Service Corporation International (SCI) 2016 Q3 法說會逐字稿

Welcome to the third quarter 2016 Service Corporation International earnings conference call. My name is Hilda and I will be your Operator for today. All participants in a listen-only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to the SCI management.

Good morning. This is Debbie. I'm the Director of Investor Relations at SCI. Before we begin today with prepared remarks about the quarter and some commentary, let me read the customary Safe Harbor link. 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. The risks and uncertainty's included 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 adjusted earnings per share, adjusted operating cash flow and free cash flow. A reconciliation of these measurements to the appropriate measures calculated in accordance with GAAP is provided on our web site and in our press release and 8-K that were filed yesterday. With that behind us I will now turn the call over to SCI's Chairman and CEO, Tom Ryan.

Thank you, Debbie, good morning, everyone. We really appreciate you joining us on the call today. As usual I'll begin my remarks with an overview of the quarter followed by a more detailed look at our the funeral and cemetery oppositions. Let's begin with an overview of the quarter. As you saw in our press release yesterday we were pleased to report adjusted earnings per share of $0.26 for the third quarter. Which is a $0.03, or 13% increase from the prior year and within our range of expectations.

Solid operating results were driven by growth and revenue in our cemetery operations. Further bolstered by effectively managing our controllable field and back office overhead expenses. Resulting in about a $0.01 operational improvement for the third quarter of 2016 over 2015. The remaining $0.02 increase in earnings per share can be attributed to two things. First, lower interest expense resulting from our recent refinancing of our 2016 and 2017 notes. And a reduced share count due to our ongoing share of repurchase program.

Let me also mention a few other notable items during the quarter. We generated an impressive $143 million in adjusted operating cash flows representing a 14.5% increase compared to the prior year quarter. We are committed to deploying our shareholder's cash to the highest and best use. In terms of capital deployment in the third quarter we invested about $20 million for growth capital, $14 million in acquisitions, and another $6 million in constructing new funeral home locations. This brings our year to date totals to $70 million for acquisitions and over $12 million for new funeral home construction.

Additionally during the quarter we returned $137 million back to our shareholders in the form of share repurchases and dividends. This should demonstrate to you our belief in the future strength of our business platform and the cash flow growth we expect it to generate. When looking at our results achieved in the first nine months of the year, as well as the expectations for the fourth quarter, we are confident that we will finish the year within our 2016 guidance range for adjusted earnings per share of $1.20 to $1.30. And adjusted operating cash flows from $450 million to $500 million.

Now let's look into how funeral operations performed for the quarter. Comparable funeral revenues decreased by $6.9 million, or 1.6% compared to the same period last year. As shown in the table of our press release, core revenue declined 1% or $3.7 million. Due primarily to a 2.3% decline in core comparable funeral services performed. This decline in funeral services performed occurred in July, under performing our expectations while August and September trended flat within our expectations.

Helping to offset the negative effect of the lower funeral services performed was a 1.4% increase in the core funeral average. When you break down the components of the core funeral average we were pleased to continue to see the 2.1% improvement in the organic growth at the customer level as we expand the use of our new point of sales system, HMIS+, taking advantage of technology that allows us in a very concise way to walk families through a variety of memorialization options.

We're seeing people select more options and that's generating higher levels of revenue. This 2.1% organic growth in the core funeral average was reduced to 1.4% as it was negatively impacted by a 70 basis point increase in the core cremation mix to 47.5%. Outside of core revenues we saw continued growth and recognized preneed revenues of $1.9 million, or 7.5%. Recall these are the deliverable product components of the preneed contract which are delivered immediately after the sale.

Primarily representing cremation related merchandise and travel protection plans sold by our non-funeral home network. General agency revenue was down 9.5% compared to the prior year third quarter, primarily from a decline in preneed insurance sales production. We experienced a temporary mix change between insurance and trust sales production as we transitioned one of our business units from Stewart's insurance vendors which we were obligated to use under the contract until it expired to our preferred insurance vendor.

General agency revenues were also impacted to a lesser extent by our decision in August to discontinue sales of preneed insurance contracts at the Catholic mortuary's in the L.A. Archdiocese that we have agreed to sell. So on the total revenue decline of $6.9 million, funeral gross profits declined $3.2 million and margins declined slightly to 17.2%. The majority of the profit decline is due to the decrease in higher margin core revenue as a result of funeral services performed combined with lower general agency revenues from a reduction in preneed funeral insurance sales production. These profit declines were partially offset by continued profit increases from SCI Direct as well as lower expenses from effectively managing our fixed cost structure in a low funeral volume environment.

Finally, comparable preneed funeral sales production grew a modest $1.6 million, or about 1% in the quarter. Year to date our preneed funeral sales production has grown about 5% and is in line with our mid-single digit percentage guidance range.

Now shifting to cemetery operations. Comparable cemetery revenue grew $10.9 million, or 4.1% during the third quarter. Led by an increase in recognized preneed revenue of $8.5 million, or 5.3%. This growth is in recognized preneed revenue resulted from an increase in preneed's cemetery sales productions as well as higher merchandise delivery. For the quarter preneeds cemetery sales production grew $9.1 million, or 5.1%. Led in part by an increase in large property sales activity as well as an increase in preneed merchandise sales. Other cemetery revenue which is comprised primarily of trust fund income grew $2.4 million as a result of improved financial market conditions. From a profit perspective comparable cemetery gross profit increased $1.9 million over the prior year quarter while the gross margin percentage declined slightly to 23.7%.

Growth from core revenue carried a slightly lower gross profit than we would have expected. A substantial portion came from merchandise revenue which carries a gross margin which is approximately one-third less than the gross margin on property sales. This gross profit increase was partially offset by increases in fixed maintenance, sales, and administrative costs.

We believe the maintenance expense increase generally relates to a temporary overlap cost as we continue to transition to third party vendors for cemetery maintenance services that will drive future synergy's. That concludes our cemetery operations review for the third quarter.

Now, as we step back and think about our overall business for the remaining three months of 2016 we believe the fourth quarter will be a strong earnings quarter driven by improved operations as compared to the prior year. Operationally on the funeral side we would expect to see more favorable trends in funeral services performed and continued strength in the organic funeral sales average. We do expect to lose slightly less than a penny from losing the operating contributions from the L.A. Archdiocese business.

In our cemetery segment we expect to see continued preneed sales production growth in the mid to high single digits as well as significant seasonal revenue recognition from cemetery construction projects completed during the fourth quarter as we've experienced in prior years. Lower interest expense resulting from our previous refinancing as well as a lower share count from our share repurchase program should also positively impact earnings per share by $0.02 for the fourth quarter. While a slightly higher tax rate could reduce earnings per share by about $0.01.

Finally, I feel very positive about our momentum going into 2017. After what we believe will be a strong finish to 2016, when we look back at the year, it was a tough one. Funeral volumes through nine months are down 3.5%, and preneeds cemetery sales while they're up 4.3% year to date have trended towards the lower end of our mid to high single digit percentage growth guidance. Disciplined capital allocation, leveraging our scale, and delivered expense management allowed us to deliver the results that we did.

In the meantime, we implemented a more efficient financial system in Oracle, continued to identify new categories to leverage our scale, both in the supply chain and through metrics that will drive workforce and processed efficiency. We rolled out and trained our people to use a more contemporary customer facing point of sales system, HMIS+, which fully implemented a new customer relationship management system Sales Force, to our 4,000 plus strong sales organization and it allocated $82 million towards new businesses to expand our network.

Therefore with the easier funeral comps, implementing the supply chain and process efficiency, capturing the full year impact of HMIS+ on funeral average and more experience with the sales force as the customer relationship tool, I would expect that we could at the upper end of our 8% to 12% earnings per share growth range next year in 2017. Before applying that upper end of the range, earnings per share growth to your model, be sure to remember to adjust your base 2016 for the following two items.

First, the sale of the L.A. Archdiocese properties result in a head wind of approximately $0.02 per share as compared to 2016. And second, we received $13.5 million, or about $0.04 per share in the first half of 2016 from cash distributions of capital gains from cemetery perpetual care trusts that from what we know today will not repeat in 2017. As we get into finalizing our plan for next year, we will always be looking for ways to enhance our earnings and cash flows in our quest to maximize shareholder value.

So, to wrap it up I'd like to thank our entire team. We had a great quarter and delivered solid growth. Both in adjusted earnings per share and adjusted operating cash flows in the face of a challenging volume environment. But we look forward to a strong finish in 2016. And with that, I'm going to turn the call over to Eric.

Thanks, Tom, and good morning, everybody. Today, as usual, I'm going to provide you with some details of the cash flow performance and capital deployments specifically for the third quarter. And then I'd like to touch on our financial position and also have a few comments surrounding our outlook for the remainder of the year as well as 2017. So let's start with some details around cash flow for the third quarter.

We generated an impressive $143 million of adjusted operating cash flow. This is an increase of $18 million or 14.5% from the prior year. And this was ahead of our expectations. The increase was primarily driven by improvement in our earnings and working capital, which more than offset the expected increase of almost $8 million in recurring cash tax payments. So a little bit more color on this.

The working capital improvements in the quarter primarily related to two things. First we identified opportunities to reduce processing times for our trust withdrawal activities. In other words become more efficient and we were able to pull more funds quicker out of our trust funds.

As we highlighted for you last quarter, due to the way the July 4th holiday fell this year we benefited from lower payroll funding in the third quarter by about $8 million. Again we mentioned we were going to have that tail wind on our last call. Maintenance CapEx and cemetery development CapEx, again the two components we defined as CapEx in our pre-cash flow calculation came in at $42 million for the quarter, which is about $5.5 million higher than prior year primarily related to increased investment in what we characterize as high return cemetery development project.

Deducting these capital spending items from our adjusted cash flow from operations we calculate our free cash flow for the third quarter to be just over $100 million, or almost $13 million over the prior year third quarter. So during the quarter let's shift to how we deployed this cash flow. And we're very proud of the significant amount of capital that we deployed towards acquisitions and other growth initiatives in the quarter.

Summing to total investment of roughly $157 million. As Tom has already mentioned we invested just over $14 million towards acquisitions during the quarter which primarily was related to one transaction to buy two funeral homes and one crematory.

This brings our total acquisition related spending in the first nine months to about $70 million of capital deployed. This is well into the range that we've talked about and I've guided before for the full year of $50 million to $100 million towards these accretive acquisitions.

And remember, we normally expect to have a mid teen after tax cash IRR on capital deployed towards these acquisitions. Most importantly we continue to remain very optimistic about the pipeline of acquisition opportunities that is available to us in future quarters. Additionally we spent almost $6 million on the new build and expansion of several funeral homes in both US and Canada during the quarter.

We also deployed just over $25 million in capital towards dividend payments during the quarter. This $0.13 dividend rate per quarter reflects an 8% growth over the rate on the prior year quarter. And last, but, again, certainly not least, we re-purchased 4.2 million shares for a total investment of $112 million during the quarter. This is at an average price of $26.34 per share and also included a 3 million share block that we purchased in mid September. Since the beginning of 2016 we have repurchased 7.5 million shares for a total investment of just over $190 million and an average price of $25.61 per share.

So to summarize, we currently have about 190 million shares outstanding and about $88 million of remaining share repurchase under the current Board authorization. Now let's shift to forward look. And let's talk about cash flow in terms of the outlook for the fourth quarter and the full year. In the first nine months of 2016 we've generated over $400 million of adjusted cash flow from operations. Which was slightly ahead of our internal expectations. We remain confident in achieving our guidance range for the full year of 2016 for adjusted cash flow. And that range is $450 million to $500 million.

One item I do want to mention to you at this time that has changed is our expectation for cash taxes. We have consistently guided to over the past year a cash tax payments for the full year of 2016 would be in the ballpark of about $140 million. Due to our continued efforts and our tax planning initiatives I do think this could be as much as $15 million to $20 million less than what we originally anticipated. And all of this will benefit the fourth quarter.

As a reminder, though, next year in 2017 we do expect to pay more cash taxes as we continue the journey to becoming a full cash taxpayer. Also as it relates to the fourth quarter keep in mind that in the fourth quarter of 2015 cash flow benefited from $15 million of accelerated non-earnings merchandise to service trust withdrawals. This will not repeat in this year's fourth quarter. So the lower taxes that I just mentioned will really help to offset this head wind related to the merchandise and service trust withdrawals that occurred last year in the fourth quarter.

Lastly, our capital spending for maintenance and cemetery development is trending a little bit higher. Reflected increase investments and new cemetery property projects that carry very favorable returns on this capital deployed. We currently believe we will end the year at approximately $160 million versus our previous guidance of $150 million. So finally let me provide a high level review of our financial position currently.

We continue to enjoy great liquidity at SCI. And a very manageable near-term debt maturity profile both bolstered by our recent refinancing. Our liquidity at the end of the quarter remains robust at $520 million. This consists of about $178 million of cash on hand and just over $340 million of availability on our long-term revolver.

Our leverage, which we calculate as net debt to EBITDA in accordance with our updated credit facility was about 3.9 times as of September 30th. We expect our leverage ratio to trend modestly downward, though, during the fourth quarter as our EBITDA grows. And we remain confident we will end the year well within our targeted range of 3.5 to 4 times. This, again, gives us our continued flexibility to execute our capital deployment strategies well into the future.

In conclusion I want to echo Tom's comments that it was a strong quarter for us, but particularly on the cash flow front with a 14% increase over prior year. And we sincerely appreciate the efforts of all of our 24,000 team members at SCI that are driving these stellar cash flow results. In 2017 we expect continued strong cash flows after considering a continued increase in cash tax payments to a full cash taxpayer level. And as always, we commit to you that we will aggressively work to deploy our cash flow to continue to deliver significant long-term value for our shareholders. So we appreciate you joining us this morning and we will now open it up for questions.

Thank you. We will now begin the question and answer session. (Operator Instructions) We have a question from Joanna Gajuk from Bank of America.

Good morning. Thanks for taking the question. So, first, if I may, did I hear right that you said that you expect the next year EPS to be at the upper end of the 8% to 12% range?

Yes, Joanna this is Tom. Thanks for that question. What I was saying is I feel very good about our ability to grow at the upper end of that range. But I cautioned everybody about is there's some unusual factors to consider when you take the base 2016 number. One of them is we're going to lose the benefit of the Catholic mortuaries from the L.A. Archdiocese. That's a $0.02 head wind that you have to take out of the base.

And then we had some internal care distributions out of our trust funds that, again, probably aren't repeatable in the first half of last year (inaudible). But absent those things, the point I was trying to get across, we implemented a lot of initiatives last year. Probably too many. Looking back. Wearing us out. But these are tools that are really going to allow us to compete more effectively to think about 2017, 2018.

We've got a new point of sale customer-facing system that allows us to be more effective in front of client families and expanding what we believe they'll want to spend on their funerals. We have salesforce.com which is a very effective tool that our sales force can use in managing leads and distributing strategy and training.

And when you combine those things with the continued opportunities to leverage our scale with new systems and abilities to negotiate new supply agreements further down the chain, we get pretty excited about our ability to deliver us all. So I did say upper end but, again, I would caution you, make sure to understand there are some things that you need to take into consideration.

Great. That's helpful. And then in terms of just your outlook. You're saying that I guess the preneed sales production year-to-date, that's in line, but some other things. So can you just talk about sort of your view in terms of comparable sales growth by segments? Kind of the way you usually talk about things. How you see it trending next year?

Yes. I'll talk really to the cemetery, on this one. On cemetery sales, if you look over the last four or five years, we have been able to, I think, on a compounded basis to grow that at about a 10.5% clip. I think what begins to occur, one of the reasons we talked about this before in getting guidance is that's probably not a long-term, sustainable number. When we think about our ability to grow. So we've always said mid to single digits.

We've always outperformed that. I think this year we're running into the rule of large numbers in that we're about 4.5%. It's not where we think we should be. We think it should be higher than that. But we should be normalizing, we believe, over the next few years, in a range of somewhere between mid single digits and high single digits.

So call that a 4% to 8% range. And outside surprise. We could have a bad quarter. But our thoughts are with our opportunities continue to develop inventory, then our demographic opportunities to sell into that, the effectiveness of utilizing our customer service management tool to be more efficient and be able to manage more people and grow that sales force gives me hope to believe we can achieve at the upper end of that range.

I think we're getting to a point where we've implemented the tiered strategy in a lot of cemeteries. We had that pop when we first got the Stewart cemeteries in the beginning to put in some inventory into those places. I'm excited. I think you'll continue to see mid to single digits is what we're guiding over the next few years.

Great. And then the last question, just broadly speaking, are you seeing any pressure on labor I guess because of some minimum wage increases? Is there anything to think about in terms of the overtime rule that's taking effect December 1st? Would that be impacting any of your employees at all?

Yes. I think there's a few components to some of the rules are changes that are going on out there. I think from a minimum wage perspective we're not as concerned. The reason for that is almost all our customer-facing employees earn well above the proposed changes. So we're not too concerned. We are concerned with some of our maintenance employees. And, again, I kind of view that as Walmart turned this into a positive.

We're going to comply with those rules, we'll do what's right and we'll make this a net positive. It's not a big number when you think about the minimum wage change. As you think about the manager exemption change under the new FLSA, that is going to have an impact on some of our management. What that encompasses is how much base pay that we have versus how much incentive pay we have.

We have strategies in place to begin to bolster some of that base pay to meet the requirement of what we need to do under the new rules and shift that from the incentive side. So I think there's tools to deal with this stuff. We don't expect it to be a material impact. Albeit will have an impact.

And again, as it relates to labor, we have 24,000 people and they're what make this Company run. So we're going to do what's right by the employee. But, again, we don't think these rules are going to harm us in any way. They're going to be an opportunity to do things better.

Great. Thank you. I'll jump off.

Thanks, Joanna.

We have a question from Ryan Halstead from Wells Fargo.

Just another follow-up on the preneed sales production. I was wondering, the production was a little bit lighter than expected. And I thought maybe you could talk about the sales infrastructure and if there's any change you're seeing in turnover rates or any other reason that resulted in the quarter not having the upside surprise that you can sometimes expect?

Thanks, Ryan. Yes. As it relates to turnover rate that's been a challenge in our sales organization and really throughout the industry. And probably a lot of sales organizations over time. One that we want to fix. We have not seen any increase in that. Our expectation was to begin to manage that down and we believe ultimately this sales force tool is going to allow us to do that. It's going to allow us to have better visibility as it relates to the challenges that we're facing in markets as it relates to sales counts or sales managers.

And be in a position to apply the training to be more effective earlier on so that people, once they're on-boarded, are going to stay. So nothing like that occurred in the quarter. I relate this to we've got a lot of new tool that we are putting in front of people. There's a lot of new initiatives. And with new initiatives sometimes you're doing more training. You're taking your eye off the ball. You're not meeting your goals and objectives.

As an example we have a sales enablement tool we're rolling out today to allow our counselors to have tools in the field, new technology to implement contracts in someone's home through a computer and be able to pay and collect. So we have a lot of things that I think are going to enhance our ability to, one, to be more relative in the customer's eyes by utilizing current technology.

And allowing our counselors to be much more productive with their time. And so I view this as kind of a pause and a suggestion, if you will, of a lot of things that are going on. And I know at the end of the day we expect great things from these tools. So, I wouldn't get too bogged down in the numbers. We're always looking on the horizon and trying to see what's going to make us great the next three to five years. And sometimes that requires a little bit of indigestion in the interim.

Okay. That's helpful. Then on the funeral services performed, you did call out kind of an inter-quarter trend with July representing most of the sluggishness and then August and September being more closely in line with your expectations. Is there any way you can kind of lay out, how those actual year over year growth rates trended inter-quarter? And, how that kind of bridges into your fourth quarter expectations?

If you go back and look, and again, it's always on a comparable basis, right Ryan? You're comparing to the prior year. July of 2015 was still a very, very strong year. So we were comparing against a pretty tough number. And we're down I don't recall exactly, but somewhere in the 6%, 7% change.

And then August and September, I forget but they were essentially flat. One was up a little bit and one was down a little bit. And that was the time period where we saw the adjustment down in the 2015 number. So as I think about the fourth quarter we feel, put it this way, I probably feel the most confident of any of the quarters yet that we've got a better shot at a better comparable number.

So we feel pretty good about what we're compared to. Having said that, if you look at us in the quarter we were down 1.8% in volume. The CDC data, which, again, doesn't perfectly correlate was down 1%. The flu deaths were down 5% even for this third quarter. So I just want to say I still believe this generally is a phenomenon with death rate and what's happening. And we're going to compete as effectively as we can in these markets. And we're always trying to find better ways to compete within the marketplace. Preneeds is a key component of that.

So we're going to continue to drive it. I guess I would say fourth quarter I feel as confident as I have all year about our ability to try to show better volume.

Okay. That's very helpful. And then the last one for me. On the pricing for the average funerals performed and the HMIS+, it sounds like you're fully rolled out at this point. Can you just give a sense of utilization? How many of your locations are fully utilizing this? And what do you think is a good expectation for a full year impact on the average revenue per service that you think this can drive?

Okay. And, again, Ryan, remember, this was kind of rolled out in phases. So as an example I think the 900 and something locations went live just at the end of September. So we're not fully implemented. We still have some markets that we have some regulatory issues. We've experienced some issues as it relates to bandwidth, Wi-Fi.

Because as you can appreciate we're trying to run data from these presentations in order to generate contracts. So there's some logistical issues with getting this up and running and working right. What I will tell you is in the test markets this HMIS+ was a very, very effective tool in expanding what people bought.

I'd say as we roll it out, like anything, people that really embraced it have a very favorable big impact. And in some other markets we didn't have a favorable and big impact. That requires us to go back and say, What's the problem? Is it training? Is it bandwidth? That's where we find out some of these problems. They say, well, gee, Mr. Ryan, I'd love to be able to do that, but it takes forever to get through our Wi-Fi system we need more capacity.

So those are the types of, I'd say, learnings that are occurring today. I'd say once we're up and running our belief is that could have as big an impact on average all in as to move the whole average 1% to 2%. Is that fair to say? But, again, I think it's going to be larger in some places. And that would be against our previous expectations. So there's a lot of expectation riding on this. And, again, it's going to correlate with J.D. Power loyalty scores. It's going to correlate with our ability to generate revenues. It's going to correlate with our counselor's ability to earn more for them. This is a win, win, win, across the network if it goes right. And everything is telling us it's very effective and we have to work out some of the kinks and we're excited about it.

Great. Thanks for taking my questions.

Thanks, Ryan.

We have a question from Scott Schneeberger from Oppenheimer.

Hey, everyone. This is Greg on for Scott. I was just wondering if you could touch upon how the acquisition pipeline looks and maybe speak to the level of competition in acquiring prospects in the current environment?

Sure. Greg, this is Tom. I would tell you that the pipeline still looks very good. We've got a lot of deals working in different stages of progression. But I'd say we're busy out there talking to people from an introductory perspective, evaluating financial statements, negotiating letters of intent. Things of that nature. So we feel very good and continue to see pretty good visibility on the deal flow. I'd say from a competitive perspective, again, it all depends upon where it is and who the target is. We've got deals where we're the single bidder.

That they've approached us and what a what they view as a very fair bid and they don't want to go to an expanded process. And then we'll always have a few where we'll show up and see some competitors. I'd say just as often that competitor could be a local or regional person versus a public, more national chain. So across the board. But we still feel very good about our ability to deploy capital in that arena.

We also, hopefully you have seen kind of a pickup in our spending as it relates to new funeral homes built. And I think again you'll see a trend of more money being spent the remainder of this year. And as we look into 2017 and 2018, similar types of opportunities to continue to deploy capital for great returns to expand our network.

Great. Thanks for that. And could you maybe touch on the drivers of the lower G&A in the quarter? General agency revenue and what you view as permanent cost reductions and how we should think about that going forward?

A lot of that is what Tom already mentioned. Has to do with a metric-driven organization, that's not just in corporate G&A, but also in the actual field operations and funeral and cemetery in terms of managing costs. A good amount of it really has come lately from supply chains. It has to do with the initiatives that we have.

Not just from the working capital perspective, but also had an expense-positive effect as we continue to manage our network diligently using metrics and driving our entire spend of our entire Company towards larger contracts that are negotiated and ultimately have more synergy's. The best way to say it, to use our tagline, is leveraging our scale. And you have seen that all through our organization. Whether it's in the supply chain or all the other ancillary functions that we have.

Great. Thanks for that. I'll hop back into the queue.

We have a question from Chris Riggs from Susquehanna Financial.

Good morning, everyone. Just one question here. This trend has been at least for the last couple quarters. When I look at the comparable funeral services performed, the at need obviously remains the weakest component. But I don't fully appreciate why there's a divergence between the volumes that are maturing out of the backlog versus the true at need.

Are you talking about the volume itself or the average?

The volume. The volume at need was down 3.6%. And then the funeral home matured preneed was up 0.2%. and than the non-funeral home matured preneeds was up 3.4%. I'm trying to figure out what is causing a divergence between the true at need versus the other two cohorts.

Couple of things. First I'll talk to at-need versus core preneeds maturing. And then I think we got a separate issues as it relates to non-funeral homes. Think about true at-need versus our preneed backlog. Think of the history of the way that the preneed backlog was built at SCI. The first bucket of backlogs relates to people we acquired. We acquired a lot of funeral homes that had preneed programs that probably were highly cannibalized. They were people that we would have written that the wife of the husband that passed away. She would have walked through the door, but now she's a preneed backlog person.

The second phase of SCI was what we sold once we came in. If you roll back 20 years we were a highly, we focused our efforts on family service. Or, again, people that were getting leads were coming from our funeral homes. So you think about what's coming through the backlog now, it's probably a highly cannibalized previously written preneed, or an SCI preneed that was written some time ago.

Again with the focus on the leads that came out of the funeral home. In recent years we have expanded to a more market-based approach where we're generating leads outside of the funeral home. Whether it be through a search engine optimization, through direct mail, we're generating different types of leads. What you have seen flow through today is again, our more aggressive approach to preneed showing up as a preneed going at need and not necessarily moving the needle on the overall volume if that makes sense. The last non-funeral home piece relates really to Neptune. And Neptune like (inaudible). As you think of Neptune's volume, their ability to sell preneed contracts is I believe Steve is, versus at-need is like three to one. Is that right? Two to one?

So they were always a very highly aggressive pre-need writer of contracts. So on a three to one ratio, and look our base business, and again that's what the consumer wants. We're not one to one. We're .6 to one or something like that.

So they have incredibly tied up that customer through a preneed contract, and because they're out there more aggressive than anybody else, you're seeing a pattern of growth that exceeds the death rate. So those are kind of my from the hip analysis of what I think those trends are. And, again, there's always dynamics locally that are going to change things. But that's generally the way I view it.

Okay. That's great. And then just a question on the cash taxes here and maybe I just lost track of this because I can't recall what the difference is. When look at the 140 could be 120 this year in cash taxes. But then I look at book rate, it's trending at a level lower than that. And I guess is there a point in the future where at least what we're seeing in the reported income statement sort of roughly matches what you're going to pay in cash taxes? Or is there always going to be a delta? At this point the cash tax is trending higher than what you were reporting on the reported income statement. Thanks.

Yeah. Well, let me just level set for you, Chris. The year to date we have paid about $100 million in taxes. And you said right. It could be about 120-ish is the way it's based on now based on some tax (inaudible) initiatives that we have done and continue to find. That's $20 million we've paid in the fourth quarter would roughly equate to a similar number we paid in the fourth quarter of 2015. But we would end up much higher than we did last year.

So the $120 million would compare to about $93 million or $90 million (inaudible) 2015. So still a $30 million what I would characterize as a head wind complete year over complete year. Now, in terms of the provision, the provision was actually a little bit lighter this quarter. Which was related to a return to accrual adjustment that occurs what you file your tax return. When you file that you true up your provision through your current quarter income statement. So I would consider third quarter to be somewhat low in nature.

I think the more correct provision to use when you look overall is in that 37% to 38% area. I think as we become a full cash taxpayer, which we have been successful in continuing to defer for several years as you and I have talked about this for many, many times, I do think that what you would consider a cash tax rate is going to approach your provision rate. There'll always be a little bit of separation because of temporary and permanent differences which we tax in book accounting. But generally it is going to start creeping up, that cash tax rate, towards the provision and get close to or just underneath matching the income statement provision.

Okay. Great. Thanks a lot.

We have a question from John Ransom from Raymond James.

Good morning. I had to jump off for two minutes. So just tell me that you have already answered this. But, I know you touched on the preneed coming out of the backlog, but I don't know if you said, one of your tail winds has been that you've gone from a deficit to a surplus in terms of the revenue per funeral coming out of the backlog. As we look out over the next five years or so how much juice is left in the maturing preneed going at need to help the overall ASP?

John, we already answered that question. I'm kidding. I had to do it.

You're a funny guy, Tom.

And I think as we think about that we think there's more juice, to answer your question. We're trying to become better at the predictability of what we believe is going to come out there. And one of the things I did touch upon, I don't know if you were on the call. Kind of the buckets of backlogs. We have the acquired contracts that probably weren't as robust and probably weren't invested in the same way as we (inaudible). Got the SCI written stuff from 15 years ago and previous that was probably, again, highly cannibalized, better written contracts and better invested and then today which is probably a more growth-oriented approach to preneed.

Hopefully, new market share approach to preneed that, again, we believe is invested pretty widely. So as more and more of those contracts become what's coming out of the backlog I would expect that we've got a little ways to run as it relates to what's coming out of there.

And the one factor you do have to keep in mind is that the contracts aren't going to grow at the same level as trust contracts. So your growth assumption on those contracts is less at 1%. But remember it's written at a pretty high ticket price. Probably in the $6,000 range and growing over time.

So that was my question. So you're writing stuff at $6,000 today versus your blended average. So we should think about most of that being thrown into the 1% growth a year category with your assurance. And then the rest being maybe 30% being thrown into your trust where it might earn 3%, 4% a year? Something like that.

I think that's right. But coming out of the backlog today is more trust wages, as you just said. So call it 55/45, maybe insurance versus (inaudible).

Okay.

Again, over time we're trying to get better at doing it. That difference is going to grow. And so there'll be an inflection point way out there where insurance isn't growing at the same rate trust is and you'll have a difference. Now, the benefit is we'll have (inaudible).

Okay.

And we're deploying.

Sure. My other question is the M&A has been a bit better than I would have thought this year. I know you did one big one. Is there anything going on with the environment that would explain that, or is it just one of those years?

You know, my gut history tells me it's probably just one of these years. I will tell you that I think the industry it going through the same thing the world is going through. The baby boomer impact. A lot of these donors are probably baby boomers or just in front of them. A lot of what we're seeing when you look at the different mortuary schools that are out there, the enrollments have changed dramatically over time.

You're not seeing as many sons and daughters of funeral directors going into the business. So with that I think there's a lot more inflection points where owners are saying, hey, I'm working my tail off. I care about my legacy. But my kids don't want to run the business. Who is the best at maintaining our legacy?

Our belief is we're that group that can do that. And we're going to give the opportunities to the employees to grow. We're going to spend money and make sure that reputation is still a solid one. So we're just seeing more opportunities to tell that story. I'd like to believe it's going to be a continuing trend. But, again, as history tells us, sometimes, you go through a slow patch again. Right now we're still seeing a lot of opportunities to go out and talk to people.

And thanks. My last question would be I know you had a tough comp this year on your preneeds cemetery because of the Stewart work you did. You were growing it at 5% to 7% in the past. Do you think that's a good number to think about for next year or is it going to be a bit better than that you think?

On the cemetery side we have always called mid to high single digits. You can put your own definition on it. I would call that four to nine, I guess.

That's a pretty big range. Right.

That's a big range. And, again, it really depends upon, it's really hard to tell quarter to quarter and even on annual basis. But we beat it for so many years, people got to the point where they say, yeah, single digits, they'll really do low, 10 to 12 or something. I really believe that we can achieve mid to high single digits. You're seeing 4% so far this year. We're not satisfied with that. We think it should be higher than that. As I think about realistic long-term numbers, you get into the 6%, 7%, 8%, those are areas that we would like to achieve. Can you have a 12% along the way? Sure. Can you have a 4%? Yes. We're seeing one right now.

Right.

My belief is we're going to get back to that, and the reasons behind it are going to be we have a customer relationship management system that is allowing us to reduce turnover in our sales force. To manage people more effectively and apply that training and eventual grow the people in the sales force with that more effective tool. If that occurs like we believe, the numbers we're talking about are very, very achievable and upside surprises are achievable too.

And just for Eric, I know you said 190 million shares. Just to be clear, is that a good fourth quarter number and fully diluted shares? Just trying to make sure we got that figured out. [multiple speakers]

Fully diluted would be about 3.5 million to 4 million more shares than that. That was just the actual number outstanding.

Great. Thank you.

Yes.

We have a question from A.J. Rice from UBA.

Yes. Thanks. Hello, everyone. Since you already used your joke on John I don't have to worry about telling you that I got on a little late too so I may have missed something. But anyway. Okay. Okay. A couple things. On the commentary that the agency revenues were off a little bit in part because of the Stewart transition. Does that turn or is this sort of the new normal on the agency revenues?

No, that will turn. So that was really a temporary transition where it was a geography where we still had to use Stewart's previous provider. And in the switch we have to get every body licensed appropriately for the insurance product. So what happened was we wrote a lot of trusts instead of insurance in that transition period. Our belief is that all that's going to convert back into insurance. That piece will flip back around. We do have the issue as it relates to the mortuary which will be something we have to overcome in 2016. And think about the Catholic mortuaries as writing about $1 million a month. So, probably $12 million a year in previous insurance production that will go away.

Right. Okay. And you mentioned the new tool which will help you on the organic growth side I guess on the funeral side. I'm just trying to think about underlying pricing trends. I know there was an effort, at least there has been an effort to sell a more fulsome service package to those choosing cremation. And so your averages on the cremation side of your at need funeral business were growing a little faster than the traditional business. Is that still the case as well? And any flavor for how much of a differential there might be?

Yes. It is the case. Again, I'll use round numbers, A.J., because you heard me say these over the years and I've always used round. Today our average burial is probably approaching $7,700. Our average cremation through the funeral home is averaging close to $5,300 today. So the difference now is about $2,400. And as you recall, because you have been around me long enough, this difference used to be around $3,000. So, we've made quite a journey if you will on the cremation side in getting a wider array of relevant products and services in front of that cremation consumer. Combined with that as, you know, the direct cremation consumer still spends about $2,200, but that's generally going to be done through our non-funeral home network.

Okay. Just the last question on the CapEx increase. I see that some of that's development of cemetery properties. Is that new properties or is that making changes to existing properties to prepare them in a different way?

It's the latter, A.J.. It's the development of the undeveloped property. In other words it's building new mausoleums on our cemeteries and projects like that. And it is developing new acreage in terms of creating the inventory for the sales force to sell.

Okay. Okay. All right. That sounds great. Thanks a lot.

You bet.

Looks like we have time for one more. The question comes from Robert Willoughby, from Credit Suisse.

Thanks Tom or Eric. I think you gave the production number for the Catholic facilities that are going. It was a 12 million preneed number. But is there kind of a revenue run rate for at-need? Any type of event volume that we need to adjust our models for?

I think the revenues associated with the Catholic mortuary business on annualized basis is about $29 million. Does that sound right? And from a EBITDA perspective, about $9 million or $10 million, along those lines. That was the at need funeral business, Bob. What we're talking about is the preneed sales were $1 million a month. As you think about the G&A revenue impact, we're going to lose $12 million for not writing (inaudible).

And can you remind us on the cash flow then coming in here in the fourth quarter? And I assume that shows up in investing activities?

No, first of all in the fourth quarter we're going to effectively sell those businesses. We've already written down the businesses, what they're going to pay us. But I think from a cash flow perspective I guess it would show up as the proceeds we will receive will be down in investing.

And that's $30 million or so.

Yes. That's $27 million.

Yes. I think it's $27 million and then they're going to pay us annually per year about $1 million depending upon production level. Things like that.

And Eric, you usually give us a share repo number to date in the quarter. Is there any update there?

Yes, oh, you're talking about --

In the fourth quarter?

In the fourth quarter? We're out there in the market. We did a big block in September. So we're going a little bit slower during the quiet period that we set up. But ultimately we will pick that up and expect to finish very strongly.

Okay. Thank you.

Okay.

Thank you. We have no further questions. I would like to turn the call back over to the SCI management team.

Thank you so much. We appreciate everybody being on the call. We look forward to talking to you again in 2017.

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