Service Corporation International's CEO Presents At Bank Of America Merrill Lynch Health Care Conference (Transcript)

Service Corporation International (SCI)

Bank of America Merrill Lynch Health Care Conference Call

May 15, 2012 8:00 pm ET

Executives

Thomas L. Ryan – President and Chief Executive Officer

Eric D. Tanzberger – Senior Vice President, Chief Financial Officer, and Treasurer

Analysts

Robert Willoughby – Bank of America/Merrill Lynch

Presentation

[Call Starts Abruptly]

The leading death care services provider. We toured its flagship property here in Las Vegas yesterday and are impressed. They just bought the dominant provider in this market positioned to grow ahead of the market in the coming years. Here to present for the Company is Tom Ryan. He is President and Chief Executive Officer. He is joined on the podium by Eric Tanzberger who is the Chief Financial Officer.

Thomas L. Ryan

Thank you, Bob, and thank you Bank of America for inviting us back again this year. For those of you listening on the call, we’ll direct you to the appropriate slides. I’ll take you straight to slide four. SCI at a glance. This just gives you an idea of the industry itself and kind of our position in the industry. We are the largest, as Bob mentioned, in North America in the funeral and cemetery business. We’ve got just over 1800 locations and from a market cap perspective are just about $2.5 billion.

Translated into revenues, you can see we’re about a 13% share as we can define it in North America, which is about $2.3 billion in revenue. One of the attributes about this industry that I think is compiling is the predictability of it. And one of the reasons it’s predictable is our ability to deferred revenues. These are very sales oriented organizations in our industry and we now approach $7 billion in backlog, and this represents just over three times our annual revenues. So again a predictable revenue stream, very predictable cash flow stream, and these are primarily supported by cash in state regulated trust funds that we have management oversight for.

We outsource that function to professionals, but they again have ultimate oversight over the direction of those funds. Or we fund those through third party life insurance policies, which again we would be the ultimate beneficiary of that have some component of growth and have a component of G&A revenues that can help defray the cost of growing that backlog.

So again the business is very cash flow friendly and you can see from our perspective, last year we generated $279 million in free cash flow. And our free cash flow per share has grown compounded more than 10% since 2004; we really implemented our new strategy. And we anticipate that this year the mid-point of the range will be about $300 million, and you can see we have a guidance range of $270 million to $330 million.

And it’s very important, I think, in a slow growth industry that you deploy this cash as best you can with the highest returns, and we do that through a blended approach of acquisition, share repurchase, a growing dividend and again kind of minding that debt maturity schedule to ensure that the appropriate risk is associated with reward. And all in, when you take all those things into consideration, it’s our belief that we’re poised to benefit from the aging of America and we’re beginning to see that through our pre-need efforts, and I’ve got a slide that I’ll show you that here in a minute.

So this here is the death care industry and landscape, and this just shows you some of the other public competitors and the relative size. And keep in mind these five companies together still represent less than 20% of an industry, so still very, very fragmented with room to grow. But you can see on a revenue basis, again, we’re $2.3 billion and on a property basis it all looks very relative in size. And I think the key component is to show you the free cash flow in the lower left hand corner.

And again if you look at this, what it tells me, and you have some slight accounting differences in models, MLPs, and things and the like, but if you boil it all down, I think it shows you that scale works in this industry. If you look at us and you look at Stewart, you can see a much higher cash flow, free cash flow generated per revenue dollar. And so we think that that can continue to go. Scale is a good thing in this industry, and we’ll continue to exploit it going forward on a cost basis. And I really think we’re at the forefront of beginning to exploit that on a revenue basis long-term. And again the total pre-need backlog, you can look to the far right and see again the predictability of the industry, and particularly as it relates to us.

Our competitive strengths, again, are our unparalleled network. We’re in 44 states, 43 states, eight Canadian provinces, and you can see the blend of business is just over 14,000 funeral homes and approaching 400 cemeteries. One of the things we launched, I guess now it’s been probably close to ten years is our Dignity Memorial brand, and the concept here long-term it’s our belief that the familiarity of this brand and what stands behind it will begin to bear fruit, like many other industries that the baby boomers transformed, the mom-and-pop grocery store, the mom-and-pop Home Depot.

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