Gain more traction. Right. Okay. All right. Thank you for coming to Service Corporation International, SCI. We have Aaron G. Foley, Senior Vice President, Treasurer. This is Tobey Sommer, Mid-Cap Industrial Analyst at JP Morgan. To set the stage, I wanted to highlight why SCI is here with us today. SCI is North America's largest provider of funeral and cemetery services, uniquely positioned to benefit from demographic tailwinds and robust pre-need backlogs. This scale, brand, leadership, and transformation toward a customer-centric experiences-driven platform have delivered constant growth and strong free cash flow. That's one of the reasons we wanted to have you. Thank you, Aaron, to come to our conference. To kick things off, I think as Aaron, it would be helpful to start with introductions of the SCI, what the company is, what you do, and your story, please. Sure thing, Tobey, and thank you all for your time and yours as well. Aaron Foley, as you mentioned, SVP and Treasurer of SCI. I've been here just over 18 years. Actually came from Moody's Investors Service and started running our forecast and budgeting process at SCI, and kind of just worked my way up there. Kind of started at a very interesting time in the company's history and company's business if you followed or understand the history of the company. It's grown through acquisitions. We went through a hyper acquisitive period during the 1990s, where at one point, we were in over 20 different countries with 4,500 locations. We did so with no focus on return on invested capital. It was just trying to get as many acquisitions under our belt as possible. We've all seen how that unfolds in one way or another. We came up with about $1 billion worth of debt coming due in the next 12 months with negative free cash flow. Mm-hmm. We had to make some tough decisions. We ultimately had to liquidate all of our assets in those other 20 different countries to remain solvent, if you will. Really you know since 2002 to 2005 then changed out the management team really integrated 40 years of acquisitions that had never been integrated and to get our footing under us. Really in 2005 kind of started the strategy that we're at now you know following this 8%-12% earnings growth framework. We did our first major acquisition after that time period and getting you know our feet under us in 2006 with Alderwoods the next largest competitor. I was able to join right after that. Mm-hmm Over the last 18 years, really helped to, you know, manage the capital structure, help with acquisitions, larger acquisitions, financing those over that time and get more involved in the investor relations world over the last 12-1 5 years. Thank you, Aaron. SCI has transformed from a traditional funeral and cemetery operator to a customer-centric, experience-driven platform with a focus on operational excellence and talent development. What has been the most important cultural or organizational change driving this transformation? You know, I would say that the business itself, really you should split between a funeral and a cemetery business. I would say to some degree, it really hasn't changed fundamentally through this transitional period. The funeral industry is truly a caring and compassionate industry. People come in as a calling to help people in their toughest times of their lives to manage through the death of a loved one. The cemetery side rather is really more of a sales-centric, sales-focused type business. It's kind of a real estate play going out and selling. Mm-hmm Individual lots of land to our consumers. What I think we have come in and how we have changed the business is really through the scale that we have. Being able to leverage that scale to go out, we've got a 3,800-person sales force, go out and radiate into our competitor's backyard to build that backlog that we currently have of $17 billion to drive the sales, continued cemetery property sales and go along on that front. As I mentioned through the clustering approach that SCI has, we're able to go in and purchase caskets cheaper than anyone else. We're able to centralize resources as it relates to processing the entirety of the stream of operations for the deathcare cycle as it occurs. We're able to do that. We're able to go in and really tier the cemetery property, as I'm sure we'll talk about later. Mm-hmm. We've got the capital to, you know, go in where a cemetery had been a homogeneous, just, lots throughout the cemetery. We're able to go in and really dig out holes and create lakefront property. We're able to parse out property and create private family estates, private mausoleums, and create from that, you know, base level, entry level, you know, type inventory all the way up to very customized type, inventory as well. We've got the capital to be able to do that. We've got the resources to cascade down from the very top, a very systematized and really consistent platform that we expect our employees to follow to ensure that, you know, we're able to maintain that customer-centric, that caring and compassionate approach to managing our business, but also taking advantage of the scale that we have. Sure. Thank you. How do you ensure the operational discipline, if it comes to service quality and people first culture remain embedded across such a large geographical, like, diverse network? Sir, I think, you know, I think I would say that the tone starts at the top with our, you know, CEO, Tom Ryan, cascading down to the president, Jay, down to John, our Chief Operating Officer, Jerry, Head of Sales. We've got Dignity University is a platform, digital platform that we have that has tens of thousands of hours of online training that are available to our associates. Depending on their roles and responsibilities within the organization, they're required to take a certain curriculum of courses. We've got that requirement in place that they follow to help create some of that consistency. There's also reporting. As you would expect, we make sure that from an operational perspective, all of our locations, you know, have P&Ls. We track those P&Ls, we monitor them, we ensure with the breadth of our operations, where there are outliers, whether it be positive or negative, we understand what is going on at those outliers, and we target into those to give them assistance or learn from them, how they're doing things, differentially better and how we, you know, can cascade that throughout the rest of our organization. We also monitor, you know, online Google star ratings, to make sure that the Google star ratings for the locations where we see, again, outliers, whether positive or negative, how we can go in and just make sure that we can manage those instances, particularly where we're seeing lower Google star ratings. As you know, in this type of industry, as one would expect, reputation is paramount. Mm-hmm. Making sure that our reputation is held true. Most of our locations, they really retain the name of the former owners on the side of the locations, but we do brand them as Dignity Memorial, or many of them as Dignity Memorial. Making sure that that brand is upheld to a certain standard and people know that when they come to one of our locations, what they should expect from a service perspective. Thank you. You talk about branding and also, the reputations. Like, what are the key elements of your people power and talent retention strategies, and how do you maintain consistency and accountabilities across the 2,000+ locations? Yeah. I'd say in addition to, like, that Dignity University I was talking about and monitoring the Google star rating, we've also got internally a survey through, you know, historically had been Great Place to Work. Now it's a We Listen Survey that's, you know, performed through Workday. We cascade that survey out to our 25,000 associates to better understand, you know, what we're doing well and what we may not be doing as well as an employer within the space. We will listen to all of that feedback. We will, you know, internalize it and try to figure out how can we make sure that we're, you know, doing the best that we can for the associates that we're working with. They are truly the lifeblood of our company, and they're the face of our company, to make sure that reputation remains intact. We definitely are monitoring that and ensuring that that's being, you know, reacted to, if you will. Something that we've done more tactically more recently that I would point to, and Tom actually mentioned it on the call recently, is in our sales force, our 3,800-person sales force, we've gone and shifted a portion of our compensation. The cash portion hadn't changed, what's generally getting paid out for each sale. We're shifting from a very more heavily focused variable component to slightly more toward a fixed component of salary. Okay. The reason why we're doing that is, we have noticed that as we've made some shifts in certain different states, to a more fixed structure, that the counselors do have more of a retention. You know, the turnover does get reduced. When you see lower turnover within a sales organization which historically do have large turnovers- Mm-hmm They are more productive. They're able to, you know, explain the services and products that we're selling better to the consumers, and they're better able to transact. We also notice that we have a better quality of sale coming through, that there are fewer cancellations that come from counselors who've been on for a lot longer. We utilize those strategies. We try to figure out how to tweak tactically on the fringes to, you know, maximize the retention and ensure that we're, you know, managing the organization as well as we can. Thank you. Moving to growth strategies. SCI's strategy leverage demographic tailwinds, such as the aging baby boomer generations, robust pre-need backlog, and shift toward more personalized experience-oriented services. What are the main drivers for sustained revenue and margin growth as you convert pre-need to at-need contracts, Aaron? Yeah. As I mentioned earlier, we've got a $17 billion backlog. Mm-hmm ...of future revenue that's coming through. That's a little over 4x future revenue. You really kind of have to step back and split those between a trust contract and an insurance contract, particularly on the funeral side. On the cemetery side, it's really 100% trust, and it's just the merchandise and service pre-need sales that are going into trust because the pre-need property, which is really about 60% of our pre-need cemetery sales, is really recognized at the time of purchase, so there's no need to trust those funds. But what I would say is right now we're probably about half and half between trust and insurance going when you combine our funeral and our cemetery businesses. On the trust side, we've got exposure to market risk, the ups and downs of market risk. We always like to mention that it's really a muted impact for the current period, any current period market drivers, because we're only recognizing and pulling those funds out of the trust funds when we are performing the service or providing the products. Historically, those contracts have been in our backlog for a little around 10-14 years. In any given year where there is a decline in the markets or an increase in the markets, only those contracts that are maturing during that time are going to be impacted immediately. They've also got 8-9 years of embedded returns that, you know, they've benefited from or detracted from over the last 10 years. Usually it's higher. We do have a 4%-6% real return target on our trust funds that we've, you know, been able to see exceed 70% of the time over the last 15-20 years. We have market risk on the trust side. On the insurance side, we have credit risk with the pre-need insurance provider that we work with. There's more stability there. We do garner a-- currently it's about a mid-30% general agency commission on each of those sales that comes at the time of sale. Then over the time that those contracts are in the backlog, they're growing at about, you know, or accreting at about 1% per year of earnings on those. You've got these two different frameworks there for trust and insurance that are peeling out of the backlog as we provide these products and services. Specifically on the funeral side, what we do is we index our what's going into the backlog, our pre-need average, to our at-need average. What you'll notice is our what's going into the backlog is about 4%-5% higher than what we're currently selling an at-need funeral contract for. Then on top of that, what's coming out of the backlog benefiting from the insurance accretion, benefiting from the trust returns, what's coming out of the backlog maturing is about 8%-10% higher. Us seeing that we're able to exceed what we're doing on a current period, you know, gives us confidence that our pre-need strategy is working. If you were to see those be the opposite way, it would not be as comforting an approach to be taking from a strategy perspective. On top of watching that backlog peel out, we've also had to, throughout the history of the company, manage our fixed cost structure. We do have a very high fixed cost structure, so making sure that those stay at or below inflationary type trends are very important to ensuring as those pre-need maturities occur, we have a managed cost structure so the margins that are benefiting the company are as maximized as possible. Thank you. How do you see the balance evolving between traditional burial cremations and new memorializations offerings? What are the most important growth opportunities in the next three to five years? Sure. I'd say right now we're probably as a company 62%-63% cremation. I like to say we're already the largest cremation provider in North America. Mm-hmm. You know, I think we have effectively managed the transition that we've witnessed over the last 30 years from more focus on burial to cremation. It's historically been around 100-200 basis points of shift that has occurred over the last 20-30 years. We're starting to see that moderate some, where we've seen cremation mixes stabilize in other countries around the world. That seems to be around 75%-80%. As we get closer to that full saturation point, if you will, you would expect that slope of increase to decline. Also if you look at our top 15 markets or so that we operate in, there are several that are already at that saturation point. We've seen that 100-200 basis points of growth. Last year it was closer to 50 basis points of growth. I think that that's gonna ebb and flow some over the next several years as we do get closer to that. But I think 50 to 100 basis points of growth is probably a fair expectation for change. Every 100 basis points of change is about a $13 million headwind to EBITDA on a $1.3-$1.4 billion EBITDA company. That's an impact, but I think it's a manageable impact. You know, to your point about how we are reacting and how we're evolving, the cost structure at a company or a business that may have 80% cremation is much different than a business that may have only 30% cremation. You don't need as many people or necessarily as big of facilities. As we see these changes evolve over time, we manage our cost structure accordingly. You know, on top of that, I think you've also heard us talk more recently about how we're putting our shoulder more behind a cremation opportunity on the cemetery side. Mm-hmm. When you think about our business of about 2,000 locations, 1,500 funeral homes, 500 cemeteries, there's an overlap of about 300 locations that we call combo locations where there is a funeral home that sits directly on a cemetery. Some of the metrics that we've looked at say that about one out of every four cremation services that we do at those combo funeral locations gets interred at our cemetery, whether that's through a cremation niche opportunity, which is basically a glass front box that people can put their urns as well as keepsakes in, the family can come back and remember their loved ones. We have columbariums where the urn can be effectively interred. We've got scatter gardens and such. We think that people don't really know that that opportunity necessarily exists out there for the cremated remains. We think that there may be an expectation or an impression that the remains just need to be taken home, that they may be left on the mantle for some time, but many times they, you know, transition to a closet or something like that. If they knew that they had an opportunity to inter their loved one in a place that they could be remembered, we think that that can be very much desired. We've started a strategy of really creating media and putting our shoulder behind it to see what this opportunity could grow to. Can that 25% that go into our current cemeteries currently, could that grow to 30, 35%, 40%? You know, again, we're at the very early innings. I can't say anything as it relates to what I expect the full impact of the company to be, but we're seeing some very promising results there. Thank you. Mm-hmm. Aaron, I was impressed when I visited your Houston Memorial Park with the cemeteries, sometimes like over 2 million- Mm-hmm the levels of offering that you have in the real estates. How do you plan to further unlock the value from your premium real estate portfolio and tiered cemetery inventory? Sure. We currently spend about $165 million every year on what we call cemetery development CapEx. That's where we go in, and we'll look at our 500 cemeteries and see what inventory is available at these cemeteries, and we will, you know, incur capital to develop sections of those cemeteries. We've got several thousand acres of undeveloped property, and we'll either go through and develop that property or take existing property, developed property, and put these private mausoleums on if there is a desire by our customer for that. To your point, we've seen private mausoleums go for upwards of $5-$6 million in some cases, from an inventory perspective. You're gonna continue to see us spend that $165 million to develop inventory at our cemeteries as we see the consumer velocity come through and the desire come through. I think too, again, our 3,700-3,800 sales force out there, giving them the tools, giving them the training necessary to continue to get in front of those consumers to truly champion, hey, this is, you know, this facility is where you want to come and remember your loved one. We've spent the capital to maintain these to be the most beautiful parks, we believe, in each of the cities that we operate in. What we're focusing on more tactically currently is focusing on increasing that head count somewhat. We think that we've stabilized on a production per head count level, and we think that we can increase the number of head count while increasing production, not kind of reducing it across. Focusing on head count, focusing on more seminars. We've kind of gotten away during COVID from doing as many seminars because, again, it's a gathering of people eating food. Mm-hmm ...advertising our products and services. We're bringing those back. Those are some of our best leads that are out there. You know, increasing those more, and we're seeing more positive impacts from doing that already. Working with some of our tools within our customer or our CRM system to utilize more AI modules to route the leads that we do receive. If we expect them to be better type leads, those get routed to our better counselors to, you know, as quickly as possible, follow up on and make sure that we're able to convert that sale. Finally, the fourth thing, and Tom mentioned these, was focus on large sales, really getting out there and making sure that the community knows that, hey, you don't need to just have, you know, a homogeneous lot. You can come through, and we do have this customized inventory, and we do find that there are so many customers who do want that. Just continuing to focus in on that and ensuring that our teams are able to, you know, sell as effectively as possible. Thank you. Talk about CRM and like its Beacon platform. How are digital investments, or I would say AI investments and data analytics, supporting both growth and margin expansions for SCI? Yeah. I'd say that, you know, because we have the scale to incur capital to develop these tools that I think we're able to differentially benefit from versus our competitors, we're able to, for example, at the pre-need facility, take a tablet in there and go through the entire sales process, showing all the products and services that we offer to, for the consumer to consider. They may not take it all, but you know, it's kind of a choose your own adventure type book. You can choose a cremation or choose burial. You choose burial, it shows all the burial options. Choose cremation, all the cremation options. At the end of the process, what used to take a 3-4 hour type process of someone filling out by hand all of the different selections that a consumer may desire, we've transitioned that to now a process that may take 1-1.5 hours. From a customer experience type perspective, it's much better. We think that that also enables us to be more competitive from a counselor perspective, that if they know that they're not gonna have to go through these processes 3-4 hours to, you know, convert a sale, we're gonna be the employer of choice in this industry from a sales counselor perspective. I think, you know, utilizing technology from that perspective, utilizing it even in the back office to make it more efficient. We've gone through and taken a process that may have had 80, 90, 100 different forms that needed to be filled out across the process from picking up the loved one through the final disposition. We've been able to kind of aggregate that into 40 or 50 type forms and try to pre-populate as many as possible with the data that, you know, consistently needs to be included in each of those forms. I think all of those efforts that we're taking are trying to make a more efficient back office, more efficient structure for our sales counselors and our frontline employees dealing with the and working with the families. I think, you know, like many companies, we're kind of at the early stages of scratching how AI can benefit the company. Now, there are a couple places we've already seen it, and it's not amazingly dramatic, but from an obituary writing perspective. A lot of those obituaries are currently written by our funeral directors. Historically, that may have been a 4- or 5-hour type process to truly thoughtfully sit down and write an obituary for someone for someone's loved one. We can now take AI and take, you know, a conversation that we've had with the family to understand their loved one, what their loves were, and put that into AI, and it can draft something really nice that can then just be tweaked. Something that used to take 5 or 6 hours now may take 30-45 minutes. That's time savings. We're seeing it on building websites as well, where we may not have a ton of media for a specific of our 2,000 locations that we operate in. To build a website, we can put into AI, say, "Hey, we're looking for a drier climate type photos. Look through our library of media that we have of locations that we already have photos, and help us build out a website that truly represents what, you know, this location would look like from a customer experience perspective." That's helped out. I think there are further opportunities that we're evaluating in the back office. I don't think that there's gonna be something transformational in our industry, like potentially in other industries. I think that people are gonna continue to want a caring and compassionate person to deal with in this industry. I do think that from a financial analytics, financial processing type perspective, there are gonna be more opportunities that we're continuing to explore and figuring out how we can best employ. Thank you. Mm-hmm. Before we open up the questions, capital allocations and M&A, Aaron, what are your criteria for evaluating M&A opportunities? Are there any specific geographies or service lines you're prioritizing? I would say we, as we've talked about the leveraging our scale dynamic, we truly try to find areas that are larger urban type markets where we're able to get in and really, you know, use or share the usage of hearses, share funeral directors. The average funeral home in America may only do 100-150 services per year. You've got someone who's working for one day but may just be waiting for something to happen the next two. If you're able to cluster and leverage that scale, you're able to, you know, share costs a lot more effectively and maximize that margin. You know, I think that we've got that benefit that's helping us out in that regard. You know, excuse me, could you? The M&A? Yeah. The M&A. The M&A. We also look at markets that the consumer appreciates and values our products and services. Where we've seen a lot of our growth recently is more in the traditional Hispanic and traditional Asian communities on the West Coast and South Texas, in Florida. Those are gonna be where we're going to want to focus on. We generally don't have hard and fast rules of thumb, but generally a location that does at least 150 services per year, that does at least $2 million in revenue. Looking at opportunities there, I think in the U.S. and Canada, the larger consolidator opportunities aren't necessarily as great. A lot of the acquisition opportunities for the larger consolidators, we've sold them either locations that we didn't want or we were required to sell from an FTC perspective. To acquire those types of operations, I think we would ultimately be liquidating a lot of our existing or a lot of those locations that we couldn't ultimately, you know, have going forward. I think you've seen us spend more capital for growth perspective, filling out our footprint in areas where, you know, we may already have saturation, but we've seen the population shift or grow in one way or another. We did that more recently in 2021 or so. We opened a cemetery on the west side of Houston. Historically, we haven't really opened cemeteries because of the cost of capital constraints associated. We opened that cemetery, and within the first two years, we'd already achieved our year seven or eight projection of revenue turnover coming through. Then actually just this week, we've now opened a funeral home on that cemetery. Usually, we have to have a certain amount of interments coming in per year on a cemetery before we'll consider building a funeral home on that cemetery. It's just been so successful, we've decided to go ahead and accelerate that as well. We've probably identified a handful of other geographies around the U.S. where we're gonna be, you know, deploying capital to drive that growth. Thank you. I would pause here if anyone has any questions from audience. Okay. All right, for the last a couple of questions, Aaron, are there any aspects of SCI's business such as your real estate portfolios, digital transformations, and people first culture that you believe are underappreciated by investors? You know, I think it's been more of a near-term dynamic, but I think just the consistency and strength of our earnings and our cash flow. You know, the last three or four years have been somewhat turbulent as we kind of went from $1.90 in 2019 of EPS all the way up to $4.57 in 2022 with the impact of the COVID experience impacting our business. Now, the last three years, we've seen an expected decline in volume that has been a headwind. We've also seen increases in interest rates that, you know, have been a headwind for many different companies. We've seen an increase in tax rates as well as some of the 2017 Tax Cuts and Jobs Act dynamics have flowed through. We've also kind of intentionally de-risked our business and had some business changes at SCI Direct, our non-funeral home business, where we're now deferring earnings that we had historically been delivering and recognizing at the time of sale. Now those will be recognized into the future. I think what may be missed is we've got all that behind us now. I think 2026, we're kind of getting into a period of renewed growth, and we feel that we're confident that we're back in this 8%-12% earnings growth framework. When you look back from really 2005 when the management team really started the growth and eight to twelve percent dynamic, we've been able to grow during that time by about 14% EPS growth. Above that 8%-12% growth. I think that we're back. I think that, you know, people are gonna wanna see that those dynamics are truly playing out and that we're seeing that take place. I think that that's an underappreciated aspect currently. I think that that's, as we, you know, continue through 2026, we'll see that come through. I think too that, you know, the $17-$18 billion backlog that we have, just the strength and consistency there as we, you know, we believe that we're growing on the margins. We would be foolish to think that we're expanding market share with the entirety of our backlog, but I think we're expanding some market share on the margins. I think that that's, you know, underappreciated. I think that as we get closer to the baby boomer demographic impacting. Right Our industry, you know, it could be the latter part of this decade is kind of what we expect. The oldest baby boomers are 80 years old this year. Usually, when you've reached an 80-year-old type age, you know, it's about 82, 83 is usually kind of the average age. I think that once we start seeing that impact our industry, that's gonna be pretty strong and powerful. Right. Thank you. Time swap. Aaron, thank you very much, and thank you for everyone joining. This is it. Thank you. Thank you, Tobey Sommer. Thank you, everyone.