Service Corporation International

Good day, ladies and gentlemen, and welcome to the SEI third 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 and one on your telephone keypad. To withdraw your question, please press star, then do. Please note, this event is being recorded. I would now like to turn the conference over to SEI management. Please go ahead.

Thank you, and good morning, everyone. This is Debbie Young. Welcome to our company's review of business results for the third quarter of 21. I hope everyone has a chance this morning to review our press release we issued yesterday. Before we begin with the prepared remarks from Tom and Eric, let me remind you that we will be making some forward-looking statements. 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 and Events section.

that out of the way I'll now pass it on to Brian our chairman and CEO Thank You Debbie hello everyone and thank you for joining us on the call today this morning I'm going to begin my remarks with a high-level overview the quarter followed by a more detailed analysis of our funeral and cemetery results and finally comment on our guidance for the fourth quarter as well as our updated thoughts and expectations now for 2022 and and 2023 as a broad overall comment let me just say that 2021 has certainly exceeded our expectations what we have been able to accomplish in the last two years has been remarkable our services and care for our communities has been needed more than ever and in these unprecedented times our team has risen to the challenge with grace and unwavering commitment i am so proud of our team and continue to be amazed by their dedication and support. Now for an overview of the third quarter. Let's start by taking you back to our mindset the last time we spoke in mid-July. We were seeing a declining trend of COVID deaths that began during the second quarter. This downward trend, coupled with the IHME's outlook, was reflected in our earnings guidance for the back half of 2021. Shortly thereafter came the impact of the Delta variant, and we saw an unexpected surge in COVID and non-COVID mortality that began in August and has continued into October. Therefore, we have seen funeral volumes and cemetery revenues that have exceeded our previous expectations. Now diving into the highlights of the third quarter. We generated adjusted earnings per share of $1.16 a 47% increase over the prior year quarter. The primary driver of the earnings per share growth was high computer results driven by increases in both volume and sales average. The cemetery segment also delivered strong revenue growth, which was generated by both at-need cemetery revenue growth and continued strength in pre-need cemetery property sales production. At a high level, adjusted operating income grew $74 million and contributed over 85% of the increase in adjusted earnings per share. The remaining increase was primarily the result of fewer shares outstanding. Now let's take a deeper look into the funeral results for the quarter. Overall, the funeral segment performed better than we expected. Total comparable funeral revenues grew $70 million, or 14%, primarily due to improvements in the sales average, as well as continued strong volumes from the Delta variant COVID impact and from excess non-COVID deaths, which tended to skew younger and more pronounced in smaller markets. Recall that third quarter 2020 volumes were up about 19% year-over-year, and we grew another 3% on top of that this third quarter. which we had not anticipated in our guidance from the second quarter call. Core funeral revenues grew by $48 million, led by an impressive 8% increase in the funeral sales average and a 3% increase in funeral volume. The sales average continued to climb sequentially and is up about 4% over the 2019 pre-COVID third quarter. our percentage of families selecting services has essentially returned to pre-COVID levels. And the funeral sales average is also being positively impacted by an uptick in ancillary revenues, such as flowers, catering, and by a lower discount rate. The favorable impact of these positive trends has been slightly reduced by a modest 60 basis point increase in the core cremation rate. Pre-need funeral sales production for the third quarter grew $50 million for nearly 22%, which exceeded our expectations. Both our core funeral home and SCI direct businesses posted strong production increases against an easier comparison quarter in 2020. The higher insurance production component also generated a $7.5 million increase in general agency revenue. we continue to see growth in marketing leads from both digital and seminars that have not only very successfully generated pre-need sales production, but have done it at a lower cost. On the core funeral home sales production front, we saw average revenue per contract increase by almost 8% to over $6,000, as an increasing percentage of our pre-need customers are choosing some form of service. From a profit perspective, funeral gross profit increased $40 million and the gross profit percentage grew 400 basis points to 28%. The incremental margin percentage generated from the core revenue increase was slightly reduced by an increase in lower margin ancillary revenues and elevated staffing and service levels as compared to the somewhat more limited service structure we operated under during the third quarter of 2020. Additionally, we experienced elevated fuel and energy-related costs. Now shifting to cemeteries. Comparable cemetery revenue increased more than $42 million, or 11% in the third quarter. In terms of the breakdown, at-need cemetery revenue generated $20 million, or 47% of the growth, driven primarily this quarter by a higher quality court average sale. an impressive increase in at-need large sales, and by a modest increase in contract velocity. Recognized pre-need revenues generated about $16 million, or 37% of the revenue growth, primarily due to higher than expected pre-need cemetery property sales production, as well as higher recognized pre-need merchandise and service revenue. Additionally, we achieved a $7 million increase in perpetual care trust fund income, primarily due to the timing of capital gains. Pre-need cemetery sales production grew $25 million, or 8% in the third quarter, which exceeded our expectations. A higher quality core sales average accounted for the majority of the increase, followed by growth in large sale activity. The institutional implementation of BEACON in our cemetery sales presentation has led to a reduction of discounting that is having a favorable impact on core sales efforts. Although we expected a tougher comp on the velocity side, the number of pre-need contracts sold actually grew modestly in the quarter, which also contributed to the increase. As I mentioned in my pre-need funeral discussion earlier, we continue to see production growth from our marketing-generated leads program that very successfully generated pre-need sales production. Additionally, we are seeing improvements in key sales metrics, such as appointment and close rates. Cemetery gross profits in the quarter grew by approximately $28 million, and the gross profit percentage increased 300 basis points to 38%. Similar to the funeral segment, the incremental margin percentage on the revenue increases was slightly reduced by elevated staffing and maintenance costs associated with operating full service cemeteries as compared to the limited service structure during the third quarter of 2020. Now let's talk about our revised outlook for 2021. Based upon better than expected results in the third quarter, we are again raising our guidance to an earnings per share range of $4.15 to $4.45 for the full year of 2021. This increases the midpoint by an additional $0.95 and represents a 33% increase of our 2020 results. This raise in our guidance is primarily due to the earnings per share outperformance delivered in the third quarter. Additionally, we have increased our projected earnings per share for the fourth quarter primarily due to higher than originally anticipated funeral volumes and higher than anticipated at-need cemetery revenues, both being impacted by an increase in Delta variant morbidity and non-COVID excess deaths. The midpoint of our fourth quarter guidance, 89 cents per share, would still be a decline in earnings per share as compared to the $1.13 earned in the fourth quarter of 2020. Within our funeral segment, we are anticipating a comparable volume decrease in the high single-digit percentage range in the fourth quarter of this year versus a very strong prior year quarter, which was up over 17%. Meanwhile, we expect the average revenue per case to continue to compare favorably, growing at a mid-single-digit percentage range for the last quarter of the year. Finally, we forecast pre-need funeral sales production to grow in the high single-digit percentages for the fourth quarter versus the prior year quarter. On the cemetery side of the business, we expect at-need cemetery revenues for the fourth quarter to be relatively flat compared to the prior year quarter. This is comparing against a phenomenal 2020 fourth quarter that delivered a 30% increase in 2019. As far as pre-need cemetery sales production goes, we expect a flat to low single-digit percentage increase in the fourth quarter when compared to a very robust fourth quarter 2020, which was up over 16%, culminating in back-to-back years of impressive 20-plus percent growth in 2021. I'm sorry, in 2020 and in 2021. When looking out over the next couple of years, we expect COVID to have a negative pull-forward effect, on revenues and earnings temporarily. Like many other companies, we also expect to experience mild wage and supply chain cost pressures in the near term. Having said all that, this crisis has accelerated the utilization of technologies, resulting in enhancements which improve our effectiveness and result in cost efficiency in our field operations, within our sales teams, and our support functions. Compound that with improvements in our capital structure, your share buybacks and managing our debt maturity profile, and we expect to generate impressive earnings per share compounded annual growth rates, both in the next two years and well beyond. To emphasize the strength of our post-COVID operating platform and capital structure, I will again give you an example utilizing the $1.90 in earnings per share we reported in 2019 as our pre-COVID base. In 2022, we expect the impact of COVID to begin to wane, thereby bearing the brunt of the full forward effect. Even with funeral volumes down double-digit percentages, and now we're thinking roughly 15,000 funeral cases less than we did in 2019, We believe at the midpoint of our model, our 2022 earnings per share can reflect a 14% compounded growth rate over the three-year period, resulting in a $2.80 earnings per share for 2022. Beyond 2022, we believe that the pull-forward effects should begin to wane and a trend of year-over-year growth should begin as we approach aging baby boomer cohort with a leaner and more technologically efficient and effective operating model. We continue to believe that we will see 2023 earnings per share approaching $3.25, which would maintain that 14% earnings per share category over the four-year period. I wish I had never heard of COVID-19, but it is a reality our company country and world have had to deal with and are dealing with. I am so very proud of our team for what they have done in helping our communities while finding a way to make our company an even better one in a post-COVID world, all the while generating such impressive earnings per share growth for our stakeholders. In closing, thank you again to our entire SEI team for your selfless dedication to our client families and the communities that place our trust in us.