Service Corporation International

Good morning and welcome to the Service Corporation International fourth quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. 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.

Thank you, Andrew. Good morning. This is Debbie Young, Director of Investor Relations for SCI. Welcome today to our company's review of business results for the fourth 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. A reconciliation of these non-GAAP measures to the appropriate GAAP measures is provided on our website under the investor webcast event section and also in our earnings press release in 8K that were issued yesterday. With that out of the way, let me pass it on now to our chairman and CEO, Tom Ryan.

Thanks, Debbie. Hello, everyone. Thank you for joining us on the call today. We hope you and your families are staying safe and healthy. This morning, I'll provide a little color on our business performance during the first quarter. Then I'll offer some commentary on our 2021 outlook with the understanding that there remains substantial uncertainty surrounding the effects of the COVID-19 pandemic, which could change guidance significantly. However, before I begin, I would like to say a few words about this past year. 2020 has certainly been one of the most uncertain and challenging periods that any of us can remember. As I reflect back on the last 10 months, I can say with certainty that our results are a testament to our team's incredibly hard work and to the resilience of our underlying business. I'm extremely proud of our entire SCI team for going above and beyond the call of duty in 2020. In this difficult period, we stayed relentlessly focused on what we do best, helping our client families gain closure and healing through the process of grieving, remembrance, and celebration. The health, safety, and well-being of our SCI family was a top priority, and not only were we able to avoid any layoffs, mandatory furloughs, or reductions in pay as a result of the impact of COVID-19, we were able to recognize the incredible efforts of our frontline associates with hero bonuses and provide special bonuses for every associate that does not participate in our annual incentive plan. In 2020, our services were needed more than ever, and I am proud that we were able to perform a significantly increased number of services without any disruptions to our business. which highlights the power of our scale. One thing that became clear throughout 2020 is that our fundamental business has not changed. We did not see a wholesale shift in the consumer preferences, and our cremation remains stable. Although we were restricted in our ability to have large gatherings in 2020, we heard loud and clear from our consumers that they still have a desire to memorialize and to celebrate the lives of their loved ones. virtual arrangements, live streaming of services, outdoor services, drive-through visitations, radio transmitted graveside services, and many more unique memorialization and celebration of life ideas are now a normal part of what we do. The success and acceleration of these enhanced service offerings have highlighted the importance of innovation in our industry. We will continue to invest in technologies that enhance how we interact with consumers digitally, providing a better customer experience to the arrangement conference and beyond, while also enhancing efficiencies in our operations. As the year unfolded, actions we took in response to in-person meetings limitations yielded non-customer facing efficiencies. We more effectively utilized our labor force using virtual training, our customer relationship management system, and other technology tools instead of incurring travel-related costs. We drove down our lead cost per sale by accelerating the growth of digital leads and making significant improvements to our direct mail program to drive record growth. All of the many learnings from this year will make us a better company going forward. As a result, we're positioned to enter the post-pandemic world as a more agile and efficient company. Now let's shift and provide you with some color about the quarter. We last spoke in late October. Our projections did not forecast the tremendous surge in COVID mortality that the US experienced in late November and December. Just to give you a little color on the cadence of the quarter, our same store funeral volumes were up 7% in October, then grew to 13% in November, and an unprecedented 31% in December, which is the highest monthly growth rate we experienced all year. As a result of this surge late in the quarter, we finished the fourth quarter with adjusted earnings per share of $1.13, compared to 60 cents in the prior year, well above the range we provided to you in October. Both funeral and cemetery segments had margin improvement of over 600 basis points, driven by double digit top line percentage growth applied against a more efficient cost structure. We also benefited from a lower share count and a lower tax rate. Let's take a look at funeral operations in the quarter. Total comparable funeral revenues were approximately $49 million or 10% 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 $53 million, driven by a 17% increase in the number of cases, partially offset by a 3.4% decline in the funeral sales average. The predominant reason for the increase in services performed was due to the direct impact of COVID-19, and to a lesser extent, to an increase in non-COVID-related deaths, such as heart disease, stroke, cancer, drug overdose, and suicide, perhaps the consequence of a lack of access to healthcare during 2020. Words cannot convey the level of my appreciation and respect I have for our frontline team. The tremendous care you provided record numbers of our client families during such a stressful time can only be described as heroic. Thank you. The decline in the funeral sales average of 3.4% was due to some local jurisdictions reimposing restrictions on gatherings, given the surge in deaths of November and December. This resulted in a decline in the number of cases with the service. The cremation mix shift was a moderate 120 basis points and had a minimal impact on the quarter over quarter funeral average decline. Pre-need funeral sales production for the quarter was down 1.6% versus the prior year, which is a significant improvement over results posted in earlier quarters this year. While we saw record growth in production from our digital and direct mail leads, we continued to be hampered by a decline in pre-planning seminars due to local restrictions and consumer reluctance on in-person gatherings in restaurants. From a profit perspective, funeral gross profit increased $45 million and the gross profit percentage increased 640 basis points to 27.5%, realizing a 92% incremental margin in 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 with fewer and smaller services, as well as reductions in non-customer facing costs and certain marketing and promotional expenses. Now shifting to cemetery. Comparable cemetery revenue increased $64 million, or 18% in the fourth quarter. At-need cemetery revenue accounted for $25 million of the growth, driven by more burials performed due to the effects of COVID-19. Recognized pre-need revenues accounted for $35 million of growth, mainly due to higher pre-need cemetery sales production during the quarter. Pre-need cemetery sales production grew $40 million, or 16%, in the fourth quarter, driven by increased lead sources associated with the higher at-need services and burials performed. The preponderance of the growth, $25 million, or about 60%, was from a 12% increase in velocity for the number of contracts sold. the remaining growth of about $15 million was primarily due to large sales activity. We continue to see a more productive and efficient Salesforce with better utilization of our customer relationship management system and improved conversion rates from our direct mail and digital lead campaigns. Consumer reception to having a pre-planning discussion remains very high. I want to take a moment to recognize the tremendous efforts of our sales team. For the full year 2020, they wrote more than $1 billion in cemetery pre-need sales production. This is a new company record, so hats off to the entire sales organization. Cemetery gross profits in the quarter grew by approximately $49 million, and the gross profit percentage increased 680 basis points to 39%. growth in revenues and strategic cost reductions combined to drive margins beyond normalized incremental levels. For the full year 2020, we reported an adjusted earnings per share of $2.91, a 53% increase over 2019 in a one of a kind year. As we look ahead, we acknowledge that there are many unknowns facing 2021. Obviously, The speed and efficacy of the vaccine rollout could have a significant impact on the spread of the virus, hospitalizations, and ultimately on the number of deaths. This combined with the willingness of the consumer to transact on a pre-need basis may have a material effect on our 2021 results. There is no doubt that in 2020, we service deaths that were pulled forward from a future year. While we know that the timing of the pull-forward is impossible to accurately predict, we have developed models based on data from the IHME and the CDC which incorporate historical trends in current COVID-related deaths by age group as well as by comorbidity factors in determining what future years are impacted by accelerated deaths and by how much. Based on all these assumptions, We believe adjusted earnings per share in 2021 will likely range between $2.50 and $2.90 per share. We have provided a wider than normal range based on the uncertainties surrounding the impact of COVID-19. Let's take a deeper dive into our assumptions for the 2021 earnings per share guidance. We are modeling funeral volume to be down versus 2020. but mid single digit percentages higher than the 2019 levels due to the expected impact on funeral volumes in the first few months of 2021 associated with COVID-19. We anticipate double digit year over year percentage increases through March. Then while we expect the continued impact from COVID-19 deaths, we predict comparable volumes to trend lower for the rest of the year, as compared to the very active final nine months of 2020. We expect the funeral average to be down low single digit percentages in January and February and begin to see favorable trends as we compare back to the early months of the COVID outbreak in 2020. While we anticipate growth year over year, we still believe we will struggle to get back to 2019 levels, as we believe many people will continue to be reluctant to gather in large groups. We expect pre-need penal sales production to begin to rebound in the back half of the year and for the full year to grow in the mid to high single-digit percentage range. Cemetery at-need revenues should see significant year-over-year growth in the first quarter, followed by a comparable decline in the last three quarters as we face a significant hurdle from the 2020 results. For the year, we expect cemetery at-need revenue to be down versus 2020 but still show significant growth over 2019 pre-COVID levels. Cemetery pre-need sales production grew at an unprecedented rate in the back half of 2020, and we believe that momentum will carry over into the first half of 2021. We expect double-digit percentage growth for the first four months of the year before confronting challenging year-over-year comparisons beginning in May. For the full year, we anticipate pre-need cemetery sales production to be down in the mid single digit percentage range versus 2020, but still be delivering solid growth as compared to our 2019 levels. So in closing, in spite of experiencing the most challenging environment, our team continued to deliver. We rose to meet challenges never faced by our company before, and you have been an extraordinary example of commitment, professionalism, and agility. It's an honor to work with such great people and my sincere heartfelt thanks to the entire SCI family. As we look ahead, I'm extremely optimistic about our future. While we do not anticipate the impact from COVID to completely go away, it is our belief that we should see a more muted effect on our results for 2022. Therefore, we expect a decline in case volume and at-need cemetery revenues and therefore on the associated earnings and cash flow from the pull forward effects of 2020 and 2021. However, the knowledge that we gained from this awful COVID experience is anticipated to produce a more competitive and profitable operating platform in the years to come. Therefore, we predict an impressive earnings per share growth for 2023, approaching $3 per share, resulting from a combination of enhanced market share, a leaner infrastructure leveraging technology, and a more efficient sales structure. As the pull-forward impact wanes and the baby boomers begin to enter their late 70s, we expect a further acceleration of earnings growth. With our eyes on the longer term, we are continuing to invest in technology and new service offerings that allow us to remain relevant with our consumers enhance our digital client experience, and more efficiently and effectively serve our customers. With that, operator, I'll now turn it over to Eric.