Operator: Good day, and welcome to the SCI Q3 2026 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 and one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to SCI Management. Please go ahead.
Trey Bocage: Good morning. This is Trey Bocage, AVP of Treasury and Investor Relations. Welcome to our Q3 earnings call. We will have some prepared remarks about the quarter from Tom and Eric in just a minute, but before that, I will quickly go over our 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 discuss certain non-GAAP financial measures.
Trey Bocage: 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 the call over to Tom Ryan, Chairman and CEO.
Tom Ryan: Thanks, Trey. Good morning, and thank you for joining us, everyone. I will begin my remarks with some high-level color on our business and performance for the quarter, then provide some greater detail around our funeral and cemetery results. I will then close with some thoughts about our earnings expectations for the rest of 2026. For the third quarter, we generated adjusted earnings per share of $0.97, which was more than an 11% increase as compared to $0.87 in the prior year. Higher revenues and profits from both the funeral and cemetery segments were further bolstered by lower general and administrative costs, resulting in an $0.08 earnings per share increase in operating income. Below the line, the favorable impact of a lower share count was partially offset by a higher effective tax rate, resulting in a $0.02 increase in earnings per share for the quarter.
Tom Ryan: Comparable pre-need cemetery sales production grew by 5%, and comparable pre-need funeral sales production grew by 6% for the quarter, while adjusted cash provided by operating activities increased by $29 million to $297 million, helping fund our business capital needs and growth capital investments while affording us the flexibility to be opportunistic, returning capital through share buybacks and through consistent dividend increases. While year-over-year comparisons delivered impressive quarterly earnings per share growth, revenues and earnings were below our internal expectations as lower than anticipated funeral volumes, lower general agency commission rates, higher fixed costs, a higher selling compensation rate, and larger deferrals of cemetery sales production put downward pressure on revenues and earnings versus our expectations. Now let's take a deeper look into the funeral results for the quarter. Total comparable funeral revenue increased by $19 million, or just over 3% compared to the prior year quarter.
Tom Ryan: Comparable core funeral revenues increased by $11 million, or about 2.3%, primarily due to a healthy 2.8% growth in the core average revenue per service. This core average revenue growth was achieved despite a modest increase of 60 basis points in the core cremation rate. Comparable core funeral volume declined by 0.5%, which was below our internal expectations. Year-to-date, our comparable core funeral volumes declined 3.1%, predominantly due to a difficult first quarter comparison. Based on our nationwide internal analysis, we believe we have maintained our market share throughout 2026. Non-funeral home revenue increased by almost $3 million, primarily due to an 8% increase in the average revenue per service.
Tom Ryan: We expect this impressive growth in the average revenue per service to continue as the older pre-need contracts that are maturing out of the backlog have higher cumulative trust earnings, and the more recent pre-need contracts written will mature with an average revenue per service that is higher. Non-funeral home pre-need sales revenue decreased by $2 million. Half of this decline was due to an operational shift to defer the delivery of urns on pre-need contracts to the time of need, and $1 million of the decline was due to lower general agency revenues generated from pre-need sales production.
Tom Ryan: While we saw healthy growth in our non-funeral home pre-need insurance sales production of over 9%, our general agency rate declined as we saw a shift in product mix away from multi-pay to single-pay contracts, accompanied with a higher cancellation reserve effect as we build it for our new stream of insurance-funded contracts. Comparable funeral gross profit increased by approximately $4 million on our $19 million revenue increase, with the gross profit percentage flat at about 18%. Fixed costs grew at 3%, or by $10 million, which was in line with our expectations. In addition, gross profit was negatively impacted by higher selling compensation and promotion costs associated with supporting strong insurance-funded pre-need sales production in both the core and SCI Direct channels.
Tom Ryan: Our transition to a sales compensation plan with increased guaranteed hourly wages added 40 basis points to our selling compensation rate, negatively impacting expected gross profit by about $1 million. Pre-need funeral sales production increased by $19 million, or about 6%, over Q3 2025, driven by healthy growth from both core and SCI Direct. Now shifting to cemetery. Comparable cemetery revenue increased by $19 million, or about 4%, primarily due to higher core revenue, complemented by an increase in other revenue. Core revenues increased by $12 million, primarily due to a $14 million increase in total recognized pre-need revenue, of which $3 million resulted from higher property revenue and $11 million from higher merchandise and service revenue. Merchandise and service revenue also reflects the positive impacts from increased merchandise and service trust fund income.
Tom Ryan: Other revenue was higher by $7 million compared to the prior year quarter, primarily from an increase in endowment care trust fund income based on market performance and higher total return distributions. Comparable pre-need cemetery sales production grew an impressive $17 million, or 5% in the quarter. Core sales contributed $13 million, supported by continued strong underlying sales velocity growth of about 3%. Large sales accounted for the remaining $4 million increase. For the nine-month period ended in September 2026, pre-need cemetery sales production is higher by 7.5% versus the prior year. This performance reflects the strength and effectiveness of our sales strategy and execution, generating mid- to high single-digit percentage sales growth in both pre-need funeral and cemetery by focusing on our four pillars: sales counselor headcount growth, driving lead effectiveness, seminars, and large sales.
Tom Ryan: Cemetery gross profit in the quarter grew by $1 million on our $19 million growth in revenue, with margins declining by 110 basis points to approximately 33%. Fixed costs grew by 4%, or about $7 million, slightly higher than our 3% expectation. This was primarily due to increased healthcare costs and media spend and training around our cemetery cremation memorialization project. Gross profit was impacted by higher selling compensation, reflecting the strong pre-need sales production growth of 5%. In addition, our transition to a higher fixed-cost, guaranteed hourly wage sales compensation plan focused on counselor retention added a 100 basis points to our selling compensation rate, negatively impacting expected gross profit by almost $5 million.
Tom Ryan: Finally, our pre-need property sales production grew by 4% versus revenue recognition of 1% for the quarter, which has deferred an additional $6 million of revenue into our backlog with little or no incremental selling costs associated with it. While this had a dampening effect on the quarter, it will benefit future quarters when it converts to revenue and profit. Now let's shift to a discussion about what we've experienced year-to-date and our outlook for Q4 2026. We have provided an EPS guidance range of $1.10 to $1.20 for Q4.
Tom Ryan: This reduction in our full-year EPS guidance is a reflection of unfavorable expense trends we experienced more acutely than anticipated during the quarter, lower funeral volumes than anticipated during Q3, and an expectation of lower funeral volumes based on our October experience versus our original assumption for volume growth during Q4. As we look at our full-year 2026 results, we now expect normalized EPS at the midpoint of our guidance range to be approximately $3.99, compared with our original midpoint of $4.20 when we provided guidance in February. There are several factors that explain this change. First, funeral volumes were weaker than we originally anticipated back in February, with full-year volumes now projected to be approximately 200 basis points below our initial expectations. This represents an estimated $0.18 to $0.20 in EPS headwind.
Tom Ryan: On the positive side, growth in cemetery trust fund income beyond our expectations delivered $0.12 per share, offsetting a meaningful portion of the financial impact from lower funeral volumes, providing an important source of earnings resilience. Second, our pre-need cemetery sales production is expected to grow 6% to 7% for the year, surpassing our 4% to 5% original expectation, which we estimate will contribute roughly $0.08 to $0.10 per share of earnings growth. However, this benefit has been predominantly offset by an approximate 100-basis-point decline in our cemetery revenue recognition rate. A larger portion of our sales growth has come from merchandise, services, and undeveloped property, for which revenue is deferred until the associated performance obligations are satisfied.
Tom Ryan: At the same time, a greater portion of our related selling compensation is fixed and recognized immediately, creating an unfavorable timing mismatch between the recognition of selling costs and the associated revenue. Keep in mind, this is an issue of timing. This increase in cemetery sales production will be recognized in future periods. Finally, we have experienced approximately 100 basis points of additional fixed cost percentage growth impacted by higher than anticipated healthcare, sales promotion, and fuel costs. In total, negatively impacting EPS for the year by about $0.10. Higher selling compensation rates from the new plans had an additional $0.05 per share drag on our earnings as compared to our original February expectations. While we are disappointed that our 2026 earnings performance has fallen short of our original expectations, we remain encouraged by positive underlying trends in our business.
Tom Ryan: We continue to see healthy operating cash flow growth for 2026, which we anticipate continuing into next year. Additionally, we are experiencing mid to high single-digit sales production growth in both our funeral and cemetery pre-need businesses, continuing to grow our massive $18 billion backlog, which will benefit future periods when recognized, delivering even higher margins with less selling costs being recognized due to our sales compensation plan changes. As we look ahead to 2027, we expect continued strength in pre-need sales production and expect our comparable funeral volumes to be flat to slightly higher. We will remain focused on enhancing our general agency commission rates, increasing the mix of cemetery products that are recognized as revenue at the time of sale, and improving our related selling costs.
Tom Ryan: We will also focus on appropriate pricing of our products and services in a higher inflationary environment while managing the rate of increase in our fixed cost structure. In closing, we remain firmly focused on building long-term value for our shareholders, growing revenue, leveraging the strength of our scale, and allocating capital with discipline to the highest and best use. As we move into a period of meaningful demographic tailwinds, we are exceptionally well-positioned to expand our reach, serve more families, and deliver sustained growth over time. In closing, I would like to recognize and thank our entire SCI team for their ongoing commitment to our customers, our communities, and each other. Your dedication continues to be the foundation of our success. With that, I will turn the call over to Eric.
Eric Tanzberger: Thank you, Tom. Good morning, everybody. Today, as I usually do, I will begin by reviewing our cash flow results and capital investments all related to Q3. Then I will shift gears and briefly cover corporate G&A expense during the quarter. Then I will close with some comments on our cash flow guidance and overall financial position as we finish 2026. Starting with Q3, we generated an impressive adjusted operating cash flow of $297 million, an increase of $29 million or double-digit 11% over the prior year. The primary drivers of the quarter-over-quarter improvement included higher operating income, which contributed $15 million after excluding the $11 million of gains on asset divestitures.
Eric Tanzberger: A $30 million net source of working capital in the quarter, primarily due to one fewer payroll run that I mentioned as a timing difference in last quarter's call to be a tailwind this quarter. These benefits were offset by higher cash taxes of just over $15 million. Capital investments during the quarter, we invested $137 million of capital in our existing funeral home and cemetery locations, business acquisitions and real estate, and construction of new funeral homes and cemeteries. Let's break that down a little bit. We invested $80 million of maintenance capital back into our existing locations, which was generally in line with our expectations.
Eric Tanzberger: Of that amount, we invested $42 million in new high-yielding cemetery development projects, $31 million in improvements to our existed funeral home and cemetery locations to enhance the overall customer experience, and $6 million in our digital strategy and other corporate investments. We also invested about $24 million of growth capital in real estate in the quarter. This went primarily toward the construction of new funeral homes, as well as the purchase of real estate for future new build and expansion opportunities. Speaking of acquisitions, we deployed $34 million in the quarter, adding funeral and cemetery locations in Michigan, Illinois, Florida, and Indiana. We are very excited about these high-quality funeral homes and cemeteries joining our company, and we are happy to welcome all of these new associates to our SCI and Dignity Memorial family.
Eric Tanzberger: These acquisitions bring our investments for the first 9 months to about $73 million, and we believe we are very well-positioned to achieve our full-year target of $75 to $125 million of capital investment as it relates to acquisitions. Remember, acquisitions and our new build capital investments generally yield low to mid-teen after-tax internal rates of returns. Now turning to capital distributions to shareholders, we returned just over $100 million of capital in the quarter, through $53 million of share repurchases and $49 million of dividends. We repurchased just under 700,000 shares during the quarter at an average price of just under $80, bringing shares outstanding to 136 million at the end of the quarter. Year-to-date, we have returned over $460 million in capital to our shareholders, which includes the repurchase of about 4 million shares at an average price of about $79.
Eric Tanzberger: That totals about $320 million, and total dividends of about $145 million. As of today, we currently have about $480 million of remaining share repurchase authorization under our current share repurchase program. I mentioned earlier, I would now like to comment on corporate G&A expense, which was about $31 million for the quarter, which decreased $7 to 8 million quarter-over-quarter and was somewhat below our expectations. This $8 million decrease was primarily due to lower long-term incentive compensation accruals, which are tied to our long-term total shareholder return plans, coupled with a favorable legal settlement, with other G&A costs generally managed in line with our expectations. Now let us shift to the rest of the year, rest of 2026, in terms of a cash flow outlook. As reported in the press release, we are confirming our 2026 adjusted operating cash flow annual guidance range of $1.055 billion to $1.115 billion.
Eric Tanzberger: To make it simple, let us call it a midpoint of $1.085 billion.We continue to expect maintenance CapEx of about $335 million, consistent of about $170 million for cemetery development, $140 million for maintenance capital with funeral homes and cemeteries, and $25 million for digital and corporate spend. When you deduct this $335 million of maintenance CapEx from the adjusted operating cash flow guidance midpoint I just mentioned, we calculate adjusted free cash flow of $750 million for 2026. This is an impressive 18% over last year's growth, over last year's $637 million of adjusted free cash flow. As we move forward for the rest of the year, there is still no change to our cash tax guidance, which stands at approximately $120 million for the year.
Eric Tanzberger: As I mentioned last quarter, just to remind you, cash taxes this year benefited from the utilization of about $40 million of solar tax credits generated through tax equity investments. Without these credits, our cash taxes would be closer to $160 million, and adjusted free cash flow would have increased, still double digits, to just over 11% over prior year. From an effective tax rate perspective, there is also no change to our full-year 2026 rate guidance of 25% to 26%. Now I'd like to provide a few updates on our liquidity and financial position. We continue to benefit from a favorable and disciplined debt maturity profile, complemented by continued robust liquidity. We ended the quarter with total liquidity of about $1.7 billion, consistent of approximately $173 million of cash on hand and approximately $1.5 billion available under our long-term bank credit facility.
Eric Tanzberger: We ended the quarter with a leverage ratio of net debt to EBITDA of about 3.7x, which is less than it was sequentially last quarter, which was 3.8, and well within our long-term leverage target range of 3.5x to 4x, as we've mentioned consistently over the years. In conclusion, this strong balance sheet that I just mentioned to you, this robust liquidity, our consistent, predictable cash flow stream continue to support our capital deployment program and give us significant flexibility to invest capital opportunistically for the long-term benefit of SCI, our associates, and our shareholders. Before I turn the call back over, I'd like to just take a moment, as Tom did, to sincerely thank our 25,000 associates here at SCI.
Eric Tanzberger: Your selfless service to our client families certainly does not go unnoticed, and we are extremely proud of the positive impact you continue to have in representing our company in the communities that we are privileged to serve. Operator, this now concludes our prepared remarks. With that, I'd like to turn it back over to you, and we'll turn the call open to questions.
Operator: 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 are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question is from Parker Snure, Raymond James. Please go ahead.
Parker Snure: Hey, good morning, and appreciate you having me on for the questions. Just on some of these cost items that you flagged, like the advertising, the healthcare expense, how should we think about these items as we move into 2027? Are some of these more one-time in nature, like maybe the advertising? Or should we think about these persisting into the future? I would assume the healthcare is a little bit more persistent. I know you are not giving 2027 guidance, but just want to make sure that we are all squared away on some of these items as we think about the bridge into 2027.
Tom Ryan: Sure, Parker. You hit the nail on the head. Healthcare costs are healthcare costs, and I think every company is experiencing some of that. We are probably seeing it a little more acutely of recent. So that is something that, again, we will try to manage as best we can, but we have less control over. As you think about selling costs, again, we are going to react to all these things. I think you will see a reduction in those selling costs going forward. Some of it is timing. If you recall, we are rolling out this cemetery cremation memorialization project across the country in waves, and so sometimes you hit costs in a quarter, which we think will normalize as we progress throughout the rollout. We do think we are getting great benefit from some of these things. The last one that we called out was fuel costs.
Tom Ryan: On the fuel cost side, again, I think it is a topic that everyone is very aware of and what is happening and what will cause it. Now, what we, again, will do is try to find ways to use less fuel. Do we have too many cars in the fleet? We are going to go over everything with a fine-tooth comb and do as much as we can. But those are trends that what we saw in Q3, that it is hard to do a lot about when you think about Q4. But as we approach 2027, those are things that are on the table and other costs that we are going to take account of.
Parker Snure: Okay, I appreciate that. Then, just on the advertising expense, just wondering if you could dive deeper into that. You mentioned it is a cremation memorial offering, but just wondering if you could give more color on just what exactly that offering looks like, what you are doing there. I think you mentioned maybe some timing, but what is driving the higher-than-expected expense on that item?
Tom Ryan: I think it is two things. One is more cemetery-related and one is more funeral. I mentioned the cemetery cremation memorialization project, and you will recall, Parker, that is where we are putting one where we have advertising in the market. Think of both digital and media spend that are out there promoting certain markets. Also, just some of the other items that are on location. When you walk into a location, you have a TV up and running that shows you what the cremation gardens look like and really promotional materials associated with it. We are seeing a lift as you think about cremation memorialization sales in these markets, even beyond where we are. We are glad they are there. I think we could manage the rollout of the cost a little bit better.
Tom Ryan: As you look at the funeral side of the equation, we talked about getting more leads from seminars. We are spending a little more money doing a lot more seminars year after year, which are generating leads, which we are following up on and selling. Again, I would call a lot of this growing pains that I think we can manage the cost a little better, but we knew they were coming. We wanted to do it. It is resulting in positive things as it relates to our sales force. We are going to, again, try to get our arms around managing that a little better, and then look at every portion of our costs. Really, there are two things. Some of these are inflationary costs that we are probably going to have to pass some of those along to the consumer.
Tom Ryan: As you think about reactions in 2027, it is going to be pricing, it is going to be managing these fixed costs a little more acutely to the extent we can. What I commit to you is we are going to do something about this. We do not like it either. At the same time, I think these are things we are aware of, and we are growing our sales like we intended to do.
Parker Snure: Okay, if I can just squeeze in one last one. On the recognition rate, appreciate some of the color there, and I know it is a timing issue between merchandise and property sales and things like that. Just curious if you have any visibility on when that might flip towards a little bit more of a normal rate because it has been down a fair amount in the first three quarters of this year.
Tom Ryan: Sure, Parker. Remember, a lot of this, as year-over-year has to do with, or I should say seasonally, is going to be different, right. So Q4, you should see a higher recognition rate overall. It is a quarter that historically is going to deliver that. As you think about years and recognition rates in between there, I think it is going to get marginally better. But remember, we are selling a lot of merchandise and services that are going into a backlog that get deferred, but you are also seeing the benefit right now. If you think about what is going really good for us in the quarter and for the year, merchandise and service trust fund income, endowment care fund income are up dramatically because these big pools of capital are generating cumulative earnings. So that will probably continue.
Tom Ryan: What we can do is try to sell more ready-to-deliver cemetery property. We are seeing some trends where people are selling into projects that are not yet developed, and so when those flip, it recognizes. But we can encourage our sales counselors, again, to sell a higher mix of deliverable property, which should result in some higher recognition rates. So again, I think those are things we will focus on, as I said in my comments for 2027, to do a better job of selling those recognizable properties.
Parker Snure: Okay. Thank you.
Tom Ryan: Thank you.
Operator: The next question is from Joanna Gajuk, Bank of America. Please go ahead.
Joanna Gajuk: Oh, hey, good morning. Thanks so much. I appreciate the comments about next year, and I understand you do not have the guidance laid out just yet, but it sounds like the pre-need cemetery sales production is growing very nicely. I guess if we say mid-single digits, maybe high single digits into next year, and then funeral volumes flat to up slightly, and maybe some of these costs you manage, there's pricing power you guys have. Kind of putting all this together, is it fair to say that you should be able to grow inside your long-term growth algorithm into next year? If not, anything else you would flag in terms of the headwinds or tailwinds for next year?
Tom Ryan: Sure, Joanna. I think, again, we're not prepared to give guidance for next year, but I can tell you how I feel and looking at the trends and the things that I believe, and I believe that we will definitely be in that guidance range. I don't see any reason why we shouldn't return. There are some slight negative trends, but I think there's some very positive trends as well. So I feel pretty strongly that we'll be able to do that next year. Again, that's before I talk about what's our reaction to some of these additional costs. We're going to pass along some of these costs, and we're going to reduce some of these costs, and that should result in growth next year that's exciting.
Joanna Gajuk: Okay. Thank you for that. I guess just to clarify, if I may, I appreciate you walking us through the annual guidance change, the drivers, the 80/20 for the volumes and for the higher cost and such. But how we think about Q4 in particular, it seems like all of this is really hitting Q4. So can you help me understand what exactly are the assumptions here in terms of, because it sounds like the costs are really showing up really hard in this Q4 in terms of the headwinds versus what the prior guidance implied?
Tom Ryan: Sure. Yeah. Let me give you a little of that cadence. I talked to the year, but I think as you go through the cadence of the quarters, when we sat at the end of Q2, our models were showing within the range of guidance that we gave you guys. What we knew is that funeral volumes were not good in H1 of the year, but the trust fund income was very strong and negating a lot of that impact. As we got into Q3, the things that kind of surprised us were, number one, we expected our funeral volumes to come back in H2 of the year. Like I mentioned on the call, the Q3 volumes were short. October, we are looking at volumes, and they are down slightly versus being up, which is where we had them forecasted.
Tom Ryan: Volume in H2 of the year has a pronounced effect on changing our guidance. The other thing is, we saw strong pre-need cemetery sales, and we experienced them, but we gave back a little bit in the recognition rates. Again, we are selling items that are not getting recognized today, and we do not necessarily see a big change in Q4 that is going to fix that. The last thing is just the cost. To give you an idea, in Q2, our fixed costs grew at 2.7%, and in Q3, they grew at 4.1%. A lot of the sneak up in the costs, if you will, occurred in Q3. As I mentioned a little bit earlier when Parker's question, these are things like healthcare, these are things like fuel costs.
Tom Ryan: These are things that, to a certain extent, are selling costs that are committed. Those trends we anticipate to continue in Q4, and that is what really led us to say, "Hey, look. Q4 is not going to make the guidance now because of these cumulative effect of these things." Again, we feel like given some time, these are things that we can manage in 2027 and get back to the growth that you guys expect us to deliver.
Joanna Gajuk: Just very last, the advertising cost, can you quantify in terms of how much it was, I guess, in the quarter and do you assume Q4, presumably it is at the same level? Thank you.
Tom Ryan: I'm sorry, Joanna. I didn't hear that. Selling cost?
Joanna Gajuk: Oh, the advertising or promotional cost or the promotional cost.
Tom Ryan: Promotional cost. Got you.
Joanna Gajuk: Yeah. Promotional cost. Thank you.
Tom Ryan: Yeah, I think the selling costs were about, call it a little over a penny above our expectations. Call it about $2 million for the quarter. I would expect that to probably be about the same in Q4. Then I think as we calendar this as you get into 2027, particularly in the back half, those things should begin to trend down. Again, we may get our arms around, are we spending too much money? Can we do it for less? These are things that we are going to check under the hood and try to do more efficiently, more effectively. What we do not want to do is losing any momentum as it relates to addressing this cremation consumer, particularly in our cemeteries. The same on the funeral side.
Tom Ryan: We think these seminars are working fabulously as you think about the productivity of the sales that come out of them.
Joanna Gajuk: Thank you.
Tom Ryan: Yes.
Operator: The next question is from Tomo Sano, JP Morgan. Please go ahead.
Tomo Sano: Hi. Good morning, everyone.
Tom Ryan: Morning, Tomo.
Tomo Sano: Thank you. Maybe on funeral volumes, could you give us more color? What has changed relative to your expectations? Is the recent softness mostly a normal mortality volatilities, or are you seeing anything more fundamental?
Tom Ryan: Yeah, Tomo. Based on our analysis of the market, like I mentioned on our prepared remarks, we think we're holding market share very well. That's what the statistics tell us. So we're just basically seeing in death rate. As you'll recall, Tomo, we had the down 6% or so in Q1, which again, we used historical trends to say that ought to halve or so in Q2. Well, it was a little better in Q2 than we thought, but still down. Q3, we expected to be slightly up, and Q4, maybe a little better up. As you saw in our Q3, we're slightly down versus that slightly up expectation. That hurt us, probably about 3 pennies or so, and we're projecting into Q4, probably another, 4 or 5 cents of negative versus our expectation.
Tom Ryan: Those are the types of things that are impacting the back half of the year, which again, combine those with the trends in cost, and that is what led us to changing our guidance.
Tomo Sano: Thank you. Then, just one another one, maybe on digital strategies. Consumer discovery is evolving pretty quickly with AI search and LLMs. Are you seeing any meaningful change in how consumers find and engage with SCI, particularly on the pre-need side? Does that change how you are thinking about your digital investments?
Eric Tanzberger: Yeah, Tomo, it is a big driver for us, and it is a big strategy for us, and we put capital behind it. You could see the CapEx that I mentioned in my remarks, where I call out that it is digital and corporate, but there is a tremendous amount of that has to do with digital in terms of how we are generating leads, how we are generating more intelligent leads, and getting them to the right people quickly through the sales funnel, using the CRM systems and all the processes that Jay and Jerry and their team are working through diligently and Jamie as well, as we move forward. I think, as you stated, it is an extremely fast-evolving strategy. What used to be organic SEO is now figuring out where you land within the AI engines and where you land in LSAs and paid search as well.
Eric Tanzberger: The answer to your question is yes, we are on it. Yes, we are diligently working on it. Yes, we will continue to deploy capital, but I do not see a huge increase in capital at all. I want to level set that as it relates to it. We are already investing in those opportunities.
Tomo Sano: Great. Thank you for the color, Eric and Tom.
Eric Tanzberger: Thank you, Tomo.
Tom Ryan: Thanks, Tomo.
Operator: The next question is from Toby Sommer, Truist. Please go ahead.
Tyler Barishaw: Morning. This is Tyler Barishaw on for Toby. You mentioned strong returns from acquisitions historically. Can you maybe unpack why you wouldn't lean in a little heavier during this time when volumes are a little under pressure?
Tom Ryan: Sure. Yeah, we had some really nice acquisitions this year so far and 4, particularly in the quarter that I mentioned in my remarks that we're very excited about in Michigan, Illinois, Florida, and Indiana, and we'll continue that. We continue to have the robust pipeline. We're going to look for the right opportunity at the right time that really fits with our marketplaces, our scale, where we are and where we can really compete well. For that situation, just to state the obvious, there's plenty of acquisition pipeline deals that we've chosen to pass on and utilize our capital to the higher and best use with some other opportunity, whether that's construction, whether that's share repurchases or something along those lines. So we have a long-term approach, a patient approach.
Tom Ryan: When it fits our model and fits helping our company with the scale in our existing markets, that's when we really get excited about those opportunities, like the 4 that we had this quarter. That win-win situation between us and the really excellent high-quality independent that we end up merging with ends up with a win-win situation that generates that, let's call it a 12% to 15% after-tax return, which is really good use of our capital in our opinion.
Tyler Barishaw: Makes sense. Can you maybe just unpack how you expect volumes to progress throughout the quarter?
Tom Ryan: Throughout the quarter? I think we really anticipated by month that we would see growth, slight growth month-over-month. We are not into November yet, so I do not want to predict a doom. It is just October is starting out a little lower already. We had the Q3 softness. I do not know where it is going to land, but we are projecting that the Q4 should be down slightly as compared to the prior year. We do not really have an opinion yet about November, December, and how that falls out.
Tyler Barishaw: Makes sense. Thank you for the time.
Tom Ryan: Sure.
Eric Tanzberger: Thank you.
Operator: Next question is from AJ Rice, UBS. Please go ahead.
AJ Rice: Hi, everybody. Maybe just some points of clarification to some of the comments already made. Obviously, something like fuel costs, some of the other costs that are elevated, I think it makes sense that you would adjust pricing to reflect that. Obviously, a lot of companies across industries are doing that. I am wondering, when you say, "Okay, I have got higher fuel costs that I want to pass on," what is the timing on that? I know you are saying you will be able to reflect some of that next year. Does it take a certain period of time, or is that something you say, "Hey, we need to pass on fuel cost, and we can turn the switch almost immediately?
Tom Ryan: AJ, what we typically do is we price in kind of waves throughout the year versus annualized pricing. We will go into markets, evaluate all the components. I think what this is going to cause us to do is what you are talking about is, let us talk about the ones that we think make sense now and get those in place, and then continue with our annualized reviews like we do throughout the year, where we will come in a wave. That is going to be our plan preliminarily is to look at items that we believe are inflationary and need to be adjusted more immediately and put those in the markets that we can. At the same time, begin to try to manage some of those costs so we do not have to pass them to the consumer as best we can.
Tom Ryan: We are going to be doing both very diligently over the coming months and first part of 2027, and then continue with those kind of rolling annual pricing reviews that we do throughout the markets.
AJ Rice: Okay. On the G&A that was favorable, it sounds like most of that is the incentive comp accrual, which makes sense. You did mention this favorable legal settlement. I know sometimes you break that out. You did not specifically break that out this time. Can you give us a little more flavor of how significant that was?
Tom Ryan: Yeah. The amount was about $3 million. The reason why we don't break that out is we kind of have an internal rule that says something over $5 million is material enough to exclude to the positive or the negative. In this case, it wasn't the $5 million, so we left it in. I'd point out also, AJ, if you look at our gain and loss on assets, we sold some excess land for a tidy profit, and you'll see that's not included in recurring operations. That's a gain or loss on sale. We just, again, if we have these material items, we try to break them out for you. Again, you can judge how you want them, but it's about 3 million bucks that I think was a favorable result of a legal settlement.
AJ Rice: Okay. I appreciate the comments about whether to lean into deals or lean into share repurchases. If you look at the deal activity year to date, you're sort of almost to the low end of your targeted range of $75 million to $125 million. I know in many years, you get a lot of deals in Q4. Any thoughts about where you're likely to end up? How much activity there's likely to conclude in Q4?
Eric Tanzberger: The pipeline's really pretty robust, and I know I've kind of been a broken record and have said that, but it takes time in developing these relationships with these really high-quality, larger independents that really fit our strategy. So I see more deals closing in Q4, AJ. I see us getting us solidly in that range. I don't necessarily see us exceeding that range this year. Again, I also wanted to be very clear in my comments that we have $480 million of capacity right now of share repurchases and $1.7 billion of liquidity. I want to make that point very clearly as we move into Q4.
AJ Rice: Okay. My final thing, there may not be that much more to say than you've already said, but if you think about the year, Q1 was very soft on volumes. I think you're down about 6%. Many years when you have a quarter like that, you see a rebound later in the year. It just sort of offsets it, and you end up normally. This year, it just seems to be relatively soft throughout the year. It sounds like you think you're holding on to shares, so that's not the issue. Do you think it's more pull forward, lingering effect of COVID than anticipated? Do you have any other view about it? Is the idea that you will be flat to up next year, slightly up in volumes?
AJ Rice: Is that your comfort levels, mainly because you had a pretty soft year this year, so it is an easy comp? Is that the current thinking, or is there anything else to hang your hat on there?
Tom Ryan: You hit on a lot of them, AJ. I think, yeah, there is the trend that we always talk about that says the really down Q1 comes back, and to a certain extent, we have done that, right? We are down 6. We will probably finish somewhere around down 2, which is not a bad comeback. I do believe there is still some lingering COVID pull-forward effect. I do not think it is super material, but I do think that is a piece of what we are seeing. As I think about next year, yes, the comp, particularly in Q1, should be pretty good. Remember, part of the reason was we had a strong flu season in Q1 2024 and a, I am sorry, 2025, and a weak one in 2026. We will see how this goes.
Tom Ryan: At the same time, you would expect a pretty good comparable just from that. Then, to your point, our models, again, that we run, baby boomers were born in 1946 and continue on to 1964. They are 80 years old now. I think our models are showing that that should begin to trickle in effect. Maybe not so many baby boomers yet, but as you look at the age trends, we should begin to see some favorable impacts. So I think there is a little bit of comp, a little bit of favorable impact from demographics. Again, we are going to manage the cost structure very well. So to the extent we get that, then I feel really good about what we can do in 2027.
AJ Rice: Okay. Thanks a lot.
Tom Ryan: Thank you.
Operator: The next question is from Scott Schneeberger, Oppenheimer. Please go ahead.
Scott Schneeberger: Thank you. Good morning. I just want to follow with what AJ Rice just asked on funeral volume. It has been uncertain all year, bouncing around. I was going to ask the question he just asked, but what I was getting at, bigger picture, is just the overall, I think on an earlier question, Tom Ryan, you said exciting growth next year. I just want to make sure because it looks like you have to manage some expenses better. That is clear, but manageable. It is just kind of kicking the tires. Everything still seems on pace.
Scott Schneeberger: Also, the cemetery pre-need production, a really strong performance this year looks like is going to play out. So that you will not have easy comps. I guess, just what is behind the confidence? What are you seeing? Large sales look good. Velocity look good. How is the low-end consumer holding up in this environment? I guess that is where I am pressing here for next year as far as continued performance.
Tom Ryan: Sure, Scott. I think that we feel confident because of, we talked about before, the volumes. The things that we're going to focus on is that we can control, like I said before. We're going to have inflationary pricing that's going to cover some of these costs. We're going to manage down those costs. When I think about the positive trends, remember, we made these sales compensation switches that are negatively affecting from a timing perspective year over year. As we anniversary those sales compensation changes, you're not going to have that negative movement in your face. The other thing is you think about general agency rates. We kind of missed the boat a little bit on expectations, what we thought we could generate from a product mix perspective. We probably underestimated the cancellation reserves we were going to have to set up.
Tom Ryan: As I think about the positives, we'd expect that we can move the general agency commission rates in both core and SCI Direct north. I think our compensation plans are going to anniversary themselves, and we can manage them better. We can manage these fixed costs, again, get our arms around it and focus on reducing those and get this inflationary pricing. You combine that with what we're seeing on the consumer side. We're not seeing a slowdown in that consumer bucket yet. I know everybody's anticipating it. I know that the credit card companies still don't see it either. I'm not saying it can't happen, but we see no evidence of that at this point in time. Those are the things is continued success on the pre-need front, managing costs better, getting more inflationary price increases in place.
Tom Ryan: Around these comp plans and general agency rates that we've had some negative trends. Those should begin to reverse themselves and result in better comparable year over year results.
Scott Schneeberger: Thanks, Tom. Eric, I'll follow that with just the guidance was maintained for free cash flow. That's pretty powerful with the $0.21 midpoint dip in the EPS guide. Could you just speak to what is holding that up so nicely? Is it unique items in this year, or can you continue to drive this strong cash flow performance and address some of the other uses of capital or use capital in some ways that have already come up on the call to the benefit going forward? Thanks.
Eric Tanzberger: I think we really can, Scott. We have some really good momentum and some solid cash flows that are coming. I have to give our sales force, especially on the cemetery side, some really good kudos in terms of high-quality contracts, excuse me, that continue from an installment perspective to be solid and to be better in terms of cash flows coming in than what we expected. But even more on top of that.
Tom Ryan: The level of down payments that we're getting is better than what we've seen before and better than what we anticipated. I think we're very focused on free cash flow, as you know, at this company, and in addition to the 8% to 12% earnings per share basis, the $750 million of cash flow is about $5.50. We're very proud of that. We want to continue to grow it like we have. But it's a team effort. But a lot of this stuff that's holding it up nicely, Scott, relates to the cash coming in the door from the installments and the down payments of current pre-need cemetery sales associated from the sales force.
Scott Schneeberger: All right. Thanks very much.
Eric Tanzberger: You bet.
Operator: The next question is from Toby Sommer, Truist. Please go ahead.
Tobey Sommer: Thank you. I wanted to ask a question about what you are experiencing in different areas of your customer base. How do trends compare and/or differ among your highest-end customers, the core middle, and the lowest-end customers that you serve, which I know are not absolutely the low-end customer. Thanks.
Tom Ryan: Yeah. I think, Toby, as we think about it, historically, we have always correlated the high end, call it the mid-high end, more with what is happening in the housing market, what is happening in the stock markets. Because again, people feel confident, they feel good. They are willing to spend larger pools of money on these types of things. The thing that can make that change is shifts in the market. Again, these are typically temporary, but those are the things that are going to drive. So we are continuing to see activity at the high end of the market. Again, that can change. As you think about the other customers, we are still seeing people buying our products and services. On an at-need basis, you would not expect that to change much anyway, even with economic cycles.
Tom Ryan: On the pre-need, you would, and we are still seeing a customer that is willing to buy on the pre-need side, and that is a good thing. I think that continues to show high consumer confidence. It probably correlates well with what is happening with the job rate. We are pretty much a full-employed economy right now. So unemployment rates could impact the confidence of that as we go forward. But right now, we just continue to see all of those consumers willing to purchase. Like Eric said, surprisingly, we are seeing higher down payments, and less people financing, if you will, over these things. If you look at We talked about general agency rates on SCI Direct. We are seeing more consumers buying single-pay insurance versus multi-pay. That kind of says that the consumer is okay, right? They will cut the whole check versus financing it.
Tom Ryan: Now that dampens our commission that we get, but the consumer seems to be pretty healthy.
Tobey Sommer: Yeah. One more, if I could sneak it in. Do you have any intended changes to your healthcare plans in 2027 that might be able to mitigate some of the higher healthcare in the back half of the year?
Tom Ryan: Our employees are so important to us, Toby, so we try to do as much as we can for them. Healthcare costs are across the board. Obviously, they will share in some of these costs for their out-of-pocket. But the extent we can, this is really important. We are a very people-centric business. So, there is only so much we can do. What we are trying to do is get people more healthy, right? With screenings and going to the doctor from a preventive maintenance perspective. So, we continue to push those types of things to our employees. But again, I would just caution that this is something that is near and dear to our heart. They, too, will see increases in their contribution, but that is just the way the world is right now.
Tobey Sommer: Thank you. I appreciate that.
Tom Ryan: Yeah.
Operator: This concludes our question and answer session. I would like to turn the conference back over to SCI management for any closing remarks.
Tom Ryan: Thank you everyone so much for being on the call with us. Hope you have a great rest of the day, and we will talk to you again for our Q4 earnings call next year. Thanks so much.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.
