Service Corporation International (SCI) Earnings Call Transcript & Summary

Good morning, everybody. This is John Ransom. Welcome to the 42nd in-person, Raymond James Institutional Conference. We have Aaron, [ Ali ] and Eric, all vowels, now I think of it, from SCI. I always say this, and Eric's going to roll his eyes, but I think SCI has been the longest standing attendee at our conference. I think they first came in the early '80s, probably when we had the conference at the Hampton Inn on Ulmerton Road. And now here we are. So with that said, let's get to it. Thank you, all of you who braved the COVID protocols and mass flights and what to get here. We're looking forward to a successful conference. So I got my handy questions here. So because this is -- we just have some journalists here. Eric, you've been at the company for more than 20 years. I've been covering the stock more than 20 years. But maybe one thing that always finds helps people, in particular, with SCI is a quick sort of history lesson of the phases of the company from near death to M&A to the grinded out to the boomer phase. So maybe you could kind of recap a little bit sort of your perspectives on the history of the company, where it sits today versus kind of where it was when you started?

I started -- good morning, everybody. I started 25 years ago at SCI. John and I have been working there for together for 25 years. We don't look any different at all, at least I could tell.

Not a bit.

Not a bit at all. So it's an interesting company. It's an interesting industry. It's a great industry from a cash flow perspective as well. We're the largest in the industry, funeral homes and cemeteries. We own about 2,000 of them. Going way back in time and thinking about those memories, some of which are quite painful that we remember, the company essentially consolidated on an EPS-accretive roll-up model in the '80s and '90s, and that was 2 management teams ago that, that occurred. The company ended up in 23 countries across several continents, obviously. And unfortunately, I would characterize it as overpaid for a lot of those particular acquisitions. Essentially, that kind of came to a halt like most roll-up models do that overpay and are not focused on return on invested capital, but are focused on EPS accretion. And that occurred in the late '90s. In 1999, I think we had negative cash flow and about $4.6 billion of debt and $2 billion of that was due within like 24 months or something like that. I'm trying to forget all this, by the way. Ultimately, we were put in as senior management in 2002, about 3 years later. From '99 to '02, we're able -- that's the sale component of the history, where we're able to sell 21 of 23 countries and essentially get out of what was a pretty significant liquidity crisis. Ultimately, from '03 to '05, I characterize it as kind of fixing the sins of the past and creating a platform for growth. That was assimilating hundreds and hundreds, if not thousands, of acquisitions over 40 years and reconciling records and such and changing the accounting from a very aggressive accounting to a very conservative accounting that exists today. And then from 2005, we're ready to have a platform for growth and such. We consolidated further in the industry with large transactions at that point in time, Alderwoods in 2006, a few in 2009 and 2010, and then ultimately, Stewart Enterprise is the #2 player in 2014. Since then, we've been really shifting towards remaining relevant in our organic growth model and remaining relevant specifically with a change in consumer and getting to know that consumer and utilizing technology as we prepare for what John just said, is the next big wave, which is the baby boomer generation. There's really 2 drivers in the industry. One is the cemetery segment, which is to be driven by preneed sales, and that is what it sounds like. It's selling property before the time of need, and that's over $1 billion of sales for us, and that generates a significant amount of growth. And then the second part of the equation is when the baby boomers affect the funeral segment, which has not yet happened. First time we touch a consumer, they're in their early to mid-60s. So ultimately, the baby-boom generation has crossed over that threshold, and that's why the preneed cemetery sales are growing, call it, mid-single digit. We can talk about COVID in a second because it's been a crazy 2 years, but mid-single-digit type growth in preneed cemetery property sales and ultimately, that will translate to a funeral segment, which is so much tepid growth right now, but will ultimately affected by the baby boomers, all of which we will invest in technology, invest in a different way to touch those consumers in terms of a celebration of life. The industry is changing dramatically away from traditional mourning of their loved one and going to a much lighthearted celebration of life. And I think we'll be at the kind of the tip of the spear of being the most relevant in the industry as that baby boomer generation affects us moving forward. That's kind of a summary, John.

Great. So moving more to recent history, and I realize this is something we talked about on the conference call, but I think this is a useful recap. You talked about on your transcript that your fixed costs are only up 6% over the past 2 years. That's total. So a little less than 3% compounded a year, but you service 17% more clients in that time period. So good work on the productivity side. But what else would you say was the most enduring lessons/structural change for the better that the company was able to execute on during the past 2 years?

Well, great question. I think, ultimately, you'd have to, again, bifurcate the answer between the funeral and cemetery segment. I think the most endured lesson that we learned in the funeral segment is that the incrementality in terms of the revenues drop into the bottom line or the incremental margins is a better way to say it from...

Is that a word, incrementality?

I think it is.

Okay. All right. It is now.

It wasn't Louisiana where I grew up. Getting corrected by someone from Georgia here. But ultimately, when you saw -- it's a 70% fixed cost structure in the funeral segment, cemetery is as well. And so when you put more throughput through that infrastructure, you should see some pretty great incremental margins come through and you should see margin expansion. And the funeral segment is a 19%, 18% to 20% type margin business right now as it's not grown significantly prior to the baby boomers affecting it. But we had margins in the upper 20s. We had them expand to 26%, 27%, 28%. And we did not have to add a lot of costs in terms of doing that. And we are very efficient, as John said. Now there was parts of our organization, which were stretched too thin, and that wouldn't be a situation that would be sustainable, but that's primarily because COVID was not equal across the U.S. and Canada, as we all know. It was -- had hotspots across there as well. But ultimately, when people said -- when the baby boomers come, are you going to have to add infrastructure? Are you going to have to add labor to the business itself? Or are you going to really enjoy those incremental margins? And ultimately, I think one of the things we learned is that, yes, the model is going to work on the funeral side. On the cemetery side, I think it continues to see that people want to celebrate the life of their loved one and value the business. And that's a great thing in these changing times and such. But there was definitely times where we were precluded from doing a lot of things for gathering restrictions and such. But we found a very, very strong desire from the consumers to ultimately want to value and have those services even if they're the graveside at the cemetery as well. So both of those things just kind of bodes well for the solid growth that we expect from an incremental margin perspective as well as just the desire of the consumers out there to celebrate the life, have closure and not take no for an answer, frankly, in a lot of cases. And I would say at 30,000 feet, those are probably the biggest 2 lessons that we learned.

So #1 topic for us has been, of course, labor. I think it's going to become energy costs, but it has been labor. And so maybe just talk about the kind of person that you're able to attract in 2022. And I think about tough jobs, commission-based sales with no recurring revenue is a tough job in your cemetery and funeral side. Some of the lower end kind of operations and maintenance in the funeral cemetery side might be a tough job. So just talk about like the kind of person that wants to do this type of work and then how you go find those proverbial needles in the haystack?

Yes, it's a great question. I think we'll face cost pressures. We'll face labor pressures just like everybody else. We're not immune to that. I think our -- we talk about gas and such, our utilities are probably only $60 million, $70 million. Our fuel is only $10 million. But I say that because the next statement I'll make is that our labor is about $700 million. And so that's by far our highest cost component. We have 24,000, 25,000 employees with just under $4 billion in revenues. That's a lot of employees for that amount of revenues and such. But it's interesting how we're not Amazon. We're not Target chasing the gig employee and having to pay $22 to $25 an hour to keep those employees. What John was referring to is that's a very small part of our business. If you take our 25,000 employees, 16,000 to 17,000 of those are full time. and most of those are in the funeral segment. And most of those are professionals that have some sort of what I'd characterize as kind of a calling to be in the industry. These aren't gig employees who are going to go from one job to the next and such at all. And I think we have a little bit of a structural edge for most industries because of that because the associates don't necessarily want to jump around and such. So we haven't had a great amount of turnover as well. We do have a component though of part-time employees that are facing the same pressure and have some turnover just like that. But when I say that we've held our labor cost to probably 2% to 3% a year, over many years, even during COVID. Are we feeling it? Yes, we're feeling it. I would guess that 2% to 3% is probably going to be more like 3% to 4% this year, but it's not a tremendous game changer for us that we're doing. John mentioned the sales force as well. We had about pre-COVID, we probably had about 4,300 to 4,400 sales counselors that again, are selling funeral products and services on a preneed basis in cemetery, property and products and services on a preneed basis. Some of those are commissioned, maybe about half of them are commissioned and half of them have a base wage associated with them. But with that being said, that sales force has actually shrunk, and it's become much more productive than it ever was. We had 15% growth in 2020 for preneed cemetery sales. We had 25% growth last year. And it's gone from 4,400 to 3,700, 3,800 people, and it's more productive than it's ever been because of the technology mostly the CRM system and such that we are able to implement. So we haven't come in full circle to your question, John, we haven't seen that turnover either. In fact, the turnover that we have seen has been kind of what we have wanted to see happen to shrink that sales force and make it more productive and ultimately more efficient as well. So labor is something that very heavy for us, as I said, a little bit more cost pressure this year than what we've seen in the past. But are we seeing the types of things that you're hearing about where people are taking $15 an hour to $25 an hour that you're hearing the targets of the world, essentially do that? No, we're not seeing that type of pressure in our industry.

So to -- I do think one essential way to understand SCI is as is a consumer-facing B2C selling organization with J.D. Power scores they're proud of. And so talk about both funeral and cemetery, what's the -- does the 80-20 rule apply? What would you like your top tier salespeople, what kind of compensation could they earn? How is that structured? What kind of turnover do you have at the bottom end? How do you keep feeding that machine, et cetera?

Yes. We have a good amount of -- your specific to the 3,800 sales counselors is your question, I guess?

Yes.

So we have a good amount of turnover at the bottom end. There's no doubt about -- our turnover is probably 60%, in that ZIP code at the bottom end. But you're right, there's an 80-20 rule going on. There are counselors that have been here for 20 years, 30 years and such and have been selling, especially out on the West Coast and such with the Asian consumer for many, many years and have done very well. I mean the top counselors can make upwards of, call it, $300,000, $400,000 probably. And those are the very, very top counselors. Most counselors are probably earning in the $40,000 to $60,000 range, and that is where the turnover potentially is. But ultimately, what we're trying to do is just make that so much more by utilizing technology, digital leads, the Salesforce CRM system, we can go into much depth you want in terms of those initiatives. But ultimately, we're just trying to make it so much more stable, so much more holding people accountable than what we've done in the past, and it's just really paid off in terms of its effectiveness.

Great. So I know you love this question, and you'll knock it out of the park. But the company has put a lot of money into its funeral homes and made them a destination for celebrations of life. But how do you -- do you find that it's more competitive with other sort of event space now, now that we're in the celebration of life? And do you see a day where the company is maybe a little more asset-light and uses event space on a rental basis? Or do you see the need 5, 10 years down the road to continue to own these funeral home assets? In the same way, not that you'll ever get at all of them, but is that something -- is there a long-term migration on the asset footprint, do you think, over time?

Yes, it's a great question, and I think I've been answering it the same way for 15 years we've been at this conference, and the answer is it's possible, but we haven't seen it. And it's interesting when you think about it. Draw an analogy like green burials just to draw an analogy to John's question. It's like there was this movement of green burials, which doesn't include embalming, doesn't include caskets, it's biodegradable, everything associated with that and such. And so we kind of got into a 3-point stance in 2011. We went to the Green Burial Council, which is not-for-profit across the United States, and we're saying it's coming, it's here. I think we did we did 300-plus thousand funerals last year, and I bet you 30 of them may have been green. I mean it's like -- and so I come full circle to the asset-light model. We have...

Probably all in Nashville and Seattle.

They're actually up in Washington. Yes, you're right. But ultimately, we're prepared to do whatever we have to do. We're not married to any type of infrastructure. Right now, the answer to your question is, clearly, we need that infrastructure. We need the celebration space, we're transitioning to even more detailed kind of a good, better, best type model in terms of the celebration space and kind of tiering the rooms that we're able to offer to our families. We've spent a good amount of capital in terms of CapEx, going through our 1,500 funeral homes and such, building out so that they can have the celebration of life. And you always have the risk, as you said, of the country club, of the Marriott Hotel and such of coming in. We just haven't seen it from the traditional consumer that would have come into our funeral home and utilized our services for the celebration of life. I do think that the consumer that is a simple cremation consumer that says, "Hey, I don't want the celebration. I just need you to come cremate my loved one." They are the ones that are probably disproportionately starting to use country clubs and hotels and something along those lines. But I think they always did something. They may have done it at somebody's house or something, but they've always done something, and our goal is how can we convert that simple cremation consumer to utilize our services and our footprint incrementally from where they are. John mentioned the SCI Direct model. We have a very low end 10-plus locations that are a direct cremation business is asset-light their rental spaces because there's no service, you don't need that. Could we transition the whole company to that if we needed to? Absolutely, we could. But what I would say is we're constantly looking at it. We're constantly trying to be nimble, similar to that green burial situation. We will move with the market. But it's so interesting that you hear these stories, and we just haven't seen the need to move one way or the other. And I can't really explain it, but that's what we're seeing.

I mean I'd add one editorial comment is I do think one of the attractiveness of this story over time is just the fact that change is probably a bit more evolutionary than in other industries. So I don't think Eric's all that smart, but I know that he can handle a slow pace of change. So you got to match your management teams up to the situations. I kid, we have a lot of...

You said that for 15 years.

I know, I don't have any new material. You think of them just like me, I've slow rate of change. I think one of the surprises certainly does into the market was just the correlation of the cemetery preneed sales. I mean, it makes sense now looking at it, but just the correlation of cemetery preneed to funeral activity, and so your guidance this year is interesting. You're calling for 3% to 5% growth in your funeral, but mid-teens decline in your cemetery pre-need sales. So maybe just talk about that learning. And then just speaking of cemetery preneed sales, you've really advanced the use of technology. So how has the technology helped not only your sales productivity but also maybe second order effects in terms of simplifying some of your product design and form following function, if you will?

Yes. Ultimately, what we've noticed during COVID is probably about half of the incremental sales that we've had -- and again, we expect cemetery sales to grow call it, 5% to 6% per year, 5% to 7% per year. And as I said already, it grew 15% in 2020 and 25% last year. About half of that is probably related to COVID. And the other half were true incremental sales that are going on about how we're approaching the consumer through digital leads and utilizing that technology and we're excited about that. What I would say the drivers right now in the preneed cemetery business are essentially technology, leads the sales effectiveness itself that we're able to get from that and then ultimately, the inventory. And you've kind of mentioned that at the end, I believe, is that the inventory that we have in our parks or in our cemeteries is very tiered compared to what it was 10 years ago when we started talking about that. And that has really helped as well. But there's no doubt COVID drove the velocity as well. But specific in terms of the technology, and this will evolve, but it's the Salesforce CRM system that we are forced to use that our counselors were finally forced to use because there was no other lead sources whatsoever. But where we're going with that is places where we haven't been before in terms of taking a group of counselors, call it, 20 counselors at a cemetery and really making them specialists on each type of lead. So you may be great at in-person seminars. That person may be great at a follow-up visit 2 weeks after a family has had a death, and there's more family members. This other person could be really, really good at digital lead sources, an e-mail and such and going back and forth. And that's really what we're trying to figure out is we're really kind of making each one of our sales forces subgrouped into specializations in terms of those leads. The digital leads themselves have been tremendous. We've really changed a different strategy, changed out a Chief Marketing Officer 2 or 3 years ago, and she's brought a tremendous amount of knowledge in terms of all the search engine optimization and such and has really increased -- changed our websites and have really increased our digital leads proportionately as well. And there's so much better. And all of this, by the way, is when we used to sell and have a cost of sales in terms of the selling comp of about 22%, and now it's down to 18% to 19%. And so a lot of efficiencies come in from the technology perspective, and I think that will only get better. I think ultimately, we get to the point where we're using artificial intelligence within the CRM system to even get even further to differentiate which leads go to which counselor and why. We're kind of doing that using sales manager judgment now. But I think, ultimately, once technology can take that over, then we're going to get even better.

So we have 5 minutes. This was not on the scripted questions, but I'd like to keep things interesting. So company has done really well, kind of, I would say, evolution 3 yards in a cloud of dust. I expect that to continue. But just out of curiosity, like what were some of the to shake things up, maybe different business lines, M&A opportunities, strategy. What were some of the more maybe, for lack of a better word, off the wall things you guys thought about and may be rejected and why? And what things might you consider that we'll get a press release one day and go, wow, I didn't see that coming. So what kind of things people present you with? How big is your BD team out there beating the bushes. Help us with that thought.

Well, the business development team is doing well, obviously. I mean, I think you saw the acquisitions in the fourth quarter, and I think that will continue. But going to kind of your big picture question, and we've done a lot during the years. We've looked at adjacencies, a lot of different adjacencies some of which would be, let's take hospice for one. And ultimately, I don't think we could -- we have not had the opportunity to get comfortable, in all honesty, John, with the kind of enterprise risk of owning hospice and that sort of being a source for those funeral homes. And when you think of 60 minutes and those types of things, it was it's difficult for us to wrap our heads around from an enterprise risk management perspective. We weren't able to do that. Obviously, we looked at the REIT extensively, and we were pretty close to doing it, but it just -- and ultimately, the current strategy, return more to our shareholders and our stakeholders than breaking the company up into the opco propco, if I remember those terms back in the day. We looked at inversion as well. So kind of the not really activists, but kind of the mini activist type things over the years, we've always tried to stay ahead of. We looked at inversion extensively and said, okay, it doesn't make sense because of this. We really studied the REIT over probably a 12-month period and took it very seriously. But ultimately, it was clear to us that the better return opportunity for our stakeholders was to stay with the model that we had going forward. And again, the REIT didn't make sense also because it had the possibility of ultimately becoming asset light. And so you get into this structure and then you may have to blow up the structure going forward from that perspective. So we get ideas like that all the time in terms of adjacencies and such. You start getting into adjacencies with health care, that's not the enterprise risk as it relates to hospice, for example. But we just could never find anything outside of our -- sticking to our knitting in our silos, so to speak, that ultimately, in our opinion, made sense to deploy the capital. We just thought continuing to acquire through an M&A program within the industry, continuing to shrink the number of shares outstanding with the proper return, throttling up, throttling down based on the return of the share repurchase program. Just ultimately, when you looked at that return based on the risk, so you kind of risk adjusted it, it just made the most sense, and that's why we've kind of stuck with it for so many years and have been so consistent.

Well, time flies when you're having fun. On that note, we will adjourn Parker [indiscernible] where the breakout is. [ Amirante ], you sure we got the [ Amirante ]? [ Amirante 2 ] for breakout. Thank you.