Service Corporation International (SCI) 2014 Q1 法說會逐字稿

Welcome to the first quarter 2014 Service Corporation International earnings conference call.

(Operator Instructions)

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

Good morning, everyone. This is Debbie Young with Investor Relations at SCI. Welcome to our call today as we discuss our results for the first quarter. As usual, before I turn the call over to Tom and Eric for their remarks, let me remind you that the comments made by our Management team 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. Okay. With that behind us, I'd like to now turn the call over to SCI's President and CEO, Tom Ryan.

Thanks, Debbie. Good morning, everyone. Thank you for joining us on the call today. I'm going to begin my comments by giving you the customer highlights for the quarter. Then I'll provide some details on the Stewart onboarding and integration, including some very good news on our identification and planning of additional synergies. Finally, I will close by giving you some color on our outlook and the rest of 2014.

Beginning with an overview of the quarter, we are pleased to start off the year by reporting normalized earnings per share of $0.28 which is in line with both the prior year as well as our internal expectations. This is particularly significant knowing that we are facing the toughest funeral comparison in several years.

If you'll recall, the first quarter of 2013 had an exceptionally strong flu season. Although we felt the impact of this decline in the first quarter, particularly in our funeral businesses, I am pleased to tell you that the legacy Stewart business performance made up the difference, bringing in over $117 million of combined funeral and cemetery revenues which were slightly ahead of our expectations.

I want to pause a moment to give my heartfelt thanks to the entire SCI team, both my legacy SCI and my legacy Stewart teammates for all of their hard work and execution in the first few months of the integration. Let's face it, any time you have an acquisition of this size, there is going to be some level of disruption as we work through the integration as well as the Federal Trade Commission divestiture process. Fortunately, this isn't our first large integration. I believe, to date, we have performed admirably in spite of these distractions and remain very confident in our ability to drive value.

Now, for an overview of funeral operations in the quarter. Overall, the results of our comparable funeral segment came in slightly lower than our projections for the quarter. When compared to the prior year, our first quarter funeral revenues declined by $23 million.

As I mentioned earlier, we expected the majority of this decline in our core funeral revenues due to a strong flu season in the prior year. Funeral volume decreased 7.2% for 2013. That being said, if you compare the first quarter volumes to the first quarter of 2012 -- so we're excluding the 2013 flu season anomaly, funeral volumes are relatively flat. This is encouraging for the remainder of the year as we put behind us the most difficult quarterly comparison of 2014.

Partially offsetting the volume decline was a 1.8% increase in the sales average, when you exclude Canadian currency impact and trust fund income. This was achieved despite a 200 basis point increase in the cremation rate. The revenue shortfall was the primary reason that comparable funeral profits are down by $22.1 million.

Gross margin percentages were also lower by about 370 basis points in the current year quarter. Last year, we had a 26% gross margin, which was unique due to the high margin impact of incremental volume. We would have expected margins to be in the 23% to 24% range for the first quarter of 2014. However, increases in printing and selling costs and higher maintenance and utility costs associated with the harsh winter put additional pressure on our margins.

On a pre-need basis, we grew comparable pre-need funeral sales by 1.3% in the quarter. In recent years, we've seen a higher growth rate on the pre-need funeral sales. We believe lower comparable volumes which generate leads coupled with the high level of change management in the quarter temporarily impacted our ability to grow at these higher levels.

So, to summarize funeral results: we saw a decrease in comparable revenues, which we anticipated; we did a good job of managing costs; and were pleased with the performance of the legacy Stewart businesses as we started off the year. As it relates to the remainder of the year, we are still modeling funeral volumes for the year to be down in the low single-digit percentage range which implies more favorable comparisons in the remaining three quarters of the year. Additionally, we would continue to expect to grow pre-need funeral sales production in the mid to high single-digit percentage range for the remainder of the year.

Now let's talk about cemetery operations. Comparable cemetery revenue increased $1.2 million over the prior year quarter. Comparable cemetery profits declined $2.8 million in the quarter. As you can imagine, we had a few distractions during the quarter coming off the closing of the Stewart transaction at the end of December.

The most noticeable impact of the quarter was the under performance in cemetery pre-need sales production which fell short of both prior year as well as our internal expectations. As we rolled out changes in our sales management infrastructure, we had approximately one-third of our 38 sales directors that were new in their roles.

So as they were getting up to speed on our sales program in their area of responsibility, they were also spending more time focused on the integration of our new businesses. This was particularly noticeable in January and February, we saw the largest decreases in our pre-need sales production. Conversely, in March, we saw a lot of energy and focus in the sales team as they began to hit stride.

As a matter of fact, March of 2013 was our highest production month of 2013. In March of 2014, we were able to match the prior year sales level. This has us very optimistic about the remainder of the year.

Looking forward, we do anticipate there to be some additional choppiness in the second quarter as our sales force undergoes the rollout of a new compensation plan and training on our updated point of sales system. Additionally, we're adding significant enhancements to our lead management capabilities by introducing salesforce.com. Absent these temporary changes, our sales team is beginning to hit stride. We are confident about our ability to deliver exceptional growth in 2014 and beyond.

So to summarize our cemetery results, our first quarter pre-need cemetery sales were lighter than we hoped to start out of our integration. But looking forward, we reiterate, our March 2014 monthly performance has given us confidence that we can achieve our targeted levels of up, mid to high single-digit percentage increases for the year.

Now let's shift to Stewart. We are very excited about the legacy Stewart businesses' performance in the first quarter. As I mentioned a few minutes ago, legacy Stewart businesses generated over $117 million of revenue in the first quarter. Generally, I would say the margins and sales averages are in line with our expectations as these businesses experienced the same decline in funeral volume as we did in the first quarter.

While we are still ramping up our efforts on Stewart's pre-need funeral and cemetery sales programs, we continue to believe this represents an area of meaningful opportunity for the Company. We should begin seeing the benefits in the back half of the year.

In addition to the solid results from our acquired businesses, you may have already seen in the earnings release that we were pleased to have identified and developed plans for additional synergies that will have a partial benefit this year and a full impact in 2015. Recall, we originally estimated that the benefit of leveraging the back office scale combined with the purchasing synergies from the Stewart acquisition would be about $60 million. We now have increased our range to approximately $75 million to $80 million.

These additional synergies are primarily related to procurement and opportunities to further leverage the back office scale of the combined Companies. Of the new total synergy estimate of the $75 million to $80 million, we still believe that half will be achieved during 2014 and the remainder in 2015. Looking forward, we believe we can continue to find additional value in the legacy Stewart businesses, their revenue synergies, as we implement strategic pricing, Dignity funeral packages, catering and reception events and flower sales programs.

Shifting to the divestiture process. The process is going very well. Maybe the timing is a little slower than we expected; however, we remain on track to complete all sales within the next three to six months. We, again, reiterate that we still expect the divestitures to generate between $315 million and $340 million of after-tax proceeds. Keep in mind, we make about $4 million a month as long as we own them.

In summary, as it relates to the Stewart transaction, we believe that the acquisition was a big win for us and for our shareholders. We look forward to the future growth of these businesses once they're fully integrated.

So to wrap up with the first quarter behind us, we remain confident in our earnings per share and cash flow targets for 2014 communicated to you back in February. With the additional synergies identified, we believe that we are currently trending towards the high end of our guidance ranges. 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 are realized, which are now in the $75 million to $80 million range.

I am optimistic about the potential for further synergies to be identified as it relates to implementing other SCI revenue strategy. As I think about the remaining quarters, we may experience some additional change in management distractions during the second quarter which could be slightly disruptive from a sales perspective. However, the back half of the year should enjoy a large share of synergy impact as well as an integrated, focused sales team that can generate impressive growth.

Lastly, we expect to continue to generate strong cash flow, which Eric is going to update you on shortly. This cash flow along with anticipated divesture proceeds expected in 2014 will support a quick deleveraging and allow us to return our focus to capital deployment strategies designed to enhance shareholder value. This concludes my prepared comments. I will now turn the call over to Eric.

Good morning, everyone. I'm going to start by commenting on our cash flow results for the quarter. Then talk about the remainder of 2014 as well. Then I also want to touch on our current financial position and capital deployment plans for the remainder of the year. So let's start with cash flow and talk about our adjusted operating cash flow which grew $9 million in the first quarter to $164 million, which was in line with our expectations.

So let me highlight some of the key items that are driving this. Cash flow in the quarter benefited from incremental cash flows related to the addition of Stewart, which performed in line with our expectations.

Also, as I mentioned on the February call that we had, cash flow benefited this quarter from lower payroll disbursements as we partially funded a January 2014 payroll in December of 2013. That amount was approximately $18 million. These increases in cash flows were somewhat offset by anticipated higher payments for cash interest and cash taxes, which collectively together grew $22 million over the prior year quarter.

Cash interest payments increased $14 million. This is related to the incremental debt associated with the Stewart acquisition. Cash tax payments increased from about $6 million to $14 million -- so increased about $8 million. Again, both of these items were in line with our expectations.

If you deduct maintenance CapEx and the cemetery development CapEx of approximately $22 million, we calculated our free cash flow for the first quarter to be approximately $141 million or $7 million over the prior year. While slightly higher than last year, CapEx came in lower than we expected. So we expect our CapEx to ramp up later this year and again, expect our full year guidance to remain unchanged.

Overall, we're very pleased with our first quarter free cash flow results. We recognize this represents the result of a lot of hard work on both the part of the legacy Stewart and our SCI associates as we work through the integration and look forward to further cash flow growth with the new combined foundation. Again, as Tom mentioned, I want to thank all of our associates for all the hard work during the first quarter as we are working through the Stewart integration.

So now looking forward for the rest of 2014, I would like to reaffirm our outlook for the full year 2014 cash flow from operations, again excluding special items, of the range of $430 million to $480 million. Consistent with the updated EPS expectations, we now believe we will be trending toward the upper end of this cash flow range as a result of the additional Stewart synergies mentioned by Tom earlier as well as from a cash tax update I'm going to mention in a second.

So some things I'd like you to keep in mind as you think about the annual range of cash flow. First, our first quarter cash flow is seasonally high due to cash interest payments that primarily occur in the second and fourth quarters. During the first quarter, we paid about $16.5 million in cash interest. We expect to pay just under $70 million in the second quarter and just under $90 million thereafter in the second half of 2014.

So now turning to cash taxes. In February to remind you, I stated that we expect cash tax payments in 2014 to be approximately $70 million. During the quarter, we completed our first opportunity to not only confirm, but refine at a very detailed level many of our tax assumptions that we made related to the Stewart operations during our 2013 diligence period.

As a result of this more detailed analysis, we are now anticipating that our 2014 cash tax payments will be in a range of $50 million to $60 million. So further positive refinement of the original cash tax assumptions related to Stewart would push us toward the lower end of this cash tax range. However, stronger operating performance would create higher taxable income and would push us to the high end of this cash tax range.

As I mentioned previously, our recurring CapEx guidance of $135 million to $145 million also remains unchanged. This result in anticipated free cash flow in 2014 to range from $285 million to $345 million. With the addition of the incremental Stewart synergies and expectations of the lower cash taxes that I just mentioned, we do believe we are currently trending toward the upper end of this free cash flow range.

On a per share basis, our free cash flow guidance range equates to $1.32 to $1.59 using a fully diluted, weighted average share count of about 217 million shares. We believe this represents a favorable high single-digit free cash flow yield.

Now, I'm going to shift to our financial position and give you a few highlights on our capital deployment. We continue though to have robust liquidity. At March 31, we had $150 million of cash on hand and about $330 million of availability on our credit facility. In terms of deploying cash in the quarter, we funded $110 million on our revolver during the quarter and used cash on hand as well to retire all of Stewart's $132 million of convertible notes as well as the associated premium of about $36 million.

Also during the quarter, we bought the remaining outstanding shares of Neptune. This cash deployment is reflected in financing activities on our cash flow statement. With this purchase, we now own 100% of Neptune. I want to stress that we continue to be very excited and believe that SCI Direct has significant growth potential.

Finally, we paid $17 million in dividends in the quarter, which reflects the recent 14% increase in the dividend rate which is now $0.08 per share per quarter. As Tom noted earlier, we remain on track to receive around $315 million to $340 million of after-tax proceeds from divestitures associated with the Stewart acquisition. We expect to close all these divestiture transactions and receive the associated proceeds this summer or early fall.

We will use the first $200 million of the after-tax divestiture proceeds to pay down a portion of our roughly $600 million term loan as stipulated in our bank credit agreement. Also note that, we have required quarterly payments on our term loan with remaining payments of approximately $23 million in the remaining portion of 2014.

Now with these required debt payments as a backdrop, we do plan to take a balanced approach to deploying our capital for the remainder of the year. This will be done through a blend of share repurchases and debt payment as we get closer to our targeted leverage around the mid 3 range on a net debt basis.

This leverage which is calculated as net debt to EBITDA in accordance with our credit facility dropped to below 4 times to 3.95 times as of March 31. This being below our 4 times credit facility threshold gives us increased flexibility in making capital allocation decisions this coming quarter, which includes our ability to reconsider share repurchases.

Just to remind you, we currently have $190 million authorized under our share repurchase program. In addition to this, we'll also consider specific market acquisitions, as always, at the appropriate returns and continue returning cash to our shareholders through our dividend.

So in conclusion, with the first quarter now behind us, we are excited about the remainder of 2014 and being able to deploy our capital in a way that we believe will create value for our shareholders. Our first priority, however, as we look at the remainder of the year will be to ensure we effectively and efficiently are able to complete the integration of the Stewart operations and most importantly, achieve our robust synergy targets.

So with that, operator, that concludes our prepared remarks for this quarter. We'd now like to turn the call over to questions.

(Operator Instructions)

Bob Willoughby, Bank of America.

Tom or Eric, can you give us any forecasts on what Neptune can do for you this year? It's obviously well ahead of our expectations. What incremental economics will you be recognizing with the consolidation of that remaining interest?

Bob, I don't have the numbers in front of me, but I think you saw from the release or can conclude -- we're growing in the mid-teen digit range with Dignity Direct now. We've got 80 locations open. We've got 5 new ones opening this year. We're very excited and would expect to be able to continue that type of growth rate as we think about the rest of the year.

So, again, on a consolidated basis, it's pennies added to the base but an exciting part of, I think, a tremendous growth story as we think about the next 3, 5, 10 years out. So, that would be kind of the growth rate I would expect for this year.

All right. Would you use a double-digit rate in the outlying years as well?

I think so. I mean, I think at some point, obviously, it gets to -- it starts to -- begins to slow a little more. We are expanded now to 80 offices. I think when we started, AJ, we had 30.

So we think we can continue to open -- but that's going to trend down over the years, but I think, still is going to far outpace traditional business growth rates for us and for anybody else for that matter.

Okay. Can you comment just anecdotally what -- why -- reasons for slowing the divestiture program? How that might impact your share repurchase plans? What's a reasonable target for the back half of the year for share repurchases?

Well, I think two things there. Generally, it's finalizing contracts with the buyers. More importantly, the approval process as we go to the Federal Trade Commission about the credibility of the buyer. Again, it just a process that you have to go through with the Federal Trade Commission. It only comes once we submit a final contract. So that's a little bit of the hold up.

I tried to mention in there, the good news is we make about $4 million a month every time we hold these businesses. So, it's not tremendous skin off our back from a cash flow perspective. I would say, it should have no impact on our ability to buy back shares. That is something that is imminent.

Is a $40 million to $50 million buyback a realistic expectation?

Over what period time?

Yes. It depends on what period of time you're talking, Bob.

Second half.

Oh, yes.

Yes. I would say definitely. We have $190 million of authorization available. Even above the $200 million of proceeds that have to go to the term loan, there's another $120 million or so when you look at the guidance after-tax. Then we have all of the free cash flow in the guidance that I mentioned in the call. So definitely, yes.

Okay. Wonderful. Then just lastly, your synergy numbers don't include some of the revenue opportunities with the Stewart team as you rollout your products and services through their network. Any kind of guesstimate the magnitude of that opportunity?

It's hard to say, Bob. Some of the things I've tried to touch upon I'd say are on the funeral side of the equation. So, as you think about the effectiveness of the Dignity package program-- again, Stewart had packages and had an impact from that.

But we learned from them. We learned from us. What we've seen historically is, we come out a better product and a better ability to deliver additional products and services. We also have the catering program which at, today, is about a $30 million run rate on revenues for our set of businesses.

We -- the other thing I think you'll notice -- there's regional issues, but when you think about pricing, we've got a much more I'd say, centralized strategic approach to how we price both cemetery and funeral. It takes a lot of inputs from competitors in the area and the like. I'd say Stewart's pricing was a little more regional, a little more local. So, our belief is as we get in there, as we do some of these things, there's probably some opportunities on those equations.

Finally and I think the biggest impact of all is, as we can put the two sales forces together, get them on salesforce.com, get them on one contract system, get them on one pay plan, that's going to occur on May 1. Once we've got some run rate there, our expectations are that we can really grow pre-need cemetery sales once we get it all together.

So, it's hard to estimate because if I had an actionable plan, I would tell you. But I tell you at this point, we're excited. We think it's a big opportunity. The question's really probably when, not if.

That's great. Thank you.

AJ Rice, UBS.

Congratulations on how things are going so far. It looks like things are going very well. I know -- Eric, you made some comments about this around your comments on cash taxes. But I know one of the uncertainties in the due diligence process on Stewart was the fact that they had this big deferred tax asset.

Have you been able to -- is part of your comment about a better profile and cash taxes reflective of doing more due diligence there? Or is that still something that you're looking at and haven't really determined what the impact will be?

A little of both, AJ. I hate to answer it that way, but we're still in the middle of really refining down at the real low level, detailed level, at a legal entity for Stewart.

We had assumptions. We told you we had assumptions related to the deferred tax asset. Part of the refinement of the cash taxes is related to that issue as well as other NOL carry-forward issues, but there's still more analysis to come. We're right in the middle of it right now.

Okay. Second, I guess, what about the trust funds? I know they had managed their trust funds internally. You obviously use a multiple number of outside experts.

Are you making any assumptions longer-term about change? Does that have a financial impact on you, whatever you're going to do with those trust fund assets?

Well, first thing I'd say is they did have a different philosophy by managing it internally. But they also produced very good trust fund returns. But we have made the decision in the integration to take the Stewart trust funds and merge them into our common trust funds and use our investment philosophy, which is a philosophy of outsourcing based on our asset allocation to, call it, 25 to 30 professional institutional money managers across that asset allocation.

We are in the process, again, there is a little bit of tax planning in terms of getting those assets into our funds that we're working through as well, AJ. But I would anticipate this happening in the next probably three to four months.

Okay. There have been some discussion about looking at something more strategic with respect to the trust fund assets. I'm trying to unlock some value there. Any update on that? Or any thoughts about that?

AJ, this is Tom. Let me step back because I think there are a lot of questions around this area. Clearly, our priority and focus over the last 18 months has been on negotiating a definitive agreement for Stewart, an FTC review process, closing and integration of a significant transaction. This in itself is materially increases our opportunity for further scale and long-term value creation for our shareholders. We remain focused on delivering that value.

At the same time, we realize we've enjoyed the tax yield of NOLs over more than a decade. By the way, it's more fun using them than creating NOLs. Those days are coming to an end.

Some months back, we embarked on a comprehensive review with the assistance of external advisors on basically opening all options up and relooking in an effort to enhance long-term value for our shareholders. Obviously, as we conclude material things, we'll provide updates in the process. One of those that AJ is touching upon is this trust monetization angle, something that we can look at it accelerating monies out of trust. Clearly, we've had conversations about REITs.

There is leverage levels that we can look at. There's international expansion opportunities. So there's a variety of things that I think we'll be looking at and some can go together, some can't. So we're going through a, I'd say, a comprehensive process. I want to hesitate to conclude anything or give partial answers at this point in time. But noted, we are working very hard to see if there are other ways to enhance value beyond what we intend to do with our traditional approach of maintaining leverage levels and using excess cash to give back to our shareholders.

Okay. I'm just going to slip one last one in there.

So you bought the minority position out of Neptune. I guess there, our operating assumption has been that you're sort of on hold for small mom-n-pop type of transactions even though the market did seem to be picking up a little bit prior to the Stewart deal. Is that still the case? Or are you -- given that you've gotten your leverage down a little quicker than expected, are you thinking maybe you would be open to some mom-n-pop deals as well?

We definitely would be open to mom-n-pop deals. We're constantly keeping relationships that we've developed with people over time. As you know, AJ, because you've been doing this as long as I have, these come when they come. We're ready and waiting for a lot of these to be invited in, share our thoughts and welcome them into the SCI family. It's just really hard to accelerate that action.

So I think you'll see us do that for sure, strategically. I think you'll see us in certain markets where we may have situations where difficult to buy where we may look at expanding through a construction of new locations.

But again, I would tell you that the significant cash flow that we're generating is never going to be saturated by acquisition. So that's why I think we begin to look and say, strategically what should we be doing? We know one thing, particularly at these share prices, buying ourselves back is a pretty good deal right now. But we're going to explore a variety of options.

But the short answer is yes, we're there. I just don't think it's going to be significant enough to spend our money.

Okay. All right, thanks a lot.

John Ransom, Raymond James.

Eric, do you mind just recapping, if you don't mind, the timing of cash flows for the next couple of quarters in terms of your divestiture expectations? When do you think you're going to get the final cash back from the buyers of those assets?

So, you're asking the timing of the divestiture proceeds, John?

Yes.

What I would say is, I mean, as Tom said, it's a process that we're trying to say to some degree is outside of our control. So it's hard for us then to really describe what the timing is. I will tell you though, we're far enough along that we do expect some proceeds to come in this quarter. We haven't received any as of now, as of April. But we would expect some to come in starting next month and a little bit heavier load in June. I do think that continues in July and continues in August.

We're trying to step back and say what's most important is: A, these proceed are coming. We're getting the deals that we were expected. We're very excited about that. The after-tax proceeds that we described to you, all the way back in February, continue to be sound in terms of that range.

Then, secondly, I would say, as Tom mentioned just to reiterate, it's coming in the summer and the fall, but it's really not slowing us down, John. We have cash on hand of $150 million today. We have liquidity with our credit facility. We have free cash flow, that's robust, that's coming in. So in terms of capital deployment, we are very happy with that. We would -- we do want it done by the early fall, so we can use some of those incremental proceeds above what needed to go to the term loan, as I've just mentioned, for capital deployment opportunities.

So I think, John -- one of the confusions out there is, everybody knows that the first $200 million of our divestiture proceeds need to go to pay down debt. That is true. But that is attached to the divestiture process. It doesn't mean you can't spend money before that. So that is not something we have to wait on to begin to deploy our capital allocation strategy. It just says, the first $200 million has got to go there once you do it.

Okay. Is the gating issue anything beyond the FTC? I assume all the buyers have wound up their financing. They should be able to move pretty expeditiously once they get through the FTC again? Or are there other things to think about?

I think no. I think you're exactly right. The preponderance of these buyers are people you've heard of and know. So 80%, 90% of it, would be fully confident. Obviously, there's going to be some smaller transactions that could have some risks to approval and could have some risk to financing, but I would say they're de minimus.

Okay. Could you just -- I know you guys have been on a journey with you're trust funds, exploring monetization strategies and then maybe more recently backing off from that thought process. Could you just kind of recap where you are now in that journey? What may still be possible?

Again, John, I would reiterate what I've said before, we're still looking at that. I'd say, the general statement I can tell you is this. Those trust funds legally are the customers and not ours. I think that's the one complicating factor to some of the things I have heard spoken about outside the Company. I think everybody needs to keep that in mind.

The other thing that I think from just my perspective, if you take monies out of trust early, they're not there when you want them later. So anything that could be done, albeit, it'd be short-term value creation is going to damage our result in future periods. So, I think there's -- we're looking at it hard, but I'd say, those are two things just from Tom's perspective that hit me when you think about trust funds.

Clearly, we're going to be very efficient in the way that we fund and take monies out, but those are some complicating factors. But we're looking at everything, like I said. We're not going to leave a stone unturned. We're going to look at that versus other opportunities versus other opportunities. Again, be in a position at some point to say let's call a play on one of these.

Okay. Thanks a lot.

Chris Rigg, Susquehanna International Group.

I hopped on a little late, so I apologize if this has already been asked or you guys explained it. But on the tax side, when you think about what you can get from Stewart, are we talking about sort of portioning out -- you guys becoming a full cash taxpayer by a quarter or two? Or it could potentially be longer than that?

No. I think right now as we said, we're going to become, from a run rate basis, think of it that way. Right, Chris?

Right.

But I think this fall, we're looking at becoming a full cash taxpayer. That's where we stand today with Stewart's deferred tax asset and be able to utilize the acquired NOL associated with that acquisition.

I just want to reiterate -- you know our track record, Chris, you've known us a long time. We are constantly looking at ways to plan appropriately and reasonably in terms of deferring becoming a cash taxpayer as long as we can. That continues today, to look at other opportunities and other planning measures to defer. But from a run rate basis, as we've said, we'll be a full cash taxpayer sometime late in 2014.

Okay. Perfect. Then just philosophically with regard to buybacks versus dividends. Obviously, you've been pretty consistent in both areas and done a good job for investors. But is there any thought about a more meaningful increase in the dividend given the payout ratio's still relatively low?

Yes. I think the way we think about that at this point is, it's all relative to where your share price is trading. I think when we think about it, Chris, we see value creation versus -- in the share repurchase where we are today. The other issue with dividends -- you know this better than I do, when we -- it's very difficult to take a dividend backwards. So when you go out there with a heavy dividend, it limits your ability to be flexible for opportunistic things that we may want to take on.

So I think our strategy is, let's grow the dividend every year, again, with kind of our growth rate and give an expectation that's something that we'll continue to grow out in the future. At the same time, kind of the excess funds, at least at these price levels, we'd be in a position to buyback more shares. So, it's something we'll look at. But I think if you're talking about a significant increase, I don't think that's something that's on the horizon for us.

Okay. That's all I have. Thanks a lot.

Clint Fendley, Newbridge Group.

A good result here. I was wondering, the cremation rate spiked quite a bit. I'm wondering if your plan divestitures affected your mix here? I know the legacy Stewart had a lower rate on the cremations.

Yes. I think the cremation increase, a lot of that ties back to our growth in SCI Direct (technical difficulty) -- So, I think a lot of what you're seeing in this growth rate is the success, particularly the historical success of the pre-need efforts of Neptune and now what we call SCI Direct. Because if you look at it, they're out there aggressively selling pre-need and creating a backlog. I

f you look at that growth rate of what they're -- pre-needs going at-need, is a pretty significant growth rate. So, I think that is probably putting more pressure on the growth of our global cremation rate. If you excluded that from let's say, the traditional SCI portfolio, you wouldn't see nearly the growth rate that we're experiencing.

Okay. That's helpful. I'm wondering on the sales force implementation, just to be clear, is this a Company-wide implementation? Or are you just moving the legacy Stewart over to your systems?

Well, two things. We've taken -- we were on HMIS. Stewart was on HMIS. We've now -- what we've done is created a best practices of both I would say. As you think about the compensation plan that we're going to put together, kind of the same thing.

We're shifting systems. We're shifting pay plans. I mentioned the lead management system, salesforce.com, now that's dramatically different for both. So that's really what's going on. So, not only are we bringing our Stewart teammates on board, but there's a little bit of change, again, for I would say for, legacy SCI Management and legacy SCI sales force.

So -- again, a lot of our onboarding process is about buddy system. Don't forget just because we're onboarding Stewart employees, that is a function of the SCI employee to help that Stewart employee in that area get up to speed on the simplest things at first of getting on our e-mail system, how to use this form.

That is what is going on in our organization today. It's all going to lead to a much better platform to grow the business. So, that -- hopefully that helps you identify, it is a Company-wide change on a lot of these things.

Okay. It's on both the funeral and the cemetery segment then?

Correct.

Okay. Last question here. This is maybe a little bit left field. It maybe the last thing you would want to talk about after the last several months, but I'm just wondering what your thoughts are on potentially any international acquisitions? I know you guys both have direct experience here. Do you see any opportunities here over the next several years?

It's definitely something that we are exploring, no doubt. I think there are some tremendous opportunities internationally. I think it all boils down to optionality. Like I've said before, we're evaluating a number of things that I think could take the Company in different types of directions. That's definitely one that's understudied as we speak.

Got it. Thanks, guys.

Thank you.

We have no further questions at this time. I would like to turn the call back over to SCI Management for closing remarks.

We want to thank everybody for joining us on the call today. We look forward to speaking to you again in July when we report our second quarter results. Thanks, again. Have a great week.

Thank you, ladies and gentlemen. This concludes the first quarter 2014 Service Corporation International earnings conference call. Thank you for participating. You may now disconnect.