Service Corporation International (SCI) Earnings

Management highlights

- Overall Quarterly Financial Results * Reported Q2 2026 EPS of $0.90, compared to $0.88 in Q2 2025, a 2 cent YoY increase driven by higher cemetery results partially offset by lower funeral profitability. * Adjusted operating cash flow reached $239 million, a $71 million (42%) YoY increase, exceeding management expectations, driven by lower cash taxes and stronger cemetery pre-need cash collections. * Returned $172 million to shareholders in Q2 via $123 million in share repurchases and ~$50 million in dividends; 1.5 million shares repurchased at an average price of $76 per share, leaving total shares outstanding at ~136 million. - Sales and Operational Strategy * Follow a four-pillar growth strategy for pre-need sales: 1) expand sales counselor headcount, 2) improve lead-to-sale conversion rates, 3) increase pre-need seminar offerings, 4) grow large sales volumes. The shift to higher fixed sales compensation is intended to improve retention of top sales talent and support higher sales production. * Leveraging AI for personalized sales counselor training: AI simulates customer interactions to provide real-time feedback, standardizing best practices across the sales force, with early results positive. * Transitioned to a steady-state product mix of 70% insurance-funded contracts for core pre-need, and low 90% insurance-funded for SDI direct, retaining trust-funded products for uninsurable customers and jurisdictions that require it. * The shift to defer urn delivery for pre-need contracts to the time of need was completed in late 2025, with this transition expected to stop negatively impacting non-funeral revenue by Q4 2026. * Cremation-focused cemetery sales expansion: After successful testing in 10 initial markets, the offering was rolled out to additional markets in early July 2026, with full national rollout planned for early 2027, opening a new greenfield customer segment. - Capital Deployment * Invested $120 million in capital in Q2 2026: $80 million in maintenance capital for existing locations, $45 million in new high-return cemetery development, $30 million in customer experience improvements for existing locations, $6 million in digital strategy, $25 million in growth capital for new funeral home construction and future expansion real estate, and $15 million in acquisitions. * Acquisitions in Q2 added locations in California, Georgia, and Delaware, bringing full-year 2026 acquisition investment to ~$40 million, on track to hit the full-year target of $75 to $125 million. * Ended Q2 with $1.6 billion in total liquidity ($260 million cash on hand, ~$1.4 billion available on the long-term credit facility), and net debt to EBITDA leverage of 3.77x, right at the midpoint of the 3.5x to 4.0x target range.

Guidance

- Full-year 2026 adjusted EPS guidance is maintained at a range of $4.10 to $4.30, with a confirmed midpoint of $4.20, with management confident of delivering results within this range despite early-year funeral volume headwinds. - Full-year 2026 adjusted operating cash flow guidance midpoint was increased by $50 million, from $1.035 billion to $1.085 billion, driven by better-than-expected working capital from higher cemetery down payments and installment receipts on strong pre-need production. - Full-year maintenance CapEx guidance was increased by $10 million to $335 million, with cemetery development CapEx guidance increased by $5 million. - After deducting maintenance CapEx, 2026 adjusted free cash flow guidance midpoint is $750 million, an 18% YoY increase over 2025's $637 million. Even at a normalized 24% to 25% cash tax rate, adjusted free cash flow would be ~$680 million, a 7% YoY increase. - Full-year 2026 cash tax guidance is maintained at ~$120 million, with a 15% to 16% effective cash tax rate driven by solar tax credits from tax equity investments; the GAAP effective tax rate is expected to remain 25% to 26%, in line with prior year. - Pre-need sales production growth for the back half of 2026 is expected to be mid to high single-digits for both cemetery and funeral, with most cemetery growth coming from core sales rather than large sales. - Cemetery revenue recognition is expected to increase to the high 90% range in the back half of 2026, bringing full-year recognition to ~95%, consistent with 2025.

Segment performance

1. Funeral Segment: Total comparable funeral revenues increased by $5 million (1% YoY), contributing approximately 41% of total consolidated revenue. Comparable core funeral revenue rose $7 million (1.5% YoY), driven by 3.3% growth in average revenue per service, partially offset by a 1.7% YoY decline in core funeral volume. Non-funeral home revenue increased by over $2 million, while non-funeral home pre-need sales revenue decreased $5 million due to an operational shift in urn delivery timing. Funeral gross profit declined approximately $7 million YoY, with gross margin falling 130 bps to 18.5%, pressured by higher current-period selling compensation recognition for the shift to more insurance-funded pre-need contracts. Pre-need funeral sales production grew $20 million (6.6% YoY), with core pre-need sales up 8.3% YoY. 2. Cemetery Segment: Comparable cemetery revenue increased by $23 million (5% YoY), contributing approximately 59% of total consolidated revenue. Core revenue rose $14 million YoY, including a $15 million increase in recognized pre-need revenue ($5 million from higher property revenue, $10 million from higher merchandise and service revenue), with additional support from increased trust fund income. Other cemetery revenue was $8 million higher YoY, driven by higher endowment care trust fund income from strong market performance. Comparable pre-need cemetery sales production grew $29.7 million (8% YoY), with $24.4 million of growth from core sales and $5.3 million from large sales. Cemetery gross profit grew $7 million (4% YoY), with gross margin relatively flat at approximately 33%, as strong sales growth-driven higher fixed selling compensation in the current period offset overall gains, with deferred revenue carrying lower future compensation expense.

Risks & headwinds

- Funeral volumes have been lower than expected through the first half of 2026, with a 1.7% YoY decline in Q2 core volume, creating margin pressure given the business's high fixed cost model, though the rate of decline has moderated through Q2 and July. - A 137 million portion of the company's 7.5% 2027 notes became current this quarter, requiring upcoming refinancing, though management notes the balance sheet has ample flexibility to handle refinancing alternatives. - Trust fund income for the full year is dependent on market returns, which cannot be predicted with certainty, creating uncertainty around full-year results. - Pre-need revenue recognition depends on multiple variable factors including contract maturity timing, backlog composition, and production mix, making near-term revenue projections slightly uncertain, though long-term backlog growth is viewed as a positive. - A potential recession could impact consumer demand for pre-need planning, which would pressure sales production growth. - Recent transitions to higher fixed sales compensation and more insurance-funded contracts created near-term margin headwinds, though management expects these pressures to abate starting in Q3 2026.

Analyst Q&A

• Q: What is the strategic rationale for shifting sales compensation to more fixed pay from commissions, and what results have you seen? /

  A: Management states the main goal is to attract and retain higher quality sales counselors by providing more stable income, which directly supports higher sales production. This shift aligns with the company's four core growth pillars focused on expanding the sales force, improving conversion, increasing seminars, and growing large sales. The company is also leveraging AI to provide personalized training and feedback to the sales force, which is already improving effectiveness in early use. The four-pillar strategy is driving strong pre-need sales growth. (267 words)

• Q: How will the recent near-term margin headwinds in the funeral segment evolve in coming quarters? /

  A: Multiple one-time and transitional factors are currently pressuring funeral margins, and all of these are expected to abate by the second half of 2026. These include a one-time cancellation reserve for a vendor transition, accounting impacts from the shift to insurance-funded contracts and higher fixed compensation, and a $5 million negative impact from the urn delivery timing change. With funeral volume declines moderating, management expects funeral margins to improve in H2 2026 and improve further in 2027. For cemeteries, strong current pre-need sales growth is being deferred into backlog, so higher margin recognized revenue will flow to the P&L in the back half of the year. (231 words)

• Q: What is driving confidence in continued core cemetery pre-need sales growth, and how is the new cremation customer offering progressing? /

  A: Management notes five straight quarters of strong core sales velocity, driven by consistent execution of the four-pillar growth strategy and improved closing rates from AI training. The biggest new driver is a targeted focus on cremation consumers, a historically underserved greenfield segment for the company. After strong uptake in 10 initial test markets, the offering was rolled out to additional markets in early July 2026, with early results positive. The company plans to complete full national rollout by early 2027, rolling out in waves to ensure proper internal alignment and execution. (192 words)

• Q: Why is the cemetery revenue recognition rate lower than usual this quarter, and when will the growing backlog flow into P&L revenue? /

  A: The lower recognition rate is an expected outcome of strong current pre-need sales growth, because merchandise and service revenue from new sales is typically recognized over multiple years, and much of it will not flow into the P&L until future periods. The 88.8% recognition rate in Q2 is consistent with the prior year's Q2 rate, and management expects recognition to rise to the high 90% range in the back half of 2026, hitting the full-year target of ~95%. Backlog revenue is recognized over 6 to 12 years for merchandise and services, so strong current sales build future revenue visibility rather than near-term P&L impact. (198 words)