Service Corporation International

Today and welcome to the Service Corporation International Fourth Quarter 2021 Earnings Conference Call. All participants will be in a 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 a touch-tone phone. 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 SDI Management. Please go ahead.

Thank you, and good morning. This is Debbie Young, Director of Investor Relations at SDI. Welcome to our company's review of business results for the fourth quarter of the year ending 2021. As usual, let me quickly go over the safe harbor language before we continue. begin with the prepared remarks from Tom and Eric. 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 and in our filings with the SEC that are available on our website. During this call, we may also discuss certain non-GAAP financial measures. The reconciliation of these measures to the appropriate GAAP measures is found in the table at the end of our earnings release and also in the non-GAAP presentation located on our website under the Investors Webcast and Events section. With that out of the way, I'll now pass it on to our Chairman and CEO, Tom Bryant.

Thank you, Debbie. Hello, everyone, and thank you for joining us on the call today. First of all, I want to express my sincere thanks to our entire SCI team. As we now are on the verge of navigating in this COVID-19 world for nearly two years, I am so very proud of your resolve. You've never wavered from your mission. You've continued to do what we do best, helping our client families gain closure, comfort and healing through the process of grieving, remembrance, and celebration. From the home office teams that work tirelessly providing support to the field, thank you. To our field leadership making critical, real-time decisions that protect our company, our client families, and our employees, thank you. And a special shout out to our frontline teammates who provide peace of mind to our free-need comfort and support to our grieving families and to our maintenance teams that make every effort to ensure our locations and parks are world class. Our team gets it. It's the details that matter. Now to the business at hand. This morning I'm going to provide some color on our business performance for the year and for the fourth quarter, including some detail around our funeral and cemetery Then I will offer some commentary on our 2022 outlook, keeping in mind we must be flexible as we navigate the uncertainty of another year impacted by COVID. First, in terms of the full year 2021 results, we ended the year with a strong performance in both our cemetery and funeral segments. For the year, we grew revenue $632 million, or 18%, and adjusted earnings per share to $4.57, or 57% compared to the prior year. While we saw 4% comparable funeral volume growth, even growing over a COVID-impacted 2020, the primary drivers of our revenue was mid-20% growth in both pre-need and at-need cemetery revenues, combined with a strong 7% increase in our funeral sales average. Timely, meaningful action in our share repurchase program and debt refinancing also drove healthy increases in our full-year 2021 earnings per share. Now shifting to the fourth quarter, we generated adjusted earnings per share of $1.17, a 4% increase over the prior year quarter, and a 95% increase over a pre-pandemic fourth quarter of 2019. Compared to the 2020 fourth quarter, funeral results drove the earnings per share increase as a healthy 8% increase in the funeral sales average offset slightly lower volumes and cost increases associated with staffing and energy. On the cemetery side, profitability was relatively flat as revenue growth from at-need cemetery sales and pre-need cemetery sales was offset by a lower impact from new construction on cemetery projects, and increased costs from staffing and maintenance. Below the line, the benefit of fewer shares outstanding offset higher general and administrative and interest expense, as well as a higher tax rate. Now let's take a deeper look into the funeral results for the board. Total comparable funeral revenues grew $47 million, or about 9% over the prior year board, exceeding our expectations. as core revenues, non-funeral home revenues from SCI Direct, and general agency revenues all saw impressive growth in the quarter. Comparable core funeral revenues grew $32 million, led by an impressive 8.4% increase in the comparable funeral sales average. The core sales average continues to climb sequentially and is up about 5% over the 2019 pre-COVID fourth quarter. our percentage of families selecting to have funerals and celebrations of life has essentially returned to pre-COVID levels, and the funeral sales average is being further positively impacted by an uptick in ancillary revenues, such as flowers and catering. This increase in average was achieved despite a 120 basis point increase in the core cremation rate. Comparable core funeral volume declined 1.5% compared to the prior year quarter, slightly offsetting the positive impact of the funeral sales average. Keep in mind, the 2020 fourth quarter we were comparing against was acutely impacted by COVID and saw a 17% core funeral volume increase over the 2019 fourth quarter. From a profit perspective, funeral gross profit increased $10 million, while the gross profit percentage dropped 60 basis points to 27%. Fixed costs in the funeral segment include salaries, fringe, vehicles, facilities, and general and administrative expenses. In the fourth quarter of 2020, those costs were actually down 2% versus the 2019 fourth quarter, even with 17% more volume. As the pre-vaccine era of the virus restricted both the consumers and our ability to provide a full-service funeral. In the 2021 fourth quarter, these costs increased by 8 percent compared to the 2020 fourth quarter. So, overall, our fixed costs have increased 6 percent over the two-year period, or let's say 3 percent on a compounded annual basis, while we are caring for 17 percent more customers than we did in 2019. So bottom line, I believe we're managing our costs very well against an unusual and difficult 2020 fourth quarter comparison. Pre-need funeral sales production for the quarter exceeded our expectations, growing $30 million, nearly 14% over the fourth quarter of 2020. Both our core funeral homes and SCI direct businesses posted strong production increases against an easier fourth quarter comparison in 2020. Our core pre-need funeral average revenue per contract, going into the backlog now, is over $6,300. This is an 8% increase over 2020 and more than $300 higher than our at-need average for the quarter. We continue to see positive momentum in generating significantly more high-quality marketing leads at a lower cost through increased focus on digital leads, as well as more sophisticated data targeting for our direct mail and seminar programs. Now shift into cemetery. Comparable cemetery revenue increased $21 million, or 5% in the fourth quarter. In terms of the breakdown, at-need cemetery revenue generated $13.5 million of the growth driven by a higher quality core average sale and a modest increase in contract velocity. Recognized pre-need revenues generated about $8 million of the revenue growth, primarily due to higher recognized pre-need merchandise and service revenue. So pre-need cemetery sales production grew $39 million, or 13% in the fourth quarter. This growth is on top of a 2020 fourth quarter, which grew by 16% over 2019. A higher core sales average accounted for the majority of the increase. However, we were still able to grow the velocity of contracts sold by almost 5%, which accounted for the remainder of the sales production growth. As I mentioned in my pre-funeral discussion earlier, we continue to see production growth from a marketing-generated leads program that very successfully led to pre-need sales production. Additionally, we're seeing improvements in key sales metrics, such as the number of appointments set and our close rates. I want to take a moment to recognize the tremendous efforts of our entire cemetery sales team. For the full year 2021, they produced $1.3 billion in cemetery pre-need sales production. This represents a 28% increase over and above the very strong 15% growth in 2020. This could not be accomplished without a tremendous sales organization that is supported by the tireless efforts for cemetery management, administration, and especially our talented grounds maintenance associates that keep our parks beautiful. Cemetery growth's profits in the quarter declined slightly by $1 million and the gross profit percentage dropped 200 basis points to 36.8%. Recall that in the prior year quarter, no vaccine existed, and we saw fewer visitors to our cemeteries, so labor and maintenance costs were temporarily low. Now, as we normalize the staffing level and make enhancements in our parks' appearance, these costs combined with higher selling costs and higher energy costs reduce margins as compared to the prior year. Now let's shift to a discussion about our outlook for 2022. As you saw in our earnings release, we issued 2022 guidance of adjusted earnings per share to a range of $2.80 to $3.20, or a midpoint of $3. At the midpoint, this represents a 20-cent increase from our previously mentioned model midpoint of $2.80 in our third quarter confidence call. The $3 midpoint represents reflects a 16.5% compounded annual growth rate over the pre-COVID earnings per share base in 2019 of $1.90, well above our historical guidance range. As you think about the cadence for the year, as we compare back to a $4.57 2021, we would expect negative comparisons for each quarter. We should see continued elevated earnings in the first quarter due to COVID as we are continuing to experience increased demand with funeral volume and at-need cemetery sales. As the year goes on, we would anticipate that the COVID impact becomes immaterial and that we should begin to see the pull-forward impact from 2020 and 2021 having a mildly negative effect on funeral volumes and at-need cemetery revenue, thereby making the quarterly comparisons increasingly more difficult. For the year, we believe the favorable COVID impact from the fourth quarter and the pull-forward effect later should effectively offset into an impact that will not be material. So, how are we going to grow earnings for share at a 16.5% compound annual growth rate from the 2019 base? First, we reduced the share count with accelerated share purchases during the uncertainty of the last two years. The pandemic also forced us to quickly leverage and implement technology in ways that would have taken many years to take hold in an organization of our size. We believe these accelerated changes have made us more productive with our processes, staffing, and other efficiencies. On the sales side, we had to lean on our technological tools to manage, allocate leads, and develop and train our counselors, which has resulted in a much more productive organization. Now let's discuss some of the segment assumptions. Within our funeral segment, we know we're going to have to transition period where volumes are affected by the pull forward of services into 2020 and 2021 that I just described. Our expectations for the pull forward continue to diminish as we see a larger number of the younger population being affected by these latest surges in COVID-related mortality. For funeral volumes, we're anticipating a comfortable volume decrease in the mid-teen percentage range from 2021, but at levels that are flattish to a pre-COVID 2019 after considering the pull-forward impact. Meanwhile, we expect the average revenue per case to continue to compare favorably growing in the low single-digit range. And finally, we forecast pre-need funeral sales production to grow in the 3% to 5% range for the year. On the cemetery side of the business, cemetery at-need revenue should correlate strongly with funeral volume, so we expect them to also be down in the mid-teen percentage range. We expect pre-need cemetery sales production to fare much better, as we can drive activity with marketing leads, we expect a decline in the mid to high single-digit percentage range when compared to a very robust 2020, and then returning to a more normalized growth in 2023, but on a much higher base. Beyond 2022, as I just mentioned, we believe the pull-forward effects will wane, and a trend of year-over-year growth should begin as we approach an aging baby boomer cohort with a leaner, more technologically efficient, and effective operating model. We continue to believe that after establishing a new base year in 2022, we will return to earnings growth in the 8% to 12% range in 2023. And with demographic tailwinds and the improvements we have made and plan to continue to make to our operating platform, we expect to capture upside opportunities in the years ahead. With that, operator, I will now turn it over to Eric.