Q & A with our
Chairman and CEO

Tom Ryan answers questions received from shareholders over the course of 2018

For the full year 2018, we reported double-digit growth of 15% in adjusted earnings per share and 10% growth in adjusted operating cash flow. From a preneed sales perspective, we are proud of the growth we achieved. Funeral and cemetery comparable preneed production grew 6.5% and 4.3%, respectively, over the prior year. The resulting cash flows from operations allowed us to enhance shareholder value by deploying capital of $628 million, investing $227 million to acquisitions and new build opportunities, and returning $401 million through dividends and share repurchases.

The $1.79 of adjusted earnings per share in 2018, representing a 15% increase over the prior year, exceeded our long-term guidance range of 8%-12% growth. The growth over the prior year was aided by higher funeral revenue of approximately $30 million and higher cemetery revenue of approximately $65 million. Additionally, the year also benefited from favorable impacts from share repurchases and a lower effective tax rate partially offset by increased interest expense.

We generated $610 million in adjusted operating cash flows for 2018, which is $55 million higher than the prior year and was at the top of our November guidance range of $575 - $615 million. Adjusted operating cash flow results during 2018 benefited from approximately $70 million of anticipated lower cash tax payments.

 


Adjusted earnings per share and Adjusted operating cash flow in millions chart

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.

Over the next three to seven years, our industry will be largely shaped by the aging of the American population, most notably, the growth of the Baby Boomer generation in the death care space. In each stage of life, Baby Boomers have set new trends, transformed society and redefined norms, and we believe the impact will be no different for our industry.

We are seeing this impact take shape through three primary trends: the transition to celebration over mourning for end of life services, the growth of cremation, and the increased desire of personalization, flexibility, and empowerment in their service experiences.

The Baby Boomers, aged 54 to 72 in 2018, are already impacting our preneed cemetery and funeral sales and are starting to influence our at need business. Whether a customer chooses burial or cremation, Baby Boomers are redefining the traditional funeral by transitioning away from mourning of the death to a celebration of life ceremony that is personalized to the life of the individual. In responding to this trend, we have adjusted our strategy by repurposing traditional casket selection rooms to event rooms for a celebration of life, while also offering a digital presentation of options that allows the customer to choose from a wide variety of unique celebration services like catering and celebrant services.

The second major trend, which has been felt across the industry, is an increasing preference towards cremation. This change requires us to be much more flexible in providing products and services that meet these changing needs. On the funeral front, these needs may or may not include a service at a funeral home and these customers in many cases want simplicity when dealing with final arrangements. We are focusing on unique and personalized celebration services, as well as lessening the administrative burden on widows or widowers by streamlining arrangements both in person and online. In our cemetery business, we have responded to these trends by offering an increased variety of cremation memorialization options, from cremation gardens to beautiful glass-front niches and properties with unique views of a lake, the ocean or mountains.

Lastly, Baby Boomers are wanting to feel empowered to design a funeral the way they want it - to be the writer, director and star of their own celebration of life. In many cases, this involves advanced planning, and SCI is in a unique position to capture a growing desire to pre-plan end of life services, as the leaders in the industry for preneed. We have responded by developing an interactive and digital presentation for preplanning (Beacon), which empowers customers to choose exactly how they want to be remembered and share those plans with their loved ones. We will also leverage our scale online to offer best-in-class planning resources for consumers.

On the cemetery side of our business, we have responded to the customer’s desire for personalized and unique options by expanding our tiered inventory options. Over the last three years, we have developed approximately $250 million of contemporary cemetery property that appeals to the desires of a variety of purchasers. From high end family estates which capture incredible views to nicely landscaped hedge estates, we continue to develop property selections that resonate with the customer, whether they choose burial or cremation.

In every aspect of our business, we are listening and responding to our customers’ changing needs and leveraging our scale to deliver unparalleled experiences - both digital and in person - that meet these changing needs.

 

Historically, we have competed aggressively in our marketplace for both the at need and preneed customer. We believe preneed is a key competitive advantage for us because of our unparalleled scale. However, the ways we interact with our customers are changing for both at need arrangements, as well as the entire preneed experience from customer education to final arrangements. In response, we are developing a comprehensive digital strategy that looks across the customer experience from online to in-location in developing technology that simplifies and personalizes end of life arrangements for consumers.

  • Beacon, our new state of the art point of sales application, allows us to provide a preneed sales presentation to families on a tablet. The tablet utilizes visual technology to create ideas for preplanning with the full-range of options at the touch of a finger. We are very excited to continue the expansion of this technology in 2019 for preneed funeral sales in Canada and eventually for preneed cemetery sales. Beacon is also fully integrated with our world-class Customer Resource Management (CRM) system, SalesForce. SalesForce allows us to better connect and target customers on the front-end, while Beacon allows us to better close on the back-end - a powerful combination that is unmatched in the industry.

  • During 2018, we also did a complete overhaul of the functionality as well as the look and feel of our location websites through DignityMemorial.com. These newly designed websites were designed to be both responsive (mobile-friendly) as well as search engine optimization-friendly in improving our overall rankings in Google search results. These changes have helped us reach an all-time high in traffic to the Dignity Memorial site (over 96 million visitors in 2018 and a 21% increase in traffic year-over-year). The increase in traffic, combined with an improved user experience, are driving record growth of preneed leads from the website.

  • As we continue to enhance our digital presence, we are also putting increased focus on managing our reputation online, through Google, Yelp and Facebook. Consumers are increasingly using online reviews to choose products and services, including funeral arrangements. We intend to leverage our scale in growing our online reputation, while actively responding to reviews and customer concerns online. We have made significant progress over the last 6 months and plan to accelerate our growth in this area for 2019.

  • For the future, we are pursuing a number of different projects to streamline planning and arrangements, allow users to explore what’s possible in making their own arrangements, and create a more personalized experience tailored to the individual.
  • Honoring Those Who Serve logo with transparent background


    One of our most profound offerings is The Dignity Memorial Public Servants Program allowing us to recognize the courage and selflessness of those who serve our towns and cities. 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, we have been privileged to serve over a thousand fallen heroes.

    Associates are encouraged to build relationships with public servants in their respective communities and show appreciation for these services. For example, some associates like the manager of Shadow Mountain Mortuary in Scottsdale, Arizona, have built such strong ties with the local fire department that her colleagues often volunteer in the community alongside the station personnel.

     Comforting Those Who Grieve logo with transparent background


    We are committed to educating professional caregivers about the funeral profession and practices so they are not only able to effectively support families of all cultures and religions, but can also provide a seamless continuum of care for all individuals they serve. Participating Dignity Memorial locations offer free funeral education courses to hospice professionals for continuing education credit.

    We understand the loss of a loved one and the accompanying grief can be an extremely difficult experience. To help people recover, we developed the Dignity Memorial Guidance Series featuring the insights of renowned grief experts. This extensive collection of booklets, brochures, DVDs and CDs offers professional advice and compassionate insight to help caregivers assist others in dealing with the complex emotions of grief.

    We also offer the Dignity Memorial L.I.F.T.® program which helps widows and widowers adjust to the loss of a spouse by socializing with others who share similar feelings and experiences. Widows or widowers can engage in activities like luncheons, sporting events, holiday activities, day trips, and educational seminars. There are no fees or dues to participate in the program. L.I.F.T. participants are only responsible for their meals or personal expenses, and participation is not restricted to those who have been served by Dignity Memorial providers.

    Partners in Caring logo with transparent background


    We are also honored to support veterans and military servicemen and women who have helped serve and protect our country. Through the Dignity Memorial Homeless Veterans Burial Program, we offer dignified funeral services with military honors at no cost to eligible homeless and indigent veterans. The program has provided burial services for more than a thousand homeless veterans since the program's inception in 2000. We are proud to partner with the U.S. Department of Veterans Affairs and other veterans organizations to ensure the fine men and women who served our country are not forgotten.
    We have been addressing sustainability on a less formal basis throughout the Company with various inclusion and diversity efforts, improvements to address our water usage, and other Company processes for many years. Our plans for 2019 include the first phase of a formal program, which will begin with an evaluation of our sustainability goals, evaluation of the gaps and opportunities, creation of our sustainability plan, and evaluation and reporting of our sustainability performance.

    We are currently developing our Supplier Code of Conduct. Our policy will ensure our suppliers have safe working conditions and that their employees are treated fairly and with respect. Additionally, we encourage responsible and environment friendly production processes.

    We are making efforts to ensure our supplier diversity policy reflects our Company values. SCI already procures from a very large pool of small and diverse suppliers; however, we will improve this by fostering an inclusive procurement process that provides the maximum opportunity for small and diverse businesses to participate as partners and suppliers of goods and services. An additional benefit of ensuring that these suppliers are included in the procurement process is increased competition, which leads to lower costs and increased levels of innovation, service, and product quality.

    The Company will expand water recycling or reclamation efforts currently in place. Reclaimed or recycled water is the process of converting wastewater into water that can be reused for other purposes. SCI believes that reclaiming water for reuse instead of using freshwater is a valuable water-saving measure. This process benefits ecosystems, improves stream flow, nourishes plant life, and recharges aquifers, all as a part of the natural water cycle. In addition to our reclamation efforts we are also piloting water conservation technology at several of our cemeteries.

    Earth sustainability iconWe are working on a carbon footprint evaluation, which will measure the carbon dioxide produced by burning fossil fuels for transportation and the production of consumer goods related to our business.

    We strive for more transparency with our stakeholders about our environmental, economic, and social impacts. We are having conversations with our major stakeholders to ensure we are meeting their expectations around sustainability reporting. We are evaluating the various frameworks for sustainability reporting, gathering information, and will report this information in a clear and comparable manner once our evaluation is complete.
    Our people, first and foremost, are the number one reason for our success. Therefore, getting the tone at the top right and focusing on an outstanding corporate culture rises to the top of my priorities. SCI’s associates do incredibly important work and are critical to our success. They compassionately support our client families through very difficult times and help them celebrate the lives of lost loved ones by preserving memories that transcend generations with dignity and honor.

    We have built an incredibly strong culture that offers mutual support, promotes trust, rewards employees’ efforts, and ensures employees know their work is meaningful and makes a difference to each of the client families they serve. Most recently we have started surveys and focus groups around inclusion and diversity and received our Great Place to Work Certification.

    INCLUSION & DIVERSITY

    Inclusion and diversity have always been core principles for Service Corporation International. But now more than ever, those values are crucial for the success of our Company as we support client families across North America. A culture of inclusion leverages the diversity of backgrounds, experiences, thoughts, and perspectives among our team of associates, enabling us to make better business decisions and remain relevant with our customers.

    In support of our culture of inclusion and diversity, we developed specific leadership training required for every associate who manages others. The program provides tools and support in promoting an inclusive culture where all individuals have an opportunity to thrive.

    In 2017, we conducted surveys and focus groups from a wide cross-section of our associate population. A committee was assembled to address the results and ensure that inclusion and diversity are integrated into the Company’s long term business strategy.

    In 2018, we held our first Women's Leadership Conference, which allowed an opportunity for women leaders across the company to connect, share ideas, learn from each other, and continue to enhance their leadership skills.

    Supporting a culture of INCLUSION and DIVERSITY through:

    • Employee leadership training
    • CEO action
    • Commitment

    To underscore our commitment to advancing inclusion and diversity, I have joined the CEO Action for Diversity & InclusionTM. The CEO Action for Diversity & InclusionTM is the largest CEO-driven business commitment to advance inclusion and diversity within the workplace. Recognizing that change starts at the executive level, I, along with our entire executive team, am committed to the advancement of inclusion and diversity in the workplace.
    During 2017, to increase awareness of our Company culture to external candidates, strengthen pride and commitment with current associates, and build visibility for our brand we initiated the process of obtaining certification as a Great Place to Work by the Great Place to Work Institute.

    One of the many benefits of the Great Place to Work certification is being identified as a workplace with a high-trust culture. The Great Place to Work certification is also a great attraction for recruiting talent. Not only are the right employees key to keeping families satisfied and establishing a lasting reputation, but they are also central to our Company’s internal business culture.

    Great place to work certification logos We obtained our Great Place to Work certification in 2017, but we were inspired to continue to push forward with additional initiatives. During 2018,   we surveyed over 2,800 associates on topics such as our atmosphere, communication, pride, rewards, challenges, and management. Leadership was   able to benchmark our culture against that of some of the world’s most successful companies, but also identify improvements from the 2017 survey   results and identify areas where we can continue to make progress. We are proud to say that for the second year in a row, we achieved the Great   Place  to Work certification based on feedback from our associates.

     Maintaining a diverse and inclusive culture that is high-trust is a competitive advantage. The confidence and relationships we have built with our   associates translate into superior customer service and innovation in the celebration of life services for our client families. We will continue our efforts to engage and support our associates and look for their feedback through surveys and even through online sources such as Glassdoor, to ensure we are maintaining the culture we believe in.
    The composition of the board has become more diverse and reflective of our core values.

    1. Percentage of women has increased from 9% to 30%
    2. Average age has decreased from 70 to 66
    3. Average tenure has decreased from 24 to 15 years
    The composition of our board is becoming more diverse in its perspectives and experiences and is more reflective of the communities that we serve and further enhances our strong core values. In May 2018, Jakki L. Haussler and Sara Martinez Tucker were elected to the SCI Board of Directors. Both members bring unique perspectives to our Company and increase the diversity of the Board. We believe their unique perspectives will contribute insight for evaluation of corporate strategy, setting incentives, and enhancing our corporate culture.

    Additionally, the Board has a strong Lead Independent Director with a wide variety of experience including government service, private sector, and a lifetime commitment of advocating for people with disabilities. He is fully committed to ensuring decisions are made in alignment with Company values and strategies. Our Lead Independent Director, Tony L. Coelho, looks out for the well-being of the Company, our diverse communities, and the shareholders’ interests as a priority.