SERVICE CORP INTERNATIONAL Q2 FY26 earnings call SCI

SCI reported Q2 FY26 adjusted EPS of $0.90, up from $0.88 year-over-year, despite muted growth in the first half due to lower Funeral volumes and deferred Cemetery revenue. The company anticipates solid revenue growth and margin expansion in both Funeral and Cemetery segments in the second half of 2026, projecting double-digit EPS growth for that period. This confidence is underpinned by strong momentum in preneed sales, increasing average revenue per Funeral, and disciplined expense management.

Comparable Funeral revenues increased marginally by 1% or $5 million, with core Funeral revenue up 1.5% driven by a 3.3% growth in core average revenue per service. This was achieved despite a 1.7% decline in comparable core Funeral volume, which moderated throughout the quarter, showing slight growth in June. Nonfuneral home revenue increased over $2 million, primarily due to a 9% increase in average revenue per service, benefiting from maturing preneed contracts with higher trust earnings. Gross profit percentage declined 130 basis points to 18.5%, impacted by higher selling compensation due to a shift towards insurance-funded preneed sales.

Comparable Cemetery revenue increased by $23 million or 5%, primarily from higher core revenue and increased other revenue. Core revenues rose $14 million, with recognized preneed revenue up $15 million ($5 million from property, $10 million from merchandise and service). Other revenue was higher by $8 million, mainly due to increased endowment care trust fund income from market performance. Comparable preneed sales production grew an impressive $29.7 million or 8%, with core sales contributing $24.4 million and large sales contributing $5.3 million. Cemetery gross profit grew 4% or $7 million, with margins relatively flat at 33%, also affected by higher selling compensation.

SCI's sales strategy is built on four pillars: increasing sales counselor headcount, improving lead-to-sale conversion rates, expanding preneed seminars, and growing large sales. The company is leveraging AI for sales training, providing personalized feedback and role-playing opportunities to enhance effectiveness. The shift to insurance-funded preneed contracts is nearing a steady state, with approximately 70% of core and low 90s for SCI Direct sales being insurance-funded, while retaining trust-funded options for specific customer needs or jurisdictions.

Adjusted operating cash flow reached $239 million, a 42% increase year-over-year, exceeding expectations due to lower cash taxes ($64 million benefit from renewable energy investment credit) and stronger cemetery preneed cash collections. The company invested $120 million in capital, including $80 million in maintenance, $25 million in growth capital for new builds and real estate, and $15 million in business acquisitions. SCI returned $172 million to shareholders through $123 million in share repurchases (1.5 million shares at $76 average price) and $50 million in dividends. The full-year adjusted free cash flow guidance was raised to $750 million, an 18% increase over FY25.

SCI maintains a strong financial position with $1.6 billion in liquidity, comprising $260 million cash on hand and $1.4 billion available on its credit facility. The company ended the quarter with a net debt to EBITDA ratio of 3.77x, within its long-term target range of 3.5x to 4x. This robust balance sheet and predictable cash flow stream provide significant flexibility for opportunistic investments and shareholder returns.

Trust fund income significantly benefited both segments, with endowment care trust fund income increasing due to market performance. The company manages approximately $8 billion in trust funds, with low double-digit to mid-teen returns over the past three years contributing positively. The preneed cemetery recognition rate was 88.8% in Q2, lower than the full-year average due to seasonality and higher sales production deferring revenue. Management expects higher recognition rates in the back half of the year as projects are completed and merchandise/service revenues are recognized.