Service Corporation International

21 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 zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your telephone keypad. To withdraw your question, please press star and then two. Please note, this event is being recorded. I would now like to turn the conference over to the STI management. Please go ahead.

Thank you. Good morning. This is Debbie Young, Director of Investor Relations for STI. Welcome to our company's review of business results for the first quarter of 2021. Before we jump into the prepared remarks from Tom and Eric, 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 on 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 Investors, Webcasts, and Events section. It's also in our earnings press release and AK that were issued yesterday. With that out of the way, I'll now pass it on to our Chairman and CEO, Tom Ryan.

Thanks, Debbie. Hello, everyone, and thank you for joining us on the call today. We hope you and your families are staying safe and healthy these days. It's hard to believe it, but it's been a little over a year since the onset of the pandemic, and we are thankful that our associates and our communities are beginning to experience some relief from the overwhelming effects of COVID-19. Before I begin, I want to once again express my heartfelt thanks and appreciation my SCI family. It is your courage and commitment that positioned us for the results we posted this quarter. You have continued to stay relentlessly focused on what we do best, helping our client families gain closure and healing through the process of grieving, remembrance, and celebration. I want to assure you that your health, safety, and well-being continues to be a top priority for us. Now to the quarter. This morning, I'm going to begin my remarks with a high-level overview of the quarter, followed by a more detailed analysis of our funeral and cemetery results, and finally, comment on our guidance and outlook for this year. For the first quarter, we generated adjusted earnings per share of $1.32 compared to 43 cents in the prior year for an extraordinary increase of more than 200%. This strong earnings per share growth was driven by two factors, significant funeral volume increases, which we anticipated based upon December volume increases of 31%, and a substantial increase in cemetery property sales, particularly pre-need cemetery property sales, which exceeded our expectations and significantly enhanced our earnings per share results for the first quarter of 2021. At a high level, both the funeral and cemetery segments in the Corps had margin improvement of over 1,000 basis points, driven by a double-digit top-line percentage growth coupled with a more efficient cost structure. We also benefited from a lower share count and lower interest expense, which was more than offset by a higher adjusted tax rate. Let's take a look at the funeral results for the Corps. Total comparable funeral revenues grew $109 million or almost 22% over the same period last year. These favorable results were driven by our core funeral businesses as well as SCI Direct. Core funeral revenues grew $95 million due to a 22% increase in the number of core funeral services performed and a 0.5% improvement in the core funeral sales average. In the first three months of the year, we continued to see a meaningful increase in the number of services performed due to COVID-19, with January and February showing very strong year-over-year growth and then tapering off somewhat in March as comparisons to the prior year became more challenging and as the effects of the vaccine rollout began to impact this year. For over a year now, our frontline team has been serving record numbers of client families and continue to do so with compassion, commitment, professionalism, and agility. We were very pleased with the core funeral sales average growth of 0.5% in the quarter. This was achieved despite a modest 20 basis point increase in the core cremation mix, which is well below our typical annual expectation of 100 to 150 basis points. In March, the funeral average rose an impressive 8% when compared to the prior year, and more than offset the more difficult pre-pandemic comps in January and February. Additionally, when you look at the core average in absolute dollars in the month of March, it is pretty much in line with pre-COVID levels. I believe this is a testament to the value our families continue to place on remembrance and celebration, which is very encouraging to us. As restrictions are easing, and both our client families and their guest comfort levels about larger gatherings improved due in part to the vaccine rollout, we should expect that improvement to continue. Pre-need funeral sales production for the first quarter grew an impressive $35.3 million, or 16%, which exceeded our expectations. Both our core funeral homes and SCI direct businesses posted strong increases, after a challenging 2020. The growth predominantly came in the month of March, and we did have an easier comp in the back half of March, but we also saw significant growth in leads from digital and direct mail, increased location traffic due to higher-at-need services performed, and from the gradual return of in-person seminars. From a profit perspective, funeral gross profit increased $85 million in the gross profit percentage increased more than 1,000 basis points to 31%, realizing a 78% incremental margin on our revenue growth. We continue to benefit from growth in our high incremental margin core business, coupled with the efficiencies that have favorably impacted our cost structure. Now shifting to cemetery. Like I referenced earlier in the quarterly overview, we experienced significant growth in cemetery revenues in the back half of 2020 and anticipated carrying momentum into the first quarter of 2021. But our cemetery performance this quarter even exceeded our lofty expectations. Comparable cemetery revenue increased almost $161 million or 54% in the first quarter. In terms of breakdown, at-need cemetery revenue accounted for $40 million, or about 25% of the growth, driven by more interments performed due in part to the effects of COVID-19. And recognized pre-need revenues accounted for about $120 million, or the remaining 75% of the revenue growth, due to higher than expected pre-need cemetery sales production during the quarter. Pre-need cemetery sales production grew an astounding $130 million, or 67% in the first quarter. The majority of this growth, or about $85 million, was driven by an increase in core velocity, or the number of pre-need contracts sold. The remaining growth of about $45 million was about evenly split between increases in large sales activity, as well as a higher quality core average sales. Consumer reception and demand for our products and services remained very strong. We saw significant lead growth this quarter, which was the combination of higher traffic from our at-need services and acceleration of leads from multiple lead channels, including digital and traditional lead sources, as well as a record impact in certain markets from the Qingming holiday that drove elevated pre-need cemetery sales from our aging communities. We also continue to see a more productive and efficient sales force with better utilization of our customer relationship management system and improved conversion rates from our lead campaigns. Cemetery gross profits in the quarter grew by approximately $111 million, and the gross profit percentage increased more than 1,500 basis points to nearly 41%, realizing a 69% incremental margin. Now I'll speak to our revised outlook and provide a little color. Back in February, recall that we issued adjusted earnings per share guidance of $2.50 to $2.90 per share. We had qualified this guidance and provided a wider range than we have historically, as we felt it was difficult to predict the timing and the efficacy of the vaccine rollout. funeral volume comparisons the rest of the year resulting in down mid single digit percentages for the entire 2021 in a favorable remaining nine months of funeral sales average resulting in the return to 2019 pricing levels showing low to mid single digit percentage growth over 2020 averages however Based upon our pre-need cemetery sales production for the first four months of the year, we are increasing our guidance for the year from a decline in the mid-single digits to finish the year in a range of flat to potentially low single-digit percentage growth. Primarily from this pre-need cemetery sales production guidance increase, we are adjusting our annual earnings per share guidance to $2.70 to $3, thereby raising our midpoint by 15 cents. As we noted in our guidance from last quarter, we still expect future periods of earnings per share and cash flow results to be negatively impacted temporarily by the pull forward of funeral case volumes and at-need cemetery sales into 2020 and early 2021. Still, efficiencies we have gained by improving processes and leveraging technology have allowed us to produce a more competitive and profitable operating platform. This combined with the capital structure improvements we've made over the last 15 months are expected to allow us to produce earnings per share compounded annual growth returns in the low or even potentially mid-teen percentage range for 2022 and 2023, off of a pre-COVID 2019 earnings per share base of $1.90, even while absorbing these temporary pull-forward effects. From there, we anticipate that we will begin to see the impact of baby boomers entering their late 70s and realize the benefits of our investments in technology to stay relevant with the next generation of consumers. These investments will enhance our ability to drive market share to improve both the physical and digital customer experience and in a more effective and efficient manner. In closing, I just want to say what an honor it is to work with such a great team and that I am proud to call my SCI family. Your selfless dedication to our families and communities is so appreciated, especially in times like these. My heartfelt thanks to each of you. With that, operator, I'll now turn it over to Eric.