Service Corporation International (SCI) 2017 Q2 法說會逐字稿

Welcome to the Second Quarter 2017 Service Corporation International Earnings Conference Call.

My name is Ellen, and I will be your 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. This is Debbie Young, Director of Investor Relations at SCI. As usual, before we begin today, 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.

Also today, we may refer to certain non-GAAP measurements such as adjusted EPS, 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 website and in our press release and 8-K that were filed yesterday.

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

Thank you, Debbie. Hello, everyone, and thank you for joining us on the call today. As usual, I'm going to begin my remarks with an overview of the quarter, followed by a more detailed analysis of our funeral and cemetery operations. And finally, I'll comment on our improved outlook for the year 2017.

Let's begin with an overview of the quarter. Yesterday, we reported adjusted earnings per share of $0.35 for the same quarter, which is a $0.07 or 25% increase over the prior year quarter. Keep in mind that this operational growth was achieved despite a $0.02 headwind from perpetual care capital gain distribution and the lost financial contribution from the L.A. Archdiocese properties in the prior year quarter. This $0.02 headwind in the quarter was offset by a $0.02 noncash benefit in our tax provision related to revised accounting standard for share-based compensation, which we discussed last quarter.

Considering these 2 offsets, we had true operational growth of $0.07 during the quarter. So let's talk about the $0.07 growth. We achieved higher operating profits in our comparable businesses, led by an increase in preneed cemetery revenue, coupled with effective cost management in both business segments. This contributed $0.07 to growth in adjusting earnings per share. Below the line, through fewer shares outstanding and a lower adjusted tax rate, helped to offset increases in both G&A and interest expense.

On the cash flow front, we generated $76.3 million in adjusted operating cash flows, which was an 11% increase that Eric will touch on in more detail in just a moment.

Now let's talk about how funeral operations performed for the quarter. Comparable funeral revenue decreased by 1% compared to the same period last year. Comparable core funeral services increased slightly quarter-over-quarter and comparable core funeral average during the quarter had organic growth at the customer level of 0.3%.

This improvement was more than offset by a 110 basis point increase in the core cremation mix, which resulted in a slight decline in the core funeral average of 0.6%. We continue to see growth in recognized preneed revenues of a little over $1 million or 3.8%. Recall, these are the products within the preneed contract which are delivered at the time of sale, primarily representing cremation-related merchandise and travel protection membership plans sold by our non-funeral home network.

Other funeral revenue, the preponderance of which is general agency revenue, was down $5 million compared to the prior year quarter on lower insurance-funded preneed sales production. Comparable preneed funeral sales production decreased $6.1 million or 2.8% in the second quarter of 2017 compared to 2016. This decline was primarily due to a $15.7 million decrease in core preneed funeral insurance production, which was offset by a $7.8 million increase in core preneed funeral trust production.

The decline in overall funeral production as well as the mix shift between insurance and trust is primarily due to the recent changes in our sales compensation plan.

Earlier in the year, we introduced sales counts of productivity metrics into our sales compensation plan. As anticipated, this resulted in more emphasis being placed on preneed cemetery property sales as well as terminally imminent funeral trust sales.

We believe these changes in our compensation plan align with our emphasis on customer service as well as our current earnings and cash flow growth strategy as evidenced by the growth in cemetery preneed sales and terminally imminent funeral sales in the first half of the year. However, with many of our counselors writing contracts for both funeral and cemetery, the new changes have had a -- the effect of slightly drawing attention away from growing core preneed funeral production.

On a positive note, we grew funeral operating profit $3.4 million over the same period last year. The reduction in preneed funeral sales production, coupled with enhanced selling cost efficiencies, reduced our selling cost for the quarter by $4.4 million. Additionally, we did an excellent job of managing other variable and fixed costs, all of which drove our operating margins higher by 90 basis points from 19.4% to 20.3%.

Now moving on to cemetery operations. Our cemetery segment continued to deliver outstanding results during the quarter as top line comparable cemetery revenue grew $28.7 million or 10%. This was primarily driven by a $27.6 million or 15.4% increase in recognized preneed revenue. Higher preneed property revenue accounted for $14.9 million of the increase and higher merchandise deliveries accounted for another $7.9 million.

Of the $14.9 million increase in preneed property revenues, $9 million is a direct result of the continued momentum of our sales team, selling into developed inventory projects. The remaining $6 million increase was a result of recognized revenue sold in the previous quarter, where revenue recognition was triggered during the current quarter as the property was either developed or met the 10% collection threshold.

Preneed sales production or sales activity continued to have strong growth of $12.1 million or 5.5%. Of this $12.1 million increase in preneed sales production, $5.7 million related to preneed property sales, and $6.4 million related to preneed merchandise and service sales. Of the $5.7 million increase in preneed property sales, $10.4 million was driven by an increase in large sales velocity as the number of contracts over $40,000 for the quarter approached 400 versus 267 in the prior year quarter.

We attribute this to higher demand, coupled with more available inventory to present to our client family. This large sales increase was partially offset by a decline in other property sales. Finally, cemetery operating profits grew an impressive $18.7 million and operating margins expanded 360 basis points to just over 29%. On revenue growth of $28.7 million, this represents a 65% incremental margin, which is about what we would expect in this high fixed cost business.

Now let's reflect back on our performance thus far. For the first 6 months, our same-store funeral profits are up over $90 million or 5% and funeral margins have expanded by 90 basis points. In the same 6-month period, comparable cemetery profits have grown an impressive $27 million or 21% and margins have improved a remarkable 270 basis points. This has resulted in a year-to-date adjusted earnings per share growth of $0.17 or over 30% to $0.73 per share.

Even after adjusting for the $0.05 of excess tax benefit from the accounting change, we have organically grown by $0.12 or just above 21%. So on the heels of this strong year-to-date performance, we feel comfortable raising our full year 2017 guidance for adjusted earnings per share.

Our current expectation is that adjusted earnings per share will range between $1.42 and $1.52 versus our previous expectation of $1.29 to $1.43. The new midpoint of our guidance is up by $0.11. Included in the new midpoint of $1.47 is $0.07 of excess tax benefit resulting from the new share-based accounting guidance, $0.05 of which has already been recognized.

Even when backing out the $0.07 of excess tax benefit, $1.40 represents an expected 13% increase over our 2016 adjusted earnings per share. We believe this is impressive considering our normal annual 8% to 12% growth expectation. This would not be possible if it was not for the 23,000 dedicated members of our team that display a passion for taking care of our client families on their worst day, and provide peace of mind and protection to our preneed families as well as the members who support all our field services. Together, we're making it work really well. Thank you, team.

In conclusion, we had communicated back in February that the first half of 2017 was an easier comparison. And the back half of 2017 will have a more challenging comparable hurdle. However, we feel very good about our ability to continue delivering solid performance. And we'll continue deploying capital for the benefit of our shareholders to enhance the long-term value of the company. With that, I'll turn the call over to Eric.

Thanks, Tom, and good morning, everybody. I'd like to begin by excellent (sic) [echoing] Tom's comments about how pleased we are with the performance in the quarter as well as the first 6 months of the year. In my remarks for you today, I'm going to address some details about our cash flow performance and capital deployment specifically in the quarter, and then I'm going to touch on our outlook and financial position for the remainder of 2017. So let's start with an overview of cash flow for the quarter.

And as you've seen, starting with this, this was a solid quarter for us in terms of cash flow. During the second quarter, we're excited to report we generated $76 million of adjusted operating cash flow, which was an increase of about $7 million or 11% versus the prior year quarter of about $69 million. This increase is impressive when taking into account the $6 million of special perpetual care trust fund distribution that only occurred in the prior year quarter.

It's also important to note that the absolute levels of adjusted operating cash flows in the second quarter should not be annualized as the majority of our cash interest payments occur in both the second and fourth quarters of each year. So driving this $7 million of cash flow growth during the quarter were, first, strong operating results that generated $0.07 of recurring earnings growth over the prior year quarter. And again, that's what Tom just detailed in his remarks.

This $0.07 of cash earnings growth equates to about $21 million of cash flow growth and was somewhat offset by the expected $10 million increase in recurring cash taxes, which were from $54 million to $64 million in the current year quarter as well as other normal working capital usage.

Maintenance CapEx and cemetery development CapEx, and these again are the 2 components that we define as CapEx in our free cash flow calculation, came in at about $40 million for the quarter, which was about $3 million higher than prior year but well within our expectations. Deducting these capital spending items from our adjusted cash flow from operations, we calculated our free cash flow for the second quarter to be $36 million, an impressive 16% higher than the $31 million generated in the prior year quarter.

So now let's talk about deployment of cash in the quarter. So moving on from free cash flow, our capital deployed to acquisitions, new location builds and to shareholders was significant in the quarter, totaling roughly $88 million. We are pleased to note that we invested almost $18 million for the acquisition of 5 funeral homes and 1 crematory as well as the purchase of the remainder of a minority noncontrolling interest reflected in financing activities on our cash flow statement. Remember, as we said in the past, accretive acquisitions remain our highest priority for capital deployment due to the significant after-tax cash returns we generate on these investments.

We also invested $5 million on the construction or expansion of several funeral homes during the quarter. In shifting to capital returned to shareholders during the quarter, we paid just over $28 million in dividend payments. And after our last conference call, we increased our quarterly dividend rate $0.15 per share, reflecting an impressive 15.4% increase over the prior year quarter's dividend.

Last, but certainly not least, we repurchased a little over 1.1 million shares for a total investment of $37 million during the quarter. We currently have about 187 million shares outstanding and just under $250 million of remaining share repurchase authorization.

Now let's shift to the remaining part of 2017. In midyear through 2017, adjusted cash flow from operations has grown $6 million from $259 million in the prior year to $265 million and is ahead of our original expectation.

Similar to the quarter, impressive year-to-date cash earnings growth of about $0.12 per share, after removing $0.05 of noncash excess tax benefit, yielded roughly $35 million of adjusted operating cash flow. This increase is partially offset by an increase in cash taxes of about $22 million, and again, those numbers were $83 million in the current year-to-date versus $61 million in the prior year, and was also influenced by other working capital uses.

Consistent with what Tom said, based on our strong first half results, we are raising our 2017 guidance range for adjusted cash flow from operations. We currently expect that adjusted cash flow will range between $480 million and $520 million, an increase of $15 million at the midpoint of our guidance to $500 million. This is versus our previous expectation range of $465 million to $505 million with a midpoint of $485 million.

In addition to strong earnings growth, supporting this increased guidance is a $10 million reduction in our full year cash tax estimate for 2017 to now range between $140 million to $145 million from our previously disclosed range of $150 million to $155 million of cash taxes paid. This decline is primarily related to our continuous efforts and effective tax planning.

And briefly, while on the topic of taxes, you'll notice that in the quarter we made the bulk of the expected payment to the IRS for the settlement of the audits of tax years 1999 through 2005 that I described to you last quarter. We paid $34 million during the second quarter which was funded using our bank credit facility. We anticipate additional payments to occur in the back half of the year that, in addition to amount already paid, will bring us to our total net IRS settlement amount of approximately $40 million, which will finalize this settlement. And remember, these payments I just descried to you are excluded from our guidance for adjusted cash flow from operation that I just mentioned to you.

Our guidance for capital spending in 2017 from maintenance and cemetery development continues to be $180 million for the full year. And when you're deducting these recurring CapEx items from our 2017 adjusted cash flow from operation expectations, we'll calculate the free cash flow in 2017 ranging from $300 million to $340 million with a midpoint of $320 million, which is $15 million or about 5% higher than our previous midpoint of

$305 million of free cash flow.

So before closing, let me provide a high-level view of our financial position as we close out the quarter. We began the second half of 2017 on sound financial footing. We finished the quarter with $225 million of cash on hand and $206 million of availability on our long-term bank credit facility. Taking into account the fact that some of our cash is encumbered due to being in Canada, and our minimum operating cash floor threshold that we keep, we believe our unencumbered liquidity will be approximately $365 million at the end of the quarter, which we view very favorably. Our leverage, which is calculated as net debt to EBITDA in accordance with our updated credit facility definition, was 3.71x as of June 30, which is right in line with our targeted leverage range of 3.5x to 4x.

So we are very proud of our performance in the first half of the year. And as we look forward, we are excited about the remainder of 2017. Be assured that our management team will continue to work hard to increase the value of your investment in our company, in particular, by deploying capital to the highest relative return opportunities. So with that, operator, that concludes our prepared remarks. And we'll now open the call open to questions.

(Operator Instructions) Our first question is from A.J. Rice with UBS.

First, maybe just ask -- appreciate the details around the updated guidance and all. If you think about it, we got second half, you got a $0.10 range there $1.42 to $1.52. What do you see as the variables that would get you either to the higher end or the lower end of that range whether it's -- I know volumes is always a question mark, but is there -- is that the primary variance? Is there anything else that we should know of?

This is Tom. I think the primary reason we'll get to the higher end of the range is going to be how successful we are with our cemetery sales production. That's probably the #1 driver. And shortly behind that being funeral volume. But those are going to be the real levers I'd say, A.J., that push you one way or the other. Everything else probably wouldn't be a material event as it relates to that.

Okay. You guys have talked about the acquisition. While you're seeing a decent acquisition pace this year, can you sort of characterize where you're at in terms of the pipeline? Are you seeing any competition for deals that's noteworthy? Is pricing about the same? Give us some flavor for that if you don't mind.

Sure, A.J. I think through the 6 months, Eric, we spent $51 million. Am I doing that -- remembering it correct?

$51 million without the growth CapEx for the new field constructions -- acquisitions, yes.

Right. So acquisitions were $50 million, and we guide $50 million to $100 million. I'm feeling pretty good about getting close to that $100 million if not getting there when you think about the pipeline today. As it relates to deals, it really depends on the deal. But we've seen quite a few deals where we may just be the only bidder. There are other occasions where we do have competitive bidding. I'd say the deals that we've seen are coming in at about the same bifurcation, if you will. So we continue to see people approaching us and wanting to be part of our network with the appropriate pricing, and we see some competitive bids. But it looks very good. I'd say pricing-wise, it's pretty much the same. You're seeing deals coming in about the same levels that they came in last year and the year before. So we feel very good about our ability to compete for those. And I'd say the pipeline is robust and we are optimistic about our ability to close some deals in the back half of the year.

Okay. And then maybe just lastly, also an acquisition related. I know this is a big part of the strategy over time. But it seems like to me, and maybe I'm wrong, but it's been a little more in the forefront as these 1031 exchanges. Can you just remind us what the opportunity with those are? And is there any particular reason why you're seemingly maybe seeing a little pickup in that activity?

Yes, I think, A.J., we've just disclosed it more to you. We've always had these exchange funds. And of course, just to remind you, to answer your question, when we divest of assets real property, at some point in time we can redeploy those funds that we received from the divestiture in a tax efficient manner. And that's really what the 1031 exchange funds are. When you look at our cash flow statement year-to-date, you'll see $24 million of acquisition, but you actually have to add about another $22 million to get to the full amount from the 1031 exchange funds of $46 million in terms of acquisition. And if you remember, I mentioned it in my prepared remarks that we also bought the last remaining piece of a minority interest in a separate business and that's about $5 million, and that goes down into finance activities. So just a little confusing on the cash flow statement. But at the end of the day, it's a great economic decision because you're taking divestiture proceeds and you're redeploying them in a tax efficient manner to accretive acquisitions that have an after-tax [IFR] in the midteens. So anytime we can do that, we will definitely continue that.

The next question is from Chris Rigg with Deutsche Bank.

I'm just hoping to get some more color on -- when I look at the comparable funeral results, the revenue is down 1% but the margin was up 3.8%, even the percent margin was also better by about 100 basis points. I guess, is that just a mix shift dynamic? Or how would you describe that?

Yes, Chris. I think the first way to think about it is, part of the reason it's down 1% is that -- is you got $5 million decrease in general agency revenue. When you think about general agency revenue, you're effectively getting an agency fee that's going to offset the selling cost. So what's occurred is, you got revenue that has no margin effectively, because we had a similar reduction in selling cost that's slightly off. So that probably is the biggest piece to understand is that if you take that out, actually funeral revenues were -- was up a little bit as you think about the core and you think about SCI Direct and its impact. So that's part of it as if you're making -- you're actually making a bigger -- a little bit of a margin from the fact that your core businesses are operating that way. And couple that with the effects of our other cost management opportunities which are really around utilizing FTE metrics as well as supply chain opportunities that we've been able to take advantage of.

Got you. And then just thinking about changes to preneed selling compensation and the structure there. I mean, is the desired outcome to see the number of sort of core funeral preneed contracts sold decline, like they did in the quarter? Or do you expect that will actually begin to climb at some point?

Yes, I think there's a couple of reasons why it's down, Chris. And so let me be very clear. It is very important to us and you will see it grow again. We had some temporary changes that have occurred, one of which is in our selling cost changes. We've seen some creep in our selling costs as they -- particularly on the funeral side. And we're focused on a couple of things: one is, minimizing some of the discounts and really becoming much more efficient in the cost of sale as it relates to funeral. The other thing is, when we bought Stewart, we inherited an insurance contract that we honored over a couple of years. And we had a transition less than 12 months ago from Forethought to AMLIC in certain regions of the country. And that transition of vendors caused some turbulence, if you will, but again I think we're working through and we'll get through as well. So I think these are temporary. I think we're going to grow with a much more efficient cost of sale as we look forward. So -- no, that is the plan and we just want to do it in the most cost effective way to enhance value for our shareholders. And also, a process that's very customer friendly.

Great. And then just one last one on the preneed cemetery production. Obviously, another very strong quarter. And we disclosed the data sort of on a 3-month -- quarterly basis only, not a 6-month period. But can you give us a sense for -- if we were to think about that in a 6-month basis, where you'd be and how you expect the second half of the year to trend on a year-to-year basis?

Sure, Chris. So the first half of the year, if I remember correctly, our preneed -- if you think about sales production, which is probably the most important thing and the lifeblood of what we do, it's up 9%. So this quarter, it was 5.5%. During the first quarter, I think it was something bigger, 12%, 13%, 14%. So blended for the first half of the year, we're very pleased at 9%. As you know, we kind of guide long term, think around 6% or 7%. We feel very good about the back half of the year. I think the other dynamic that occurred in the second quarter, which was a little unusual, is you noticed that we had a lot more recognition rate as it relates to what we sell. And we believe that's just a function of we spend a lot of money in CapEx, if you will, developing cemetery properties over the last few years, so maybe $1 million a year. And now you've got a pretty robust inventory level that we're able to sell and develop property today. So a higher proportion of second quarter got recognized than in the prior year quarter. And I think you'll see that kind of continue into third, and maybe a little less lumpiness as you think about the long term when you recognize this developed inventory property. So 9% first half of the year. We still feel very good about the kind of guidance in the 6%, 7% maybe in the back half. And we may surprise to the upside, I hope.

The next question is from Erin Wright with Crédit Suisse.

This is Adam Krasner on for Erin. I just wanted to touch on share repurchase which was down sequentially in the quarter, it looked like. And I'm just wondering how we should think about the level of repurchase relative to 2016 for the full year?

When we look at 2016 and look back at it and generalize for the whole year, but you're pretty much in the mid-20s. And the way we philosophically look at deploying capital, we're always going to deploy to the highest relative return opportunity. And obviously, we have certain metrics that we look at in terms of valuing our company and form an opinion on the intrinsic value, compare that to where we are trading in the marketplace and the size of that discount, we view as the opportunity to deploy capital. And when we quantify the size of that opportunity versus other relative opportunities, that's philosophically how we deploy capital. So I think we're very disciplined in the way we do share repurchase program. We're not doing just to do it. If we are deploying capital towards it, we think the value and to some degree, we think it's the higher value than other relative return opportunities. So that's the way I would describe it. So when you get back into 2017, the first quarter was a little heavier, part of the first quarter was in the high 20s [until] in terms of the share price and now we're into where we are today. That doesn't mean that we are not in the market. We were in the market yesterday as a matter of fact under our 10b5-1 because we are. And we believe we should we at these levels. But that doesn't mean we are not going to throttle up when the opportunity gets bigger and throttle down in terms of the size of the deployment to that particular opportunity based on the metrics that I just described to you.

And maybe just shifting gears a bit to average revenue per funeral service, which was down a little bit year-over-year. I know there are some dynamics with cremation mix there. I'm wondering if you could just unpack a little bit, maybe into those 2 segments what kind of pricing you were seeing kind of on an individual product level.

Well, I mean, I think, really what we're seeing is, first of all we had a tough comparison as well. I think a lot of what we were seeing was some more softness in the cremation customer as well, which we've been seeing and we're addressing that with all the products and services that we have, which the highlight of it clearly, we bifurcated a little differently in terms of the true atneed customer, where death has occurred and are walking into the funeral home versus the customer that's walking in with a matured prearranged funeral contract in their hand. And I think we are continuing to see a little change in growth essentially of what's coming out of the backlog, again continues to be very impressive in terms of the average revenue per sale. But in terms of the atneed customer, I think we've seen probably a little bit more softness than we've seen in other quarters in the cremation consumer walking into our core funeral homes. But again, I think we have a lot of initiatives and a lot of product offerings that we're constantly updating and working on to turn that corner. And I do expect that to maybe turn that corner in the back half of the year as well.

The next question is from Joanna Gajuk from Bank of America.

So if I may just come back to the discussion around the change you made in terms of the incentives for the sales force and how it resulted in fewer or lower [undergrowth] in funeral sales production, while the cemetery production clearly accelerated. So is there something you're doing to try to swing the pendulum back towards the funeral sales production growing faster? Or just there's going to be continued focus on the cemetery?

Well, I think -- Joanna, thanks for the question. I think you'll see obviously continued focus on the cemetery for a variety of reasons. One, a heritage cemetery sale develops a real long-term relationship with our client family. If we sell dad a plot, we've got a real good chance to go back and get a funeral because remember you're interacting with them in their earlier age. And we also have the ability to network through that family. So that's one of the reasons cemetery is very important to us and therefore, the emphasis that we have. So if you think about funeral, we've put a little more emphasis on, one, competing more effectively for the terminally imminent contract. So again, we want to make sure our sales force are dealing with those families that are having a near-term need and ensure that that's met. So we've incented our sales force to more effectively deal with those client families. We've incented the sales force more along the cemetery focus. And the other thing at the same time we've been doing is focusing on discounting on the funeral. So there are lot of things that probably were hard medicine, if you will, for the core preneed funeral customer. Having said that, we think it's a healthy base that we now will begin to grow up them in a variety of ways. We're going to utilize our sales tools. We've got sales enablement going out into the field that's going to allow us to present better to our client families. We're going to continue to focus on growing that preneed customer on the funeral side in the right way. So we believe that this is going to continue to grow. It's going to grow in new and different ways, a lot more of our lead management now is going to be through searching engine optimization A little emphasis on direct mail, but probably less so. So I think if we transition, you're going to see us grow in a different way, but continue to grow that preneed backlog we believe is very important and we'll continue to do so.

Great. It's helpful. And then, if I may just -- a very -- a number that is a question and I'm not sure whether I missed it, but did you talk about the actual number of shares you bought during the quarter?

Yes, we bought about 1.1 million shares during the quarter, Joanna, and our amount that's outstanding is about 187 million shares that are outstanding.

Did you buy anything after the quarter ended?

We have under a 10b5-1 plan, the answer is yes. But it was somewhat minimal.

Okay, great. And actually one last question too, following up to the earlier discussion around acquisition pace and you're saying that you're seeing sort of similar trends in terms of competition in the multiples. But is there anything in your mind that maybe change in terms of going back internationally?

No. Joanna, we're focused on the U.S. and Canadian market where we exist today. We just think there's ample opportunities from a risk/reward profile that will maintain our focus in the coming years.

The next question is from Scott Schneeberger with Oppenheimer.

This is Daniel in for Scott. Most of my question has been asked, but can you elaborate a little bit on the expense management in the quarter and help us think about the funeral margins here in the back half and discuss some puts and takes, please?

So in terms of expense management, I think, Tom has already hit on a couple of our programs. One relates to selling costs where we continue to do things in terms of making our selling efforts more productive as an outcome of investing capital into Salesforce.com and some of the other programs that we're using. And I think that's starting to have an effect in terms of a reduction in a little bit over 100 basis points, frankly, in the funeral segment in terms of total selling cost. And maybe about half of that in the cemetery segment. So that's going to be a drop to the margin as -- to the bottom line and increase your margin as well. Some other things that Tom has already mentioned is, we're very much a metric-driven organization and looking at staffing metrics, including full-time equivalents and those types of metrics that we utilize as the company continues to be successful for us. Another thing that Tom has already mentioned is our supply chain function. Our supply chain function continues to do what I characterize as really stellar work in terms of using our purchase power. And it can be just anything. It can be large items, all the way down to the small spend at the individual core funeral homes and cemeteries and it can relate from removing waste to electricity and to the large items in granite for the cemeteries and everywhere in between. So that's been a very successful program for us, all of which Tom has just mentioned. We're also using technology. We spent some capital to implement some new systems here, new Oracle systems, and we're getting efficiencies at the support level. And the most important thing that I'd probably describe to you is, a lot of our cost initiatives are clearly what we characterize as noncustomer-facing costs. So I really want to make that point is that these aren't costs that are going to interrupt the relationship that we have as the location touch point to the customer. That's the most important point to our cash flow stream and to our revenue stream. This is about the support function of those people that interact with a customer every day, and we just have a mentality and a culture of making ourselves more efficient. And those are a list of examples that I can give to you today to support that.

Got it. And if we think about the funeral margins in the back half, you had pretty strong performance the second half. Can you help us think about that in the back half?

It's really seasonal. So as you think about the third quarter, margins are probably going to dip a bit because generally you're not going to have the impact of flu. And in the fourth quarter, they either climb back towards what you see in the first half of the year. Obviously, the first quarter is generally going to be the strongest funeral margin quarter for us. So again, probably a little dip in the third and back to where you're standing now in the fourth.

Okay. A final one for me. On HMIS+ and Salesforce.com, can you give us some progress update there and the impact you've seen so far?

Well, I think, as far as HMIS+, we've seen on that front, I think, we're about 90% implemented Steve, does that sound about right? 95% now. So we did get a little bit of a benefit we believe in the last year. So in certain of these markets you're lapping that this year. In some other markets, we expect to see some impact from that, the ones that have nearly implemented it. And so we're excited about the opportunity to do that. And like any other technology or rollout, the first time you do it, some people are very effective at it and sometimes people aren't and you go back and retrain. And that's where we're in the midst of now. So we know one thing. It's a much better way to communicate with our customer, no matter what the impact is on the top line. And we're also excited about what we think we can do at the top line once it's fully trained and implemented. Salesforce has been out there now for a couple of years. And I guess, I'd say that it was something that I think, again, people felt like they didn't understand the power of it. They didn't understand -- there's probably a little resistance to try to use it every day. And I feel like now we're in the sweet spot of people really beginning to understand the benefits and utilizing it more effectively. So we again believe that the biggest impact from Salesforce is in the days ahead. But today, I'd tell you that it's making us much more accountable, better company and in a particular sales organization.

The next question is from John Ransom with Raymond James.

Just to go back to the subject. I know you're not at all tired of talk about. Just as you step back and look at the sales force, how -- on a scale of 1 to 10, how hard is it in a 4.5% unemployment economy to attract people that you -- versus say 2 or 3 years ago when there was a little bit more slack in the economy?

Yes, I think, John, it's always hard to find good people and retain them. So it's a big effort. What we've been trying to do is a lot of these Salesforce.com and the other is, what those tools allow us to do is identify training opportunity. What we would love to see is a higher retention of our sales force. We've got great people and we want to see them succeed. So a lot of these tools are designed to say, hey, we don't want to have to have the [effort] of hiring, and -- that we have to do all the time. So our focus has really been on training and developing our existing people with an idea as we generate more leads going forward with search engine optimization and utilization of the Internet through mobile devices that, that is going to generate an ability to grow. So today I'd say, we've actually shrunk our sales force a little bit, probably over the last 6 months. But I'd say that's more of a reflection of training and developing. And I would say, today it might be slightly harder to find people. But there are still good people out there because these are great jobs, great opportunities within the company. So I wouldn't say it's a struggle. It's always hard. It's a big part of our job. But we're not seeing any diminishment of opportunities to find people.

Is it the 80/20 rule in terms of production?

Pretty much always, right? It's 70/30.

So this is not 70%. That 70% probably had been making a ton of money. What's the turnover on that piece, and has that gotten better, worse or stayed about the same?

I'd say slightly better. I think if you look at our overall statistics, we look at it from kind of an inside sales and an outside sales. The outside sales probably still turnover 70%, 80% and the inside sales are probably around 40% to 50%. But yes, I think a lot -- you're exactly right. The churn within that 70% is a lot higher. And we've probably got 30% could have been with us long time and are very successful.

Yes. It doesn't seem like the industry has really cracked that code on the 70%. It's like they get in and they sell to the 8 people they know and then they run out of the leads and have to go do something else.

There's a little bit of that. I feel like we are getting better and I feel like -- but it's a struggle. And I think you see it in a lot of industries and a lot of Salesforce people have (inaudible) and you're right, I don't think anybody's cracked the code yet.

And so my last question would be, if you look at say life insurance salesmen, they have recurring revenue. So they ladder up their income over time. This is kind of a one and done sale. So it's just tougher. I'm sure you guys have thought about, well, maybe we need to give these guys some other things they can sell that provide a steadier income. Is that, a, am I making this up? And, b, is there a reason why you don't think that would work? Whether you think it would just dilute their attention away from the core business or am I just crazy thinking about this?

No, John, really, I think long-term you're exactly right. I think there's other things that could be sold. But I would tell you this is a very lucrative and a successful model for salespeople. I mean, there are equal opportunities to make it. Having said what you said, do I think someday you could sell other products through your sales force? I think that's a possibility. I really do. But I'd say you today, there's ample opportunity to make money and advance in the organization and it's a matter of us doing a better job of developing people in the skills that they need and we will continue to focus on, but yes you're crazy, but yes you're probably right.

The next question is from Duncan Brown with Wells Fargo.

Just sort of one area for me. Wanted to talk, go back to core funeral pricing and, Eric, I appreciate your comments there. Is any of that due to the decrease in general agency revenue? Or is that carved out of that 0.6 number you quote?

No, that's not included in that. The general agency revenue is a separate line item and a separate taxable stream coming from a third-party life insurance company.

Okay, that's helpful. And then, when you talk about, I think, you said maybe turning the corner in the back half. Do you think that can get back to sort of 1% to 2% pricing growth in 2 half '17 or no?

I don't think so. I think the way we're looking at this right now, Duncan, is -- what we're seeing is we're probably competing a little more heavily in capturing more customers. So I think on the front line, we're trying to serve more client families. We've got a little more discretion, obviously, cremation mix is changing too. But I think a function of this is we may be doing a better job competing in the marketplace. So we feel pretty good about where we are. I do think pricing will get back at some point, but right now I think our focus is really on capturing as many client families as we can and developing those relationships.

So a little more focus on when competing on price?

Yes, I think we're always competing. So I don't want to act like we're doing something very different. I just think people feel like we want to make sure we win because when we do, we're developing a longer-term relationship that leads to opportunities and the like. So I think there's an acute awareness of that. And again, I'm generalizing, but we're competing more effectively the marketplace.

And we have no further questions at this time. I'd like to turn the call back to SCI management for closing remarks.

I want to thank everybody for being on the call today. We really appreciate it. And we look forward to speaking to you again at the end of October. Have a great week.

Ladies and gentleman. This concludes today's conference. Thank you for participating. You may now disconnect.