Service Corp International – Funeral Home Services
Outlook & Pricing Trends – 7 September 2021
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Larry Merington (LM)
Specialist:
CEO at Veneration Holdings LLC
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Agenda:
1. Increased cremations in light of coronavirus, including customer profiles and potential pricing impact
2. Service Corp's (NYSE: SCI) competitive positioning amid a pivot to services, highlighting scale benefits
3. Pricing dynamics – Service Corp’s price leadership and government reimbursement for customers
4. Ethical controversies around PE investment and Service Corp’s key risks
Contents
Q: Could you give a high-level overview of the death care services market? How has it evolved during your
time in the industry?
3
Q: How does a large amount of cremations taking place in the US impact pricing or an operator’s overall
amount of dollars per event? It’s a cheaper option for many families. Does that reduce the total market size? 4
Q: Could you elaborate on how trends are developing across the US? You said cremations are upwards of
51% in the US. Are cremations increasing in the Midwest or South vs the East or West Coast?
Q: How does Service Corp International’s full suite of death care products and services compare across the
market, considering the huge pivot to the services side?
Q: How has coronavirus impacted the industry? Why do you think public investment into the market has
been limited, given how fragmented it is on the mom-and-pop side?
5
6
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Q: Could you discuss some of the hurdles to investment? Is it the different state regulations, the state
certification requirements for people being trained to collect bodies or the PR challenges around PE dipping
into funeral services? What are the main concerns around more industry consolidation, where many
inefficiencies could be solved with competent management?
8
Q: How does Service Corp’s scale allow it to be more competitive on costs for raw materials, headcount and
expansion? Could you discuss the dynamic between those scale benefits and the nuanced, personal
conversations that need to be had with families?
8
Q: How are consumers reacting to price increases in light of the pandemic, where they might be losing
family members unexpectedly but also potentially losing their jobs? There is a huge demand for services
where Service Corp can leverage pricing. How does that fall back on the consumer? How does the payment
process work?
Q: Could you talk about pre-need services across the industry? When did this start to accelerate? How do
companies formulate tailored pre-need services or programmes to take advantage of demand?
Q: Your outlook suggests that we won’t return to a normalised pricing environment. How strong would
Service Corp be on pricing if coronavirus dissipates and death rates normalise? Is there heavy price cutting
or promotional activity in the industry? How does the industry handle these slower periods?
Q: Are cancellations popular when selling pre-need services? Do people gradually stop paying? How does
that dynamic play out?
Q: What are Service Corp’s biggest risks? What do you think keeps management up at night?
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Service Corp International – Funeral Home Services
Outlook & Pricing Trends
Transcription begins at 00:00:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Service Corp International – Funeral Home
Services Outlook & Pricing Trends. I am Nyree Hinton and I will be facilitating today’s Interview with Mr
Larry Merington, CEO at Veneration Holdings LLC.
Larry, before we get started with today’s Interview, please state I agree or I disagree to the following
statement: You understand the definition of material non-public information and agree not to disclose any
such information, or any other information which is confidential, during this Interview.
LM: I agree.
NH: Could you start with a brief introduction to your background?
LM: I started my career in the death care industry by being recruited by Korn Ferry to be the CEO of Stewart
Enterprises, then the second largest publicly traded company in what is known as the death care industry,
which is about USD 22bn in size. I interviewed for that position, did not become the CEO, but did get offered,
by the board, a position in senior rank to revolutionise their top-end growth. That’s what they wanted to see,
and they felt that they needed someone with my background. I did that for a number of years, we made some
progress, and then we got bought by SCI, and I’ve had relations with the SCI people most of my career within
the death care industry. At the end obviously, in the negotiations for being bought, we were constantly meeting
with the SCI people, so I know them quite well, I know their structure, and they bought the second largest
company, our company, so I know what they’ve done with it since, and that’s probably what we’re going to talk
about a little bit today.
After that, private equity backed me for a number of business ventures in the death care sector. I’ve bought
and sold probably 20 different properties now, and I’m currently on my own, using my own money, doing
something to validate another part of the funeral business, and if it works, I intend to go back and raise some
more capital and try to put some of these systems in place. That’s my background. I’ve been a spokesperson for
many conferences, and given talks on trends and technology and the lack, actually, thereof in this industry,
and just about every aspect that there is of the death care industry, I’ve had something to do with, either
managing it, buying it, examining it, comparing it to others. If you have an questions, I think I’m pretty well-
qualified to run the gamut of anything you might have. With that being said, that’s my background.
I should throw in a couple of other things. I’m currently a Professor at Tulane University in the Freeman
School of Business. I teach strategy and integration, and in that, it’s a capstone course, mandatory for all the
undergrad seniors. Most of that is experiential. We have them work on real companies. I also have spent 30
years flying fighters in the air force, and so if my military bearing comes out every once in a while about a
fetish with time or any of those sorts of things, forgive me. Couldn’t get rid of that gene when I quit flying.
[00:03:32]
Q: Could you give a high-level overview of the death care services market? How has it evolved during your
time in the industry?
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LM: The death care industry is really three things. It’s disposition of the body, it’s ceremony, which we know
really as gathering for a funeral, and then it’s memorialisation, which would be burial or cremation. There are
three big chunks in this particular industry that makes it easier to understand which I’m talking about as we
go through. The disposition is, high level, somebody has to pick up the body. They have to be accredited,
certified, etc, to manage the retrieval of a dead body, from either a house, hospice, hospital, accidents. Even
indigents, it has to be certified people to do that. That’s typically a funeral director, and if they have to, they
work with the county-based morgue manager of some sort. There are different names for them in each state.
The state rules, for every state that manages funeral, cemetery and crematory operations, differ. It would be a
whole lot easier if they were all the same. There’s reciprocity between a number of them, but for me, having
always managed multi-state operations, it is a very difficult task to do, because the states are the governing
bodies in their funeral commissions.
The ceremony part is the funeral home. There are 19,000 funeral homes, more or less, in the United States.
Almost all of those are privately owned. There are only, let’s see, 25% now is about the right number, 25% of
this industry is owned by big players, and that includes publicly traded companies, but 75% is unconsolidated
and it’s owned by independents, so this business, this industry is highly fragmented. It’s been in a roll-up
mentality for years and years and years, but it’s a lot of real hardship to take a USD 500,000 a year to a USD
1m a year funeral home and build enough of those to get to a big enough EBITDA number to make it look like
you have an enterprise. It takes a lot of work to do that. Same transactional cost and pain that goes with
buying something really big also attaches itself to buying something small.
The memorialisation part, that’s typically burial ceremonies, and now with cremation creeping in, some of that
means taking the crypt and replacing it with a niche space which you put the cremated remains in, that’s
roughly a cubic foot block of granite somewhere in a cemetery. Otherwise, it’s ground burial, crypt burial and,
in some cases, private mausoleum burial, where you build your own monument to yourself and put your
family in, 10 generations if you want. Depends on how big a building you want and whether it’s cremation or
crypts. Those are the major categories. I didn’t talk about cemeteries too much. There are about 6,000-8,000
active cemeteries. There are probably 60,000-80,000 registered cemeteries, because many of those are
pauper graves or they’re defunct or filled, or the county or the city or the state doesn’t do anything with them
anymore, and they just close the gates. The active ones are the ones that are actively controlled by companies
that are trying to make money and taking care of those. That’s the industry.
A little bit on trends, on cremation, which is usually the first question I get, “What about cremation?” In 1900
was roughly about the recorded first cremation in the United States. The Vikings had done this, and the
Romans also, many, many generations before that, but okay, they didn’t keep very good records. Starting
around 1900 in the US, it was one cremation, and from 1900 to today, it’s taken that long to go from one
cremation in the entire country to roughly 51% of cremation in the United States. It’s now crossed the
Rubicon, if you will, where we are looking at a majority of cases could be cremation in the future. Interesting
enough is that this cremation number is skewed hugely by location. There can be a funeral home that does
75% cremation in California, and 10 miles away there could be a funeral home that handles another ethnic
class or religious class of people where it’s 2% cremation. These numbers are by state is about as granular as
you can get them, and mostly you’re looking at regions, and then finally the whole country, and that’s how it’s
reported. So that you know, the best information available for that is CANA, that’s Cremation Association of
North America. They handle both Canada and the US. Their data lags by 18 months, because they vet it. They
have a bunch of PhDs that know what they’re doing when they’re looking at the data, and it suggests that it
grows between 1% and 3% per year in terms of cremation rates.
[00:09:02]
Q: How does a large amount of cremations taking place in the US impact pricing or an operator’s overall
amount of dollars per event? It’s a cheaper option for many families. Does that reduce the total market size?
LM: You bet. The industry shot itself in the foot when cremations started to get to about 20%, and they
wanted it to go away. The industry is very slow to change. It is technophobic and it does not embrace modern
practices at all, and has been forced to in the last 10 years. Cremation, when it got to about 20-25%, we would
Private and confidential 4
see people try to convince the family that they really didn’t want cremation, and these were funeral directors,
mostly, that you see in the industry. They would try to talk them out of it or they would treat them like second-
class citizens. They would not offer any additional services to speak of. It would be essentially a basic
cremation, “We’ll go get the body, we’ll bring it in and cremate it and turn over the remains to you as quickly
as we can, because we don’t make any money off you.” That was the messaging that pretty much was taking
place when I first got into this industry, and was watching the insanity of telling a consumer they can’t have
what they want, that you have to take what they have. That’s where this disconnect came.
They disconnected it because they marked up the caskets so greatly. They went to this retail model, they took a
piece of furniture, a casket, then marked it up, and the internet destroyed that myth pretty quickly after about
five years of the internet up and running, and Amazon and people having the access to look and compare that
you could buy that same casket, have it shipped in from China for one-third the price that you’re currently
paying for it. Smartly, in a service industry, the focus, and we were one of the first to do this, to really focus
this way back when, that was focus your mark-up on your service, because that’s what people are paying for, is
the heritage, the service, everything that goes with it, and make your mark-up on the piece of furniture
tolerable, you still have to make money, but tolerable and not outrageous. In doing that, our revenues were
stable and actually increasing, because the reputation on your service is what people are paying for.
We also had to reteach a bunch of funeral directors in our own operation, and across the board not all funeral
directors are embracing any of this stuff that I’m saying. When they’re forced to because they work for you,
that’s a little different story, but we had to force them to treat the cremation customer with options, and we did
some third-party JD Power level of research work on this, and found out that people who came in for
cremation were dumb as a doorknob on what their options were, and our people were absolutely not wanting
to wait on them, because they wanted somebody to come in with a full-service traditional burial, including a
casket and viewings, and that was the stuff they were going to make money on, so they didn’t want the
cremation person to come in.
That research also indicated that it wasn’t a money issue necessarily. That is clearly, for about 7-8%, maybe 7-
9% of the United States population, this is based on a sample set we had, we didn’t interview everybody, but
that 7-9% out there are a cohort that really are looking at just cost. That’s it. They don’t care about ceremony,
they don’t care about religion. They just don’t want to talk to a creepy funeral guy and do anything other than
purchase at the lowest common denominator. You throw those out because they’re always going to be the
same, they’re not going to be the ones you’re going to persuade, but you can persuade others to have a service,
etc, because that same body of research indicated everyone that could afford and just picked cremation, and
blindly chose a direct cremation because they just wanted it over with, had deep regrets about not having a
gathering and a memorial, some place to put the cremated remains, all of the other things that now you hear
the industry talking about.
To the numbers, yes, it is a less revenue possibility, but if you run your funeral home right and you manage to
sell merchandise with it, an urn, some keepsakes to go with the urn, also a niche space on the memorialisation,
you will make more profit on less revenue, because those mark-ups, they’re staying strong and they’re
tolerable for the community, and so it’s easy, I think, if you get your messaging right, to adjust the
presentation you make to families about cremation and the options that they have and price accordingly. In
the end, you should be at least revenue-neutral or certainly close enough, and many times, we find ourselves
revenue ahead when we do a good job with the cremation consumer. I’ve seen a trend a little bit here recently,
where they’re going for an embalming, a viewing, and then cremate the body. They want to have that last, and
so they want all of that, so you might get a USD 9,000 funeral out of what started off being a basic cremation.
[00:14:52]
Q: Could you elaborate on how trends are developing across the US? You said cremations are upwards of 51%
in the US. Are cremations increasing in the Midwest or South vs the East or West Coast?
LM: Rural central America, the central part of America and the rural parts of it have the lowest cremation
rates, and they’re still going to probably be between 15% and 25%. That would be considered low. Many of
Private and confidential 5
them have edged up to 30-32% and plateaued right there. Southern California now averages 63-64%
cremation. What’s funny about that is that it varies by location within the LA basin, and that’s 23 million
people that live there, so you would assume that, yes, there are going to be little pockets of differences. The
minute you get interior to California, you end up getting into a situation where you’re back to rural again, and
that cremation rate drops a lot. The heaviest cremation in the United States is Hawaii, at about 85-88%,
followed by the Pacific Northwest, California. Florida is creeping up in cremation, but again, it has a lot of
rural influence, so that has some impact on it. East Coast north of the Carolinas has embraced cremation a lot,
Virginia particularly, and you’re starting to see that in different places, but they’re stabilising now and not
increasing as rapidly. Your question really was is the Breadbasket increasing rapidly, and the answer is no, it’s
not. In fact, if I said 1-3% per year increase in cremation rate, they’re going to be at the 1% side and maybe the
0.8% and 0.7% side of that growth.
Interesting about cremation, what kind of people choose cremation? When you’re profiling consumers,
because in the end, this is a corporal work of mercy, caring for the dead, but it is also a business and it has
clients and consumers, and there’s no way you’re going to flush the consumer mentality out of their bodies
after they’ve been programmed by Amazon and Google for so long that they’re not going to forget that just
because they walked into an arrangement room. Who chooses cremation? It tends to be people that are highly
educated, above average income, have lived a mobile life. That means they’ve lived in multiple places. They’re
not very religious at all. They might say that they have spirituality, but they’re not going to say, “I’m a
Methodist,” or a Lutheran or a Catholic. They’re just not going to admit they belong to any organised religion.
The last piece is that they tend to be a lot of own their own businesses or have owned their own businesses
type of people.
The people who choose tradition, on the other side of the equation, tend to have lived in the same city and
maybe the same house all their life. They tend to be more blue collar in their approach and education and
income. They tend to be very religious, and they tend to be rooted in the community, much more rooted in a
community, and see the value of the community involvement and inviting people to a gathering to respect and
honour a dead person. I think that helps. That’s also research work that’s very current. Within the last 18
months, we’d been staring at that to see if we could profile that consumer and figure out what we should be
doing to meet the needs.
[00:18:49]
Q: How does Service Corp International’s full suite of death care products and services compare across the
market, considering the huge pivot to the services side?
LM: When they bought us, we had created a whole bunch of gee-whiz technology stuff that had not been seen
in the industry before, that really cut a lot of our cost and reached to these themes that I’m talking about right
now, about educating the consumer, creating relationships, touch points, social media programmes that would
allow you to have a consumer approached by six or seven different communication tools that would create
engagement and then hold that engagement, and then therefore create heritage. SCI could not adopt our suite
of capabilities into their their larger platform at that time when they bought us. I note, in the last three years,
they have been pulling from our playbook much more than they had when they first bought and consolidated.
You have to right the ship, get the policies and practices in when you make a big acquisition. They’re very good
at that, by the way. They’re very good at absorption of businesses that they buy, and getting them up and
running on their platforms. A lot of funeral directors may not like it because it is very corporate intense, and
most funeral directors are pretty much mom-and-pop businesses.
SCI has learned and is now incorporating some of these, and is still continuing to grow and still continuing to
dominate as the leader in many aspects of what it does in the funeral industry. I think they’ve strengthened
their team as time has gone on. That’s my observation from afar about the talent pool that they drew from and
about my discussions, and it’s been about a year now, maybe two years since I talked to the CEO of SCI, and
their CFO also went to the same undergrad school as I did, so we belong to the same alumni clubs. I don’t
socialise with him, but they have real talent in the top of the business, not just funeral directors that have been
turned into bookkeepers or senior officers. These guys have backgrounds in finance and accounting and other
Private and confidential 6
things that make them broader and stronger leaders. They’re managing through these trends.
Also, SCI tends to be the price increase leader. Everybody follows when SCI increases its prices, because they
always figure if they’re 5-10% below, they’ll get the business, but instead, SCI is also using that money and
repurposing it to build that engagement, to build the heritage that I talked about, and this service component,
if you want the best, that’s what you’re going to do. You’re going to probably end up going to an SCI facility.
That’s not true in every location, but their capabilities are quite good. They do, however, have a very corporate
edge to them, and that can turn people off that are consumers, about this is akin to your mortgage, when you
just keep signing papers that you know you can never change, and you feel like there’s one for every paint
swatch, you’ve got to sign a disclaimer that if it has lead in it, you’re not going to sue everybody. That’s what
it’s like in an SCI arrangement, is you’re going to get a bunch of forms that treat this solemn moment, this sad
moment in most cases, into what feels like you’re buying a house.
[00:22:39]
Q: How has coronavirus impacted the industry? Why do you think public investment into the market has been
limited, given how fragmented it is on the mom-and-pop side?
LM: I’ll do COVID first, and then we’ll go mom-and-pop second. The COVID impact, in Q1, you guys have
studied this I’m sure, looked at SCI’s numbers, but I can tell you from the independent side, some of the
businesses were down almost 50-60%, because COVID just slammed the door and all the bodies started just
stacking up in coolers. There’s a logistics part to this business of collecting that body. I made that sound
simple. It’s not. Then, what do you do to store the body before you’re going to embalm it? COVID, in its early
days, just filled up a bunch of cooler spaces at morgues and in funeral homes and in mortuary businesses.
When that ran out, somebody had to start figuring out what to do with the bodies, because they’ll decompose
fairly rapidly, left in ambient temperatures and un-embalmed. That had to kick in, and people started saying,
“Let’s get the embalming done at least,” and you see Q2, an improvement. When COVID first had its major hit,
the first three months, not pretty for anyone in a lot of different industries, except maybe household delivery
of food. We see Q2 though, a bounce and a strong, mostly Q3, rebound as people learned to do virtual funerals,
learned to manage their way through the adversity of COVID.
COVID, of course, accelerated the death rate in the United States, which is on its early beginnings of
acceleration due to the baby boomers reaching their natural death age, so there’s a burden on the system right
now. It’s a very, very good time to invest and build on this business, and yet I can only count one or two private
equity companies that have ever successfully navigated this and had the patience and the wherewithal to do a
roll-up and get to a critical mass size, and then continue to grow and build that. I think the expectations of,
“We buy it at 3x and we spin it in 3-5 years and sell it at 9x,” it’s not a tech business. It doesn’t grow very fast.
The death rate is akin to the population times a percentage of how many people are going to die. That’s offset
by better medicine and by better care of your health, and then it’s also offset by overdoses on opioids, which
right now is about 90,000 a year from drug overdoses. That’s up from roughly 15,000 a year five years ago.
All these trends and pieces and parts, you put it in the stew and you say, “Okay, why wouldn’t somebody want
to invest in this?” You’ve got stable cash flows, it’s 100% participation by the human population in this, it’s not
like you have a sector, and the answer is, this is my answer because I’ve pitched my companies over 100 times
to various private equity guys and many of them have thrown money at me, but their mindset is, “We need to
see immediate results, and we need to get to critical mass very quickly, so we only want to buy something big
enough that it’s already at critical mass.” Those properties in our industry are going to go for a healthy
premium when you’re talking about that. The smartest way to do it is to close your eyes and keep writing
cheques, and get a good operating team and an M&A team that can be efficient, and just let them buy as many
things as they possibly can buy, as fast as they can, consolidating as they go along and then merging that into a
technical platform, an ERP and a CRM system. That is what no one wants to do, because it’s too difficult to
navigate, and few do it, at least that’s my opinion. That’s not written down in some manual anywhere. That’s
my experience, that’s my insight, and that’s what I feel is keeping this from being a much more attractive
investment for the private equity world.
Private and confidential 7
[00:27:13]
Q: Could you discuss some of the hurdles to investment? Is it the different state regulations, the state
certification requirements for people being trained to collect bodies or the PR challenges around PE dipping
into funeral services? What are the main concerns around more industry consolidation, where many
inefficiencies could be solved with competent management?
LM: There are a couple of things. This goes to the second question you asked me about mom-and-pops and
buying them and consolidating. Normally, what you hope you can do is buy a business that you sit down,
negotiate the terms, and once you get a handshake, you turn it over to the lawyers and they continue to get the
asset purchase agreement and its ancillary documents together. That sort of works here, but many times, I’ve
been sitting at the kitchen table of a husband and wife who are selling their cemetery or funeral home or
combo operation to us, and it’s all about, “How are you going to treat my family, and what kind of special
benefits do I get?” Every one of those is a tightly negotiated and emotional move, incredibly emotional,
because what we’re seeing is third-generation funeral home owners, their kids do not want the business. No
one in their family wants the business. They’re reaching their 60s and 70s. They want some time off, they want
to enjoy life, they want an exit strategy, and so they do this. That makes it emotional for them, and we try to
give them an off-ramp. They might work for us for a year or two years, so that they can still claim that they’re a
partner in this in some fashion, and they’re not just going to let go of the rope and let some corporate guys
come in and start radically changing what we do.
There’s also a branding issue that gets in your way. You talked about regulatory. We can navigate regulatory
pretty easily. It just requires more people to do it, and you have to stay on top of the state-by-state regulations.
That’s a turn-off. If you did want to invest, many times I’ve been asked the question, “Why don’t you just
invest in one state?” I say because the opportunities are in multiple states, and the best locations are what
you’re going to look at. Tier 2 cities are my favourite, because they’re generally underserved and there’s no
market-dominant funeral home in that size. Those are what we tried to target in my life, and we were
successful, but they’re not all going to be in the same state. That would have made it somewhat easier, didn’t
make it impossible. We still managed to do that with a small crew, and I don’t think that’s really a big issue.
It’s just painful to deal with bureaucrats in different states. That’s all, and there’s no way around that. It’s
easier if you can do it one state, but there are only a few states that are big enough that you can have nearly an
endless supply of funeral homes, Texas, California, Florida. You can count those off and say that might be
where I would want to concentrate if I began to get to critical mass, but eventually, you’re going to have to be
outside of them, into another state. I don’t know of any successful roll-up strategy in our industry that is
targeted in one state and one state alone. They may have started in one, but they’re now all over the place.
The other piece here has to do with transactional costs, because you’re essentially paying a chunk of money
that if you could pay 10% more of that and buy five times the size business, that’s all it would cost you, until
you get to a very large business where you’re going to have to plonk down USD 1m to do due diligence or
something upfront before you know if you’ve got this thing fully negotiated. It’s really time-consuming and
dollar-consuming, unless you’re highly efficient and you’ve got a model down that works. There are several
players that do, and I’d like to think that we accomplished that too when we were doing our M&A at a very
brisk pace. I say brisk, and I’ll give you an idea, is that I bought 16 locations in 12 months. We were humming
along at a more than one transaction per month type of roll-up when we stopped and then finally sold what we
had built. Not so much regulatory is keeping them away, the other factors and the idea that you can’t see
immediate improvements, and you’re constantly worried about the expense side, while you’re doing the roll-
up, about the cash burn.
[00:32:24]
Q: How does Service Corp’s scale allow it to be more competitive on costs for raw materials, headcount and
expansion? Could you discuss the dynamic between those scale benefits and the nuanced, personal
Private and confidential 8
conversations that need to be had with families?
LM: I’ll start with that, and then come back to the cost side situation. SCI’s history was to start in Houston,
Texas, and they owned a couple of premier cemeteries, funeral homes, excuse me. They weren’t cemeterians at
the time when they first began. The roll-up began with them doing it with their own money and some local
banks, back when banking was a lot more flexible, and they borrowed and built, borrowed and built. Then that
got boring. They started buying bigger companies that they could absorb, and they don’t really buy much of
anything, unless it’s a tuck-in, now that is small, because it doesn’t move the needle, and so why spend the
money? You’re wiser to spend the money on making internal improvements to get your earnings per share up,
instead of wasting time and effort to buy a USD 1m funeral home, doesn’t really do anything for you or your
investors. They’ve got this equation that it’s very similar to, I’d say NorthStar is the same way and they’re not
publicly traded, but SCI wants to buy big, impactful facilities.
They’ll pay a premium for it, and they’ll absorb that as fast as they can into their way of doing business,
because they believe that way is the cheapest model that you can get, and the most cost effective and efficient
operation, the low-cost operator model. They push very hard to get to that status as fast as possible after
purchasing a company, and it’s always a large enterprise that they buy. Today, they might buy tuck-ins here
and there. That’s just for a regional manager saying that they could do better with their whole portfolio in a
region if they could get one of the competitors out of the way that is causing price problems for them, and so
they buy them. That’s not unusual in any industry, that you can either outcompete your competitor, purchase
them or exit the market. Those are the three choices. In their case, they rarely exit any market, and if they do
so, they do it very, very quietly. It’s usually they sell the small operations that make no sense to them, small by
being at or under USD 1m a year in revenue.
The cost side management, they are the behemoth, over USD 3bn in revenue, so they are the largest company
in the death care industry, not the world, but at least in our country and in North America in general they are,
because they do have Canadian holdings. They are able to ratchet the casket prices and the memorial prices for
stone and for any bronze that they use, any statuary. All of that, they get the very best prices, which typically
are somewhere between 25% to 40% of what the standard funeral home is going to pay, and that’s going to be
the discount, 25-40% discount. They enjoy a large price or margin gain right there because of that. Their
personnel are paid well, so they’re not saving money on the personnel. They expect a lot of performance out of
that personnel, so their headcounts generally are smaller. They will try to leave people in place as long as they
can if they’re heritage people, like, “My daughter has always worked here.” “What does she do?” “She answers
the phone,” and, “Do we really need her?” “No, but she’s always worked here.” They’ve adhered to those rules
to keep harmony at the funeral home, but as quick as they can make those changes and to get to the efficient
model, they will.
The real savings for them is going to be on the products, not necessarily on their locations or on their services.
The fact that they also can manage a gigantic trust fund that is set up to pay for funerals and cemetery burials
in the future, you can mine some of the money that comes out of that every year. I think they’re at about USD
12bn, if I’m not mistaken, of money that’s currently in their trust funds. A certain percentage of that comes
back to them every year on interest gains over time that they can mine, by regulatory bodies from each of the
states have their own regulations. More of that is a good shape for them, because just of the sheer size.
[00:37:41]
Q: How are consumers reacting to price increases in light of the pandemic, where they might be losing family
members unexpectedly but also potentially losing their jobs? There is a huge demand for services where
Service Corp can leverage pricing. How does that fall back on the consumer? How does the payment process
work?
LM: There are a bunch of ways to pay. I’m going to start with that, because that’s more interesting for the
moment I think, and probably more insightful. The government right now has a programme that they’ll
reimburse you up to USD 9,000 if you have a loved one that died of COVID, and so all you have to do is file for
that through FEMA, if I’m not mistaken. They’ll pick up the tab for your funeral, so the impact of COVID, at
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least for that, has been minimised by that possibility of being able to pay for it that way. We never do payment
plans, and I say we, there is a payment plan system out there so you can pay over instalments for a funeral, but
we can’t undo a funeral in case they stop their payments, so in our industry, it is very much a pay before we
have any kind of services whatsoever. We’ll pick up the body and eventually we’ll get paid for that, even though
we’re not getting paid upfront.
The next thing, though, is before we conduct anything further, whether it’s an embalming or cremation, a
visitation, a ceremony of any sort, we need all the money paid upfront. It’s credit card, cheque, cash or
insurance assignment. People forget about this one. If that person had a life insurance policy, we have systems
built into our financial models, and people that do this for us around the United States, we hand them the
insurance policy, they give us the money, then they go get the money from the insurance companies, so that
takes us out of brokering the deal with insurance companies and trying to pull the cash out of there as fast as
we can. Somebody else will front the cash, and then we will go ahead and pay for our expenses and take care of
us, so that we can perform the ceremony. Part of this is people have an expectation in different regions for
what it’s going to cost. Sticker shock is always an issue, but during these COVID times, with the government
printing money and everybody is staying home and drawing unemployment benefits, the fear factor over not
having a job or not paying for anything, we’re getting into a situation here that I see drifting in, early stages,
and my antenna is up for this, is in a welfare state, the expectation is everybody else will pay for it or somebody
else will take care of it, and it’s not me. I see that on occasion right now, but mostly, people still understand
that it’s their responsibility to take care for their loved one and set aside some money for it.
People are also hedging their bets during COVID by doing the following thing, which is smarter, and that is
prearranging their funeral and cemetery. That, they can make instalment payments on. That process is
something that SCI is very good at, selling pre-made funeral and cemetery services. I would guess, I haven’t
looked recently, but I did look at one of SCI’s quarterly updates not long ago, and their pre-need business has
been pretty robust during COVID, which everyone says, “That’s weird, how can that happen?” Back in the
recession in 2007, 2008 and 2009, we saw our pre-need business go up. It stabilised for about 12 months, and
then it went up as the recession deepened, because people were taking stock of what they needed to spend the
money on. A bass boat can wait, but if mom and dad die, we’ve got to make sure they’re covered, so let’s go
ahead and buy programmes for this, because we’ll need it. Now, with COVID, there’s probably more of a driver
force than ever, because COVID is a killer. The recession was just an economic disaster. COVID is killing
people, and therefore you want to say, “I want to make sure that’s taken care of. I want my family to stay
together, I want us to know that we are prepared for death,” and it puts it right back in your face, so another
driving force is that fear factor that people would need these services and should pay for them now, especially
while they can get them on instalment payments at probably very good rates, and maybe the government will
even pay for some of it.
[00:43:00]
Q: Could you talk about pre-need services across the industry? When did this start to accelerate? How do
companies formulate tailored pre-need services or programmes to take advantage of demand?
LM: Pre-need, we could be two hours, the shortest tutorial I’ve ever given to finance people and accounting
people has been three hours on all the ins and outs of pre-need, so I’m going to keep this really high level. It
will spark probably a plethora of questions, but that’s okay, because we can go back to three hours, but I want
some more pieces of paper in front of me, because I’m going to have to cite a lot of FASB laws and accounting
stuff, etc. This trend started about 40 years ago, and it started very slowly. I don’t know exactly where it
started. It pretty much came through the insurance world for funeral, so instead of life insurance, you would
have death insurance. Death insurance was something that you could buy, USD 0.25 a week, they were selling
policies in Alabama, USD 0.25 a week and you get your funeral paid for. As time went on, what happened to all
those funds? I’m paying USD 0.25 and then my mom dies, and I want to call in the insurance policy. The
insurance company is nowhere to be found, the money is not anywhere to be found. Uh-oh. We’ve got
problems with this sector with people being criminals, so big huge laws came into play, and each state now
regulates it very carefully, as these people that set up the fronts for insurance companies that were doing these
kinds of policies got found out, got tracked down and got put in jail, but not until after millions of dollars were
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moving into criminal hands.
Insurance still is the way for a funeral if death takes place. You go down and one of our salespeople at the
funeral home will be a licensed agent for an insurance company, and they will fill out the forms. We get a
commission, the salesman gets a commission, and the person coming in gets a contract that if they keep
paying on it, it’s prepaid and they can pay out over, it’s typically a 3-5 year pay-out. Five would be long. Two is
too short. I think the average is about three years for these contracts. The effort there is to try to keep it under
USD 150 a month or something around that number, so that it doesn’t have sticker shock on whatever you’re
doing with your family budget. Cemetery is a completely different animal. Funeral and insurance go hand in
hand, but cemeteries are forever. You can repurpose a funeral home, make book stores out of it, sushi shops,
whatever you want. You cannot repurpose a cemetery into another kind of property without getting huge
political and governmental approvals, and approval from every family that’s buried there that you can exhume
them and move them all, so you can build something new on the cemetery property. Hence, cemeteries are
perpetual and they have to be cared for.
The laws mean that you have to trust money, put money into a trust fund that’s managed by a trustee, a third
party that takes care of that money, so you can still buy in instalments, but your money is not going to the
funeral home anymore or the cemetery. It’s going to a trustee. That can be the same person, but it’s rare that it
is. The trustee then manages that, and then when you die, there are two trust funds. One is the trust fund for
you to be buried in that plot that you now have a perpetual right, that’s what you bought, a perpetual right to
be buried there. You do not physically own the property in which you are buried. The second trust fund is
perpetual care, and that’s a trust fund that when the cemetery is full, there’ll be enough money, call it an
endowment fund, that will be available to care for the cemetery in perpetuity. All of that becomes very
complicated on how it’s handled, and when you recognise when a sale is made, when we sell a pre-need for the
funeral, we immediately get a commission on that, so we’re paid and we’re done. On cemetery, until the last
payment is made, in many states, we don’t get any upfront money for that. In the end, we probably gain more
money, but we have to be patient and wait. When you go, “What does your deferred income look like on your
balance sheet,” that takes a lot of explanation to explain what the liability and what the asset is, because you do
have an asset and a liability at the same time, created by doing that. That is very simplistic about what trust
funds and insurance policies do in the pre-need world.
Is it on the rise is a question that a lot of us are always paying attention to. It goes in cycles, it really does, and I
think with the baby boomers starting to die now they’re naturally ageing out, I believe that we will see
moderate increases in arranging, by pre-need, funerals and cemetery events, because mom and dad and
grandma and grandpa, whoever they might be, are all entering that age where we’re going to see a fairly
significant jump in the number of people dying annually, starting in the next three years maybe. It’s already
beginning to start now, as the oldest boomer is starting to reach the bracketed age where they’re not going to
live much longer. That number, if we look at all the population, we do all the calculations, that’s injecting
500,000, probably more like 600,000-750,000 more deaths in 2030 than we have today. In nine years, we’re
going to be at 3.4 million deaths or 3.2 million instead of 2.4-2.5 million, so that’s going to be a big increase.
That’s going to have a big impact on people’s thinking. My guess is that they’re going to want to try, in order to
mitigate prices and inflation, etc, if they’re starting to die at that rate, people are going to be incentivised to
start looking at pre-need packages.
[00:49:43]
Q: Your outlook suggests that we won’t return to a normalised pricing environment. How strong would
Service Corp be on pricing if coronavirus dissipates and death rates normalise? Is there heavy price cutting or
promotional activity in the industry? How does the industry handle these slower periods?
LM: If you have a good pre-need programme, that balances out the ebb and flow of what you mentioned there
as a slowdown in deaths or a slow time period. You can mitigate that by going out and selling pre-need,
especially if you have a combo operation. That means a cemetery and a funeral home on the same property.
Now you have a lot of assets that you can sell ahead of time, and a lot of ways to balance that and make a ton of
money doing so. The bigger combo operations are the ones that are most protected from any ebb and flow
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issues. They tend to be behemoths when it comes to managing their way through any kinds of downturns and
taking advantage of the upturns. The downturns, when normalised after COVID, after delta, after all of this
goes away, what is, do we think, going to happen? We’ve been programmed now for several years to be afraid
of germs and afraid of each other and afraid of death, more so than we had before, and I think we’ll wash some
of that out of our system, but it’s going to leave a stain on generations to come that are going to remember that
they need to be prepared for this, because it can happen again in their lifetime.
I think that you’re going to see more people invest in understanding what funeral and cemetery arrangements
and cremation arrangements they have available to them, and treat it more as a consumer issue, like an
insurance policy, and get it taken care of some time in their life, if they can afford it. You might even see
corporations, on a social responsibility basis, offer this as one of the benefits of working for that company, is
that you get the first USD 1,000 or something towards your funeral and cemetery expenses. As for price
elasticity, from SCI’s standpoint, if they discount anything, they do it on such a short-term basis and in a
targeted market, not across the platform. It’s a funky thing in this industry, because although SCI owns all
these properties, they’re not known as SCI properties. They’re known as Smith & Smith Funeral Home or
Jones & Jones Funeral Home. The local branding stays. You never change the name, because nobody will ever
know what that is, whereas if Exxon buys an oil company, it becomes Exxon. ExxonMobil was a solution to
make everybody happy, but they can brand by their bigger name, and we don’t do that. I don’t think you’re
going to see price where people are going to be price averse and look for different ways to do this, because even
though cremation can be a lower cost, it involves a whole bunch of negatives that most people just don’t want
to have in their ceremony.
[00:53:25]
Q: Are cancellations popular when selling pre-need services? Do people gradually stop paying? How does that
dynamic play out?
LM: There are certain markets where it’s tough, and those markets are tough on everybody, it’s not just us,
about getting payments out of someone. The bad debt or cancellation rates are nominal, if you ask me,
compared to many other industries, and there’s always, typically a remorse period of 7-14 days in there, so
nobody has to miss a payment and get into that where we’re speed dialling them every day to try to get them to
pay. If they have remorse, that’s hugely when we see the cancellations, and that’s usually also a regulatory
requirement by an insurance board or a state regulatory body that there be a remorse period after they sign
the contract, so that we don’t have to chase that too much. Yes, we do have cancellations and bad debts, but it’s
not at the severity that many other industries face when they’re looking at them, and it varies by locations,
where your facilities are, and it varies by the population served in those locations.
[00:54:45]
Q: What are Service Corp’s biggest risks? What do you think keeps management up at night?
LM: What keeps SCI’s management up at night is mostly about what are we going to buy next to make sure
we’re keeping and moving the needle for our investors, who expect us to continue to have robust earnings per
share. When we are handicapped in the market by having too much concentration, and under a Hart-Scott-
Rodino enabled diligence of some sort, there are not many other big companies they can buy where they
wouldn’t have to just tear apart what they just bought and sell it to someone because of antitrust. What keeps
them up at night is all financially driven. I don’t think they’re worried one bit about whether they’re going to
have elasticity pricing problems, whether cremation is going to get gigantic on them and they’re not going to
be able to participate. I think they have all the horses in place to manage all of that, and I don’t believe that’s a
fear for them.
Recessions don’t hurt us. We’re nearly recession-proof. Our stock prices might go down in publicly traded
companies, but the revenues don’t. You go back and look and you’ll find, and that’s a good little exercise to go
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through, is to make yourself feel about how resilient these businesses are, that even in the ’07, ’08, ’09
recession, revenues had a blip in there, but then stabilised and then grew. I think what they worry about is
that. Tsunamis or earthquakes, those all kill people and that usually ups the number of cases that we do. It’s
morbid as hell and it’s not fair, as it’s nature of our business, but that is one way to increase the death rate, is
to have pandemics, so that doesn’t bother them. I can’t really think of anything other than an economic answer
to that one.
[00:57:01]
NH: I think that’s a good place to end the Interview, Larry. Let me just close by saying thanks again for your
time today. Clients, thank you for joining Third Bridge Forum's Interview today. If anyone would like to speak
with Larry in a private call or meeting, please let your relationship manager know. Larry, thanks again.
LM: Thank you. Take care.
Transcription ends at 00:57:14 of the recorded material
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