Service Corporation International

Good morning and welcome to the SEI second quarter 2021 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 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, and good morning. This is Debbie Young. Welcome today to our company's review of business results for the second quarter of 2021. I hope everyone has had a chance to review our press release issue yesterday. Before the prepared remarks from Tom and Eric, let me remind you that we will 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 measures to the appropriate GAAP measures can be found in the tables at the end of our earnings release and also on our website under the Investors Webcast Events section. With that out of the way, I'll now pass it on to our chairman and CEO, Tom Ryan.

Thanks, Debbie, and hello, everyone, and thank you for joining us on the call today. I'll apologize in advance for my voice. Eric promises me I live worse than I sound. This morning, I'm going to begin my remarks with a high-level overview of the course, followed by a more detailed analysis of our funeral and cemetery results, and finally, comment on our guidance and outlook But before I begin, I want to give special thanks again to my SCI family. You worked so hard to deliver the impressive operating results you reported this quarter. But more importantly, you continue to stay relentlessly focused on what we do best, helping our client families and the communities that we serve gain closure and healing through the process of grieving, remembrance, and celebration. During these difficult times, I just can't say enough about how you continue to rise to the occasion. You truly are my heroes and you have my heartfelt appreciation. So let's get right to the highlights. For the second quarter, we generated adjusted earnings per share of 92 cents, a 59% increase over the prior year. The primary driver of the earnings per share growth was our 34% increase in cemetery revenues which was generated by our continued strength in pre-need cemetery property sales production, at-need cemetery revenue growth, and highly profitable increase in recognized pre-need merchandise and service revenue. The funeral segment delivered strong funeral sales average growth, which more than offset expected declines in funeral volumes when compared against a quarter severely impacted by COVID-19 in the commercial restrictions imposed at the time. Pre-need funeral sales productions came roaring back with a 57% increase over the prior year quarter. At a high level, adjusted operating income grew $58 million and contributed over 70% of the increase in adjusted earnings per share. The remaining increase was the result of fewer shares outstanding, lower interest expense, and a lower adjusted tax rate. Now let's take a look at the funeral results, of course. Overall, the funeral segment performed better than we expected. Total comparable funeral revenue grew $48 million, or 10%, primarily due to significant improvements in the sales average, which helped to offset anticipated lower volumes when compared to the elevated pandemic volumes of last year. Core funeral revenues grew $25 million, led by an impressive 14% increase in the core funeral sales average, more than offsetting a 7% decline in volume. We are very encouraged by the rebound in the funeral sales average. Our core average revenue per service is up almost 3% versus the 2019 pre-COVID second quarter. You'll recall that in last year's second quarter, we saw a concerning drop in the percentage of customers with a service when services were limited by COVID-19 and the related restrictions. We have seen this percentage approach pre-COVID levels as our client families continue to place significant value on memorialization and celebration. Pre-need funeral sales production for the second quarter grew an impressive 106 million, or 57%, which exceeded our expectations. Both our core funeral home and SCI direct businesses posted strong increases against an easier comparison quarter in 2020. We continued to see significant growth in marketing leads for both digital and direct mail that very successfully generated pre-need sales production. In addition, lead growth from seminars grew over five times from the same quarter in 2020 which was severely impacted by COVID and related restrictions. On the non-marketing lead front, we saw significant rebounds in grassroots events at both our locations and venues, as well as enhanced willingness of the customer to meet with us at our location or in the privacy of their homes. With these more robust leads, our highly effective sales teams have increased the lead-to-sale rate almost 17% versus a historical average which hovered in and around the 14% range. From a profit perspective, funeral gross profit decreased approximately $8 million, resulting in a lower gross profit percentage of 20.5%. The incremental margin generated from the core revenue increase was slightly reduced by elevated staffing and service level costs associated with operating at full service facilities in the current quarter as compared to the limited service structure we operated under during the second quarter of 2020. Additionally, facilities costs were higher as temporarily deferred repairs and maintenance expense from the pandemic and the Texas freeze combined with higher utility costs put additional pressure on our margins. $15 million of our revenue increase this quarter was other revenue, primarily general agency revenues associated with our 70% increase in insurance-funded pre-need funeral sales production. These revenues are almost entirely offset by sales costs and therefore have a negative impact in the immediate term on our funeral profit percentage. Finally this quarter, saw elevated expense associated with incentive compensation for our field leadership, as financial results for the first half soundly exceeded both prior year and our own expectations. Now shifting to cemetery. Our cemetery sales performance continues to exceed even our lofty expectations. Comparable cemetery revenue increased $117 million, or 34% in second quarter, In terms of breakdown, recognized pre-need revenues accounted for about $89 million, or 76% of the revenue growth. This remarkable increase was driven by higher than expected pre-need cemetery property sales production, as well as higher recognized pre-need merchandise and service revenue, as cumulative trust earnings on delivered contracts were significantly higher during the quarter. At-need cemetery revenue accounted for $18 million, or 15% of the growth, driven by more interments performed due in part to the effects of COVID-19. Additionally, we experienced a $10 million increase in perpetual care trust fund income due to the timing of capital gains. Pre-need cemetery sales production grew an impressive $94 million, or 36% in the second quarter. Core velocity, or the number of pre-need contracts sold, increased by more than 20% and accounted for 56% of the quarterly pre-need cemetery sales production increase. Large sales production increased over $25 million, or 60%, over the prior year quarter, accounting for 27% of the quarterly increase, while a higher quality core average sale contributed the remaining 17% of the sales production growth. As I mentioned in my pre-need funeral discussion earlier, we continue to see improvements in the lead to sales rates across various marketing channels, coupled with a more productive and more efficient sales team utilizing tools like Beacon and Salesforce CRM to drive superior sales performance. Cemetery gross profits in the quarter grew by approximately $57 million and the gross profit percentage increased 490 basis points to over 35%. The incremental margin on the revenue increases more than offset slightly elevated staffing and service level costs associated with operating full-service cemeteries as compared to the limited service structure during the second quarter of 2020. Similar to the funeral segment, this quarter saw elevated expense associated with incentive compensation for our field leadership, as financial results for the first half soundly exceeded both prior year and our expectations. Now let's talk about our revised outlook for 2021. Back in May, we raised our adjusted earnings per share guidance to a range of $2.70 to $3. Based upon results in the first half, we're again raising our guidance range to $3.20 to $3.50. This increases the midpoint by an additional 50 cents and represents a 17% increase over our 2020 results. The two most significant adjusted assumptions for the back half of the year from our previous guidance are number one, higher pre-need cemetery sales production, and secondly, higher funeral case volumes than we'd originally anticipated. as the impact of COVID-19 variants have put upward pressure on the adjusted IHMA projections for COVID deaths in the back half of 2021. Within our funeral segment, we're anticipating comparable volume decreases in the high teen percentages for the back half of 2021 versus 2020, resulting in being down mid-single digit percentages for the year 2021. Meanwhile, we would expect the average revenue per case to continue to compare very favorably in the back half of the year, resulting in mid single digit percentage growth for the year 2021. Finally, we would expect pre-need funeral sales production to continue growing in the high single digit to low teen percentages for the back half of 2021, resulting in a mid to high teen percentage growth for the entire year. As this sales production revenue is deferred, it will have a slightly negative impact on funeral margin percentages in the near term as selling costs should offset general agency commissions, but it will enhance our market share, funeral revenue, and profits in future years. On the cemetery side of the business, we would expect at-neat cemetery revenues to decline in the mid- to high-teen percentages in the back half of the year, similar to the funeral volume trends. However, at levels that are well above 2019 revenues, resulting in low to mid-single digit percentage growth for the entire year versus 2020. As far as pre-need cemetery sales production goes, we would expect a mid-single digit percentage decline in the back half of 2021 as compared to the robust levels of 2020. However, sales production should be a double-digit percentage growth over 2019 levels, resulting in mid- to high-teen percentage growth for the year 2021 over 2020. As far as the future years, I wish I had a crystal ball for you. Not having one, I will convey what we expect with the information that we have at this time. We still expect future periods, earnings per share, and cash flow results, be negatively impacted temporarily by the pull forward of funeral case volumes in 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 more competitive and profitable operating platforms. This combined with the capital structure improvements, particularly the share buyback activity, produced exceptional earnings per share compounded average growth rates even in these negatively impacted years. And once those pull forward effects fade and demographics set in, the mid and longer term outlook for SCI is even more impressive. As an example, even in 2022, where we might expect funeral case volume to be down double digit percentages versus 2021, performing some 25,000 fewer funerals in 2022 than we did in 2019. Remember, we generated earnings per share of $1.90 in 2019. We would expect 2022 earnings per share, even with a high single-digit percentage volume decline compared to 2019, to be in the 11 to 15% compounded growth range off that $1.90 2019 pre-COVID earnings per share base. That would equate to a $2.60 to $2.90 per share approximate result for 2022. Our models post-2022 would say the pull-forward effect should begin to wane and an accelerated year-over-year growth should begin as we approach a favorable demographic impact with a leaner, more technologically efficient, and effective operating model. Last quarter, I mentioned we could see 2023 earnings per share approaching $3 to $3.25. I believe we're even more comfortable with the $3.25 possibility today. In closing, I just want to say thank you again to our entire SDI team for your selfless dedication to our client families in the communities that place their trust in us. With that, operator, I'll turn it over to Eric.