outstanding to just over 130 million at the end of March.
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Key Q&A
Q:How did funeral volumes progress throughout the first quarter and what are the expectations for the second quarter?
A:Funeral volumes were down in all three months of the first quarter, with January and February seeing steeper declines and March slightly better but still down. April is also down but not as bad as the first quarter. Management anticipates improvement throughout the second quarter and positive comparisons in the back half of the year.
Q:What is the outlook for preneed cemetery production for the full year?
A:Preneed cemetery production grew 9.7% in the first quarter. Management expects mid-single-digit growth for the year, driven by initiatives like increasing headcount, improving lead-to-sale ratios, and expanding seminars. They are confident in maintaining momentum despite tougher comparisons later in the year.
Q:What is the expected EPS seasonality for the year and what factors could impact it?
A:First quarter EPS was $0.97, and historically, the second quarter is down $0.08 to $0.10. This implies $0.88 for Q2 and $1.85 for the first half. Management expects a ramp in the second half due to recovering funeral volumes, which could shift profitability to later in the year. They are modeling different scenarios and will refine estimates after Q2.
Q:What were the reasons for the decline in funeral volumes in Q1, and did it impact market share?
A:The decline was attributed to tough year-over-year comparisons due to last year's strong flu season. Management does not believe it impacted market share, as checks with private competitors and CDC data indicate similar trends across the industry. They expect volumes to bounce back.
Q:What actions were taken to address declining funeral volumes?
A:Field teams managed labor costs by adjusting part-time and full-time help based on volumes. Other cost controls included managing travel expenses while maintaining high-quality service. Management emphasized long-term focus on customer and employee care.
Q:What initiatives are driving growth in cemetery sales, and how sustainable are they?
A:Growth is driven by initiatives like increasing headcount, expanding seminars, and targeting cremation consumers with new strategies. Large sales contributed significantly, with $20 million growth in Q1. Management expects sustained growth through these initiatives and plans to expand cremation-focused efforts to more markets.
Q:How is preneed funeral growth being achieved despite declining at-need funeral volumes?
A:Preneed funeral growth is driven by seminars held outside funeral homes, better lead generation, and improved closing rates. Transitioning to a new insurance partner and product has also contributed to improved performance.
Q:What is the potential impact of the cremation cemetery strategy?
A:The cremation cemetery strategy, piloted in 10 markets, showed strong results by educating consumers about cemetery options for cremation. Management plans to expand this initiative to 80 more markets in July, expecting it to complement overall growth.
Q:What are the expectations for funeral and cemetery gross margins for the year?
A:Funeral gross margins are expected to be slightly down due to volume declines, while cemetery gross margins are expected to grow by 60 to 120 basis points, depending on revenue growth.
Q:What is the outlook for acquisitions and their impact on the business?
A:The acquisition pipeline remains strong, with $25 million closed in Q1 and additional deals in April. Management does not expect short-term funeral volume declines to impact long-term acquisition opportunities.
Q:What is the guidance range for EPS and what factors could influence it?
A:The EPS guidance range is wide due to uncertainty in funeral volume recovery. Management expects to be in the lower half of the range if volumes remain low but could move to the upper half if volumes recover and cemetery trends continue positively.
Q:What is the impact of large sales on cemetery performance and how consistent are they?
A:Large sales contributed significantly to Q1 growth, but their timing can vary quarter-to-quarter. Management is confident in sustained growth due to expanded inventory and initiatives targeting high-value sales in more markets.
Q:What is the impact of trust fund earnings volatility on results?
A:Trust fund earnings are expected to range between $300 million and $350 million for the year, with muted short-term impact due to the time it takes for contracts to mature.
Q:What is driving above-inflation cemetery maintenance costs?
A:Cemetery maintenance costs are driven by labor, water, fertilizers, and equipment. Management is working to control these costs while maintaining high-quality service and appearance.
Q:What is the timing and impact of Qingming on cemetery sales?
A:Qingming occurs in late March and early April, crossing over quarters. It provides an opportunity to present new inventory and contributes to cemetery sales, but its impact was consistent with prior years.
Q:Review of Unclear Management Responses
A:Management avoided providing specific numerical guidance for the potential contribution of the cremation cemetery strategy, citing the early stage of the initiative and limited data from the 10 pilot markets. They also did not provide precise details on the expected impact of trust fund earnings volatility on quarterly results, emphasizing the long-term nature of the effect.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
CDC industry
CEO overview
COVID era
Cemetery digit
Core revenue
Outside COVID
Preneed funeral
SCI risk
Treasury Investor
ability closing
ability term
addition funeral
average basis
balance funeral
capital discipline
case volume
challenge insurance
channel challenge
closing term
community team
compensation preneed
context Outside
contract expense
control cost
cost inflation
cost structure
customer relationship
decline case
decline funeral
decline momentum
decline need
decline service
funeral case
funeral revenue
margin framework
point decline
production funeral
reach
revenue increase
strength
term headwind
value
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The company presented strong growth initiatives in cemetery sales, with preneed funeral growth despite declining at-need volumes. The cremation cemetery strategy and acquisition pipeline show potential for sustained growth. Despite some uncertainties, such as funeral volume recovery and trust fund earnings volatility, the overall outlook remains positive due to strategic expansions and initiatives. The EPS guidance, although wide, suggests potential for higher performance if volumes recover. These factors, coupled with effective cost management and expanding initiatives, indicate a positive stock price movement over the next two weeks.
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