Service Corporation International (SCI) Q2 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to the SCI Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to SCI management. Please go ahead.

Thank you, and good morning. This is Debbie Young. Welcome today to our company's review of business results for the second quarter of 2021. I hope everyone has had a chance to review our press release issued yesterday. Before the prepared remarks from common Tom and Eric, let me remind you that we will be making some forward-looking statements today.

Thanks, Debbie, and hello, everyone and thank you for joining us on the call today. I apologize in advance for my voice. Eric promises me, I look worse than I sound. This morning, I'm going to begin my remarks with a high-level overview of the quarter, followed by a more detailed analysis of our funeral and cemetery results. And finally, comment on our guidance and outlook for the year. But before I begin, I want to give special thanks again to my SCI family. You work so hard to deliver the impressive operating results reported this quarter. But more importantly, you continue to stay relentlessly focused on what we do best, helping our client families and the communities that we serve, gain closure and healing the process of grieving, remembrance and celebration. During these difficult times, I just can't say enough about how you continue to rise to the occasion. You truly are my heroes and you have my heartfelt appreciation. So let's get right to the highlights. For the second quarter, we generated adjusted earnings per share of $0.92, a 59% increase over the prior year. The primary driver of the earnings per share growth was our 34% increase in cemetery revenues for the quarter, which was generated by our continued strength in printed cemetery property sales production, at need cemetery revenue growth and highly profitable increase in recognized preneed merchandise and service revenue. The funeral segment delivered strong funeral sales average growth which more than offset expected decline in funeral volumes when compared against the quarter, severely impacted by COVID-19 and the commercial restrictions imposed at the time. The preneed funeral sales production came roaring back with a 57% increase in the prior year quarter.

Thanks, Tom, and good morning, everybody. First, we hope to you, your friends and your family are remaining safe and healthy during these really trying times. I want to first and most importantly, echo Tom's comments that our positive quarterly results discussed today are a testament to the dedication and hard work of all of our team members here at SCI, which are putting our client families first and one of their most dire times of need. We appreciate each and every one of you. So this morning, I'd like to begin by walking you through our cash flow results and capital deployment for the quarter and then briefly touch upon our revised full year cash flow guidance and financial position. So let's start with cash flow. We generated adjusted operating cash flow of $192 million in the current quarter, compared to $184 million in the prior year, which exceeded our expectations, primarily due to the strong preneed cemetery sales production that you saw yesterday in our release, and Tom just walked you through. In addition to strong operating cash flow results, which again, resulting from EBITDA growth of over $60 million, we also benefited by a decrease in cash interest payments of about $25 million, primarily resulting from the timing of our recent debt refinancing transactions. I want to go ahead and highlight the transaction that we completed after our last earnings call. In light of the continued historic low interest rates, we took the opportunity to issue new 10-year $800 million senior notes at a 4% rate.

We will now begin the question-and-answer session. The first question is from Joanna Gajuk from Bank of America. Please go ahead.

Good morning. Thanks so much for taking the question here. So I guess I appreciate all the commentary about the second half growth rates and what it implies for the year. And can you just flesh out a little bit more, the dynamics around the cemetery pre-sales strength? I mean, clearly said that it surprised you. So any kind of ideas in terms of what's driving that and kind of what gives you confidence that we will continue in second half? Are those kind of pull-forward sales as it like just people obviously are thinking more about their own mortality and whatnot, so kind of making these decisions faster than in the prior year. So kind of flesh out the dynamics – those dynamics for us. Thank you.

Sure, Joanna. First of all, I would say, obviously, we believe that COVID deaths have had an impact on our ability to generate leads and generate production. So some of this is, for lack of a better term, pull forward. But I guess the preneed cemetery sales side with so many potential customers. I don't -- it's not like it -- it's really an opportunity to capture it. We still think a significant portion of this relates to, I think, people's realization and focus on what we do. And I think as long as COVID around and maybe a while after that, I think their aperture for what we do is going to continue to be available. And the last piece that I think is just true, and I think Jerry here runs our sales force would agree this comment, we have found a better way to manage and we're managing with less travel, leveraging technology, focused on leads, what we do with those leads and success. So you heard me reference the lead-to-sale percentages at 17%, and it used to be at 14%. So we're getting better leads. We're following up better. We're utilizing our tools, sales force, customer relationship management Beacon. And so I think there's an element of continuation. The other thing that gives me confidence on the – and we referenced this a little bit on the cemetery side, we've been selling a lot of merchandise and services. Remember, those get deferred and put into trust on. And if you look at our numbers this time, those were up pretty significantly. Why is that? We've sold a lot of preneed customers. And those money can invest in trust months. There's some cumulative trust earnings in there that roll out as we deliver merchandise and services. So that, again, will be something that ought to benefit the back half of the year 2022 going forward for all those reasons. So hopefully, Joanna, that helps answer your question.

Right, no that's good color, and I guess to your point, similar dynamics, the print funeral sales production also up very nicely, right? So I guess it's kind of similar dynamics as in just like you have, obviously, mentioned the salespeople being more efficient, but just the whole point of them being out there, right, and more kind of able to do those events in person, right, that's driving the specific bucket, right?

Exactly. So – and I think what's slightly different about funeral that's made it a better comparison and growth and probably will be as you think about the back half of the year. funeral leads, a lot of them were dependent upon seminars. If you remember, the seminar is effectively shut down last year. The other thing about funeral is we do follow-up events with the family. So once we've had a funeral we'll follow up that typically generates fleets. Well, last year, going to let us in their home to follow up. So I think the dynamics of markets opening up again, people feel more comfortable. That tends to give a boost back to funeral, maybe more relatively than even in the cemetery. In the cemetery, we can do it outside. You're generally showing people through the cemetery. So there's just a different dynamic. But we feel very positive about the momentum in both channels. And I just think funeral has got an easier comparison as you think about the second half of the year versus cemetery. The cemetery will continue to be very strong.

Yeah. I Appreciate. If I can squeeze a follow-up to something you said before in terms of the funeral average sales essentially slightly above 2019 levels. So things really came back really nice there. But are there still some markets essentially closed for activities, or are you pretty much open? Thank you.

It's pretty much open. The last one to Canada was pretty shut. California has gone back in certain pockets to mask inside. But as of right now, we're seeing people as you can see in the numbers, choosing to celebrate, memorialize, get into gatherings. And we think that's such a positive thing. I mean, you probably noticed in here the cremation rates flat for the last couple of quarters. I don't expect that to continue. But I do think people are focusing on what's important in their lives on the people that's, important. And that aligns well with what we do. So we're happy to be of service to our families.

Great. Thank you.

The next question is from Scott Schneeberger from Oppenheimer. Please go ahead.

Good morning. Hi. It's Daniel on for Scott. Could you guys elaborate a little bit on the expectations for semitranfuneral margins, please, in the back half? And also discuss the efficiencies, you guys have gained it could be sustained with some perspective on how margin should expand a little bit longer term as well, please? Thank you.

Sure. Eric, do you have the -- some margin stuff you want to talk to you in front of you.

Yeah. The margins essentially for the -- as you know, we had a little bit of pressure relative to the incremental revenues that Tom has already described in a lot of detail. The question is for the back half of the year, what will that look like. And what will it look like as it relates to the revenues in the back half because of the volume declines that will ultimately potentially occur during the quarters. And that's hard for us to predict as it relates to the Q3 and Q4 volumes. I mean, Tom did mention that we do not have a crystal ball, but we do use the IHME statistics from the University of Washington. And there's no doubt that things appear to be picking up from a COVID perspective in the back half of the year. I do think some of the things that put pressure on, the margins during this quarter such as part-time and overtime, to some extent, has now been ramped up. And I think there could be some pressure as a comparison in the back half of this year because of 2020. But there's other cases where ICP, for example, our incentive comp plan, I think we have that in a place where we're very comfortable with based on our projections through the second quarter. So I think the punch-line is I don't really expect it to be too much pressure as it relates to the back half of the year, but really from those fixed costs that we just described. And ultimately, it's going to be a question of throughput. And what you saw in the second quarter is that the model that we have in terms of incremental margins based on more volume clearly worked drop to the bottom-line, and then we had some fixed cost pressure. So if the fixed cost relieves itself in according to what the margins are going to do are going to be a function of what do we think the volume is going to be in Q3, Q4, so a little bit out of our control. Ultimately, I think we could see a little bit of headwinds related to it, but it's going to be somewhere in the ballpark of the very high teens and maybe with some volume help we can get into where we kind of were in the second quarter as well.

Got it. Thank you.

I'm sorry, the second part of question you asked about, what are some of the sustainable things from the model. And I think in that regard, what we're finding is from a selling cost perspective, both from a lead management cost per sale, cost per lead and looking at travel and entertainment and utilizing technology to leverage more, those are tools that are allowing us to reduce the cost of sales you think about selling. The other thing is by utilizing a lot more technology, if you look at our staffing metrics, just to give you an example, our full-time staff, as you think about a quarter, probably runs about 7,100, 7,200 FTEs in the funeral segment. And that's pretty consistent whether you go back to 2019, 2020 or 2021, the difference is the way we utilize the part-time metric. Pre-pandemic were 2,100 on average in a quarter personnel for the pandemic. In the pandemic, we dropped to 1,400, so pretty significant. That was because we didn't have is elaborate funerals. We had a more simple structure because we couldn't operate at full tilt. Now we've moved that back to about 1,700 or 1,800 in this quarter, where we did a lot more funerals than we did in 2019. So I think the way to think about this is we found a staffing metric model that's more efficient, more effective in how we service clients even in a full service mode that we're in today. So a lot of little things like that that have, I think, allowed us learnings to over the long-term, manage more effectively when you think about the cost side of the equation.

Got it. Very helpful color. Thank you. Just a quick one on cremation. Not change so much on a year-over-year basis recently, I understand the comps is a factor there as well. But could you speak to where you see the cremation mix going near-term? And what kind of trends you've seen in the quarter?

Yeah. So what we saw was effectively flat this quarter, last quarter. Historically, that range has been about 100 to 150 basis points per year. There's a lot of different opinions to know, and I trust our Chief Operating Officer, very much on this. And I think what he sees and when the feedback, I think we would expect that maybe the 150 basis point move is over for a while that a lot of people are seeing value and memorialization value in the cemeteries -- you're seeing in the cemetery sales production. So again, we don't know, but I think our expectation is that it will slowly begin to grow again and maybe not the historical levels we've seen.

Got it. Thank you very much. Good luck.

The next question is from A.J. Rice from Credit Suisse. Please go ahead.

Hi, everybody. Just maybe quickly to follow-up on that last discussion around cremation rate. Do you think much of what you're seeing there was just that cremation was elevated a year ago because of the inability to have normal services, or do you think that's really not part of it?

I think there's a little bit of that, A.J., for sure. But I think we even saw it in the first quarter where you were comparing back to as much. And so again, I agree with you. I think the flat of this has a little bit of what happened last year. But I think, again, just from the talking to people that are in the field and what people are doing. And I think it's a sentimental thing where people are saying, life's too short, and I'm going to celebrate the people I love, and it's important to me. So again, I just provide that feedback. I don't know where it will normalize out. Again, we do anticipate it to begin to grow, maybe just not at the levels we saw. So -- but you're right, there's -- surely in the second quarter, there's a comparison issue.

Okay. When you think about the funeral averages and the strength you saw there, is there any way to discuss what you're seeing in terms of the average is coming out of the backlog from pre-need to at-need versus the walk-in at-need. And does that give you any gauge on how far you bounce back? And how far you may still have to go as we return to normal?

Yeah. I think if you look at, for instance, for the quarter, I believe, our at-need walk-in average was about $5,800 in the core part of our business. So I'm going to talk not SCI Direct for a minute. And our preneed going atneed was about $6,400. They got about a $600 delta, that's what's coming out of the backlog. And so when you think about the robust nature of that backlog and our ability to continue to grow it, what we're putting into the backlog today is just over $6,000 on the core side. So again, I think what that tells us is that customers are paying up for premium. They want remembrance, they want celebration, they want to be able to agree, they want to do a lot of the traditional things. So we view it as two things. One, there's probably room on the atneed side for increases. And we like what's coming out of our backlog and more and more will come out of our backlog as you think about how this rolls out in the future.

Okay. And then maybe finally on capital deployment. You're expressing confidence or Eric is on the acquisition pipeline. Does that mean that there's deals that are pretty far along at you take -- you haven't done much you're still saying you could think you could do $50 million to $100 million. And then on the buyback, I know in this quarter, you did about $81 million is -- that seems a little above average, for sure. What -- is there any updated thoughts on the quarterly run rate to contemplate for that?

A.J., I will take share repurchase is first. The $81 million is pretty much in line with what you've seen in the first quarter. I think we did $106 million. Last year, we did over $500 million deployed to the shares. The answer to your question is we're going to deploy capital to the highest relative return opportunity. And ultimately, we believe shares are a good value where they are, and we've been purchasing through 10b5-1 all during this period, and we'll continue once we get out of this period to an open market repurchases. But in terms of the level of those repurchases that's going to depend on the relative valuation with other opportunities – excuse me, the relative opportunity with how we feel about the perfect value of the company. But I'm trying to tell you very clearly is, we will continue -- our expectations are to continue to deploy capital towards our share repurchase program at these levels. So I hear that very clear, subject to what I've already described. In terms of the acquisition pipeline, I think things ebb and flow and with COVID, there's always some timing issues and things being delayed. I think what we're trying to communicate to you is that there is a pipeline out there that we are involved in and we are active in, and that gives us optimism and confidence that we will continue down that path. I don't really want to say any more than that at this point in time, but it's a good pipeline.

Okay. Great. Thanks a lot.

The next question is from John Ransom from Raymond James. Please go ahead.

Good morning. I was just remembering that your stock used to be $1 a share back in the late '90s. I think about that take that basis. The question I have, Eric, is I like your 25,000 fewer funerals and here's our earnings compared to 2019. Could you just help me understand how much of that is just structurally better cost structure? How much of that is higher preneed? And how much of that is -- anything else you want to help us with.

Well, I think, John, as you think out to 2022, the capital structure loan is probably $0.45, $0.50, and I'm doing this from memory, so forgive me if I'm off a little bit. I would think the cost side of it is, again, probably another $15 million the high-teen sense. And then I think there's real upside. Clearly, we're going to make less money on the funeral side, right, we did 25,000 just funeral and cemetery because of the levels that we operate in today and the effectiveness of our model and leads is going to be significantly higher. We think about -- when we think about -- you heard me reference last time, I kind of went back and said, take a 2019 level and we believe we can grow cemetery sales 7% compounded. So if you believe that is the right way to think about it, and you can come up with a number that says, now I know of excess 2020 and 2021 sales are. But there's nothing we believe that should stop us from compounding at seven and a lot of our models now run higher than that. When you think about what type of levels preneed cemetery should be at in a given year 2022, 2023. So that allows you some pretty spectacular numbers on that lower share count, more effective operating platform. And so you get to these numbers, like what we're saying for 2023 at $3.25. If I told you in 2019, we'll grow EPS 10% a year, I think it's like 268, 270. Is that right? And so I'm telling you, okay, we got to this pandemic. We now we're at 325. So that tells you -- that's really cemetery, both property production and merchandise and service revenues that will be delivered combined with, again, the better operating structure, better capital. And we're still -- and now we've got a really good trend for funeral, right, because funeral is going to be challenged. But the good news is that that pull forward is going to wane. And so year-over-year comparisons are going to get actually kind of tailwinded. So I feel really good about as we think about moving out to 2025, what type of growth you can see within SCI.

And Tom, did you just turn a tailwind into a verb, I like that. I like you said. Okay. Sorry. No more. I'll just be serious. No more comment yet.

Oh, come on. You…

The other question I had was the surprising thing last year to us was how much cemetery preneed related to stronger funeral volumes. So as you go down the other side of that slope, just is there a rough rule of thumb, say, for every 100 points of funeral volume decline, that equals x dollars or maybe pressure on some material preneed, or is it not that easy to think about it that way?

I don't think it's too easy to think about it that way. Jerry, is there -- is that -- would you have any comment on that? And so I don't think so. I mean I think with -- obviously, every time you have a case, there's an opportunity to follow-up, which lead is a way to generate a lead. And I'd tell you, the one thing that's slightly different today about our model, and a lot of this is with our new Chief Marketing Officer, Jamie Pierce is not know anymore in here while. But Jamie has really turned up the capabilities as it relates to digital leads, and that actually feeds into direct mail. And then we don't think about direct mail and digital, but there's a lot of science behind the technology that we have a much lower cost of direct mail and a much more effective piece. And so that has taken what used to be marketing leads in the 10% to 15% of our lead process, now with the 25% to 30%. And those are much more effective workable leads. And so, when you think about that, that really isn't driven off a customer walking in. So, I think we're less leveraged to the funeral volume as we think about our ability to drive cemetery sales production going forward, then the pre-COVID SCI is the way to think about it. So that's why, I think we're pretty confident about, we continue to do this. And one nice thing about cemetery is it really is a heritage sale. When you get to in there's an opportunity to get Tom's brother, Tom sister, everybody loves, Tom. And John, I know you're part of that group that would make you a potential customer.

Thanks everybody loves Raymond. So it reminds me, Beacon and cemetery got a lot of discussion a couple of years ago. And part of that was, say, we can simplify our product offerings, not that 87 turns that we're selling. Where are you in that process? Is there still more upside? And what the shopper are you kind of through that process?

We've kind of got it in most of our 90% of the network. And I would tell you, it's hard to understand what the impact is, but here's what I know for sure. It's a much more robust, efficient sale. So, when you think about our ability and you keep hearing this reference velocity, the number of contracts, our sales counselors can do a lot more in a day than they used to get to. The other thing that we're finding because you have the ability to kind of control the price test and everything else is, we're seeing less discounting. So higher average sales, more throughput through the system. And I'd say, that's a big function of Beacon's contributing that. I also would tell you that I think are embracing our customer relationship management system, which we've had for a while, and we were good at it. But now when you couldn't travel, it was your lifeline. And I think it's become the lifeline for our sales organization and all the potential that was wrapped up in that. And so, we're actually making -- it's so useful now we're trying to make adjustments to it to make it even more useful people are embracing it. So while it was always embraced, I think it's embraced throughout the entire sales organization now. Those two things are very big reasons why we're confident about the future.

That’s it for me. Thank you.

Thanks John.

This concludes our question-and-answer session. I would like to turn the conference back over to SCI management for any closing remarks.

I want to thank everybody for being on the call. Stay safe out there, and we look forward to talking to you again in October. Have a great week.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.