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.

Thanks, Tom. Good morning, everybody. As we reflect over the past seven or eight quarters during this pandemic, we are so proud of all of our associates, especially those who have been on the front lines with the families and communities we've had the privilege to serve. I can't thank you enough for all you have done and the support you have provided during these most challenging of times. We're all hopeful we are closer to the end of this pandemic, which will enable us to return to some form of normalcy for all of us. So, with that, I'd now like to transition to walking you through our cash flow results and capital for the quarter and full year of 21, and then provide some comments on our outlook for 2022. So, operating cash flow is approximately $190 million in the current quarter, compared to $245 million in the prior year, with a primary decline due to an increase in cash tax payments during the quarter, to $97 million versus the $36 million in the fourth quarter of last year. Excluding cash taxes in both periods, operating cash flow before taxes increased almost $6 million to $287 million in the fourth quarter, driven by modest increases in earnings and favorable working capital, partially offset by $6 million of higher cash interest payments. So, as we step back and look at the full year of 2021, we generated $912 million in adjusted operating cash flow, representing a substantial increase of $108 million, or 13 percent, over the prior year. Deducting recurring CapEx of $260 million, which again represents maintenance CapEx and cemetery development CapEx, we calculate free cash flow for the full year to be an impressive 652 million in 2021, up 33 million from 619 million in 2020. So capital deployment has really been a highlight all year for us, and the fourth quarter was no exception, deploying nearly $500 million, which is the highest quarterly capital deployment we have seen in recent history. This capital went to reinvesting in our businesses first, expanding our footprint through key acquisitions and new funeral home builds, and returning capital to shareholders. Now let's talk about the breakdown. We invested $110 million in our businesses with $65 million of maintenance capital and $45 million of cemetery development capital spent during the fourth quarter. From a growth capital perspective, and as I mentioned on our October call, recall that we were very excited about the acquisition candidates we were working with late in 2021. So I'm happy to report, as you have seen, that those acquisitions closed, bringing the total investments during the quarter to $112 million, and again, expecting low double-digit to mid-teen IRRs on each of these transactions. These businesses added almost $40 million of full-year revenues from 28 funeral homes and two cemeteries in Ohio, California, Illinois, Oregon, and Rhode Island. And most importantly, I'd like to welcome the over 300 new associates from the Schoeninger, Miller-Jones, Wapner, Skyline, Russell Boyle, and Golden businesses to the SCI family. We also deployed about $16 million towards new builds in Texas, Colorado, Washington, and Florida. This brings total 2021 spend on new builds to $43 million with, again, low double digits to maintain IRRs, which also helped drive additional earnings and cash flow growth for the company. Finally, we deployed $248 million of capital during the quarter to shareholders through dividends and share repurchases and $700 million for the full year of 2021. For the last two years alone, we've meaningfully reduced our outstanding shares by about 10% through timely execution on our repurchasing strategy. Since the inception of our repurchase program, we have now reduced our shares outstanding by just over 50%. So now let's shift to our outlook for 22 in terms of cash flow and capital. Based on the guidance range for adjusted EPS of $2.80 to $3.20, which is noted in our press release, we expect our adjusted cash flow from operations to range from $675 million to $725 million, again, with a $700 million midpoint. As Tom mentioned, at the midpoint of our earnings guidance range of $3, we expect to meaningfully exceed our 8 to 12 percent earnings growth framework for EPS when comparing back to a pre-COVID 2019 base of $1.90. So, from a cash flow perspective, our 8% to 12% earnings growth framework generally translates historically into about a 4% growth in adjusted cash flow before cash taxes. So adjusting for $150 million of expected cash taxes in 22, our adjusted cash flow from operations before cash taxes is expected to be about $850 million at the midpoint. This equates to a 6.5% CAGR over our pre-COVID 2019 adjusted cash flow from operations before cash taxes of $700 million, which is similarly in excess of this normalized 4% annual growth that we normally expect. So there are also a couple items that I'd like to highlight when we think about our adjusted cash flow in 2022. First, we will be required to pay the remaining half for about $20 million of payroll taxes that were deferred in 2020 as allowed under the CARES Act. And as I just mentioned, cash tax payments in 22 are anticipated to be about $150 million based on the midpoint of our earnings guidance, or $115 million lower than the $265 million of 2021. And from an effective tax rate standpoint, we continue to model in the range of 24 to 25 percent in 2022. One other topic I'd like to address for 2022 as we look forward for the full year is our corporate G&A expectations. Now, historically, we've guided to around 125 to 130 million of annual recurring corporate general administrative expenses. Recently, we have begun a process to reevaluate our overhead structure with all of the initiatives we currently have under way. As a result of this review that is ongoing, we have identified about 20 to 25 million of costs, which we believe may be more appropriately characterized as corporate in nature versus field-related expenses that is primarily related to certain technology, risk, and governance areas. Therefore, when you're modeling 2022 at this point, I would expect annual corporate G&A to increase to maybe around $145 to $150 million per year, with the corresponding dollar-for-dollar decrease in costs in the segment margins, so therefore with no effect on our bottom line or our cash flows. So looking forward to 2023, we expect to return to a normalized cash flow growth trajectory with an expected 4% growth and adjusted cash flow from operations before cash taxes, which again is in line with our 8% to 12% earnings growth framework per share that we just mentioned. So in terms of capital deployment, moving on to some thoughts in 2022. Our expectations for maintenance and cemetery development capital expended is $270 million to $290 million for the year. At the midpoint, Cemetery development CapEx comprises about $120 million of this amount, and maintenance CapEx makes up the remaining $160 million. This maintenance CapEx of $160 million includes about $110 million of normal routine maintenance capital used at our funeral and cemetery operating locations, as well as another $50 million for field and corporate support capital. This $50 million is primarily being deployed towards technology to not only improve the customer experience with ultimately customer-facing technology, but also towards network infrastructure at our operating locations. In addition to these recurring capital expenditures of $280 million at the midpoint, we expect to deploy $50 to $100 million towards acquisitions, and roughly 50 million more in new funeral home construction opportunities, which together, as I've continued to say, drive meaningful after-tax IRRs, well in excess of our cost of capital. So to summarize this for a capital deployment strategy for 2022, we really expect to continue much of the same as you've seen from us over the past several years. We follow a disciplined and balanced approach Deploying capital to the highest relative value for our shareholders. And of course, this strategy is predicated on our stable free cash flow, our robust liquidity, which was over $1 billion at the end of the year, as well as our favorable debt maturity profile. Lending additional support to this strategy, our leverage ratio at the end of the quarter landed just under 2.6 times from a net debt to EBITDA perspective. And as we've noted in the past, looking beyond the impacts of this pandemic, we continue to expect to increase back to our targeted leverage range of three and a half to four times towards the latter part of this year as we lap stronger EBITDA quarters moving forward. So in closing, after a very strong 2020, We are very pleased that we exceeded those results in 2021. We are most proud of how our team has persevered over the last two very challenging years. The compassion and professionalism our teams have demonstrated is truly remarkable, and we appreciate each and every one of our team members. As we look forward to another year, I'm very excited about the momentum we have moving forward into So with that, operator, that concludes our prepared remarks. I'd now like to go ahead and turn it back over to you for the Q&A session.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Scott Schneiderger with Oppenheimer. Please go ahead.

Thank you very much. Good morning, everyone. I guess I'd like to start with, you know, funeral and particularly cemetery pre-need sales. remain quite strong. And it sounds like you all are anticipating within this 2022 guidance that second quarter, third quarter, fourth quarter is where we really see the reversion from the pull forward based on, you know, your crystal ball at the moment. I want to ask, cemetery pre-need, it sounds like you think that that will persist for a Could we get a little bit more sense of what kind of tail that would be in bridging you to the normal period, presumably in 2023 after that reversion period? Thank you.

Sure, Scott. What we think is, again, COVID obviously had an impact on our funeral business, obviously has an impact on our ad need cemetery revenues. And so our expectations are that as this begins to wane, particularly the last three quarters of the year, that our comparisons are going to get, you know, down kind of double digits as you think about those two categories. And to your point, when you turn it around and talk about, let's talk about cemetery because that's going to impact EPS. You know, funeral we feel very good about. We actually think we'll continue to grow it, you know, low to mid single digits for the year. But on the pre-need cemetery side, you know, while we're saying, call it mid-teens for funeral volume, we're looking at kind of mid-single digits. You'd say, how did you do that or why is it different? And I think our opinion is this, that we have, because of technology and the tools that we have access to in our learnings, that we are a much more effective and efficient sales force with better leads, better ability to train, just much more effective and efficient And so from that, we think 2022, while it will be down versus 2021, establishes this new base, and let's call it mid-single-digit down, and then we begin to grow off of it again. So there really is, I'd say, an efficiency and effectiveness of everything from the lead coming in to the sales force itself to the sales managers that are using technology to better manage, develop, and train. And so that's the way we view the world is that pre-needs kind of got a new base to go off of and at-needs still going to be impacted by what's happening with deaths, clearly. And that's something that's really outside of our control.

Thanks. I appreciate that. And then switching over to at-need funeral, the revenue per service has really bounced back nicely. I'm curious, it's been about two quarters since FEMA amended the COVID-19 funeral assistance policy to, you know, to financially assist with funerals for COVID related deaths. How much has that contributed? Obviously opening up has contributed a lot, but how much is the, this, this financial assistance program contributed to revenue per funeral service and cemetery for that matter? And, and, and how long will that, is that program anticipated to persist? Thanks.

So just a little feedback on that. It's very difficult for us to measure it. The one thing that we have done is we've put the link on our website, and I would tell you that very few people ever went there. So we're not seeing a big evidence of that contributing to the spend of our consumer. You know, I think what it is, guys, a couple things. On the pre-need side, clearly our trust fund income if you look at the market returns or just our returns over the last three years, they're all, you know, kind of mid to high teen returns that have accumulated in those, in those trust funds. So that's having a big impact on the pre-neco and at need. And on the at need side, you know, it looks acutely, you know, higher compared to 2022. But what's really causing that is remember last year's fourth quarter and most of last year, we saw a real shift out of service. And what we're seeing now is a big return to service. And we're seeing people that are choosing particularly cremation, but burial too, are spending up for additional services and the like. We also are seeing a real rebound in what we call our ancillary revenues. And these would be flowers that are purchased by friends of the family, as well as kind of catering. So these are These are things that kind of went away for a while, and not only have they come back, but they've come back incredibly strong. I think on the flower side, we're well beyond anything we ever saw as a company. So I think those are the things really lifting it. And if you step back and you look at my comments, I'm saying off a 2019 base, our average is up 5%. Now, I'm very pleased with that. I think we're happy, but it's not unreasonable, right? I mean, you'd think over a two-year period, if you can get 5% inflationary pricing, you So I think some of it is just the numbers look unusual as you try to compare back, but a lot of positive things happening, and we do not have any real evidence of FEMA. Now, clearly, there's money in the system out there. I don't want to pretend there's not, and that could have an impact on what people want to spend, can spend, but I don't think it's anything material.

All right. Thanks, Tom. Appreciate that. One more, if I could sneak it in. This is essentially a 2023 CapEx question, just to give you the question up front. But you've been trending prior to the pandemic 7% CapEx as a percent of revenue. And it looks, depending on what your sales estimate is for this upcoming 2022, looks like that's going to be up around 9%. It sounds like you have some increased infrastructure technology spending. I'm just curious. Are we going to see a reversion on CapEx percent of revenue, if that's the way you think about it, back down to like a 7% in 2023 and thereafter? Or are we going to be at a new elevated level of 9 or 10-ish going forward and just kind of a little bit more of what's behind in this increased CapEx spend? Thanks.

Hey, Scott. It's Eric. There's a couple things that are happening here. First, let's talk cemetery development. So as you know, in that 7%, we've always said, all else being equal, we think we're going to spend somewhere around $100 million in cemetery development CapEx per year. If you look at the financials, you'll notice that we didn't spend that in the last two years. We spent in the low 80s, frankly, for cemetery development. So I think one thing you have to notice is that our cemetery development is going to be higher this year, kind of making up some momentum there. and some of the capital that we had. And some of those are just projects that got hung up in permitting in California and things like that. But, you know, let's call that $120 to $125 million. So that's a little bit higher, and I anticipate that normalizing. So that's going to be part of that component going back down to the 9%, 7%, the metrics you use. The other thing that I'd tell you is, you know, our maintenance capex, you know, kind of normalized around $125-ish million in that ballpark. It was generally that 110-so area investing back into the funeral homes and cemeteries from a maintenance perspective. And then we had this corporate strategic kind of spend, which was about $15 or $20 million or so. And that is what has grown that I talked about on my conference call. And that's been the things that I've said before, which are some of the infrastructure as we've gone through. Remember, 2,000 locations going through. You can't do that overnight. So that's going to be a multi-year project where we are investing in network upgrades, infrastructure, which, again, is all about the technology we use on-site for customer-facing things such as Celebration of Life, in addition to some of the software that we use that's also customer-facing, such as HMIS Plus and et cetera. Ultimately, I think that eventually starts reverting back to the mean, but I wouldn't characterize that probably in 23%. I think we need another year or so, maybe 18 months, to get through some of the stuff we're doing. We've also talked about re-imagine, which is some of the efficiencies we want to bring using technology to the back office part of the field operations. That's going to be ongoing as well for a couple of years. To answer your question, cemetery development kind of reverts back. I think maintenance is here for a little bit longer. maybe for another year in 23, maybe leaks into 24, and then it starts reverting back.

Hey, Derek, that's real helpful. Thank you, and thanks for taking all my questions. Guys, I'll turn it over.

The next question comes from Joanna Gajouk with Bank of America. Please go ahead.

Good morning. Thanks for taking the question. So thanks for the clarification on the complex stuff. I was also wondering about that, the number being higher. But I guess also as it relates to DNA depreciation and amortization for the year, I don't know whether you – is there a number you can guide us to? Because it seems like it could – you know, historically, right, DNA has been higher than COPEX, correct me if I'm wrong. And then I guess it might actually flip this year. So how should we think about it? I guess DNA, that's what I'm getting at. Thank you.

I think DNA is going to be a little bit higher. I really do. I think it's somewhere around 280, 290 million in that general area. The one thing you have to remember is probably 160 to 170 million of that. Joanna is the D part, the depreciation. But the amortization, remember, is the non-cash cost that relates to the sale, the recognition of the cost of sale related to cemetery property sold on a free need basis. So from that perspective, the reason why it ends up being somewhat variable is because it relies a lot on what the pre-need cemetery sales are going to do in the property area. And as we know, that's going to be quite different this year than last year. So that's kind of the biggest variable in our DNA, which is somewhat unique to our company, is that amortization of cemetery property that you can see on the cash flow statement. But as a very general statement, I kind of go with those numbers that I just described to you to help you kind of think about it and model it for 2022.

Okay, that's helpful. And two more. I guess the one follow-up on the deals you did in Q4. So I guess, you know, clearly there was, you know, I just kind of demand for these deals closing soon. last year, so kind of how do you think about this year in terms of, you know, M&A, you're expecting kind of a more elevated activity, or it was just things were delayed last year and this is what just happened in one quarter, and I guess any kind of change to, you know, multiples is their kind of requirement or rather expectation, you know, the multiples will be moving higher.

Okay. Well, you know, as I said in my remarks, you know, the official guidance is the going back, reverting back to our $50 to $100 million that I think we'll spend this year in 22 related to M&A. So with that being said, I said that last year too, and we ended up beating that handily, especially because of the activity that we saw in the fourth quarter. And as I kind of alluded to in my remarks, you know, I said in the October call that we were somewhat pretty excited about the pipeline that had come to fruition and presented itself in the fourth quarter of last year. And I don't think that pipeline just shuts down overnight. Now, I don't want to say anything more than that. I guess the best way to say it is I think we continue to have some excitement early in 22, the same type of excitement that we characterized in the call when we talked about it in the fourth quarter as well.

And with that excitement, any pressure on multiples to bank?

No, I think generally, you know, we're pleased with the type of the multiples and we're pleased with the type of after-tax IRRs that we're able to produce. You know, they're going to be in the low double digit to kind of mid-teens, depending on the deal and the deal size. But, no, I think we're somewhat pleased with the type of returns we're getting.

Okay, great. And my last question, so the commentary around that. aging demographics. So you even put it in the press release, which I think was first time maybe. So how should we think about that? Are you kind of pointing to the concept of like, you know, we're getting closer, but is there a kind of a more, you know, finite commentary there? You know, are you expecting to see this benefit in 23 or is it kind of more, you know, period after that where it's going to be a more meaningful impact? Thank you.

I think the comment was geared more towards a post-23 look. I think what we're trying to say is a couple of things about demographics or potential impacts that are non-market share related. And I'd say, number one, the cohorts from COVID that were impacted, we mentioned the younger demographic, which tends to not be a pull-forward effect. And that's really because if you think about Omicron and even before that with Delta, both those impacted, I'd say, you know, non-vaccinated people that were younger versus the first waves, which were more concentrated when nobody had any vaccinations, were more concentrated, let's say, in the nursing homes. So I think the waves become less impactful. Then as you think about the next few years, and we'll probably explore this a little more when we get to our investor day, is There's unfortunately a lot of negative trends out there when you think about, I mean, even car deaths, smoking's up for the first time, you know, alcohol sales, so many things that impact our health that continued, we believe, to have a near-term impact that's not going to revert back to 2019. And then longer term, I think, which is the bigger impact, we're referencing to say, look, the baby members get older, you know, every year or one more year. And so we're closer and closer. So I think as we think about, you know, managing and expectations, we look at the mid, you know, particularly kind of the middle part of this decade that we may have more to do than we originally anticipated we'd be doing five years ago.

Thank you. Thanks for this call.

Thank you.

As a reminder, if you have a question, please press star then 1 to be joined to the queue. The next question comes from AJ Rice with Credit Suisse. Please go ahead.

Hi, everybody. I wondered if I could first ask about the cemetery production number. You're up 13% year to year, and I think you said velocity was 5%, implying probably a pretty robust increase in the averages. What did you see there? It didn't sound like that was the really high-end stuff that you sold on a pretty neat basis, but what is going on with that?

Yeah, Jay, I think on the high-end sales, we actually saw those slightly down versus the prior year. So you're right. 5% was velocity. Call it 8% was average. And you say, how is that possible? And, you know, If you remember the whole concept of the tiered inventory, it was about building out the entire tier, the very top all the way to the middle to the bottom. So you think about the 8%, it's not necessarily a price increase. It's a different level of inventory. So over the last few years, we've built out more of this stuff. We've enhanced the beauty of the cemetery. And I'd say that the stuff that people are coming to look at and particularly as we saw more volume, they're buying up. They're seeing better opportunities and they want higher quality cemeteries. So kind of back to our original plan was build it and they will come. And that's really how cemeteries kind of worked out for us. So we're not seeing increases in price necessarily. It's buying up and value chain that's driving that average revenue per case of 8%. Okay.

When you think about both businesses and you reference some and talk about a little bit of prayer remarks, some inflationary pressure, it sounds like if you look at it relative to 2019, it's still for your business pretty good on the cost side, compound annual growth 3%. But I know that a lot of times just your absolute price increases, you're trying to sell a richer service and all of that, but the average price increases year to year tend to be more CPI driven. As we see CPI and other inflationary indexes increase here in the last six, nine months, if you look at that, are you inclined to move your pricing more in line with what the current inflationary trends look like?

Yeah, we really try to look at it on a market by market basis. So I don't want to generalize and say, you know, from a national perspective. So most of our costs tends to correlate with labor. So the way we try to look at this is, you know, if we're seeing labor cost increases in a market, we're going to adapt to that and huddle up as a team and say, you know, here's what we're facing. We've got to if we have to maintain these key employees, then let's get a plan together to figure out how we pay for it. And so I would tell you that that's probably the most – the way that we approach pricing within a market, clearly we have some thoughts and ideas, but that's really being driven by local market conditions.

Okay. And your perception is you have the ability to make those price adjustments as needed. There's not resistance – people still relatively immune to what people paid a year ago, and so that there's been a price adjustment in any sense?

We do, AJ. I think where we've done that, because we're very sensitive to that, we do not want to price ourselves. If you remember a few years back, we really made some adjustments, particularly to the cremation side of our business, to be more competitive in that market. So we are absolutely sensitive to that, monitoring that. And I know of no market where we've made those adjustments where we feel like it's come back in our face. So we're careful. They're not going to be egregious price increases. But again, I think if we're seeing some labor issues, which you can see from time to time, let's say in a hot market where it's labor competitive with other industries, be it real estate or other folks, we have more ability to pass along those inflationary costs. And again, we try to engage the whole market in saying, hey, how do we solve this problem? If we really are losing people, we need price increases, then let's come up with a game plan to where everybody wins. And I'd say that approach so far has worked. Clearly, there's inflation in the system, and we're going to have to deal with that in the coming year.

Okay. And then just lastly, just another aspect of the deal activity in the fourth quarter. Should we think about this as just sort of normal succession planning coming to fruition that maybe got put on hold a little bit during the pandemic? Or is there any other dynamic, people burned out post-pandemic with everything they've had to deal with and therefore looking to make a transition that maybe wouldn't have been if the pandemic hadn't happened? Or is there any other dynamic at work that you see that's prompting some of these transactions?

I think it's a little of all the above. For sure, I think that you continue to have kind of an aging transition problem. So every year, the businesses that we're buying generally are not startup businesses. They're generational businesses. So I think that is definitely playing an impact. I think having gone through COVID and everything that's happened over the last couple of years is, you know, from talking to some people that are making these decisions, they're saying, I want to enjoy life. And so I do think that's had a bit of an impact. And, you know, let's face it, you know, what's the best time to sell your business when I pro forma have volumes up? And, you know, that's a starting point of any negotiation. Clearly, we're not going to pay for what we believe are one-time business, but But I think all those things kind of come together to force a little more activity. And like Eric referenced, we're clearly seeing more deal flow opportunities to grow. And, again, I think we're going to be selective. But we're excited about what we're seeing now. And I kind of think this will go on for, you know, a little period of time. Okay. Exactly.

Okay, great. Thanks a lot.

Thank you.

The next question comes from John Ransom with Raymond James. Please go ahead.

Hey, I'm still mad at you guys for sending me that mailer for dignity. I'm a boomer, but I'm kind of a young boomer. It was very targeted, John. I've tried to get healthy during the pandemic. The The question I had is if you look at the full kind of excess pull-through, which is a nice euphemism, of course, of the last two years, and what is your current thing? So let's just say that's a little over 100,000 excess funerals. What's your current thinking about the pull-through of that as we look out over the next, like, one year, three year, five years? Have you been able to get any insight into that?

Yeah, I think it was a little bit different than what we originally said earlier in the pandemic. That's the first thing I'll have to say. First of all, the 100,000 for us is really more like 120,000 of what we believe were the COVID ancillary deaths that we did, which was about 50,020 and 70,021 is a very rough estimate. You know, when we first said a third, a third, a third, I think we're very much off, and I think we've been trying to say that. You know, we're learning as we go forward and trying to figure it out. But I think the tail is much longer is the first thing I'd say. It's not just a three-year event. And the second thing I'd say, it's roughly maybe even half to a little bit less than half of that a third, a third, a third. So when you think that way, you know, think of 15, 14, 15, 16% area of You know, I'm talking way too precise, you know, just to start, because we haven't experienced this yet, and we have to get through and continue to sync up. But we think in 22, for example, it's somewhere about that percentage of the 120,000 that's through there. What I'll tell you is we'll learn as we go. I'd be very surprised if that's perfectly accurate, but we'll put our best foot forward, and we'll learn as we go, and we'll update you as we move forward.

Okay. And then just kind of flipping this, I haven't talked to you about this in a while, but, you know, I would imagine finding, you know, commission-based salespeople to sell a product with no recurring revenues, you know, is a tough gig in 2022. So just kind of talk about maybe your Salesforce turnover productivity metrics, kind of the 80-20 rule, and if you've had to do any different things to recruit people, or maybe with the comp structure, the payout, anything there to I mean, because you're obviously humming in a difficult backdrop, but what have you had to change to keep that going, if anything?

Well, John, I think, first of all, just to compare pre-pandemic to post-pandemic, we're actually probably down about 400 to 500 counselors, because one of the things we did is, in the uncertainty, we didn't know what kind of leads we were going to be able to generate, because remember when we started, traditionally we were getting a lot of leads through, I'd call it the the walk-in model or the activity follow-up model, we didn't have a lot of marketing leads being generated. So we really pared down and said, let's give our leads to the best people. And at the same time, launched this marketing sales lead programs, which became incredibly effective. At the same time, you'll recall, we had customer relationship management software, which we were encouraging people to use, but weren't insisting that they use it. And what happened in all that when you shut down travel and you didn't have the ability to go is we started leaning on these technological tools to manage and then had these incredible leads. So what we found is we were much more productive as a sales force, as a sales management team. We had more capacity to manage because we weren't on the road all the time. We were using, you know, data. off of this customer relationship management, so we knew effectiveness. We could apply training. So what's really happened out of this is we have less people that are selling a lot more, so much more effective. So as we think about going forward, I think our thoughts are this. We can go deeper on effectiveness. We believe we're now launching tools that actually will allow us to be more productive, more effective with what we have, At the same time, we're generating more marketing leads that we talked about. So I think it's going to be an interesting dance that allows us to be more productive, but at some point our hope is that we're going to have so many leads that we have to begin to grow the headcount again too. Right now, I tell you, there's a lot less turnover, a much more effective sales force, and it's really being driven by productivity and putting the best leads in the hands of the most capable salespeople.

I mean, Tom, do you think looking back on it a year from now or so, you'll say this might have been the most enduring benefit of the COVID response?

For sure. I mean, I think it's the biggest impact. We've got some efficiencies I think we've gained in staffing and learning how to manage that. I think some back office efficiencies that we've learned by leveraging on technology. But the biggest issue, and when you think about the excitement of what we're on is, we believe we've achieved a new plane of sales production. You know, we accelerated the growth. We're saying we don't, you know, some of this isn't going back. Clearly, some of it's COVID. And I think Investor Day, we'll try to talk a little more. But, you know, we mentioned before, we really accelerated. We used to, you know, guide the cemetery sales at 4% to 6%. You know, over this period, compounded, We think over the last three to four-year periods, we may have grown at 9% to 10%, and we don't think we're giving it back. That's the real growth, right? And then we have the excess growth that's related to COVID. So that's what's exciting. And so I think we're at a new base camp for 2022 that we're going to begin to grow off of and probably wouldn't have achieved it if COVID didn't happen. Gotcha.

And last one for me, is there any more wood to chop with Beacon on the cemetery side? Is that fully deployed at this point?

It's fully deployed, John, at this point. But what you'll see going forward, as Tom just mentioned, there's a lot of technological increases and uses that we want to do and improvements that we want to do. So it will be that type of ongoing thing. But the answer to your question is it's rolled out and deployed.

Okay. Thanks, guys. Appreciate it.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to the SCI management for any closing remarks.

Thank you, everyone, for being on the call today. We look forward to talking to you again in our first quarter earnings call in late April, early May. Take care.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.