Service Corporation International

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 all lines are in a muted or listen-only mode until the Q&A session at the end of the conference. To signal for a question, simply press star and 1 on your telephone keypad. 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 and press release and 8Ks 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 frontline 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 pre-need sales counselors have adapted at a record pace to the use of new technologies and social distance. You've made it possible for us to deliver peace of mind to our families 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 at-need cemetery revenues for the month of June. Additionally, as gathering restrictions were eased, we experienced unprecedented growth in our pre-need cemetery sales production. While we saw those trends continue into July, we expected the impact to subside during the third quarter. Needless to say, we were wrong. These trends continued throughout the entire quarter. Results in both operating segments exceeded our expectations. For the month of October, we continued to see strong year-over-year growth, albeit at slightly lower levels, than what we saw during the third quarter. It's a bit awkward and very humbling for us to speak to you today about our financial results for the quarter, at a moment in time that has been so sad, so challenging, and filled with so much uncertainty for so many people. Yesterday, we reported earnings per share of 79 cents for the quarter, compared to 37 cents per share in the prior year. Both funeral and cemetery segments had margin improvement of over 700 basis points, driven by double-digit top-line percentage growth applied against a leaner cost structure. Below the segments, higher general and administrative costs and a higher tax rate were predominantly offset by a lower share count and lower interest expense. Let's start with an overview of our funeral operations. Total comparable funeral revenues grew approximately $53 million, or nearly 12% during the quarter. Both core and non-funeral home channels performed very well and were slightly offset by lower general agency revenues caused by a decline in insurance-funded pre-need funeral sales production. Core revenues grew $54 million, driven by an 18.5% increase in the number of cases partially offset by a 3.6% decline in the funeral sales average. While we believe most of the increase in cases is due to the direct impact of COVID-19, the CDC has identified approaching 100,000 excess non-COVID-19 deaths associated with cardiovascular events, diabetes, cancer, suicide, and drug overdose, We are hearing that the collateral damage effect from restricted mobility, whether government mandated or behaviorally induced, has resulted in deferred or foregone medical care for life-threatening disease screening and limited access to mental health care, potentially contributing to these excess non-COVID deaths. Our discussions with our market leaders support this position. In addition, certain market leaders believe we are gaining market share, particularly in the larger hotspots where our scale can differentiate us from our competition. The 3.6% decline in the funeral sales average was trending positively from the second quarter decline of almost 9%. The cremation mix shift was a moderate 110 basis points and had a minimal impact on the year-over-year decline. The drag on our sales average continues to be a dip in the funeral and cremation cases with a service attached. Pre-COVID, this percentage was about 63%. In April, it dropped to 40% as the restrictions on large gatherings were implemented. This percentage has steadily increased as restrictions have been lifted and has increased to 58% for the month of September. Pre-need funeral sales production for the third quarter was down just under 3% versus the prior year, an improvement from the 27% decrease versus the prior year we experienced in the second quarter. Two of our top lead sources for funeral sales production, in-person pre-planning seminars and in-person follow-up visits, continued to be down, contributing to the relative decline in pre-need funeral sales versus our cemetery sales production efforts. From a profit perspective, funeral gross profit increased $47 million, and the gross profit percentage increased 750 basis points to 24%, realizing an 88% incremental margin on our revenue growth. Growth in our high incremental margin core business more than offset slight declines in our lower margin revenue streams. We also continue to benefit by the efficient management of labor hours, as well as reductions in non-customer facing costs and certain marketing and promotional expenses. Now shift into cemetery. Comparable cemetery revenue increased almost $91 million, or nearly 30% in the third quarter. The increase was primarily attributable to core revenue growth of $93 million. At-need cemetery revenue accounted for $24 million of this growth, driven by the higher volume from the effects of COVID-19. Recognized pre-need revenues accounted for the other $69 million of core revenue growth, mainly due to higher pre-need cemetery sales production during the quarter. Pre-need cemetery sales production growth was even more pronounced, growing $95 million or 47% in the third quarter. Remember, we recognize $69 million in the quarter. Therefore, we've deferred about $26 million of our pre-need cemetery sales production growth from the third quarter into the backlog to be recognized as revenues in future quarters. While we're pleased to deliver $20 million of the sales production growth from large sales, the preponderance of the growth about 60 of the $95 million was an increase in core contract velocity of about 35%. This increased sales velocity is being driven by a more productive sales force. Higher at-need activity has generated more highly effective leads, which are more easily converted to a sale. Additionally, we are seeing a more receptive consumer in general. meaning we're seeing more of an openness or willingness of the consumer in this COVID environment to have the pre-need discussion. We also believe COVID has conditioned our sales force to more aggressively embrace our customer relationship management system like never before, which has resulted in higher levels of sales counselor efficiency and productivity. Finally, we also believe customer and counselor incentives designed to differentially drive cemetery production versus funeral, have had a favorable effect on cemetery sales velocity. Cemetery gross profits grew by approximately $55 million, and the gross profit percentage increased 740 basis points to 35%. Growth in revenues and strategic cost reductions were somewhat offset by higher selling costs associated with the significant increase in sales production. As you saw in our press release, we provided updated guidance for the total year 2020 for adjusted earnings per share, cash flow, and capital expenditures. The ranges are wider than what we typically would give this close to the end of the year due to the uncertainty surrounding the go-forward impact from COVID-19. We base our assumptions on our October results to date, as well as models provided by the Institute for Health Metrics and Evaluation, or the IHME, that project future mortality from COVID. Therefore, we would expect to see funeral volume growth and acne cemetery revenue growth trends in the high single-digit percentage range for the fourth quarter. Assuming that widespread restrictions on gatherings are not reimposed, we would anticipate the funeral average to continue to migrate closer to the prior year averages, probably down 1% to 3%. We would expect pre-need cemetery sales to continue to grow over the prior year, but at lesser levels than we saw in the third quarter, probably in the high single-digit percentage growth range. As any company begins to think about 2021, the one thing we know for sure is that we don't know. There's never been a less predictable year, at least in my business career. We've run a variety of scenarios, ranging from a minimal impact from COVID starting at the beginning of 2021 to a scenario which says November 21 looks a lot like November 20. If these models prove correct, the range for adjusted earnings would be $2.25 to a high as $3 per share for the year 2021. In a scenario where COVID has little to no impact on 2021, we would anticipate funeral volumes to decline in the 12% to 15% range from 2020 levels or a 2% to 5% decline from 2019 levels. We would anticipate that the funeral sales average would be a very favorable comparison for the year, especially in the second quarter, as we are already experiencing a bounce back towards pre-COVID spending levels. We would expect a pre-need cemetery sales production decline in the low to mid single digit percentages, as we would be comparing to some pretty difficult comps. Even under this scenario, the effect on our earnings per share from improvements we made in our capital structure through debt refinancing and share buybacks, combined with our leaner operating structure, would produce an adjusted earnings per share result that would meet or exceed our long-term 8% to 12% growth framework on a compounded basis from our 2019 earnings per share base of $1.90. Our most likely scenario for now is that we might see a continued impact from COVID into the first quarter of 2021, with a lessening effect during the second quarter, trending to a more normalized environment by the end of the year. Under this scenario, the quarterly cadence expectation would be significant growth during the first quarter in funeral volumes as well as printing cemetery sales, followed by a leveling off in the second quarter as favorable comparisons in April transitioned to a challenging comparison in June, where we experienced excess funeral volume and significant pre-need cemetery sales growth in 2020. The third quarter would be the toughest comparison, followed by a more subdued decline in the fourth quarter. So in summary, I am extremely optimistic about our future. Our team has proved what they are made of during this extraordinary time, and I believe our culture strong as it was before is even stronger today. I believe our actions taken in response to the COVID crisis and our presence both physically and digitally has afforded us selective market share gains. I believe the accelerated use of new technology required to successfully meet customer needs during COVID has provided many advantages. It will benefit our brand perception and customer loyalty. In addition, the adoption of new technology is producing a more effective and efficient sales model as well as a more nimble service delivery platform. We have improved our Fortress balance sheet position with our most recent refinancing, further lowering interest costs as well as extending and improving our debt maturity profile. Once again, I'll close with a sincere thanks to our team, not only for a terrific quarter, but for the positive difference that you continue to make in so many lives during the most trying of times. Now I'll turn it over to Eric.