Service Corporation International

Good morning and welcome to the first quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by a zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to SCI management. Please go ahead.

Good morning. This is Debbie Young, Director of Industrial Relations at SCI. We'd like to thank everyone for joining us today. As usual, I'll quickly go over the safe harbor language, and then we'll begin with prepared remarks from Tom and Eric. 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 may 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, Webcasts, and Events section, and also in our earnings press release that was issued yesterday. With that, I will now turn the call over to Tom Ryan, SEI's Chairman and CEO.

Thank you, Debbie. Hello, everyone, and thank you for joining us on the call this morning. Obviously, these are unprecedented times. and we're sending our best wishes to you and your families. Our thoughts remain with those affected across the world by this pandemic. Given the unique circumstances, we have modified the order of our remarks in an effort to anticipate and address topics that are important to you in the most constructive way. I will begin by addressing the strength of our current financial position, followed by a discussion of current business trends Then I will touch upon ways we are continuing to help our families celebrate, heal, and find closure in a COVID-19 world. Finally, I will touch upon the business results of the first quarter. Allocating capital wisely has been central to our company's core strategy for a long time. Key to that strategy, stealing a phrase from Jamie Dimon, is our commitment to maintain a fortress balance sheet. With that, We can and will weather this storm. As of today, we have over $750 million of liquidity, no significant debt maturities until May of 2024, and based on historical experience, the ability to generate significant free cash flow, even in an economic downturn. Our fortress balance sheet and strong underlying fundamentals enable us to truly maintain financial flexibility. which is advantageous during a crisis like this. This strength allows us to continue investing in our incredible people and businesses, in technology and other digital strategies, cemetery inventory developments, and other business development strategies such as acquisitions and new builds. Additionally, we intend to maintain our current dividend policy and will execute on other opportunities which capture additional value For our stakeholders. Next, to my SCI family that I know is listening, I know we are still in the midst of this crisis and it's far from over. But I just want to say how proud I am of the heroic efforts many of you have made to serve our client families during these hectic times and the dedication and perseverance you continue to display. Our teams in hot zones around the country None more severe than New York and New Jersey have been extraordinarily busy dealing with an unprecedented number of families that needed our help. Our teams have gone above and beyond. In the New York, New Jersey area over the last three weeks, we have brought in over 100 funeral service professionals who volunteered from around the country to assist our local teams in taking care of our families. Additionally, as the cemeteries and crematories have been overwhelmed, we brought in 23 additional refrigeration units, leveraging storage capacity to help relieve an overwhelmed system. All across our network, our courageous teams have selflessly put the needs of others first, marshaled resources, and taken action in the best interest of our communities. Thank you for your tremendous efforts and know that our number one goal as a company is to keep you safe and supports you as you care for others. Now shifting to a discussion of current business trends. The COVID-19 pandemic has had a significant effect on our associates as well as our operations. I will begin the business discussion sounding like John Ransom telling the story about the hole in one he had while playing by himself. Through February and the first part of March, we had a lot of great momentum in the business. Funeral case volume was up, average revenue per case was growing by almost 4%, and the cremation mix change was rather muted. Pre-need sales for both funeral and cemetery were both growing impressively. Then, we all know what happened, COVID-19 and the ripple effect. There are two what we believe to be temporary and many others. For pre-needs and cemetery sales, one of the most effective lead sources was seminars that occurred predominantly in restaurants. This would lead to an appointment that would occur typically in one's home or touring one of our beautiful parks. Once markets were inundated with shelter-in-place orders, and many more. Our ability to conduct business was impaired. However, our creative sales and marketing teams did not stand still. They found practical ways to overcome social distancing obstacles by leveraging technology, creating an on-demand pre-recorded pre-planning seminar and pivoting our focus to exponentially grow digital organic leads. Pre-COVID, Our daily appointments were running about 3,000 a day. They dropped to 1,000 a day early in the crisis, and today are back up over 2,000 a day and are trending upward. Our sales counselors are now conducting close to 40% of our sales presentations virtually using technology. For the month of April, pre-need cemetery sales are trending down about 35% to 40%. but I have every confidence that as parts of the country begin to reopen, as social distancing requirements are relaxed, and as we get more effective at utilizing the technology, we will be back in a big way. The other temporary negative trend is the funeral sales average. For the month of April, it's down about 11% compared to the prior year. This too has been affected by the shelter in place orders around the country that place rigorous restrictions on gathering sizes, and in some hotspots, required direct burial or cremation. A sizable percentage of our families have been unable to select the use of our facilities for visitations and funerals, certain equipment, and even floral arrangements and catering. While our families have been incredibly understanding, they continue to demonstrate to us their desire for celebration, remembrance, and closure. For example, over 1,200 families have booked future memorial services to be conducted at a later date. Until we get back to normal, we have over 1,000 locations offering Facebook Live to allow extended family and friends to participate virtually in the ceremony alongside the immediate family. Again, as parts of the country begin to reopen and social distancing requirements relax, we believe our families will once again returned to more robust service offerings which assist in the grieving, healing, and closure process. Now I'd like to share some examples of creative actions being taken by some of my teammates. For those families who did not defer services until a later date, we're finding creative ways to help them honor their loved one in assisting in the grieving and closure process. We have utilized Facebook Live for virtual participation and services. Virtual visitors can leave messages in an online guestbook that we attach to balloons or flowers that are present in the room with our family. We have performed drive-thru visitations at the funeral location or church so friends and family can participate from their cars, offering condolences at a safe distance. We have organized processions through neighborhoods as friends line the streets Holding up signs of support and remembrance as the procession passes by. Many locations have also extended visitation and service hours to allow family and friends to come in limited groups to pay their respects to the family. After each group departed, our teams would then disinfect the public area before allowing the next group of visitors, waiting in their cars, to enter and participate in the visitation. Even in times as scary as these, our courageous professionals understand the importance of the grieving and healing process and are finding creative ways to facilitate this process in a safe environment. Now for a brief overview of the first quarter. Diluted earnings per share, excluding special items, declined in the first quarter by $0.04 per share to $0.43, as our powerful momentum through the first 70 or so days of the quarter was abruptly impacted by the ripple effects of the COVID-19 pandemic. Our comparable funeral revenues for the quarter increased by about $8 million. This increase was primarily driven by higher core revenue of $9 million. Our 1.5% increase in core funeral services performed was enhanced by a 1% growth in our organic funeral sales average. Increased cases from COVID-19 in the latter days of March, for the most part, offset the decline in our average revenue per case in the final weeks of the month, as certain customers were limited in accessing our facilities and services due to restrictions and gathering sizes instituted around the US and Canada. Our cremation mix shift was a modest 30 basis points for the first two months. and grew to 260 basis points for March, resulting in a 110 basis point shift for the quarter. Comparable funeral gross profit decreased about $3 million to $103 million for the quarter. Comparable cemetery revenues decreased about $7 million for the quarter. The largest decrease came from recognized pre-need property revenue decline of almost $13 million. Remember that the end of March is usually when we experience a surge in pre-need sales production related to the celebration of Qingming. So our comparable pre-need cemetery sales production declined by almost $23 million for the quarter, or just over 10%. This had the most dampening effect on our earnings per share for the quarter, as cemetery pre-need sales production through February was up about 11%, and Marcus production declined by 35%. Therefore, comparable cemetery profits declined by $11 million. Margins in both segments were impacted by normal inflationary increases in salaries, including higher health insurance premiums, as well as an increase in doubtful account reserves given the current economic conditions. In closing, I would again like to send my heartfelt appreciation out to our team of heroes. Words cannot describe the feeling of pride I have when I think about what we're doing out there. Every facet of our team is going above and beyond in keeping our teammates, our families, and our community safe. From an operating performance perspective, we have been privileged to serve over 5,400 COVID-19 decedents and their families today. Thankfully, the mortality trends seem to be slowing. However, we do believe approximately 20 to 25% of our COVID-19 related cases have come from nursing homes and retirement communities. History tells us that some of these cases could be a pull forward of decedents from the back half of the year. While we're experiencing challenging trends in funeral average and pre-need cemetery sales, I would expect us to begin to migrate back towards pre-COVID-19 levels in the very near future. Just know your SCI team will be working hard to protect our most precious asset, our people. We will be working hard to improve financial results and utilizing our fortress balance sheet and liquidity to invest in future value creation opportunities for the benefit of our stakeholders. Thank you, and now I'll turn the call over to Eric.