Good morning, and welcome to the SCI Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to SCI management. Please go ahead.

Good morning, everyone. This is Debbie Young, Director of Investor Relations for SCI. We welcome you to our call today to go over our business results for the second quarter. Before the prepared remarks, I'll remind you that we will be making some forward-looking statements. Any comments made by our management team today 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. During this call, we will also discuss certain non-GAAP financial measures such as adjusted EPS, adjusted operating cash flow and free cash flow. A reconciliation of these non-GAAP measures to the appropriate GAAP measures is provided on our website under the Investors section and in our earnings press release and 8-K that were issued yesterday. And now it's my pleasure to introduce our Chairman and CEO, Tom Ryan.

Thanks, Debbie. Hello, everyone, and thank you for joining us on the call this morning. On behalf of SCI and our entire team, I want to start by saying that I hope you and your families are continuing to stay safe and healthy. This morning, I'm going to start by trying to describe the operating environment we experienced as well as our business performance during the quarter. At the end, I'll attempt to provide guidance as best I can for the rest of the year, considering the continued level of uncertainty around the effects of the COVID-19 pandemic, the public orders from governments and the evolving patterns of consumer behavior, a tall order, but here we go. When we last spoke in late April, while we were seeing a significant increase in funeral case volume, we were also experiencing a significant decline in preneed cemetery sales production of some 40% and a decline in the funeral sales average of about 12%. Both of these key operating drivers were being impacted by government-mandated stay-at-home orders, which fueled consumers' fear of closely interacting with others in gathering and group settings. We implemented a number of temporary cost-saving initiatives and quickly introduced additional technology to support our operations, sales efforts and administrative functions. Early on, the preponderance of the funeral volume increases were being felt on the East Coast, Michigan, Illinois and Louisiana. These markets, along with California, due to stay at home orders, experienced meaningful declines in funeral sales averages. On the cemetery side, we saw significant declines in a lot of places in preneed cemetery sales and more pronounced in our larger markets on the West Coast. As we moved into May, we began to see averages improve across the country as states began to reopen with the Northeast being the…

Thanks, Tom, and good morning, everybody. First, I think it's appropriate just to say that all of us at SCI hope that you, your loved ones, your family, your friends, et cetera, are remaining safe and healthy during this time. Secondly, I'd like to say how grateful and proud that I am as well of our 25,000 team members as they continue to provide vital support to those we care for in all the communities that we serve. I want to reiterate that we would not be here today discussing our positive quarterly results without the dedication and hard work of all of our team members. So to all of our team members here at SCI, I say, thank you. So now let's shift to the business at hand today. I first plan to provide an update on the strength of our financial position, allowing us to weather this pandemic storm, and I will then discuss our cash flow results for the quarter as well as give some color for the remainder of the year. So we entered this crisis from a position of strength, and we continue to be very well positioned. We continue to have a significant amount of liquidity and flexibility to meet all the needs of our businesses as well as invest in growth opportunities. Our liquidity has remained robust, growing to just over $775 million, consisting of about $220 million of cash on hand plus $555 million available today on our long-term bank credit facility. We reduced our leverage from 3.88x at March 31 to 3.79x at the end of June, which is well within our targeted range of net debt-to-EBITDA of 3.5 to 4x. Additionally, let me remind you that other than a small series of notes that are due in November of next…

[Operator Instructions]. Today's first question comes from Scott Schneeberger with Oppenheimer.

It's Daniel on for Scott. Congratulations on a good performance in the quarter. Could you elaborate a bit on the drivers of the cemetery preneed sales? And maybe help us get a sense of the magnitude of each and elaborate a little bit on what you're seeing into July thus far?

Sure, Daniel. This is Tom. Thanks for your question. So on cemetery sales, you -- I guess it's first important to point out. If you look at our cemetery atneed sales, they're up more dramatically than we've ever seen them. And that is being driven by the fact that, unfortunately, more people are -- more families are going through the experience of losing a loved one. And as that is happening, it's driving traffic in your cemetery. So that is continuing to happen. We've seen it happen throughout the second quarter. And so I want to point that out because that also, if you think about it, if I lose dad, I may buy a space for mom, too. So you're getting a pretty good lead source, what we call a companion sale, that's helping drive that. And that's just a small part of it. The second thing that we've done, and we talked about standing up technology, is we now are getting very good and very effective through training of going through virtual appointments. So we're able to interact with consumers. If we can't get into their homes or they're not capable of coming to the cemeteries, we're able to transact with them, provide information and the like. As part of our strategy also because we knew these were going to be difficult times, we added additional incentives for our salespeople to sell cemetery. We have lifted some restrictions as it relates to that, I'll call them, customer incentives. So we're utilizing some 0% financing terms. We're utilizing a little more discounting. And those are the types of things that I think are happening now that are allowing us to drive cemetery sales with a more attentive customer because there's more of them there. And that's leading to a lot of the success that we're experiencing in May and June. And we're continuing to see that success roll into July. So we feel very good about our team. I think our sales team has been heroic in being able to stand up this technology. They're utilizing a lot of the tools that they were using before, but now it's their lifeblood. They're not able to travel. So we're utilizing sales force to monitor appointments and which leads to -- I'm sorry, monitor leads, which leads to appointments and then after appointment setting, can we close that sale. And we're able to help our teammates at a senior level as they're managing the various businesses from their death, but they're able to provide, I'd say, a more productive training and development in this COVID environment.

And that was very helpful color. I recognize a little early to think about next year. But could you please give us some perspective on how you think about any pull forward dynamics as we try to model out going forward?

Daniel, I'm assuming you're talking about both funeral and cemetery there?

Yes, please.

Okay. So on the funeral side of things, we believe we're now -- and just so this isn't an updated number, not for the quarter. But to date already, we've probably provided services to about 12,000 COVID cases, which is not insignificant. And so with that, typically, when we see a flu season, you're going to see a pretty significant pull forward because a lot of times with the flu, it's going to result in death with people that have health -- other health issues or elderly. A lot of times they're in retirement communities or homes. So we're used to seeing probably a pull forward of 60%, 70%, 80%, sometimes probably closer to that. What's worried about COVID, and I don't think we -- we don't know yet is truly the answer, is COVID, when you looked at it when it first started in the United States on the East Coast, we saw a significant number of cases coming out of retirement communities, nursing homes. And so when you think about those numbers, those probably were cases that were pulled forward. I mean, clearly, all of these are pulled forward. The question is, did you pull it forward from 2020 -- later 2020 and '21 or from another date. So that may play out a little more like the typical flu. As you're seeing it spread across the country and particularly seeing it in some of the later states or call them the Sun Belt states, that percentage of what I'll call nursing home customers is going down. We're seeing a lot more people that you never would have expected to have a death that's occurring. So I think the percentages will change as time goes on. So I wish I could be a little more predictive for you,…

And our next question today comes from A.J. Rice at Crédit Suisse.

A couple of questions, if I could. So obviously, the cemetery production was stronger than expected. And it sounds like one of the -- I mean, it sounds like you did a good job on the transitioning to virtual sales and so forth. But it sounds like one of the dynamics was also that people that had the spike in death, whether it's COVID related or whatever, when they went to buy the cemetery plot they bought multiple plots. Is there any way to parse out how -- where you stand relative to the traditional sort of preneed selling activity? How much that is off versus this phenomenon of just an uptick in atneed that had some spillover effect in just cemetery production?

Yes, A.J., thanks for your question. I don't have the specific numbers in front of me. And I didn't want to -- I don't want to give an indication that that's some majority of it. It's not. It's one of many factors. So if I were to speculate, and again, I'm speculating, we grew production some 10%. I would say that that's probably somewhere of the, call it, 20% to 30% of the increase. I think a lot of it, too, has -- goes back to we really hustled. We got -- the way this thing kind of transition is we started out in April with a real decline in the number of leads. And we rotated pretty quickly and generated new leads through digital technology and through some enhanced direct mail campaigns. And with those new leads in May, you began to see us setting a lot more appointments. And so the appointment count began to go up. And again, this is outside of the walk-in business. And from that appointment count, while we were doing really good, our close rate wasn't quite as good, again, because of some of the virtual technology. And by June, we really had it hammered. We had the number of appointments were very, very high and our close rates as it relates to those appointments jumped to levels we really haven't seen in recent years. So I think a lot of this really has to do with that. I mentioned the incentives before. We enhanced the incentives for the sales counselors on directed at cemetery. The customer incentives were much better. And so if you saw, A.J., our production was up but our GAAP revenues were slightly down. And what that means is we had not an insignificant amount of people that didn't put 10% down or took to 0% financing. Now we've taken into account what we think is -- potentially may cancel because probably some of this business has a higher likelihood to cancel. But so far, so good. Our collections have been great. And so we believe that, that production is going to turn into GAAP revenues in the third quarter and the fourth quarter. So I would tell you, I don't have specifics, but that is not the majority reason. It's just one of a few reasons why we're doing so well, A.J.

Okay. Another question is, obviously, you got good margin leverage or gain in the funeral business. I know last quarter, when we're dealing with the big spike in cases in New York, there was some discussion about, well, at some level, we don't get the operating leverage off the incremental case. It ends up almost hurting margins because we're sort of overwhelmed. And that sort of indicated maybe there wouldn't be as much margin leverage on these incremental cases. But it looks like that you did see that. Now I know there was a lot of company-specific initiatives as well that were designed to pull cost out. Can you sort of parse out in your mind how much was -- well, the leverage on the incremental case was actually pretty good? Or is this really mostly just company initiatives? And how sustainable is some of that going forward?

Sure, A.J. I think most of it is -- I'll bifurcate the two. First to say, our field management did a spectacular job, and the incremental volume did produce the level of profits that you would expect. And we had kind of warned you guys, I think, ahead of time, we were concerned that may not be the case. And some of that may have been my experience that I saw in Europe, if you remember the summer in Paris, where we experienced an extraordinary number of deaths. And because of what we had to do at the company, we experienced -- we didn't get the throughput that you would expect in the business. And I'll just tell you that, that did not happen. Our teams did a fantastic job of managing their cost, their staffing. And so the field really drove a lot of the salary and wage savings that we experienced. And remember, we didn't lay anybody off. We didn't furlough. This was managing the workload between part-time and over time and the like, but effectively utilizing people. And as you'll recall, in the Northeast, particularly, we had some heroic helpers coming from outside of the state to assist our friends in the Northeast. And vice versa, we're seeing that happen again today in different markets like Florida, Texas. So that is real, and that is something that I think if it happened again, we'd continue to do, and that was led by our field management. At a higher level, we really took on some things like noncustomer-facing costs, which are -- were easy to do. I mean we've had a lot of travel, a lot of things that we spent money on, trips, incentives, things like that, that just kind of faded out. Our lawn and grounds on the cemetery side, we managed better than expected, and that was very purposeful. We kind of went in and said, how many -- what's our cycle on knowing, special projects, and we found some better ways to maintain the ground and save some money there. And again, that, I think, continues to happen. And then I think media spend. We spend money, local advertising, national media, different forms of media. And because of what's going on, it just made sense to tone that down, and we have and saved a lot of money. And we're going to tone it back up at some point, but I think it's going to be different and probably spend less money, because we learned a lot through this crisis. So a lot of levers, a lot of good things. And I think learnings across each of those things that I talked about that's going to allow us to make some of those savings very permanent and some of them will come back as things normalize.

Okay. All right. And maybe just one last question. I know the discussion about what was happening with average revenues per funeral. There's an expectation coming out of the first quarter that it would be down low double digits, low 10%, 12% or something. And you came in better than that. Where was the variance? What was better than you were expecting? And do you think any of those declines are permanent? Or do you think -- you still think we'll see it return to normal at some point in the future?

Okay. So A.J., if you take the month, it's probably easier to see this. We were down in April about 12%. 11% of that was people not spending -- it's kind of what I referred to on the call, people not buying catering or flowers or maybe not having a service. So 11% of the 12% decline was that and then the other 1% is just our typical mix change. As you got into May, remember that 11% number because that's just a ticket, walk -- somebody walking in and spending. In May, that 11% went down to 6.7%. And in June, it's down to 3.1%. So it gives you an idea of the quarter has many turns and twists. As we sit here in June and July, that gap is very different than where we started. Now to your point, as I think about going forward, I believe -- and again, this is Tom's opinion, so maybe not worth as much. It's going to be a little bit of an issue because I think there are people that for at least the next 12 months, if we understand this virus right, there's going to be some reluctance to gather in larger groups for a while. And so I do think there's a hangover effect. I just don't think it's that big. I think we're now seeing, like I said, a 3% to 4% year-over-year decline. That may be tough to fill that gap for a little while. I think 1 day, it does because if we've learned 1 thing, we know that our families really, really want to go through this grieving process, celebrate a life lived. So I don't see that culturally going away. I just think there's a concern around the spread of COVID that it's probably going to be a hangover for the next 12 months or so.

[Operator Instructions]. Our next question today comes from John Ransom with Raymond James.

No holes in one this quarter either. So I had to give you a little update, still no hole in one, 58 years in. The -- thanks for that polite laugh, Eric. The -- as we think about modeling funeral ASP for the rest of the year, is that down 3% that you mentioned in June, is that a -- you think that's -- assuming that the world kind of stays in this holding pattern of rolling shutdowns, but nothing -- not going back to pre-Phase 1, do you think that's a good way to think about it?

Yes, John, I think that is. Could we get a little bit better? Yes. And at some point, you're going to lap yourself, right? So when you talk about month-over-month or quarter year over quarter year. So as you get into March of next year, you ought to have a pretty good tailwind helping you out. But until we get to that point, I think that's probably the best way to think about it, John.

And this is mostly the atneed. So the preneed going atneed is that still hanging in. People aren't -- people may defer, but they're not asking for their money back?

Yes. For the most part, yes, we've seen a little bit of that. But -- so the gap in preneed going atneed is a lot better. You are going to have the few that come in and say, "Hey, I'm not gathering or I'm going to do 10 people. I want a little money back." So -- but yes, not 3% gap, so maybe 1% gaps on that.

Okay. Second question is, I know that cemetery is growing faster than funeral preneed for a while, but I've never seen a gap quite like this. Just what is it about the way those two products are sold that explain such a disparity? I mean we modeled down correctly in funeral, but I'll be honest, we didn't see such a disparity that you do so well in cemetery, but struggle so much on the funeral side. Just help us understand why those -- how those things are sold differently, would explain such a big gap.

Sure, John. So on the cemetery side, we're experiencing a little -- number one, recall that we're incenting our sales for to sell a little bit more cemetery, and we're not doing that on funeral today. I don't think that's the biggest reason, but I think it's just important to understand. The second thing is, like I said, there's an immediate need, if you think about it, as I have a death and I'm burying my loved ones, if I'm burying my wife, I want to buy the space next to her. And if I don't do it now, then somebody else could buy the space next to her. So I think there's a locked in -- you need to make a decision to do something whereas, let's say, a companion funeral sale, I got time, right? It doesn't really matter. So I think there's an urgency for that cemetery sale. The other thing that's very impactful is we get a lot of our leads on funeral from 2 sources that kind of dried up for now. One is seminars. We mentioned it a little bit. So we have these grassroots events or educational seminars, which generate a lot of interest and leads for us. Those have shut down to effectively 0 because they were in restaurants. Those were 75%, 80% of the -- conversions off that were funeral, and that's kind of gone away. Now we've done some additional lead work to help funeral, and I think it's getting better, but that was kind of a shock to the system. And the other thing is just referrals. We generate a lot of leads off of having a service then following up with friends and family afterwards, bringing flowers over or a phone call. Well, people aren't as receptive to follow-up visits right now. So because funeral was so vested in those 2 lead sources, I think, it's been impacted more dramatically. The good news is, again, it's kind of like what you're seeing in the funeral average. We're creeping up better and better in funeral because we're taking these new leads that are coming from digital or coming from direct mail, and we're getting better and more effective at how we use them. So I think you're going to see improvement as the back half of the year comes in on funeral, but it is a little bit harder just because of that lead source issue.

Right. And no more Golden Corral meals with 50-year best friends...

Exactly. And we were going to have one -- we're going to have one called Hole in One in Florida, named after you, but then I realized you didn't ever have one.

No, no. The other -- just to remind us. Cemetery certainly more heterogeneous. It could be a $100,000 monument or a $300 bronze marker. But just at a high level, what's the median versus average sale, if you will? And how much of that are you generally booking in the quarter you sell it versus how much are you deferring just to level set that for folks?

So when you think about the non-large sale, think of the blended sale as being -- and I'm making this up, John, so it's not going to be perfect. But think of it as a $4,000 sale and more likely than not, that's going to be -- or maybe $5,000 is a better use. So when you think of $5,000, we'll say $3,000 of that could be the property and the other $2,000 would be a service and merchandise that you may buy. So in that case, typically, if we sell it and we get 10% down and it's constructed, we're going to take the $3,000 to income and $2,000 are going to get deferred and put into the trust fund over time. On a large...

But you're paying the commission -- you're paying the commission day 1 on the $5,000, right? So $5,000...

Exactly.

You're paying the commission, you're recognizing $3,000, but you're probably only collecting a fraction of that. So the cash is -- you're just collecting a fraction of that, especially if it's like a 4-year, 5-year contract or something?

Yes. But on average, our typical down payments probably is about 40%. So on the fringe, you're going to have some of that, and we are definitely -- our average down payment is down this quarter versus most because of incentives. But generally, it's pretty good cash in hand. And again, when you think about selling something, your ability to repossess is pretty easy in the cemetery. So it's a pretty good collateral.

Interesting. And then if we think about the more interesting question, I think. So a year from now things, hopefully, are back to normal. What permanent and structural changes will have been made at SCI, either cost or how you go-to-market or business or philosophical? What do you think sticks? And then what do you think is just -- this is a temporal reaction to an extraordinary pandemic?

I think the biggest learning for us -- first of all, I think it's leveraging technology. A lot of companies have said this. We have advanced our use of technology 3 or 4 years over the last 3 or 4 months. And it's really great timing because we had a lot of initiatives that were driven off introducing more technology, both to the support side of what we do. So think of the back office mechanisms that happen and the customer facing. So we're in the midst of developing a product that was going to make us more effective and efficient any way and make us better at interacting with consumers. And through this, we've accelerated it. We did not cut back on that because we view this as a huge opportunity to advance the ball. I think as a company, we're all more tech savvy. We're less afraid to jump into that. We learned a lot of things around, I think, media spend, at a local level and a national level. So I think there's quite a few things that are changed, John. And the other one, I think, that we've learned is travel. We were -- and a lot of companies like this, I'd call it heroic travelers where we'd get out quite a bit and beat the bushes and see people. And that's an effective way to manage sometimes. But I think what we're learning is with these technology tools, you're top of a better manager being driven off of data. And I think on the sales force side, for sure, the feedback from our senior sales leadership across the board has been saying, Tom, we're so much more effective because we're utilizing these tools to understand what's happening and can take corrective actions. It'd be helpful. And so I think you'll see less travel and entertainment and things like that across a lot of countries. Now that isn't bode well for the restaurant business, but -- or the hotel business. But I think that's a collective learning corporate America.

Now is Beacon in our future on cemetery? Or is that still kind of a Maniana [ph] thing?

No, it's in our future, but Eric, go ahead and...

John, Beacon's been doing pretty well. I mean 1 thing we have been doing is executing -- continue to execute on the plan that I laid out to you in previous quarters. And so I think we have upwards of, let's call it, probably 2/3 of the 500 cemeteries or so that have kind of been implemented in some stage as of right now. It's difficult to measure based on the volatility that we're obviously seeing. It's difficult to isolate it. But I think when we do get to it and we show pre and post implementation, I do think we're starting to see some decent movement in both the cemetery average sale, kind of, what Tom just mentioned, as well as some better control and visibility into the discounts of the cemetery property. So yes, behind the scenes, there's been some improvement, specifically related to that in our cemetery business that I think will benefit the future when we get back to more kind of normal times.

Ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the conference back over to management for any final remarks.

I want to thank everybody for participating on the call today, and I want to also make sure that you guys stay safe and healthy and be careful with all this. We missed getting to see everybody, but that day will come, too. So please stay safe until the next time, and we'll speak to you, I believe, in late October. Thanks again for being on the call.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.