Service Corporation International (SCI) Earnings Call Transcript & Summary

Welcome to the Wells Fargo Healthcare Conference. Before we start, please note that Wells Fargo securities events are by invitation only. Members of the press or media are not permitted to join. If you are a member of the press or media please disconnect at this time. Also please be advised that today's conference is being recorded. Thank you.

Good morning. Welcome to Day 2 of our -- the Wells Fargo 2020 Virtual Healthcare Conference. My name is Duncan Brown. I'm the high yield health care analyst here at Wells. I'm very excited to have SCI, Service Corp. with us once again this year and CFO, Eric Tanzberger. Eric, thank you so much for being with us. We really appreciate it.

You bet, Duncan. Happy to be here.

I think in terms of order of events, I'll go ahead and start off with a few questions. But I mean, the goal of this is for the investor community to ask what they want to ask. So I'm sure everybody knows by now, Zoom has a Raise Your Hand feature. Please, for those that are on the call on Zoom, please feel free to raise your hand, and we'll do our best to get to as many of you as we can. So please don't be shy on that. But I'll kick it off, Eric. I mean, look, 2020 has been an absolutely crazy year on a lot of fronts. And SCI has found themselves in the middle of the pandemic. And before we get to the particulars, I'd just love if you're willing to give relative -- a summary about how SCI has been able to respond to the pandemic, how it's impacted the year thus far and any sort of implications for the back half of the year?

Sure. So thanks again for having us, Duncan. We appreciate it. Happy to be here with you today and everyone joining us as well. I hope everybody is healthy and safe, which is the most important thing as we continue, as a country, to navigate this. As a company navigating this, it was -- I guess the way I'd describe it, looking back at April, which seems like 4 years ago at this point, it was just kind of a shock to the system, right? You kind of saw things coming in March and February. None of us really knew how significant or serious this was going to be. But ultimately, in April, just to give you a feel for the shock, our volume -- our funeral volumes were up 20%. A really strong month, as you know, Duncan, is probably funeral volumes up 1.5% to 2% or maybe even 3% in some certain situations with flu and such. So you have a 20% increase in your throughput all of a sudden. The average dropped off as well because everything was being shut down. Families could not celebrate, could not gather, as we all know, with the initial lockdowns. So therefore, there was a piece of the spend that was not there at that point in time related to catering and flowers and visitations and celebrations and such. So then our average was down about 12%. And then at the same time, as you know very well, is that a lot of your leads from your preneed business come from that, not only from the deaths that go over to the cemeteries, but just radiating from those particular families. So then we had preneed cemetery sales down upwards of 30%, 35%. Those are numbers that I haven't seen in 25 years being in the industry and being at SCI. So that's just kind of setting the table on where we were and what a shock to the system that it really was. Ultimately, that all came back as we know for the quarter. The immediate steps that we did is made a decision to make sure that our associate base, our 25,000 employees were safe, healthy and taken care of. I think we're one of the rare companies that committed early on to get through this from a no furlough perspective, no voluntary furloughs, no layoff perspective. To this day, we're very proud that we're able to navigate through that. But I think a lot of the navigation of that is really predicated on the fact that we were somewhat prepared from a financial perspective, from a balance sheet perspective, Duncan, to really weather this storm. Any time that we deploy capital before we go through our deployment priorities, the first thing that we make sure that we have is a very manageable debt maturity profile, the proper liquidity and the proper free cash flow as well. And so our system or what we thought we were prepared for was significantly pressure tested, as you know. And what it turned out to be is it all kind of worked the way we expected. And that really gave us the confidence to make those statements to really put our associates first and really have confidence that we were going to weather the storm. Now certainly, we really managed costs at the front end to the extent that we could outside of those personnel situations, noncustomer-facing costs, travel, those types of things, overtime, those types of things. Any type of advertising, media spend, anything that comes to mind that is variable to the nature that you can affect in a short-term period of time, we certainly did that, and we're able to do that. And then really things just started to get better during the quarter. As we mentioned on our call, all of a sudden, the volume wasn't up as much. It was up high single-digit to low double digits, ended up 13% for the quarter. Instead of average being down 12%, certain jurisdictions were opening and therefore, we're enabling the spend to occur related to visitations, related to celebrations. That brought the average down to, let's call it, low single digits, maybe 3% to 4% at that point in time. And then most importantly, just as surprising was the initial headwind in preneed cemetery was the snapback in preneed cemetery. And that really goes to the consumer that I'll mention in a second, but just to give you a feel for it, down 35% in April became up 20% and up 40% in June. So I think we ended up the quarter, I think, up 10% overall in preneed cemetery sales. The good news, I think, ultimately, navigating through this, and I'll talk a little bit about what we think going forward, Duncan. But I think the best thing that came out of this was the consumer clearly was telling us that this event wasn't going to fundamentally change our industry or in terms of behavior of the underlying consumers in our particular industry. And let's face it, for us, that's a good thing. Ultimately, there was a lot of frustration with our client families that wanted to have visitations, wanting to have gatherings, want to mourn their loved one, or in a lot of cases, celebrate the life of their loved one. And that's a very good thing because this could have potentially gone a different direction where our industry or the service component of our industry maybe lost some importance. And what we found is, it's actually just not true. It was just as important as it always has been. And more importantly, the aperture of the consumer in terms of this is important, and now I'm really starting to think about it, and I actually want to preplan and start planning was a nice what we would consider an upside surprise, but really foundational in nature in terms of positivity, really, as you think about this industry going forward. Post the quarter, I think at the end of July, we gave you some indications that the trends that you saw in the back half of the quarter were continuing. As COVID is out there and as jurisdictions open or close, that's how SCI is going to behave. You saw it very volatile you saw it, but you definitely saw the effect during the second quarter. And it just depends on what COVID looks like during the rest of the year and into 2021 in terms of what the ultimate effect is. So I know that's 30,000 feet and that was a long answer to your short question, Duncan, but that's kind of how we saw the last, let's call it, 4, 5 months.

No. I appreciate it. So I'm going to ask a question that I get all the time, and I don't have the answer to. Maybe it's an impossible question. But you noted how rare the volume trends in Q2 were, right? I mean, so how should we think about that elevated volume impact that -- what that will -- what the longer-term impact that will be on volumes going forward, not necessarily Q3, Q4, Q1, whatever but as it relates to 2022, 2023, et cetera? I mean, are there any sort of stats or thoughts you can help us think through to try to wrap our minds [ around ]?

Yes. I mean, as you said, it's almost an unanswerable question because we haven't been through this before. What I will tell you is there's a little bit of a proxy out there in terms of other flu seasons, just normal flu seasons that have occurred like the 2018 flu season and such. For those of you that are kind of new to the story, a flu season that occurs in the first couple of months of the year, call it, January and February of a particular year does accelerate volume for future quarters. So really, you have a pretty large uptick in your first quarter in terms of throughput, in terms of number of funeral services performed. And then ultimately, what you have after that is softness in Q2 and Q3 because what we find is the vast majority of that flu season is capturing elderly, weaker patients or individuals that ultimately would have used our services in Q2 and Q3. So think of accelerating Q2 and Q3 business into Q1, and that's ultimately the effect of a flu season just foundational as we then -- let's talk about more specifically the COVID situation. So what's different about COVID? Obviously, the sheer numbers are different. We haven't seen this type of incrementality in terms of the funeral services before ever, as I've described to you earlier. We've had, what, we're about 180,000, 190,000 deaths, I think, across our nation. I think we, at SCI, as we've told you in our prior conference calls, have generally been around the 8% to 9% share of that. We have a 12% market share in funeral, but ultimately this has been very spotty in pockets in terms of where the hotspots are. And in places like the Northeast, we really have more mid-single-digit type market share in the Northeast in some of those hotspots. So that's why I gave you kind of that 8% to 9% figure. So ultimately, if you do that math, we're somewhere around 15,000 incremental deaths on a base that we normally do, call it, 320,000, 325,000 funeral services a year. So this is an [ incremental ] 15,000, which is significant, but over a period of time, you're talking, what is that, 3% or somewhere around that time. So the question is, how much was really truly elderly that's going to be pulled forward in a short period of time and how much, frankly, was a very unusual situation where you're talking about 20-, 30-, 40-, 50-year olds that, frankly, you are not going to service in the next 1 to 2 or 5 years or maybe Duncan, maybe not in years in my career when we're still doing this. So that's really the hard part to model. We've generally thought just looking at cohorts and age cohorts of what we've seen in the COVID situation and our company specifically as well as our data that's available out there, we generally think it's somewhere maybe around 2/3 of those deaths or 60% to 70% maybe should be considered elderly in nature and pulled forward in nature in a shorter time frame. Now whether that's we pulled forward from Q3 and Q4 of this year or do we pull forward from 2021, Duncan, that's the real hard part to model that I'm not sure how to help. We're going to have to just get through it ourselves and try to continue to figure out. I will tell you, though, that would be 10,000 of the 15,000 deaths, and I guess, compare that to the 320,000, that's really your 3%, if you do the math right. So we could obviously see some headwinds in 2021 to the extent of maybe low to maybe even approaching mid-single-digit percentage declines in the funeral volumes. The good news to that is we've learned a lot about our cost structure. We've learned a lot about implementing technology. We've learned a lot about managing through it in a more productive way. And I think we're just going to apply those learnings to 2021 to really help us: a, probably manage through this headwind that we just described, but also; b, to ultimately continue to have margin expansion in future years as well.

Okay. I appreciate it. That's helpful. And I guess that 2/3 metric is particularly, for a lack of a better word, interesting as you think about modeling it out. The other side that you mentioned on the funeral side again is obviously pricing, which negatively impacted by social distancing and other things. I wonder if you could help us think about -- so your pre-COVID revenue per service, is there a way to know or could you help us think about a percentage that relates to services that do not include visitors? So as we think about what -- if you're completely shut down from -- or social distancing's come back in a real way, the potential impacts there?

Yes. I think generally, what we've seen is, if you look at our -- what the spend is and you kind of break it down and call our funeral average overall, somewhere around the high $5,000s, you may even call it $6,000 if you want to just to kind of round it at this point in time. You're generally seeing, call it, 15% to 20% is the spend that you're really precluded from doing. So that was a little bit of misinformation, I guess, is the best way to describe it that was out there early in the situation that, from our perspective, with the shutdown, 80%, 70% 50% of the spend is just not going to be able to physically be there because of the state jurisdictional laws. And that's just -- that simply wasn't true. There's a tremendous amount that we do for our customers in terms of picking up decedents, prepping, embalming, casketing, other merchandise and such, which is all still there. So ultimately, you're looking at, call it, $1,000 or somewhere around that, call it, 15% to 20% of the spend was certainly at risk. And that's really what we saw when we saw in April, the volume being down 12% -- excuse me, the average being down 12% in April that I had already mentioned to you because everything was kind of shut down in the near term. Then as things started opening up, you saw immediately that spend being able to occur. Ultimately, though, I will tell you, as I described to you earlier, there was a very true spirit of these families that just said, look, we're going to figure out how to do it. And as we've said before, we've done a lot of creative celebration. Whether it's at a cemetery outside, whether it's drive-by type services and celebrations or commemorations or what have you, we've done a lot of creativity. But ultimately, there are places such as California that were significantly locked down. We have a pretty sizable business in Canada that is -- continues to be significantly locked down as well. We're finding ways to do it. Right now, you can't have indoor funeral services in California. So if you go by -- not all of our locations because we don't have the physical real estate space to do it. But most of our large locations, we have a significant amount of outdoor tents that are now set up, that have been set up for many months now that are enable us to have properly legal, social distancing type outdoor services in California. So the one thing that I would tell you is, again, just to reiterate, the families wanted to celebrate and our frontline associates wanted to give that to them and wanted to serve those families. And they really did some incredible things to pull off what they've been able to pull off, which, again, we've learned from as well as we move forward.

I appreciate it. I'm more just curious sort of the creative solutions that you all have been able to come up with, is that [ bowling ] upon the local operator? Or is that coming down from corporate or a mix of the 2?

It's a little bit of both. Let's give you an example like in the L.A. area with the outdoor tents, that particular law is more specific to California. And so a lot of the times, the local management were very creative and got tents out there as quickly as they could and took that initiative and created a tremendous environment. Same thing with some of the drive-by things that we saw. Some of the cemetery services that have occurred, instead of having the celebration indoors at a funeral facility, they're having it outdoors at the cemetery themselves. And they were broadcast using AM radio frequencies and stuff. That was the stuff that was more local-driven that you have to give them credit for creativity. Some of the stuff that I'll consider a top-down from corporate and kind of pushed out would be things like maybe the Facebook Live initiative that we were very quickly able to roll out to pretty much 1,200 of the 1,500 funeral homes pretty quickly. A lot of that was -- we were already studying that and already testing that as well. But it was an incredible rollout in terms of speed and quality, frankly, to get that up and running into those locations. And so that really was a corporate push. And now all of a sudden, you may have 10 family members legally allowed under the jurisdiction, attending the funeral or visitation itself that gets broadcast live through Facebook to everybody. So it's a combination of both, but we're really proud of our associates in terms of their initiatives and their creativity and just frankly, their drive to satisfy the families in terms of the services that they wanted to have.

Great. I appreciate that. And just as a reminder for those who are on the call, typically in the conference, this is when I would pass around the mic. But if anyone does have a question for Eric, please just raise your hand via the Zoom app, and we'd be happy to try to get to you. I guess, one of the things that surprised me, and I guess, there were a lot of things in 2020 that surprised me, but your cremation was up certainly, but not maybe up as I might have expected. Was it in line with your expectations? Or just your thoughts on the impact that COVID may have on cremation trends going forward?