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.

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 have faced. To them and to all of our associates supporting those on the frontline, 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 now 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're 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 facilities. on the much higher EBITDA generated this quarter, we were able to reduce our leverage from 3.79 times at June 30th to 3.44 times at the end of September as it relates to our trailing 12-month calculation. Now, as we look beyond the impacts of this pandemic into the future, we still intend to manage leverage in the range of 3.5 to 4 times. So let's talk about cash flow and capital deployment during the quarter. In the face of this pandemic, our businesses performed much better in the quarter than our expectations, which were much lower for many of the reasons Tom mentioned earlier. Ultimately, we were able to generate adjusted operating cash flow results of $195 million during the quarter. When compared to the prior year, adjusted operating cash flow decreased $14 million, as cash earnings from the 42 cents of adjusted EPS growth in the quarter was more than offset by $89 million of higher cash tax payments, most of which was timing-related, as well as a net use of printing working capital. So let me walk you through some of these components in a little bit more detail. The increase in cash tax payment I just mentioned of $89 million was partially earnings-driven, but also had some timing aspects as we had deferred $47 million of federal and state income tax payments as allowed by the IRS from the second quarter into this, the third quarter. We also experienced a net use of working capital primarily related to the substantial growth in cemetery printing property sales during the quarter, which grew by 56%. Now recall, that printing property sales generally have immediate revenue recognition as we're able to deliver this property at the time of sale. However, about 70% of these sales are paid to us on an installment basis, primarily over a three to five year period, and that's what creates this working capital use. So shifting to capital deployment, during the quarter, we deployed a total of $225 million of capital to reinvest in and grow our businesses, as well as return in value to our shareholders. Regarding the breakdown, we invested $41 million in the business through maintenance and cemetery development capital spend. While this is lower than the prior year quarter, we have refocused our efforts around these capital projects and expect this spend to ramp up in the fourth quarter. We have deployed another $32 million into growth through acquisitions and new-build opportunities. And finally, we returned just over $150 million to shareholders in the form of a dividend and share repurchases during the quarter. So now let's shift to the foreign look and outlook, and let's first talk about 2020. And in the first nine months of 2020, adjusted cash flow from operations has grown $81 million, or 17%, to almost $560 million. Now recall that we have benefited from about $30 million in deferred payroll taxes as allowed under the CARES Act. So excluding this deferral, we've grown $51 million, or 11%, over the prior year. When you look to the remainder of 2020, and as you saw in the press release, we're providing updated adjusted operating cash flow guidance of $740 million to $790 million for the full year of 2020. This is in congruence with the higher adjusted earnings per share ranges given and lower cash interest expected as a result of the recent refinancing activities, which are being offset by anticipated higher cash taxes. So now, moving beyond 2020 and beginning to think about 2021, we first acknowledged There are many unknowns and the pandemic continues to be an ever evolving situation. We have performed extremely well in 2020 and it will be a tough year to repeat. However, we are encouraged by the positive momentum we are currently seeing with pre-need sales, expected improvements in the funeral sales average as COVID eventually gets behind us, and our leaner cost structure. With all this being said, based on the range of outcomes for adjusted EPS that Tom mentioned, we expect our cash flow in 2021 could similarly range from $550 to $700 million. There are a few known items impacting 2021 cash flow that are also worth noting. First, We will be required to pay half of the 2020 deferred payroll taxes or $20 million in 2021 and the remainder of that in 2022. Additionally, we'll incur three-quarters of regular payroll taxes in 2021, which we're able to defer in 2020, which totals about $40 million. These items together collectively create a $60 million headwind to cash flow and 21 when compared to 2020 for payroll taxes. We also expect some cash interest benefits looking into 2021 associated with the third quarter refinancing activities that we just completed. And lastly, we recognize the importance of reinvesting in our business and expect our maintenance capital spending to return closer to pre-COVID levels as we look to the fourth quarter and into 21. I would also anticipate higher cemetery development spending in 21 as we complete some high return projects that were purposely deferred earlier from 2020. So then in closing, I'm humbled by the passion and heart of our team members and I'm extremely proud and thankful to all of them who have continued to prioritize the needs of our client families all while performing these services in a very safe manner. It truly is amazing how much we've accomplished this year in such a challenging environment, and I again thank all of our almost 25,000 associates for these tremendous efforts. So with that, Operator, that concludes our prepared remarks. I'd now like to go ahead and turn it over for questions.

Certainly. Thank you. Ladies and gentlemen, if you'd like to ask a question live over your telephone line, simply press star and 1 on your telephone keypad. Pressing star and 1 will place your line into a queue, and I will open your lines one at a time. Also, a friendly reminder that if you're joining us today on a speakerphone, please return to your handset prior to pressing star and 1 to be certain that your signal does reach our equipment. Once again, ladies and gentlemen, that is star and 1 if you would like to ask a question. We'll hear first from A.J. Rice at Credit Suisse.

Yes, thanks for all the information there. 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 of ways to go and seeing that rebound. And I'm assuming you're assuming a more normalized year next year as you get back to next year. Is that what is part of the strength and the guidance is all about?

Hey, Jay, I think that's correct. You know, we mentioned, I think I mentioned four different things that we believe are kind of impacting sales. And while you're right, the at-need 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 printing and the importance around it. And there's 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 Salesforce you know, driving activity, you know, through the management process. And that's been more effective. So I think if we think about the coming years, clearly at some point, hopefully soon, you know, this acne traffic is going to slow down. And that's going to have a year-over-year, you know, issue for probably particularly June of the third quarter. But I also believe that this focus of the consumer may last beyond it. And I don't think this is something that everyone is going to forget right away. And I think the attention 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 in the sales per case decline in the third quarter was down 3.6. 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 and the rest of the country is 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?

We saw actually both Canada and California improve, particularly in the back half of the third quarter. We didn't see that big differential change. It's still slightly different, but not that big. Really across the whole network, we're seeing a normalization. Now clearly people are not having as large a gathering, and as we shared with you, our attachment rate for service used to be 63%, it dropped to 40, it's now back to 58. If you bifurcate that, the burial consumer's 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. You know, 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 the prepared remarks, Tom, that you think you may be picking up share B2B 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? Do you have any sense of how much of a share shift we might be talking about?

Sure, yeah, I'll follow up, but I'd like to, you know, Jay Waring, our chief operating officer is here, and he's had a lot more discussions, I think, with some of our markets. And, Jay, you want to share a little insight, and then I'll follow up on, you know, the last part of this question.

Yeah, one thing we're seeing a benefit from is a tremendous focus on safety, tremendous focus on quality with PPE, with finance. We actually added a question to our GED Power Survey at the end of April, and to the families that use us that ask, did you feel safe and quite clean at the location when you visit our location? And over 99.5% of the families said yes. So anecdotally, we were in Los Angeles a couple weeks ago, and the team at Rose Hills said, we believe we are gaining a 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 the clergy.

And I just add on, AJ, from a digital perspective, you know, we rolled out our Every Detail Remembered campaign, and we have a 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, you know, 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 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.

Okay. Thanks a lot.

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

Hey, good morning. 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-to-like basis and what costs 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 always 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's 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 digital leads much more effectively, which are a lot cheaper than our traditional lead methods. 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 and to 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 reimagined will allow us to further leverage our cost structure.

Tom, that was, as usual, a beautifully eloquent answer, but it did not have a single number in that answer, so maybe is there a number that you could attach to any of this? This is a math question. I bet you did well on essay questions in high school. I did.

I just put B on all the answers on the math section. 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 a weird one. We've probably identified somewhere within a range of $10 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 do. So I'd say that's probably a fair number to think about today. Okay. Somewhere in that neighborhood.

All right. That's it for me. Thanks so much.

Okay. Thanks, John. Once again, to our phone audience, that is star and one if you would like to ask a live question of the management team. We'll hear next from Scott Schneeberger at Oppenheimer.

Thanks very much. Good morning, all. 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. That follows 46% in third quarter. I'm just curious. It seems conservative based on trends we hear in the market and what you're commenting on in October. So 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 pre-need. Thank you.

Sure, Scott. So as you think about cemetery, two 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 standstill, but, you know, 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'd get 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 anticipate and kind of what we're seeing as we're out of the gates in October. So I think that's probably the better way to think about it, and that would be my two 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 Tammy will kill me, the word cadence. The cadence of the project intends to fall in the fourth quarter. So you will see a catch-up, I would expect, in recognizing some of the revenue that we've sold into the backlog today. So that will be a change. That will be a change when you think about 2021 and next year. You know, we're anticipating probably spending somewhere in the neighborhood of $100 million on cemetery inventory development. And so, you know, when you think about 2021, you know, I would expect that number could be even higher when you think about a recognition percentage.

Okay, thanks. I appreciate that. Yeah, and now it's going to be my next question. You somewhat answered it, just how the recognition flows and spills into the – it's certainly the first part of 2021 and throughout. I'll move on from that, though. Eric, you covered some discussion on use of capital. Just curious what the company's 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 Surface 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. Thank you.

Okay. I'll take that first part of it. You know, I mean, it's all, Scott, you've known us 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 days 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 are 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 kind of the highest relative return, from kind of an after-tax IRR perspective. Then you look at what's next, and it's probably new builds. So both the first things that we're doing, of course, none of this is done without reinvesting in the business. So the first thing we're doing is maintenance capex and cemetery development. Then with that 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 a couple years to get the EBITDA stream up and running, but it's very successful into the low double digits percentages. The dividend we know about, as we've said, we're gonna continue to, we feel very strongly about having a dividend and we'll continue to grow the dividend commensurate with how the company is growing. And I think the last resort is probably in the shares. And I think one thing that I'll comment on, as you see our track record in shares, is that we have taken very seriously the differential return of those shares versus what we believe the true intrinsic values of those shares. So you have seen us at certain points shut down shares, and you've seen us at certain points be very aggressive. So not only is it relative to M&A and new builds, and it frankly doesn't really beat those returns, but it's a very relative amount among kind of a spectrum of what we're used to seeing in terms of that return with shares. At the levels that you saw during the pandemic, and specifically during the third quarter, we think it's a very good use and a high return opportunity relative to past returns for share repurchasing program, and that's why you've seen us execute it on as we have. But I want to be very clear, the first thing we're doing before we do that is reinvesting in the business and going to the higher relative return opportunities first, such as M&A and new buildings.

Thanks. So just a quick follow-up on that and then one more. On M&A, are there ripe 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 is it?

No, it's happening. I think there's been some disruptions, as you know, that's out there. Jay alluded to it in terms of us being able to withstand this and leverage our scale. Other people probably struggle a little bit to maybe do that, that don't have the scale and the wherewithal to get through some of it. With that came what we think is maybe a little bit of market share, especially in the hotspot markets. You know, I'd also say that that's kind of brought a little bit more life to the pipeline. We obviously don't, you know, 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% rate on capital gains out there. If it went that direction... I do think that's going to motivate a lot of people. So we are poised and ready to talk if that were to occur.

Yeah. Interesting dynamic, Tom. Thanks. And then lastly, just looking for an update on the funeral rule. I'm guessing that's been probably a back burner topic, but I know you check in with FBC on occasion. Just curious what the status is there.

Yeah, the status is somewhat, you know, frankly quiet since the last time we talked. I mean, we concluded the – everybody, 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 was 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, you know, there'll potentially be probably some hearings and in-person meetings as well associated with that process. You know, with the election right here and everything going on, obviously, in the world, you know, 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 happening 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.

Great, thanks. Appreciate it, Gus.

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.

We want to thank everybody for being on the call today. Please stay safe, take care of yourself, and And, again, you know, 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.