Good morning, and welcome to the Second Quarter 2019 Service Corporation International Earnings Conference Call. My name is Brandon, and I will be your operator for today. 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.And I will now turn it over to SCI management. You may now begin.

Thank you. Good morning. It's Debbie Young, Director of Investor Relations at SCI. Thanks for joining us today as we discuss our second quarter results. I'll quickly go over 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 talk about certain non-GAAP measurements, 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 is also in our press release and 8-K that were filed yesterday.With that, I'll now turn the call over to Tom Ryan, SCI's Chairman and CEO.

Thanks, Debbie and thank you everyone for joining us on the call this morning. Today as usual, I'm going to begin my remarks with a high-level overview of the quarter followed by a more detailed analysis of our funeral and cemetery operations, and finally comment on our outlook for the back half of 2019.So let's begin with an overview of the quarter. As you saw our press release yesterday, adjusted earnings per share grew $0.03 or almost 7% to $0.47 per share. This was in line with our expectations as growth in our cemetery segment and a lower tax rate helped to offset higher interest expense. Summarizing the quarter at a high level, we had a solid operating income growth in our cemetery segment by recognizing a higher amount of preneed cemetery sales production through income as we purposefully drove more sales into a higher percentage of already developed property.Funeral profits were flat as an increase in funeral volume in both our core and non-funeral home channels and continued focus on cost offset a decline in the sales average caused by a rising cremation mix. The good news is that our non-funeral home operating channel SCI Direct is back on track with an increase in preneed sales production of over 15%. Below the operating line a lower tax rate more than offset anticipated higher interest expense from higher variable rates tied to LIBOR as well as refinancing some shorter-term variable rate debt into 5.125% senior notes.Now shifting to some more detail around the funeral operating performance for the quarter. From the top line perspective, we grew comparable funeral revenue over $5 million, or about 1% compared to the same period last year, primarily related to higher recognized preneed revenues. Core funeral revenues grew slightly over the prior year quarter.We were…

Thanks, Tom. Good morning, everybody. I'm going to now give you some color on our cash flow results during the quarter. I also want to provide some insights on our trust funds. I'll cover our capital deployment for the quarter and then more importantly, I'll touch on our financial position and our outlook for the remainder of the year.So as you saw in the press release, we've generated adjusted operating cash flow of $84 million in the quarter, this is in line with our expectations. It was down about $20 million from the prior year quarter, as growth and operating profit was more than offset by anticipated both higher cash tax payments as well as higher cash interest from the debt refinance activity that we did during the quarter.Quarter-over-quarter, cash tax payments increased $20 million and, as I said, that was expected. In the first half of 2019, we have incurred $50 million of cash taxes as compared to about $25 million in the first half of last year. So we refined our estimates for the full year. We now believe cash tax payments will be closer to $90 million for the full year of 2019, which is a $10 million reduction from what we previously guided in terms of cash tax payments.Therefore, looking at the balance of the year, we estimate $40 million of cash taxes in the back half of 2019 compared to $30 million, which was spent in cash taxes in the back half of 2018. Now, also related to taxes, we noted in our press release an adjusted effective tax rate for the quarter of 23.3%, which declined from 26.7% in the prior year, as we primarily benefited from higher excess tax benefits on increased exercises of stock options.Keep in mind though, as you compare the…

Thank you, sir. [Operator Instructions] And from Oppenheimer, we have Scott Schneeberger. Please go ahead.

Thanks. Good morning, everyone. I guess I’d like to start out on the lower cemetery pre-need growth in productions, specifically in the quarter. Tom, could you go over again please the drivers of that? Maybe give us a sense of magnitude of each? And then some thoughts about the corresponding turn in benefit in the second half and thereafter? Thanks.

Sure, Scott. Thank you. First of all, I guess, I'd level set with, and I think I had in the prepared comments. If you look back at the second quarter 2018, it's our highest production quarter for cemetery -- pre-need cemetery in the last five years for sure maybe for ever. Same quarter is always, generally, a very strong quarter on a seasonal basis. So, we had a high hurdle to get over.The second thing we did, and I've touched upon a little bit, but didn't go into great detail with regards to some changes that we made associated with our target. One, we raised the targets for achievement in order to get bonuses. We recognized the fact that interest rates are -- can be a form of discount. And so, in equating that to the way that we compensate the sales force and driving fair interest rates as we finance these things over time.And then finally, some discipline around utilizing the sales force product, which is the customer relates to your management. So, we did a lot of things that are tough, good behavioral changes that I think is going to drive productivity enhance our sales force ability to sell. And again, when you do those things, and we did these predominantly in April and May, they can be temporarily distracting. And so, I think that had an impact, but again as I mentioned, I think those are the things that are going to benefit Q3 and Q4 when you think about our ability to achieve those production levels.And then, we just mentioned again that from time-to-time, you're going to have markets, and particularly, big markets. We mentioned in the first quarter some challenges in Vancouver as it relates to reaching targets of previous years. And those things just are going to happen from time-to-time, and we've got plans that we believe are going to allow us to lift our game even in the bigger markets.So we're excited about the back half of the year. I think we are confident that number one, we're generating probably the best leads we've ever generated in the history of the company. They are going to be very productive as you think about the back half of the year. By the way, these leads cost less than they used to cost. They're better leads.We're now globally on a customer relationship management system that kind of allows us to be more productive in handling those leads and managing them over time. And so, we feel really, really good about the momentum as we enter the back half of the year. Tough second quarter, but I think we made some changes that are positive for the long-term benefit of our company and our sales construction.

Thanks. I appreciate that, Tom. The cemetery recognized revenue was certainly elevated and benefited the quarter, I suspect that might be a little bit more volatile in the back half. Could you please discuss that a little bit?

Sure, Scott. I think, first of all, when you think about cemetery construction project, a higher proportion of them tend to occur in the back half of the year, particularly in the fourth quarter, and a lot of it just has to do with weather obviously a lot of work can get done in the summer months, when you think about certain markets. And so, a lot of the completions will occur that's what will be the case. We expect it to be the case.Last year, we had an unusual amount of hit in the third quarter. And so, I just kind of highlighted for you guys. We don't believe we'll see the same level of constructed revenue recognized in the third quarter. So, we think our production will be great, but the GAAP revenues probably will be closer to flat or slightly down. But in the fourth quarter, I think we'll pick that back up.So, lot of the reasons why we can recognize more revenue today is, because we've invested in these cemetery projects. I mean, we've now gone multiple years of significant development of great projects, and so now there is more inventory on the ground to sell, and we're selling it so we can recognize it faster. So, I think that's a little bit of what you're seeing in the first half of this year. And so, to smooth it out a little bit as you think about having a full country's worth of good existing inventory to sell.

All right. Thanks. One more if I could, I'll leave the funeral side for others to ask but the cost savings initiatives that benefited the quarter could you touch upon that a little bit more? And perhaps how that should affect second half?

Yeah. I think some of it, I've touched upon we've done a really good job of finding more efficient ways to generate leads through digital leads that are cheaper than historical. We've got significantly more leads in the quarter related to seminars. We've lowered the cost and the effectiveness of our direct mail programs. So a lot of things around lead generation that have helped we also have seen from a customer facing cash cost perspective, we've had initiatives both in the field and in the home office to reduce the what we call non-customer facing cost.So think of travel, entertainment, things of that nature and we have seen successes to the level of 20% to 30% type of reductions year-over-year. So again, I think what we're really doing to the company is to say look we're going to begin to invest in some new and exciting things that relates to digital strategy focusing on driving more customer behavior, let's find ways to fund these investments that we see coming.Another thing, I think we'll talk a little bit more because this happened in the third quarter, but we purchased cemetery land – raw cemetery land for the first time in a long time in some of our – couple of our key markets that, again, we want in the long-term make sure that we have the right type of inventory to continue to sell. So as you think about putting capital to work organically in some of these markets now even in some cemeteries this is just really an effort to rally everybody around, let's generate cash to invest in our future and continue to lead the industry in a direction, we want to go.

Okay. Thanks. We'll be balancing maybe some sales of cemetery now that you mentioned that you're purchasing some land or is it just opportunistic and one-off's you think?

Yeah. I think the land that we purchased is really around the long – having a long-term footprint that works in some of these big markets. So think of the LAs, the Houstons places like that where we have significant presences, big cemeteries, lot of growth in those markets, and just making sure that we've got developed property to meet the needs of those consumers their wants and needs. So I think these are kind of one-offs, they're not big ones, but these are the types of things that and like I mentioned before kind of the digital strategy that we're embarking upon from generating leads to also adjust the customer experience, finding ways to fund those projects with our hard-earned dollars and making sure that our shareholders get the right returns.

Okay. Thanks very much. I'll hand over.

Thanks, Scott.

From Bank of America, we have Joanna Gajuk. Please go ahead.

Hi, Joanna.

Good morning. Thank you for taking – yes. Hi. Good morning. Can you hear me now?

Yes, Joanna.

Great. Okay. So I guess on the first on the core on the funeral segment the core cremation shifted 170 basis points so that's better than 200 basis points you talked about in Q1. So, I guess maybe can you just flag to us the items you're talking about the last two quarters in terms of the impact of the acquisitions and also on actions that were impacting the last two quarters in terms of what was the magnitude of the impact this quarter?

Sure, Joanna. So I think last quarter, we talked about this and we saw a 200 basis points shift and my comments were around it. We believe 30 to 40 basis points of that shift was associated with some changes we made in selected markets. I think we had 30 markets where we made changes to I would say the starting at pricing as it relates to the cremation consumers in those markets. And we saw volume less in those markets associated with it. Another 30 to 40 basis points, we believe was the mix of acquisitions, as I think I mentioned before, the average cremation rate and the acquisitions over last two years was probably about 65% higher than our traditional.So those two things, we thought combines and I tell you that that's proving out, I believe to be accurate.What we're seeing now is, for instance even within the quarter Joanna, you saw the 170 basis points. In June it was significantly lower than that. And that's just anniversary comparison. We made these changes throughout the year, last year.So, you're seeing some year-over-year overlap now as it relates to that pricing being in place in those markets. And therefore you've gotten your initial lift. And you've maintained it.So, we still believe that the cremation mix in our business is probably changing about 100 to 150 basis points give or take a quarter. And the additional volume or I should say mix that's been driven, is incremental volume where we're getting customers as we weren't getting before.So, that's why even though the mix changes there, we're pretty excited about at it. And we think it's adding to profitability versus detracting product.

Right, I am sorry, so you're saying that there is still -- or did you anniversary the impact of the changes you're making in the 30 markets? Are you still not anniversarying it fully?

I think you'll probably see it fully sometime in the fourth quarter. I think there is probably still a shift. Again shifting more to normalized trends in the third quarter, but you still got some anniversary pricing that we did in the fourth quarter of 2018 that will impact that.And again I'm not perfectly familiar with, the cadence of our acquisitions. But again, I think you will see it normalize back within that 100 basis point to 150 basis point range, probably at the top of that in the third quarter.And again may be to the midpoint by the time you get to the fourth quarter and that would be an expectation.

All right, that's helpful. And I guess, staying on the funeral segment. So, the margins declined year-over-year, and I guess the decline was not as severe as in Q1. And to your point the revenues -- the comparable revenues was actually up nicely. So what kind of revenue growth do you need to keep margins flat in that segment?

I mean, if you look at the second quarter, we're down I think 30 basis points on the margin percentage. And we did it with I think 1% revenue growth. I think if you can get in the -- closer to 1.5% then you can begin to grow your revenues on that side of the business.So as you think about the back half of the year, to the extent we can flatten out the average and continue to grow volumes which again I think we feel like that's something that can be achieved, then you will see margin growth in the back half of the year.

All right, and then, if I may follow-up on the statements you're making in terms of your investments in digital strategy. So can you flash out a little bit more in terms of what you're doing different? Or it's just a continuation of what we heard before in terms of certain end optimization improving your website anything new or anything you're accelerating? Thank you.

Well really, the digital strategy is going to be a longer-term transformation that's probably going to take multiple, multiple years. And will ultimately also be about the customer experience and how we handle the entire process from on-boarding a customer until we receive the feedback from that customer.But what I'm talking about now, that we're spending some time and money on, was the updated websites. And the effect of that, because we've seen for instance in the first half of the year, we've grown about 33% over 61 million sessions on our websites.We also have had acute focus on our online reputation. And done some things to again solicit feedback from our customers to see those ratings, we're driving those of course up, which again then drives more traffic and more search engine results for us, when you think about on a paid basis and even again on a non-paid basis.So, it's things like that, that are we believe is going to generate more leads, more effective leads, build our reputation. And so, allow us to compete more effectively. And obviously against our competitors which always don't have the ability to do some of these things.So, that's really what we're talking about and today I think we'll do more as it relates to customer segments and being able to find ways to engage with consumers and drive more customers to our business as time goes on.And again it will continue when you think about the way that we interact and service our customers. It's just going to be continued stream of investment that I think is going to again put a further gap in our performance versus what's the rest of the industry can do.

So, over time will you be able to kind of pinpoint to any changes in market as a result of these? Or I guess you quoted some stuff in terms of the visits on your website, but anything you will track over time and report back to us in terms of how does it impact your market share?

That's certainly the goal Joanna. I think it's really early days, but I think we talked a little bit about this customer segmentation study that we've done and we've completed that. We've had multiple groups study this looking at different ways that we can take this information and use it to our advantage to service customers better and focus on the things that we can do to drive future behavior.And we mentioned a couple of things that I don't think are secrets to your industry, but we believe based upon our study that there is a higher preponderance of people that want to celebrate enough more and we think there is a higher preponderance of people that wanted more simplified versus complicated.So, taking those learnings and saying how can we better communicate, provide information, transparency to the consumer where they view us as the place to go when you want to celebrate. They view us as the place to go because it's simple. And that's easily said, hard to do and I think now what we're trying to do is articulate that strategy, develop ways to engage the consumer.And to the extent, we can do that I believe that's going to drive market share for us in differential ways. We're going to continue to compete like we are I still believe preneed is a huge driver of future market share and we're the best at it and we're going to continue to get better. So, think of that combined with what I just said and you get excited about what the future could hold for SCI.

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

Thanks Joanna.

From Credit Suisse, we have A.J. Rice. Please go ahead.

Thanks everybody. Couple of questions if I could. On the numbers around the perpetual care trust fund reserves and obviously, year-to-year headwind of 10% of this year -- or this quarter, I know part of what's been going on there as you've been restructuring some of the portfolio for your total return strategy is that pretty much played out? And may be is this level what we're likely to see? Or do you think this was unusually soft relative to what you'd expect going forward?

I think more of the latter A.J. Again it was volatile in the first quarter in a positive direction; it was volatile in the second quarter in a negative direction. Lot of that has to do with timing of the capital gains that are distributed like I talked about in the remarks.This relates to the trust funds that are still in the old type portfolios with the fixed income-oriented asset allocation as opposed to the total return portfolios which are about -- and we saw returns probably up to 40% 45% of the total assets, it's not played out yet. We hope to have some larger states come online next year or the following year, that would may even put us above 50%.But on the portfolio, that is the old asset allocation, again, the way it works under the state laws is the portfolio manager can decide to trigger capital gains. And from that, it then gets distributed to us and its then earnings and cash flows to us from those examples.So, the more you go to total return, the more you reduce the old fixed income portfolio and the less volatile it will be. But all else being equal, it's generally about $70 million, $75 million of earnings for us each year coming out of the perpetual care funds and they're somewhere between -- $10 million or $20 million of that will be capital gains. So, there is that much volatility through it and you saw that going opposite directions in Q1 and Q2, but normalized for the entire first half versus prior year.

Okay. All right. And then same thing about the agency fees, I guess that was a drag this quarter, it had been positive in the first quarter. I think in that first half you're up about 3%. Is that just normal ebb and flow in your mind? Or is there anything going on that made it a drag in the current quarter? And what do you think about the back half there?

I think it will normalize in the back half. I think that ebbs and flows and it sometimes you have a mix change between what is being sold in states that are selling predominantly trust fund-oriented PAF versus insurance contracts. Now as a general statement, our insurance going into our backlog, our PAF sales are somewhere around 70%, 75% is a very general statement, but depending on geographically which states are selling what and how the 90-day quarter goes, it can't ebb and flow. And when it does ebb and flow like it did this quarter and we actually had less of a mix of insurance funded contracts that can to a less -- to some extent although it never really would be material I think in my mind could affect your general agency revenues. So, we really expect that to be normal as you've seen it in the back half of this year.

Okay. Any update on the Beacon initiative?

There really isn't that much of a change in facts that I described to you before from last quarter. Just to refresh everybody's memory, funeral is coming first, cemetery is coming second. We had funeral up to about 75% of eligible contracts being sold and 75% of usage. That's not new information. And then we pivoted our resources towards the cemetery segment, which again is a little bit more difficult because each property in the cemetery that needs to go into the system is different and unique, but more importantly there is a lot more vendors and a lot more merchandise to be able to put into the system as well. As I described to you last quarter, we continue to test just a handful of cemeteries as we build the application that will continue and it's kind of going to be the same message till we get to 2020 and really start seeing some of the testing results and go from there.

Okay. And just my last thing, so this is just a conceptual question, if we look at the earnings trajectory in the first half, it's been in the single-digit range, if you blend the two quarters together. And then the expectation is that you move into the low double-digit range in the back half of the year, it sounds like a lot of that is just easier comps, but there is a lot of other moving parts. Is there a handful of things? Or one or two things that you would point to specifically that give you confidence that you can see that acceleration and that return to double-digit growth is within reach?

Yes A.J. I think two things. On the funeral side because, we believe the comp volume situation is going to be better, we feel like funeral revenues will surprise a little bit to the upside combine that with we've got SCI Direct back on the track of growth. So put those two things together with our cost initiatives, we think funeral profits grow in both the third and the fourth quarter that's going to be one significant driver.Cemetery sales, we feel really good about. I mentioned at the third quarter from a GAAP perspective will be more of a challenge because of the completed construction. But when you combine it with the fourth quarter, we see cemetery driving a lot of that improvement. We also think there is -- general and administrative cost will go down. You may recall last quarter's third quarter we had a huge adjustment to our PUP accrual because the stock price went up. So, we think we got a favorable comparison when you think about general and administrative expenses in the back half of the year.And it would be even greater except for the fact that Eric already mentioned our tax rate is probably going to be about 500 basis points higher as it relates to last year because we had a low tax rate. So, even with that high tax rate of 500 basis points increase, we see earnings per share growing double digits in the back half of the year. So, a lot firing on all cylinders as it relates to segments and G&A cost and just little bit of a drag on tax.

Okay. All right. Thanks a lot.

Thank you, A.J.

[Operator Instructions] And from Wells Fargo we have Duncan Brown. Please go ahead.

Hey. Good morning. I wanted to go back to cremation to make sure I understand you right. So, the two sort of drags would be M&A and with assets that have higher commission rates than the broader portfolio, and then the 30 markets that you targeted to sort of expand the cremation focus. And if I'm hearing you right, most of that annualizes we think by Q4, and then after that we get back to a more normalized cremation rate of 100 to 150?

That's our expectation Duncan, correct. You hit the nail on the head I think, and again it is just -- as we get further in the year, you got less year-over-year of change though.

Great. Thank you. And I guess the follow on to that is it sounds like what you did with those 30 markets was successful, are there another 30 that you're looking at that we might see a rollout on or something like that?

I don't know that there is 30, but there is probably more that we will test. These were markets where we started off with markets where we felt like we were losing some share, particularly around that, I would say, starting at price point for cremation. As you'll recall, Duncan, years ago, we kind of took a strategy that said we're going to let our core funeral homes service at a service level that's high service level at a price point that is a little bit higher, and we can service these customers through SCI Direct and that's worked pretty well.But what we found is there is still a consumer that values going to that funeral home that has a price point that maybe a little bit below where we were in serving these markets. The test proved out. We saw that by lowering a little bit of that price, we saw the volume come in. And so, we're constantly -- we've got a team that full-time dealt with this is, looking at what's the optimum pricing in some of these markets.Sometimes it's we can raise prices, and sometimes it's we're going to be lower to be more competitive. So, I don't foresee a wave of changes that we saw happen in the latter part of last year and the early part of this year in our future, but I think there will be some tinkering around that as we go forward.

Okay. That's helpful. And then, I think it was in your prepared remarks, Tom, you talked about some regulatory issues on cemetery pre-need. I may have misunderstood, but can you give us some color on that?

Yeah. I think when -- I was generalizing in certain markets, but as an example, I think we talked about in Vancouver last time, two things are, I would say, impacting confidence in that market. I don't want to tell you that it directly correlates to our performance in Vancouver, but there's two things people are to be aware of.One is there is a foreign buyers tax that's been implemented in Vancouver, and it's to deal with affordability of housing in the Vancouver market. So, what's that done is the Chinese and the Hong Kong buyers that are coming in, there were a big part of our growth in the Vancouver market. It's tougher number one. It's more expensive, and you may see less of a migration over the last couple of years.And then, I think the other piece that again kind of touches upon regulatory, is that there has been a real clamp down on money moments out of China, and again this is a population of Chinese descent and are either immigrants or relatives of immigrants. And that's again I think put a damper on confidence in the Vancouver market. And so, while we don't think it's dollar-for-dollar correlated, it's just a fact that we're dealing with, and you have from time-to-time things like that that occur in different markets. And that's what we meant by that kind of general term of regulatory.

Got you. That’s all. Last one for me. You mentioned or it's in the press release, you buyback some bonds in the open market. I wanted if you could tell us which tranche, and if that sort of signals the new appetite for you all to look at buying in the open market? Or it's just opportunistic?

I think it's opportunistic, but I wouldn't be surprised if it continues. I told you in my remarks Duncan that, I think we want to work ourselves down around 3.75, got up to the upper end of the range on purpose last year, because we had wonderful acquisitions to deploy capital and used a lot of our revolver to do it. Those were our 2027 notes, which carried a coupon at 7.5%. So, a little bit opportunistic as well in terms of bringing that higher interest rate down by taking those particular tranches out. But ultimately, it's a value proposition and you look at where everything is trading at, as you know, so well and try to kick-off in the open market the ones with the best value for us.

Great. Thank you.

Yeah.

Okay. There are no further questions at this time. We'll now turn it back to SCI management for closing remarks.

Thank you everyone for being on the call today. We'll talk to you on our third quarter release in late October. Have a great week.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.