Good morning and welcome to the SCI Shared Second Quarter 2022 Earnings 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, Director of Investor Relations. Today, we're going to be providing an overview of our business results for the second quarter. As usual, I'll quickly go to cover our Safe Harbor language before the prepared remarks. 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. In today's call, we'll also discuss certain non-GAAP financial measures. A reconciliation of these measures to the appropriate GAAP measures can be found in the tables at the end of our earnings release and also on our website under the Investors sections, Webcast and Events. To begin our prepared remarks, I will hand it over to Chairman and CEO, Tom Ryan.

Thanks Debbie. Hello everyone and thank you for joining us on the call today. First of all, I want to express my heartfelt thanks to our entire SCI team. It is your perseverance and commitment that positioned us for the results we posted this quarter. More importantly, we've continued to stay relentlessly focused on what we do best. helping our client families in our communities gain closure and healing through the process of grieving, remembrance, and celebration. Now, to the business at hand. This morning, I'm going to begin my remarks with a high level overview of the quarter, followed by some further color on our business performance for the quarter, including some detail around our solid funeral and cemetery results. For the second quarter, we generated adjusted earnings per share of $0.84, an $0.08 decrease over the prior year quarter of $0.92, which experienced a more significant pandemic impact. For a better perspective of this quarter's performance, we delivered earnings per share growth 45% above 2020 and 79% above our pre-pandemic 2019 second quarter. Compared to the 2021 second quarter, the funeral results were relatively flat, but well ahead of our expectations as we continue to see elevated levels of funeral services with a strong funeral average. On the cemetery side, profitability was below prior year as preneed cemetery sales production, while still historically very strong, was down about 3% versus the 2021 second quarter. Additionally, Cemetery Trust Fund income declined as it was impacted by steep declines in the equity and debt markets during the second quarter. So, for the quarter, we saw a $0.03 decline in earnings per share from operations, both comparable ups and acquisitions and a $0.05 decline below the line as higher general and administrative costs, primarily impacted by the timing of incentive accruals…

Thanks Tom. Good morning everybody. I really want to start with the most important thing and that's really thanking our 24,000 plus associates that have helped us produce these impressive financial results this quarter. Everybody in the field as you continue to provide exceptional service to our customer families and all of our communities during these exceptional circumstances, while also managing through the COVID era and taking us beyond that era. So, hear me very loud and clear, thank you for everything that you do for our company. So, with that being said, I'd like to discuss rest of the color; our cash flow results, capital investments for the quarter, some of the market effects on our trust funds, and then provide some comments on our cash flow outlook for the remainder of this year. So, we generated operating cash flow of $141 million in the second quarter. This is in line with our expectations. It was about $50 million lower in the second quarter last year, that again was impacted by COVID-driven positive activity similar to our adjusted earnings per share. These current cash flow results are significantly higher than pre-COVID activity levels, such as the $84 million of adjusted cash flow we generated in the second quarter of 2019. So, for this quarter, though, versus second quarter last year, our cash flow was reflective of the $18 million decline in operating income, which excludes gains on divestitures $15 million of higher interest in cash taxes, as well as about $17 million or so of an increase use of working capital. The cash interest payments were on target increasing expected $10 million, predominantly associated with debt restructuring transactions, which we did in the second quarter of last year, as well as a smaller impact from increases in our floating…

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

Good morning. Thanks so much for picking questions here. So, I guess, you mentioned the cemetery preneed sales rate declining over year, but still running pretty healthy versus the pre-pandemic levels. So, I guess two questions, first, I guess when you talk about the 45% above the pre-coronavirus pandemic levels, is there a way to think about the breakdown for this number, how much is due to high velocity and how much is from high average price?

Yes, Joanna, I don't have the -- compared broken down, but I think just from speaking from using approximations, we're -- I think all three trends look very favorable. Our velocity is higher, quite a bit probably in the high single-digits. We've seen some healthy increases in sales average as we've invested in cemetery property and upgraded the cemeteries. And our large sales activity again, is more than double-digit percentages higher. So, really firing on all cylinders. And I think the one thing I was just pointing out is we knew that last year was probably the peak, right, you had a lot of COVID activity. You had a consumer that was, for all intents and purposes, kind of, locked down and not anywhere to go. And two, you really haven't seen any signs of inflation occurring in the economy. So, it's a perfect world. And the only difference we're beginning to see in some of this is our speculation is we're seeing some of the consumers particularly at the middle and the bottom of the socio economic demographic see and then pull back a little bit. And again, we're speculating that gas prices that's electricity. Is it a good time for me to start a three-year payment on the cemetery property? Probably not, I'd like see things settle out. The good news is, and that's what we're trying to point out, these are leads that we maintain relationships with. And so as things settle out, we expect we'll go back and close those contracts. But that's really it. And I think too, you've got a consumer, that means you're seeing the airports and the lost luggage in Europe. I mean, people are out doing stuff, not just traveling, but they're going to shows and doing different things. We've also seen some unique things like, COVID resurface. I know one region of our company in the sales region, we had, I want to say, 40% of our sales counselors out either on vacation, or with COVID, you got customers with COVID. So, I think we just had a little bit of a of a of a difficulty that we expect to begin to work out of. We still have a very high propensity for, for customers to want -- once we get in front of them. Our close rates are the highest they've ever been in the company. So, we feel really strong. We just wanted to point out, we are seeing a little bit of a consumer in attendance in this compared to a very attentive last year second quarter.

And I guess that actually was my question also in terms of dynamic -- in terms of the preneed cemetery sales, maybe, some impacts there. And I guess in the quarter was down year-over-year obviously very tough comps, but up last time, you were talking about sufficient for the pre-cemetery sales to increase low single-digits for the year despite tough comps. So, is this still sufficient for the full year?

Yes, I think we believe we're going to get back to slightly positive for the year when you look at the cumulative effect, or right around there. I mean, surely, still feel pretty good about getting back to levels for the whole year because we had a really solid first quarter as you'll remember. I think we're up over 10% We're going to eat away at that. I think if you think of the back half year, we'll probably be slightly down, but a cumulative year that achieves the same level as 2021 or thereabouts.

And I guess this also is linked to the recognized cemetery revenue. So, you mentioned last quarter this 50 projects that have been developed across the country, and that you expect record $35 million revenue over the rest of the year and maybe into early next year. So, are these on schedule, timing for when you might expect these revenues to come through, is it, kind of, tracking as you were expecting things when we last time talk about it?

Yes, Joanna, I think particularly in the fourth quarter, we anticipate having a lot of completed construction projects. And like I was kind of referencing in my comments, we really been selling hard into those. So, I think that impact on -- to your point, recognized preneed revenue is going to be pretty significant when you think about the fourth quarter. So, probably going to recognize more than we sell in the fourth quarter by quite a bit. Probably not the same dynamic in the third, but again, we will have some completed contracts in the third quarter too.

Okay. So, -- and I guess there are no delay in terms of just you mentioned some other things, but sounds like these are--.

You're right. I think we feel good about the timing on all this.

Okay. And if I might just -- very last question. So, you mentioned because I was also thinking in delays and things around just the labor because, I guess, the -- I covered the healthcare services, so they talk about a lot shortages, and I guess you also mentioned, like sales people out on vacation, or actually down with the virus and whatnot. So, can you just talk about what you see on your labor front in terms of either -- just people not available for work, does that create any issues? And then I guess also on wage increases, what are you seeing there given the inflationary environment we're in? Thank you.

Sure. So, if I bifurcated by funeral, the funeral front, we're probably seeing overall wage increases in the 4% to 4.5% type of levels. Now, what that composed of two different things. One is, because we have more, I'll call it, robust funeral services, this quarter versus last year, second quarter, remember, you still had a little bit of a lockdown effect, and not as celebratory on general level. So, we'll probably have more hours of labor when you think about overtime and things like that servicing a similar level of cases. But we're also seeing a little wage inflation, particularly in certain markets. And our philosophy, like I said, before, led by Jay Waring, our Chief Operating Officer, is as we experience those, our local teams are sitting down and saying we've got issues, let's give these wage increases. Now, let's find a way to put this on the price list. Because again, we do a fantastic job, and we want to be able to charge appropriate rates for our great people. So, we're managing that away, I'd say we're not seeing the same level, as you're probably hearing about, but it is a little higher than normal, inflation is creeping into that. On the cemetery side, it's probably a little bit more. Some of our cemetery maintenance is internal and some is third-party contracts. And on both fronts, we're definitely seeing some inflationary increases that we've absorbed, and they're probably in the higher range, kind of, the higher single-digit. We've had those inflation now for a couple of quarters, so it isn't brand new. And again, we're trying to manage as best we can. And again, pass along those costs to the consumer as we go through our annualized pricing. So, we feel good about being able to cover those through pricing, but we're seeing a little bit of that creep in and as you would anticipate. But again, nothing -- like I mentioned in my comments, it's not a material event for what we do.

Thanks all. Thank you.

Thank you, Joanna.

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

Good morning. Hope all is well in Houston? Sorry, COVID voice I guess. So, Eric or Tom, do you think there -- is it possible there could be a structural pickup in M&A? Or do you think it's just one of those good years?

Obviously, it could be either, John, because I think, our window is probably a 12 to 18 month window that we can get excited about or not be excited about. I think we've been telling you we've been excited about 12 to 18 months out. And I still would say that. I tend to believe your first part of the comment, which is I do think we're in a new era. And I think -- if you remember in Investor Day when John presented, we upped our belief as to what we think we'll be able to do on an annualized basis, not by significant amount, but I think it gives you an idea that we think, particularly, kind of, post-COVID and regulatory things that are going on, aging of the baby boomers, the family transitions. So, we're -- we believe it's out there and we're out there working hard and I'd say today, we feel very good about the pipeline.

Okay. And I probably know the answer to this question, but have you heard anything at all from the SEC?

No, we have not heard anything yet from the SEC, related to our response, which -- I guess, that was back in 2019. Is that right? So, -- yes, we're still waiting to hear any SEC response. But again I just want to reiterate we continue on their main issue to have different levels of pricing that are out there and testing it in different ways. And we're probably going to be ahead of the curve, and we don't necessarily think whatever happens, is going to really have a material effect, John, on the long-term health of this business.

And then, like, I know, you've done a little bit of this, but is there a future where you do a higher number of de novos, than what you're doing now? And what did ever move the needle?

It's possible. The de novos are going to have, as we all know, just stating the obvious, just a slightly less return, because you're kind of building up EBITDA, for the first two or three years as you're as you're building the brand new business. So, it's always nicer to be able to go in and not only have well established EBITDA streams, and well established businesses, and most importantly, partnering with the management teams and the owners that are in place with some of the wonderful businesses that we just purchased, for example, in the last year alone. Ultimately, that's just an advantageous effect and with us having only 15%, 16% market share and call the entire consolidation universe, kind of, in the 20% range, I just think that there continues to be opportunity out there subject to other market conditions, John, that acquisitions are just going to continue to be a little bit more lucrative. That being said, we've continued to ramp up the de novo spend, and we'll continue to do that as well.

Okay. And then just the -- well, never mind, I forgot my question. Just probably getting old. Thanks, guys. Appreciate the time.

Thanks John.

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

Thanks very much. Good morning all. Just following up on John's question on M&A. Eric, you mentioned closing something after the end of second quarter, just curious on the West Coast and then this this illusion to guide to being a strong year in M&A? Could you give us a sense of how large that acquisition is that you already closed?

The acquisition that we closed was not tremendously large acquisition, it was less than $10 million of a spend. What we're talking about in terms of the excitement is the things that are in the pipeline right now that we expect to close that we're very excited about. So, more to come on that, Scott.

All right. Thanks. Appreciate that. I came on a little bit late, my apologies if this has been covered. But funeral pricing growth remains pretty strong and I'm just curious how inflation works into that. And when I came on, I think you said something about flowers and ancillary services being soft. And that's the part I missed the, which flies contrary to the strength in the numbers. So, could you just elaborate on I guess the way to address it is going forward? How do you see funeral pricing growth? Is that going to step up to cover costs? Or is that something that that may just steady state from here or even go backwards? Thanks.

Yes, Scott, I think, we do believe we can pass along inflationary costs in a standard theme and what you missed earlier, we talked about a few things that are happening differently. If you recall with COVID, especially initially, we saw a real decline and I'd say the full service funeral and part of that was because the lockdown, access to vaccines, all those types of things. So, people were doing smaller ceremonies, having smaller rooms or no rooms, not buying a lot of flowers or catering. What we're seeing is a robust reawakening of all that. And -- so you think about what's going on, one of the strategies that we were already putting into place is upgrading a lot of our facilities to have some differential opportunities for, let's say, facility charges. So, as you go into a place, you could get the premium room in one price, you get the middle room or the lower room, we're seeing a lot of people buying up into that premium room, we're seeing a lot of people buying more flowers, more catering for their specific services. We've done an incredibly good job our teams have working on what I'll call, third-party flower sales. So, if you think about the website, so obviously, we sell a lot of flowers to the family, but the friends and family they go to the obituary click on, we're selling more and more flowers through our partnership there and that too, is driving -- all these pieces are working together to drive differential average. And at the same time, we believe we can pass along all the inflationary pricing. Now, the one thing that puts pressure on pricing every year is that cremation mix change. And we anticipate that to continue. That's probably going to be a bit of a headwind. One unique thing I noticed about this quarter and it's so immaterial for us compared to others, but I thought about it, as I looked at Colgate and Procter & Gamble, we're seeing, believe it or not, even through Canada, because of the strong dollar, the Canadian dollar conversions probably a bigger impact on us than -- or as big an impact as cremation mix when you think about average. The nice thing is you convert the cost into dollars, too. So, it really didn't hurt you to drop to the bottom-line. So, we feel good about pricing and we will pass along inflationary and want to continue to drive more robust celebrations of life, utilizing our great and improving facilities and combine that with catering, flowers, and other things that make a celebration of life special.

Thanks. Appreciate that. And just quick answer if you already covered it, but it's done in the release a cremation rate ticked up a little bit in the quarter, just comments on that sustainability or if that was a blip? Thanks.

I think Scott as you remember, we saw a bit of the cremation rate back up last year and we even saw a little bit of it in the first quarter. And we always thought the trend pre-COVID was 100, 150 basis points a year, we went to less than 100 basis points, I think it was for many quarters last year. So, I think you're just seeing a little bit of a reversion to the mean, it's 170 this quarter, I wouldn't get excited about that. But I do think we anticipate getting back to that annual trend of 100 to 150. And our excitement is we have so much more to offer the cremation customer today and we think in the future that's a real opportunity for what is now 55% of our customers. So, we're just thinking about how can we do more? How can we serve them better, and get excited about it.

Understood Tom. Thanks. And just one last one. It, kind of, I think a good overview was provided of -- from Joanna's questions with regard to cemetery preneeds. But if I could just summarize and you could add a little color on this, we saw a slowdown in the second quarter, maybe a little bit more than you expect. It sounds like it was a bit of the consumer and maybe just delay and maybe some unique items, but you still sound confident in achieving, let's call it flattish to slightly positive for the full year in premium cemetery. Is it because you just, how are your leads looking? What gives you that confidence and any commentary as to the cadence of second half this year, next year of premium cemetery? Because I think you're trying to smooth that pretty well. Just want to understand how comfortable you feel on handling the reversion from a potential pull-forward? Thanks.

Yes, I think we still feel very good. And so to answer, there's a lot of a lot of questions, but I'll try to summarize. So, let's break it down. When you think about the consumer right now, we're still seeing a very healthy, I'll call, high end consumer. So, large sales have hung in there. Even with the stock markets being down in the first half of the year. We got a little bump back in July. Hopefully that's there. So, the confidence is there. I think the real issue for us and by the way, the average sale, even outside of that is hanging in there very good too. So, we're really talking about is what's happening with velocity. Well, I'll tell you that from a leads perspective, we're still doing great, we're still seeing a significant amount of leads. In the front, we've had, at least temporarily is, are those appointments holding. If people are -- we set an appointment, and then somebody cancels or because they're going on vacation, or they got something else to do, or their get their gas bill and go, I'm not going to do that. So, we believe there's a little bit of inflation, a little bit of distraction, because I have other things to do. The other thing that I mentioned to you is, we've seen an outbreak of COVID amongst consumers and, probably is -- again, it's not as deadly COVID, but still people sick, and you're not going to take an appointment, or a counselor can't go back and follow-up. So, our belief is, as we fight through this, our counselors will get back, these appointment rates will hold better, our close rates are really good. So, absent inflationary problems, cause that people may not want to pull the trigger, we still feel very good, because the leads are there, our are counselors are very effective. We actually believe we're going to have more leads. So, I continue to think things are good. And the only thing I'd point out, and this isn't news to you guys, because you read the news, like I do, inflation has crept in. And if you're a monthly -- if you're going to buy over 36 months, and you're sitting down in your budget, you may be saying right now, I got to cover the gas bill and so maybe I'll put this off. And I think our belief is, is that subsides, people are going to get back in the game, and there'll be an opportunity for us to really go back out to sales channel.

Got it. Thanks Tom. Appreciate that summary.

Thanks Scott.

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

Hi, everybody. Just to make sure I know, we're sort of approaching normalcy, would you say COVID-related cases this month and sort of -- or this quarter sort of where you think they're going to settle out, or you still feel like that's somewhat elevated, relative to where things shake out? I know, you've talked about it being down 50 million year-over-year, I think -- I got that, right.

A.J., I think that, COVID cases on a national basis, I think, now are like 300 -- if I remember, right, 300 deaths a day. I would expect it that's probably going to continue for some time. It's very low relative to the periods of COVID, but it's just not material to our numbers. So, -- like, we tried to point out an Investor Day, I think we're experiencing, we're servicing elevated numbers of consumers. And you'd say, okay, what is that, Tom? Well, we've mentioned a little bit, we think there's still excess deaths, we think we can correlate it with lack of healthcare, people probably drinking too much, smoking too much, driving too fast, depression, access to mental health. The other thing that we see -- and this is kind of a -- it's tough, because it isn't perfect data. But we're seeing what we believe are market share gains, and really kind of across the board, but probably more acutely in the West, as we look at states like Arizona, Nevada, Colorado, California, we appear to be gaining a decent amount of share in those markets. So, I think those are the reasons why we sit here and say, yes, COVID is not going to have an impact. But we think we've probably got deeper market share penetrations combined with what we believe are excess deaths that will continue to occur in the near-term over the next few years. I hope the country gets healthier, I hope access to healthcare gets better, but the trends don't support that thesis.

Now, for some time, there's been discussion about your emphasis on pre-arranged funerals. As that book matures and you started really ramping that up post the credit crisis, that would drive some market share gains, is that what you're seeing? Or is it something else that you think is driving those market share gains?

I think that contributes to it, A.J., because one of the things if you think about the markets that I just mentioned, they are high combination facility market. So, as you think about Colorado, Arizona, so more -- again, more specifically, probably Phoenix, Denver, L.A., really all up and down California and you look at those places, Las Vegas, Nevada, those are places where we're really knocking the ball hard, where we've got great cemeteries, we've got great sales forces, I do believe that they've penetrated those markets. So, surely a contributing factor not all of it, but that's why strategically we've set out to do those things.

Okay. Any updated thoughts on -- you guys have been good throughout this -- just try to give a sense of how much pull forward was sort of near-term? And how much is more long-term? Have you revisited that as time is passing in any way? And any updated thoughts on what that pull-forward of COVID deaths imply from the next number of years?

Well, Eric has got a medical degree, and he's a professional demographer I'm going to pass that to him. He's been studying this A.J.

Yes, A.J., just really no data is what I what the short answer is that we talked about at Investor Day. We put some numbers out there that we thought there was somewhere in the range of 15,000 ish cases that were pull-forward in 2022, probably the same in 2023 and that really drops off. So, as we've gone in and try to look at it a little bit and decide how far off are we? The answer is probably, we're pretty close to those estimates, at least for the visibility that we have now. So, no change -- no material change to really report as the answer.

Okay. And obviously, you commented on the acquisition pipeline and your optimism about that, is there anything that you're seeing? I know, it ebbs and flows, but is there anything that seems to be driving a bit of an uptick in activity? And any comments you can make on whether pricing on potential deals is relatively stable or moving around or competition for deals, if there is any?

Yes. So, I think first of all, we do think more people are out there trying to sell I think it's a combination of the aging of the owners without a succession plan. Because most of these are owned by baby boomers, right. So, every year, they get a little bit more, I'd like to have more free time and have a liquidity event. And so I think that's just a natural backdrop that we're working against. Combine that with COVID, which has been kind of a two and a half, three year frenzy, and people having to work really hard people having to deal with staffing issues. So, I think that puts a lot of pressure on a reason to sell. As far as price goes, I think we've held pretty good. I'd say it's, it's probably -- people come in with an expectation, as you can imagine, here's my 2021 numbers, I'd like to be paid for that. Our opinion is, those aren't sustainable numbers and so we try to realistically say, what's the pace of this business. And -- but that's obviously going to start a conversation at a higher expectation. So, I would say it's not materially different, but I do think that's part of the process and at the end, I think we get to a good answer. So, as far as the competitors go, it's really the same groups of people that we see out there. I don't see a lot of new entrants, but if you roll back the clock five years, there's probably a little more activity a little more competitive pressure as you think about the acquisition pipeline. John, did you -- disagree John agrees with me. That's rare. So, write that down.

Okay. Thanks a lot.

Thank you.

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

Thank you, everybody, for being on the call today. We appreciate you and we look forward to speaking to you again, I believe, in late October, early November. Talk to you soon.

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