Welcome to our Third Quarter 2019 Service Corporation International Earnings Conference Call. My name is Sophia, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that, this conference is being recorded.I will not turn the call over to SCI management. You may begin.

Hi, good morning, everyone. This is Debbie Young. I'm the Director of Investor Relations at SCI. We'd like to thank everyone for joining us today as we discuss our third quarter results. I'll quickly go over the safe harbor language, and then we'll start with remarks about the quarter from Tom and Eric.Any comments made by our management team today that state the company's or management plans, intentions, beliefs, expectations, projections, or predictions 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 press release and in our annual report on Form 10-K and other filings with the SEC which are available on the Investor Relations section of our website located at investors.sci-corp.com.Any forward-looking statements that we make on this call are based on assumptions as of today and we do not undertake any obligation to update or revise any forward-looking statements made during this call.Today, we may also present both GAAP financial measures and non-GAAP financial measures such as adjusted EPS, adjusted operating cash flow and free cash flow. A reconciliation of these non-GAAP measures to GAAP measures is provided on our website in our presentation titled Non-GAAP financial measures and in our earnings press release that was issued yesterday and which is also available on our website.With that out of way, I'll now turn the call over to Tom Ryan, SCI's Chairman and CEO.

Thanks, Debbie, and thank you everyone for joining us on the call this morning. Today, as usual I will begin my remarks with a high-level overview of the quarter followed by a more detailed look at our funeral and cemetery operations, and then finally comment on our outlook for the fourth quarter of 2019.So let's begin with an overview of the quarter. As you saw our press release yesterday, adjusted earnings per share grew by $0.02 or nearly 6% to $0.37 per share. A solid performance in our funeral segment coupled with lower general and administrative expenses more than offset the decline in cemetery profits associated with lower cemetery revenue from completed construction projects.On the cash flow front we were pleased as we generated an impressive $209 million of adjusted operating cash flow or 53% increase over the prior year quarter. Eric will provide more color on cash flow in his remarks.As we compare earnings to the prior year quarter, I would highlight a few things. We had a solid performance in our funeral segment with operating profit increasing over 8% driven primarily by higher funeral services performed in both our core funeral businesses as well as SCI Direct.In our cemetery segment, you may recall from our last quarterly call that I mentioned we expected cemetery revenue and profit pressure in the third quarter due to the significant amount of revenue recognized from completed cemetery development projects in the prior year quarter. This anticipated completed construction revenue decline combined with a slight reduction in preneed cemetery sales production resulted in a 12% decline in cemetery operating profit for the quarter.Operating income was favorably impacted by almost $12 million, due to a reduction in general and administrative expenses. Most of this about $8 million was associated with a reduction in our…

Thanks, Tom. Good morning, everybody. I'm going to now give you some color on our strong cash flow results we have for the quarter and also talk about capital deployments during the quarter, and then I'm going to touch on our financial position and outlook for the remainder of the year.So first, let me give you an overview of cash flow, which was a significant highlight for the quarter as you saw in the press release. We generated adjusted operating cash flow of $209 million, which compared to the prior year quarter was an increase of just over $70 million. Lower cash tax payments, lower cash interest from recent debt refinancing transactions as well as higher and strong cash receipts were the key drivers for this increase.So let me give you a little more color on all three of those variables I just mentioned. First, recurring cash tax payments decreased $20 million quarter-over-quarter. But through the first nine months of the year, recurring cash tax payments are basically flat to the prior year at $57 million. We have also refined our 2019 estimates partly from lower pretax income associated with the losses on early extinguishments of debt during the quarter as well as some tax planning.We now believe cash taxes for the full year will be approximately $75 million compared to the $90 million that I previously stated. This reduction of the $15 million year-over-year is the primary driver of the increased cash flow guidance that you saw in the press release.Also related to taxes, the adjusted effective tax rate for the quarter was 18.5%, which was higher than the 17.6% in the prior year, but certainly lower than what we had expected. This is primarily due to higher stock-option exercise activity that occurred during the quarter than what we…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from A.J. Rice from Credit Suisse.

Hi, everybody. Couple of questions, if I could ask. So in the cemetery business you seem optimistic that we're going to see a rebound in the fourth quarter. You're highlighting it sounds like to me if I got it right two issues. One being these Chinese-intensive markets Vancouver LA and that you've experience pressure and one being the recognition factor I'm just trying to understand are those related to one another? Is it your view that the recognition factor headwind will moderate in the fourth quarter, but you're not assuming that the Chinese buyer issues will change is that the way to think about it?

Yes, A.J. this is Tom. Exactly right. The construction piece is -- really is the timing element and we knew the third quarter was going to be a tough comparison. As we look at the fourth quarter the construction impact we would anticipate to be pretty equivalent or maybe slightly above the prior year fourth quarter. And in our assumptions right now, we're just assuming that we continue to see some challenges around that Chinese consumer segment. If that were not the case, then we'd do better than probably where our head is right now.So we believe it's temporary, and we know it will fix itself one day, it's just hard to predict when that day is. I think the positive thing A.J. and remember is, we've take in the body blow of $18 million, if we project for fourth quarter, it's probably $20 million of a decline. And if you can just stabilize that, 2020 looks pretty good. And if you can growth it, even better.

Okay. Okay. I guess I would also ask on the capital deployment second quarter row where you've been pretty active in buying debt on the public market. I guess you are at 3.83 times debt-to-EBITDA. So you're in that 3.4% to 4% range that you've traditionally talked about.One I guess, if you moved the range down for any reason, and so you're trying to get to a lower than that level of debt? And second if you think interest rates are going down, I guess, I'm wondering why not wait and buy maybe that debt? Or is that driving your decision I guess to buy the debt as opposed to the equity?

Hi. A.J., this is Eric. So we're buying those notes really from a deleveraging play, although, there is some savings obviously from an interest perspective. Ultimately, there is a pattern. If you remember last year late in the year, we did a very large acquisition during the year, which was about $135 million spend, which -- that coupled with other factors was kind of an increase in our leverage towards the very high-end of the 3.5 times to 4 times range.And we wanted to get it back kind of towards the middle. And I do anticipate that this 3.83 will probably be back in the middle of the range of 3.7 to 3.75 in that area by the end of the year. We have not changed our opinion of 3.5 times to 4 times. But we were purposely buying those notes, which appeared to us from a valuation perspective on spreaded treasuries to be the most appealing notes that are out there from that valuation to try to go ahead and tick off from a deleveraging perspective.In addition to that, you're right that we did for example, instead of taking the November notes and refinance them in the high-yield market from fix rate to fix rate we did make a play to take those onto the revolver, which we had significant capacity of. That's about a 4.5% to call it a 3.3% to 3.5% interest rate play, but that moves you to more of a floating rate debt, as we continue to see things point in the direction of decrease in rates.So the open-market purchases with the deleverage in play we're comfortable with 3.5 to 4. Well probably end of the year in the middle of that at 3.75. But we did move some fixed rate debt is floating rate debt as well.

Go ahead.

A.J. I was just going to say -- to add on what Eric's saying we as we get to the desired leverage level I think you'll see 2020 be a little more aggressive as it relates to share repurchases compared to this year. This was the year that ends up pretty light and we can get back to more normalized activity there.

Okay. And then just my last question on Beacon the initiative there what's -- where you're at? What are you seeing? And any latest update on that?

So the update on funeral is somewhat the same update, because if you remember as we've said before we've shifted a lot of resources to cemetery. So in funeral about 80% of the eligible contracts are being written -- 80% of the contracts that are being sold or eligible to be written on Beacon. And other's eligible contracts were used in it or utilizing the tool about 80%.That's really not new information A.J. that's kind of stagnant what you've seen before, because all of the movement in energy has been on developing the cemetery side of the Beacon equation. And again, we continue to work on that proficiently with our resources. We have described to you in previous calls that that's a much tougher integration of that due to the individualistic property at each and every one of those 450 cemeteries coupled with the substantial number of vendors and products that we sell that are -- that vary among all the different cemeteries as well.We continue to start the process to test it. I think by the end of the quarter it was in maybe like a 40 test sites and about to go into some more. But that's kind of the status where we are. We continue to work very hard on the cemetery, but not much of a --more of an update on that on the funeral.

Any time frame on rolling it out to cemetery? When you think you might actually formalize the rollout?

At this time, we're going to wait until we roll it out -- I'm sorry testing it to really understand it a little bit better but before we do. I do anticipate some of the rollout to commence in 2020. But it's probably easily the back half, but I'm not ready really at this point to give you any type of quantification of that particular effect.

Okay. Thanks.

Our following question comes from Joanna Gajuk from Bank of America Merrill Lynch.

Good morning. Just a follow-up and clarify some of the comments about 2019. So, you reaffirm your guidance, and then you said if I guess the Asian population or the consumer purchases continue this disappointing level, you're going to be towards the lower end? Or are you saying that you assumed guidance, because you are going to assume steady -- I guess situation in those two markets? So can you just clarify exactly what you -- how do you think about those two markets improving or stabilizing versus -- and what's included in your guidance?

Hey. Joanna, this is Tom. Thank you. Yeah, I think what we're meaning is, we've left you a pretty wide range for the fourth quarter obviously via maintaining it. So, I think if I do my math right. I was not a math major. $0.50 to $0.70 would be the range. I think what we're saying is that if we continue to see challenges we're anticipating in the way we think about it in those markets that we think it's probably going to land in the lower part of that range versus higher part. And of course, there's a lot of things that are moving back and forth, but that's our assumption if we continue to see challenges in those markets, which we're assuming. If those challenges were to lift, then I think we'd be more excited about getting to the middle or slightly higher than that part of the range.

Okay. That's helpful. And any I guess read what -- I guess been going on in these markets after the quarter-end? I mean in October, do you have any visibility, any changes in trends so far you see this quarter?

Well again, I think what we're seeing is there maybe slight improvements in those markets, but it's really too early to tell. We've really only got a month under our belt. And it's really, again -- a quarter is a full three months. So, I wouldn't say we're seeing anything that different. But I'd say in those parks in particular, are doing pretty good in October and we feel pretty good about that.But, I do think there's still a cloud if you will of uncertainty hanging over consumer segment and understand why. And – so, I think it will be a challenge to get some of those to the finished line. But again, we believe it's temporary and these things will change and change in our favor.

Right. And if I may, so I guess that leads me to the next, I guess, start around next year outlook. I know it's early to give guidance and specific numbers and whatnot. But can you frame big picture headwinds, tailwinds for next year the way we should think about it? I mean you made a comment, you'd expect at least in the cemetery segment those two markets to maybe stabilize, and then you focus on growing and coming back to 4% to 6% growth sales production in cemetery segments. So, any kind of comments you can make about how we should think about next year and maybe flagging any headwinds as in any comps or anything we should be thinking about for next year? Thank you.

Yeah. Joanna, I just feel very confident about next year and a couple of reasons why. You'll recall, we re-implemented some -- the right things and within our sales force, we did a couple of tough things early in the second quarter. We raised our bonus targets for the first time in a couple of years based upon where we were within the comp plan. We put some gates around ensuring that we can charge interest on contracts which we had -- a portion of our contract for people where not charging interest which is a form of a discount in our minds. And -- so again we were going to treat it as such if that were the case.And we'd also have -- we pay commissions and bonuses based upon business that's on salesforce.com. So we did a couple of things that really needed to be done. They were tough. They can be a bit of a distraction. You combine that with the fact that were down 20% in these high sales production markets. We believe that's going to come back. We think we've taken the proponents of the body below.And then the last thing I think about is we just spent a lot of money on these new development projects high-end development projects. And -- so we have the inventory on the ground to get out there and sell. And I have the highest level of confidence in our sales team in our sales management. And -- so I feel really good about 2020. I think we're going to get back on track and you guys are going to be pleased with the performance we can turn in.

Thank you so much for the commentary.

Yes.

The following question comes from Scott Schneeberger from Oppenheimer.

Good morning. It's Daniel on for Scott. Switching gears a little bit to funeral. Can you talk your expectations for average revenue per service and volume as we look into the coming quarters here? And maybe some perspective on flu season these years?

Sure. So I think, first of all, as it relates to the fourth quarter it's our anticipation that we should see some slight volume growth in the quarter, again hard to really predict. But based upon what we saw last quarter or with the trends that we're seeing in our markets we expect that to happen. We've seen some favorable trends as it relates to average as far as getting better and better quarter-over-quarter. We'd expect that to continue in the fourth quarter. Again not a significant change, but probably a positive growth as it relates to that.And I think as we look into the following year we have some of the same expectations the early feedback on the flu and again it's really hard to tell you only have what you're finding in the Southern Hemisphere which is where all this starts we anticipate it could be a bad flu season. I mean that -- I hope it's not. I hope everybody's got their shot. But that could be an impact on the first quarter. Once again it will get muted throughout the year. So it isn't something that is a big factor as the year goes on but probably could impact the first quarter next year.And I think on the average front we feel pretty good. We made some adjustments in markets to entry-level cremation prices in our locations. We took that below in 2019. We're not going to have a similar effect in 2020. So as I think about pricing in '20 I think it's a better trend than what we've experienced in 2019. So we feel good about fourth quarter about fourth quarter on funeral perspective and I think we feel good about 2020.

Got it. Thank you. Funeral margin can you provide some perspective on that as well as we look ahead and maybe elaborate a little bit on the cost-saving initiatives? And how that could impact the longer-term funeral margin profile?

Sure. So yes, as we've said I think on our Investor Days and continue to believe funeral margins are going to ebb and flow slightly, but they've been essentially flat for quite some period of time. I would tell you that I would expect that to continue to be the case as we go forward. There's only so much you can do with costs when you don't have a significant revenue. If we trend at 1% or 2% of revenue that's going to be the case.I do believe one day, we're going to see the impact of increased debts associated with just demographics. When that demographic impact occurs and takes 1% to 2% revenue growth to -- closer to 3%. That's a pretty significant bump in our cash flows and earnings. I think if I compute that correctly a 200 basis point increase in our revenues drops about $0.07 or $0.08 to our earnings per share strength.So not predicting that. I don't think it's going to happen in 2020. But I don't think it's that far away either. And what can we do in the meantime? We've been on the right businesses we can capture more share through our pre-need programs, which is what we're doing.We can compete more effectively by honing in our pricing which is one of the things we anticipated and did in 2019. We're really readying, I would say this platform for that event.And when it does, it's going to expand margins. But in the meantime, I think, I would think of funeral is maintaining around a annualized 20% margin as you think about going forward, with growth that will be impacted by that demographic.

Got it, thanks very much.

Our next question comes from Duncan Brown from Wells Fargo.

Hey good morning. I just wanted to go back to the properties that you highlighted that were driving the cemetery side. I think you threw out an $18 million number. Was that just in the quarter or was that a year-to-date number?

Yeah. Duncan, that's a year-to-date number. I think in the quarter it probably was closer to $7 million is my recollection. But it's been consistent. We've seen it in three separate quarters. We've probably begun to see it, in the latter half of -- or should say the latter half of the quarter fourth quarter 2018.So again it doesn't make me feel any better. But I think the comp gets better as you get in 2020. And if there were a cloud of uncertainty lifted and people felt more confident about accessing the money that they have, then they get back to thinking about these things.It's just -- it's really more a psyche as the way, we interpret a lot of this is. It's kind of like when they stock market when down in 2007, 2008, not a lot of people would've were run out buy a new Ferrari.You pause. And you wait and see what's going to happen and when you feel better, you re-establish your buying pattern. So, that's – again, I think 2020 -- I've been on the upside versus the downside but we don't know yet.

That's helpful. And not to get too specific but is that $18 million does that include just those three West Coast properties? Or also some of the impact maybe you highlight last quarter there was some issues in the Vancouver market how -- what does that incorporate?

Yeah. Its three cemeteries, two in Vancouver and a very large one in Los Angeles, that really are focus on that Chinese consumer segment. So it is literally three cemeteries in two markets.

Okay. Great and then, it sounds like -- thank you for that. It sounds like, might expect a robust M&A quarter in Q4. I just wondered if you can provide any more color on what you're seeing and multiples changing at all. And just any commentary around that would be helpful.

Sure. So I think we are seeing still a pretty robust pipeline of activity again, not large deals but good deals. And I'd say the pricing is good. I mean, we'll probably see a little bit of an increase but not a significant one.And again, we're going to be selective to buy into places that fit our strategy. And we're going to pay the prices that shareholders expect the appropriate returns. I think the other thing I would point out and it was in Eric's comments is, we are very focused on, building new locations.And you're seeing a higher level of activity. And I would expect that to continue. Because again we can select where that is demographics they are happening within cities. We can build a contemporary facility that's really designed for that consumer. So, I'd expect to see that trend continue. And while the IRRs aren't quite as high as in acquisitions because of the first two years, you're really kind of building the business, what we're seeing is when you get out to years three, four and five are some really nice growth trends. So, I think you'll continue to see us plant those seeds and have more spend in more locations that will be new facilities in markets where we've got a great management team.

Got you. Thanks. And last one for me. You mentioned the $35 million of land you bought in California, I just wondered if you could share some early thoughts on the plans there? How we should think about the rollout for that new -- of those new assets?

Yes. We're beginning plans right now to begin to develop sections of that cemetery. In any place, you've got permitting issues and initial investments. So, as Eric I think mentioned, we've got three other cemeteries around there, one of which had an inventory issue, we were getting to the point where we needed more land and so it's really a perfect spot for us. It will probably touch a variety of these cemeteries consumer markets.One of the cemetery specifically is focused on jews clientele. We've got a -- in our millennial population that we've got a great robust program going with. And again, this is going to allow us to develop properties that are conducive to those consumers and what they want and allow us to continue to grow in LA for decades to come. So, we're excited about putting it there. It's a big investment, but it's going to allow us to continue to grow in a very, very important market to us.

Great. Thanks.

We have no further questions. At this time, I'd like to turn the call back over to the SCI management.

I want to thank everybody for being on the call today. Happy Halloween. And it hurts me to say this, but congratulations to the Nats. I'm not going to say baby shark. See you next year. Thank you.

Thank you, ladies and gentleman, this concludes today's conference. Thank you for participating. You may now disconnect.