Service Corp International (SCI) Q4 2021 Earnings Call Transcript

Good day, and welcome to the Service Corporation International Fourth Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to SCI Management. Please go ahead.

Thank you, and good morning. This is Debbie Young, Director of Investor Relations at SCI. Welcome to our company's review of business results for the fourth quarter and the year ending 2021. As usual, let me quickly go over the Safe Harbor language before we begin with the prepared remarks from Tom and Eric. Any comments made by our management team that state our plans, beliefs, expectations, or projections 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 release and in our filings with the SEC that are available on our website. During this call, we may also discuss certain non-GAAP financial measures. A reconciliation of these measures to the appropriate GAAP measures can be found in the table at the end of our earnings release and also in the non-GAAP presentation located on our website under the Investors Webcast and Events section. With that out of the way, I'll now pass it on to our Chairman and CEO, Tom Ryan.

Thank you, Debbie. Hello, everyone, and thank you for joining us on the call today. First of all, I want to express my sincere thanks to our entire SCI team. As we now are on the verge of navigating this COVID-19 world for nearly two years, I am so very proud of your results. You've never wavered from your mission. You continue to do what we do best, helping our client families gain closure, comfort, and healing through the process of grieving, remembrance, and celebration. For the home office teams that worked tirelessly providing support to the field, thank you. To our field leadership, making critical real-time decisions that protect our company, our client families, and our employees, thank you. And a special shout out to our frontline teammates who provide peace of mind to our preneed customers, comfort and support to our grieving families, and to our maintenance teams who make every effort to ensure our locations and parks are world-class. Our team gets it, the details matter. Now to the business at hand. This morning, I'm going to provide some color on our business performance for the year and for the fourth quarter, including some detail around our funeral and cemetery results. Then I will offer some commentary on our 2022 outlook. Keeping in mind, we must be flexible as we navigate the uncertainty of another year impacted by COVID. First, in terms of the full year 2021 results. We ended the year with a strong performance in both our cemetery and funeral segments. For the year, we grew revenue by $632 million, or 18%, and adjusted earnings per share to $4.57, or 57% compared to the prior year. While we saw a 4% comparable funeral volume growth, even growing over a COVID-impacted 2020, the primary drivers of our revenue were mid-20% growth in both preneed and at-need cemetery revenues, combined with a strong 7% increase in our funeral sales revenue. Timely, meaningful action in our share repurchase program and debt refinancing also drove healthy increases in our full year 2021 earnings per share. Now shifting to the fourth quarter. We generated adjusted earnings per share of $1.17, a 4% increase over the prior year quarter and a 95% increase over the pre-pandemic fourth quarter of 2019. Compared to the 2020 fourth quarter, funeral results drove the earnings per share increase as a healthy 8% increase in the funeral sales average offset slightly lower volumes and cost increases associated with staffing and energy. On the cemetery side, profitability was relatively flat as revenue growth from at-need cemetery sales and preneed cemetery sales was offset by a lower impact from new construction on cemetery projects and increased costs from staffing and maintenance. Below the line, the benefit of fewer shares outstanding offset higher general and administrative and interest expense as well as a higher tax rate. Now let's take a deeper look into the funeral results for the quarter. Total comparable funeral revenues grew $47 million, or about 9% over the prior year quarter, exceeding our expectations as core revenues, non-funeral home revenues from SCI Direct and general agency revenues all saw impressive growth in the quarter. Comparable core funeral revenues grew $32 million, led by an impressive 8.4% increase in the comparable funeral sales average. The core sales average continues to climb sequentially and is up about 5% over the 2019 pre-COVID fourth quarter. Our percentage of families selecting to have funerals and celebrations of life has essentially returned to pre-COVID levels. The funeral sales average is being further positively impacted by an uptick in ancillary revenues, such as flowers and catering. This increase in average was achieved despite a 120 basis point increase in the core cremation rate. Comparable core funeral volume declined 1.5% compared to the prior year quarter, slightly offsetting the positive impact of the funeral sales average. Keep in mind, the 2020 fourth quarter we're comparing against was acutely impacted by COVID and saw a 17% core funeral volume increase over the 2019 fourth quarter. From a profit perspective, funeral gross profit increased $10 million, while the gross profit percentage dropped 60 basis points to 27%. Fixed costs in the funeral segment include salaries, fringe, vehicles, facilities, and general and administrative expenses. In the fourth quarter of 2020, those costs were actually down 2% versus the 2019 fourth quarter, even with 17% more volume as the pre-vaccine era of the virus restricted both the consumers and our ability to provide a full-service funeral. In the 2021 fourth quarter, these costs increased by 8% compared to the 2020 fourth quarter. So overall, our fixed costs have increased 6% over the two-year period, or let's say 3% on a compounded annual basis while we are caring for 17% more customers than we did in 2019. So bottom line, I believe we are managing our costs very well against an unusual and difficult 2020 fourth quarter comparison. Preneed funeral sales production for the quarter exceeded our expectations, growing $30 million, or nearly 14% over the fourth quarter of 2020. Both our core funeral homes and SCI Direct businesses posted strong production increases against an easier fourth quarter comparison in 2020. Our core preneed funeral average revenue per contract winning the backlog now is over $6,300. This is an 8% increase over 2020 and more than $300 higher than our at-need average for the quarter. We continue to see positive momentum in generating significantly more high-quality marketing leads at a lower cost through increased focus on digital needs as well as more sophisticated data targeting for our direct mail and seminar programs. Now shifting to cemetery. Comparable cemetery revenue increased $21 million, or 5% in the fourth quarter. In terms of the breakdown, at-need cemetery revenue generated $13.5 million of the growth driven by a higher quality core average sale and a modest increase in contract velocity. Recognized preneed revenues generated about $8 million of the revenue growth, primarily due to higher recognized preneed merchandise and service revenue. So preneed cemetery sales production grew $39 million, or 13%, in the fourth quarter. This growth is on top of a 2020 fourth quarter, which grew by 16% over 2019. A higher core sales average accounted for the majority of the increase. However, we were still able to grow the velocity of contracts sold by almost 5%, which accounted for the remainder of the sales production. As I mentioned in my preneed funeral discussion earlier, we continue to see production growth from a marketing-generated leads program that very successfully led to preneed sales production. Additionally, we're seeing improvements in key sales metrics such as the number of appointments set and our close rates. I want to take a moment to recognize the tremendous efforts of our entire cemetery sales team. For the full year 2021, they produced $1.3 billion in cemetery preneed sales production. This represents a 28% increase over and above the very strong 15% growth in 2020. This could not be accomplished without a tremendous sales organization that is supported by the tireless efforts of our cemetery management, administration, and especially our talented grounds maintenance associates that keep our parks clean. Cemetery gross profits in the quarter declined slightly by $1 million and the gross profit percentage dropped 200 basis points to 36.8%. Recall that in the prior year quarter, no vaccine existed, and we saw fewer visitors to our cemeteries. So labor and maintenance costs were temporarily low. Now as we normalize the staffing level and make enhancements in our parks appearance, these costs, combined with higher selling costs and higher energy costs, reduced margins as compared to the prior year. Now let's shift to a discussion about our outlook for 2022. As you saw in our earnings release, we issued 2022 guidance of adjusted earnings per share to a range of $2.80 to $3.20, or a midpoint of $3. At the midpoint, this represents a $0.20 increase from our previously mentioned model midpoint of $2.80 in our third quarter conference call. The $3 midpoint reflects a 16.5% compounded annual growth rate over the pre-COVID earnings per share base in 2019 of $1.90, well above our historical guidance range. As you think about the cadence for the year, as we compare back to $4.57 in 2021, we would expect negative comparisons for each quarter. We should see continued elevated earnings in the first quarter due to COVID as we are continuing to experience increased demand with funeral volume and at-need cemetery sales. As the year goes on, we would anticipate that the COVID impact becomes immaterial and that we should begin to see the pull-forward impact from 2020 and 2021 having a mildly negative effect on funeral volumes and at-need cemetery revenue, thereby making the quarterly comparisons increasingly more difficult. For the year, we believe the favorable COVID impact from the fourth quarter and the pull-forward effect later should effectively offset into an impact that will not be material. So how are we going to grow earnings per share at a 16.5% compounded annual growth rate from the 2019 base? First, we reduced the share count with accelerated share repurchases during the uncertainty of the last two years. The pandemic also forced us to quickly leverage and implement technology in ways that would have taken many years to take hold in an organization of our size. We believe these accelerated changes have made us more productive with our processes, staffing, and other efficiencies. On the sales side, we had to lean on our technological tools to manage, allocate leads, and develop and train our counselors, which has resulted in a much more productive organization. Now let's discuss some of the segment assumptions. Within our funeral segment, we know we're going to have to transition periods where volumes are affected by the pull-forward of services into 2020 and 2021 that I just described. Our expectations for the pull forward continue to diminish as we see a larger number of the younger population being affected by these latest surges in COVID and COVID-related mortality. For funeral volumes, we're anticipating a comparable volume decrease in the mid-teen percentage range from 2021, but at levels that are flattish to a pre-COVID 2019 and after considering the pull-forward impact. Meanwhile, we expect the average revenue per case to continue to compare favorably, growing in the low single-digit range. And finally, we forecast preneed funeral sales production to grow in the 3% to 5% range for the year. On the cemetery side of the business, cemetery at-need revenue should correlate strongly with funeral volume. So we expect them to also be down in the mid-teen percentage range. We expect preneed cemetery sales production to fare much better as we can drive activity with marketing leads, and we expect a decline in the mid- to high single-digit percentage range when compared to a very robust 2020 and then returning to a more normalized growth in 2023 but on a much higher base. Beyond 2022, as I just mentioned, we believe the pull-forward effects will weigh and the trend of year-over-year growth should begin as we approach an aging baby boomer cohort, with a leaner, more technologically efficient and effective operating model. We continue to believe that after establishing a new base year in 2022, we will return to earnings growth in the 8% to 12% range in 2023. And with demographic tailwinds and the improvements we have made and plan to continue to make through our operating platform, we expect to capture upside opportunities in the years ahead. With that, operator, I will now turn it over to Eric.

Thanks, Tom, and good morning, everybody. As we reflect over the past 7 or 8 quarters during this pandemic, we are so proud of all of our associates, especially those who have been on the front lines with the families and communities we've had the privilege to serve. I can't thank you enough for all you have done and the support you have provided during these most challenging of times. We're all hopeful we are closer to the end of this pandemic, which will enable us to return to some form of normalcy for all of us. So with that, I'd now like to transition to walking you through our cash flow results and capital for the quarter and full year of '21 and then provide some comments on our outlook for 2022. So operating cash flow is approximately $190 million in the current quarter compared to $245 million in the prior year with the primary decline due to an increase in cash tax payments during the quarter to $97 million versus the $36 million in the fourth quarter of last year. Excluding cash taxes in both periods, operating cash flow before taxes increased almost $6 million to $287 million in the fourth quarter, driven by modest increases in earnings and favorable working capital, partially offset by $6 million of higher cash interest payments. So as we step back and look at the full year of 2021, we generated $912 million in adjusted operating cash flow, representing a substantial increase of $108 million, or 13% over the prior year. Deducting recurring CapEx of $260 million, which again represents maintenance CapEx and cemetery development CapEx, we calculate free cash flow for the full year to be an impressive $652 million in 2021, up $33 million from $619 million in 2020. So capital deployment has really been a highlight all year for us, and the fourth quarter was no exception deploying nearly $500 million, which is the highest quarterly capital deployment we have seen in recent history. This capital went to reinvesting in our businesses first, expanding our footprint through key acquisitions and new funeral home builds and returning capital to shareholders. Now let's talk about the breakdown. We invested $110 million in our businesses with $65 million of maintenance capital and $45 million of cemetery development capital spend during the fourth quarter. From a growth capital perspective, and as I mentioned on our October call, recall that we were very excited about the acquisition candidates we were working with late in 2021. So I'm happy to report, as you have seen that those acquisitions closed bringing the total investments during the quarter to $112 million and again, expecting low double-digit to mid-teen IRRs on each of these transactions. These businesses added almost $40 million of full year revenues from 28 funeral homes and two cemeteries in Ohio, California, Illinois, Oregon, and Rhode Island. And most importantly, I'd like to welcome the over 300 new associates from the Sheninger, Miller Jones, Lochner, Skyline, Russel Boyle and Golden Businesses to the SCI family. We also deployed about $16 million towards new builds in Texas, Colorado, Washington, and Florida. This brings total 2021 spend on new builds to $43 million with, again, low double-digit to mid-teen IRRs, which also helped drive additional earnings and cash flow growth for the company. Finally, we deployed $248 million of capital during the quarter to shareholders through dividends and share repurchases and $700 million for the full year of 2021. For the last two years alone, we've meaningfully reduced our outstanding shares by about 10% through timely execution on our repurchasing strategy. Since the inception of our repurchase program, we have now reduced our shares outstanding by just over 50%. So now let's shift to our outlook for '22 in terms of cash flow and capital. Based on the guidance range for adjusted EPS of $2.80 to $3.20, which as noted in our press release, we expect our adjusted cash flow from operations to range from $675 million to $725 million, again with a $700 million midpoint. As Tom mentioned, at the midpoint of our earnings guidance range of $3, we expect to meaningfully exceed our 8% to 12% earnings growth framework for EPS when comparing back to a pre-COVID 2019 base of $1.90. So from a cash flow perspective, our 8% to 12% earnings growth framework generally translates historically into about a 4% growth in adjusted cash flow before cash taxes. So adjusting for $150 million of expected cash taxes in '22, our adjusted cash flow from operations before cash taxes is expected to be about $850 million at the midpoint. This equates to a 6.5% CAGR over our pre-COVID 2019 adjusted cash flow from operations before cash taxes of $700 million, which is similarly in excess of this normalized 4% annual growth that we normally expect. So there are also a couple of items that I'd like to highlight when we think about our adjusted cash flow in 2022. First, we will be required to pay the remaining half for about $20 million of payroll taxes that were deferred in 2020 as allowed under the CARES Act. And as I just mentioned, cash tax payments in '22 are anticipated to be about $150 million based on the midpoint of our earnings guidance or $115 million lower than the $265 million of 2021. And from an effective tax rate standpoint, we continue to model in the range of 24% to 25% in 2022. One other topic I'd like to address for 2022 as we look forward for the full year, is our corporate G&A expectations. Now historically, we've guided to around $125 million to $130 million of annual recurring corporate general and administrative expenses. Recently, we have begun a process to reevaluate our overhead structure with all of the initiatives we currently have undergone. As a result of this review that is ongoing, we have identified about $20 million to $25 million of cost, which we believe may be more appropriately characterized as corporate in nature versus fuel-related expenses that is primarily related to certain technology, risk and governance areas. Therefore, when you're modeling 2022 at this point, I would expect annual corporate G&A to increase to maybe around $145 million to $150 million per year, with the corresponding dollar-for-dollar decrease in costs in the segment margins. So therefore, with no effect on our bottom line or our cash flows. So looking forward to 2023, we expect to return to a normalized cash flow growth trajectory with an expected 4% growth in adjusted cash flow from operations before cash taxes, which again is in line with our 8% to 12% earnings growth framework per share that we just mentioned. So in terms of capital deployment, moving on to some thoughts in 2022. Our expectations for maintenance and cemetery development capital spending are $270 million to $290 million for the year. At the midpoint, cemetery development CapEx comprises about $120 million of this amount and maintenance CapEx makes up the remaining $160 million. This maintenance CapEx of $160 million includes about $110 million of normal routine maintenance capital used at our funeral and cemetery operating locations as well as another $50 million for field and corporate support capital. This $50 million is primarily being deployed towards technology to not only improve the customer experience with ultimately customer-facing technology but also towards network infrastructure at our operating locations. In addition to these recurring capital expenditures of $280 million at the midpoint, we expect to deploy $50 million to $100 million towards acquisitions and roughly $50 million more in new funeral home construction opportunities, which together, as I continue to say, drive meaningful after-tax IRRs well in excess of our cost of capital. So to summarize this for a capital deployment strategy for 2022, we really expect to continue much of the same as you've seen from us over the past several years. We follow a disciplined and balanced approach, deploying capital to the highest relative value for our shareholders. And of course, this strategy is predicated on our stable free cash flow, our robust liquidity, which is over $1 billion at the end of the year as well as our favorable debt maturity profile. Lending additional support to this strategy, our leverage ratio at the end of the quarter landed just under 2.6x from a net debt-to-EBITDA perspective. And as we've noted in the past, looking beyond the impacts of this pandemic, we continue to expect to increase back to our targeted leverage range of 3.5 to 4x towards the latter part of this year as we lap stronger EBITDA quarters moving forward. So in closing, after a very strong 2020, we are very pleased that we exceeded those results in 2021. We are most proud of how our team has persevered over the last two very challenging years. The compassion and professionalism our teams have demonstrated is truly remarkable, and we appreciate each and every one of our team members. As we look forward to another year, I'm very excited about the momentum we have moving forward into 2022. So with that, operator, that concludes our prepared remarks. I'd now like to turn it back over to you for the Q&A session.

The first question comes from Scott Schneeberger with Oppenheimer. Please go ahead.

Thank you very much. Good morning, everyone. I guess I'd like to start with funeral and particularly cemetery preneed sales remain quite strong and it sounds like you all are anticipating within this 2022 guidance, that the second quarter, third quarter, and fourth quarter is where we really see the reversion from the pull-forward based on your crystal ball at the moment. I want to ask cemetery preneed. It sounds like you think that that will persist for a while longer. Could we get a little bit more sense of what kind of tail that would be and bridging you to the normal period, presumably in 2023 after that reversion period? Thank you.

Sure, Scott. We believe that COVID had a significant impact on our funeral business and cemetery revenues. As we expect conditions to improve, particularly in the latter part of the year, we anticipate a decline in our comparisons in those areas. When focusing on the cemetery side, we see it affecting our earnings per share while remaining optimistic about funeral growth at low to mid-single digits for the year. For preneed cemetery sales, we project mid-teens volume for funeral while estimating mid-single-digit growth for preneed. The difference in performance can be attributed to our enhanced sales effectiveness due to better technology and training capabilities. We expect 2022, although lower than 2021, to establish a new baseline from which we can grow again. This improvement stems from a more efficient sales process, from lead generation to training and management. Preneed has a new baseline to build on, while at-need sales will still be affected by the ongoing impact of death rates, which are beyond our control.

I appreciate that. Switching to at-need funeral, the revenue per service has bounced back nicely. I'm curious about the impact of FEMA's amended COVID-19 funeral assistance policy on funeral revenue, considering it's been about two quarters since the change. How much has this financial assistance program contributed to the revenue per funeral service and cemetery? Additionally, how long is this program expected to last? Thank you.

It's quite challenging for us to gauge the impact of the program. We did add a link on our website, but very few people have actually visited it, so we aren't seeing significant evidence of it influencing consumer spending. I believe what's affecting us on the preneed side is primarily our trust fund income, which has seen mid- to high-teen returns over the past three years, providing a notable boost to both preneed and at-need services. The at-need side shows a marked increase compared to 2022, largely due to a shift back to service after a significant period of out-of-service situations last year. Many individuals are opting for both cremation and burial services and are willing to spend more on additional offerings. We've also noticed a strong recovery in our ancillary revenues, including flowers and catering, which had diminished for a while but have returned robustly, even surpassing previous levels we've seen as a company. Overall, when we assess it against a 2019 baseline, our average is up by 5%, which is encouraging. While some might see unusual numbers in comparisons, there are many positive developments occurring, and we do not have concrete evidence linking FEMA funding to our results. There is certainly funding available, and it might influence people's spending decisions, but I wouldn't characterize it as having a significant effect.

All right. I appreciate that. One more, if I could sneak it in. This is essentially a 2023 CapEx question, just to give you the question upfront. But just you've been trending prior to the pandemic 7% CapEx as a percent of revenue. And it looks depending on what your sales estimate is for this upcoming 2022, looks like that's going to be up around 9%. It sounds like you have some increased infrastructure technology spending. I'm just curious, are we going to see a reversion on CapEx percent of revenue if that's the way you think about it back down to like a 7% in 2023 and thereafter? Are we going to be at a new elevated level of 9 or 10-ish going forward? And just kind of a little bit more of what's behind in this increased CapEx spend. Thanks.

Scott, it's Eric. There's a couple of things that are happening here. First, let's talk cemetery development. So as you know, in that 7%, we've always said, all else being equal, we think we're going to spend somewhere around $100 million in cemetery development CapEx per year. If you look at the financials, you'll notice that we didn't spend that in the last two years. We spent in the low 80s, frankly, for cemetery development. So I think one thing you have to notice is that our cemetery development is going to be higher this year, kind of making up some momentum in some of the capital that we had. And some of those are just projects that got hung up in permitting in California and things like that. But let's call that $120 million to $125 million. So that's a little bit higher, and I anticipate that to normalize. So that's going to be part of that component going back down to the 9%, 7% the metrics you use. The other thing that I'd tell you is our maintenance CapEx kind of normalizes around $125-ish million in that ballpark. It was generally that 110 to so area investing back into the funeral homes and cemeteries from a maintenance perspective. And then we had this corporate strategic kind of spend which was about $15 million or $20 million or so. And that is what has grown that I talked about in my conference call. And that's been the things that I've said before, which are some of the infrastructure as we've gone through remember, 2,000 locations going through, you can't do that overnight. So that's going to be a multiyear project where we are investing in network upgrades, infrastructure which again is all about the technology we use on-site for customer-facing things such as celebration of life in addition to some of the software that we use that's also customer-facing such as HMIS+, et cetera. Ultimately, I think that eventually starts reverting back to the mean, but I wouldn't characterize that probably in '23. I think we need another year or so, maybe 18 months to get through some of the stuff we're doing. We've also talked about reimagine, which is some of the efficiencies we want to bring us in technology to kind of the back office part of the field operations, and that's going to be ongoing as well for a couple of years. So to answer your question, is cemetery development kind of reverts back. I think maintenance is here for a little bit longer, maybe for another year in '23, maybe leads into '24 and then it starts reverting back.

Eric, that's real helpful. Thank you, thanks for taking my questions.

The next question comes from Joanna Gajuk with Bank of America. Please go ahead.

Good morning. Thank you for addressing my question. I appreciate the clarification on the CapEx because I was curious about that amount being higher. Regarding depreciation and amortization for the year, can you provide a specific number? Historically, D&A has been higher than CapEx, but it seems that may change this year. How should we consider D&A? Thank you.

I think D&A is going to be a little bit higher. I really do. I think it's somewhere around $280 million, $290 million in that general area. The one thing you have to remember is probably $160 million to $170 million of that, Joanna is the D part, the depreciation. But the amortization, remember, is the non-cash cost that relates to the sale, the recognition of the cost of sale related to cemetery properties sold on a preneed basis. So from that perspective, the reason why it ends up being somewhat variable is because it relies a lot on what the preneed cemetery sales are going to do in the property area. And as we know, that's going to be quite different this year than last year. So that's kind of the biggest variable in our D&A, which is somewhat unique to our company is that amortization of cemetery property that you could see on the cash flow statement. But it's a very general statement. I kind of go with those numbers that I just described to you to help you kind of think about it and model it for 2022.

Okay. That's helpful. And two more, I guess one follow-up on the deals you did in Q4. So I guess, clearly, there was some pent-up demand for these deals closing last year. So kind of how do you think about this year in terms of M&A? Are you expecting kind of a more elevated activity or there was just things were delayed last year and this was just happening in one quarter? And I guess any kind of change to multiples? Is there kind of requirement or rather expectation the multiples will be moving higher?

As I mentioned earlier, our official guidance is to revert back to our estimate of spending between $50 million and $100 million this year for M&A. Last year, we exceeded that expectation, particularly due to the activity in the fourth quarter. I expressed my optimism during the October call regarding the promising pipeline that emerged in the last quarter of the previous year. I don’t believe that pipeline will just disappear overnight. While I won't elaborate further, I can say that we still feel a similar level of excitement about our opportunities as we did when discussing them in the fourth quarter.

And would that excitement cause any pressure on multiples, do you think?

No. I think generally, we're pleased with the type of the multiples, and we're pleased with the type of after-tax IRRs that we're able to produce. They're going to be in the low double-digit to kind of mid-teens depending on the deal and the deal size. But no, I think we're somewhat pleased with the type of returns we're getting.

Okay. Great. And my last question, so the commentary around aging demographics. So you even put it in the press release, which I think was first and maybe. So how should we think about that? Are you kind of pointing to the concept of like we're getting closer, but is there a kind of a more finite commentary there? Are you expecting to see this benefit in '23? Or is it kind of more a period after that where it's going to be a more meaningful impact? Thank you.

Yes, Joanna, I believe the comment was more focused on a perspective beyond 2023. What we are conveying involves several aspects related to demographics or potential impacts that aren't related to market share. Firstly, the cohorts affected by COVID include the younger demographic, which generally doesn't exhibit a pull-forward effect. This is mainly because, with Omicron and even prior with Delta, the non-vaccinated younger individuals were primarily affected, unlike the initial wave that was more prevalent in unvaccinated nursing home residents. Consequently, the impact of these waves has diminished. Looking ahead to the next few years, which we will elaborate on more during our Investor Day, there are unfortunately many negative trends, including increased car accidents, rising smoking rates for the first time, and alcohol sales, all of which affect our health and are likely to have a short-term impact that won’t revert to 2019 levels. Additionally, in a longer-term perspective, the aging baby boomer population becomes a significant factor every year. Therefore, as we manage expectations for the mid-part of this decade, it seems we may have more challenges to address than we previously anticipated five years ago.

The next question comes from A.J. Rice with Credit Suisse. Please go ahead.

Hi everybody. I wondered if I could first ask about the cemetery production number. You're up 13% year-to-year, and I think you said on velocity was 5%, implying probably a pretty robust increase in the averages. What did you see there? It didn't sound like that was the really high-end stuff that you sold on a preneed basis. But what is going on with that?

AJ, we actually saw a slight decline in high-end sales compared to the previous year. You're correct that 5% was due to velocity, while about 8% was from the average. You might wonder how that's possible, and it ties back to our tiered inventory concept, which focuses on enhancing inventory across all levels, from the highest to the lowest. So, when we mention the 8%, it's not simply a price hike; it's about having a different inventory mix. Over recent years, we've improved our offerings and the appeal of the cemetery. As more people visit, they're purchasing at higher rates and seeking better quality options. Our original strategy was to enhance our offerings, believing that people would respond, and that's essentially how things have played out. We're not necessarily seeing price increases; rather, it's the purchasing from higher-quality options that is driving the 8% average revenue per case.

Okay. When you think about both businesses, and you referenced some and talked about a little bit in the prior remarks, some inflationary pressure. It sounds like if you look at it relative to 2019, it's still for your business pretty good on the cost side, compound annual growth, 3%. But I know that a lot of times just your absolute price increases you're trying to sell a richer service and all of that. But the average price increases year-to-year tend to be more CPI-driven as we see CPI and other inflationary indexes increase here in the last 6, 9 months, have you looked at that? Are you inclined to move your pricing more in line with what the current inflationary trends look like?

We evaluate each market individually, so I don't want to make broad generalizations. Most of our costs are closely tied to labor. When we notice an increase in labor costs in a specific market, we come together as a team to discuss our situation. If we need to retain key employees, we develop a plan to manage those costs. This is essentially how we approach pricing in a market. While we have some overall ideas, local market conditions primarily guide our decisions.

Okay. And your perception is you have the ability to make those price adjustments as needed. There's not resistance. People still relatively immune to what people paid a year ago, and so there's been a price adjustment in any sense?

We do, A.J. I think where we've done that because we're very sensitive to that, we do not want to price ourselves. If you remember a few years back, we really made some adjustments, particularly to the cremation side of our business to be more competitive in that market. So we are absolutely sensitive to that, monitoring that. And I know no market where we've made those adjustments when we feel like it's come back in our face. So we're careful. They're not going to be egregious price increases. But again, I think if we're seeing some labor issues, which you can see from time to time, let's say, in a hot market, where it's labor competitive with other industries, be it real estate or other folks, we have more ability to pass along those inflationary costs. And again, we try to engage the whole market and say, 'Hey, how do we solve this problem? If we really are losing people, we need price increases, then let's come up with a plan to where everybody wins.' And I'd say the approach so far has worked. Clearly, there's inflation in the system, and we're going to have to deal with that in the coming year.

Okay. And then just lastly, just another aspect of the deal activity in the fourth quarter. Should we think about this as just sort of normal succession planning coming to fruition that maybe got put on hold a little bit during the pandemic? Or is there any other dynamic people burned out post-pandemic with everything they've had to deal with? And therefore, looking to make a transition that maybe wouldn't have been if the pandemic hadn't happened? Or is there any other dynamic at work that you see that's prompting some of these transactions?

I believe it's a combination of factors. We certainly have an ongoing transition issue as we tend to acquire established, generational businesses rather than start-ups. This is certainly influencing the situation. Additionally, after going through COVID, many decision-makers express a desire to enjoy life, which I think has affected their choices. It’s also worth noting that the best time to sell your business is when our pro forma volumes are up, which serves as a solid basis for negotiations. We won't pay for what we consider to be one-time businesses, but all these factors are contributing to increased activity. As Eric mentioned, we're observing more deal flow opportunities for growth, and while we will be selective, we're enthusiastic about current prospects. I believe this trend will continue for some time.

Okay, great. Thanks a lot.

The next question comes from John Ransom with Raymond James. Please go ahead.

Hey, I'm still mad at you guys for sending me that mailer for dignity. I'm a boomer, but I'm kind of a young Boomer.

It was very targeted, John.

Yes, I am focused on getting healthy during the pandemic. My question is regarding the excess pull-through observed over the last two years. If we assume that's a bit more than 100,000 excess funerals, what are your current thoughts on the pull-through for that as we look ahead to the next one, three, and five years? Have you gained any insights on this?

Yes. I think it was a little bit different than what we originally said earlier in the pandemic. That's the first thing I have to say. First of all, the 100,000 for us is really more like 120,000 what we believe were the COVID ancillary deaths that we did, which was 50,000 in '20 and 70,000 in '21 is a very rough estimate. When we first said one-third, one-third, one-third, I think we are very much off, and I think we've been trying to say that. We're learning as we go forward and trying to figure it out. But I think the tail is much longer; that's the first thing I'd say. It's not just a 3-year event. And the second thing I'd say, it's roughly maybe even half to a little bit less than half of that one-third, one-third, one-third. So when you think that way, think of 15% to 16% area. I'm talking way too precise, just to start because we haven't experienced this yet, and we have to get through and continue to sync up. But we think in '22, for example, it's somewhere about that percentage of the 120,000 that's through there. What I'll tell you is we'll learn as we go. I'll be very surprised if that's perfectly accurate. But we'll put our best foot forward and we'll learn as we move forward, and we'll update you as we move forward.

Okay. I haven't discussed this in a while, but I assume that finding commission-based salespeople to sell a product with no recurring revenues is challenging in 2022. Can you talk about your sales force turnover and productivity metrics, particularly regarding the 80-20 rule? Have you implemented any changes to your recruitment strategies or the compensation structure to maintain performance in this tough environment? What adjustments, if any, have you made to keep things running smoothly?

Well, John, I think, first of all, just to compare pre-pandemic to post-pandemic, we're actually probably down about 400 to 500 counselors because one of the things we did is in the uncertainty, we didn't know what kind of leads we're going to be able to generate. Because remember, when we started, traditionally, we were getting a lot of leads through, I'd call it, the walk-in model or the activity follow-up model. We didn't have a lot of marketing leads being generated. So we really pared down and said, 'Let's give our leads to the best people and at the same time, launch this marketing sales lead programs, which became incredibly effective. At the same time, you'll recall we had customer relationship management software, which we were encouraging people to use but weren't insisting that they use it. And what happened in all that, when you shut down travel and you didn't have the ability to go, is we started leaning on these technological tools to manage and then have these incredible leads. So what we found is we were much more productive as a sales force as a sales management team. We had more capacity to manage because we weren't on the road all the time. We were using data off of this customer relationship management. So we knew effectiveness. We could apply training. So what's really happened out of this is we have less people that are selling a lot more; so much more effective. So as we think about going forward, I think our thoughts are this. We can go deeper on effectiveness. We believe we're now launching tools that actually will allow us to be more productive, more effective with what we have. At the same time, we're generating more marketing leads that we talked about. So I think it's going to be an interesting dance that allows us to be more productive. But at some point, our hope is that we're going to have so many leads that we have to begin to grow the headcount again. Right now, I'd tell you there's a lot less turnover, a much more effective sales force, and it's really being driven by productivity and putting the best leads in the hands of the most capable sales people.

I mean, Tom, do you think looking back on it a year from now or so, you'll say this might have been the most enduring benefit of the COVID response?

I believe the biggest impact comes from efficiencies we've gained in staffing and our ability to manage it better. We've also improved back-office operations through technology. However, the most exciting development is that we think we've reached a new level of sales production. We have accelerated our growth, and we believe that some of these gains are not going to reverse. Much of this is due to the effects of COVID, and we plan to elaborate more on this at Investor Day. Previously, we would estimate cemetery sales to grow by 4% to 6%, but over the past three to four years, we believe we may have actually grown by 9% to 10%, and we don't anticipate losing that progress. That's the real growth. Additionally, we experienced an extra boost related to COVID, which adds to our excitement. It feels like we've established a new base for growth in 2022, which we likely would not have reached without the COVID situation.

Got you. And last one for me. Is there any more wood to chop with Beacon on the cemetery side, is that fully deployed at this point?

It's fully deployed at this point, but as Tom just mentioned, we have many technological advancements and improvements that we want to pursue, so it will be an ongoing process. But the answer to your question is that it has been rolled out and deployed.

Okay, thanks, guys. I appreciate it.

This concludes our question-and-answer session. I would like to turn the conference back over to the SCI management for any closing remarks.

Thank you, everyone, for being on the call today. We look forward to talking to you again on our first quarter earnings call in late or early May. Take care.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.