Service Corporation International (SCI) 2015 Q4 法說會逐字稿

Welcome to the fourth-quarter 2015 Service Corporation International earnings conference call. My name is Hilda, and I will be your operator for today.

(Operator Instructions)

Please note that this conference is being recorded.

I will now turn the call over to the SCI management team.

Good morning. This is Debbie Young from Investor Relations at SCI. Thanks for joining us today.

As customary, let me begin our call with the Safe Harbor statement. 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. Reconciliations 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.

So, now, let's begin with comments from SCI's Chairman and CEO, Tom Ryan.

Thank you, Debbie, and good morning, everyone, and thank you for joining us on the call today.

I would like to start this earnings call by reflecting on some of our major accomplishments in 2015. Then I will get into the details of the quarter, and end with some color on our outlook for the year 2016.

So, first, some observations on 2015: First and foremost, I am most proud of what we do for our client families each and every day, providing peace of mind and making their worst day just a little bit better.

There are also milestones as a public Company that we should be proud of, and these are a few I would like to highlight: First, while maintaining our position as the largest by far in our industry, with 16% market share and $3 billion in revenues, we were able to grow earnings per share again in 2015 to $1.18 per share, which translates to an impressive 16% annualized rate since 2011. We also reported record adjusted operating cash flow of approximately $514 million for the year, and deployed $433 million to return to our shareholders through share buybacks and an increasing dividend.

We continued our momentum in pre-need cemetery sales by growing them over 12% for the year, and at a compounded double-digit rate over the last five years. We also received the prestigious J.D. Power President's Award in recognition of our high-quality service to our customers, one of only 12 recipients in J.D. Power's 47-year history, scoring with the likes of Ritz Carlton in customer satisfaction and loyalty.

And finally, for our shareholders, we've delivered a 17% total shareholder return versus a flat S&P for the 2015. And now we delivered a significant premium to the S&P return for the 1-, 3-, 5- and 10-year periods ending in 2015.

So, I would like to say thank you to my 24,000 teammates, who continue to work tirelessly to serve and support our families at their greatest time of need. It is because of your efforts every day that we are able to accomplish what we have.

Now let's shift to an overview of the fourth quarter. We reported normalized earnings per share of $0.37, which was consistent with the prior-year period, and within the guidance range provided to you back in October of $0.36 to $0.39.

Adjusting for the $0.04 prior-year perpetual care benefit, earnings per share grew approximately 12%, despite headwinds of lower funeral volume, impacted by a mild comparative flu season; the negative impact of Canadian currency; and lower trust fund income due to the volatility in the financial markets. These headwinds were more than overcome by a strong pre-need cemetery sales production, the impact of our share repurchase program, and a lower tax rate.

On the cash flow front, we generated $89 million in adjusted operating cash flows, which again, was well within our guidance range, despite expected higher cash tax payments of $22 million year over year.

Now for an overview of funeral operations in the quarter. When compared to the prior year, our fourth-quarter comparable funeral revenues decreased by $11.1 million or 2.4%. This is below our expectations, as lower funeral volumes, negative currency trends and lower trust fund income put pressure on our funeral revenues.

As noted in the press release, core revenues declined $19 million or 4.7%. A comparable funeral volume decline of 4.2% was the primary reason.

As far as core funeral average goes, we experienced a 1.2% growth at the customer level. However, revenues and average were negatively affected by $5.3 million as a result of the Canadian dollar trading at $0.75 versus the prior year at $0.88, as well as the $2.6 million negative impact from the lower trust fund income, and an 80-basis-point increase in the cremation mix.

Outside of core revenues, we saw increases from SCI Direct of approximately $3.4 million or 13.1%, as non-funeral home matured pre-need volume, or performance of funeral services, increased over 7%, and recognized pre-need sales of urns and travel protection increased $3.2 million or almost 16%. Other revenue grew $4.5 million or 13.2%, which primarily consists of General Agency commissions earned from pre-need insurance sales production.

Funeral profit, therefore, decreased $8.8 million from the prior-year quarter, and margins were 20% compared to 21.4% in the fourth quarter of 2014. Core profit declines were partially offset by increased profits from SCI Direct and General Agency commissions.

Comparable pre-need funeral sales production, excluding terminally imminent transactions in both periods, was essentially flat, or down about $1 million. Keep in mind: We were facing a very difficult comparison, as the prior-year quarter growth rate was nearly 12%.

For the full year, pre-need funeral sales production increased $24 million or 3.4%. This is consistent with our annual guidance of low- to mid-single-digit growth.

Now let's turn to cemetery operations. Overall, comparable cemetery results was the highlight of the quarter, as operating performance was ahead of our expectations. Comparable core cemetery revenue grew $15.2 million or 5.9% in the fourth quarter, due to higher recognized pre-need revenue, which was reduced by lower at-need revenue and the negative effects of Canadian currency.

Pre-need sales production was the primary driver, as it grew by $12.1 million or 6.8% through increases in both average customer spend, as well as increased sales contract velocity. Additionally, revenue associated with the completion of construction projects, which, from a seasonal perspective, tends to be more pronounced in the fourth quarter, contributed the balance of the core revenue increase.

Other revenue declined $17.2 million, primarily as a result of the $15 million perpetual care trust fund income benefit reported in the prior year. Additionally, our normal trust fund income declined $2.2 million, due to unfavorable market returns.

Therefore, comparable cemetery profits decreased $8.6 million, as the $15 million perpetual care trust income benefit reported in the prior year was 100% profit. Excluding that unique item, cemetery gross profit grew $6.4 million, and margins increased 70 basis points to 31.5%.

This growth resulted from the $15.2 million core revenue increase, which should produce 60% incremental margins, or approximately $9 million. This increase was partially reduced by a $2.2 million decline in normalized trust fund income.

Now shifting to our 2016 outlook, as we disclosed in our press release, we are providing 2016 earnings-per-share guidance in the range of $1.20 to $1.36. Since we provided preliminary guidance to you back in October, we've continued to see negative financial market returns, as well as a weaker Canadian dollar.

As we're not in the business of predicting the future for the stock market, or currency movements for that matter, rather than moving the entire range down from our previous guidance, we lowered the bottom of the range by $0.04. At the mid-point of our range, expectations for growth in 2016 still falls within the 8% to 12% range, even after considering these headwinds and the slightly higher tax rate.

While we do not provide quarterly guidance, from a timing perspective, please keep in mind that we had a very strong flu season in the first quarter last year, up almost 5% in funeral volume, and had a 17% growth in pre-need cemetery sales production. So, it was going to be a very tough comparison this year under any scenario.

This January, we saw a decline in funeral volume of over 12%, which was consistent with what we saw in our market share checks and in conversations with other industry participants. Therefore, the first quarter should be a challenging comparison. After that, we would expect to get back to traditional earnings-per-share growth trends for the remainder of 2016.

For the year, we expect funeral volumes to be down slightly, with a slight growth in core funeral average, excluding currency, mix and trust income. We expect SCI Direct to grow high-single digits, and General Agency commissions to grow in the mid-single digits. And we will manage our costs aggressively.

We also expect to grow pre-need funeral sales in the low- to mid-single-digit percentage range. On the cemetery side of things, we anticipate revenues will continue to increase, led by pre-need sales production growth in the mid- to high-single-digit percentage range.

So, in conclusion, we expect continued growth of the Business, around the assumption that demographics are moving towards us. We will continue our strategy of growing revenues by remaining relevant and driving pre-need sales now and into the future. We will continue to leverage scale differentially through our sales organization, through supply chain and technology, and through our pre-need trust and insurance backlog.

Finally, we will continue to deploy capital towards its highest and best use, by growing through acquisition and new-builds, increasing our dividend, and shrinking the equity base in anticipation of the demographic impact coming. All the while, we will protect this great Company by maintaining a fortress balance sheet, carefully managing both our liquidity and debt maturity profile.

This concludes my prepared comments, and I will now turn the call over to Eric.

Thank you, Tom, and thank you, everybody, for joining us this morning.

And before I dive too deep into the details, I want to stay back up at 2015 full year versus 2014, and just really reiterate how proud we are of our financial results for the full year of 2015. And of course, I would like to thank our nearly 24,000 both dedicated and talented associates that really drove this outstanding performance throughout 2015.

So, this morning, I'm going to be addressing our annual cash flow results, as well as the capital deployment that we did in 2015. I also want to talk about our cash flow in the quarter. And then I also want to give you some more color and some comments related to cash flow for our outlook for 2016.

So, first though, let me start by taking an opportunity to again step back and reiterate our capital deployment philosophy. We've been executing this for the past several years. So, to begin, our consistent and predictable cash flows form all of the basis of our overall strategy to drive increased value for our shareholders.

Looking at 2015, we generated $514 million in adjusting operating cash flow -- which, by the way, is the highest we have achieved in many, many years. Complementing the strong operating cash flow base, we maintain robust liquidity, and we manage our near-term debt maturities.

So, with those facts as the backdrop, we then deployed capital to achieve the highest relative total shareholder return through our choices of acquisitions, growth CapEx, dividends and share repurchases. And the results have been impressive.

For the five years ended December 31, 2015, we have achieved about a 245% total shareholder return, when you compare it to the S&P 500 of about 80%. And you can be assured that we intend to keep our focus on growing the value of your investment in SCI over time.

So, with that backdrop, let me give you an overview of our cash flows for the full year of 2015, and then dive into the capital deployment that I just said. As I just mentioned, in 2015 we generated $514 million in adjusted operating cash flows, compared to $509 million in 2014.

But to really give you a more accurate picture of these 2015 cash flows, I really need to highlight a couple of items when you compare to 2014. First, we paid $51 million more of recurring cash taxes during 2015 compared to 2014 as, again, we moved closer to becoming a full cash taxpayer. Secondly, we benefited from approximately $27 million of operating cash flows in 2014 that were associated with the [FTC] divestitures that we have previously mentioned.

So, when you really normalize those two items, I think of adjusting operating cash flow in 2014 of being about $431 million versus the $514 million in 2015 -- which, by the way, is a growth of over 19%. And the drivers of the cash flow growth are predominately the higher earnings that Tom just described, and higher cash receipts primarily associated with strong pre-need cemetery sales.

So, we also finished 2015 with healthy liquidity of $335 million, which consisted of $135 million of cash on hand, that you've seen on our balance sheet, and about $200 million of availability on our longer-term credit facility. This strong liquidity through 2015 positioned us well to deploy a healthy amount of capital towards what I've already mentioned: acquisitions, dividends and share repurchases. And in fact, when you include some 1031 exchange funds, we deployed $69 million in acquisitions in 2015, which reflects 176% increase over the $25 million that we invested in acquisitions in the prior year.

Dividend payments in 2015 totaled about $88 million -- again, an increase of over 22% compared to 2014 payments of just over $70 million. We also returned $345 million of capital to investors in 2015 in the form of share repurchases, which is the largest annual amount we have repurchased since 2007. So, in total, $433 million in capital was returned in 2015 to our shareholders through these combined share repurchases and dividends -- which, by the way, is 37% or $118 million more than 2014 levels.

So, now let's shift gears and talk a little bit about cash flows during the quarter. We generated $89 million of adjusted operating cash flow in the fourth quarter, which was well within our guidance range communicated to you in October, which was $75 million to $100 million.

Similar to the full year though, let me provide a bit more color on these cash flows for the fourth quarter. First, our recurring cash tax payments were $22 million higher in the fourth quarter of 2015 versus the fourth quarter of 2014. And in addition to this $22 million, as a side note, we also paid about $10 million in non-recurring cash taxes, which was associated with the restructuring of some of our legal entities. Secondly during the quarter though, we also funded about $12 million more in payroll quarter over quarter, which is really just a timing difference, due to the timing of the New Year's holiday this year versus last year.

Lastly, when you think of the quarters, I also want to address two cash flow items that are similar amounts that really occurred in both quarters. If you remember, in the fourth quarter of 2014, we received $15 million of perpetual care trust capital gains that did have a correspondent earnings impact, that Tom just mentioned earlier.

In the fourth quarter of 2015 though, we also received a similar amount. It was $15 million, but it was from our cemetery merchandise and service trust capital gains. And those will not have an earnings impact until at the time we deliver or perform that underlying merchandise and services on those pre-need contracts.

So, then let's shift and talk about 2016. And as you saw yesterday in our press release, we finalized our guidance for 2016 to generate a solid $450 million to $500 million of adjusted operating cash flows.

Now, our range has slightly decreased due to the acceleration of the $15 million of cemetery MST capital gains that was received in the fourth quarter of 2015 that I just mentioned. And just so you know, our models previously reflected that receipt of those funds in the first quarter of 2016.

We also took, when you think of our guidance, a more measured approach to our expectations for normal trust-related capital gain distributions, due to recent market conditions. While we expect to pay more in cash taxes in 2016 over 2015, the good news is that our expectations for these cash tax payments in 2016 have now been lowered to approximately $140 million, which compares to $160 million from our previous guidance that we disclosed to you last quarter. And that's primarily driven by further tax plan.

Our expectations for maintenance and cemetery development capital spending in 2016 are approximately $150 million. This is slightly higher than 2015 levels, as we continue to improve the aesthetics of our funeral businesses, and most importantly, reinvest in our cemetery businesses by constructing relevant and contemporary cemetery property inventory.

So, when you deduct that CapEx from the operating cash flow, our guidance for normalized free cash flow in 2016 is a range of $300 million to $350 million. Now, this does compare to free cash flow of $372 million in 2015. So, the primary cause for the year-over-year variance is associated with the increase in cash tax payments in 2016 versus 2015, which is an increase of about $47 million. Additionally, we are expecting a greater use of pre-need working capital, as our cemetery pre-need property installment sales continued to experience robust growth.

So, in conclusion, 2015 was a great year for us, as we have generated very robust free cash flow. And when I look forward to 2016, we expect to repeat the consistent capital deployment philosophy which we executed in both 2014 and 2015. We, of course, will continue to maintain adequate liquidity, a beneficial near-term debt maturity profile, and think of our leverage range of about 3.5 to just below 4 times.

So, we will continue then to deploy that free cash flow towards acquisitions, dividends and share repurchases. And in fact, since closing on the Stewart acquisition in December of 2013, we have repurchased almost 25 million shares, for a total investment of just over $600 million -- which includes, by the way, 1 million shares we have repurchased subsequent to the end of 2015 for just under $25 million. Currently today, we have just under 195 million shares outstanding and about [$255] million of remaining share repurchase authorization -- which, again, gives a substantial amount of capital deployment flexibility as we move forward in 2016.

Ultimately though, we will continue our balanced approach to driving shareholder value by focusing on deploying that capital to the highest relative value opportunities. And again, this has been our track record, and you can expect us to continue this value-enhancing approach well into the future.

So, with that, operator, that concludes my remarks and Tom's prepared remarks. And we're going to go ahead and shift the call now over to take questions from the investors.

(Operator Instructions)

Scott Schneeberger, Oppenheimer.

Thanks. Good morning, everybody. I guess, first question I'd like to start off with would be the trust fund. Have you had conversations with the investment managers about how they are positioning, given the volatility in the equity markets year to date? And then just some thoughts about how that may be -- obviously you've adjusted guidance at the low end a little bit for 2016 -- how you are thinking about the cadence of the impact of equity markets as you move through the year. What's implied in guidance, is it -- as far as what your prior expectation was until now? Thanks.

Okay. Well, Scott, the way we are set up is, we interact almost daily with our registered investment advisor. We do talk to our trustees, and periodically, we do have meetings. We probably have 25-ish professional institutional money managers, and we do have several conversations during the quarter just to further our understanding. But in no way are we influenced in that -- we believe in our asset allocation over the long-term. It has worked for us successfully, as we've had a, generated a real return of about just over 3%, I would call it, over the last trailing 10 years -- and that's additional earnings and cash flow to us in the future. And we're going to maintain that discipline.

Now, talking about the guidance terms of what you are referring to, yes, we did bring down the low end of our guidance as it relates to some of the performance that we saw subsequent to the last time we talked to you in October. So when we talked in October, the trust funds were up about 1% year to date.

They ended the year down 1%. So we had that swing primarily in the month of December. Since then, in January, our trust funds are about down 3%. And ultimately, if you recall the metric that we try to give -- for every 1% or so that our trust funds drop, on an annualized basis -- and again, as a very general statement -- it can equate to about a $1.5 million of EBITDA. But we don't want to get into this game of trying to predict what we think the markets are going to do.

So generally, yes, we've taken down the low end of the guidance. But we did not want to infer that it wouldn't come back during the year either, and that's why we maintained that high end of the guidance. But ultimately, we have this plugged in, where we do think that our standard way of modeling -- which is, the markets will generally be flat to slightly up -- is what's built in to the midpoint of our models and our guidance.

Great, thanks. That's helpful. As a follow-up, I would like to ask -- obviously you have some nice momentum in pre-need sales and cemetery. I'm curious how you think about that, as well as funeral, in an economy that might be uncertain, where consumer confidence might be uncertain. It is, after all, a discretionary spend. But maybe some anecdotal history as to your confidence on why that would hang in, in this environment, what you've seen in the past, and what would lead you to such conclusions? Thanks.

Sure, Scott -- this is Tom. I think based upon historical observation, when you go back to 2008, 2009, when the world looked like it was going to end, and the markets were down 30% and 40%, we did see a temporary pause in prearrangement. It probably lasted three or four months, and it really lasted through March of 2009. And I must admit, surprisingly to me, it bounced back pretty dramatically beginning in April.

I think the conclusion we've had is, that this is probably the least volatile discretionary purchase you can have, in the sense that it is a planning item that people want to resolve. So even in bad times, I think people try to find a way to deal with this, so there isn't added pressure on their survivors. So I think, generally, you are going to find people staying pretty attentive from a contract flow perspective. What I will say, when there is financial uncertainty or a down market, is, you do tend to see the high-end drive a bit. So as an example, we even saw some in the fourth quarter. We did not see the same robust level of what I would call high-value sales on the cemetery side that we did in the fourth quarter of last year. So I do think it is more sensitive at the high end, as far as what people are willing to spend. But relative to other discretionary businesses, I like our odds.

All right, thanks. If I could sneak one more in, and then I will turn it over. Could you speak to the M&A environment right now? You gave some color on the call about 2015 versus 2014. What are the thoughts as we enter 2016, and what are you seeing out there with regard to the target's susceptibility to, or openness to, talk? Thanks.

Yes, I think we are seeing a healthy level of openness to talk. We've got a few under letter-of-intent as we speak today. We've got a couple others in negotiating stage. So I would say that we feel really good about the activity levels. The way that we try to do it is to maintain relationships with businesses that we are attracted to. That's predominately what we are doing. And these are going to turn when it is time for them.

So generally, there's a transition from an owner to the children or something like that, where that isn't what's going to work for that family. And we want to be in a position to understand the opportunity SCI presents their employees, to them themselves and staying involved.

So most of the time, that's what it is. We do see a few broker deals as well. But we feel really good about what we are seeing, and therefore pretty comfortable with the guidance that we put out there as to what we think we'll be able to accomplish this year.

Great, thanks. I will hand it over.

Chris Rigg, Susquehanna.

Good morning. Just wanted to follow up on the operating cash flow guidance change. Obviously you had the pull-forward of some of the trust income into the fourth quarter. That seems like it was substantially, if not entirely, offset by lower cash taxes. So when we think about what's causing the $25 million delta -- I know you laid out a bunch of items -- can you help us quantify or at least sort of force rank, what's causing the biggest impact versus the least impact? Thanks.

I think, generally, Chris, we expect to continue to have robust pre-need cemetery property sales. And for the most part, those would be sold on an installment basis. And as we grow, I think that creates -- as you recognize that revenue under our accounting, as you know, after 10% down, and it is constructed, that creates a use of cash. Because you're recognizing revenue today, and installment sales going to come in over the next three to five years, is the way I would describe it. I'd also talk about that there is some normalized level under -- each state is complex, and each state is different under these [trust] laws. But as a general statement, there is a normal amount of, let's call it, $10 million to $20 million of capital gain distributions that we get from these trustees, based on the performance of the trust fund.

And I think we also obviously, is what I was trying to say, is, we've taken those down as well. We've also continued to drive some sources in working capital related to days sales outstanding. And after you start squeezing it down, there's only so much you could do as well. So those -- all those factors, Chris, were taken into account, as well as the $15 million that was pulled forward to the fourth quarter of 2015, when we talked about the general guidance of $450 million to $500 million.

Okay. And then just on the volume outlook, I think, unless I missed it, you just said low-single digits. Which I think is -- I think you were down 1% to 2% in the guidance from last fall. Has there been any change to that outlook today?

Chris, this is Tom. We saw, as you heard in my comments, January was not a pretty volume month -- down some [20]%. We still feel comfortable about the low-single-digit guidance for the year. Let me explain a couple reasons why. Number one, just to give you more color on January, we have a new market share tracking capability in certain markets. We are looking at that, and we're, again, seeing market share trends the same. Our volume in SCI-Direct was down 10%. This is a business that tends to grow.

So again, we know debts are off. We talk to suppliers. And so we feel very comfortable that this is a market phenomenon that occurred in January. So to give you a little history, in 2014, volume was down 11% for SCI. We finished the year down 2%. If you go back to 2012, volume was down some 4.5%. We finished the year flat.

So I think what we see -- and I can go further back in history, as we look at these things -- we tend to gain back some of that loss throughout the year, typically in the back half of year, as you begin to enter the next comparison. So we feel pretty good, and are still modeling, like you said, a little deterioration in the annual, but not a lot, because we think most of it comes back as the year progresses.

Okay, great. Thanks a lot.

Okay.

A.J. Rice, UBS.

Hi, everybody. I know usually your biggest swing factor in your EPS range would be, I think I would say, the uncertainty around what the at-need volumes are going to be. And I guess today you're introducing as well, given the volatility in the market, the trust funds. Are there any other big items that swing you around in your range? Or are those really the two drivers that will determine whether you get to the higher end or lower end of the range?

I think, from a revenue perspective, you see FX having an impact, A.J. But as you know, as you drop it down to the bottom, it is probably as impactful or less impactful than the trust fund side. So really the other big number for us, in my opinion, is pre-need cemetery sales. So if that were, for whatever reason, not to grow, or flat or go backwards, that's going to have a pretty big impact on our numbers. So we still feel good about that number. But I think the biggest one, other than that, you hit upon, is going to be funeral [ride]. The other two are impactful, but I would say, less impactful as you think about the volatility quarter to quarter.

Just to come back on the pre-need cemetery side, in light of the volatility in the market, a little uncertainty on the economy, clearly not what we saw in 2008-2009. Are you guys making any changes or adjustments to your compensation programs for your sales people? To try to either maintain the strong results you have seen or even potentially pick it up, in light of some soft volumes on the funeral side? Is there anything you can do there?

I think not so much. We always tweak from time to time. But again, I don't think January sales were as bad as they could have been expected to be. We really maintain a posture with the sales force to really look at the long term of these things. So we are not going to be reactive. We feel good about our compensation programs. We feel good about the opportunities that are out there, A.J. So no, I would not say we are doing any kind of reactionary things. We're going to achieve our numbers. We feel good about that. And so the short answer is, no.

Right, okay. Then final question on the -- thinking about the share repurchase. I know 18, 24 months ago, there was a discussion about recap and other things you could do. And I think the Company went through the process and said: look, we'll stick with our knitting, and buy back with the free cash flow, but we are not going to at that point lever in the balance sheet up. And I understand the comments today about wanting to maintain a fortress-like balance sheet.

But with the market pullback, it sounds like you are going back to the couple-hundred-million buyback mode, absent some bigger deal coming down the pike. Is that the right way to think about it? Or is there anything, because of the pullback in the shares, that you perceive that you are being presented with an unusual opportunity, and you might actually take on a little leverage to accelerate the buyback?

Well, I think we will be -- like the guidance says, we want to maintain the fortress balance sheet. We want to make sure we survive if things got really bad economically again, outside the control of SCI. We will be aggressive within that realm. I don't foresee us, at this point in time, changing our strategy as it relates to leverage on the Company, in any super-aggressive way. Now, having said that, you never say never. But in today's environment, I think we will be aggressive within the realm of maintaining that fortress balance sheet.

Okay. All right, thanks a lot.

Okay.

(Operator Instructions)

Duncan Brown, Wells Fargo.

Hi, good morning. Maybe going back to the outlook for pre-need cemetery sales, I think, Tom, you said bad years, historically, some of the high end of that business has been hit, and may be at risk. Can you help us think about or quantify what percentage of pre-need cemetery relates to the high-end side of the business?

I don't have the specific numbers in front of me. But to give you an example of numbers of contracts, if I remember this right -- and Steve, help me if I'm wrong -- 130,000 is about the high end and that's over 130,000 contracts. So I think at the high end, the way to think about it is, we will do -- for instance, last year's fourth-quarter, I think, Gerry, we did 300-and-something high-end sales [that we find], is that right? And this year, we did 250.

So the fall-off is, call it 20%. And the number of contracts above -- is it $20,000? $40,000? So contracts above $40,000. Quantify that as somewhere between 250 and 300, in thinking about those. And so what you will tend to see is, in these types of uncertainties, you might see that drop off some 20%, 25%. And you can quantify that number times the $40,000.

So it isn't, by any stretch -- I don't want to alarm you. It just challenges your ability to grow year over year, I think, is the way to model it. So we believe we will continue to grow contract count. But I go back to the fact that in uncertain times, people tend to plan. And the real issue gets around, can you get those over $40,000 -- or in some cases, million-dollar sales -- that just don't happen when the stock markets go down 20%, because people are waiting to see a bottom. But generally, those are people that defer, and make that purchase when things get better. So we will manage through it.

Okay, that's helpful, and I appreciate the granularity. Also I appreciate the color on January volumes in the historical context. Since you called it out, can you tell us what January 2015 volumes were? Were they up an outsized amount relative to Q1 2015, so they are a particularly difficult comp?

Yes, January last year was up over 5% -- 5.1% is my recollection of that. So therefore, as you would expect, that was going to be a tough comp no matter what happened this year. So that's why I tried to -- even though we don't give quarterly guidance, Q1 is going to be tough on a comparable basis. But we feel really positive about the quarters afterwards, that we can regain that momentum of growing our earnings per share, like you guys expect. But I do think we've got to get our helmet on. Q1 is not going to be a pretty comp. It just won't be.

Sure. Okay, I appreciate --

Thanks.

And last one for me. I think historically, you talked about a 3.5 to 3.7 leverage target. It sounds like maybe you're -- I don't want to put words in Eric's mouth. Maybe it sounded like just below 4 times. Is there an official change in the leverage target, leverage range? Or how should we think about that?

I think it is just -- what we've -- we've evolved and said it is going to be round 3.75 as well. Al's just trying to give color and make sure people understand our thought. Which is, we really believe, in this environment, coupled with liquidity and near-term debt maturity profiles under control, is to kind of stay below 4 times. It bumped to -- it ended the year about 3.8. I think some of the volume that we talked about in the back half of the quarter fell off towards December, some of the financial markets.

Again, trust fund income fell off in December. So it probably bumped a little bit higher. But no philosophical change, Duncan. I wouldn't think of it that way. I just think when you start having 0.2 of a range, it's a little bit tougher. And it is implying a sense of accuracy that's probably not always there. Because we are such long-term thinkers in terms of guidance and such. So that's all that I was trying to say.

Got it. Thank you.

Yes.

Chris Rigg, Susquehanna.

Thanks for taken me again here. Just a follow-up on an earlier question with regard to capital deployment, broadly. The stock is down about 33% from its summer highs. Does that change the way you guys think about buybacks versus M&A? Just given the magnitude of the sell-off doesn't seem to reflect the underlying performance of the business. Thanks.

Yes, definitely on a relative basis, Chris, it is a good question. The stock becomes much more attractive. But I think the good news is -- what we like to say about acquisitions from a long-term perspective, when you think about our strategy of growing revenues through pre-need, about leveraging the scale of the business, and then generating more cash to redeploy. Acquisitions always have a near and dear part of our equation.

And also when you think about the internal rates of return, they tend to get -- I'd say most of our acquisitions are in the 14 to 15 type of IRR return. And the stock, even at these levels, is a great return. But it is probably not that level of return. So acquisitions still probably pop up number one. But boy, from a timing perspective, if we can get low-20s, we are going to -- that's an opportunity for us.

Okay, thanks again.

Thank you. And at this time, I would like to turn the call back over to the SCI management.

Okay, we want to thank everybody for being on the call today. We appreciate your participation, and we look forward to speaking to you again on our first-quarter results in April. Thanks so much.

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for your participation. You may now disconnect.