Q & A with our President,
Chairman, and CEO

As the largest consolidated deathcare company in North America, we serve over 300,000 families each year. We want to stay ahead of trends in our industry that are important to the client families we serve. We are constantly evolving to meet the varying preferences and needs of our customers and we believe that remaining relevant is key to generating revenue growth. Whether a customer chooses burial or cremation, Baby Boomers are redefining funeral customs by transitioning away from traditional mourning to a personalized celebration of life ceremony.

Throughout 2019, we began to further develop our strategy to attract and serve growing segments of future customers. To gain deeper insights into that customer, we commissioned a comprehensive customer segmentation study. The study validated many of our beliefs around our traditional customer base, but also raised our awareness of the varying desires of growing customer segments that prefer a more uplifting service, often referred to as a celebration of life. These customers, who we have identified as celebrators, prefer a less traditional gathering with more interaction, more participation, and more personalization.


We will continue to listen to our customers and evolve our strategy to remain relevant to ensure we create the unique experience each customer prefers.

We are taking insights from the study to enhance many of our current offerings to be more responsive to these changing customer preferences. In late 2019, we selected a number of markets where our research shows higher concentrations of celebrators and have begun investing in expanding celebration of life service offerings. These services could be very simple or very elaborate depending on the customer’s desires. We have also continued repurposing certain spaces in our facilities to become more flexible with event rooms allowing us to further expand our catering offerings and celebrant services in these markets. We have replaced the casket selection process by offering a digital presentation of options that allows the customer to choose merchandise and services including unique celebration, catering, and celebrant services.

In our funeral business, we focus on memorialization merchandise and services that will be meaningful to both our burial and cremation customers. The trend towards cremation requires us to be much more flexible in providing products and services. We have developed cremation service packages, which may or may not include a celebratory memorialization. The cremation trend is one that we are familiar with and has allowed us to develop a broader range of cremation service offerings, which better align our value proposition with a variety of customer preferences from very simple to full service.

In our cemetery business, we continue our focus on revenue growth by increasing the number of high-end and unique cremation property development options. Our “Landmark Estates” development strategy expands across the cemetery network, increases the number of exclusive, one of a kind estate developments and private mausoleums that capture a family's vision and commemorate a legacy of a life well lived. We have expanded our cremation property developments to meet the increased demand for more personalized options such as glass niche columbariums and custom cremation gardens with unique features memorialized in granite. Our innovative cemetery merchandising strategies have introduced new memorialization options with custom designs and products in both bronze and a variety of granite colors and styles.

As we evolve to meet ever-changing customer preferences, we will continue to cater to the religious, ethnic, and cultural traditions important to many of our customers. Our research shows that many key customer segments place a premium on trust and transparency, and we are focused on aligning our strategy with our customer preferences throughout their experience with us. We believe we have the scale and operational excellence to meet the needs of the growing group of celebrators while continuing to cater to our traditional customer. In summary, we will continue to listen to our customers and evolve our strategy to remain relevant to ensure we create the unique experience each customer prefers.

As the largest deathcare company in North America, we are able to leverage our scale by developing our sales organization and optimizing the use of our network through technology and for the benefit of our preneed backlog. Our large scale enables us to achieve cost efficiencies through the maximization of purchasing power and utilizing economies of scale throughout our supply chain channel. We also leverage our scale with technology to offer best-in-class experiences and helpful resources for our customers.

We continue driving operating discipline and leveraging our scale through standardizing processes and capitalizing on new technologies to improve the customer experience. Advancements in technology are changing the way we present our product and service offerings to customers. Our funeral atneed point of sale system, HMIS+, uses a digital platform enabled with high-resolution video and photographs to create a seamless presentation of our product and service offerings. Our newly implemented and mobile preneed funeral sales system, Beacon, provides customers with a full digital presentation experience in their home or other place of their choosing.

In 2018, we completed a redesign of almost 2,000 Dignity Memorial® location websites, featuring a modern and user-friendly design. These location-specific websites have been optimized for mobile use and updated with enhanced search engine optimization capability. In addition to the contemporary and sophisticated design, client families now enjoy new features such as a streamlined obituary completion process, social media sharing capabilities, and the ability to create and share personalized content in memory of their loved one. In 2019, our websites experienced significant growth in the number of visits, which reached nearly 130 million.

During 2019, we took significant steps to improve the quality of customer feedback and elevate our online reputation. We engaged a third party to improve the response rate from customers for online reviews and we have seen a significant increase in the number of reviews over the past year. Online reviews provide visibility of customer engagement down to the location level and improve our response time in addressing customer concerns. We collaborated with a leading technology partner to deliver the J.D. Power surveys digitally, which has increased the quantity and quality of customer feedback and reduced the time it takes to receive customer feedback. In late 2019, we established a social media presence for a number of our funeral and cemetery businesses. These digital efforts have resulted in favorable customer satisfaction ratings and increased digital sales leads.

In addition, we want to further leverage technology throughout all of our processes to provide customers with the type of experience they expect. For example, we replaced the funeral merchandise selection process with a fully digital presentation of options. Our customers are now able to select all of the elements of funeral merchandise and service in comfort and privacy. We have also embarked on a process that will simplify the administrative burden placed on families by streamlining arrangements in person and online. We will continue leveraging our scale by embracing the technology that our customers have come to expect.

LEVERAGING OUR SCALE THROUGH
EMBRACING TECHNOLOGY

HMIS+

Our funeral atneed point of sale system that helps with the seamless presentation of our products and services.

Beacon

Our recently implemented and mobile preneed sales system that provides customers with a full digital presentation experience in their homes.

Dignity Memorial® location websites

With its redesign, our client families now enjoy a streamlined obituary completion process, social media sharing capabilities, and personalized content in memory of their loved ones.

We are proud of the many accomplishments our 25,000 associates have contributed to our success as we continued to focus on serving over 300,000 client families in 2019. For the full year 2019, we reported 6% growth in adjusted earnings per share and 4% growth in adjusted operating cash flow. We also grew our operating income approximately $36 million, or 6%. The resulting cash flows from operations allowed us to enhance shareholder value by deploying capital of $404 million, investing $143 million in acquisitions and new build opportunities, and returning $261 million through dividends and share repurchases.

Proxy 2020: GAAP Performance Measures
(1) GAAP - Generally Accepted Accounting Principles


Proxy 2020: Adjusted Performance Measures chart
(2) Adjusted Earnings Per Share and Adjusted Operating Cash Flow are non-GAAP financial measures. Please see Annex A for disclosures and reconciliations to the appropriate GAAP measure.

 

We also had positive operating trends in the fourth quarter of 2019. Our funeral gross profit in the fourth quarter grew 10%, reflecting increases in both services performed and sales average. We grew preneed funeral sales production over 12% for the quarter, enhancing the value of our future results by growing the preneed backlog and capturing future market share. In our cemetery segment, our comparable preneed sales production increased 5.2%, or over $12 million, compared to the prior year quarter. We expect to see this growth in preneed sales production to continue and to benefit the Company in future years.

At SCI we are advancing our business strategy for growth, which includes sustainable financial performance and value creation. We continue integrating responsibility for environmental, social, and governance (ESG) performance into the policies and principles that govern our Company. Our commitment to effective and strong governance is underpinned by our belief in doing the right thing every time for our client families, associates, and communities. We are committed to our sustainability efforts through evaluating water usage, reducing our carbon footprint, and working with responsible and ethical suppliers. In 2019, we completed the first phase of a more formal approach to addressing sustainability, which included evaluating related goals and performance reporting.

Expanding Our Water Reclamation Efforts

We support water recycling and reclamation efforts for converting wastewater into a reusable resource. This process benefits ecosystems, improves stream flow, nourishes plant life, and recharges aquifers, all as a part of the natural water cycle. We are surveying our cemeteries to ensure we are optimizing our water usage and researching the potential for more conservation efforts. In addition to our reclamation efforts, we are piloting new water conservation technologies at several of our cemeteries.

Reducing Our Carbon Footprint

We continuously evaluate our carbon footprint through the measurement of operation processes related to our business. Our fleet consists of approximately 7,000 vehicles, including funeral procession vehicles such as limousines and hearses. We began replacing large vehicles with subcompact and hybrid vehicles in 2019 to become more fuel efficient, which results in less consumed fuel and a 3.3% reduction in carbon dioxide emissions. We plan to continue increasing the number of fuel-efficient vehicles in our fleet and are advancing our green initiatives by piloting electric vehicles in select locations. We are also installing solar panels in certain locations in California and are looking forward to reviewing the impact at these locations in 2020.

Partnering with Ethical Suppliers

We created our Supplier Code of Conduct ensuring our suppliers support safe working conditions and treat their employees fairly and with respect. Additionally, we encourage responsible and environment-friendly production processes. We finalized our supplier diversity policy reflecting our Company values. SCI already procures from a very large pool of small and diverse suppliers; however, we are improving this by fostering an inclusive procurement process that provides opportunity for small and diverse businesses to participate as partners and suppliers of goods and services. Additional benefits of ensuring that these suppliers are included in the procurement process are innovation, unique products, and different perspectives. We published our Supplier Code of Conduct on our corporate website, which can be found here.

We are a team of caregivers who compassionately serve client families during difficult moments. This compassion builds enduring relationships that are essential to our business. We demonstrate this commitment throughout our Company in the way our associates treat client families and each other, as well as how we care for our communities.

SCI supports and encourages giving back to the communities we serve. When our communities hurt the most, our team of compassionate caregivers are there to help. In the aftermath of national tragedies, our teams work closely with local and state authorities to provide resources, equipment, and volunteers. We help communities by providing funeral and cemetery services to families affected by these tragedies as they have enough to bear without the added burden of an unexpected funeral. We also know that grief is ongoing, and we help our communities commemorate, honor, and remember the lives lost on the anniversaries of recent tragedies. We also support our communities through other programs such as the Dignity Memorial LIFT® program, which helps people adjust to the loss of a spouse or partner. Activities include luncheons, sporting events, holiday activities, day trips, and educational seminars that provide opportunities for attendees to socialize with others who share similar feelings and experiences. There are no fees or dues to participate in the program. Participation in the program is not restricted to those who have been served by Dignity Memorial®providers.


Compassion is what differentiates our company from others. Our associates are the key to our Company’s future. It is their enthusiasm, positive outlook, and compassion that heighten our level of care to families and propel our Company’s continued success.

We are committed to supporting the families we serve before, during, and after the funeral service. The loss of a loved one and the accompanying grief can be extremely difficult. We are proud to provide families with helpful benefits and resources, such as the 24-hour Compassion Helpline®, which provides confidential phone access to professionals trained in grief counseling. To help people cope, we also developed the Dignity Memorial Guidance Series® featuring the insights of renowned grief experts. This extensive collection of booklets, brochures, and online resources offer professional advice and compassionate guidance to help caregivers assist others in dealing with the complex emotions of grief.

Just as we are committed to the families in our care, we are honored to support our public servants, veterans, and those serving in the military who sacrifice so much in the line of duty. For decades, SCI has supported those who serve our country by actively recruiting dedicated veterans to become part of our Company, and through programs such as the Dignity Memorial Homeless Veterans Burial Program, which offer dignified funeral services with military honors to homeless or indigent veterans. Through our Dignity Memorial Public Servants Program, we recognize the courage and selflessness of first responders who serve our communities. This program offers, at no cost, dignified and honorable tributes, including funeral services and cemetery property, for career and volunteer law enforcement officers, firefighters, and emergency services personnel who fall in the line of duty. Over the years, it has been our solemn honor to serve hundreds of fallen heroes.

Compassion is what differentiates our Company from others and is key to building enduring relationships as one of our core values. Our associates are the key to our Company’s future. It is their enthusiasm, positive outlook, and compassion that heighten our level of care to families and propel our Company’s continued success.

Deploying capital to acquisitions is a key part of our long-term growth strategy. The acquisition pipeline remains robust, and we have a strong list of prospective funeral service locations and cemeteries to evaluate for future acquisitions. Our footprint and the quality of our assets are a tremendous advantage for our Company, which we want to maintain and improve over time. This results in being selective about the companies we purchase and disciplined in our acquisition approach. The timing of acquiring a funeral service location or cemetery must be right for the seller and is typically related to a family succession event.

Proxy 2020: Acquisition Spend by Year chart

Over the last three years, our acquisition spend has varied year to year depending on the size of available acquisitions. For example in 2018, we completed a large acquisition that caused an increase in the capital deployed, which is reflected in the graphic above. We typically expect to spend $50 million to $100 million a year on acquisitions that have internal rates of return in the low to mid teen percentages but that spend will vary based on the potential acquisitions available. We also target spending another $50 million on new funeral service locations and cemeteries, which will have returns in the lower teens and provide desirable, long-term growth trajectories. We deploy another roughly $70 - $90 million on cemetery property development annually, taking existing undeveloped cemetery property and creating tiered cemetery inventory, such as lots, lawn crypts, mausoleums, and private estates. These incremental investments provide our counselors with new and unique inventory driving cemetery preneed sales production.

In the years that we have fewer available businesses to acquire, we find other ways to grow and invest our capital. We will increase our investment in new funeral service locations and cemeteries when the returns create value for our Company and shareholders. In 2019, we increased our growth capital spend on building new funeral service locations and expansions of existing locations to remain relevant with our customer and to expand our footprint into desirable markets. These facilities are built with an emphasis on modern, flexible designs that appeal to a broadening array of customer preferences. During 2019, we also acquired land that will be developed for future cemetery use in some of our largest markets that had a need for incremental inventory. This investment in our future will allow us to continue to create cemetery offerings that appeal to varying preferences in those markets for many years to come. The opportunity for acquisitions can vary from year to year, so we will continue flexing our capital deployment to drive total shareholder return.