Good day, ladies and gentlemen, and thank you all for joining this Service Corporation International's Third Quarter 2020 Earnings Conference Call. As a reminder, today's session is being recorded. And with that, I'm pleased to yield the floor to SCI management.

Thank you, and good morning, everyone. This is Debbie Young, Director of Investor Relations for SCI. We welcome you today to our company's review of business results for the third quarter of 2020. Before the prepared remarks, let me remind you that we'll be making some forward-looking statements today. 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. 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' Webcast and Events section, also in our earnings press release and 8-K that were issued yesterday. So with that out of the way, let me pass it on to our Chairman and CEO, Tom Ryan.

Thanks, Debbie, and hello, everyone, and thank you for joining us on the call this morning. On behalf of our entire SCI team, I hope that you and your families are staying safe and healthy and finding ways to make the most of these challenging times. This morning, I'm going to start by giving a little color on our business performance during the quarter. Then I'll provide some commentary on our fourth quarter guidance as well as share some preliminary thoughts on 2021, with the understanding that uncertainty surrounding the effects of COVID-19 pandemic could change that guidance significantly. Before we get started, let me first say to our entire SCI family and particularly to our front-line associates, thank you so much for your courage and resolve, and for putting the safety of our client families and teammates first. In our funeral homes, personal care centers and cemeteries, you care for our client families and our communities during the most difficult of days through the most difficult of circumstances. You provide our families the opportunity to grieve, remember and celebrate starting them on the path to healing and closure, which is so important to what we do. So thank you. Our preneed sales counselors have adapted at a record pace to the use of new technologies and social distancing. You made it possible for us to deliver peace of mind to our family who wish to develop plans for their future now. Great job team. If it weren't for the hard work and dedication of our nearly 25,000 associates, none of our success would be possible. When we last spoke in July, we were experiencing elevated deaths from COVID-19, which had resulted in significant growth in our funeral volumes and atneed cemetery revenues for the month of June. Additionally, as…

Thanks, Tom. Good morning, everybody. First and most importantly, we hope that everyone is staying safe in these trying times. Our thoughts remain with the families and communities still facing the toughest challenges created by this pandemic. I'd also like to begin my remarks this morning, recognizing our almost 25,000 associates who have worked tirelessly to support our communities as we have navigated this pandemic. The results that we are presenting today directly reflect how our frontline associates have taken on and bravely overcome the obstacles that they affect. To them and to all of our associates supporting those on the front line, we are deeply grateful for the professionalism and poise you have shown during these extremely trying times. So with that, I'd now like to transition to providing some additional color on the financial results. First, I'm going to provide an update on the strength of our financial position that is allowing us to succeed and also be opportunistic in this challenging environment, followed by our cash flow results for the quarter, and then I'm going to end like Tom did with some forward-looking thoughts for the remainder of both 2020 and 2021. So let's start with financial position. And as you know, we are fortunate to have a resilient business model with reliable cash flows that are allowing us to weather the uncertainty created by COVID-19. While we entered the pandemic bolstered by a strong financial position and a favorable debt maturity profile, we continue to be very well positioned with a significant amount of liquidity to first invest in our businesses and then to secondly, invest in growth opportunities. Specifically, our liquidity has remained robust at roughly $740 million, consisting of $220 million of cash on hand, plus $520 million available on our long-term bank credit…

We'll hear first from A.J. Rice at Crédit Suisse.

Maybe first off, when you think about the cemetery production you're seeing, obviously, it sounds like a fair amount of that is spillover from COVID-related sales that people are buying multiple plots as they have a death in their family. But can you sort of get back to where you think traditional production is? Is there still a ways to go in seeing that rebound? And I'm assuming you're assuming a more normalized year next year, when you -- as you get back to next year. Is that what is part of the strength in the guidance is all about?

A.J., I think that's correct. I think I mentioned four different things that we believe are kind of impacting sales. And while you're right, the atneed activity is a part of it, I would say it's clearly not near a majority of it. A lot of what we believe we're seeing is this openness of the consumer to have the discussion around preneed and the importance around it. And there are some other things that are driving it, like I said, I believe we're managing the process a lot better with our customer relationship management system. Because, again, we were precluded from traveling, right? So we're sitting there with sales force driving activity through the management process, and that's been more effective. So I think as we think about the coming years, clearly, at some point, hopefully soon, this atneed traffic is going to slow down, and that's going to have a year-over-year issue for probably -- particularly June into the third quarter. And -- but I also believe that this focus of the consumer may last beyond it. I don't think this is something that everyone's going to forget right away. And I think the intention of the consumer could continue. So we're pretty excited about the opportunity to have the conversation to provide that peace of mind to our families, so they take care of that and something that's truly important. And I think what's going on now just reinforces to everybody how important this is. So we feel good about -- obviously, 2020 is going to be a tough comp, but we feel good about 2021 and beyond.

Right. So the sales per case decline in the third quarter was down 3.6%. It sounds like you think it will improve a bit in the fourth quarter. Is it still primarily a bifurcation that your Canada operations and maybe California are a little worse than that, given the lockdown situation in the rest of the countries closer to even? And what do you think -- how are you thinking about that going into next year? Are you thinking that you'll see some further easing in the restrictions in Canada and California? Or are you more optimistic about the rest of the country just picking up more?

A.J., we saw actually both Canada and California improve, particularly in the back half of the third quarter. So we didn't see that big differential change. It's still slightly different, but not that big. So really, across the whole network, we're seeing a normalization. And clearly, people are not having larger gathering and as we shared with you, our attachment rate for service used to be 63%, it drop to 40%, it's now back to 58%. If you bifurcate that, the variable consumer is pretty close to par, kind of back to the same level. And we're seeing a little bit of a stubbornness of -- even though we've seen improvement on the cremation side, where a lower percentage of people are choosing service with cremation, and we, too, think that will improve. So we feel better. The other things that are impacting it are, clearly, people are not buying as much catering, a lot of the ancillary things that they traditionally would buy. So as we begin to open up more, we'd expect those categories to be selected and see a return to revenue growth.

Okay. Maybe one last question. You mentioned in prepared remarks, Tom, that you think you may be picking up share vis-à-vis local competitors. Just wondering what do you think is driving that as you're better able to handle the COVID situation. Is that what's driving that? Or what do you think is driving that? And do you have any sense of how much of a share shift we might be talking about?

Sure, David. I'll follow-up. But I'd like Jay Waring, our Chief Operating Officer is here, and he's had a lot more discussions, I think, with some of our markets. Jay, do you want to share a little insights, and then I'll follow-up on the last part of his question.

Yes. One thing we're seeing about this, Tom, is a tremendous focus on safety, tremendous focus on quality, the PPE, with . We actually added a question to our J.D. Power survey, we did that in April, to the families that use us, that ask, "Did you feel safe and clean of the location when you visit our location?" And over 99.5% of families said yes. So anecdotally, we were in Los Angeles a couple of weeks ago, and the team of Rose Hills said, we believe we are gaining share because we have a reputation in our community of safety and cleanliness. They feel comfortable coming here for gathering and for services as do clergy.

And I'd just add on, A.J., from a digital perspective, we rolled out our Every Detail Remembered campaign, and we're having much higher digital presence. There's a lot more people flowing through the websites. There's a lot more people on social media. So I think, again, with the scale that we have, with the expertise in that area that we have in the company, we're getting our message out more and more, more effectively. So I think from a physical interaction with the consumer and with a digital interaction with the consumer, our awareness is up, and we feel like we're seeing numbers that are above our expectations, again, both in the, let's say, the hotspot markets and throughout the network.

Our next question will come from John Ransom at Raymond James.

This may be a hard question, but how should we think about -- let's just imagine a world where volumes next year and volumes this year are sort of in sync. So we're stripping out the variable costs. How should we think about the permanent cost structure on kind of a like-for-like basis? And what cost you've been able to take out during this year?

Sure, John. And I would only expect that type of question from you. Good one. So there's a lot of learnings, I'd say, John, on the cost side. The first one I'll touch upon because you go through the crisis, this is a question you've asked us for 15 years, 20. Do you have flexibility in your network in order to handle? And I think what we found out -- and I'd have told you, yes, and I guess I didn't really know the answer, now I do. The truth is we did a tremendous job. Our teams are so talented and the tools that we have to do it. And I'd say through the learning process, what we found is that we probably weren't utilizing the clustering concept to the maximum benefit because we got in positions where we said, we really don't have enough part-time labor or they're not available. And I said, we probably did a much better job of sharing resources than the company has ever done, partially out of necessity, but partially out of nimble local management and just being smart about it. So I think we learned better how to utilize our labor force through this process more effectively. The other thing is we have a lot -- and this is a corporate America issue, a lot of travel and entertainment goes into almost 25,000 employees. I think what we learned is when we didn't have it, we did pretty good. It doesn't mean we won't have it going forward, but I'd say the levels as we think about those types of things from travel and entertainment, to seminars, to ways that we leverage marketing or leads, we learned a lot in that piece. And I think, again, I touched upon it earlier, you'll probably see -- we've really driven down the cost per lead, and we're utilizing digitally much more effectively, which are a lot cheaper than our traditional lead method. So I think we just found better ways to operate as we move forward. And on the backs of that, John, I think what's interesting because these are all things that we did with existing technology. We're now in the midst of what we call a reimagined project, which is taking -- leveraging technology to the next level. It's really every facet of service delivery. So we've accelerated a lot of that through this crisis to try to get there even quicker. And that's going to allow us, I think, again, to become even more efficient, more effective. And most importantly, I think more nimble in delivering service to our client family. So a lot of good news around that. And I think there's near-term benefits that will benefit '21 and '22. I think longer term, reimagine will allow us to further leverage our cost structure.

So Tom, that was, as usual, a beautifully elephant answer, but it didn't have a single -- did not have a single number in that answer. So maybe share a number that you could attach to it. This is my last question. I bet you did well on essay questions in high school. But it was a math question.

I did. I just put Jay on all the answers on the math section, but I think it's hard to pin down an exact number. But I guess the way I would say it this way is, I believe that even today, if you look out into 2021 versus the cost structure, let's call it, a 2019 cost structure because '20 is going to be weird one. We've probably identified somewhere in the -- within a range of $10 million to $20 million of savings as you think about the way that we're doing it today. And I believe we're just getting into that. Like I said, I think when we have the tools with reimagine, we'll be in a position to drive more efficiencies as we begin to think about how we service clients and what we did. So I'd say that's probably a fair number to think about today, somewhere in that neighborhood.

We'll hear next from Scott Schneeberger at Oppenheimer.

I guess if we could start with the guidance for the balance of this year, I believe I heard it was high single-digit cemetery premium growth in fourth quarter. Now that flows 46% in the third quarter. I'm just curious, it seems concerning based on trends we hear in the market in which you're commenting on October. So -- and just curious on how that is being looked at. And also, if you could please work into the answer, consideration of the recognition trend in preneed.

Sure, Scott. So as you think about cemetery, 2 things to consider, we're comparing against probably an easier comp when you think about third quarter of last year. So when you look at the percentage change, and we had a pretty strong fourth quarter. So to start with, I'd say, the comps are different. And then the second thing, I believe, part of this is, remember, we had the second quarter -- I don't want to use the word to stand still, but when you look at the month of April, in particular, activities were down dramatically. So there's probably a little bit of a catch-up factor that rolls into this 47%. That's probably not a number I'm used to, I'd love to get used to it, but I don't believe it. But what we are seeing and continue to see is this consumer that is ready to have the conversation. So you may be right, maybe high single digits ends up being a little conservative. But I think it's more in the ballpark of what we'd anticipate and kind of what we're seeing as we're out of the gates in October. So I think it's probably the better way to think about it. And that would be my 2 biggest reasons are catch-up from the second quarter and the comparable issue. As far as recognition goes, we traditionally -- the fourth quarter is typically more of a recognition spillover just because of the gave me the word cadence. The cadence of the project, it tends to fall in the fourth quarter. So you will see a catch-up, I would expect in recognizing some of the revenue that we sold in the backlog today. So that will be a change. That will be a change when you think about 2021, next year. We're anticipating probably spending somewhere in the neighborhood of $100 million of cemetery inventory development. And so when you think about 2021, that would -- I would expect that number could be even higher when you think about a recognition percentage.

Okay. I appreciate that. Yes. And then that was going to be my next question and you somewhat answered it. Just how the recognition flows and spills into certainly the first part of 2021 and throughout. I'll move on from that though. As you covered some discussion on use of capital, just curious what the company stance is with regard to M&A in this environment? You talked about differentiating versus peers. We've heard it out in the industry, the technology factor of Service Corp. certainly is a differentiator in this environment. So just curious on M&A and also thoughts with regard to using capital on stock repurchase.

I'll take that first part of it, M&A. I mean, it's all -- Scott, you know it's long enough where we've been very consistent, and we're not really deviating from our plan, and that is you look at the highest relative return opportunity. And M&A is going to win in those situations. I do agree with you that I think we are starting to bring things to the table in terms of really hitting on all cylinders in the categories we've described to investors before on Investor Day is leveraging our scale and utilizing of technology. And I think -- I also would kind of echo Tom's comments. I really think we're kind of in the early innings of that, to be honest with you. I think some of the stuff that we're doing now, and we're going to put capital behind such as the reimagine project, I think, are going to be even more of a differentiator. That's not moving the M&A needle today because it hasn't been executed upon. But I think people are starting to notice, and I think it will move the needle, frankly, in the future as more of a differentiator to us. So when you think of M&A being the kind of the highest relative return from a kind of an after-tax IRR perspective, then you look at what's next, and it's probably new build. So both -- the first things that we're doing -- of course, none of this is done without reinvesting into the business. So the first thing we're doing is maintenance CapEx and cemetery development and with an excess cash flow after we're comfortable that we reinvested appropriately into the business, we're looking at M&A and new builds. New builds has a slightly less return than M&A because it takes…

So just a quick follow-up on that and then one there. On M&A, are there right targets? Or is this an industry that's just incredibly distracted right now, and that's not something that can actually happen right now? Or where is it?

No, it's happening. And I think there's been some disruptions. As you know, that's out there. Jay kind of alluded to it in terms of us being able to withstand this and leverage our scale and other people probably will struggle a little bit to maybe do that, that don't have the scale and the wherewithal to get through some of it. So with that came, what we think is maybe a little bit of market share, especially in the hotspot markets, and I also that, that's kind of brought a little bit more light to the pipeline. We, obviously, don't -- we report quarterly. So we reported our Q3 numbers there. But I would just characterize it as it's coming to life, and I think we're kind of excited about what we're seeing in terms of the pipeline.

Scott, I'd just add to that. There's a candidate that's got a 39.6% right on capital gains out there. If we went that direction, I do think that's going to motivate a lot of people. So we are poised in writing to Tom if that were to occur.

Yes. Interesting dynamic, Tom. And then lastly, just if you can update on the funeral rule. I'm guessing that's been probably a back burner topic, but I know you check in with FTC on occasion. Just curious what the status is there.

Yes. The status is somewhat, frankly, quiet since the last time we talked. And then we concluded the -- everybody in the industry and everyone who wanted to publicly comment, concluded those comments with the FTC kind of mid-June was their cutoff. And so I really don't have an update since the last conference call, which is late July. The process is, Scott, as you know, that the commissioners and the staff primarily will look at this and digest all these comments, and then they'll go and decide internally whether they want to -- what they want to do. And if they choose to move forward with something, it kind of resets the process, whereas there's a little bit of an indication of what they want to move forward with or consider. And then we have an adequate time period to not only submit in writing, but they'll potentially -- if past is true of the future, there'll potentially be some -- probably some hearings and in-person meetings as well associated with that process. With the election right here and everything going on, obviously, in the world, I'd be very, very surprised if there's something imminent. If there is, I'm not aware of it. I just think that may delay a process that's already got a lot of meat to it because there's a lot of comments that they're going to have to kind of go through and file and digest along the way.

And ladies and gentlemen, that does conclude our question-and-answer session. I will turn it back to SCI management for any additional or closing remarks.

I want to thank everybody for being on the call today. Please stay safe and care yourself, and again, make something good out of this strange time. We'll talk to you again on our fourth quarter earnings call, which will be in early February. Thank you so much.

This does conclude today's session. We thank you all for your participation. You may now disconnect your lines, and we hope that you enjoy the rest of your day