管理層發言
Good day, and welcome to the SCI's Fourth Quarter 2025 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to SCI management. Please go ahead.
Good morning. This is Trey Bocage, AVP of Treasury and Investor Relations. I'd like to welcome everyone to our fourth quarter earnings call. We will have some prepared remarks about the quarter from Tom and Eric in just a minute. But before that, let me 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. A reconciliation of these measures can be found in the tables at the end of our earnings release and on our website. I will now turn the call over to Tom Ryan, Chairman and CEO.
Thank you, Trey. Hello, everyone, and thank you for joining us today on the call. This morning, I'm going to begin my remarks with some high-level color on our business performance for the quarter, then provide some greater detail around our funeral and cemetery results. I will then close with some thoughts about our 2026 business and financial outlook. For the fourth quarter, we generated adjusted earnings per share of $1.14, which was an 8% increase compared to $1.06 in the prior year. We saw moderate increases in revenues and gross profit in both the funeral and cemetery segments driven by strength in comparable and non-comparable operations as well as slightly lower adjusted corporate, general and administrative expense which, when combined, resulted in $0.04 of earnings per share growth from operating income. Below the line, the favorable impact of a lower share count contributed an additional $0.04 of earnings per share growth. For the year, we generated adjusted earnings per share of $3.85, which was a 9% increase compared to $3.53 in the prior year. We saw solid increases in revenue, gross profit, and comparable margin percentages in both the funeral and cemetery segments contributing $0.26 to adjusted earnings per share growth from operating income. Below the line, the favorable impact of a lower share count and slightly lower interest expense was somewhat negated by a higher effective tax rate, resulting in a net $0.06 favorable impact on earnings per share growth for the year. If the effective tax rate had remained constant, we would have had an additional $0.07 in earnings per share for the year resulting in $3.92 or 11% earnings per share growth over the prior year. Now let's take a deeper look into the funeral results for the quarter. Total comparable funeral revenues increased $3 million or just less than 1% over the prior year quarter as growth in core and non-funeral home revenue was somewhat negated by lower core general agency revenue. Comparable core funeral revenue increased by $6 million or just more than 1%, primarily due to a healthy 3.2% growth in the core average revenue per service. This core average growth was achieved despite a modest increase of 30 basis points in the core commission rate. The favorable impact from the average revenue per service growth was muted by a 1.9% decrease in core funeral services performed for the quarter. For the full year 2025, comparable funeral volume declined less than 1% as we believe the impact of the COVID pull-forward effect continues to diminish. Non-funeral home revenue increased by $3 million primarily due to a more than 11% increase in the average revenue per service. We expect this impressive growth in the average revenue per service to continue as older preneed contracts, that are maturing out of our backlog, have higher cumulative trust earnings and more recent preneed contracts written will mature with higher value in the backlog due to our operational decision to no longer deliver preneed merchandise at the time of sale. Non-funeral home preneed sales revenue increased over $2 million or more than 11%, as increased sales production with a higher percentage underwritten on insurance-funded preneed contracts generated more than an $8 million increase in general agency revenue. This was partially offset by a $6 million reduction in revenue recognized from merchandise deliveries in the prior year quarter. Core general agency and other revenue declined by $8 million or almost 13%, primarily due to a lower general agency commission rate versus the prior year quarter that was impacted by changes in product mix and higher cancellations resulting from the impact of our insurance partner transition. We believe the general agency commission rate to be stabilized now in the mid-30s percentage range moving forward. Funeral gross profit declined by almost $4 million, while the gross profit percentage declined by 70 basis points to just about 21%. A modest increase in revenue was more than offset by a $5 million increase in recognized selling compensation costs. While the cash rate expended for selling costs was flat versus the prior year, recognized selling costs increased for both the core and non-funeral home segments. For core, we have shifted our sales counselor compensation to more fixed versus variable, resulting in less being deferred for preneed trust sales production. On the SCI Direct front, our conversion from trust-funded products to insurance-funded products compels the immediate recognition of the general agency commission and the related selling costs. This has the effect of replacing high-margin merchandise revenues in the prior year with lower margin general agency commissions, therefore, putting downward pressure on SCI Direct's margins as we compare to the prior periods. The team managed fixed cost growth to less than 1% for the quarter, which had the effect of moderating the impact of the recognized selling cost increase. Preneed sales production increased by $29 million or about 11% over the fourth quarter of 2024. Core preneed funeral sales production increased by $25 million or 12%. Non-funeral home preneed sales production increased by over $4 million or 8% over the prior year quarter. We feel great about our momentum in both channels, now having had the time to work out the kinks of the insurance partner transition in the core segment. And as of the end of 2025, we have now rolled the insurance product into 100% of our SCI Direct locations. Now shifting to cemetery. Comparable cemetery revenue increased by $5 million or about 1%, primarily due to an $8 million increase in other revenue, slightly offset by a $3 million decline in core revenue. The core revenue decline was primarily due to a $3 million decline in at-need revenue. Total recognized preneed revenue was essentially flat as a $6 million increase in preneed merchandise and service revenue was offset by a $6 million decline in recognized preneed property revenue. Preneed merchandise and service sales production was up $15 million over the prior year number, growing the preneed sales backlog by over $9 million. Other revenue was higher by $8 million compared to the prior year quarter primarily from an increase in endowment care trust fund income. Comparable preneed cemetery sales production increased by $8 million or about 2%. Core sales accounted for a $13 million sales production increase powered by impressive velocity growth, which was slightly offset by a $5 million decline in large property sales, which was comparing against a very strong prior year large property sale quarter. For the full year 2025, preneed cemetery sales production grew by about 4%. We feel very good about the momentum our team carries into 2026. Cemetery gross profit in the quarter grew by $5 million or about 3% and the gross profit percentage increased by 70 basis points, generating an operating margin percentage over 36%. While recognized revenue growth was 1%, high-margin trust income was slightly offset by lesser margin core revenue declines. And when combined with our team managing fixed cost growth slightly higher than 1%, this resulted in gross profit growth and margin percentage expansion. Now let's shift to a discussion about our outlook for 2026. As you saw in our earnings release, we provided a normalized earnings per share range of $4.05 to $4.35 for 2026 or a midpoint of $4.20. The 2026 range is 5% to 13% growth with a 9% growth at the midpoint. Within our funeral segment, we expect flat to slightly down funeral volume compared to 2025 with the average revenue per case growing at inflationary rates, slightly negated by the effect of a modest cremation mix increase. We do expect to see higher general agency revenue from increased preneed sales production as well as slightly higher selling costs recognized, not cash, from the effect of the shift to a higher percentage of fixed compensation that does not get deferred. Finally, we believe we can continue managing fixed costs slightly below inflationary levels with higher productivity, which all in should drive profit growth for the funeral segment, increasing the gross market percentage by 20 to 60 basis points. We expect preneed funeral production for both the core and SCI Direct businesses to grow in the low to mid-single-digit percentage range. For the cemetery segment, we anticipate that we can grow preneed cemetery sales production in the low to mid-single-digit percentage range, resulting in cemetery revenue growth of about 2% to 5%. This, combined with our continued focus on managing inflationary costs, should result in impressive segment profit dollar growth, expanding our gross margin percentages by 30 to 60 basis points as compared to 2025. Below the line, we expect a net favorable impact on earnings per share as the positive effect of a lower share count is slightly offset by higher interest expense and a slightly higher tax rate as compared to 2025. For our shareholders, know that we are laser-focused on growing your great company as best we can for the long term, growing revenues, leveraging our scale and deploying capital to its highest and best use. In conclusion, I want to acknowledge and thank the entire SCI team for their daily commitment to our customers, our communities and to one another. Your dedication is the foundation of our success. Thank you for making a difference every day. With that, operator, I will now turn it over to Eric.
Thank you, Tom. Good morning, everyone. I appreciate you joining us today. I want to start by acknowledging and sincerely thanking our over 25,000 associates at SCI across our network. Your dedication, compassion, and commitment to excellence truly make a difference every day. We are grateful for the care you provide to the families we serve and the positive impact you have in the communities we are privileged to support. Today, I'll begin by reviewing our cash flow results and capital investments for the fourth quarter, followed by a recap of our full-year performance in 2025. After that, I'll provide an outlook for our 2026 cash flow and capital investments and conclude with an update on our strong financial position. In the fourth quarter, we achieved robust adjusted operating cash flow of $213 million, exceeding the upper end of our recent guidance range for the quarter. When compared to the previous year, adjusting for an expected $21 million increase in cash taxes, our adjusted operating cash flow decreased by $34 million. Looking deeper, our adjusted operating cash flow benefited from a rise in adjusted operating income of $8 million, demonstrating the strength of our funeral and cemetery operations this quarter. However, cash interest increased by $24 million, mainly due to a lower interest environment in the prior year quarter influenced by bond financing and the reduction of our bank credit facility completed in September 2024. Additionally, this quarter saw a net use of working capital of $18 million, primarily due to the timing of payroll in the current quarter. For the full year, we ended 2025 with impressive adjusted operating cash flow of $966 million. When excluding cash taxes and special items for both years, operating activities for 2025 provided $108 million in cash, marking an increase of 11% compared to 2024. In the fourth quarter, we invested $174 million in capital for our funeral homes and cemeteries, new growth ventures, acquisitions, and real estate, contributing to a total annual capital investment of $508 million. In that quarter, we allocated $107 million for maintenance capital back into our businesses, with $47 million directed towards high-return cemetery development projects, $51 million to our funeral and cemetery locations, and $8 million to our digital strategy and other corporate investments. For the year, our total maintenance CapEx reached $328 million, slightly below the previous year but above the high end of our guidance. We used a portion of our fourth-quarter cash flow from operations to reinvest in maintaining our funeral homes to enhance customer experiences and cemetery development, creating new tiered options for our clients. We also allocated $31 million in growth capital for constructing new funeral homes, expanding existing ones, and acquiring real estate for future projects, bringing our total growth capital for 2025 to $79 million, which was expected to be down about $25 million from 2024. Regarding acquisitions, we invested $36 million in the fourth quarter for business acquisitions across several locations in North Carolina, Arizona, Florida, and Canada. Overall, we completed the year with $101 million in acquisition spending, which fell within our annual guidance target of $75 million to $125 million. We are excited to incorporate these high-quality funeral homes and cemeteries into our company and welcome the new associates to our SCI family. In terms of capital distributions, we returned $107 million to shareholders during the quarter through $59 million in share repurchases and $48 million in dividends. We bought back just under 1 million shares at an average price of about $79 per share. For the entirety of the year, we returned $645 million to shareholders, with $461 million for share repurchases and $184 million in dividends, reducing our outstanding shares to just under 140 million. After the year-end, we repurchased an additional 500,000 shares for around $40 million at an average price of about $80 per share. Before discussing our 2026 outlook, I would like to mention that corporate G&A expenses rose by $19 million over the prior year quarter to $34 million, primarily because the prior year quarter had benefited from a $20 million legal reserve reduction. Excluding that impact, G&A expenses actually decreased by about $1 million from the previous quarter. Looking ahead to 2026, we expect corporate G&A expenses to average around $40 million to $42 million per quarter, noting that this could fluctuate depending on our accruals related to compensation plans. Now, moving on to our cash flow outlook for 2026, as stated in our press release, our adjusted operating cash flow guidance range is projected to be between $1.0 billion and $1.06 billion. The midpoint assumes cash earnings will grow by about $70 million, reflecting growth in our funeral and cemetery operations. Cash taxes are anticipated to decline by approximately $20 million, leading to $120 million in cash taxes, offsetting higher expected earnings with a tax benefit from investments in renewable energy projects. Beyond 2026, we expect to return to a normalized cash tax rate of about 24% to 25%, barring additional tax strategies or regulatory changes. We expect our 2026 effective tax rate to align closely with 2025's rate of about 25% to 26%. Additionally, we anticipate a modest decrease in cash paid for interest this year, as higher average balances are offset by lower rates. Regarding capital investment for 2026, we project maintenance CapEx to be about $325 million, consistent with 2025 levels. We plan to invest $135 million in enhancing our funeral homes and cemeteries, $165 million in high-return cemetery development projects, and $25 million in our digital strategy and other corporate investments. We also expect to allocate an additional $75 million to $125 million for acquisitions, which aligns with our recent annual targets. Alongside maintenance CapEx and acquisition spending, we intend to invest approximately $70 million to $80 million in growth capital for new funeral home construction and real estate opportunities, yielding low to mid-teen after-tax internal rates of return. Finally, maintaining our long-standing strategy, we aim to continue returning capital to our shareholders through dividends and share repurchases in a disciplined manner, barring other higher return investment opportunities. To conclude, I want to comment on our current liquidity and financial position. In November, we secured a new $2.5 billion bank credit facility, comprising a $750 million term loan and a $1.7 billion revolving credit facility, both maturing in November 2030. This transaction enhanced our liquidity by over $350 million, leaving us with approximately $1.7 billion in liquidity today. We closed 2025 with leverage levels consistent with the prior year at just over 3.65x, at the lower end of our long-term net debt-to-EBITDA target range of 3.5x to 4x. Our robust balance sheet, enhanced liquidity, and consistent cash flows facilitate our capital deployment strategy, giving us significant flexibility as we advance into 2026 for long-term growth benefiting SCI, our associates, and our shareholders. Thank you, and now I'll turn it back to you to open the call for questions.
分析師問答
Our first question comes from Joanna Gajuk from Bank of America.
So first, on the cemetery preneed sales production, it sounds like you expect low to mid-single-digit growth for '26. So can you kind of break down your assumptions in there for the large sales versus the core? I mean, it sounds like in Q4 large sales declined year-over-year because of the comp, but it sounds like the number must have been good. So if you can give us a sense of the magnitude of the amount for the year for '25 and then what you assume for '26, I guess?
Sure, Joanna. Thank you. In the fourth quarter, we experienced a slight decline compared to a tougher comparable. For the year, we're looking at a slight increase of about 2% for large sales, possibly around 3% year-over-year. As we consider next year, I'm quite confident in the momentum we have heading into 2026. We're optimistic about our performance in both large sales and core sales. Predicting large sales can be challenging, but I anticipate a modest increase of 2% to 3% there, with potentially a stronger growth rate for core customers. However, large sales can be unpredictable and may show some volatility, especially during tougher times.
If I may, can you provide any updates on how things are progressing this year, particularly in your locations and possibly elsewhere? Can you also comment on any disruptions to the sales process due to the winter storms affecting some of the markets?
Yes. We continue to see very positive trends on both preneed cemetery sales and on funeral sales. We've had a real focus. Our sales team is really focused around 3 things this year, and this plays a little bit into something we've talked about. We've shifted more compensation to fixed from variable that we talked a little bit about in my comments. And that was a strategic decision to focus on people power, focus on retention of our key employees by giving them the stability of that higher guaranteed pay. So the 4 things we're working on are people power or call it, people retention. We believe if we can increase the number of preneed seminars that are out there, it's going to increase the number of good leads. And then once we have those leads, a real focus on the lead to sale rate, which is really the conversion of the leads. And then finally, really focused big time on large sales, making sure we have the inventory, making sure they have the presentations right, that we're finding people that could be customers in this category. So those 4 things really drive our sales, and we're laser-focused. Jay has got everybody laser-focused on those things, and we're seeing great results. We're seeing both at the high end and at the core level on funeral and cemetery.
Any color on activity so far?
Well, I don't want to share specific percentages, but as we look ahead to January, there are two important points to consider. First, funeral volume last year was quite strong, making our comparison somewhat challenging. While we've noticed a slight slowdown in volume, we're experiencing significant early success in sales for both funeral and cemetery services, especially in the cemetery area. However, it's important to remember that one month does not set the tone for the entire year. We're optimistic about these results, and I believe the team is focused on the right priorities, giving us confidence in our prospects for 2026.
Great, last one, I guess, staying on the cemetery side. Can you talk a little bit more about the opportunities to grow cemetery for cremation customers? So you noted the shift to cremation is slowing down, but 65% of services are cremations. And I guess you kind of talk last time about opportunities to grow cemetery sales for the cremation customers. So can you give us an update of where things stand and kind of what are your goals for this year?
Sure, Joanna. We actually have piloted in a few markets now in the process of rolling out to more a specific focus on that cremation consumer. And some of that is putting videos into our locations that can show the opportunities to the cremation customer and just making it more visible to our visitors and to the clients that we're serving. So, yes, we're doing a lot of things as it relates to media and the like to create that awareness and hopefully drive some opportunities in that market. I'd say early days, we feel very good about it. And it's going to take a while to roll it out to the entire network, but we're in the beginnings of doing that now and are excited about the results to come.
Up next, we have A.J. Rice with UBS.
First of all, just on the comments that Eric made on G&A. You explained the Q4's impact, but I think your Q4 of '24 the comp, but Q4 of '25, you're only at about $34 million. I think we had been thinking you'd be more like $38 million to $40 million based on the third-quarter call. What drove the better performance on G&A?
Two things, really, A.J. The first one is that we have short-term and long-term ICP accruals, and this is primarily a long-term situation, an LTIP situation. And just to remind you, we have some performance units that get compared to the S&P MidCap 400. And that's going to move quarter-to-quarter, which is what I was trying to say during my conference call remarks. Sometimes you have a $2 million, $3 million, $4 million headwind and sometimes you have a $2 million, $3 million, $4 million tailwind. And that's what occurred during the fourth quarter. Absent that kind of volatility on LTIP, you should see a $40 million to $42 million per quarter G&A expense as we move forward. That's kind of the middle-of-the-road expectations as we move forward. The other thing that can move it that you kind of have seen us talk about in the last few quarters, sometimes you have some positives and negatives related to some of the insurance being self-insured. This primarily could be Workers' Comp, sometimes general liabilities, sometimes auto liability, sometimes even the health care accruals. Generally, those aren't moving as much as we've seen kind of the LTIP accruals move in. But any of those at any point in time can do that, and we'll explain that to you. But in terms of modeling, I think I'm pretty comfortable with that $40 million to $42 million a quarter right now.
Okay. When considering the shift towards more insurance, you've mentioned commission normalization and the impact of SCI Direct. Will things be more straightforward going forward? What does this mean for the commission run rate? It seems like it might be slightly lower in the latter half of 2025. Should we expect to annualize that in the first half of 2026 or something different? Additionally, regarding SCI Direct, it appears the restructuring is complete, and we should see more normalized trends, but I want to clarify that.
Yes, that's correct. Regarding SCI Direct, we have fully implemented the insurance product in those markets. While there will still be some trust sales due to individuals who cannot be insured, over 90% of the sales are expected to be insurance, which will generate commissions and associated selling costs. We anticipate that SCI Direct will show a positive trend year-over-year, and it's been a while since we've seen that, so we are excited about it. On the subject of commissions, it's important to note that we experienced an 11% growth in preneed sales production, which is partly driving the increase in selling costs. We've also transitioned slightly towards a fixed cost plan compared to a variable one. As we consider the trust product, less is being deferred and more is being recognized. This does not reflect an increase in cash but rather a change in the compensation structure. Overall, I believe SCI Direct will continue to trend positively moving forward.
Okay. And you also called out, I think this may be the second straight quarter of the improvement in velocity you're seeing in the cemetery production area. Can you just maybe drill down a little bit more about what you're seeing there and what's driving that and what might implications of that be?
Yes. I think, A.J., a lot of that's back to those 4 metrics or particularly the first 3. Having one, the aim to try to have higher retention of our good people and getting them quality leads and then really focusing on the training to take that lead and convert it to a sale. And so as I think about our success in being able to do that and focusing on those types of things, we're seeing, again, trends that we really like. And so we are seeing velocity drive our success as we think about the core cemetery sales. So I just attribute that to focus. You mentioned the cremation consumer before. We are seeing a higher lift of people, cremation consumers choosing to buy into our cemeteries. So all those cumulatively bode very well as we think about cemetery production going forward.
Our next question comes from Tobey Sommer with Truist.
I was wondering if you could talk about the drivers of lower than inflation expense growth. That's pretty impressive, particularly if you think that your ability to achieve that has legs.
Sure. Some of the developments in 2025 focus on our product offerings and sourcing. Our supply chain team, headed by Michael Johnson, has made significant improvements in how we retail products and set prices. We've seen enhancements in merchandising costs as we evaluate our buying and selling strategies. A key aspect is our commitment to labor efficiency. We empower our operators to proactively manage staffing levels, providing them with tools such as metrics and daily dashboards. This enables us to oversee labor efficiency and share best practices across our portfolio. Additionally, we have a cross-functional margin improvement committee that has been operating for several years, concentrating on the spread of these best practices. We believe we have a solid handle on managing variable costs, especially in staffing, as volumes are not as high as anticipated. This reflects the effectiveness of our operations management team in controlling costs.
So would you say that you think that this sort of spread could be achieved beyond 2026 or take it one year at a time at this stage?
I think it's kind of a one year at a time. And I do believe that's true, but it kind of gets back to volume, right? If we begin to see volumes ticking up, it becomes a little more complicated as you think about staffing costs, you're going to see some rises in that because, again, these are variable costs. But at the same time, I think it really allows us in the challenging volume periods to manage costs as low as you see us do it. But I'd expect those to trend back up as volumes begin to increase as we anticipate over the coming years.
If I could sneak one more in from an acquisition perspective, you closed out the year and right down the fairway for your total capital deployed. When you look at the pipeline, is there any change in the composition such that something might be a little bit bigger this year?
I think we're seeing a similar type pipeline, Tobey. I think we're very excited about it. As I've said before, it's generally going to be more of larger independent type transactions that are both funeral and cemetery. And the best that we could do in those situations were places that we already exist and already have local scale. And that's the best of both opportunities for our company as well as those independent funeral homes that are decided to join our company, and we can continue the great service and the way they're treating their consumer in those markets that we are already in and guarantee that really, but the pipeline is good. The pipeline is healthy. We're very busy. I think I've been saying that for a couple of quarters now. And I think I'm going to still say the same thing. I think it's pretty good and pretty busy, and we're excited about it.
Our next question comes from Tomohiko Sano with JPMorgan Chase.
This is Tomo from JPMorgan. Could you talk about the plans for developing selling premium cemetery inventory and your outlook for recognition rates? And could you talk about how do you view price elasticity as well, please?
We're going to deploy capital, which is the first part of your question, similar to last year, which our metric right now is about $165 million of very high returning opportunities. As you're describing as you saw Memorial Oaks during your tour, we're going to invest in tiered type inventory at each of our cemeteries that are going to give offerings all the way to the higher end in terms of families that want like private estates and such, then you go all the way down to the semi-private areas, and then you get to some of the initial more lower-tier type offerings. I think that it continues, coupled with our sales force, to be the best value opportunity that we can get and the highest return opportunities we can get for that type of capital. In terms of the cemeteries themselves, there's relatively high barriers to entry. We're very lucky to have this 35,000 acres that we had that were built over many, many decades by really the founder of this company over a long period of time where metropolitan areas have grown around these cemeteries, but yet we still have a tremendous amount of capacity and years left within these cemeteries. What you saw in Memorial Oaks, which Houston has now grown out and surrounded, still has many years left, many decades left in terms of inventory. For those of you all on the call have been to Rose Hills, that's a similar situation where L.A. has grown around it and many years left in that. So we're very lucky to have it. We have good barriers to entry. We're going to price it based on the tiering effect and type the value proposition that exists that we've always had. We feel that there's a lot of opportunity with a strong cemetery consumer, especially as the demographics over the long term turn our way over a period of time.
Very helpful. Just one follow-up on the M&A pipeline in 2026. Could you talk about prioritization for expansion, especially what drove the recent acquisition in locations of North Carolina, Arizona, Florida and Canada? And are you continuing to target these locations or more broader-based M&A?
No. We aim to focus on markets where we already operate, as this gives us national scale wherever we invest. Having local scale allows us to create significant synergies when larger, well-established independents join our company. We have a strong presence across the United States and a solid business in Canada, extending from the West to the East, particularly in Toronto. We will work on building long-term relationships within our valuable pipeline, engaging with business owners and their families who express interest in discussing future steps and liquidity events. Our strong liquidity and efficiency create a mutually beneficial situation for our independent partners.
Our next question comes from Parker Snure with Raymond James.
Just wanted to drill down on the GA revenue in the funeral segment a little bit more. With your core preneed funeral production up 12%, but the GA commissions were down just a bit. Maybe just talk us through some of the drivers there. I know there were some comments on the commission rate. I know you previously made some comments on a flex product that comes in with lower commission, maybe just drill down on some of the dynamics driving that.
Certainly, Parker. As you consider the timing of everything, we're just starting with our new contract with the insurance partner in the fourth quarter of 2024. We're cautious about predicting the rate due to the many variables involved. Any new plan will come with revised pricing, learning curves, new forms, processes, and rules, making change management essential. The two key areas I mentioned are related to the product. You noted that we introduced the flex product in the middle of 2025, which wasn't available at the end of 2024. The flex product has a significantly lower commission rate compared to traditional insurance. Another aspect is early payoffs; we try to estimate how many will sign up for these plans and pay off within a year, with early payoff rates being slightly higher, which can lower overall commissions. Additionally, the choice between a single upfront payment and a multi-pay option involves different commission rates, so we’re working to predict the distribution between these options. Regarding cancellation rates, there are a couple of factors to consider. One is the cancellation rates from our previous insurance provider, which increased for older contracts and tends to fluctuate unpredictably. I don't expect this trend to persist at the same levels. Secondly, we've noticed a slight uptick in cancellation rates compared to what we experienced with the previous provider, likely due to the learning process surrounding the new plan. We are understanding the points where customers may face frustrations with processes, rules, and forms, and I believe we'll improve in these areas over time. We project a mid-30s percentage rate going forward, which we think is a reasonable estimate for modeling '26 and '27. We expect to enhance our performance in areas like cancellation as we gain more insight.
Okay, great. That's super helpful. Just a follow-up on that. It seems there was an accrual related to the cancellation rate. Can you provide a number for the scale of that? Is this expected to be a one-time occurrence, or will it be an ongoing accrual affecting the numbers consistently?
I believe the cancellation rate experience we've encountered is slightly higher than we anticipated, which requires us to make adjustments. Consider a 200 basis point impact from this adjustment this quarter, and we've included this in our projections for 2026. As you model, I suggest thinking of that mid-30s figure, which accounts for any necessary adjustments we foresee. Over time, I believe we will improve in this area due to typical reasons related to new products, forms, processes, and our team adapting to them. I expect this to improve gradually, as change management can be challenging. Ultimately, we have a better product for our customers, and we're achieving higher commission rates. We're very pleased with our partnership and expect it to continue to improve positively.
Yes, absolutely. Understood. And then just if I can squeeze in one more. On the perpetual care trust, that was up $8 million year-over-year. I think for the full year, it's up about $16 million. Maybe just help us with what is expected in your guidance for 2026 for perpetual care trust revenue? And maybe just remind us on the accounting treatment of how that portfolio is accounted for.
Yes. We had a great year across all the trust funds, as you saw Parker, at a 15% return. We normally expect and model kind of about half that, kind of about a 7%-ish type market return in the trust funds. That's true for the internal care funds just like it's true for the MST funds. The internal care fund is really split into two components. One is a prudent person approach, which is the same 60% equity, 30% fixed income, 10% alternatives type mix that you would expect from that type of portfolio. There's still though a few states in the internal care fund, which don't follow that method and primarily are invested in fixed income securities. When that occurs, when there are gains or losses from those portfolios, that flow through that particular line. The issue was not during the fourth quarter of '25, but in the fourth quarter of '24, we had a liquidation related to a portfolio manager and that created a $4 million, $5 million, $6 million loss that came through. So it's not that the portfolio looks so much better than last year is that last year was pressured by that particular event in the internal care funds.
Our next question comes from Scott Schneeberger with Oppenheimer.
I have probably a total of three questions. I'm going to ask the first two upfront. We heard a lot about the flu in the fourth quarter, certainly carryover into the first quarter. But funeral volumes were pretty light in the fourth quarter. Just kind of curious what you're seeing on the flu front. And then the second part of the question is, the guide for 2026 on funeral volumes flat to slightly down. When are we going to see that? I mean that's kind of in the trend, but is there a conservatism in there? Or is that the trend? I was thinking we might be seeing that start to improve a bit. So just thoughts on those.
You bet, Scott. So as it relates to flu, you're correct, we did hear about the cases. I think as it relates to creating funeral volume that we're not seeing any of that. We're not hearing any of that. And as we think about trends in volume, it's probably good to take a step back for a second. So we know that the COVID impact occurred. We knew that we're going to have the COVID pull-forward effect, and we've modeled that. And we think we've got a little bit of diminishment there, but less year-over-year. The other thing just to point out that we don't talk about as much, but you'll recall us talking about it during COVID, was the term excess deaths. And what did that mean? And we said that was kind of the ripple effect of COVID. We saw increases in drug overdose, suicide, traffic fatalities, murders, lack of cancer screenings. And so we couldn't explain this excess volume that has occurred even beyond COVID. And I think as you look at the statistics now, and this is a positive for us as a society, I think goodness, right, drug overdose down, suicide down, traffic fatalities down, murders down, cancer screenings back to levels, and you're seeing deaths from cancers trend down. So as you look at the national data and again, it's not perfect, as a country, volumes were down in 2024. Preliminary '25, they're down. So I think what we're going through is a little bit of a trying to normalize out of this strange period. The other thing that we do is we go back and look at the CAGR of the 2019 numbers. So if you go back and look at pre-COVID and you said, let's expect volumes to increase 1% over the next few years. If you do that and look at our current volumes, you'd be very pleased about where we stand. As you think about market share, as you think about demographics. So it's very confusing, and I understand why it is. It's frustrating for us sometimes too. And look, we're paranoid. We're going to fight for volume for market share. Are there markets we could do better as we think of cremation pricing, maybe, and we're doing that every day and trying to fix it. But I think if you really take a step back and do the compounded impact of '19, you feel very good about the volumes that we're experiencing today. We still believe the demographics of this business, just the pure aging of society is going to have an impact, and it's just challenging to understand exactly when you're going to be able to see that. It isn't being clouded by some of these other trends. But again, we're going to manage our costs. We're ready to take care of that. On the good news front, so as I think about '26, yes, we think it's probably going to be flat to slightly down. January is a little soft, as we mentioned earlier, but we'd expect it to trend back towards flat. I think as you get out to '27, '28, '29, we expect to see funeral volumes increase is the way our models are working. So we think we're close. We're poised and ready to do it. I'd say on the positive front, on the cemetery side, we're seeing a lot of great things in our sales activity, both in large sales and in core. So still feeling good about '26. Volumes could be slightly down to flat, like we said.
Great. Appreciate that color, Tom. And then the last question, it kind of dovetails off all that. The guide for 2026 EPS is growth of 5% to 13%. That certainly encompasses your 8% to 12% midpoint kind of in the bottom half of that. It feels about right, but just curious what has you concerned that could put you at the lower end? What are the drivers that could put you up at the higher end or above?
I believe that at the lower end, we are looking at ongoing soft funeral volumes. If volumes decrease, say by 200 basis points or so, that would be challenging to manage. However, if we see flat volumes, we feel optimistic about reaching the higher end of our expectations because we are witnessing a lot of sales activity that gives us confidence. We are also pleased with how SCI Direct is performing and believe we have a strong handle on our expenses. The primary concern that could push us towards the lower end would be a continued year-over-year decline in volumes. We will do our utmost to aim for the higher end of our EPS guidance, but overcoming that decline would be our biggest challenge if it persists.
This concludes our question-and-answer session. I would like to turn the conference back over to SCI management for any closing remarks.
We want to thank everybody for being on the call today. We look forward to speaking to you again soon. I guess next call will be at the end of April. So everybody be safe out there. Thanks again.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.