Operator: Good morning, and welcome to the Second Quarter 2026 SCI 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.
Trey Bocage: Good morning. This is Trey Bocage, AVP of Investor Relations and Treasury. Welcome to our second quarter earnings call of 2026. We are going to have some prepared remarks about the quarter from Tom and Eric in just a minute. But before that, I will quickly go over our safe harbor language. Any comments made by our management team that state our plans, beliefs, expectations or projections for the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such statements. These risks and uncertainties include, but are not limited to, those factors identified in our earnings release and in our filings with the SEC that are available on our website. Today, we might also discuss certain non-GAAP financial measures. A reconciliation of these measures can be found in the tables at the end of our earnings release and on our website. With that out of the way, I will now turn it over to Tom Ryan, Chairman and CEO.
Thomas Ryan: Thanks, Trey, and good morning, everyone, and thank you for joining us. I'll start with an overview of our quarterly performance, followed by some expectation setting for the back half of 2026 and then a deeper look at our Funeral and Cemetery results for the quarter. For the second quarter, we generated earnings per share of $0.90, which compared to $0.88 in the prior year. Cemetery revenue and gross profit increased, supported by high single-digit growth in preneed cemetery sales production and solid growth from cemetery trust fund income. This favorable impact was slightly enhanced by lower general and administrative expense. Funeral revenues grew marginally where profitability declined somewhat offsetting the favorable impacts, resulting in a $0.02 increase in earnings per share from operating income. Below the line, the favorable impact of a lower share count and a slightly lower effective tax rate was offset by the net negative impact from interest expense and other income expense. While the first and second quarter earnings per share growth was muted by lower Funeral case volumes and deferrals of Cemetery revenue, we have some very positive momentum to carry into the back half of 2026. Comparable preneed cemetery sales production grew by 8% and comparable preneed funeral sales production grew by 7% for the quarter, while adjusted cash by [indiscernible] operating activities increased by $71 million to $239 million, helping to fund our business capital needs and new growth capital investments, while affording us the flexibility to be opportunistic, returning capital through share buybacks and consistently through dividend increases. As we enter the back half of 2026, we believe we are poised to deliver solid revenue growth as well as margin expansion in both the Funeral and Cemetery segments as compared to the back half of 2025, resulting in double-digit earnings per share growth in the second half of 2026. Now let's take a deeper look into the Funeral results for the quarter. Total comparable Funeral revenues increased by $5 million or just about 1% over the prior quarter. Comparable core Funeral revenue increased by $7 million or about 1.5% primarily due to healthy 3.3% growth in the core average revenue per service. This core average growth was achieved despite a modest increase of 60 basis points in the core cremation rate. Comparable core Funeral volume declined by 1.7%, exceeding our expectations coming out of a challenging first quarter. We saw less meaningful declines in April and May as compared to the first quarter and slight volume growth for the month of June. Nonfuneral home revenue increased by over $2 million, primarily due to a 9% 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 a higher average revenue per service. Nonfuneral home preneed sales revenue decreased by $5 million, primarily due to an operational shift to defer the delivery of earns on preneed contracts to the time of need. This transition was completed late in 2025, so we are nearing the anniversary date where all earned deliveries will occur at the same time of need approximately $7 million with the gross profit percentage, down 130 basis point to 18.5%. In a high [indiscernible] business model, revenue growth of less than 2% and is always going to percentage a challenge to gross margins. In addition, gross profit was impacted by higher selling compensation associated with strong insurance-funded preneed sales production. Selling compensation costs incurred or paid out were relatively consistent as a percentage of sales production dollars versus the prior year. We have shifted to a model that sells more insurance-funded contracts, both for core and SCI Direct. And under GAAP, less selling compensation gets deferred versus a trust-funded product, resulting in a higher percentage of selling compensation being recognized against general agency revenues in the current period. Early July was the anniversary of the preponderance of our sales production shift to insurance products. Going forward, recognized selling compensation should stabilize and improve Funeral gross margin comparisons in future periods. Preneed Funeral sales production increased by $20 million or about 6.6% over the second quarter of 2025, driven by an 8.3% increase in core preneed sales production. Now shifting to Cemetery. Comparable Cemetery revenue increased by $23 million or about 5%, and primarily due to higher core revenue complemented by an increase in other revenue. Core revenues increased by $14 million primarily due to a $15 million increase in total recognized preneed revenue, of which $5 million resulted from higher property revenue, and $10 million from higher merchandise and service revenue. Merchandise and service revenue also reflects the positive impact from increased trust fund income. Other revenue was higher by $8 million compared to the prior year quarter, primarily from an increase in endowment care trust fund income based on market performance, and higher total return distributions. Comparable preneed sales production grew an impressive $29.7 million or 8% in the quarter. Core sales contributed $24.4 million, supported by continued strong underlying sales velocity growth in the mid-single digits. Large sales accounted for the remaining $5.3 million increase. This performance reflects the strength and effectiveness of our sales strategy and execution, generating high single-digit percentage sales growth, both Preneed Funeral and Cemetery by focusing on our four pillars: sales counselor headcount, driving the effectiveness, seminars, and large sales in the face of fewer leads generated from activities through our locations. Cemetery gross profit in the quarter grew by $7 million or 4% with margins relatively flat at approximately 33%. Gross profit was impacted by higher selling compensation, reflecting the strong preneed sales production growth of 8% and. A large percentage of our preneed sales production growth, particularly for cemetery property, was deferred relative to the growth in preneed recognized revenue. On the selling compensation side, we recognized all of the fixed compensation in the period incurred. And because most of the growth came from core sales with a higher proportion of fixed compensation, the recognized revenues or a larger burden of the selling compensation this quarter. You want to good news. The deferred revenues that went into the backlog to be recognized over the coming quarters will not only deliver revenue growth but lower associated selling compensation expense and therefore, at higher relative margins. Now let's shift to a discussion about our outlook for 2026. The $4.20 midpoint of our annual guidance range for 2026 is confirmed as we narrow the range expected for adjusted earnings per share of $4.10 to $4.30. While the first quarter Funeral volumes presented a near-term headwind, we saw the year-over-year rate of decline moderate and expect that to continue in the back half of the year. When combined with strong momentum in Preneed Cemetery sales, average revenue per Funeral, and continued disciplined expense management, we are confident in our ability to deliver within our stated earnings range. In closing, we remain firmly focused on building long-term value for shareholders, growing revenue, leveraging the strength of our scale, and allocating capital with discipline to the highest and best use. As we move into a period of meaningful demographic tailwinds, we are exceptionally well positioned to expand our reach, serve more families and deliver sustained growth over time. In closing, I'd like to recognize and thank our entire SCI team for their ongoing commitment to our customers our communities and each other. Your dedication continues to be the foundation of our success. With that, I'll turn the call over to Eric.
Eric Tanzberger: Thank you, Tom. Good morning, everybody. Thanks for being on the call today. Before I begin my prepared remarks, I want to take a moment to do what we always do, which is most important, and that's to thank our more than 25,000 associates across the entire SCI network and across our company for how they handle the families, work with the families in a compassionate way and continue to have that compassion and care across all the communities that they serve. We're truly proud of the very positive impact that those associates are having in the communities that we serve. So with that being said, I'll start by reviewing our cash flow results this morning and capital investments for the quarter before concluding with an update on our cash guidance for the full year and our overall financial position. So let's start with the second quarter. We generated impressive adjusted operating cash flow of about $239 million. This exceeded our expectations and was an improvement of about $71 million or 42% over the prior year. So let's talk about breaking that down a little bit. Operating income produced cash flow that was about higher by about $7 million. Cash taxes were also lower by $64 million, predominantly due to a renewable energy investment credit realized in the quarter, and I'm going to give you a little bit more detail later in these remarks. Outside of cash taxes, working capital was relatively flat in the quarter as our preneed working capital sources were offset really by increased other working capital uses, but stronger cemetery preneed cash collections provided about a $36 million source, which is driven by both the 8% higher preneed cemetery sales production during the quarter where, again, [ a proportion ] is as deferred into the future as well as some higher collection rates on these preneed contracts. These higher receipts that I just mentioned were offset by corresponding pretty much $37 million use of working capital, which is primarily associated with the timing on an additional payroll funding in the current quarter, which, by the way, will benefit us in the second half of this year. Finally, cash interest was modestly lower by just about $1 million as lower cash interest associated with our 2032 notes was partially offset by higher interest on our floating rate debt. So let's talk about capital investment during the quarter. We invested $120 million of capital into our existing funeral home and cemetery locations, also business acquisitions, real estate and new construction of funeral homes and cemeteries. So to break this down, we invested $80 million of maintenance capital back into our current locations which is [indiscernible] into our current funeral home and cemetery locations, which again improves the overall customer experience and $6 million into our digital strategy and other corporate investments. We also invested $25 million of growth capital during the quarter towards the construction of new funeral homes as well as the purchase of real estate for future new build and expansion opportunities. From an acquisition standpoint, we deployed $15 million towards business acquisitions in the quarter, which added Funeral and Cemetery locations in California, Georgia and Delaware. As always, we're thrilled about these high-quality funeral homes and cemeteries joining our company, and we're more than happy to welcome all the new associates to the SCI family. These acquisitions bring our full year acquisition investment to almost $40 million, and we remain confident in the current acquisition pipeline and our ability to achieve $75 million to $125 million of acquisition investment target for the full year of 2026. So moving on to capital distributions to our shareholders. We returned $172 million of capital to shareholders during the quarter through $123 million of share repurchases and just under $50 million of dividends. We repurchased over 1.5 million shares during the quarter at an average price of about $76 per share. This brings the number of shares outstanding to just over $136 million at the end of the quarter. Year-to-date, we have returned over $360 million in capital to shareholders repurchasing 3.3 million shares at an average price of $78, which totals to $266 million, an additional $96 million of dividends. Subsequent to the end of this quarter, we've continued that momentum by repurchasing another 330,000 shares for about $26 million, which equates to about $78 per share. So let's now shift to the rest of 2026 in terms of cash flows. As we reported in the press release, we are increasing the midpoint of our adjusted operating cash flow guidance for the full year by about $50 million from our previous midpoint of $1.035 billion to now $1.085 billion for the full year. This $50 million increase is driven by better-than-expected working capital sources, which is primarily the increase and Cemetery down payments and installment cash receipts on higher production that we've mentioned today this morning. Finally, we're also raising maintenance CapEx slightly by about $10 million from $325 million in total to $335 million with Cemetery development and maintenance targets really both only increasing by about $5 million each. When deducting this $335 million of maintenance CapEx for the full year from the adjusted operating cash flow guidance midpoint that I just mentioned, we calculate our adjusted free cash flow at $750 million for the full year of 2026. This is an impressive 18% increase over last year's $637 million of adjusted full year free cash flow for 2025. A little bit more detail here as well. There's no change in our cash tax guidance, which is approximately $120 million of cash taxes for the full year. However, I do want to remind everyone, we've talked about this before that we are not a full cash taxpayer during 2026 with a cash tax rate of about 15% to 16% which really compares to a more normalized cash tax rate of about 24% to 25% expected sometime in the future. Cash taxes this year are primarily benefited from the utilization of solar tax credits that have been generated through tax equity investments. And while these credits reduced cash tax payments and, therefore, increase cash flow from operations, they are accompanied by about $40 million of cash outflows or investments, reflecting in investing activities during this quarter. So assuming we pay cash taxes at the full normalized rate of 24% to 25%, we'd actually pay closer to $190 million of cash taxes for a full normalized run rate which would have also brought our calculated free cash flow to about $680 million, which again is still a very strong 7% increase over the prior year $637 million that I just mentioned to you. And as a side bar from an effective tax rate perspective for the income statement, we continue to expect our full year 2026 to trend in line with what you've seen in the prior year with about a 25% to 26% effective tax rate. I also want to provide some brief updates on our liquidity and financial position this morning. We continue to benefit from a favorable and disciplined debt maturity profile, while $137 million of our 7.5% 2027 notes became current this quarter, our balance sheet provides ample flexibility as we evaluate our refinancing alternatives. We ended the quarter with liquidity of about $1.6 billion, which consists of $260 million of cash on hand and just under $1.4 billion available on our long-term bank credit facility. We also ended the quarter at the midpoint of our long-term leverage target range of 3.5x to 4x net debt to EBITDA and that was exactly about 3.77x for the end of the quarter. So as you could see with all of these statistics, our strong balance sheet, our robust liquidity that I just mentioned, are very consistent and predictable cash flow stream, really continue to supplement our capital investment programs, which ultimately results in significant flexibility that we have to invest opportunistically for the long-term benefit of SCI, our associates and our shareholders. So operator, this concludes my remarks and Tom's remarks. And with them, I'll turn it back to you, please, and we'll open the call up for questions.
Operator: Our first question comes from A.J. Rice of UBS.
Albert Rice: First question, maybe just to ask a little bit about the strategy behind what you're doing with the sales force moving more to fixed compensation a little away from commission. What's the thinking there? And are you seeing that have results in -- is that part of what's going on with the production picking up?
Thomas Ryan: A.J., this is Tom. I'm going to answer that specifically, and then I want to let Jay Waring speak to this strategy a little more depth. The short answer is yes. By giving more fixed compensation, the idea is to attract the best people we can, and therefore, most appropriately retain the best people that we giving them a better opportunity to stay in there and really learn the selling techniques. And so it's mostly a retention tool, and we do find it effective. But with that, I referenced the four pillars as part of our strategy, and I think it's a good question to kind of launch Jay to give you a little more detail into some of the things we're focused on and what we think is driving some of the extraordinary performance. Jay, do you want to...
Sumner Waring: Yes. So as Tom mentioned, our sales strategy has four pillars for growth. And the first pillar is increasing the number of preneed sales [indiscernible]. So [indiscernible] that [indiscernible] your question, we're trying to expand and enhance the size of our sales force. The same pillar is increasing our lead to sale rate. So the percentage of our leads to end up resulting in a sale. The third pillar is increasing our number of preneed seminars. So our customers tell us that attending a preneed seminar is a very low key, low-pressure way for them to learn about the benefits of preplanning. And the fourth pillar is increasing our large sales. We've had a lot of success over time with large sales. We believe they are a nice core competency of ours, and we see opportunities to further build on that. So overall, I'd say that Gerry and Brian and our entire team are executing very well. We're seeing strong results, and we're very excited about our future growth.
Thomas Ryan: And A.J., just to provide a little color to what Jay said. This lead to sale rate, you think, what does that mean? Well, that's really about being more effective through the sales process. And the other day, Jay and Gerry were in my office showing me we're utilizing AI right now to train our people. And we have the ability to have AI customer interactions that give grades, give feedback, personalized advice. And so they're really leveraging this tool to be very effective, and it's really early days. But -- so we're pretty excited about we're doing and where we're headed with that.
Albert Rice: Okay. And just another aspect on the preneed sales. I guess on the Funeral side, you made the pivot over to more insurance-related sales from the trust. But I know some -- I believe, at least some states still require you to do the trust and there may be reasons to do the trust in some instances. Where do you settle out in terms of how much of the sales going forward are going to be insurance related versus trust? And are we at that point where you're sort of at a steady state going forward?
Thomas Ryan: We are, A.J. As of July, I think this year, we're kind of at that steady state in the low 90s. And I'm talking about SCI Direct, sorry. I would say 70% is in the core, and the difference really being there are certain people that can't get insurance, right? So we always have to have some form of a trust product. And then again, jurisdictionally we may prefer a trust product in certain states. So yes, I think we're -- we think 70% is probably the right core number and low 90s on the SCI Direct. We're really trying to push that. But again, not everybody is insurable. So we need to be flexible enough to to make sure we take care of our customers.
Albert Rice: Okay. And just a final question on -- you made the comment that over the course of the second quarter, it sounds like the Funeral volumes basically stabilized and even improved a little bit in the last month of the quarter. Any early read on what you're seeing in the third quarter? Is it continuing to be steady to improving?
Thomas Ryan: Yes. What we're seeing in July, A.J., it's pretty much flat is kind of preliminary [indiscernible] obviously, we're not done with July, but right around kind of flat volume versus last year. Obviously, we don't know what the rest of the year holds. But I think we feel pretty good that the percentage that we're at now will continue to shrink as we get to the back half of the year. And so probably be in line or better than the trends we talked about in the first quarter.
Operator: The next question comes from Scott Schneeberger of Oppenheimer.
Scott Schneeberger: I'm just going to follow up on some things Jay said. In prepared remarks, you all mentioned, hey, we're doing the four pillars. These are structural and ongoing in the sales technique because with the softer Funeral activity, there's less companion sales and lead opportunity. In time, do you anticipate as that comes back, that will just provide more strong tailwind to what you're able to do in preneed sales?
Sumner Waring: Yes. This is Jay. I'd say yes. What you're seeing today is really garnering more customers away from the cemetery away from the funeral home and primarily through our seminars. And one of our greatest lead sources is serving atneed customers and [indiscernible] those customers after their time of need. So to the extent the interim account grows and the funeral volume grows, we'll be in great shape.
Scott Schneeberger: And then just following on A.J.'s last question about the funeral volumes. It was surprisingly soft in the first quarter, but it looks like it's much more stable on a year-over-year basis here in the second and July as mentioned. How are you thinking about that going forward? And I'm talking looking a year out, do you think we're getting back to a normalized level and perhaps working towards a demographic shift of an increase with that first quarter being anomaly or still being conservative and not certain?
Thomas Ryan: I mean, Scott, as you know, we don't know. But I personally feel like we're on the cusp of beginning to see this impact. And the only thing that negates that slightly when I think about, let's say, 2027 because obviously, I think we'll have a good comparison to '26. I feel good about that. And I think we'll begin to see the demographic impacts. The things that I read about are, we came out of COVID, we kind of had the spike of excess deaths related to a lot of things, right? I mean, if you look at drug overdoses, if you look at suicides, if you look at auto fatalities, there are so many good trends for society that those are getting better, right? Now at some point those stabilize. But when I think of '26 to '27, I hope the suicide rate goes down again, I hope all these things are going to happen. So that could be something that has a minor impact on 2027 as I think about it. But overall, I think the demographics, we should begin to see that kick into the numbers. And I think that's our expectation. And it's really hard to precisely predict, but that's how we feel about as we look at models and project internally.
Scott Schneeberger: And then just lastly, can we speak to margins for a second, a bunch of moving pieces that have impacted the quarter. You called it out, but can we roll it together tightly about puts and takes on the margin in second quarter, how we might see third quarter? Not only the payroll, but how some of the activity in production versus sales and sales compensation is going to impact that?
Thomas Ryan: Sure. So kind of level set here, Scott. First is, as we think about how we manage expenses, we have labor efficiency metrics in dashboards. And so our frontline leaders and team members are out there every day, utilizing those to manage as best we can. So as an example, if salary expense inflation is 3% in a tough quarter. And again, this is a global statement, they can manage salary costs down to 2%, right? So they have -- they have the tools, they have the talent. I can't remember what that quote is from, some movie. And then Cemetery side, they have the same type of tools. And then we have a team here in corporate, the staff with a lot of leadership from the field, that's called the Performance Improvement Committee. And so we take ideas from the field and can disseminate those quickly and manage costs as best we can. Again, it's a high fixed cost business, but on the margin, we can do some things. So as I think about Funeral margins going forward and some of the things -- the wins that were in our face, obviously, volume is a big one. But two things are happening right now that are -- or a couple of things are happening that are going to go away. We talk about our General Agency revenues both on SCI Direct and core. And as you think about the transition from one vendor to the next, we've had to create a cancellation reserve. And so they're bearing the burden right now of probably about 200 basis points of creating a reserve that I'd say will go away sometime shortly, and we think will be better. Number two, the selling compensation changes, and here, this would be two things. One is when we transition to more fixed cost, we're getting close to the end of that. And the other piece is the transition to an insurance product. So those two things for lack of a better term, didn't really impact our cash outlay, but impacted the way we recognize expenses. And again, those kind of go away in the third quarter. So we've been bearing the brunt of this and it's -- so Funeral margins should get a little better. The last one, and again, they're all happening at the same time, we used to deliver urns prior to need we stopped doing that a while back. The last quarter, I believe, is the fourth quarter, Trey, is that right? We'll have no longer have anything in both periods of delivery of urns. And that hurt us by $5 million. So as I think about margins in '26, the rest of '26, they should get '27, they should get better again on the funeral side. On the Cemetery side, the things I think about are backlog delivery, right? We told you we're selling a lot more than we're delivering, and we're deferring a lot less expense. So those higher margin cemetery delivery should happen in the back half of the year. And then, again, we've got great performance in our trust funds. I hope those continue. I think they will. And the key metrics of that trust fund, just to keep in mind are what's the original corpus go in. We always talk about income, but I kind of want to point out something. The business that's in the backlog has a higher base value than it's always going to improve. We see it every quarter. It's higher -- better written business. How long has it been in the trust fund, so we can get with the period of time that it's been at work and then what are those returns. So it's not only income, it's really just the value of the contract that's coming back. And those are the things, I think, when I think about Cemetery, that will enhance the margins going forward and enhance the margins of Funeral. And so we're confident we have the tools and the trends are starting to shift in our favor.
Operator: The next question comes from Tyler Barishaw of Truist.
Tyler Barishaw: This is Tyler Barishaw on for Toby. Impressive preneed sales production of past single digits, how should we think about that for the balance of the year? What kind of range do you expect?
Thomas Ryan: And you're talking about Cemetery, Tyler? I suspect or both?
Tyler Barishaw: Yes, primarily [indiscernible].
Thomas Ryan: Yes. So on the Cemetery side, for the 6 months, I think we're up about 8.8%, call it, rounded 9%. And when we about the back half of the year, I think, right now, our position would be we're going to be in the mid- to probably the mid- to maybe low high single-digit percentages is a place that we're kind of modeling and believe, and we think most of that is going to come from core. That's the piece because as you think about the back half of the year from a large sale perspective, last year was pretty good. I think we're in the mid-40s quarter of large sales. And that's a comparison that's a good target. And I feel good we can match it or slightly beat it. But I think we anticipate most of the growth to come from the core sales.
Tyler Barishaw: Can you also then touch on Funeral as well?
Thomas Ryan: Yes. Funeral probably the same, mid-single-digit type of percentages as we think about those things. And again, trending better, I hope, as we think about general agency commission rates and things like that, particularly as we get out into 2027.
Operator: The next question comes from Joanna Gajuk of Bank of America.
Joanna Gajuk: A couple of questions. The first, I guess, on the last one in terms of the numbers. Can you quantify the large sales in this quarter in Q2? Because Q1, I guess was also like in the low $40 million.
Thomas Ryan: Yes. We actually, in the second quarter, approached almost about $50 million. So it was a really good quarter. Obviously, it wasn't dramatically more than last year because last year was a great quarter, too. But yet, Joanna, we're seeing -- we're starting to hit numbers closer to $50 million. And I'd say the breadth of the sales getting better, Jay, do you want to touch on that a little bit?
Sumner Waring: In terms of [ private mausoleums ] sales?
Thomas Ryan: Yes. I mean I think we talked about the other day, the over million segment is kind of a different one. What we're really seeing success in now is to call it the $100,000 sale to the $900,000 sale. Do you want to touch a little bit about our focus on that?
Sumner Waring: Yes. I give an accolade to Gerry and Brian and the team who are doing intensive training with our sales force on understanding what all the options are and showing the options to the customers really that has [indiscernible]
Thomas Ryan: So it's really more contracts -- and I think that's a very positive thing of hitting that inventory level that's more affordable for more people. And I think that focus is really paying off.
Joanna Gajuk: Okay. That's great. And on the comment you were making that you expect more growth, excuse me, from the core. So what gives you confidence that the build demand, I guess, for that type of product?
Thomas Ryan: Well, I think of the trend. We've seen 5 quarters in a row of trending strong velocity. I think a component of that is the training we're talking about and the focus, Jay keeps talking about the four pillars. We've really got the team all singing from the same song sheet. We're focused on the things that are going to drive that, whether it be predominantly from seminars and getting those types of leads focusing on the closing rate using those AI tools. And then specifically, we called out before, we've got a real focus on that cremation consumer. So again, remember, we view that opportunity as almost like a greenfield opportunity. We had cremation consumers that we weren't talking to about these products. And now we have the props, if you will, within our facilities where it's natural in conversation. And so we're seeing an uplift in the number of cremation consumers that are buying, and that's going to show up in velocity. Now that's going to push down the average price a little bit, but that's okay. We'll take it every time because it's a new consumer we weren't going to get or we haven't got historically. So that's why I think we feel confident that, that trend should continue. Now how much? You're right. I mean you end up with a recession, that could impact the number of people that want to prearrange, but we're confident that [indiscernible] that we should continue to keep the focus on driving velocity.
Joanna Gajuk: So on this cremation customer, any out there, I think, on the Q1 call, when I asked about this, you said you guys tilted in like 10 markets. So are you doing it in additional markets and kind of how things are going there on the cremation customer buying cemetery product?
Thomas Ryan: We have -- we rolled it, I think, in early July to a number of other markets, and we're continuing to monitor the waves and it continues to be incremental. So I think the first 10 markets, the take-up rate was dramatically better. I think in the second wave, it's better, maybe not the same rates, but it's clear that with the focus and with the materials and the visibility and some of that, again, is around marketing, sometimes within the facility or digital we're seeing a real pickup in the conversation and therefore, pick up in our ability to sell where we've tested. So we ultimately -- I think by early '27 will be everywhere but we're rolling out waves and really trying to make sure we're doing it right and getting the internal buy-in.
Joanna Gajuk: My question on the [indiscernible] but it was around trust fund income. It seems like you [indiscernible] throughout the call that clearly that's [indiscernible] through the numbers helping average sales in both segments. So can you help quantify? I think you disclosed this number in 10-Q, but can you give us a ballpark number maybe in terms of [indiscernible] trust on income in both segments and also -- there was an other line in cemetery that benefited from that as well. So it seems like maybe the returns are tracking higher so is that correct? And also what does it mean for the second half of this year? Are you assuming a higher returns coming through because of this or sort of kind of help us understand how this helps your -- to get to your guidance.
Eric Tanzberger: You bet. So remember, we have about $8 billion or so plus of trust funds, about $2.5 billion is in the internal care fund, which is a little bit of a different animal, Joanna, as we've talked about in the past. About 70% of that internal care fund is really a kind of a fixed return that we could take out according to the state laws. The 30% is the old way where it's mostly fixed income investments, and that's ordinary income get that's distributed to us and once in a while as portfolio managers make those decisions, whether to create realized gains, those sometimes or some portion of those get distributed to it, which makes ECF a little bit more lumpy. Although this quarter, we saw it a little bit more lumpy to the positive by $7 million or $8 million as a very general statement, the trust fund income [ fall 3 ] can range anywhere from, let's call it, $330 million to $360 million-ish. And again, I don't know what the markets are going to do in the back half. That's the best guidance I could give to you. I'd tell you about $125 million of that number that I gave you is related to the ECF, the rest is related to the MST. And not only do you have to have a crystal ball to understand what the returns are going to be. As Tom mentioned earlier, you got to have a crystal ball in terms of how old the contracts are and what the original amount corpus was coming out, too. So there's a lot of moving factors kind of in that guide, but that's generally where it is for a full year of 2026.
Joanna Gajuk: All right. But would you say the returns are coming in better and...
Eric Tanzberger: They are. I mean we've had -- yes, we've disclosed the returns every quarter, as you know. And what's really benefited this is we've had low double-digit to mid-teen returns on these trust funds for the past 3 years alone. So you're really starting to see the value of the diversity of not just having the general agency revenue with the insurance contracts and all of that cash flow, but you're also seeing the benefit of diversifying over to the trust fund investments as well and having those good markets create nice trust fund income for the company's cash flows as well. So it really is a good, nice mix that we've kind of designed here.
Operator: The next question comes from Parker Snure of Raymond James.
Parker Snure: So the preneed cemetery, you had another great quarter there, fifth straight quarter of positive same-store production growth. But the recognition rate was low at 88.8%. I guess what's your expectation for the recognition rate in the back half of the year? And when should we largely expect a lot of the production to flow through the P&L?
Eric Tanzberger: So you really have to split it up, Parker, as you and I have talked about before. The recognition rate includes an atneed component, and that's generally 100%. It includes a property component which over the full 12 months should also be about 12%, but this production growth also includes merchandise and services to kind of state the obvious. And when that occurs, that recognition rate occurs a little later. Maybe about half of the services occur, the revenue recognition in the same year, maybe about 2/3 of the merchandise occurs in the same way. When you put all that together, for a full year, that's where you get to about the 95% recognition rate that we report to you, and those are the components of it, so everybody understands it. We're not too far off at 88% than we were in the prior year at this exact time. Though I don't think we're coming off of our guidance at all. We expect to have higher 90 percentages, if you will, in the back half of this year. That would be very consistent with the back half of last year. But it also -- so we should end up somewhere around that 95%. It could be higher if the mix of production, which can't perfectly predict ends up heavier towards property than merchandise and services, maybe you see as high as 97%. If it ends up a little bit higher on merchandise and services, maybe you see somewhere around 93%. But generally, there's there's no real movement here from a full year basis to comment that we're not kind of on plan and what you normally see during the year.
Thomas Ryan: And Parker, just to clarify because I want to make sure it's understood. When we're talking about the merchandise and services, very few of them turned within a year. The real answer is we're selling, for lack of a better term, we're going to sell 100 this year and 65 are going to come out of the backlog and they generally have nothing to do with one another. And so it's two different streams, and that's what history tells us. But how many coming out of the backlog, we don't know. If we sell a lot to Eric's point, if instead of selling 100, we sell 110, but only 60 come in, that's going to drive down that recognition rate, right? So that's why it's hard to project or predict because there's two components that really have nothing to do with one another. And if we have a good selling year, the recognition rate on merchandise and services is going to look low. That's okay. That's a good thing, right? So just to clarify, it's -- these are typically going to have a life of 6 to 8 to 10 to 12 years when you think about merchandise and services.
Parker Snure: Yes. No, that's helpful. That's really helpful. And then just on share repurchase, you increased your authorization in June. I know that's a fluid thing with the stock price, and it certainly -- it's run over the last couple of months. But what's your general expectation baked into your guidance for share repurchase for the remainder of the year?
Eric Tanzberger: I think it's more of the same of what you normally see. I mean, we have well over $500 million of capacity. I want to remind everybody that we go heavier and go lighter depending on what we believe the intrinsic value is versus the share price, and we've been very disciplined with that. I think we're on a run rate first half of the year to be a little bit stronger than we were prior year because we were able to buy shares in that $76 to $78 range, as we've disclosed to you. We're not trading at that right now. So we'll take that into account. But we still feel very good about the return we're getting from those shares, but a lot of times what you'll see us do is slow down and speed up based on that return and based on that opinion that we just gave to you.
Parker Snure: Right. Okay. And if I can just squeeze in one last one. Just on fixed cost control. I know in the first quarter, you guys talked about managing fixed costs below inflation. Just wanted to check in there and see how that progressed through the second quarter as well?
Thomas Ryan: Yes. I think like I said before, if you look at labor costs in the second quarter, we managed them to about 2%. And that was again a function of we didn't -- our volumes are down a little bit, and our field utilizes those dashboards and metrics to manage labor costs or be part time and the like. And so they do a fabulous job. And so Parker, what will happen is, what I hope happens is we do more Funerals in the third quarter, and then I expect that cost to again rise back up to kind of inflationary levels closer to 3%, 2.5%. So that's where we are and how we manage it.
Operator: The next question comes from Tomo Sano of JPMorgan.
Tomohiko Sano: On production side, when production outpaces recognized revenue, what KPIs or guardrails do you use to manage the trade-off between near-term margin pressures and future margin expansion? And then when should we expect that backlog to translate into margins, please?
Thomas Ryan: On the Funeral side, Tomo, I think there's a seasonality to this business. So what you typically see is in the first 2 quarters, and it's true again now is we're selling a bit more than we are delivering because we're selling into projects that get built later in the year. So a lot of completions of projects can happen in the third and fourth quarter. And the other thing that's happening is we're selling in this project, it's building that backlog. So we'd expect the back half of the year that our preneed property recognition rates would go 100% or higher because what we're experiencing right now, as Eric pointed out, is lower rates on those properties. We're in the 90s, sometimes in the high 80s and that gets correct itself in the third and fourth quarters. Now comparably, that happened last year, right? So it doesn't really help you when you think about the comparisons, but sequentially, you expect higher margins to occur in the back half of the year and that we expect that again.
Tomohiko Sano: And on follow-up, digital investments, how are digital investments impacting such as like lead generation conversion, case mix, collections? And could you talk about like some of the evidence that impact so far, please?
Sumner Waring: Well, there's a lot in that digital investment. Some has to do with the leads that you just described coming from the websites and making sure that we get it into the sales funnel as quickly as possible. Some has to do with the applications that we've developed in-house that the sales force uses such as the Beacon tool, the tablet-based speaking tool that's in certain areas of a company, but not in all areas of our company that we continue to work on. We're obviously trying to -- we've separated that application development, and we're trying to, like anybody else, look for efficiencies through AI now and into the future in terms of that development. But the way I'd describe it, Tomo, is, as we talked about our four pillars that are driving sales, this is one of those pillars in terms of the technology investments to give us the tools to help drive those four pillars, and that's how I'd kind of describe it. It's generally around $20 million, $25 million a year is what that technology investment has been run rate that's in our CapEx guidance, but that's how I'd describe it.
Thomas Ryan: And Tomo, I know you probably heard we talk about how we're utilizing AI today, to do customized training and feedback for our sales counselors and it's still early days. But it's early days but its just such an incredibly powerful tool to get immediate feedback and be able to role play. And it just gets -- it gives people the confidence and therefore, we believe, going to improve efficiencies. And again, the beauty of AI is you're taking your best sales techniques and everybody is getting the same training. They haven't tried it out on me yet, and that would be the real answer. If I can sell something than look out.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to SCI management for any closing remarks.
Thomas Ryan: I want to thank everybody for joining us today. We really appreciate your participation. Have a great rest of the summer. We look forward to seeing you in late October for our third quarter earnings call. Thanks.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
