Service Corporation International (SCI) 2013 Q4 法說會逐字稿

Welcome to the fourth-quarter 2013 Service Corporation International earnings conference call. My name is Christine, and I will be the operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to SCI Management. You may begin.

Hello, and good morning. This is Debbie Young, Director of Investor Relations at SCI. Welcome to our call today as we discuss our fourth-quarter and year-end results as well as our outlook for 2014.

Before I turn call over to Tom, let me remind you that 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.

In today's comments, we may also refer to certain non-GAAP measurements such as normalized EPS, adjusted operating cash flow, and free cash flow. 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.

With that out of the way, I'd like to now turn the call over to Tom Ryan, SCI's President and CEO.

Thanks, Debbie, and good morning, everybody. I'm going to begin my comments today by giving you an update on our Stewart acquisition and some high-level perspective on the 2013 year. Then I will get into the details of the quarter and give you some color on our outlook for 2014.

Now, for an update on Stewart. First and foremost, we are very pleased to report that we closed the Stewart transaction on December 23, and we are in the midst of a successful integration. We couldn't be any more excited.

The Stewart acquisition generates a meaningful internal rate of return on capital deployed for our shareholders. Through this transaction, we are expanding our footprint with premier properties that complement our existing networks as well as welcoming very talented and committed people from Stewart into our SCI family.

As part of the Federal Trade Commission approval, the level of required divestitures was a little more than we anticipated. While we're disappointed to lose these businesses, we do not believe it will meaningfully affect our internal rates of return based on the anticipated sales proceeds. However, it will have a slightly negative effect to earnings per share compared to our previous expectations.

Speaking of the divestiture process, it is going very well, and we are on track to complete all sales, we believe, by mid 2014. We'd like to remind you that we are divesting of businesses that were both legacy SCI and Stewart facilities. These businesses generated EBITDA of approximately 25% of the historical field level EBITDA of Stewart on a stand-alone basis.

Shifting to integration, the back office and systems integration processes are progressing, and we're confident we can deliver our initial cost synergy estimates. As we begin our operational and sales integration, we believe this could lead to identification of additional synergies.

Now, let me move on to give you some perspective on the year 2013. We couldn't be prouder of our 2013 performance. We delivered $0.92 of normalized earnings per share, which is an improvement of $0.12, or about 15%, over 2012. Additionally, we generated $440 million of adjusted cash flow from operations in 2013, which is an increase of $60 million, or about 16%, over the prior year.

Let me walk you through a few of the key factors driving this success. First, our people. None of these results would have been possible without the caring professionalism that each and every Team Member of SCI possesses, each and every day, with the families we are so privileged to serve. To our SCI family, I want to say thank you for all of your hard work and focus.

The second key to success, preneed sales. 2013 was a tremendous sales year, period. We elevated our game in preneed funeral sales production, growing our comparable sales more than 11%, which has a minimal impact on current earnings per share and cash flow but is a key strategy for our future growth.

Meanwhile, our preneed cemetery production continued on its annual tear, growing comparable sales an additional 11%, having a meaningful impact on our current financial results. You will recall, beginning in 2009, we began to invest in developing the key infrastructure to delivering superior sales production.

Our success from 2010 through 2012 was almost exclusively generated through enhanced sales force productivity, accomplished through lead management, improved systems, sales manager, and counselor training. Surprising to us, our sales force size remained relatively constant. So more recently in 2013 and really looking again into 2014, we're investing and recruiters, trainers, and sales managers to support an effort to sell through an expanded sales force, to be achieved through better hiring, training, and retention.

During 2013, we added over 250 or about 7% to our Sales Counsellor Team. And remember, traditionally, people purchase cemetery property in the early 60s, so with the baby boomers turning a range from 50 to the age of 68 this year, our best days remain ahead of us and should continue for some time.

The third and final key, I'll just guess, is SCI Direct. Starting in 2014, we established a new division which will manage our direct cremation brands, such as Neptune, National Cremation Society, and Trident.

We continue to see strong growth in businesses that focus on direct cremation. Our recognized preneed revenues from these businesses increased over $15 million, which is just about 30% growth over 2012.

Finally, as we put 2013 behind us, I would remind you that the financial successes I just mentioned, including a healthy growth in earnings per share and free cash flow, was achieved in an environment where we were precluded from deploying capital strategically for the benefit of our shareholders. With the Stewart funding and closing now behind us, we look forward to 2014 with an ability to again return capital to our shareholders like we have historically.

Now, let's shift to an overview of the fourth quarter. We posted outstanding results, with earnings and cash flow exceeding the high end of our guidance ranges we discussed in October. Normalized earnings per share increased $0.05, or 23%, to $0.27. This was $0.03 higher than the top end of our guidance range.

The increase in earnings was primarily generated by continued growth in preneed cemetery sales during the fourth quarter and higher cemetery property construction revenues. We also experienced lower general and administrative expense.

Recall last year that we absorb some unusual legal costs and settlements, as well as higher incentive-based compensation expense. These positive operating results more than overcame the effect of lower core funeral profits and other inflationary cost increases.

Now, for an overview of the funeral operations in the quarter. On a comparable or same-store basis, our fourth-quarter revenues declined by $3 million, a decline of $11 million in core funeral revenue, and recall, these are funeral services performed and merchandise delivered after death occurred. This $11-million court revenue decline was partially offset by a $4-million increase in recognized preneed revenue for SCI Direct, and an additional $4-million increase in general agency revenue as a result of our robust double-digit growth in our preneed funeral sales production.

Core funeral revenues declined as a result of 4.3% funeral services performed. This was anticipated, as we experience the beginning of an exceptionally strong flu season in the fourth quarter of 2012. On a comparable basis, funeral profits decreased $10 million, and our adjusted funeral margin percentage drop by 230 basis points.

There were two primary reasons for the funeral profit decline. First, keep in mind that the base fixed costs are growing with inflation, driving incremental costs of approximately $7 million per quarter. Second, core revenues carry the highest incremental variable margin, so on a decline of $11 million in core revenues that I just mentioned, we'd estimate this impacted profits by an approximate $7 million if you assume a 60% incremental margin. So those two alone would dial us back $14 million.

Partially offsetting these decreases was a contribution from recognized preneed revenue from SCI Direct. Recognized preneed revenues grew $4 million, or about 30%. But remember, this business is a lower margin, probably about a 20%, compared to SCI's core revenues.

Finally, while it would not have a negative impact on funeral gross profit dollars, growth in preneed funeral sales production generates general agency revenue, which is generally offset by selling costs. This has the effect of reducing gross margin percentage, especially when we experience preneed production growth as we did in the fourth quarter of this year.

Despite the pressure on our margin percentage, we believe this is a good problem to have, as our strategy is the focus on our preneed sales program, which adds to an already impressive $9-billion backlog of preneed contracts and future revenue.

Now, for an overview of cemetery operations in the quarter. Comparable cemetery revenues exceeded our expectations by increasing $24.4 million, or 11.5%, quarter over quarter. In addition to higher-than-expected cemetery property construction revenues during the quarter, our Sales Team continued to outperform.

Comparable preneed sales production grew a song 16% in the quarter, which was well above certain expectations, not necessarily mine. Stepping back and looking at the full year for a moment, preneed cemetery sales production grew a little over 11% in 2013, which is just great execution and more than what we expected following two consecutive years of double-digit growth. A big thank you to our Sales and Operations Teams and our Market Leadership for continuing to deliver exceptional results.

Driven by this cemetery revenue growth, adjusted cemetery profits grew $9.3 million, or about 16% for the quarter, and adjusted margins increased by 120 basis points to 27.9%. Similar to our funeral segment, incremental revenue growth results in healthy incremental margins due to our high fixed cost structure. On the operating revenue growth of $24 million, we would have anticipated incremental profit of approximately $14 million versus the actual $9.3 million that we reported.

There were two primary reasons, again, for the $5 million profit difference. First, keep in mind that the base fixed costs are growing with inflation, which in the cemetery segment would increase expenses some $4 million per quarter.

Second, our sales production success continues to outpace our ability to construct and recognize revenue. This quarter, we deferred approximately $5 million in revenue on a net basis, which would cause us to recognize an additional selling expense of $1 million in the quarter associated with production that will get recognized in future periods.

Now, I will shift to our 2014 outlook. We continue to be enthusiastic about the profitable growth that the Stewart acquisition will contribute in 2014 and again in 2015 as the full weight of the synergies is realized.

As we disclosed in our press release, we are pleased to reiterate our 2014 normalized earnings per share guidance range of $1.00 to $1.10 per share. Since we first disclosed this guidance range last October, we've had several items that negatively impacted the guidance range, including a higher level of divestitures, additional non-cash impacts from continuing to refine our purchase price allocation for Steward, and higher healthcare costs than originally anticipated.

However, there have also been some positive changes affecting the guidance. First, as we now have greater visibility into SCI's expenditures from our newly upgraded purchasing systems, we've identified additional opportunities to leverage scale and purchasing power that we think can be achieved in 2014.

Second, we believe we'll be able to continue to grow our preneed cemetery sales at similar percentages, even with the over-performance we experienced in the fourth quarter of 2013. And finally, we are now modeling higher cemetery construction revenues than what we had originally forecasted, though 2013 will be a tough act to follow.

At the midpoint of our 2014 normalized earnings-per-share guidance, it represents a 14% growth over 2013. It will continue to be challenging to grow same-store funeral revenue, until such time as we see a movement in comparable funeral volume, as revenue recognition is largely dependent, as you guys know, on the event of death.

Until then, we should continue to see steady, predictable cash flows and flat to slightly increasing profits. We will also continue to focus on growing our preneed backlog to increase market share over time, and we are modeling preneed sales growth in the mid to high-single-digit percentage range.

On the cemetery side, same-store revenues will continue to grow, led by strong preneed sales production. The double-digit growth we have achieved in the last three years has been outstanding, but this is getting harder and harder to replicate as we grow the base production each year. Our models for 2014, therefore, suggest growth in the mid to high-single-digit percentage range.

And as I mentioned, we remain confident in our ability to deliver the $60 million in synergies related to the Stewart acquisition that we have previously identified. While we continue to believe in the potential for additional synergies, it's too early in the game for us to quantify anything at this point.

Finally, in conclusion, with the Stewart acquisition complete, we believe we now have an enhanced platform for growth. Our strategy remains the same. Demographics dictate that our industry will experience a natural growth trajectory, and our improved and expanded footprint positions us well for the future.

We believe we will capture more than our fair share of this growth as we expand our network through continued specific market acquisitions, and more importantly, by continuing to grow our preneed backlog. In 2013, our aggregate funeral and cemetery preneed sales production exceeded $1.3 billion, and we will grow it from there with the addition of Stewart in 2014.

We recognize this level of activity is unparalleled in our industry and gives us a tremendous competitive advantage. Our preneed backlog today with the addition of Stewart stands at approximately $9 billion, which bodes very well for future earnings and cash flow.

In the meantime, we expect to continue to generate strong cash flow, and that, along with anticipated divestiture proceeds in the first half of this year, will support a quick deleveraging and allow us to return our focus to future capital allocations designed to enhance shareholder value. This concludes my prepared comments, and now I will turn the call over to Eric.

Good morning, everybody. I am going to start this morning with my comments describing our cash flow results for the full year of 2013, and then I'm going to talk a little bit about the fourth quarter as well. Then after this, I would like to discuss some forward-looking comments related to our cash flow outlook for 2014, our current financial position, and then I'm going to end with some of our thoughts on our capital deployment plans as we look forward in 2014.

As you've seen, we finished 2013 on a really high note, delivering strong earnings and cash flow results which exceeded our expectations. For the full year, free cash flow generated in 2013 grew $65 million to $336 million and exceeded the high end of our guidance range for normalized free cash flow, which was $305 million to $320 million.

This represents a tremendous growth of 24% over 2012 levels, despite a $10-million increase in cash taxes year over year. This increase is primarily a result of higher earnings associated with increased cemetery profits and higher cash receipts associated with preneed funeral and cemetery sales.

So in the fourth quarter, our operating cash flow grew 15% to $106 million compared to $92 million in the prior-year quarter and exceeded the high end of our guidance range given to you in October, which was $80 million to $95 million. Similar to the full-year story, the increase in operating cash flow in the fourth quarter is predominantly associated with higher-than-anticipated earnings driven by our cemetery segment results and higher preneed cash receipts on the very strong preneed sales production numbers that Tom just highlighted. Additionally, we benefited by about $5 million with lower cash interest payments in the quarter as we refinanced our 7 3/8% debt with 4.5% debt, and we did that late in the fourth quarter of 2012.

Due to payroll fund end dates this year, we also partially funded a January 2014 payroll in December of 2013, and that was approximately $18 million. This is just a timing issue, and we will see the benefit from this next quarter.

Excluding this expected payment, our operating cash flow would have grown $32 million during the quarter. So after we deduct our maintenance CapEx and cemetery development CapEx, which was approximately $31 million, and this was in line with our expectations, we calculate our free cash flow for the fourth quarter to be right at about $75 million. This is about $16 million, or a 28% increase over the prior quarter.

So now let's talk about the cash flow looking forward to 2014. We expect to continue to generate attractive operating cash flow, even with the downward pressure from higher cash taxes and higher cash interest from incremental debt related to the Stewart acquisition.

As disclosed in the press release, the guidance we gave you back in October remains unchanged at $430 million to $480 million for adjusted cash flow from operations. This cash flow guidance for 2014 at the midpoint implies growth of about $15 million, or 3.5%, over 2013.

As we have previously said, we anticipate the underlying cash flows of our business to grow in addition to the contribution from the Stewart acquisition. However, this growth will be moderated by an increase in cash taxes, as SCI's remaining net operating losses are anticipated to be fully utilized during the early part of 2014.

As a reminder, related to cash taxes, in October, we stated that we expect cash tax payments in 2014 to be approximately $70 million, and this guidance remains unchanged. This is an approximately $45 million increase over cash taxes paid in 2013, which was right around $25 million.

Neutralizing the impact of this cash tax headwind for us in 2014, our expected operating cash flow is growing at about 13.5% as opposed to the 3.5% that I just mentioned before. This $70 million of anticipated cash tax payments represent our expectation of a cash tax rate for 2014 in the high teens to the low 20% range.

Next year, in 2015, we will be a cash taxpayer for the full year, and I would anticipate our cash tax rate to be in the low to mid 30% range. Our guidance for our income statement provision -- tax provision, remains unchanged with an expected effective tax rate of 37% to 38% in 2014.

Lastly, consistent with the guidance we provided to you in October, our cash interest payments are estimated to range from $170 million to $180 million. This represents an approximately $15 million increase over 2013 levels.

Our recurring CapEx guidance remains unchanged at $135 million to $145 million which results in anticipated free cash flow in 2014 to range from $285 million to $345 million. On a per-share basis, this equates to $1.32 to $1.59, and that's using a fully diluted weighted average share count of about 216 million shares.

So now I want to talk about our financial position and then our capital deployment as we look forward to 2014. So after closing and funding the Stewart acquisition, we continue to be confident with the strength and flexibility of our financial position and our liquidity [affords] us.

At December 31, we had $145 million of cash on hand and about $420 million of availability on our credit facility. We believe this liquidity is a very robust, especially considering that the numbers I just gave you is after closing the Stewart acquisition. Now, subsequent to year end, we funded $110 million additionally with our revolver and also used some cash on hand to retire all of the Stewart convertible notes, which were right at about $132 million.

At December 31, our leverage on net debt to EBITDA basis has calculated in accordance with our credit facility was just over 4 times after the close of the acquisition, and as we have stated, we will generally target to run the Company with the leverage ratio in the mid 3s.

From a capital and liquidity standpoint in 2014, we are also expecting a significant amount of proceeds from divestitures related to the Stewart acquisition. In fact, we are anticipating pretax divestiture proceeds to range from $415 million to $430 million in mid 2014.

I do want to note, however, that the assets being divested are older in nature, and therefore have a lower tax basis. As such, these sales would generate a large gain that will be taxed closer to our ordinary statutory corporate tax rate of about 35%. We are currently evaluating various opportunities to reduce cash taxes on these associated gains from divestitures, but our current estimate for cash taxes is between $90 million to $100 million, yielding net proceeds from the divestitures of $315 million to $340 million.

We expect the cash taxes associated with these divestitures to be paid over the next three to nine months as the divestiture proceeds are realized. Again, just to be crystal clear, I want to highlight that these cash taxes will be paid out of the divestiture proceeds and are independent from our guidance of recurring cash taxes of $70 million in 2014 associated with our ongoing business that I mentioned earlier in the call.

So in terms of capital deployment going forward, first, as stipulated in our bank credit agreement, we will use the first $200 million of after-tax divestiture proceeds to pay down our $600-million term loan. And also note that we also have to pay the required amortization of the term loan in 2014, which is an additional approximately $30 million.

As we have consistently discussed before, we plan though to take a balanced approach to deploying our capital after reducing leverage to under 4 times to get back down to our targeted roughly 3.5 leverage range that I expect we will achieve by the end of 2014.

In addition to further debt reduction, we will also consider specific market acquisitions at the appropriate returns, and then return cash to our shareholders through our dividend with any excess capital going to share repurchases, assuming the valuations remain favorable. Currently, to remind you, we have $190 million authorized under our share repurchase program.

So in conclusion, again, I also want to say to welcome all of the Stewart Associates and thank the SCI and Stewart Associates in advance for their dedication and professionalism during this integration period. The integration process is on track, and it's going very well, and 2014 will be a milestone year for us as we enjoy the growth from the Stewart acquisition.

Together, as we look to the future by focusing on growing our base business, improving customer satisfaction, and deploying capital responsibly, we believe that we can continue to create value for our shareholders in 2014. So with that, operator, that concludes our prepared remarks. At this point in time, we will open the call up to questions.

(Operator Instructions)

Our first question comes from A.J. Rice from UBS. Please go ahead.

This is Brandon Fazio for A.J. Maybe a little more color on the acceleration because your last couple of quarters have seen double-digit growth on the pre-need funeral side. What's been driving that? Is there any internal sales force changes, or just the market growth is getting better?

Also, as you think about the big picture here with the backlog, obviously, it doesn't it help your earnings that much in the current quarter on the funeral side. When do you think you'd get to a point where some of this success you've had over the last decade growing that backlog, maybe that starts to more than offset what we would see in a current quarter -- in a given quarter, what you'd put into the pre-need backlog, if you will?

First part of your question, Brandon, I think is as it relates to our success. Again, I think it's -- the primary reason that I would put on the most recent acceleration has to do with what I was talking about before. We've seen productivity enhancements over the last few years to drive sales, and what you're seeing for the first time in the last four or five years is an expanded sales force.

We grew the sales force by an additional 7%. We've never done that, and we're putting people on that are very productive. So probably the primary differential over previous quarters is that we really have more people out there interacting with the baby boomers, which is driving production.

The second question I wish I could answer for you, unfortunately. If I knew that, I would tell you. So it's very, very hard to predict. What I would tell you is we have experienced accelerated pre-need production now for four years. My gut would tell me that within the next two to three to four to five years, you should begin to at least to see some of that flowing into your revenue. But again, very, very hard to predict with any accuracy. So we will continue to monitor it, but I can't give any more guidance than that.

Thank you.

Thank you. Our next question comes from Chris Rigg from Susquehanna. Please go ahead.

Good morning, guys. I got on a couple minutes late here, so I apologize if you comment on this. But with regard to the guidance, is your synergy target unchanged at this point?

Yes. The synergy target that we have is unchanged. I think what I said, Chris, if you missed it, was we feel like there could be more. We are not in a position yet to quantify what that might be. But that has not changed. I gave three factors that were negatively impacting our ability to execute 2014 and three that overcome it, which gets us back to maintaining our range.

Okay. And then when I look at the direct selling price that the average revenue per contract sold, it looks like that pricing firmed quite a bit relative to other recent periods. Is there anything notable there?

I think a lot of it has to do with smaller discounting, that we are doing a better job of explaining. You are talking about within direct cremation, sales backlog (multiple speakers)--?

Yes, when I look at the average, it looks like it was 11% to 12%, and it had been mid to upper-single digits prior this quarter.

Yes, I think we've used a lot of discounting and coupon strategically, and we've done some testing to see if people found value without that, and we realized some success in utilizing some of those techniques. And that's been probably the biggest driver of the increase year over year is just less discounting as it pertains to their products and services.

Okay. And then one of the headwinds that you talked about was the way you allocated the purchase price. I'm assuming that's falling into amortization somehow. Can you give us a sense for how much of that -- what's the incremental headwind that wasn't in your initial 2014 guidance?

What I would say, Chris, is it wasn't a reallocation. It's just the fact that when we gave October guidance, we hadn't closed the transaction yet. We were still in the middle of really pulling together what we thought the anticipated purchase price allocation, and now, obviously, it's more refined as we closed it and as of December 31 that you'll see in our 10-K.

But the answer to your question is, in terms of the original $1.05 today, it was probably about a $0.02 to $0.03 differential that had put pressure on EPS. Didn't necessarily put pressure on cash, which means you are correct in your assumption that it's more of non-cash amortization-type items that put that pressure on.

Okay, great. Thanks a lot.

Thank you. Our next question comes from John Ransom from Raymond James. Please go ahead.

Good morning. Three things. In your funeral backlog, is the mix of Dignity still higher than it is at at-need? And does that have any -- had an effect on your ASP as the Dignity matures?

Yes. We are seeing a higher mix of selling packages into the backlog, and the things that are rolling out are going to have that impact, exactly, John. I don't have the numbers in front of me, but that's the general trend that we are experiencing and that we would project over time. We feel better about the pre-need going at-need average, that that should continue to grow over time because of the type of business we are putting in the backlog.

Tom, do you have an approximate number for the maturing pre-need compared to your overall ASP, what the difference is? In other words, if you are generating $5,000 on average but the Dignity is -- the backlog is maturing at $7,000 or something like that?

I think it's about $200 differential now, John, so it's something to that effect. Keep in mind, probably, that backlog has a higher instance of cremation as it relates to -- so you are dealing with a higher mix and still generating the type of revenues that we are.

Okay. Secondly, I know you did a lot of work in the early days to minimize the cash flow drag from selling pre-need, because you stick to cash in the trust fund, and you've got to pay your salesperson. Can you remind us of currently how that stands when you sell funeral pre-need, either into the trust or into your -- into a third-party insurance, what the first-year cash flow looks from that activity?

Yes, I think, absent, if you just looked at the selling cost and G&A, if we sell an insurance-funded product, call it a -- we're going to get a 20% of faced value, just for rounded purposes. That's the G&A revenue and that cash that we'll get up front. We will pay about 15% or 16% in selling costs in order to obtain that.

The difference -- so if we sold all insurance, it would be actually slightly cash-flow positive. The difference is, in certain states and in certain instances, we sell trust. When we sell trust, we may only get retainage of 10%, and our selling costs continue to be 16%, so when you blend the two, essentially, the G&A revenues and retention are going to offset the selling cost.

One of the things we keep talking about is the margin percentage is negatively impacted. It's not really a cash flow drag in a pure sense. It just brings down the percentage margins because you are grossing up the revenues, and then you're turning around and giving away all of profit below. Cemetery side (multiple speakers) -- I'm sorry.

Go ahead. I'm sorry.

What I was going to say, on the cemetery side, the trusting laws are less punitive. We don't sell insurance to start with, but generally, we are not having to trust nearly the amount we do on the funeral side.

So as we grow cemetery, generally the cash flow is going to more than offset, and again, depending on how much you collect down payment. Regardless of that, it's a very cash-flow beneficial. As you know, to the extent we sell property, the profit gets recognized upon sales as long as it's been constructed. So very cash-flow positive on the cemetery side.

But there was a day, probably 10, 15 years ago, where our selling costs that I'm telling you are now 16% or 18%, on the cemetery side was probably closer to 20%, we're in the 30% range. And so there was a time when pre-need was very cash-flow negative, and now what I'd tell you is that on the funeral side, it's cash-flow neutral, and on the cemetery side, it is cash-flow positive.

And is your blended mix, now that you -- account for the divestitures and the Stewart deal, do you still think you'll be on the funeral side in that two-to-one range of insurance-funded versus trust-funded pre-need on the funeral side?

Yes. I see no reason why we wouldn't continue at the trend we are at.

Okay. Finally, could you just remind us, as you do a cremation funeral versus a casketed funeral, just the approximate gross profit dollars difference in those two transactions?

I would be approximating, John, because I don't have anything in front of me. Probably the way to think about it is you are going to spend on average about $4,000 less, so revenue would be impacted by that much.

I would tell you that more than likely on a profit side, it's probably closer to $2,000 because you're not going to have the cost of a casket, you are not going to some other ancillary costs. So I'd say on a gross-dollar percentage, it's probably around $2,000. I would tell you on a gross-margin percentage, not gross-dollar, that actually, it would be higher on an incremental basis.

Right. Okay. Thanks a lot. Great job.

Thanks.

Thank you. Our next question comes from Duncan Brown from Wells Fargo. Please go ahead.

Good morning. Going back to the last call, you were asked about your guidance thoughts for legacy SCI and Stewart and that you made basically similar assumptions for both volume and pricing for both legacy assets, but that you thought there might be some more opportunity on the Stewart side, particularly on the funeral portion. Any update on that?

You're talking specifically about sales, Duncan?

That's right. Sorry.

Yes. I think, again, it's really too early to tell. We're just integrating the Stewart businesses. We got some great people, some great properties.

We're a little bit difficult to transition completely because of systems that need to be integrated. We would anticipate by the end of May that we would all be on similar systems, and therefore, could go to similar sales-structure and sales-payment-type programs, which I think should generate some accelerated growth, particularly in the back half of the year.

But I would say we are still in a position of analyzing and trying to understand exactly what we think we can do. But we feel very good about the businesses and the people, and so I'd look for our ability to grow those very similarly to what we grow SCI businesses.

Okay. That's fair. Appreciate it. Still early stages.

For the assets that you need to sell, is there anything that you can tell us about them, like are they -- I think the press release, you said there was 91 locations. Our most of them combos? Is it heavily weighted to funerals or cemeteries? Anything you can parse out there?

I think on a location basis, you're going to see more funeral homes. But I think on an EBITDA basis, a lot of it is driven on the cemetery side. There's some really profitable cemeteries that, unfortunately, we're going to have to divest of. But the good news is, a lot of people are interested in them, and they are going to command good prices.

So I would say the mix of profits more tilted toward cemetery, and the mix of actual numbers, the 91, is going to be probably 60%, 65% on the funeral. That's an -- I am speaking without anything in front of me, so forgive me if I'm a little off.

That's fair. I appreciate it. Maybe if I could, one numbers question. The press release, you highlight $25.7 million of cost related to Stewart in the G&A line.

How should we think about that? Is all of that one time in connection with the transaction, or is some of that ongoing?

No, that' a one-time cost in terms of what we are calling out and adding back, [not into non-recurring]. That all relates to fees and such related to the closing of the transaction in the fourth quarter.

Great. Thanks a lot.

Thank you.

Thank you. We have time for one more caller. Our caller is Bob Willoughby from Bank of America. Please go ahead.

I apologize I jumped on late if you mentioned this already. Can you give us any comments on the performance of Stewart since their last financial report? We haven't seen much from them of late. Anything anecdotal about their experience?

Again, just to reiterate what Tom mentioned about not only the quality of assets is the quality of the people, and those people that are running the funeral homes and cemeteries for the Stewart and are going to be integrated into our network are doing a great job. We really haven't seen a lot of degradation in their performance and in their properties.

We are very pleased, again, with the assets, and we're are very pleased with the Management and the people that are just doing a tremendous job. We look forward to integrating them into our Company.

Were the pre-need efforts in line with your view?

Yes, Bob, what we probably saw a little bit of, and I think it's just hesitation in trying to understand where you are going, funeral volumes are going to be down a little bit like we experienced because you had a tough comp. I would say on the selling side, it was tough to drive sales in that interim period, but I think what Eric is trying to point out is, we think that was a temporary blip, and we believe now that within our systems and within our structure, they're are great people, great properties. We are going to get them back.

But you are right. Waiting for the Federal Trade Commission over a seven-month period, it's hard to drive sales if you are Stewart Management in that time period. So it was down a bit, but nothing shocking by any stretch.

Did you offer any update, Tom, just the timing of the divestiture program? Can you get it done in the first half, that quickly?

We do. I said in the comments, Bob, that we believe as of right now that it will all get done by midyear. We feel pretty good about that. And again, on the integration side, everything is going really well, and we are very confident about our ability to deliver synergies.

That's perfect. Thank you very much.

Thanks, Bob.

Thank you. I will now turn the call back to SCI Management for closing remarks.

We want to thank everybody for participating today, and we look forward to talking to you at our first-quarter earnings call, which will be sometime in late April. Until then, have a great 2014.

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