Service Corporation International (SCI) Earnings Call Transcript & Summary

All right. Hi, everybody. It's A.J. Rice, health care services analyst at Crédit Suisse. We're very pleased to have next up in our presentation lineup is Service Corporation. We're joined today by Eric Tanzberger, Senior Vice President and Chief Financial Officer; and Debbie Young, the Director of Investor Relations.

Eric, just maybe a high level to start it off. You guys just reported Q3 results, strong results. What were a couple of takeaways that you would make sure people, if they're new to the story, walked away from your Q3?

Sure. Thanks, A.J., and thanks for having us as well. It was a very strong quarter for us. If you didn't know us before, we issued $0.79 per share, but it's up $0.42 compared to $0.37 prior year, which is significant growth for our business and for us. And it's primarily COVID related, ultimately. What really drove that increase is predominantly the vast majority of that, the funeral and cemetery operations themselves. We're seeing a tremendous amount of throughput in terms of what we call funeral volumes in the industry or the number of funeral services that are being performed. And that's in the high, call it, teens percentage growth year-over-year. There's a little bit of offset to that in the low single-digit percentage declines in ASPs. That's predominantly because we're still not able to be an absolute full-service firm providing everything to all families that we normally do because of the COVID restrictions in a lot of different jurisdictions, particularly a line in California, a line in Canada, but the truth to it is all around the country as well. There's still some lack of gathering that's going on as well. On the cemetery segment, I would characterize it as just great performance from a preneed cemetery property sales perspective. Preneed cemetery sales, we're growing in the 30% to 40% range, just tremendous over the past few months. A lot of that has to do with families that are attending atneed arrangement, A.J., at the funeral homes, at the cemeteries. Clearly, those are the best leads for our sales force. But it's also just kind of a -- with everything that's going on with this pandemic, it's really just being top of mind in terms of people are saying, you know what, while we're attending these funeral services who are attending these cemetery services, maybe we ought to think about doing this. So maybe we finally ought to just decide to, let's go ahead and purchase cemetery property. Let's go ahead and put down on paper and talk to a funeral director or a prearranged salesperson to go ahead and enter a contractual relationship with a prearranged funeral contract and such. And that really has been driving force for the quarter and for us. Certainly, COVID has a lot to do with that as creating these tailwinds and the top of mind mentality that's out there for most of the consumers.

No, that's good. And along with your Q3 results, you did offer some preliminary thoughts on next year, [ $2.25 ] to $3. And it sounded like within that range, $0.75 broad range COVID-related impact would continue and drive the high end, less COVID-related impact at the low end. Can you talk about some of the puts and takes within that range? And that's still fairly robust even at the low end off of this year. So what are some of the things that give you confidence in that type of growth?

Yes. I think what's important to notice is, is that, as you just said, that's an extremely wide range to kind of throw out there to have initial discussions about 2021. Our official guidance that we'll dive a lot deeper, talk a little bit more about the cost structure, usually, we do that in February and have the benefit of the fourth quarter being behind us. This is a unique situation, as you know, A.J. The further we get along and even into 2021, early February, the more we digest about what COVID is doing and what the timing of the effect is on different things in terms of the spread that we're seeing in this kind of third wave in terms of vaccinations and timing of that. So that's going to play a lot into it. And that really played into such a wide range of outcomes that we're describing in terms of models. I think you hit it on the head though. There's a couple of interesting things I want to talk about at the low end of that range. $2.25 really assumes that unrealistically, frankly, in my opinion, COVID is done on December 31. I don't think you believe that, I don't think I believe that. But that's a good baseline of where we are as a company. I'm going to come back to you and describe to you, I think, why I think that's important. As you already described, the upper end of that range being $3 a share assumes COVID continues. And obviously, in that situation, there is no vaccine, there is no herd immunity, it hasn't slowed down or it's mutated or whatever you want to describe in that situation. But COVID exists through the end of 2021, at the levels that you're seeing today is that assumption. So that's going to continue to drive funeral volumes, a little bit softer ASPs in the funeral segment. But it's probably going to continue driving preneed cemetery property sales as well in that scenario. The answer is probably somewhere in between those 2 scenarios. So we've kind of laid that out on the way to give an individual the ability to form their own opinion on what they believe as it relates to COVID and then land somewhere in the middle in terms of that belief once they go over and do their own research and do their own analysis. The thing I did want to mention as it relates to that $2.25 is that if you go back in the pre-COVID levels for our company, so let's just use 2019 as an example, that was $1.90 per share of normalized earnings per share, as you probably remember, A.J. And ultimately, we believe we should be able to grow the company in the 8% to 12% bottom line earnings per share. Now some of that's come in operations, maybe half of it is coming from operations, some of that's coming from M&A and share repurchases. When you start getting into the levels that we're at, it's tougher to grow with the share price where it is from that perspective. So even then, call it, 8% to 10% in that example, if you take that 8% to 10% and compound it from the $1.90 in 2019, you're going to get around that $2.25 to $2.30 range. And that's what I think didn't necessarily resonate as much as we expected it to resonate in the conference call. When Tom really went into some detail describing some of those assumptions around that low end kind of base of that $2.25 per share for 2021, what we're really saying is the company has been performing even without this COVID bubble. And without the COVID bubble in 2021, being at $2.25, we're right where we should have been if COVID never existed in the first place, and we were growing kind of 8% to 12% or 8% to 10% in terms of bottom line earnings per share. And I know it's important for everybody to understand as well as they look at the foundation of this company and more of the foundational growth that we have moving forward in '21 and beyond.

Yes. So that sort of begs the question. I guess, was there anything about -- it sounds like you're looking at the COVID crisis and you're saying all the puts and takes, second quarter, third quarter, where we're at today, were largely driven by the pandemic and when the pandemic is over, we're going to sort of return to a normal 8% to 12% environment. Am I hearing that right? And is there anything about -- I mean you've got some cost savings you've implemented probably [indiscernible].

Yes, I would say there's a little bit more than just a COVID bubble that's going on. I think that's my point, A.J. And I don't think people are necessarily understanding that very well. But what we had in 2019 is a certain cost structure, and then we have a certain much more leaner cost structure in 2020. And I think what we're saying is -- and we've kind of said this all along. I'm not sure we can sustain the type of cost structure that we have in 2020 because a lot of that has to do with incentives that are out there for our sales force, for example, driving it, some noncustomer-facing costs and such. It has to do with a little bit of a lack of advertising and promotional spend as well. Those types of areas and some FTE situations as well has created as much leaner cost structure. I don't think we need to go back to 2019 levels, but I also think we learned a tremendous amount about our cost structure and about interacting with the consumer utilizes in technology. And I think that bodes very well for us going forward. And I don't think we necessarily have to go back to the 2019 cost structure. So the answer is somewhere in between and that needs to be understood because that's part of the synergies that we mentioned on the call that are ongoing that we learned from COVID and kept working through things to make our company ultimately better. I also want to talk a little bit deeper about technology. A couple of things that we've done. We've really learned a lot about how fast we can go in technology, both from our own internal customer, our associate, being able to adopt it, utilize it and be productive with it. And also the customer. Remember, A.J., as you know very well, you've covered us for so long, we're working with a 62-year-old to 72-year old and 82-year-old on average. And we were a little bit concerned about how quick we could roll out technology using virtual environment, using WebEx, using Beacon in conjunction with that in the preneed environment, which is our tablet tool to be utilized in the prearranged sales environment as well. And what really we learned is that we can go very quickly. We're also excited about some of the technology we've learned -- we've utilized in our digital leads for the sales force, from our websites, from search engine optimization and stuff. All of that kind of is nicely packaged and what we described on the call as some nice synergies going forward. And we think those synergies will -- are baked into those numbers, but it will also offset any type of pull-forward effect from some of the funeral services that we performed in 2020 in the COVID environment that would have existed in 2021 as well.

Yes. I was going to ask you about the pull forward because I guess on the other side, that's the one question I get asked is how much of what we're seeing this year is directly tied to deaths that probably would have happened next year or even -- it sounds like you're thinking it's actually pulled forward for multiple years to this point. But what is the current thinking from the company on that?

First of all, it's hard to nail down, let's be honest, right? What I will tell you is we've done about 18,000 to 19,000 COVID cases incrementally above what we normally do, which is 300,000, 315,000, 320,000 funeral services per year. So this is incremental to that as a large part. I think ultimately, what you see in a flu season and you've been doing this long enough to know that and see these spikes is you really are seeing Q1 events during the flu season in the United States being pulled forward from Q2 to Q3 from a large amount. I think when the pandemic first hit and put yourself back in the March, April time frame when we really kind of talked about this, we kind of took that point of view to some extent. You're really seeing elderly population in nursing homes in the Northeast being impacted very substantially. Well, it turned out that, that was the first couple innings of the story that we've all been through as a nation and what we now know fast forwarding to today, and we also probably have a good amount of innings to go before we get to this a point where we're not talking COVID daily in our everyday life is that a lot different of an age population was affected to this. You're seeing deaths that have occurred in services that we perform, where people are in their 40s, in their 50s, in their 60s, even in their 70s, but not necessarily situations where we would have performed that service in '21, or we would have performed that in Q4 of '20 that pulled forward in Q2 and Q3. So the mentality really changed. And of those 18,000 to 19,000 cases, we don't necessarily know how many are pulled forward. But we do think, A.J., based on all the -- how they're made up and the age strata and such that we have a pretty good indication that they were utilized for the deaths would have occurred in a lot of different years well into the future, and it's not so heavy probably 2021 is maybe we would have originally predicted or modeled that way.

Okay. You alluded to the pricing dynamics you're seeing, obviously, in Q2, that was pretty acute to where you had very small gatherings. It's eased up some. And it sounds like a lot of the country has returned to close to normal. But there's still pockets on the West Coast, maybe in Canada that have not. What do you see for the prospects there to return to normal? Or are we sort of step down slightly in the baseline and grow at an inflationary rate off the new baseline?

No. We don't think that we've stepped down in the baseline. I mean what we're continuing to see is a very strong demand from our client families to want to memorialize and want to celebrate the life. And with that comes that spend that we've been describing. And even if you can kind of isolate Canada, can isolate California from their lockdown perspective, even in California, though, we can't do indoor funeral services. I was just there a week ago. And we're calling different place though. We're being very flexible at one of our large locations at Rose Hills in California, we have 6 to 7 very large outdoor tents that we're utilizing, one of which was up to about 300 to 400 people that could attend with social distancing. That's the size of these situations. So we're finding creative ways to do it. And the client families, they're clearly telling us they want to do it. They want to memorialize. So the spend that was initially down 12% to 13% has gone up to the, what I call, low single digits, the 1% to 3% declines and such. And it's not just California and Canada, you're still seeing a lot of events across the nation where they can't necessarily really go out and utilize catering. They're not utilizing the visitations and the celebration like it's done before. But to us, there's not a lot of evidence, frankly, that when we get through this, that the ASPs are going to come back and grow from a normal baseline kind of in that 1% to 3% area. And by the way, in the short term in 2021, from an ASP specific situation, you're going to have some pretty easy comparables from 2020 that you've seen as well from that particular statistic.

Right, right. No, that makes sense. We always get a lot of questions about consumer behavior changes in the business, and I know changes sort of glacial not as quick as people think, but we hear more memorializations. I think you guys have mentioned a declining percentage that has a religious orientation to it, more celebration of life. You've had all the questions about online purchasing and so forth. What is sort of the state of those things in your mind? And is anything really changing the dynamics? Or is it all more noise than substance?

Well, I think the 2 thesis that we've heard out there during the pandemic has really been there's going to be a massive consumer behavior change, which is going to move towards cremation.

Right.

The second thing we've heard thesis that's been out there is there's going to be a very large change in terms of memorialization. Maybe the families still want to memorialize. But no thank you SCI or funeral industry. We just need very quick service from you, whether it be immediate burial, direct cremation or such. And we'll go memorialize utilizing some different means or some different venue or some different service component to do that. I think, you didn't know what to think, first of all, in March and April. It was such a moving target and didn't really know. And I think a lot of that thesis came out of that. And you saw a spike clearly in the Northeast in that March, April, May time frame in cremations. But what you normally -- what you found out when things started to calm down and normalize, it was really out of necessity. I mean everything was shut down. No one is allowed to travel. Cemeteries that were owned by municipalities didn't have the personnel or were just frankly closed. And so it was out of necessity that, that cremation spiked from that perspective. Fast forward to the third quarter, you see a movement in cremation of 110 basis points for us in terms of a mix change from burial to cremation. That is very much down the center of the fairway of the 100 to 125 basis points that we're used to seeing. So we really have not seen any type of movement in consumer behavior absent what I just described to you as the spike in the Northeast that lends us to believe that there's a game changer out there in terms of a mix change towards cremation or away from cremation. Secondarily, and the second thesis that we've heard kind of out there, we're seeing a similar event. I mean, certainly, the ASPs dropped. Certainly, it was because we were not able to provide the type of memorialization services, the celebrations of life very early on in the pandemic. As -- when you get into the May and June time frame and as things started to open up and the municipalities, what you clearly heard and clearly saw was -- where families and consumers saying, "I want to memorialize and I want to celebrate. I want to have that closure. I want to have that celebration of life for my particular loved one or for our families." And the other thing that you're clearly able to see is that when these event occurs, as we all know, the family is under a tremendous amount of stress and is grieving. And when our services and our professional associates are able to step in and really hold the hand of that family and help navigate them and ultimately really describe what we could do and, but most importantly, listen to that family and understand what they want. And then the family realized that we're able to deliver those products and services and really be the master of ceremonies to take a tremendous amount of stress off of those families that are especially geographically dispersed, especially even more in this COVID situation. It just lends itself to, again, a consumer behavior that's been very stable in this industry that they are okay with us being the master of ceremonies and they really want to have those celebrations of life. And we have not seen some type of consumer trend that books that what I just described to you over a period of years that I just described to you, A.J.

Okay. Maybe switching to the cemetery business for a few minutes. You -- that's been a business that's been growing at a little above average rate because of the demographic tailwind you had prepandemic. Obviously, some of the traditional ways you do for your preneed cemetery sales got put on hold given the lockdowns, but you've seen other avenues of growth come in. Where are you at in sort of rebuilding that traditional preneed cemetery process? Is there still ways to go on that? And how important has that sort of knock-on effect of you've got some deaths on the COVID side that are leading to people to buy multiple plots?

I think that has to be substantial, A.J., right? I mean we are growing substantially both in the funeral atneed business and in the cemetery atneed business. And it's hard to say that the #1 lead would not be those atneed families, but more importantly, the individuals that are attending the funeral services, attending the cemetery services. It also changes the mentality and brings that, again, to top of mind to those individuals that are attending those services. And from that perspective, that's a tremendous lead that is helping to generate the types of preneed cemetery growth that you have seen. So obviously, can we sustain 30% to 40% preneed cemetery sales growth? No, that's unrealistic. But I will tell you, though, prior to COVID, as you know, we were enjoying demographic changes and such that people had the aperture that wanted to have the discussion about preneed cemetery property. And I think that underlying base is still there. I think you're going to continue to see us grow cemetery in the 4% to 6%, 5% to 7%. Once we get all this COVID behind us, I do think that you will continue to see that. I would also tell you that the utilization of the technology in our customer relationship management, or the CRM system, we've seen levels of productivity from our sales force that we just really haven't seen in a very, very long time. And I think that bodes well also for the future. So will this COVID bubble that we're seeing slow down? Absolutely. But again, I still think you're going to see some really more normalized growth that you saw pre-COVID continue for our company in the cemetery that's going to again drive some pretty good organic growth through our earnings per share well into the future.