Welcome to the First Quarter 2018 Service Corporation International Earnings Conference Call. My name is Mattie, and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to SCI management. Please go ahead.

Good morning everyone. This is Debbie Young, Director of Investor Relations at SCI. I will start as usual with the customary Safe Harbor language before we begin with prepared remarks. The comments made by our management team today will include statements that are not historical and are forward looking. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in our press release and in our filings with the SEC that are available on our website. Today we may also refer to certain non-GAAP measurement such as adjusted EPS, adjusted operating cash flow and free cash flow. A reconciliation of these measurements to the appropriate measures calculated in accordance with GAAP is provided on our website and in our press release and 8-K that were filed yesterday. I'll now turn the call over to Tom Ryan, SCI's Chairman and CEO.

Thank you, Debbie, and hello everyone and thank you for joining us on the call this morning. Today, I plan to give an overview of the quarter followed by a more detailed analysis of our funeral and cemetery operation and finally comment on our outlook for 2018. So let's begin with an overview of the quarter. As you saw in our press release yesterday, we’re off to a nice start to 2018 as adjusted earnings per share grew $0.09 or 24% to $0.47 per share. Within this $0.09 of growth quarter-over-quarter, I'll speak to three components. First and most importantly higher operating profit from our funeral and cemetery operation contributed $0.05 or 13% of growth, which was led by increased services performed in our funeral and cemetery segment, bolstered by a strong flu season and favorable cost trends, particularly in our cemetery segment. Next, earnings per share benefited by a net $0.02, primarily from the impact of new revenue recognition standards requiring us to defer certain selling costs. This benefit was slightly reduced as processing fee revenue that was previously recognized as income on SCI’s direct contracts is deferred under the new standard, both of these items have a timing element that were normalized in 2019. Finally, a lower tax rate, a reduced share count and a slightly higher interest expense combine the benefit of our earnings per share by an additional $0.02. We also reported strong adjusted operating cash flow of $206 million, which was an improvement of $18 million or almost 10% over the prior year quarter. Finally, we continue our commitment to deploy our free cash flow to the highest and best use. During the first quarter, we returned $150 million to our shareholders in the form of share repurchases and dividends paid. Additionally during the quarter,…

Thanks, Tom, and good morning everybody. Today as usual, I'm going to begin by giving you some of my thoughts on our cash flow results and the capital deployment both of which happened in the first quarter and then I’ll touch upon our full-year cash flow guidance towards the end of my remarks. So let's begin with this overview of the cash flow for the quarter. And as you saw in the press release, we are very pleased to report adjusted operating cash flow of $206 million, which was almost $18 million, or a 9% increase, compared to the same period last year. In addition to the impressive cash earnings that Tom just walked you in his remarks, we also had expected lower cash tax payments during the quarter as well as higher operating receipts, which were partially offsets by other working capital uses. So let me give you a little more color on these results. First, we’re comparing our cash flow results to our earnings per share. Remember that our earnings this year are affected by the non-cash impact from adopting the revenue recognition accounting standard we just discussed. Recall, we told you in February that we estimated the revenue recognition benefit to be a total of about $0.04 per share for the full year of 2018, which we continue by the way to believe is appropriate. Unlike 2017 where cemetery selling costs were expense as incurred, under the new standard, selling cost incurred earlier in the year on unrecognized cemetery property sales are deferred until the associated revenue is recognized, which generally if you remember occurs in the back half of the year as cemetery projects are generally completed. As a result of this expense deferral cadence, the $0.04 annual benefit therefore is heavily weighted towards the first…

Thank you. [Operator Instructions] And our first party with a question is Scott Schneeberger from Oppenheimer.

Good morning this is Daniel on for Scott. Congratulations on a good quarter. I want to talk some margin first. Can you guys discuss, give us an update on the expectations for funeral and cemetery margins for the full year? And help us think about the cadence on each of them and the puts and takes. Thank you.

Sure, I think, we obviously feel very good about, I think, of our annual guidance what we’ve always said is look for funeral margins to range between on an annualized basis 19% to 21%. We’ve experienced just north of 20% recently. And we'd expect over the last – over the near term for those to be relatively flat because of the challenges of the revenue line item. On the cemetery side, we've guided people to say and historically we’ve done, we've been able to grow those in the call it to 80 basis points to 150 basis points type range because of our ability to grow cemetery revenues different from funeral. Now from a seasonal perspective the thing to remember, the first quarter is generally the best quarter from a margin perspective on the funeral basis. And the reason for that is again the flu activity tends to fall within that first quarter. Cemetery is very different. Cemetery margins generally get better as the year goes on for a couple reasons. One is it's warmer outside in a lot of markets and you can have a lot more sales activity. And two, remember from a property perspective, construction tends to occur more rapidly in third and fourth quarters. So as you think about margins on a quarterly basis, think of cemetery is getting better as the year goes on and generally funeral has a good first quarter and a good fourth quarter and in the middle of the year it’s a little harder because of again volumes of activity.

Thank you. On acquisitions, I mean you had pretty solid spend in the quarter. Can you give us an update on how you think about the spend for the year? And help us think about the model, how we should model this from a P&L perspective? Contribution from acquisitions in this quarter and how it might look like for the full year as well? Thank you.

Yes so I thing again and as we kind of said in my comments, we're very, very pleased with what we were able to close in the first quarter. We've got a lot of activity out there. So our belief is, it's going to be a very good year, we guided people to say we think we could spend between $50 million and $100 million in a given year. But that's always going to be, based upon the fact what size deal is going to close, how many deals are going to close? I would just tell you looking at the backlog today, we feel very good about achieving the high end or better when we think about our acquisition spend and the impact. I think as you think about the impact within a year, remember SCI having the scale that we do most of our performance is going to be driven by our operations. Acquisitions do not actually add to the value, but it's not going to be material piece of our operations. The other thing that I would – I think from a modeling perspective I just want to get out there because we tend to not talk about it much, you'll notice that we actually sell a certain number of businesses in the year. Again a lot of these are big businesses that may not fit our model anymore, some changes that occur in markets. So we’ve looked at the highest and best use for us and say we believe selling this business or selling this real estate is a better deployment of capital that continue to operate in that market. So keep in mind we are selling businesses that are going to reduce revenues in those buckets, but remember they are generally good businesses, so don't make a lot of money. And we're taking that free cash flow and redeploying it in places where we know we're going to get a return. So as you build your models I’d say look at your creative acquisitions and divestitures that are not to lose, but will put pressure let's say on your total revenues as you think about the entire year.

Got it, that's helpful. Thank you very much guys.

Our next question comes from Joanna Gajuk from Bank of America.

Good morning. Thank you for taking the question. So can I just come back to the discussion around cemetery production? I guess you said that it did indeed was somewhat disappointing, there was a tough comp. And then can you talk about, I guess some activities so far in April? So this – so half of the mid-single digit, so I'm sorry, I just want to clarify. So are you talking about the remaining of the year, or I guess for the full year? Or I guess it's going to average itself out in the first quarter and still is going to be met single digits? I just want to clarify that comment whether this was for the full year or the rest of the year in the single digit?

Yes Joanna. Hello how are you doing? And thank you for the question. I think what we're really saying is what we're trying to convey in message is we did have a tough quarter, we've got kind of this Ching Ming festival slipping from March to April type of thing. So I think what we're trying to convey back to you one is we feel very, very good about our preneed cemetery sales momentum. And we're seeing that return based upon preliminary April. It’s always hard to figure, I think, again because we gave mid-single-digit guidance for the year that we get back there. Now what’s mid-single-digit guidance? It’s I guess I define that as 4% to 6%, right. Normally I’d love to say will be at the high end of that. So as I think about this and again I never want to put a limit on what we can do, because we've got such a talented sales team. But because of the first quarter, I think, we'd be fighting to get back to the lower end of that guidance. Now what that would tell you is the next nine months look pretty good, right. As I think about the next three quarters. The other thing I’d just point out is getting back to the kind of the quarterly comparisons we tend to focus on some of the companies, Q2 of last year was a pretty high step in quarter. Q3 and Q4 really weren’t. We had a great first half of the year and not so fantastic second half of the year. So when you think about the quarterly comparisons we’ll have another tough comparison in the second quarter. I feel good about our ability to compare against that but it probably [indiscernible] as you get to Q3 and Q4.

I agree with the comps, because you underscore right the comp was pretty tough. And I guess if I look at the Q4 comp, kind of the delta is similar to 700 basis points to 200 basis points on that growth rate. So I just want to clarify how you feel about that? Because also coming back to your comments about the quarter and outlook for the year, so would you characterize quarter sort of in line with internal expectations I guess what's beat first is the consensus number. So I just want to get a color there.

Yes I guess I would define the first quarter as in line with expectations or slightly better on an overall basis. As you think about the components of that, I would define it this way. From a funeral perspective it was slightly better from a cemetery property perspective, again we're saying we weren’t very pleased with the first quarter. So we feel like that can get better. So I think we're very, very pleased at having to achieve what we believe was about where thought we’ve landed or slightly better. And we feel very confident about the back half of the year. But as you know Joanna, I think, think a quarter is not a year make and we want to have another quarter under our belt before we look at where we are on cash flow, where we are on earnings per share to you give you guys a little better perspective. But I would say we came out of the first quarter feeling very good about the rest of the year.

And if I may on the quarter in terms of the shift to cremation of 120 basis points that you flagged. Is there's something there in terms of the shift accelerating because I guess the prior two quarters it was below 100, but again I guess you mentioned this in the past that it could vary quarter-to-quarter. So what's kind of your view in terms – for the year for the cremation shift?

Yes Joanna, I think, you're exactly right, what you pointed out. We see years where it's 50 basis points, we see years where it’s 140 basis points. It would take a long periods of time, it tend to get close to a 100 basis points. And that's why we can’t use that nice round number. We do not believe this total is anything other than it’s another slightly different than the average. So we still believe that the year and the coming years will probably change it around call it a 100 basis points year-over-year. So I think that we’re seeing that drastically believe it just changed more. The one thing I would say is this has to do with core because I think we define for you that core mix change and then the overall mix change. I will say that I think we are doing a great job as it relates to SCI Direct in growing our share of that customer segment. So from that perspective I expect it to go up because we think we're capturing more share versus our competition. From a core perspective, I think, it's kind of same as it ever was. We expect a 100 basis point change annualized.

Great, thank you. If I may squeeze the last one, so at the Investor Day you talked about cemetery perpetual care trust fund structure change from fixed income to equity. So did you see any benefit of that? And I guess at this presentation you mentioned that it will be like a $15 million sort of benefit to casual, I guess annually. So should we think about this benefit materializing this year?

I think the thing with DCF is there's a lot of moving parts in that number. I will say, I think, we saw a little bit of impact from that. I think that $15 million number you're talking about is upon complete conversion of where we're going to go. It even sounds a little bit high. But I do believe that we would expect to see millions of dollars of improvement on an annualized basis year-over-year because we have shifted those funds and equities. And unfortunately we still got few stages to go. And the big one, I thing, California doesn’t become effective until 2020.

2020, right.

So some of that on a pro forma once it’s fully effective. But we do believe there will be a few million dollars of impact as we think about 2018. And you'll begin to see, I think, there is a comparable number of last year that caused our ETF not to look good, possibly good. But we expect that to be a more favorable comparison as we move throughout the year.

Thank you. I'll go back to the queue. Thank you.

You’re welcome.

Our next question comes from A.J. Rice from Credit Suisse.

Hi everybody. A couple questions but my first just sort of cleanup a couple things that have been talked around make sure I fully understand them. So on the cemetery side, especially the pre need cemetery sales I know on an annualized basis they tend to be what they are, but from a quarter-to-quarter they can be a little discretionary. Do you think weather had any impact? I know we had some quirky weather in different parts of the country. Have you guys drilled down on that or that bubbled up as an issue in terms of your production numbers in the first quarter?

Yes, I think that if you ask the question you can come up with about 15 different reasons why. And that would be one of them. We've had some regional leadership changes. We got a lot of things that I could paint them really sad circle excuses for you. But I think the truth is that’s what happens all time and we managed through it. There’s weather but I think you're right; there surely were pockets of the country when you think about the Northeast, when you think about the mid west. We had some pretty severe weather even in California. So sure, those tend to bounce back, right. So I think our belief is if you couldn’t get out to the cemetery in March because of the weather, we’ll see in May. So I think that’s another reason why we feel like look it was a comparison. There were a lot of wind in our face, but nothing fundamentally is broken. We've got a great sales team, we've got better sales tools, we've got really tremendous properties and inventory that we're putting out there. So feel really good about last nine months and your point is well taken, you’re exactly right. I just – it's hard because it's different in every market, right. Last year there were some markets with that bad weather and we got over it. This year we may a little more. But that’s the kind of the way we feel about that.

And just some of these Chinese festival impact I don’t remember hearing about before, and I’ve involved you guys for a long time. Did you – do you have any way to quantify how much of a headwind that was in the first quarter? And does that then reverse because in the second quarter you get all that back pretty much in the second quarter?

Well that what’s hard to tell because again it depends on when you run your campaign, right. So Ching Ming is the sweeping of the tombs. And in Chinese custom I believe the actual day falls like generally April 4 or 5, but it depends upon the weekend that you're having, let's say these open houses. The biggest markets where we see this are going to be in Vancouver, and then also at Rose Hill, those are traditionally. What we're finding now is we're expanding the Ching Ming celebration to other markets where our Chinese clientele haven’t had exposure to this before. And so from a long-term perspective we see this as a much better opportunity to expand Ching Ming into many of the markets. I will tell you though so goes Vancouver and Rosehill, so goes our Ching Ming production because it is so big. And so we believe that we can capture – we have captured some of that back in April. But it was a huge number, it was one of many things of why we didn’t achieve. I don't want to put it all in Ching Ming I picked that one because there was an unusual timing to this year when a weekend falls, where you have the opportunity to really have the big sales activity.

Okay.

So it's not a huge number, but it's a another reason.

Okay, on the acquisition page you had a good year last year coming in toward the high end. It sounds like you'll be towards the high end again this year. Is that a function of more properties are available, less competition for properties? Is there anything that you can point to that’s particularly driving a modest pickup in acquisition activity?

I think really two things, we definitely are seeing more activity, more discussions, but also it's really for us it's a function of the size of the deal. So I think what you're probably seeing are larger transaction opportunities in the most recent years let's say first is where they were maybe a couple years ago. But that generally is going to be the big difference for us is how big of an opportunity comes your way and those kind of come when they come. So we feel good about seeing some relatively nice sized businesses that are interested in talking with us. And again we're at different levels of discussion with different parties. And I'm just trying to give some feedback that we see a nice high point and we a nice high point with some good size businesses that we believe will be a great fit with SCI. And we'd be excited to bring those management teams and employees into the SCI family.

Okay. And then my last one is we've had this ongoing discussion the last six months about price transparency what happened in the UK. And I know you guys addressed this at the Investor Day and addressed it before, but I just want to ask is there any update in your thinking there, or anything you're seeing? And I know there's some discussion around potentially update in the funeral, has there been any update on that?

Yes no update on the funeral rule. I think we're seeing the same thing A.J. When we think about pricing we talked about a little bit of our strategy that we're deploying in certain markets and we're seeing some again the favorable result of those markets where we've done it. It’s predominately been either more competitive particulate as it relates to the cremation consumer. And we're seeing some great results from that. And again, I think, our long-term strategy is really about capturing more share and capturing what I'll call backlog inflationary pricing. As you’ll notice in the numbers that the preneed average and we said this in our Investor Day, we believe the preneed average is going to grow at a higher rate than the atneed average. It’s competitive on an atneed basis. And allowing people to pay over three, four, five-year period allows them to buy up and be more satisfied with what they do. It makes it more affordable. So we view that as the best way to continue to go. The other thing that you see is from a mix change perspective, you see more of a mix change or a higher cremation mix in the atneed customer. So there’s a little more pressure When you think about that 120 basis point mix change, it’s going to impact that atneed walking atneed average more than it’s going to impact that preneed going atneed average. So those are just some of the things we deal with. But I think we view it as its tough sledding to get inflationary pricing, but we'll continue to do it. And the upside is really going to be and what comes out of that backlog as time marches on and did in our ability to compete more effectively for more volume. And we feel I'd say the signs are that we're doing a better job competing for that volume. And what's coming out of the backlog is a very good business.

Alright, thanks a lot.

Welcome.

We have no further questions at this time. I will now turn the call back over to SCI management.

We want to thank everybody for participating on the call today. We look forward to speaking to you again with our second quarter results in late July. Have a great week.

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