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Edited Transcript of SCI earnings conference call or presentation 31-Oct-19 1:00pm GMT

Q3 2019 Service Corporation International Earnings Call

Houston Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Service Corporation International earnings conference call or presentation Thursday, October 31, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Debbie Young

Service Corporation International - Director of IR

* Eric D. Tanzberger

Service Corporation International - Senior VP & CFO

* Thomas Luke Ryan

Service Corporation International - Chairman, President & CEO

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Conference Call Participants

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* Albert J. William Rice

Crédit Suisse AG, Research Division - Research Analyst

* Daniel Erik Hultberg

Oppenheimer & Co. Inc., Research Division - Associate

* Duncan Brown

Wells Fargo Securities, LLC, Research Division - MD and Senior High Yield Health Care Analyst

* Joanna Sylvia Gajuk

BofA Merrill Lynch, Research Division - VP

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Presentation

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Operator [1]

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Welcome to our Third Quarter 2019 Service Corporation International Earnings Conference Call. My name is Sophia, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to SCI management. You may begin.

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Debbie Young, Service Corporation International - Director of IR [2]

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Hi, good morning, everyone. This is Debbie Young, I'm the Director of Investor Relations at SCI. We'd like to thank everyone for joining us today as we discuss our third quarter results. I'll quickly go over the safe harbor language, and then we'll start with remarks about the quarter from Tom and Eric.

Any comments made by our management team today that state the company's or management plans, intentions, beliefs, expectations, projections or predictions for the future are forward-looking statements.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such statements. These risks and uncertainties include, but are not limited to, those factors identified in our earnings press release and in our annual report on Form 10-K and other filings with the SEC, which are available on the Investor Relations section of our website, located at investors.sci-corp.com.

Any forward-looking statements that we make on this call are based on assumptions as of today, and we do not undertake any obligation to update or revise any forward-looking statements made during this call.

Today, we may also present both GAAP financial measures and non-GAAP financial measures, such as adjusted EPS, adjusted operating cash flow and free cash flow. A reconciliation of these non-GAAP measures to GAAP measures is provided on our website in our presentation titled Non-GAAP financial measures, and in our earnings press release that was issued yesterday, and which is also available on our website.

With that out of way, I'll now turn the call over to Tom Ryan, SCI's Chairman and CEO.

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Thomas Luke Ryan, Service Corporation International - Chairman, President & CEO [3]

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Thanks, Debbie, and thank you, everyone, for joining us on the call this morning. Today as usual, I will begin my remarks with a high-level overview of the quarter, followed by a more detailed look at our funeral and cemetery operations, and then, finally, comment on our outlook for the fourth quarter of 2019.

So let's begin with an overview of the quarter.

As you saw in our press release yesterday, adjusted earnings per share grew by $0.02 or nearly 6% to $0.37 per share. A solid performance in our funeral segment, coupled with lower general and administrative expenses, more than offset the decline in cemetery profits associated with lower cemetery revenue from completed construction projects.

On the cash flow front, we were pleased as we generated an impressive $209 million of adjusted operating cash flow or 53% increase over the prior year quarter.

Eric will provide more color on cash flow in his remarks.

As we compare earnings to the prior year quarter, I would highlight a few things. We had a solid performance in our funeral segment, with operating profit increasing over 8%, driven primarily by higher funeral services performed in both our core funeral businesses as well as SCI Direct.

In our cemetery segment, you may recall from our last quarterly call that I mentioned we expected cemetery revenue and profit pressure in the third quarter due to the significant amount of revenue recognized from completed cemetery development projects in the prior year quarter.

This anticipated completed construction revenue decline, combined with a slight reduction in preneed cemetery sales production, resulted in a 12% decline in cemetery operating profit for the quarter.

Operating income was favorably impacted by almost $12 million due to a reduction in general and administrative expenses. Most of this, about $8 million, was associated with a reduction in our long-term incentive compensation plan expense. Recall in the prior year quarter, we had an unusually large increase in this expense, associated with the performance unit plan that is tied to total shareholder return over a 3-year period.

As our stock price significantly outperformed the relative peer group during the third quarter of 2018, we were required to adjust the accrual for all 3 plans to reflect the top-quartile performance of our stock.

Now with a larger accrual, and as our performance has since held its position and more closely tracked to our peer group, our quarterly expense has normalized.

Below the operating line for the quarter, we were negatively affected by a slightly higher interest expense as well as a slightly higher tax rate.

Now shifting to some more detail around the funeral operating performance for the quarter. From a top line perspective, we grew comparable funeral revenue by nearly $6 million or 1.3% compared to the same period last year. This was primarily related to higher funeral services performed.

Core funeral revenues grew $3.7 million or 1% over the prior year quarter. We were pleased that core comparable funeral volume continued to increase, growing 1.2% quarter-over-quarter.

The core funeral sales average was essentially flat. When we look at the sales average before mix change, we are pleased to report an organic increase of more than 1% at the customer level.

Offsetting this growth was an increase in the core cremation mix of 160 basis points. As we anticipated, this mix change is lower than we have reported in the last several quarters and is settling closer to our anticipated range of around 150 basis points.

Our nonfuneral home channel, or SCI Direct, continues to perform well. We continue to show solid growth, and we are excited about the potential opportunities to continue to expand this channel. SCI Direct, or nonfuneral home revenue, grew 7% or almost $1 million, with strong increases in both volume and average.

Recognized preneed revenues grew $1.1 million or

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Recall that this represents products sold on a preneed basis, primarily by SCI Direct and are delivered at the time of sale, resulting in immediate revenue recognition.

From a profit perspective, operating profits grew an impressive $5.7 million or more than 8%, and operating margins increased 110 basis points to 16.5%. I am proud of our team's continued focus on managing our variable and fixed costs, which allowed us to convert 100% of the revenue growth into profits.

Finally on funeral, total preneed funeral sales production, which gets deferred into our backlog, grew almost 2% for the quarter, keep in mind that we were up against this tough comparison, as last year we reported a 13.6% increase in preneed sales compared to the third quarter of 2017.

In the current quarter, preneed sales at our SCI Direct locations grew a strong 5%. Preneed sales at our core locations increased 1% over the prior year quarter. We believe that we can deliver a solid growth rate in the coming fourth quarter.

Now turning to cemetery operations. As mentioned last quarter, we knew that top line cemetery growth was going to be challenging, given the significant amount of revenue recognized from completed cemetery developer projects in the prior year quarter. During the third quarter, total comparable cemetery revenue declined nearly $19 million or just under 6%. While we did anticipate a cemetery revenue decline, this was slightly more than we'd anticipated.

So let's break down the components of cemetery revenue. First the positive. We saw a $2 million or 2.5% increase in atneed cemetery revenue as this revenue stream would correlate more closely with the funeral volume growth of the quarter, with the additional benefit of favorable inflationary pricing.

Additionally, we saw a more than $3 million or 5% increase in recognized preneed merchandise and service revenue. Volume is based on deliveries, so again, correlated with funeral volumes, with the additional benefit of trust fund income growth.

From a headwind's perspective for the quarter, the biggest contributor to the revenue decline was lower recognized preneed property revenue of $21 million or about 14%.

Additionally, we saw lower perpetual care trust fund income of $3 million due to the timing of distributable capital gains.

The recognized preneed property revenue decline of $21 million was primarily associated with an anticipated decline in recognized revenue from completed construction projects, which takes previous quarter's sales production that was not recognized when sold, but recognized in the current period as it was constructively delivered.

The most disappointing aspect of the quarter for us was the 2.3% decline in cemetery preneed sales production. Clearly, individual markets will ebb and flow from quarter-to-quarter, based upon large sales timings, sales managers with significant counts or turnover, sales comp plan changes, or even the weather, these can cause temporary disruptions.

Not to make light of the situation, but this is just part of the business we've chosen to use an old-timer offline from Godfather II.

That is why I'm not going to make an excuse, only an observation and a commitment to get back to our 4% to 6% growth target.

We have 3 cemeteries in 2 West Coast cities that have historically produced, not only the largest cemetery sales production in the company, but have had a very high concentration in the Chinese consumer segment. On a year-to-date basis, just in these 3 cemeteries, our preneed cemetery sales production is lower by about $18 million or over 20% of the segment. If you add back just the Chinese production decline from the 2 markets year-to-date, it would take our company preneed cemetery sales growth from 0.2% to 3.3% growth, very close to our target range. Most of this decline is in the large sales category. These are the facts, the reasons why and when it will come back is where we shift from facts into speculation.

Based on feedback from our customers, they are encountering challenges from more restrictive policies implemented by the Chinese government that have impacted movements of cash out of China.

This, combined with a variety of ongoing political uncertainties, we believe, has caused a pause in certain of the large sales consumers as near-term access to their assets remains uncertain.

We believe this uncertainty will subside, we just don't know when. In 2019, we've absorbed an $18 million decline. If we can stabilize here, this alone should afford us the opportunity to get back to the 4% to 6% growth in 2020.

In the meantime, we're not sitting still. Our talented sales and operational management teams are focused on growing sales in our best-in-class properties with an abundance of tiered property available, utilizing our contemporary tools by continuing to grow our powerful sales teams.

We do expect preneed sales production growth for the fourth quarter. This should deliver low single-digit growth for the year 2019, that is going to be short of our growth target. But it's our belief that we can return to 4% to 6% growth in 2020.

Following the cemetery revenue decline I've described, comparable cemetery operating profits decreased about $12 million in the quarter, and margins dropped 210 basis points to 28%.

This is better than you would expect on the revenue decline and similar to the funeral segment was helped by effective management of our fixed cost.

Shifting to our outlook for the remainder of the year, we remain comfortable with our annual earnings guidance of $1.90 to $2, but we may be on the lower end if we continue to experience headwinds with the Chinese consumer segment.

As far as color for the first quarter, we would expect continued growth in funeral profits on higher volume as well as better sales average and cremation mix trends. We would expect higher growth rates in preneed funeral sales versus the 9 months of 2019.

We would expect growth in both preneed cemetery sales production as well as improved cemetery profitability.

We should continue to see the trend of lower corporate, general and administrative expenses, especially as the prior year fourth quarter had some one-time costs associated with the legal matters. This growth should be slightly muted by a higher tax rate as compared to the prior year quarter.

With that, I'll turn it over to Eric for his remarks.

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Eric D. Tanzberger, Service Corporation International - Senior VP & CFO [4]

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Thanks, Tom. Good morning, everybody. I'm going to now give you some color on our strong cash flow results we have for the quarter, and also talk about capital deployments during the quarter, and then I'm going to touch on our financial position and outlook for the remainder of the year.

So first, let me give you an overview of cash flow, which was a significant highlight for the quarter, as you saw in the press release.

We generated adjusted operating cash flow of $209 million which compared to the prior year quarter was an increase of just over $70 million. Lower cash tax payments, lower cash interest from recent debt refinancing transactions as well as higher and strong cash receipts were the key drivers for this increase.

So let me give you a little more color on all 3 of those variables I just mentioned.

First, recurring cash tax payments decreased $20 million quarter-over-quarter. But through the first 9 months of the year, recurring cash tax payments are basically flat to the prior year at $57 million.

We have also refined our 2019 estimates partly from lower pretax income associated with the losses on early extinguishments of debt during the quarter as well as some tax planning.

We now believe cash taxes for the full year will be approximately $75 million compared to the $90 million that I previously stated.

This reduction of the $15 million year-over-year is the primary driver of the increased cash flow guidance that you saw in the press release.

Also related to taxes, the adjusted effective tax rate for the quarter was 18.5%, which was higher than the 17.6% in the prior year, but certainly lower than what we had expected.

This is primarily due to higher stock-option exercise activity that occurred during the quarter than what we had expected.

Looking ahead to the fourth quarter, we anticipate the effective tax rate will be around 25%, and this compares to the fourth quarter rate in 2018 of 20.5%.

But despite this headwind, which is about $0.03 to $0.04 a share, we anticipate healthy earnings growth in the fourth quarter, as Tom highlighted in his remarks.

Secondly, as it relates to cash flow in the quarter, cash interest payments decreased a little bit more than $8 million, primarily related to the refinancing transactions that we did in May of this year that has created a cash timing difference over the 2019 quarters. In addition to this timing issue, keep in mind when looking ahead to the fourth quarter, we have executed certain financing transactions that should result in lower expected interest rates on our floating rate debt.

First, as we continue to work to deleverage, we made open-market debt repurchases in the third quarter of our 7.5% notes due in 2027 that were purchased at favorable spreads over treasuries.

Also during this quarter, we refinanced, using our bank credit facility, our $200 million notes that are due in 2020, which effectively replaces 4.5% debt with variable-rate debt.

We expect the Fed to continue reducing rates further, which in turn, will reduce the rates we are paying now on our floating-rate debt.

And then third, we had very strong cash receipt activity during the quarter. While our preneed cemetery sales had a little dampening effect on cash receipts during the quarter, we did experience very healthy increases in both our funeral and cemetery atneed cash receipts. Additionally, our ongoing efforts working with our preneed customers yielded strong results as we saw significant increases in our preneed installment collections over the prior year quarter.

So moving on to free cash flow, maintenance in cemetery development CapEx combined, which, again, are the 2 components that we define as CapEx in our free cash flow calculation, was approximately $55 million for the quarter, or about $2 million higher than the prior year quarter.

Deducting these recurring CapEx items from cash flow, we calculated our free cash flow in the quarter to be $155 million. Year-to-date, our free cash flow calculates to nearly $330 million, or a nice healthy increase of 9% over the prior year.

So now let's shift to capital deployments. We deployed just over $130 million during the quarter to grow the company and return value to our shareholders as well as make some opportunistic open-market debt repurchase that I just mentioned.

This is a 20% increase from the $108 million deployed in the prior year quarter. So in terms of breaking down the components. First, I'll mention that we did not close in any business acquisitions during the third quarter, but we anticipate a solid fourth quarter of activity with good visibility into the acquisition pipeline. We remain confident in our guidance of $50 million to $100 million of acquisition capital being deploy for the year, with about $32 million already invested year-to-date.

During the quarter, we did have an investment of $35 million in land for new cemeteries, and we mentioned this in our last quarter call that this represents the unique acquisition of some land in California that is adjacent to or even near 3 of our large cemeteries in the Los Angeles market. This represents an exciting investment in our future in this market that is already a great producer for us, and ensures that we continue to create cemetery offerings that appeal to the varied preferences in that market for many years to come.

In the quarter, we also invested an additional $10 million on new build projects, which included new funeral homes in Florida, Colorado, California, Georgia and North Carolina.

In addition to the great returns that we normally get on these investments, we are excited to expand in these desirable markets.

Dividend payments in the third quarter totaled $33 million, which represents an increase of 7% over the prior year.

Next, we returned $23 million of capital to investors in the form of open-market share repurchases, which are approximately 485,000 shares at an average cost of $46.73 per share. Our current number of shares outstanding is approximately 183 million shares at quarter end. And today, we've about $385 million of share repurchase authorization that is available to us.

We also, as I said, repurchased almost $31 million of our 7.5% notes due in 2027 in the open market during the quarter. Recall, we completed about $16 million of these repurchases in the second quarter, which resulted about $47 million of these notes being repurchased year-to-date. We view these particular notes as very attractive from a valuation perspective, when evaluating their spread over the associated treasuries.

But it's important to note that we use cash to retire this debt, which to further our efforts to decrease our leverage.

Finally, we ended the third quarter with leverage reduced about 3.83x and substantial liquidity of $925 million, consisting of $195 million of cash on hand and about $730 million available on our new bank credit facility.

So in closing, cash flow results continue to be strong. Through the first 9 months, adjusted operating cash flow has increased more than 7%, and free cash flow by nearly 9%. We expect to finish the year with a solid fourth quarter performance as well.

We are increasing the midpoint of our cash flow guidance range by approximately $15 million for the full year of 2019, and that, again, is on the expected lower cash taxes that I discussed earlier. So the previous guidance range of $550 million to $610 million becomes $575 million to $615 million of cash flow. This robust and steady cash flow, in addition to the liquidity of over $900 million that I just mentioned, sets us up nicely to deploy capital into the fourth quarter. We have a number of good acquisition prospects in the pipeline as well as continued new build projects, all while funding the dividend and returning capital to our shareholders in the form of share repurchases.

So with that, operator, that concludes our prepared remarks. And we'll now turn it back to you for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from A.J. Rice from Crédit Suisse.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [2]

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Couple of questions, if I could ask. So in the cemetery business you seem optimistic that we're going to see a rebound in the fourth quarter. You're highlighting, it sounds like to me, if I got it right, 2 issues. One, being these Chinese-intensive markets, Vancouver, LA and that you've experience pressure, and one being the recognition factor, I'm just trying to understand, are those related to one another? Is it your view that the recognition factor headwind will moderate in the fourth quarter, but you're not assuming that the Chinese buyer issues will change, is that the way to think about it?

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Thomas Luke Ryan, Service Corporation International - Chairman, President & CEO [3]

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Yes. A.J., this is Tom. Exactly right. The construction piece is -- really is the timing element, and we knew the third quarter was going to be a tough comparison. As we look at the fourth quarter, the construction impact, we would anticipate to be pretty equivalent or maybe slightly above the prior year fourth quarter. And in our assumptions right now, we're just assuming that we continue to see some challenges around that Chinese consumer segment. If that were not the case then we'd do better than probably where our head is right now. So we believe it's temporary, and we know it will fix itself one day, it's just hard to predict when that day is. I think the positive thing, A.J., and remember is, we've take the body blow of $18 million, if we project the fourth quarter, it's probably $20 million of a decline. And if you can just stabilize that, 2020 looks pretty good. And if you can growth it, even better.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [4]

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Okay. Okay. I guess I would also ask on the capital deployment second quarter row, where you've been pretty active in buying debt on the public market. I guess you are at 3.83x debt-to-EBITDA. So you're in that 3.4% to 4% range that you've traditionally talked about. One, I guess, have you moved the range down for any reason and so you're trying to get to a lower than that level of debt? And second, if you think interest rates are going down, I guess, I'm wondering why not wait and buy maybe that debt? Or is that driving your decision, I guess, to buy the debt as opposed to the equity?

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Eric D. Tanzberger, Service Corporation International - Senior VP & CFO [5]

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Hi. A.J., this is Eric. So we're buying those notes really from a deleveraging play, although, there is some savings, obviously, from an interest perspective. Ultimately, there is a pattern. If you remember last year, late in the year, we did a very large acquisition during the year, which was about $135 million spend, which -- that coupled with other factors, was kind of an increase in our leverage towards the very high-end of the 3.5x to 4x range. And we wanted to get it back kind of towards the middle. And I do anticipate that this 3.83 will probably be back in the middle of the range of 3.7 to 3.75, in that area by the end of the year. We have not changed our opinion of 3.5 to 4x. But we were purposely buying those notes, which appeared to us, from a valuation perspective on spreaded treasuries, to be the most appealing notes that are out there from that valuation to try to go ahead and tick off from a deleveraging perspective. In addition to that, you're right, that we did -- for example, instead of taking the November 2020 notes and refinance them in the high-yield market from fix rate to fix rate, we did make a play to take those onto the revolver, which we had significant capacity of. That's about a 4.5% to, call it, a 3.3% to 3.5% interest rate play, but that moves you to more of a floating rate debt as we continue to see things point in the direction of decrease in rates. So the open-market purchases with the deleveraging play, we're comfortable with 3.5 to 4. Well, probably end the year, in the middle of that, at 3.75. But we did move some fixed rate debt to floating rate debt as well.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [6]

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Go ahead.

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Thomas Luke Ryan, Service Corporation International - Chairman, President & CEO [7]

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A.J, I was just going to say -- to add on what Eric's saying, we -- as we get to the desired leverage level, I think you'll see 2020 be a little more aggressive as it relates to share repurchases compared to this year. This was the year that ends up pretty light, and we can get back to more normalized activity there.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [8]

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Okay. And then just my last question on Beacon, the initiative there, what's -- where you're at? What are you seeing? And any latest update on that?

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Eric D. Tanzberger, Service Corporation International - Senior VP & CFO [9]

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So the update on funeral is somewhat the same update because if you remember, as we've said before, we've shifted a lot of resources to cemetery. So in funeral, about 80% of the eligible contracts are being written -- 80% of the contracts that are being sold are eligible to be written on Beacon. And of those eligible contracts, we're using it or utilizing the tool, about 80%. That's really not new information, A.J., that's kind of stagnant what you've seen before. Because all of the movement in energy has been on developing the cemetery side of the Beacon equation. And again, we continue to work on that proficiently with our resources. We have described to you in previous calls that, that's a much tougher integration of that due to the individualistic property at each and every one of those 450 cemeteries, coupled with the substantial number of vendors and products that we sell that are -- that vary among all the different cemeteries as well. We continue to start the process to test it. I think by the end of the quarter, it was in, maybe like 40 test sites and about to go into some more. But that's kind of the status where we are. We continue to work very hard on the cemetery, but not much of a -- more of an update on that on the funeral.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [10]

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Any time frame on rolling it out to cemetery? When you think you might actually formalize the rollout?

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Thomas Luke Ryan, Service Corporation International - Chairman, President & CEO [11]

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At this time, we're going to wait until we roll it out -- I'm sorry, testing it to really understand it a little bit better but before we do. I do anticipate some of the rollout to commence in 2020. But it's probably easily the back half, but I'm not ready really at this point to give you any type of quantification of that particular effect.

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Operator [12]

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Our following question comes from Joanna Gajuk from Bank of America, Merrill Lynch.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [13]

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Just to follow-up and clarify some of the comments about 2019. So you reaffirm your guidance and then you said, if I guess the Asian population or the consumer purchases continue this disappointing level, you're going to be towards the lower end? Or are you saying that you assumed guidance because you are going to assume steady, I guess, situation in those 2 markets? So can you just clarify exactly what you -- how do you think about those 2 markets improving or stabilizing versus -- and what's included in your guidance?

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Thomas Luke Ryan, Service Corporation International - Chairman, President & CEO [14]

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Joanna, this is Tom. Thank you. Yes, I think what we're meaning is, we've left you a pretty wide range for the fourth quarter, obviously, by maintaining it. So I think, if I do my math right, I was not a math major, $0.50 to $0.70 would be the range. I think what we're saying is that if we continue to see challenges, we're anticipating in the way we think about it in those markets that we think it's probably going to land in the lower part of that range versus higher part. And of course, there's a lot of things that are moving back and forth, but that's our assumption, if we continue to see challenges in those markets, which we're assuming. If those challenges were to lift then I think we'd be more excited about getting to the middle or slightly higher than that part of the range.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [15]

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Okay. That's helpful. And any, I guess, read what's -- I guess been going on in these markets after the quarter end? I mean in October, do you have any visibility, any changes in trends so far you see this quarter?

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Thomas Luke Ryan, Service Corporation International - Chairman, President & CEO [16]

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Well, again, I think what we're seeing is, there may be slight improvements in those markets, but it's really too early to tell. We've really only got a month under our belt. And it's really, again -- a quarter is a full 3 months. So I wouldn't say, we're seeing anything that different. But I'd say, in those parks in particular, are doing pretty good in October, and we feel pretty good about that. But I do think there's still a cloud, if you will, of uncertainty hanging over consumer segment and understand why. And -- so I think it will be a challenge to get some of those to the finished line. But again, we believe it's temporary and these things will change and change in our favor.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [17]

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Right. And if I may. So I guess that leads me to the next -- I guess, start around next year outlook. I know it's early to give guidance and specific numbers and whatnot. But can you frame big picture headwinds, tailwinds for next year, the way we should think about it? I mean you made a comment, you'd expect at least in the cemetery segment, those 2 markets to maybe stabilize and then you focus on growing and coming back to 4% to 6% growth, sales production in cemetery segments. So any kind of comments you can make about how we should think about next year and maybe flagging any headwinds as in any comps or anything we should be thinking about for next year?

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Thomas Luke Ryan, Service Corporation International - Chairman, President & CEO [18]

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Joanna, I just feel very confident about next year and a couple of reasons why. You'll recall we reimplemented some -- the right things and within our sales force, we did a couple of tough things early in the second quarter. We raised our bonus targets for the first time in a couple of years based upon where we were within the comp plan. We've put some gates around ensuring that we can charge interest on contracts, which we had -- a portion of our contract for people were not charging interest, which is a form of a discount in our minds. And -- so again, we were going to treat it as such if that were the case. And we'd also have -- we pay commissions and bonuses based upon business that's on salesforce.com. So we did a couple of things that really needed to be done. They were tough. They can be a bit of a distraction. You combine that with the fact that were down 20% in these high sales, production markets. We believe that's going to come back. We think we've taken the preponderance of the body below. And then the last thing I think about is, we've spent a lot of money on these new development projects, high-end development projects. And -- so we have the inventory on the ground to get out there and sell. And I have the highest level of confidence in our sales team, in our sales management. And -- so I feel really good about 2020. I think, we're going to get back on track, and you guys are going to be pleased with the performance we can turn in.

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Operator [19]

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Our following question comes from Scott Schneeberger from Oppenheimer.

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Daniel Erik Hultberg, Oppenheimer & Co. Inc., Research Division - Associate [20]

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It's Daniel on for Scott. Switching gears a little bit to funeral. Can you talk your expectations for average revenue per service and volume, as we look into the coming quarters here? And maybe some perspective on flu season this year?

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Thomas Luke Ryan, Service Corporation International - Chairman, President & CEO [21]

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Sure. So I think, first of all, as it relates to the fourth quarter, it's our anticipation that we should see some slight volume growth in the quarter. Again, hard to really predict. But based upon what we saw last quarter or with the trends that we're seeing in our markets, we expect that to happen. We've seen some favorable trends as it relates to average as far as getting better and better quarter-over-quarter. We'd expect that to continue in the fourth quarter. Again, not a significant change, but probably a positive growth as it relates to that. And I think as we look into the following year, we have some of the same expectations. The early feedback on the flu and, again, it's really hard to tell, you only have what you're finding in the Southern Hemisphere, which is where all this starts, we anticipate it could be a bad flu season. I mean that -- I hope it's not. I hope everybody's got their shot. But that could be an impact on the first quarter. Once again, it will get muted throughout the year. So it isn't something that is a big factor as the year goes on, but probably could impact the first quarter next year.

And I think on the average front, we feel pretty good. We made some adjustments in markets to entry-level cremation prices in our locations. We took that below in 2019. We're not going to have a similar effect in 2020. So as I think about pricing in '20, I think it's a better trend than what we've experienced in 2019. So we feel good about fourth quarter on funeral perspective, and I think we feel good about 2020.

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Daniel Erik Hultberg, Oppenheimer & Co. Inc., Research Division - Associate [22]

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Got it. Thank you. Funeral margin, can you provide some perspective on that as well, as we look ahead and maybe elaborate a little bit on the cost-saving initiatives? And how that could impact the longer-term funeral margin profile?

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Thomas Luke Ryan, Service Corporation International - Chairman, President & CEO [23]

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Sure. So yes, as we've said, I think on our Investor Days and continue to believe, funeral margins are going to ebb and flow slightly, but they've been essentially flat for quite some period of time. I would tell you that I would expect that to continue to be the case as we go forward. There's only so much you can do with costs when you don't have significant revenue. If we trend at 1% or 2% revenue, that's going to be the case. I do believe one day we're going to see the impact of increased deaths associated with just demographics. When that demographic impact occurs and takes 1% to 2% revenue growth to -- closer to 3%, that's a pretty significant bump in our cash flows and earnings. I think if I compute that correctly, a 200 basis point increase in our revenues drops about $0.07 or $0.08 to our earnings per share strength. So not predicting that. I don't think it's going to happen in 2020. But I don't think it's that far away either. And what can we do in the meantime? We've been on the right businesses, we can capture more share through our preneed programs, which is what we're doing. We can compete more effectively by honing in our pricing, which is one of the things we anticipated and did in 2019. We're really readying, I would say, this platform for that event. And when it does, it's going to expand margins. But in the meantime, I think I would think of funeral as maintaining around a annualized 20% margin, as you think about going forward with growth that will be impacted by that demographic.

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Operator [24]

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Our next question comes from Duncan Brown from Wells Fargo.

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Duncan Brown, Wells Fargo Securities, LLC, Research Division - MD and Senior High Yield Health Care Analyst [25]

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I just wanted to go back to the properties that you highlighted that were driving the cemetery side. I think you threw out an $18 million number, was that just in the quarter or was that a year-to-date number?

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Thomas Luke Ryan, Service Corporation International - Chairman, President & CEO [26]

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Yes. Duncan, that's a year-to-date number. I think in the quarter, it probably was closer to $7 million is my recollection. But it's been consistent. We've seen it in 3 separate quarters. We probably began to see it in the latter half of -- or should say the latter half of the quarter, fourth quarter 2018.

So again, it doesn't make me feel any better, but I think the comp gets better as you get in 2020. And if there were a cloud of uncertainty lifted and people felt more confident about accessing the money that they have then they get back to thinking about these things. It's just -- it's really more a psyche as the way we interpret a lot of this is, it's kind of like when they stock market when down in 2007, 2008, not a lot of people would've run out, buy a new Ferrari. It -- you pause and you wait and see what's going to happen, and when you feel better, you reestablish your buying pattern. So that's -- again, I think 2020 -- I've been on the upside versus the downside, but we don't know yet.

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Duncan Brown, Wells Fargo Securities, LLC, Research Division - MD and Senior High Yield Health Care Analyst [27]

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That's helpful. And not to get too specific, but is that $18 million, does that include just those 3 West Coast properties? Or also some of the impact, maybe highlighted last quarter there were some issues in the Vancouver market, how -- what does that incorporate?

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Thomas Luke Ryan, Service Corporation International - Chairman, President & CEO [28]

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Yes. It's 3 cemeteries, 2 in Vancouver and a very large one in Los Angeles, that really are focused on that Chinese consumer segment. So it is literally 3 cemeteries in 2 markets.

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Duncan Brown, Wells Fargo Securities, LLC, Research Division - MD and Senior High Yield Health Care Analyst [29]

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Okay. Great. And then it sounds like -- thank you for that. Sounds like might expect a robust M&A quarter in Q4. I just wondered if you can provide any more color on what you're seeing and multiples changing at all? And just any commentary around that would be helpful.

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Thomas Luke Ryan, Service Corporation International - Chairman, President & CEO [30]

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Sure. So I think we are seeing still a pretty robust pipeline of activity. Again, not large deals, but good deals. And I'd say, the pricing is good. I mean we'll probably see a little bit of an increase, but not a significant one. And again, we're going to be selective to buy into places that fit our strategy, and we're going to pay the prices that shareholders expect the appropriate returns.

I think the other thing I would point out and it was in Eric's comments is, we are very focused on building new locations, and you're seeing a higher level of activity and I would expect that to continue because, again, we can select where that is, demographics that are happening within cities. We can build a contemporary facility that's really designed for that consumer. So I'd expect to see that trend continue. And while the IRRs aren't quite as high as in acquisitions because of the first 2 years, you're really kind of building the business, what we're seeing is, when you get out to years 3, 4, and 5, are some really nice growth trends. So I think you'll continue to see us plant those seeds and have more spend in more locations that will be new facilities in markets where we've got a great management team.

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Duncan Brown, Wells Fargo Securities, LLC, Research Division - MD and Senior High Yield Health Care Analyst [31]

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Got you. And last one for me. You mentioned the $35 million of land you bought in California, I just wondered if you could share some early thoughts on the plans there? How we should think about the rollout for that new -- of those new assets?

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Thomas Luke Ryan, Service Corporation International - Chairman, President & CEO [32]

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Yes. We're beginning plans right now to begin to develop sections of that cemetery. In any place, you've got permitting issues and initial investments. So as Eric, I think, mentioned, we've got 3 other cemeteries around there, one of which had an inventory issue, we were getting to the point where we needed more land and -- so it's really a perfect spot for us. It will probably touch a variety of these cemeteries, consumer markets. One of the cemetery specifically is focused on Jewish clientele. We've got a -- an Armenian population that we've got a great, robust program going with. And again, this is going to allow us to develop properties that are conducive to those consumers and what they want and allow us to continue to grow in LA for decades to come. So we're excited about putting it there. It's a big investment, but it's going to allow us to continue to grow in a very, very important market to us.

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Operator [33]

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We have no further questions. At this time, I'd like to turn the call back over to the SCI management.

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Thomas Luke Ryan, Service Corporation International - Chairman, President & CEO [34]

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I want to thank everybody for being on the call today. Happy Halloween. And it hurts me to say this, but congratulations to the Nats. I'm not going to say baby shark. See you next year. Thank you.

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Operator [35]

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Thank you, ladies and gentleman, this concludes today's conference. Thank you for participating. You may now disconnect.