Service Corporation International (SCI) Earnings Call Transcript & Summary

All right. I think we are live. Aaron and Tom, thanks for joining us virtually this year in person. The first trivia question is who has been to Great Clips in the last month and who has not? I think that's pretty obvious. Literally, I went to the Great Clips. There's a Great Clips at Canadian West Shore. And I went and got my $20 haircut in. Tom has not managed to do that, so he threw me a little bit when I saw him live.

So the -- we've got some questions. Hopefully, they have some answers. So we'll start with, Tom, it was a heck of a year. If we look back with our 2020 hindsight goggles, what was the biggest surprise to you on COVID? Where do you think the company has emerged better? What do you wish you'd done differently? And any other sort of insights you might have on the year that, hopefully, we're entering into the next phase with the news of more vaccines every day.

Sure. Great question, John. Thanks for that. The first focus we had as a company was on health and well-being of our team because as you came out of the gates, you're afraid, did you have the right equipment, do you have the right safety precautions? And I think that worked out really well, and they've worked tremendously hard. We've ended up with -- we had a hero bonus program where we paid out specific bonuses to people above the call of duty. We did special bonuses for every employee that's not part of an annual incentive. So taking care of them was the first priority, and I'm proud that we were able to do that. The other thing I think we've learned we saw was consumer preferences have not changed. People still want closure healing. They want their grieving process and celebration They need that. And so we were able to provide it, and I think we're still seeing a real demand for those services. And the other thing, clearly, is advancement of technology. I think as a company, we've probably advanced ourselves somewhere between 3 and 5 years through the use of virtual arrangements and scores of other technological tools that have allowed us to advance the ball more effectively, more efficiently. So I think when I think about the learnings from COVID and transfer it and say what are the things that make us a more valuable company going forward coming out of this terrible ordeal? A few things come to mind. One is I believe we've enhanced our market share as a company, and let me explain the reason for that. First, we never shut down. A lot of instances, particularly in California, our competitors were in a tough bind where they were removing bodies. They had certain amount of refrigeration, they could not take on any more customers and were effectively turning them away. So we would get calls literally saying I've called 6 funeral directors, and we always could say, yes. And the reason why we could do it was because of our scale. We had 63 refrigeration trucks in California. We rented 12,000 square feet of space in the industrial section. We closed 4 small funeral homes and used them to store bodies. So we could continue to take care of the families. The second thing we had was we had cemeteries, big cemeteries where we can have outdoor functions. So we were able to -- when California was shut down, you couldn't have an inside funeral, we could conduct them in tents in our cemeteries, get families taken care of and begin to release some of the pressure. And then finally, we moved 300 people not from California , embalmers, cremation operators, backhoe operators to help with the flux and volume that occurred to service our team. So when you take the outdoor space that never shut down, you take the digital advantage that we're continuously developing as it relates to digital marketing and interacting with the consumer, combine that with we've buried a lot of people and have that heritage relationship, I think in a lot of these bigger markets, we've enhanced our ability to compete for market share. The second thing we did, we had 17% more funerals in the fourth quarter, and we did it with less payroll, which is kind of surprising when you think about being able to flex up. A lot of what we've learned is that we can use technology in a pinch that we're going to continue to do in conducting a lot of our jobs, whether it be virtual arrangements, whether it be the death certificate, whether it would be ID-ing a body. Before we would require people to come in and see their loved one, make sure it's the right person. We couldn't do that, so it forced us to find alternative ways, which are more efficient, easier. We weren't spending time driving back and forth or doing different things. So we've become a lot more efficient, and I think that'll stick. The last piece that hasn't shown up in the numbers yet is, I'd say, the span of control has increased. When you think about our ability to manage in a world -- I'll give you an example of -- in our sales force, we've got a sales director that was over in Phoenix, a sales director that was in Las Vegas. We lost our sales director in Phoenix, and we asked Las Vegas to take over. We're using Salesforce customer relationship management. You can manage sales managers, you can manage down to the counselor and see how effective they are. We managed Phoenix great from Las Vegas. And so I think it's teaching us some things that say we may be able to look at overlay. If we're not going to travel as much, if we're going to use a lot more data and software, our span of control can increase as you think of operations, sales, even overhead. And lastly, the sales structure. We were unable to do seminars, and seminars are more expensive but a successful way to get leads. We generated leads a lot cheaper through digital and through direct mail, and we found our success rates go up and our costs go down. So we think we've got a more efficient way to run the sales force at a slightly lower cost. So it's really a leaner, meaner infrastructure that's more focused on competing as you come out of this thing.

So your cemetery, one thing I didn't see coming, frankly, was the pop-in cemetery preneed sales as a result of this. Is that also a leading indicator of some general share on the come, in your opinion?

I think in the markets, John, you're right. As it relates to places where we have a big cemetery presence, it should have an effect. We don't have that everywhere, so I don't think it's a phenomenon across the country. But in the bigger markets, without a doubt, you've got that heritage sale, you've got the -- I really believe outdoor services will be a trend that continues. I think I've attended a few, unfortunately, over the last few months. And I think people -- when you do it right, it's such a differentiator when you're able to have a classy event with tents and chairs. And -- but there are things you have to think through, PA systems, music, but we've done that. And now we have the equipment, the tools. And again, as a competitor, you can't have a service on my cemetery, right? So it's a nice advantage.

Let me ask you, so I'm noticing the trend of a beige shirt with black buttons. Is my fashion backward with my big button-down? I think I'm missing something here.

You're fine for 1983. You're doing a great job.

To see the tortoise shell glasses, right? If going back to -- and I know this is ancient history, but you decided to compete more aggressively on your cremation price point in your funeral home segment a couple of years ago. Just maybe we could do with a reset of where your price points are for cremation at the legacy Neptune channel, cremation in your funeral home and then cremation versus full casket funeral in your funeral home segment?

Absolutely. So what John is referring to, for those of you who may not know, we initiated a segment through an acquisition called Neptune probably back in 2010. And the concept there was we had a funeral home that was servicing, obviously, burial customers, but also a cremation customer where the -- having a funeral home involved was important to the process. And so people were coming through those halls, and we said, we know there's a consumer out there that doesn't necessarily want to go through a funeral home. And SCI Direct is the division now, which mainly is the Neptune brand, that's out there basically interacting with consumers at a lower price point that really don't care to go through the funeral home. What we saw even before that was that our ability to capture kind of that value customer at the funeral home, we weren't doing a very good job. We were finding out that we were probably priced at a point in the funeral home but were missing the opportunity. So as John rightfully points out, a few years ago, we adjusted some of our pricing to say could we -- by adjusting it a few hundred dollars, can we compete more effectively for that consumer that still wants a funeral home, so isn't going to go through Neptune. And so what we saw was the average ticket go down slightly, but we saw our volume go up. So we feel like where we implemented that policy, we gained a little share back, but we did see the average kind of fluctuate. So now we're saying, okay, where are our price points at these different places? And if you look at our funeral home channel, the average burial consumer -- and remember, this is going to differ dramatically by market. So California is not New York, is not Texas, is not Minnesota. But the average burial contract across the country is $700 to $800. The core cremation consumer is spending about $3,500. So the difference is being a little over $4,000. Now within that core cremation funeral home, if someone is asking for a service, if we provide a service, they're spending about $5,700. And then there's the no service customer that's spending about $2,600. So the blend of the $5,700 and $2,600 is about $3,500 because some 30% of our customers attach with a service. So that's kind of the price point we're at now as a no-frills cremation, on average, you're going to get $2,600 through our funeral home, which is strangely close to what you would pay for a package at SCI Direct. So that's kind of a point where if your -- if price is your #1, that's a price point that seems to be palatable for that consumer.

And then your fully casketed funeral and through your funeral home channel, what's that average, Tom?

That's $7,800, I'm sorry, the burial consumer. So really, the difference between the average cremation and burial -- well, maybe a better way to say it is $5,700 for a cremation was service on average. And the difference between $5,700 and $7,800, which is about $2,000, that's a casket, right? So if we can get people to cremate but have services and the like, the difference should be about $2,000, which is probably the retail price of the average casket. There's probably a little bit less than that for the casket, but that's the way to think about it.

Great. A few years ago, one of the things that was pointed out was that the funerals that you sold through your preneed channel were sold at a higher average price point, so they would come out and they would give you this ASP lift. Has that pretty much run its course, in your opinion?

John, I think there's something -- you're seeing some downward pressure on that ASP today, and particularly in 2020, and there's a couple of things that are negatively impacting it. One is when you think about some of this coming out of the backlog, a lot of times when we sold a contract, back then, we didn't sell any catering or we didn't sell any flowers. So a lot of times, what happens with a preneed going at-need, at least in the old days, we would say, okay, you have all this, but would you like a catering event? And they'd add it on, but that would show up in the average. What you saw this year was not many people were buying catering, so you saw this kind of apple and orange comparison that dropped that average down a bit. That, combined with the fact that, with restrictions, people probably weren't having bigger services and the like, so I think we saw a pause. As we look at 2021 and think about, number one, the way the market has performed, I think, Aaron, where was trust? Under 16% in the fourth quarter. So as we model out 2021, we see a pretty healthy growth this year on what's coming out of the backlog. And then I think as you project forward, you expect it to continue to rise at a reasonable rate, 1% to 2% to 3%, somewhere in that ballpark. Well, the average -- I would say more like just average out the backlog. I mean, clearly, we'll get some growth. But I think we should see that number grow, and it'd probably grow pretty well in 2021 based on the factors that I mentioned.

Yes. I get the '21 grows because you have an easy comp on ASP as people weren't buying the full. But what I'm asking is the funerals that were sold through your preneed channel, are they sold at a higher ASP? Let's go back to prepandemic levels, so where funeral is still being sold at a higher ASP when somebody buys preneed versus at need. And for a while, that was giving you a lift in your ASP. Has that sort of played out, in your opinion?

I think -- well, I'll put it this way: I think the lift there, John, in the rearview mirror is some of that lift was because we started selling catering. So if you go back 10 years ago, you weren't adding a catering job to that preneed contract. Now salespeople are trained, they're coming, they're selling that extra catering. So when you saw the average ASP go up, it probably was the attachment of something like that. And now because we're getting good at that consistently, you're not getting that year-over-year growth because they're a lot consistent amount of catering. So I think we had kind of an artificial lift that related to new products and services, and now I think you're just back to a normalized -- I wouldn't expect it to be a lot bigger, but I would expect it to be at the healthy levels we enjoy today with a little inflation.

So one of the other sort of mysteries to me is I think about your cemeteries and people that don't actually bury a body in your cemetery, but they want to have some type of marker or memorial. Are you -- where are you in the stages of competing on just kind of a memorialization site for consumers in your cemeteries versus some of the other alternatives they might have? And do you think that's an untapped area of growth, or are we overstating it?

No, I think you're exactly right. And one of the things we've always been frustrated with, and we've seen some success but never has accelerated as we like. Today, I think we figured out at 16% of our velocity in the cemetery is coming from cremation consumers. If you roll the clock back 5 years, it was less than 10%. So we are scratching the surface by creating cremation options at a price point that people find palatable, whether that be glass front niches, whether that be cremation gardens. And I think the real struggle has always been if I'm a combination facility, it's pretty easy for me to walk you to the backyard and say, let's show you some of the options that are there. If I'm not, it's a little more challenging. So we're coming up with some creative ideas. We actually tested what we call an ossuary giveaway. And what we've been doing with cremation customers is saying, hey, look, we're going to give you a free scattering or a discount -- a certificate of discount on cemetery property. And so when you get somebody who says free, I'll go take a look, it might entice me to go look because now I've got a place to put the ashes. Well, they see it and they say, okay, well, that's nice, but we can also show them all the other options. And in the test markets, we found that a surprising number of them, once they got to the cemetery, said, hey, I'll take the $500 -- and I don't know if it's $500, but it's something, I'll take the certificate as -- to apply towards buying this niche. And so we think we've found some kind of creative ways to say, let's get the foot traffic going. And these places kind of sell themselves, it's just if I got to get in the car and go somewhere, how do I make it easy for you to understand what options are out there? So we intend to continue to work on, we call it cemetery velocity, and a lot of new ideas to get more people, more contracts picking places in remembrance. But one thing I'll say, John, that gives me -- makes me feel good because you hear people, cemeteries, people don't really want to go there. Our at-need cemetery was up 40% in the fourth quarter. I mean people want to be buried, they want a place to go back to. I get it. I've told this story before, you've probably heard it, so you can't throw up. But I drove my kid for a visit and went through a town called Hearne, Texas, which is where my maternal grandparents are, and they were like a second mom and dad to me. And on the way back, I made my daughter, I said we're going to go stop by grand ma and grand pa's graves. Haven't been there in 15, 20 years. And I went in there and it was emotional, and it was even emotional for her. And -- but it was a good emotional. It was like I drove away, and I was like I felt so good going there, I felt connected to them, unlike being able to just sit in my room and go I want to remember grand pa. There's a real power to having a place of memorialization. And as I look at the future and say, 1 day, cameras are cheap enough, drones or whatever it is. I can visit mom and dad's grave or I can go to the website and see it live, and I can see my remembrances left there. And there's a lot of, I think, affordable technology to enhance the physical final resting place. So I feel good about our ability to keep going on cemetery.

Yes, there is kind of a spiritual power to those places. It's intangible. You can't really describe it unless you do it. The thing -- another -- I guess I'm always finding myself surprised, and so don't go to Vegas with me. But the other thing I thought would happen would be the boomer wave not only cuts toward more volume for you as we kind of start to circle 1946. But what about -- I have to think that there are all these baby boomer funeral home directors whose kids want to go ski in Vail and don't -- not really interested in that mission. So is there -- I mean you've consistently been at $100 million to $200 million of M&A, but I'm a little surprised that hasn't ticked up a little bit.

Yes, I kind of am, too, John, I think. But I still believe, like we've talked about before, that, that event is going to occur. It's kind of like the baby boomers in the numbers, too. We definitely know that a lot of these businesses are being managed by, like you said, baby boomers, and a lot of them are late-stage baby boomers. We know by looking at the mortuary school enrollments, 30 years ago, it used to be 70%, 80% were kids that were in the industry, and now it's 10% to 15%. So it's changing and it's dramatically changing. And you look at the whole demographics, I mean, the number of women that enter the profession now are more than men, and that wasn't even close years ago. When you look at the ethnic diversity, it's tremendous. So I'm with you. I think there's existing businesses that were -- are going to come up to say we're going to do it. And the other thing we're doing is we're spending about $50 million in building new facilities and building them geared at whatever the new customer may be. And that may be an ethnic opportunity that we've done a really good job of investing in, whether it be African-American, Asian, Hispanic. We've got a lot of great businesses, great people that can take those investment opportunities and really align with where the population is going.

Interesting. If you looked at your -- a couple of years ago, you were pretty high on rolling out Beacon to your cemetery sales, and that I know has been put off. But is that -- as form follows function, will Beacon allow you to simplify your product offering? I know funeral is kind of targeting the right good, better, best. But you've got hundreds of products on the cemetery side. Will the rollout of Beacon also allow you to streamline your multitudinous? Maybe your product mix has gotten a little too broke? Is there something there? Not only is there a sales tool, is there a way to say we're going to buy fewer products, we're going to buy them cheaper, and we're going to kind of declutter our product set?

Definitely, what you just said. Now we have continued to roll out Beacon. So I think we're at like 80%, 90% now. So we have...

On the funeral side, right?

No, we've been doing on cemetery. So we are literally rolled out. And I guess what I would say is Beacon is a tremendous tool that's a part of our success, but I really think the biggest piece of our success has been the accelerated use of sales force, which has allowed us to be more efficient and enhance our closing rates. It's allowed us to be precise in our training and development, and it has the ability -- I don't think we've talked about it on this call, I apologize, if I did. But what Salesforce can do now, as an example, if we have a digital lead, I can track Aaron as a sales counselor and know whether he's effective at managing digital leads or if Tom is. And if he's 90% strike on a digital lead, he's -- now we have the ability to funnel those leads to him, and Tom, who's better at a direct mail piece. So we have this uncanny ability now with technology to get better leads and put them in the hands who have a higher success rate of closing. And then you add that in with the fabulous inventory that we developed, our team has developed and that's what's really driven it. And what Beacon has been able to do that, I think, John, and we don't have great -- it's hard sometimes to decipher the data. What Beacon gives us is a quality and consistency as it relates to the presentation, right? And to your point, it's a little more complicated with all the products that we have to -- it's not as homogenous a sale as a funeral business, but it gives us discount discipline, which is important, right? So you can put screens and I would say here's your maximum, go up to your discount. And when you think about the efficiency of the customer interaction, it cuts down the paperwork and presentation time probably by half. And one thing consumers say is I'm tired of filling out forms, it takes too long. So I think it's streamlining our ability to close, you get the discount discipline. And I think you really -- because of the presentation itself, it forces the counselor to go through a variety of options that you don't know they're doing if they're not on Beacon. So it's been part of our success. I expect it to even get better. But yes, we're rolled out I want to say 80%, 90%.

All right. So not to get into an accounting seminar, but when we do calls with prospective investors, it inevitably devolves into an accounting seminar. And so just one thing to clear up that, I guess, I personally am not as clear on as it should be is if we think about, just on the funeral side, your preneed sales, obviously you would use your Assurant partnership in states with high trusting requirements for preneed sales, and then you would elect to trust in states with low trusting. So maybe we could kind of talk about -- let's just use, for simplicity, a $5,000 ASP for funeral. What would be a typical trusting requirement in states where you would say, look, we'll go ahead and trust versus a state where we'd say would rather substitute the Assurant model and get the commission payment but give up the potential return?

Great. So if you think about it, on average, we sell -- which -- like you said best, every state has got its own set of laws. I would say on the funeral side, where there's a trusting requirement, we're generally trusting 85% to 90% of the balance. Some may be 80%. A lot of them are 90%, some may be 0%. California is a 0% trusting state.

Well, 100%.

Yes, I'm sorry. I said the other way, retention, retention. So California is 100% trust. Texas is a 90% trust.

Texas is still 100%. Florida, though, is the most kind of lenient, somewhere around 65%.

But I'd say, on average...

We like our freedom in Florida. We're a freedom state.

So on average, on the funeral side, it's 85% to 90% trust. On the cemetery, it's probably 70% to 75%, on average. So what you're seeing is, on the cemetery side, we're trusting everything as we get enough cash out of trust. And on the funeral side, we're trying to be strategic. In a state like Florida, we're perfectly fine selling a trusted product. In California, we want to sell insurance just because it helped us fund our preneed effort. So yes, that's the way we look at it. And I think with the Assurant contract, you've got some gates in there, rails, if you will, that say you need to settle a certain amount for the greater good of the whole policy. So we just have to be sure that we're compliant with that contract. But we are, and they're a great partner. And when we sell insurance, it's a great alternative, particularly in states where the trusting laws are kind of punitive.

So Aaron, let's say, Florida, for example, what is the trusting -- do you know off hand the trusting requirement? An approximation is fine. We're doing metaphors here.

I'll funeral is probably around 70%, cemetery is probably around 60%. And that's probably the most..

Okay. Yes, so let's say, for example, a customer is putting in $5,000 over 4 years, right? That's a typical kind of contract. So you were able to -- if it's 30%, you're able to pull out $1,500 out of that trust. As the -- do you pull that out as the money comes in? Or do you pull that out kind of off the top?

It depends on states because the states actually regulate how you need to handle some of those funds, if it is on an installment-type basis. I mean there are some states where the first several payments that come through are treated as retainers, and then everything after those go into trust. But then most of the states are on a pro rata type basis that say, okay, for every $100 that comes in, 30%, you can pocket, and then 70% has to go into trust. And I'd say most states are that.

Yes. And so just to be clear, that's cash that you can collect, but it isn't booked as revenue. So it's just -- it's cash flow.

Correct.

And I think that's the confusing part for people as you're able to pull some cash out before recognize the revenue of that. And just remind us kind of the Assurant relationship. That was reupped a couple of years ago. And how long does that run?

I think we have another -- about a little over 4 years left on a 10-year contract.

Okay. And you're happy with the terms? That's worked out well for both parties?

Yes, I think so. I think it's been a great deal. And the hard -- I think from their perspective, interest rates have a lot to do with it, right? Because they're trying to deploy the capital. So I'd say the way interest rates have come down, it's probably less favorable from -- because we have a fixed return. But again, I think if you assume rates normalize at some point, it's a great deal for both parties.

Okay. Speaking of interest rates, crazy market, have you made any changes in your asset allocation? Or how are you thinking about investing?

Yes. We've really kind of kept it in place. There's no fundamental changes that have been made. I'd say that it's more of a strategic investment philosophy that we follow versus tactical. I mean we're going to make some changes on the fringe to the 18, 20 portfolio managers that we have and the underlying strategies. But I'd say that we may make 1 change per year, and so it's a really pretty stable structure that we got into that.

So no Bitcoin, no?

We're thinking about it. If you know how to take it, we'll take that.

Yes, that's how to get your stock up 30% for no reason. I think we're kind of at the end of my scripted questions. Is there something -- you guys have just reported your earnings, you're very transparent. But is there something you want to expound on further or something that I should have asked that I didn't?

You always ask all the right questions, my friend. But I think the thing to step back that I'd just leave everybody with because I think it's hard time modeling through this craziness. We try to take a look at the world and say if 2019 was a normal year and it was $1.90. We always told people, 8% to 12% growth. And we would all be happy if SCI clips particularly at the higher end of that. Now you get $2.91 in 2020, which is an odd year. The middle of our guidance takes us to $2.70 for this year. So you're kind of out of whack. What does that mean? Where are we really? And so as we think about 2022, and we talked a little bit about the pull-forward effect, we do think 25% to 30% of the extra cases would have come out of '22. So you're going to have a pull-forward hangover or whatever you're going to call it in 2022, assuming this thing normalizes. But even with that, our models run us in the 8% to 10% compounded growth off that '19 anyway. So we still get to $2.40, $2.50 somewhere in that area where you'd say, wow, you can still deliver 10% growth with a loss of volume in the year 2022. And then 2023, obviously, gets a lot better because that hang over lessens quite a bit. So I think at its core, and we talked about the reasons why, if you look out to '23, your compounded growth rate is probably 12%. And why is that? Because COVID taught us some things, and we're more efficient, more effective and more competitive. And then it gets us to the baby boomers. When you're in 2023, 2024, I think you've got to begin to see some of that impact. The oldest baby boomer is 77, 78 years old. So I just think we're positioned really well for delivering impressive earnings in a challenging environment and then really on the cusp of a bit of a tailwind as it relates to business.

I have a question that came in. Any concerns with Assurant possibly divesting its deathcare insurance business?

The subsidiary that Assurant owns is American Memorial Life, and that's our -- the preponderance of our relationship is really with them. So I think if they ever divest of that -- we're very comfortable with the management team at American Memorial Life and have a great relationship, and the agreement is in place for 4 years. So I think there's an infrastructure. And if there ever was a new owner, I guess, we'd have to deal with that 4 years from now. For now, we're comfortable.

Okay. No, I would say my unsolicited feedback is I do wish -- I've used your example for a number of my companies to say that the value and the discipline of providing longer-term growth and some of the guardrails about how you get there, I think not only do you end up with a better shareholder base but it's a tremendous discipline for management to try to stick within guardrails. And therefore, a lot of companies don't want to do it, and I think they think it inhibits flexibility. But I think in your case -- and maybe your industry doesn't evolve at the pace of other -- some other industries. But I think in your case, it's been really a tremendous discipline for people. Like, how do you bridge that? You had the big M&A run till 2014, and then you've got 10 years for the boomer wave. How do you bridge that growth for that 10 years? And I thought that was a really thoughtful way that you did that. So my -- I think it's worked out well for your shareholders and for the management team.

Well, you can see how hard I'm working because I can't even get a haircut.

Do you know my wife actually gave my first COVID haircut, and she did a much better job than I would have done giving her a haircut. So -- but it wasn't a good enough job, and I would be running back to my -- yes. So all right. Well, what is this? I think your 30th year. I think you've been coming as long as we've been having this conference. I think you're our longest-tenured attendee. So I'm glad we kept it alive virtually. Hopefully, next year, we see you in person. And thanks, as always.

Thank you, John. Thanks, everyone. Appreciate it.

Thank you.