Service Corporation International (SCI) 2016 Q4 法說會逐字稿

Welcome to the fourth-quarter 2016 Service Corporation International earnings conference call. My name is Christine and I will be the operator for today's call.

(Operator Instructions)

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

Good morning and welcome. This is Debbie Young, Director of Investor Relations at SCI. Before we begin with prepared remarks about the quarter from Tom and Eric, let me quickly go over the customary Safe Harbor language. 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 adjusted EPS, adjusted operating cash flow, and free cash flow. Reconciliation of these measurements to the appropriate measures calculated in accordance with GAAP is provided on our website and in our press release and 8-K that were filed yesterday. With that behind us, I will now turn the call over to SCI's Chairman and CEO, Tom Ryan.

Thank you, Debbie, and good morning, everyone, and Happy Valentine's Day. We appreciate you joining us on the call today. And I would like to start this earnings call by reflecting on our accomplishments for the year 2016, then I'll get into the analysis of the fourth quarter and end with some color on our outlook for 2017.

So first, some observations on the year 2016. We finished the year strong, with an exceptional performance in the fourth quarter after a tough first nine months. In 2016, we generated $1.29 of adjusted earnings per share, which was at the top end of our adjusted guidance range of $1.20 to $1.30. Our adjusted cash flow results were also very strong and exceeded the high end of our adjusted guidance range of $450 million to $500 million.

Our performance in 2016 reflected continued momentum in pre-need cemetery sales, which grew by almost 5% for the year. We continued to execute on our pre-need sales strategy by investing in our sales team, investing in the tools we utilize to enhance our productivity, and upgrading the customer-facing experience. We continue to invest in developing our cemetery properties with a broad array of tiered product options. These investments are driving strong pre-need cemetery sales growth against a growing demographic, which we believe will continue to serve as the primary catalyst for ongoing improvement in both growth and profitability.

As we anticipated, our core funeral revenue was challenging to grow, with tough comps in the first three quarters of 2016; however, a bright spot to temper this challenge has been impressive growth in our recognized pre-need revenue. Additionally throughout the year, our operating teams have done a great job of improving efficiency and managing costs. We also continued to grow our funeral pre-needs backlog, posting a 4% growth in pre-need funeral sales for the year, as we utilize technology to remain more relevant to our employees, as well as our consumer audience. Finally, our Funeral segment continues to generate significant cash flow.

From a capital allocation standpoint, we returned an impressive $326 million to our shareholders through dividends and share repurchase. This should demonstrate to you our belief in the future strength of our business platform and the cash flow growth we expect to generate in the foreseeable future. Additionally for the year, we invested $73 million for accretive acquisitions and almost $18 million on the new construction of several funeral homes.

Now let's take a look at our performance in the quarter. As you saw in our press release yesterday, our fourth-quarter performance was outstanding. We were very pleased to report adjusted earnings per share of $0.47, which is a $0.10, or 27%, increase over the prior year and ahead of our expectations. The key drivers contributing to this growth include: robust growth in Cemetery revenues and profits; effective management of our field and back-office overhead expenses; lower interest expense resulting from our most recent debt refinancing; and a reduced share count due to our ongoing share repurchase program. All these helped to offset a higher tax rate and the loss of earnings from Los Angeles mortuaries, which were divested in November.

Our cash flow results were also very strong and exceeded the high end of our targeted range. We generated an impressive $107 million in adjusted operating cash flows, representing a 20% increase compared to the prior-year quarter, which Eric will provide more color on in a moment. We are committed to deploying our shareholders' cash to the highest and best use. In terms of capital deployment for the fourth quarter, we returned $60 million back to our shareholders in the form of share repurchases and dividends paid. Additionally during the quarter, we invested about $8 million for growth capital, including $3 million in acquisitions and another $5 million in constructing new funeral home locations.

Now let's look into how Funeral operations performed for the quarter. Comparable Funeral revenue grew by $4.1 million, or approximately 1%, compared to the same period last year. As shown in the table of our press release, core revenue increased 1.7%, or $6.7 million. As we said on our last call, we anticipated the fourth quarter to be our best volume comparison during 2016, which held true. Comparable core Funeral services performed were essentially flat, as an October decline was almost completely offset by increases in November and December.

We also saw a healthy 2% increase in the core Funeral average. When you break down the components of core Funeral average, we experienced a 2.6% improvement in organic growth at the customer level. A 50-basis-point increase in the core cremation mix to 48.1% slightly offset the 2.6% organic growth in the core Funeral average, bringing the reported average to 2%.

Outside of the core revenues, we saw continued growth in recognized pre-need revenues of $1.7 million, or 7.2%. Recall, these are the products within the pre-need contract which are delivered immediately after the sale, primarily representing information-related merchandise and travel protection plans sold by our non-funeral home network.

General agency revenues was down $4.5 million, or 13.1%, compared to the prior-year fourth quarter, primarily due to a mix shift out of our pre-need insurance and into our pre-need trust sales production. While the conversion from Forethought to AMLIC as the insurance provider in our Southeast business unit is causing a temporary shift in our trust insurance mix, remember that now our terminally imminent contract, as well as our SCI Direct production, is being predominantly written on a trust contract.

Although Funeral revenue increased $4.1 million, operating profits declined $3.5 million and operating margins dropped 100 basis points, to 19.6%. The majority of the profit decline was due to the lower general agency revenues which were associated with the shift from insurance to trust production. Therefore, we still incurred the selling expense associated with the sale, but had no general agency revenue to offset the expense. Finally, comparable pre-need Funeral sales production grew $3.6 million, or 1.9% in the quarter. As I mentioned earlier, year to date, our pre-need Funeral sales production grew 4%, which is in line with our mid-single-digit percentage guidance range.

Now shifting to Cemetery operations. Our Cemetery operations had exceptional growth during the quarter, as comparable Cemetery revenue grew $36 million, or nearly 12%. This growth was primarily driven by an increase in recognized pre-need revenue of $28 million, or 14%.

While sales production growth was strong and accounted for just over $11 million of this increase, this performance was further bolstered by the completion of two large property construction projects in Vancouver, Canada, which drove recognition of pre-need sales that had occurred over the previous 12 months. This revenue increase of $36 million resulted in a comparable Cemetery operating profit increase for approximately $27 million over the prior-year quarter, and the operating margin percentage grew an impressive 460 basis points, to 35.1%.

The operating margin produced was further enhanced by the production mix, as property was the primary growth category for the quarter. Property not only typically has a higher gross margin than merchandise, but due to the large recognition of the deferred sales production from previous quarters in Vancouver, no selling costs for the deferred sales production was recognized in the fourth quarter, as it had already been reported in the previous periods that it was sold.

Now shifting to our outlook for 2017. I feel very positive about our momentum going into this year. Our adjusted earnings-per-share guidance of $1.29 to $1.43 at the midpoint represents an 11% increase over 2016, when adjusting for the $0.04 headwind from Perpetual Care capital gain distributions received in the first half of 2016 and the $0.02 headwind from the sale of the LA Archdiocese properties this last November.

When you summarize the year 2016, we benefited from strong Cemetery results, including the Perpetual Care capital gain distribution, a lower interest expense, the result of refinancing some of our public bonds, as well as increasing our variable-rate exposure to approximately $1 billion. Finally, we continued to reduce the outstanding share count through our share repurchase program. These items were partially offset by reduced Funeral profits, a function of weak volumes, and a slightly higher tax rate.

So as we think about earnings per share in 2017, we would expect growth from our Funeral segment, as we expect a revenue lift over 2016, while continuing to drive productivity and efficiency. We expect strong mid-single-digit growth from our pre-need Cemetery sales, resulting in an impressive operating revenue and profit growth. This should be partially offset by lower ECF income, again from reduced capital gain distribution.

Our interest expense could slightly increase, as we lap the impact of our debt refinancing. And with $1 billion in variable-rate debt, we could see a slight increase if rates were to rise in line with the consensus view. We would expect a healthy lift from our capital deployment action, as the 2016 and 2017 share repurchases take effect and as the 2016 [2000] acquisitions make their accretive effects felt.

As you think about the quarterly layout of 2017, remember that the Perpetual Care and LA Archdiocese headwinds, most of that impact will fall into the first half of the year comparison. This should be more than overcome by the fact that the first half of the year will be the easier Funeral volume comparison. As you think about Cemetery revenue recognition, we would expect to see continued strong sales production and level recognition rates for the year; but for the first three quarters of the year, we should experience a higher recognition percentage on a comparable basis, while the fourth-quarter comparison should be challenging, as we will be comparing to the completion of the Vancouver projects in 2016.

And finally for 2017, we expect to continue to generate significant cash flow from a capital deployment perspective. We anticipate a higher percentage being utilized for growth. In the first six weeks of the year, we closed five transactions, funeral homes in Vancouver, New York, Florida, and Iowa, as well as multiple cemeteries in Wisconsin. These businesses generate approximately $4 million in EBITDA, so we are out of the gate very fast. Also, we intend to spend about $25 million on new funeral home construction this year, which exceeds our historical pace of about $10 million.

So to wrap it up, I would be remiss if I didn't mention how extraordinarily proud I am of our SCI team. Their dedication and focus enable us to deliver value and peace of mind to our client family, as evidenced by our ever-increasing JD Power satisfaction scores. They helped to implement valuable new systems and tools that will make us better and enhance the customer experience. And finally, they delivered outstanding operational and financial performance during a year of significant headwind, and I want to thank them for their tremendous efforts.

We will continue to drive the Company forward with a focus on our three core strategies. First, growing revenues by remaining relevant to our customers in how we interact with them, as well as the products and services we provide, by growing pre-need sales and by expanding our footprint in front of the favorable demographic trends. Second, leveraging scale by implementing supply chain and process efficiency. And finally, deploying capital in a disciplined and balanced manner towards the highest and best use of our Company and our shareholders. This concludes my prepared comments and I'll now turn the call over to Eric.

Thank you, Tom, and good morning, everybody. Today, as usual, I'm going to begin by addressing our annual cash flow results and capital deployment, as well, for 2016. Then I'm going to follow with our cash flow in the fourth quarter and then finally, cover our outlook for 2017.

So let's start with an overview of the full year for 2016, in terms of cash flow, liquidity, and capital deployment. And as Tom has already mentioned, we really finished 2016 on a really high note, delivering strong earnings and cash flow results which exceeded our internal expectations. For the full year, we generated $508 million in adjusted operating cash flows, which again surpassed the high end of our guidance range, which to remind you, was $450 million to $500 million.

Furthermore, keep in mind, our 2016 cash flows included a $20 million increase in recurring cash tax payments, as we move closer to becoming a full-cash tax payer. Adjusting for these higher cash tax payments, our cash flows grew in 2016, primarily as a result of higher earnings, which particularly were associated with increased Cemetery profits, lower cash interest, and higher installment cash receipts from previous pre-need Cemetery sales.

At the end of 2016, we had healthy liquidity of $512 million, consisting of $195 million of cash on hand and about $317 million of availability on our long-term credit facility. Our leverage, measured on a net debt-to-EBITDA basis, was approximately equal to the prior year, at 3.8 times, and is well within our targeted range of 3.5 to 4 times net debt-to-EBITDA leverage.

Our liquidity and strong cash generation enabled us to continue our longstanding cash deployment strategy with a focus on creating long-term value for our shareholders. For the full year, we deployed a total of $417 million of capital towards acquisitions, new location builds, dividends and share repurchases. And in terms of the breakdown of that number, we deployed $73 million towards acquisitions in 2016 that includes some 1031 exchange funds, reflecting a 6% increase from the $69 million invested in acquisitions in the prior year. And as always, I want to again reiterate that these acquisitions normally result in a mid-teen after-tax IRR.

Additionally, we invested almost $18 million on a new build and expansion of several funeral homes in both the US and Canada, nearly doubling last year's investment. Dividend payments in 2016 totaled $98 million, an increase of about 12% over the prior year.

Finally, we returned an impressive $228 million of capital to investors in 2016 in the form of share repurchases, which has resulted in the number of shares outstanding being reduced to about 189 million shares at the end of the year. Subsequent to year end, we have continued this repurchase program, reducing our outstanding share count by an additional 1% by acquiring approximately 2 million shares for a total investment of about $57 million so far in 2017. We still have 310 million of remaining share repurchase authorization, which gives us a substantial amount of capital deployment flexibility as we move forward in the rest of 2017.

So with that annual summary of 2016, let's now look at the details of cash flows during the fourth quarter. So during the fourth quarter, we generated an impressive $107 million of adjusted operating cash flow, which was ahead of our expectation and an increase of $18 million, or 20%, over the prior year. The increase was primarily driven by improvements in our earnings, less cash taxes and less cash interest, with all of these partially offset by higher working capital uses during the quarter. This higher working capital use was largely associated with our pre-need Cemetery sales, especially related to completed Cemetery construction projects in which we recognized revenues upon project completion, but received cash payments over several installment periods.

Cash interest payments were $7.3 million lower quarter over quarter, reflecting our refinancing activity, which was early in 2016. To remind you, in the second quarter we refinanced our senior notes that were due in 2017 to a lower interest rate using our newly expanded bank credit facility at that time. Also during the quarter, we paid $12 million in cash taxes, which was $10 million lower than the prior-year quarter and also a little lower than our expectation. In total for the year, we paid $113 million in cash taxes, which was almost $20 million higher than 2015.

Continuing with the quarter, maintenance CapEx and Cemetery development CapEx, which again are the two components that we define as CapEx in our free cash flow calculation, came in at $57 million for the quarter. This is about $15 million higher than the prior-year quarter and was predominantly related to increased investments in new cemetery property projects to drive increased property sales, as well as improvement at existing locations; and these improvements were intended to assist in providing enhanced venues for family service offerings at our facilities which, of course, aligns with our strategy of remaining relevant with our client families. Deducting these capital spending items from our adjusted cash flow from operations, we calculate our free cash flow for the fourth quarter to be about $50 million, which is a 7% increase from the prior-year quarter.

So with that on 2016, now let's shift to an outlook and a discussion of 2017. And in our press release, we introduced our 2017 guidance range of adjusted operating cash flow of $465 million to $505 million. Keep in mind now, we are expecting to become a full US federal cash tax payer in 2017. Our current expectations for cash tax payments in 2017 are approximately $40 million to $45 million higher, or $155 million to $160 million in total, compared to $113 million net of refunds paid in 2016.

Now before I leave the subject of cash taxes, I want to mention an update related to our IRS audits that we have been disclosing in our filings for really some time now. We believe we have reached an agreement in principle with the IRS to resolve the issues under audit with respect to tax years 1999 through 2005. Yes, you heard that right, 1999 through 2005. Any expected settlement is not currently included in our cash flow guidance for 2017, but is anticipated to be funded, when required, using our credit facility. Therefore, I want to make this point that we do not anticipate this potential settlement to affect our expected amounts of capital deployment in 2017.

Now let's get back to our cash flow expectations for the full year. And you have to recall the items that Tom mentioned earlier related to special Perpetual Care gain distributions and the loss of the Los Angeles Archdiocese mortuaries. Similar to earnings, this will impact cash flow by about $20 million. When adjusting 2016's cash flow for this $20 million, 2016 is adjusted to be more like $488 million of cash flows, versus the reported $508 million. You will then notice that this $488 million equates to the midpoint of our 2017 cash flow guidance, and this is a result of expected growth and the underlying cash flow of our businesses in 2017 being largely offset by the increase in cash taxes in 2017 that I just mentioned.

Our expectations for maintenance and Cemetery development capital spending in 2017 is approximately $180 million. Now this amount is slightly higher than our 2016 spend of $176 million, as we continue making investments that add to our ability to create new and unique celebration of life experiences for our client families. And lastly, in addition to these recurring CapEx items, we expect to deploy $75 million to $100 million in acquisitions and other growth initiatives, including new funeral home construction opportunities.

So in conclusion, 2016 was a great year for us, as we generated very robust free cash flow and deployed over $400 million in capital to the highest relative return opportunity to continue to drive long-term value for our shareholders. Looking forward to 2017, we really expect the same, robust free cash flow and the ability to repeat the consistent capital deployment philosophy we have been executing successfully over the last several years. So with that, operator, that concludes our prepared remarks, and we'd like to go ahead and turn it over to you and turn it over to questions on the call.

Thank you.

(Operator Instructions)

A.J. Rice, UBS.

Hello, everybody. A couple questions, if I might. First of all, maybe just get you to comment on your acquisition pipeline coming into 2017. It looks like the pace of deals moderated a little in Q4, but based on the comments you made about capital deployment, it sounds like you expect that to reaccelerate. Can you give us a flavor as to what you're seeing?

Sure A.J., this is Tom. And John Faulk is going to kill me. So we've done a tremendous job in the first, like I said, six weeks of this year. I think we have five transactions closed. That would be a heck of a pace, and it's not even close to that.

We've been very successful in the ones that we had in our sights and got them closed. I would tell you that the remaining pipeline, there are still some good opportunities out there that we are pursuing. And so we're not seeing necessarily any kind of dramatic slowdown. It's just the pace that we've incurred, I'd say in the first quarter, was pretty high.

But we're still seeing a lot of conversations, a lot of interested people. So we feel, like Eric said, very good about our ability to spend at the high level of our annual guidance, as you think about acquisitions.

And the other thing that sometimes gets lost, we're going to spend somewhere around $25 million on new construction of funeral homes, which is really a dramatic increase to what we've done historically. So we're being a little more aggressive about that in places where acquisitions don't make the best sense from an IRR perspective or from what we know now is what a funeral home needs to be in today's more contemporary setting. And so places where those aren't available, we're going to build new locations that fit the profile more effectively.

Okay. And then, and I may have missed this in the prepared remarks, but the general agency revenues were off. Is that, I know you've had a lot of different things going on moving Stewart's business over, you've had other things, is that part of a conscious move, though, to push more toward trust, or what would you say is going on there?

There's really -- it is a bit confusing and we touched upon it -- there's one piece that is pretty significant and that is, we shifted an entire region's book of business away from one vendor onto AMLIC. And there were some complications in getting people, the appropriate insurance license and the like, to sell the product, and the training. So there is a mix change that I think is going to come back.

Having said that, there's two components that are probably more permanent in nature. As you think about funding terminally imminent contracts, we're writing those all on trust contracts today. And also, as you think about the growth of SCI Direct, SCI Direct is now predominantly 100% trust in what they're writing. And historically, they've written a little bit of insurance.

So I think what you'll see is probably a little bit of a cloud in the first quarter and second quarter, a stall. And then as you get to the back half of the year, you get to see the insurance grow in those more historical rates that we expect.

Okay. And then just my last question. When I look at your pre-need averages that came out of the Funeral backlog and then also the growth in recognized pre-need funeral sales, it looks like there's an acceleration there and the averages are higher than your at need averages.

I know there's some impact from the terminally imminent, but I'd wondered if you can say, are you beginning to see some of the share grab and is the averages in part helped by the rising market we've seen in the last few years. Any flavor on that?

Yes, I think it's two things. I think your terminally imminent comment is also a good one. But I think one, we're seeing the good results in the market on the trust side, so you're seeing growth in those contracts. And also, we're seeing a healthy increase of what's coming out from the insurance side, too.

And I think that's a function of we're now getting into those contracts that we wrote at a higher value for us. And so you're seeing less of contracts that, let's say, were written by somebody else and we acquired in a backlog. So this is something we've always hoped we'd begin to see, and I think we're beginning to see a little bit of that today. So we feel very good about our ability to continue to see growth on that pre-need going at need, both on the insurance side and on the trust side.

All right. Sounds great. Thanks a lot.

Thanks, A.J.

Joanna Gajuk, Bank of America.

Good morning. Thank you for so much for taking the question. If I may just come back to the commentary, prepared remarks on 2017 outlook, specifically on the segments. So you said you expect a strong growth in pre-needs on the funeral home side. And you mentioned something about, there will be some [after need] factor. So can you just flesh out that part? And also, can you talk about the Cemetery segment outlook?

As we think about the growth for pre-need, we would expect, in our modeling, to see pre-need funeral continue to grow in the low to mid-single digit range. I think this year we saw 4% growth in pre-needs funeral, and that wouldn't be an unreasonable number to think about as you approach next year.

And on the Cemetery side, again, we've been guiding people to say look at the mid and maybe jumping into the higher single digit growth range as you think about pre-need Cemetery growth. Historically, we've grown that rate at higher percentages, around 10%, 11% over the last four or five years, but a lot of that was a function of having new cemeteries, particularly from the Stewart acquisition, to apply our tiered inventory strategy toward. So what that did is allow us to differentially grow.

And now I would say that we have that tiered inventory product in predominantly most of our cemeteries, and we'll have opportunities to rotate that. Having said it, the differential impact is probably gone, so we're guiding towards the mid-single digit range on Cemetery.

All right. And then on the core growth or the at need business, so flow has been quite strong so far in Q1. So is there a meaningful impact to your business from that activity, if you are willing to share the color with us?

Joanna, this is Eric. It's too early to tell, first of all, for the first quarter. I can tell you, as we get through closing January results and getting all the feedback that we normally get really on an everyday basis from our field operations and management and that we really haven't seen a, what I would consider a material impact from flu so far in the first, let's call it, 45 days or so for the first quarter. I think there's a little bit more activity than what you've seen in the prior year quarter. But in terms of a strong flu season, I characterize it more as we're probably not seeing that yet.

Okay. And then lastly on your commentary around CapEx and how you plan to spend more on this new funeral construction. So overall, CapEx seems like it was about 6% of revenue in 2016.

So is that the right way to think about that ratio going forward, or will it decelerate to more 5% over time, in line with the last couple of years? So should we look at the 6% to being a peak, and 2017 seems to be also close to that range? So how should we think in terms of a longer period of time in terms of CapEx in terms of revenue?

I think as I said on my conference call in March, Joanna, I think $180 million is probably a good number for 2017. That roughly equates to 2016. I think 2016 was about $176 million.

We're a little bit heavier in Cemetery construction versus maintenance CapEx in 2016 versus we will in 2017. But all of this spend, I wouldn't expect it to jump more than the level that you're seeing, and probably in a couple years, I'd almost expect it to maybe even trend down a little bit. Because what we're really doing from a maintenance CapEx right now is really on the lines of remaining relevant in all the strategy that we've talked about before, and Tom again talked about in his remarks, continuing to make those venues relevant for those celebration of life experiences for our client families.

And we think it's a great investment to invest back in our businesses. But I think this level that you're seeing is probably a good level and not growing much more than this going into the, at least the near future.

Great. Thank you so much.

You're welcome.

Scott Schneeberger, Oppenheimer.

Thanks. Good morning. Eric, just a clarification question to start off. This IRS settlement for years 1999 to 2005, you mentioned that it should not affect any of your planned deployment of capital this year. So I'm curious, are we to take away that you do not anticipate it to be a material financial impact or just that you will just use the line of credit to satisfy it? Thanks.

If you listened to my comments carefully, Scott, what I said is we believe we have reached agreement in principle. And what I really mean by that is we don't have a signature yet, although I do believe we've reached that agreement. So because of that, and my General Counsel is staring at me right now, I was really precluded from commenting any further than that.

But I think you got the gist of what I was telling you that in no way do I think this will end up being something material for our company. And the best way to talk about that is in the form of liquidity and capital deployment, neither of which, I believe, is going to be materially affected. If I did believe that, then I probably would've had a different tone and said something a little differently.

Okay. Thanks. You mentioned the EBITDA contribution from the five acquisitions already made year to date. Could you just speak to where you are trending on spend so far?

I don't have those numbers in front of me but I think a safe way to think about it is to take that formula in EBITDA and put a seven or eight on it. That would be the general range that our spend in the first quarter on a comparable basis.

Another way to look at that is last year I think we purchased the entire year just over $9 million of EBITDA. And like I said, we've got [4] in the first quarter still open but we feel good about coming out of the gate and time will tell. We will see if we can more in the finish line how many more in the back half year for opportunities present themself.

All right. Thanks. Appreciate that. And then more fundamentally, I know you all were very active with developing sales tools in 2016. And could you just speak to the impact in 2016 and what the impact may be in 2017 as a result of all the activity there? Just leave it a broad, open question on how you'd like to tackle that. Thank you.

Sure, Scott. So we had a sales tool, when you think about the Salesforce, that is now implemented. And it's the customer relationship management tool, Salesforce. And we've been utilizing that for a bit now. And I would tell you that we're beginning to see some real traction across the entire salesforce. It takes a while for people to get used to the new system and probably view it as a helpful tool for the salesforce versus a management tool or a big brother tool that we can see what you're doing. So I would tell you we're in the early days of getting the productivity out of that system.

The other system that we implemented during the year was more of an at-need tool, and it's called HMIS Plus. And HMIS Plus is a customer facing technology that also generates the contract. And that's being utilized by our funeral directors today as they sit down with families. And again, a better client experience, a better experience for our personnel, a more contemporary experience, as you think about trying to hire people to come into this profession.

So again, not something I take lightly, we rolled those two things into. And with that comes some level of distraction when you roll it in. So I would tell you that we're beginning to get the efficiencies out of those two tools.

We do have a couple of new projects that we're going to roll out this year. So for instance, there's what we call sales enablement. And this is taking a tablet and every sales counselor, think of sitting in the home with somebody else, would utilize that technology to interface with the consumer. And that tablet would give them the capability, again, to generate a contract and do those types of things.

Contemporary tools that people expect companies like us to have. So as we roll that out, again, I think you'll have some bumps in the road that you always do, but this is going to take us to a much better place

So as I think about this year, I'd say Salesforce gives us the productivity and growth, and sales enablement is probably going to be a little bit of a distraction for a while. But we're going to fight through it. And I think the people that have implemented this technology are very excited about its capabilities and the results in those test markets.

We're seeing more efficient presentations. We're seeing higher value sales, higher customer satisfaction feedback. So these are all real positives. But I will tell you, like anything, you're going to have some distractions as you implement these new tools.

Okay. Thanks for that. One more final one, just a quickie. Looking at the, and starting in 2018, as we're looking at our models, how should we consider revenue from contracts with customers, the new FASB rule potentially coming into place, on how we may want to model affecting pre-need sales selling cost recognition? Just modeled as if not happening now, or is that something that's a probability and any thoughts initially on how we might want to affect our model? Thanks.

I think, Scott, you kind of broke up a little bit. So I'm going to apologize, but I think what you're asking about is the revenue recognition accounting rules that are changing that will affect our selling expense. Is that the right question?

Exactly.

Okay. So we're still working through that. There's some guidance issues on it. And generally, where we landed right now, and again, this is not signed off, we're still working through it, but it appears as if any time we've sold trust contracts on a pre-need basis, which would include all Cemetery and prearranged funeral with trust supporting contracts, we would defer those selling costs and have a specific identification method where, when the contract matured, at that point in time, we would also recognize those specific selling costs.

However, the other part of the side of the equation is pre-need insurance supporting prearranged funeral contracts. Again, we don't own the insurance company. Those contracts are not on our balance sheet. They're on the insurance company's balance sheet.

So think of us as a general agent, hence the general agency revenue we get. But from that perspective, we will need to continue to expense those selling costs related to pre-need insurance. And just as a reminder to everybody, we sell probably 70% insurance, as opposed to trust, on the funeral side. So I think if you look at the numbers that we filed with that guidance, I think you'll get in the ballpark of what you need to model, again, subject to resolution as we continue to look at that pronouncement throughout 2017.

Thanks for the color.

(Operator Instructions)

Robert Willoughby, Credit Suisse.

Hello, Tom and Eric. Just with that cremation rate moving higher, you've mentioned that in some markets you'd be able to rationalize the hard asset footprint. So is there a realistic assumption for what you might be able to realize from divestitures? I know you've got your CapEx numbers down. What kind of cash might come off of some asset sales in 2017, if any?

It's too early to tell. We're going through that right now. But I think a safe estimate is probably around $20 million, $25 million in proceeds, Bob. So I think you're probably safe, based on the run rate that we've been seeing, to include that when you're thinking about sources of cash.

Right. That's perfect. Thank you.

You're welcome.

John Ransom, Raymond James.

Good morning. Just a couple of questions on your CapEx. So the first one, which is I think a little easier, your $25 million you mentioned for funeral home construction, what's your IRR or pay back on that spend?

John, they generally are going to range, I'm going to call it 11%. They're going to be different, depending on the cost of the land. But probably 11%, 12% is a safe bet, versus acquisitions which are trending now probably in the 14% or 15%.

And again, that's solely a function of the time value of money. You just tend to have a breakeven point that's going to take a little longer than existing business. But what we find is, you generally have a facility that you love and you can grow into, and they look better and better as time goes on.

So that numerator is EBITDA and the denominator is just total spend?

That numerator would be cash flow, free cash flow.

Okay. Okay. And then the other question, I'm probably going to mangle this question because it's been a long time since I've been to accounting school, but when you think about Cemetery -- you've stepped up you Cemetery construction, as you mentioned.

So let's say for every -- again, just make up a number -- $25 million that you've been increasing that spend, so you spend $25 million, what do you get back in terms of margin and what's the timing of those cash flows? I know you can get land sales back immediately, but what the rules around when you can deliver that product and get that cash back out of the trust? And I assume these are all trust sales, not insurance sales.

Yes, of course, they're all trust sales. So just help us think about the timing and the returns of cash flows on your stepped up Cemetery spend in a simple cash in, cash out way.

Listen, John, when you think about Cemetery, what we're talking about when we spend money, we're generally spending it on property. So there is no trusting, there is no nothing, as it relates to -- because you're thinking of merchandising service-type trusts. So as you think of cash payback on a lot of these bigger projects, they're probably going to be somewhere in the just over a year, maybe up to two-year type of cash flow paybacks, really high internal rates of return.

Now remember, you're utilizing existing lands you paid for a long time ago, and that's what's making the returns so great, because it's really the incremental spend that you're putting on top of that land, or to develop that land. So the returns on these things are really great, when we think about cash outlay and how quickly we get it back.

I got you. Okay. Thank you.

Ryan Halstead, Wells Fargo.

Thanks. Good morning. And I apologize in advance, I hopped on the call late, so hopefully I don't ask you something that you've already covered. But my question is on the Funeral segment.

I was hoping you could comment on your gross profits in the quarter. Just given the strength in the revenue growth, especially in the matured pre-need segment, I was just curious what kind of profit margin and contribution you were maybe expecting, or a better way to ask it is were you disappointed with the profit contribution of your Funeral segment?

I think the way to think about it, Ryan, is as we've talk about giving longer term guidance around Funeral, we've said that we would expect, over long periods of time, until the Baby Boomers impact us, or until we have a demographic impact, is probably a better way to say it, that think of same-store sales as being, call it, 1% to 2% revenue growth, manage your costs really tough, results in flat gross margin -- I'm sorry -- operating margin percentages and generates a slight increasing bit of cash flow. That's pretty much the case if you look over the last four or five years.

What happened this year that was unusual was instead of having the 1% to 2% revenue growth, we had a revenue decline of 1.5%. And that was driven primarily by the fact that 2.5% volumes down in our funeral case volume. So when that happened, we had a negative impact on our Funeral margins and they dropped below 20%, as you'll notice as you look over the trend line.

What I would tell you is because this year was such a bad year, I would like to believe that this year, and again, we need volume to have this occur, but if it were to come back somewhat, we'd see those margins pop back up to historical levels that you'd expect.

But I'd tell you that 20% is a pretty good guess, with the way we run this business. Actually, if you took away pre-need funeral, because remember, we sell pre-need funeral, and particularly on the trust side, we sell pre-need funeral, it's a very negative experience on our margins. If you took away pre-need funeral, our margins really are about 24%.

We decided to erode our margins a bit and we cash flowed neutral by grabbing that pre-need market share today. So as I think about the future, I'd say it should say about 20%. We should grow cash. And one day, that 1% to 2% growth is going to get to 3% to 4%, because volume is going to start coming our way from the pre-need backlog, from demographics. And when that occurs, it's going to have a pretty dramatic impact on cash flows and cash margins of the business.

That's very helpful. And then maybe you covered this already, but the general agency revenue, was that expected to pick back up or is this the new run rate?

I think it's two components. There's a component that's a temporary mix shift related to going to a new vendor in one of our large geographic areas. So I think a part of that is going to begin to come back in the beginning and the early parts of 2017.

But there's another component that's important to understand. When we write terminally imminent contracts, we're writing those contracts on a trust contract almost exclusively now.

The other thing to understand is that our SCI Direct business, which is growing at a faster rate than what I'll call our core business, they are writing all trust contracts. So as you think about it, trust is going to have a little bit of a natural growth curve as you think about 2017. So the insurance comparable is probably going to be a little weaker in the first half of the year, but ought to get back to growth rates that you'd expect as you get to the back half of the year. Because you'll have run through that cycle of the comparison and we'll be back up and running in the Southeast business unit with AMLIC contracts and people with the appropriate licensure.

Okay. Great. Thanks for taking my questions.

You bet.

Thank you. I will now turn the call back over to SCI management for closing comments.

We want to thank everybody for being on the call today, and Happy Valentine's Day once again. We will speak to you at our first quarter earnings call, which I believe will be in late April. Thanks so much.

Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.