Service Corporation International (SCI) Earnings Call Transcript & Summary

Yes. I think we have to get through it and model it to really answer your last question, like how additive and how material is this going to be. But let me try to be more specific to help answer. Let me start big picture and say, what hasn't changed which would have been our kind of our enterprise risk fear. And the good news was during all of this event and all of this period of time, one of the fears of the industry, I think, was, okay, you can no longer gather and visitations are shut down. Memorialization services, for the most part, are shut down. Celebration of life are shut down. Put yourself in the April time frame. And then what could have happened in May, June, July, August, September is you could have had a consumer that, okay, got kind of used to that. Maybe we don't need to do that. Maybe we can do our own type of memorialization. We're going to use the funeral industry for picking up, casketing, et cetera, et cetera. And this other celebration of life, we're going to kind of do our own. Or memorialization, I'm not sure it's that as important culturally as we thought it was in the past. The good news is that all the arrows, all the evidence is pointing to, that just didn't happen. That just wasn't the case. To the client where it got tough because it put us in the middle between the jurisdictional laws and what some of the client families were trying to do. I mean, the Asian consumer on the West Coast, for example, they were memorializing, period. And it put us in a tight bind. So I think those are some positive things to think about. There's no doubt that the client families want to have the visitation, want to have the celebration of life, want to have the memorialization. And they were very comfortable with us being the event planners as well, even when we were being very unique in the way we're doing it, drive by, visitation services, services that were virtually broadcast using Facebook Live, services that are broadcast over a little AM radio type system in cemeteries, so it's an open air environment. So that's a good thing. So now let's get more specific to your question, which is a fair question. What does SCI look like? What do we gain from this, coming out of this? I think the biggest answer, and I'm going to use it -- I'm going to say, internal and external technology. I think internally, we really utilize some technology to help us better that really gives us a lot of feel for we can move quicker with some of the things that we want to do internally to utilize technology to make us more efficient. But I think the big win ultimately was, just to remind everybody, we're dealing with a consumer that's 62 years old, 72 years old, 82 years old. We were always very reluctant to push technology out. Well, I got to tell you, they embraced it very, very quickly, whether it's the Facebook Live virtual environment, or whether, as you said, John, it is an interaction from your preneed sales force, interacting using a virtual meeting. We used Cisco Webex's product. We used DocuSign that was rolled out immediately and such. And it was very much embraced by the consumer. That gives us a lot of confidence to continue to move that direction. And a lot of things that you started hearing us talk about in terms of -- I think Tom talked about it on the call in July, kind of an end-to-end process of when we first touch a consumer until we last touch a consumer. Utilizing technology is a project we have here called reimagine. And that can be back office technology in terms of making ourselves more efficient, in terms of, for example, tracking the decedent through all the different steps along the way. But more importantly, it's like how do you interact with the family virtually and make it a better experience, a more efficient experience and a higher-quality experience, like family portals where before the arrangement conference, they're able to upload pictures, certain information to help us get to know them better before an arrangement conference. An arrangement conference is virtual as opposed to in-person because the kids don't live in the same hometown. So I think all of those types of things on the technology banner. To what degree, we're going to have to wait and see. But I think for sure, we see ourselves as a more efficient organization in the cost structure going forward, John.

Great. Now what I didn't hear there, I wouldn't think you would have tremendous real estate efficiency. I mean, you're not going to shut down funeral homes and your headquarters in Houston. But is there anything to add on just the contribution from people working at home? Is that something that moves the needle for you?

Yes. It doesn't affect, obviously, the underlying businesses, right, funeral and cemetery. If anything, we find that our real estate footprint has become more valuable as we continue to go down the path of celebration of life and dab into touching event planners and hiring event planners, frankly. We were testing that in Florida, as we've talked about before. I mean, that footprint becomes significant. From a back-office perspective, the answer is yes. I mean, there's some efficiencies out here. We are 95% virtual work from home. One of the big steps that we did is we had 300 to 400 back-office FTEs that were in India. And what we figured out from a risk perspective, as they shut down overnight, is that we need to bring that back. But I think also, we find ourselves becoming more efficient even with that. Even with the labor arbitrage situation, we still end up net positive in that situation. In terms of moving forward as a back-office or as a corporate office, I think we haven't decided yet. We're still closed. I think there's going to be some type of hybrid model. So that bodes well in terms of some type of real estate efficiencies. But let's face it, the corporate office isn't really the big chunk of that at all. It's all in the field operations, and I don't see that real estate play being much different, frankly.

The inevitable FTC question, maybe just level set people about where we are and what your expectations are, at least in terms of maybe a -- some resolution on this?

It's hard to tell in terms of timing. I mean, obviously, the government shut down and working from home, at least that particular division of the government is. Just to refresh everybody's memory, every 10 years or so, there's a federally mandated funeral rule in the United States that promulgates us using general price list to consumers and such. There is a comment period in this latest iteration of them looking at the rules statutorily, as they're required to do so every few years, as I mentioned. A lot of it has been, should prices go online. But that's -- the crux of the issue is -- the truth to it is, they were just -- when I went up and talked to each of the 5 commissioners or at least their chief of staff and their offices, what I found is a tremendous amount of misinformation. And so our submission, John, really did 3 things. And our submission is public, so anybody can go out there in the FTC website and see our submission. But really, what we said is really 3 things. First, this is not a commodity. Anybody that's telling you that the funeral business is a commodity, it's just not accurate. If anything, it's going the other way. It's going towards customization of services. And it's very much like a wedding. The -- you could do a wedding probably for $5,000. You can probably do a wedding for $250,000 and everywhere in between. And that's kind of how it is, and so this is very much a service-oriented business that is customizing the service component, the celebration, and it doesn't really lend itself to a general price list as a commodity does. So that's the first thing we corrected them with. The second thing is the customer satisfaction in this industry is just over the top, second to none. And so we went ahead and submitted 5 years of data or I guess, those 5 years, a significant amount of years of data to the FTC of our 60,000 to 70,000 J.D. Power quality surveys that we get that ranks us. And I think it's just indisputable that the client satisfaction in this industry is really just nothing short of amazing. And there is a lot of misinformation that was out there related to that. Third thing is it's a very, very regulated industry. The federal funeral rule, as I just mentioned, but each state has a significant amount of regulation, a significant amount of oversight, whether it's trust funds, insurance or just the business itself, frankly. And there's a lot of audits going on by those states all the time. So those are really the 3 points that we wanted to make. Now timing, John, I don't really know. This could go on for another month. This could go on for another 2 to 3 years, frankly. And I just don't have any indication of how to call that play right now in terms of that. I think the news that I will share that I think is a little bit disheartening is that like everything else in the United States, things have become politicized. And when you -- right now we have -- there were public administrations. So the 5 chair people are 3 Republican and 2 Democrat. And it just surprised me how very far apart they are, which, as we all know, is indicative of our country right now. So if the election in November goes a different way and then statutorily, the commissioners will flip, and there'll be 3 on the Democratic side and 2 on the Republic side -- Republican side, I got to tell you, John, I think that's really going to be the biggest piece to this. That's unfortunate because I think the facts are very clear as we submitted them and as other organizations within our industry have submitted it. But I think, unfortunately, it's very politicized. And I think that is going to be a big factor in terms of how this shapes out ultimately.

So if we think about the downside risk here, what does that -- what actions could they take that would be something that would leave a mark in your opinion?

I think they could do -- I think mostly when I talked to them, they said, we would put the general price list online at the front of your website, et cetera, et cetera. And the -- their theory is that would bring clarity to the consumer and that would, therefore, affect our business in some way. The truth to it is, if you go to our submission or our J.D. Power data, it's very clear that the pricing clarity is already there with the consumer. So I guess it's hard to figure out where the mark would be from a negative perspective because consumers receive GPLs anyway, and they have to, statutorily, in each and every case. I guess it would be that consumer behavior would have to change, John. There would be aggregators aggregating price lists, which they do now, to tell you the truth. But the consumer behavior, for some reason, would have to utilize or make a decision differently than how they're making it now. So it's a little bit harder for us to stretch our mind to get there. And again, we're trying to not ignore a consumer using online tools, as you know. We have 1,500 funeral homes, 500 of them -- and again, they're price tiered. So our lower kind of price tiers, all of them, 500 of them have really starting at prices that are out there. You certainly can call or email and get your price lay, your GPL, if you want it. What's new and interesting, I think, John, and you got to check this out, especially, it's in your neck of the woods in Clearwater, Florida is -- I'll give you the example of a location we have called Sylvan Abbey. Sylvan Abbey is the name of it, if you just go to that website. And you're going to see now our middle-tier businesses, call it maybe up to 400 or so at some point in time. Right now, we probably only have 30 or 40 of this rolled out, but I encourage you to go to that website and see what we call enhanced product and service feel to the website, a much richer experience, which has actually gone through. Here are the venues we have, good, better, best. Here's the pricing for that. Here's the catering and menus that we have at Sylvan Abbey, good, better, best. Here are the prices for such. Here's cemetery property. Here's the celebration. So it's a pretty rich experience and going ahead and putting that information out there with dollar amounts as well. And we really think that, that -- when we listen to our consumer when it's tiered, that's really what they're asking for. In terms of the high-end locations, they're really not asking for price out there. They're asking for as much information out there and pictures and such so they can see the kind of the Ritz-Carlton location so they can see how nice they really are and such. But I would encourage you to go out and kind of see what we're doing right now because I think it's very helpful.

Well, and when people raise this issue to us, one thing we point out is that this is really an atneed issue that 40% of your funerals are -- they come through your -- they get -- that goes from preneed to atneed. People have bought this dispassionately on the preneed side with full awareness of pricing.

Yes, and that's very true.

It's an atneed theoretical risk of consumer behavior changes.

Yes. That's really what it is because I think we're rolling stuff out there. You can go to that example to see it. I think we'll continue to do that over a period of time. I think it's helpful to the consumers. But for this to really have a mark, there needs to be a material change, in my opinion, of kind of how the consumer goes about purchasing this in an atneed environment. The component or cohort that's price sensitive and goes purely on price and nothing else needs to expand materially for that to happen. And have we seen that? I got to be frank with you, no we haven't so far.

So we have about 3 minutes. I'm going to wrap up by -- I probably should have allot a longer time for this question. But the other concern we get from people, and again, this is one of these long-term issues that probably moves incrementally but certainly, the celebration of life outside of the funeral home at the beach or at the country club. The company has 1,500 funeral homes. I attended a funeral recently at your Blount & Curry Funeral Home. It's beautiful. Now a quarter mile down the street is Palma Ceia country club, and they're certainly doing their share of celebrations of life in the main ballroom, and it's probably a tie, frankly. But what's been the thinking long term? Is it possible 5 years from now that the company says, gosh, we've just got too much legacy real estate, we need to think about event space, and we need to maybe work to lighten our kind of permanent asset footprint because the consumer really just wants to have this experience in a different place other than a funeral home?

Yes. Well, the answer to your question is, certainly, it's possible. But I'll tell you that from the feedback that we have received, we just haven't seen it that way. I think a lot of those people that were going to the country club, John, probably weren't utilizing in our funeral home any way even if the country club wasn't available 10 years ago, for example. In other words, like they probably were cremation consumers in those instances and may not have been willing to utilize the funeral home anyway. They just didn't think that was the place to do it, and we can get into the segmentation of the deal. But I think, obviously, you're bringing up a good point. Look, we don't have our head in the sand. There could be a movement that says everybody wants to go to the country club. The answer is, what are we doing about it? And what we're doing about it is, we're actually, as you know, creating event space ourselves and investing capital into our funeral homes to do that. We are investing in personnel in the form of event planners. You're dealing with a funeral director, but then there's a baton handoff to a younger event planner that does nothing but planned celebrations. A lot of them are from the wedding industry, for example. That is stuff that we have implemented in certain places in Florida, and we're planning in 2020, frankly, to put some capital behind to invest further across the country. We only got to about 1 or 2 markets, frankly, to even start testing it because of COVID. Ultimately, if you -- to your point, there is plenty of times in my career alone that we have paused and looked at our real estate footprint and said, is there a higher and better use of this asset? And should we make this asset liquid? And I think we have a track record of looking at that, and I think you'll always see us continue to do that. So if there is some of this on the margins, John, yes, I think you'd see us consolidate some real estate assets and go a little bit lighter. But right now, we're hoping to go more into the event space ourselves and event planners. And of course, our advantage really is we're the first people that they call in this atneed event. So we have the first communication with that family to put our case forward with that client family, which hopefully gives us an advantage as long as we have the personnel and the real estate and all the packages that they want to meet their customized need.

Well, with that, we are 1 minute past our time. Eric, I'll see you in 4 minutes. Thanks, everybody.

Okay. All right. Thanks, John.