Service Corporation International (SCI) 2018 Q3 法說會逐字稿

Welcome to the Third Quarter 2018 Service Corporation International Earnings Conference Call. My name is Hilda, and I will be your operator for today. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to SCI management.

Good morning, and thanks everyone for joining our call today. I'm Debbie Young, Director of Investor Relations. I'll quickly go over our customary safe harbor language before we begin with prepared remarks about the quarter from Tom and Eric. The comments made by management team today will include statements that are not historical and are forward-looking. These statements are subject to risks and uncertainty 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. We may also 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 also in our press release and 8-Ks that were filed yesterday.

I'll now turn the call over to Tom Ryan, SCI's Chairman and CEO.

Thank you, Debbie. And hello, everyone, and thank you, for joining us on the call this morning. Today I'm going to begin my remarks with a high level overview of the third quarter, followed by a more detailed analysis of our funeral and cemetery operations. Then I'll comment on our outlook for the fourth quarter as well as take a little deeper dive with you regarding the rollout and impact of Beacon, our new customer-facing technology that we've been referring to over the last few quarters.

So let's begin with an overview of the quarter. As you saw in our press release yesterday, adjusted earnings per share grew $0.02 or 6% to $0.35 per share compared to the same period last year. From a revenue and operating profit perspective, this was a very strong quarter, growing revenues over 6% and operating profit at 11%. Comparable operations contributed about $0.06 of earnings per share growth as strong cemetery revenue growth was partially offset by higher-than-inflationary fixed cost increases in both the funeral and cemetery segment. These increases were associated with higher wage and benefit costs as well as an increase in marketing spend. In addition, our recent acquisitions contributed an additional $0.01 to growth for the quarter. This robust operational improvement of $0.07 was somewhat offset by a $0.05 increase in general and administrative expense for the quarter. $0.04 of this general and administrative increase was generated by higher long-term incentive compensation expense, associated with 3 separate years of a performance unit plan, whose value is tied to total shareholder return. We experienced this significant increase as SCI's stock price appreciated over 23% for the quarter, which was more than 3x the percentage growth of the S&P 500, moving our relative ranking quite significantly in all 3 plans. Additionally, higher interest expense effectively negated the positive contribution of a lower share count and a slightly lower adjusted tax rate. If we were to exclude the unusual increase in long-term incentive compensation, our earnings per share would have been $0.39 or an 18% improvement over the prior year quarter. Eric will provide some additional color on our cash flows and provide some details around our robust capital development activities for the quarter and for the 9 months in his comments.

Now I'd like to talk about how funeral operations performed during the quarter. Comparable funeral revenues increased more than $8 million or approximately 2% compared to the same period last year. Revenues from our core and nonfuneral home businesses were relatively flat in the third quarter as slight increases in the average revenue per case were effectively offset by slight decreases in comparable volume. Our core revenue per case absorbed 170 basis point increase in the cremation mix, putting downward pressure on the average. Exclusive of the cremation mix change in currency, the average revenue per case for our customer increased a solid 2%. Recognized preneed revenues grew approximately $5 million or 18% during the quarter. Recall, these are the products sold on a preneed contract, which are delivered at the time of sale, primarily representing cremation-related merchandise and travel protection membership. Finally, on the revenue front. Other funeral revenue increased $3.5 million compared to the prior year quarter. Included in this amount is an increase of $5.3 million in General Agency revenue, resulting from higher insurance funded, preneed sales production of $18.7 million or 16% over the prior year quarter. As it relates to funeral profit, we experienced a decline in operating profit of approximately $3 million and operating margins decreased 100 basis points, mainly due to an anticipated increase in funeral fixed cost. Similar to last quarter, beyond expected inflationary fixed cost increases, we continue to see slightly higher labor cost due to the deliberate raises we made earlier in the year to key customer-facing employees as well as higher healthcare costs. In addition, we continue to make investments in marketing and sales lead development, both of which are helping to drive growth in our preneed funeral sales production.

Speaking of preneed funeral sales production, I am extremely pleased with our sales team's performance for this quarter. We grew production an impressive $27 million over the prior year quarter for almost 14%. Both our core funeral home channel and our nonfuneral home channel delivered double-digit percentage growth. We continue to see a noticeable increase in production in markets where we have Beacon, our new customer-facing technology rolled out. We believe Beacon is responsible for approximately half of the growth that we're experiencing in the third quarter. Our sales teams are utilizing this great tool alongside valuable leads generated from our website redesign, digital market campaigns and search engine optimization results, delivering exceptional preneed funeral sales production growth for our company that we believe will drive enhanced market share in future periods.

Turning to our cemetery operations now. Total comparable cemetery revenue grew $29 million or about 10% in the third quarter. This was primarily driven by a $20 million increase in recognized preneed property revenue as well as higher perpetual care trust fund income of about $9 million. About half of the trust fund income growth was a result of our new total return strategy, which shifts the asset allocation of our trust fund by state requiring legislative authorization to more diversified portfolio mix versus the previous income-based approach. The $20 million of recognized preneed property revenue growth over the prior quarter was both the function of increased cemetery property sales production during the quarter as well as an increase in revenue recognized of completed construction projects with the sales heard in an earlier quarter. The capital that we deploy towards the development of new cemetery property continues to have great returns for us and our sales team has done excellent job of selling into newly constructed cemetery property projects.

We are happy to report that we returned to mid-single-digit growth for preneed cemetery sales production for the quarter. We grew over $10 million or about 5.5%. Remember, this production includes property sales that are generally recognized currently as well as merchandise and services sales, which are generally deferred into backlog and moneys are placed into trust accounts. From a profit perspective, comparable cemetery operating profits grew almost $17 million or 21%, and the margins expanded 280 basis points for the quarter. We were able to achieve a 60% incremental margin on our $29 million revenue increase, which is very good. The incremental effect of the even higher margin trust fund income was partially offset by higher fixed cost from the items we cited in funeral operations, increased wages, higher medical cost and increased marketing spend.

Shifting to our outlook for the remainder of the year. Our updated annual guidance range from the press release result in a fourth quarter earnings per share range of $0.51 to $0.59 per share compared to the $0.50 per share we reported in the fourth quarter of 2017. At the midpoint, this would imply a 10% growth of the -- over the prior year quarter. While we're not ready to provide specific guidance on 2019, we believe you could adjust your 2018 base earnings per share slightly higher for the unusual long-term compensation expense incurred in the quarter and then apply the 8% to 12% earnings per share growth factor. Keep in mind the impact of potentially higher interest rates for our variable rate debt tied to LIBOR as you model 2019.

As far as color for the fourth quarter, we would expect the slightly challenging funeral revenue result, as we will be comparing against a reasonably strong prior year funeral volume due to the early flu season impact in 2017's fourth quarter. We anticipate a strong cemetery sales production in fourth quarter that should be somewhat muted by a lower recognition rate effect of completed construction revenue as compared to the fourth quarter of 2017. On the cost side, we should continue to see slightly higher inflationary growth for wages, healthcare cost and marketing spend, impacting both segments. As many of you already know, our 3 core strategies are growing our revenues, leveraging our scale and deploying capital to its highest and best use.

I wanted to take a moment to take a deeper dive into our current initiative, which is having an impact on our business and our financial results. Our customer-facing technology for our sales team, Beacon. Beacon was capital put to its best use that both leverages our scale and gross revenues. Truly a trifecta. It's a tablet-based prearrangement tool that guides the consumer through the entire preneed sales process. Beacon is the seamless digitized presentation tool that really brings our product and service offerings to life. The tool enables the customer to make informed decisions with various payment options while automatically generating the insurance application and purchase contract and then accepts credit card payments on site. This significantly enhances the productivity of our sales team, allowing them to focus more of their time with our client families versus administrative tasks. So why are we so excited about Beacon? Well, number one, the tool showcases to our customers our entire suite of products and service offerings. Additionally, it's dynamic enough to allow our products and marketing team to add new products and services quicker than what we have been able to do in the past. Second, Beacon provides our sales leadership with greater insights into the productivity of our sales associates. For example, we can see where accounts are just spending time with the consumer and better determine where we should focus more of our selling activities and training. And lastly, we believe Beacon is a differentiator for us in our industry. This type of technology is what our customers expect in today's technology-focused fast-paced world. And it will help recruit the best and the brightest sales councilors to SCI, the differential advantage versus our competition.

Just to give you a few stats. At the end of the third quarter, Beacon was live in 878 funeral locations across 24 states, achieving nearly 60% of our rollout plan for the United States and Canada. We anticipate approximately 95% of all funeral locations to be live at the end of this year. In markets where Beacon has been introduced, we are experiencing an impressive increase in the number of preneed funeral contracts sold along with the modest improvement in average sale per contract. Additionally, we are in the final stages of developing the preneed cemetery portion of the Beacon application, which we anticipate to roll out to our cemetery sales associates beginning in 2019. As I close, I think it's worth mentioning that once again, we were certified as a great place to work through 2019, which says a lot about how our employees feel, about the culture at SCI and their job satisfaction. We could not be more proud of this recognition.

So to summarize, we are pleased with where we are after the first 9 months and continue to believe that we're on track to deliver solid results for the full year 2018. I want to, again, thank our 23,000 associates for their ongoing commitment to the customers we serve and to the success of SCI.

With that, I'll turn the call over to Eric.

Thanks, Tom, and good morning, everybody. Today, as usual, I'm going to provide some color on our cash flow results during the quarter, then I'm going to touch on our outlook for both cash flow and capital deployment and then end with discussing our financial position for the remainder of 2018. But first, I'd like to start with our continued progress on the capital deployment front. And as a reminder, our capital deployment philosophy focuses on opportunities that will yield the highest relative returns for our company. We're already off to an outstanding start in terms of delivering value to our shareholders, and the third quarter results have further enhanced this progress.

So during the quarter, we invested nearly $108 million towards acquisitions, new location builds, dividends and share repurchases. This is an impressive 20% increase of capital deployment over the prior year's quarter's investment of roughly $90 million.

So let's talk about the breakdown of this deployment. We were able to deploy $30 million of capital towards acquisitions and new builds during the quarter. About $20 million of this was for 2 notable acquisitions: One in the mid-Atlantic area, for a combination funeral and cemetery operation; and another was here in Texas for our funeral home. Remember, that acquisitions are our highest and best use of capital as they generally result in after-tax cash IRRs that meaningfully exceed our cost of capital. We are proud of these acquisitions. And most importantly, we welcome all of these new associates into the Dignity Memorial and SCI family. In addition, we are delivering on our strategy of building new funeral homes, and we spent nearly $10 million during the quarter. This spend is going to develop our footprint in important markets, for example, such as Texas, Florida, California and other states through the construction of new funeral homes and crematory operations. As we look ahead, we remain positive about our acquisition and new build opportunities.

Other deployments during the quarter. Dividend payments in the third quarter totaled $31 million, which, by the way, was an increase of 9% over the prior year of $28 million, which really reflects the $0.02 per share dividend increase announced in February earlier this year. And finally, we continue to be opportunistic with our share repurchase program, investing $47 million during the quarter, reflecting the purchase of approximately 1.2 million shares at an average cost of just under $38 per share. We currently have about 181 million shares outstanding and about 195 million of remaining share repurchase authorization at the end of the quarter.

So let's step back and look where we are for the year. We have deployed an impressive $578 million, consisting of $209 million on acquisitions and growth opportunities, and $369 million being returned to our shareholders in the form of share repurchases and dividends.

So now let's shift to an overview of cash flow, we'll start for the quarter. As you saw in yesterday's press release, we reported adjusted operating cash flow of $137 million, which is below the prior year quarter by about $30 million. This decline was primarily driven by a $21 million increase in cash taxes paid during the quarter. Keep in mind, this is really just a timing issue, as we have actually paid approximately $31 million less in recurring cash taxes year-to-date in 2018 versus 2017. The remaining decrease in cash flows during the quarter relates to decreases in working capital, related to our preneed programs. While recognized preneed property revenue increased by an impressive $19.8 million or 15.3%, the majority of these sales are made on an installment basis, having the effect of the related cash being received generally over the next 3 to 5 years.

Now I also want to address the $9 million increase in endowment care of trust fund income over the prior year quarter. We're excited to highlight that. About half of this increase relates to the implementation of the total return asset allocation structure that we have discussed with you and will benefit us going forward as well. The remaining increase relates to the recognition withdrawal of capital gains related to the normal rebalancing of our portfolios.

Let's talk also about the cash taxes again. Year-to-date, we have been able to realize about $15 million of lower taxes due to tax reform, with another anticipated $5 million benefit to be realized in this fourth quarter this year, which again, is in line with our expectations for the full year $20 million positive impact at our company from tax reform. Also, due to ongoing tax planning efforts, we now believe our full year cash tax estimate for 2018 could drop slightly below the low end of our previous guidance range, which was $85 million to $95 million that we discussed with you last quarter. So I think a better range now is our expectation of about $75 million to $85 million of cash taxes that we expect to pay during the year. And finally, as it relates to cash flow in the quarter, cash interest payments were higher by about $2 million, mainly due to the impact of higher interest rates on our floating rate debt.

Looking at maintenance in cemetery development CapEx, which combined are the 2 components that we use in our free cash flow calculation, this was approximately $53 million for the quarter, which is in line with the prior year as well as with our forecast. So looking forward in terms of cash flow, we're expecting a solid fourth quarter, as Tom already mentioned. Thinking about our original guidance for adjusted operating cash flow at the beginning of the year, we're projected $570 million at the midpoint of our guidance. And my remarks to you last quarter, we increased the guidance range by $25 million to a midpoint of $595 million, mostly reflecting the efforts of our tax gain. This guidance of $575 million to $615 million, that range remains unchanged, and the midpoint of $595 million represents an increase of a little more than 7% over the prior year adjusted operating cash flow of $554 million. Our expectations for capital spending also remain unchanged at approximately $195 million. Deducting these recurring CapEx items from our adjusted cash flow from operation expectations, calculates to a free cash flow in 2018, ranging from $380 million to $420 million, again, reaffirming the midpoint of free cash flow of $400 million. So on the cash flow front, we're very pleased with our ability to continue to generate very robust cash flow, which again, allows us to continue our capital deployment program.

So now let me provide you high-level overview of our financial position. We finished the quarter with very strong liquidity of $730 million at September 30. This consists of $158 million of total available cash on hand as well as $572 million of availability on our long-term credit facility. Our leverage, which is calculated net debt-to-EBITDA in accordance with our credit facility, has crept up somewhat to about 3.86x at the end of the quarter. We expect to manage this down during the fourth quarter as well as into 2019, closer to the midpoint of our target leverage ratio range of 3.5 to 4x. We'll also monitor interest rates while evaluating leverage as we close the year out with approximately 35% of our debt currently floating, which has pressured our earnings somewhat, as you know, during the year. So lastly in closing, we are proud of our performance year-to-date. We expect to finish with a very -- with a strong fourth quarter. We believe we are well positioned to continue to strategically execute our capital deployment plans as we move forward, focusing on maximizing total shareholder return.

So with that, operator, that concludes our prepared remarks. We'd like to turn it back over to you to generate the Q&A session.

(Operator Instructions) We have a question from Joanna Gajuk from Bank of America.

So first on the quarter, on, I guess, the outlook. Just to -- I guess, to reaffirm what you just said in terms of G&A because you kind of talked about 2019 commentary. But how should we assume that for Q4 this year, the G&A will come back to, call it, $30 million range for quarter that we've seen in earlier or first half of the year?

Yes, we do think that, Joanna. I think this is more of a onetime event that occurred during the quarter as it relates to the performance unit plans, that are, of course, are disclosed out there in the proxy, which really resulted from, as Tom mentioned, the differential run in our stock price during the third quarter, which is about 3x the S&P performance. So that -- consider that kind of a onetime event. And I think you should consider us going back to kind of the normalized levels, which are kind of about $30 million to $33 million right now in General Agency, G&A expense I should say, per quarter. So kind of around that rate for the fourth quarter would be good.

Great. It make sense. And on the point of guidance. So I understand for EPS you're now in the range but still there is a range. So can you flash to us maybe what are the key drivers to get to the higher end versus the lower end?

I think -- Joanna, this is Tom. I think the key driver, the #1 key driver is going to be cemetery sales production, and particularly around the property portion of that. And we feel very confident as we look to the fourth quarter, we believe we've got the right momentum to deliver on that. The things that are going to be a little bit in our face are, we know based upon the timing of construction contracts that we're going to be a little bit backwards compared to prior years as it relates to recognition of constructive projects. But we believe we're going to overcome that and then some with our cemetery sales production. So I think that's the key number, that pushes you towards the top or in the event of not doing well, push you back towards the bottom.

And if I might squeeze the last one, a quick one. I guess, on the endowment trust fund strategy changes that benefited this quarter. Can you flash out, I guess, where you are on that shift? Or is there a goal in terms of how many of the states will be willing to do that, because I know when you introduced this concept at the Investor Day, you talked about some states might take very long time. So kind of are you on track? Is there more opportunity to shift more of these, I guess, trust funds to that strategy?

Well, we're always trying. We continue to lobby. We think it's a benefit our company. But most importantly, we think it's a benefit for the consumers that will benefit for the long-term maintenance that the trust funds will produce through perpetuity. So that makes it a win-win situation. And that's how states are receptive to change in the laws. We've done a significant amount of movement with the states to move it toward -- to allow the total return on asset allocation. I will characterize it as kind of about half the states are there in terms of the dollars in our trust funds. We did have a major movement in California this year and a positive direction towards that, which was approved. But that's not effective, Joanna, until the 2020 year under the law that they've passed. So I would think of it as kind of 60% to 2/3 having the total return opportunity as you get to 2020, which bodes well for us. We think that's a higher return opportunity to us as you saw on this quarter, where we had good amount of movement, half of which was probably related to that total return on asset allocation.

The next question comes from Scott Schneeberger from Oppenheimer.

So start out asking on the funeral preneed sales growth. That was significant second quarter in a row, very large and accelerating. Could you discuss, kind of, compare and contrast, how much of that is Beacon versus how much of may be some of your other initiatives? And then the previous expectation for the year was low- to mid-single-digit growth rate, you clearly have surpassed that. How should we think about that growth rate going forward?

Scott, this is Tom. Thanks for the question. I think -- and again, it's always hard to measure, but based upon the markets where we're rolled out, it's our belief that about half of top -- we have 14% growth in the quarter, about half of that was driven of Beacon markets, which we're going to attribute then to Beacon's impact, which is pretty huge, particularly since we're only at 60% of the markets, with the target to be at 95% by year-end. So that is a big driver. And a lot of that I think is -- what it does in front of the customer, it also really increases the efficiency of our sales force. They're allowed to spend more time in front of families and less time with administrative tasks and burdens. And I think you're seeing a real shift of emphasis, if you will, to the prearranged products, because it's easier to do. I can meet my quotas and objectives as it relates to funeral side of the business, quite possibly to the detriment of cemetery, I mean, in certain markets. So we're excited about that. As you think about next year. And again, we haven't put out any formal guidance. And I don't want to put any pressure with Jerry sitting in the room, across from me. But I do think we should, particularly on the first half of the year, have a really nice comparable, which then should, in my opinion, settle into that kind of mid-single-digit growth. So next year, again, could be mid to high with an emphasis on, I think, real execution of the first half of the year as you think about the rollout of Beacon. The most exciting point, Scott, for me is, we're going to roll it out to cemetery next year. And it could begin at some point to impact our results as you think about sales production growth on the cemetery side of the equation, which is exciting and particularly exciting to earnings because, again, when we sell preneed cemetery property, we're generally going to be able to recognize those earnings. We don't get that benefit on the funeral side today. Having said that, what's important to us is our client families, what's important to us is the long-term future of SCI. And having Beacon in our funeral production tool kit is a huge advantage. And we see it continue to benefit into 2019.

A few more for me, if I could. Acquisitions has been very elevated this year versus your evergreen model. How should we think in fourth quarter, and perhaps looking out to next year, how active is the pipeline, clearly it has been. Is there more to go? And any margin implications in the fourth quarter or things to think about from all that you've done this year?

Yes, thanks, Scott. First, on the ones that we've done. We did highlight, as you know, we got a $0.01 in the quarter from the effect of acquisitions. And again, that's because of the size and the number of acquisitions we have been able to close. So as you think of the fourth quarter, we believe it'll have, in effect, at least that much as you think about the impact on Q4. And obviously, that's going to lop over into 2019. So that's a real opportunity for us we believe to deliver. As you think about the pipeline today, and talking to John Faulk about this, we're still seeing an active pipeline and feel good about the fourth quarter. Like we said before, your visibility only goes so far. But right now, we're continuing to see a pretty robust activity. The difference is probably going to be in the size. The number of deals we probably are seeing, but we had a very unusually large transaction this year. I don't know if that's repeatable. Having said that, I think the activity is good. I think the price discussions, they're good. And so we feel pretty good about putting a significant amount of money to work as it relates to both acquisitions as well as growth opportunities to construct new funeral homes, either on cemeteries or in other markets. So we're excited.

I'm going to throw one more and turn it over. But the -- it looks like the -- on the EPS guidance, it looks like most of the reduction of the high-end was affiliated with incentive comp or related to SCI stock price. And then also, you're talking about probably paying less cash taxes this year, yet you maintained cash from ops guidance, and obviously, the incentive comp is noncash. So is it working capital or conservative, help us think understand why the -- why that guidance did not increase for the year?

Let me -- I want to address 2 things. So I want to make sure everybody understands the incentive comp piece too. But first of all, I think the real difference this time is think about the level of -- the way we delivered the earnings this time absent the compensation, which I'll touch upon a little more, Scott, if you let me, and that is we're doing it through preneed cemetery revenue recognition. So there's 2 components. One is the preneed sales, which Eric touched upon earlier that said, when we sell cemetery, we get all the revenue but we don't get all the cash. We get cash over a longer period of time. And the same thing on the construction. We may have received a lot of the cash earlier that we are now recognizing with no cash associated with it. So there's a lot of -- there's a real mismatch between -- in timing on cash and earnings as it relates to cemetery, so any time you see that move, expect it to look one way or the other. As an example, if our preneed cemetery sales will ever go down, we would look like we're cash collectors, really good, which isn't necessarily a healthy thing, right? We'd rather have the sales. So that's probably the biggest driver of the cash change. And then Eric touched upon a little bit. We have higher interest rates, and those are cash interest rates because of the variable rate nature of our debt. The one thing I just want to clarify, Scott, on these plans, just to give people a little more color because I know they're not as apparent as they are to us. So this is a performance unit plan, it's based upon our total shareholder return related to competing pool of stock. So what happens is, think about there's 3 plans, right? Because these are 3-year plans. So we have 1 that's 3-years old, 2-years old and 1-year old. And we had to accrue every quarter based upon our relative performance and the relative payouts. And we can be paid up to 200% or down to 0%, depending on the relative rank. Well we sat at the end of the second quarter for the most part at about a onetime payout. And what happened in the third quarter was that our stock performance was 23% versus the pool of, let's call it, generally 7%. That pushed all 3 plans to 200% payout, which again, is good for shareholders. But what that did is, a normal quarter for all 3 plans, the accrual would be $3 million if you did it evenly over time. So for instance, in the fourth quarter, we might expect $3 million from last year and $3 million from this year and we never talk about it. It might be off $1 million or so. What happened in the third quarter is we had to accrue up $9 million, I believe, or maybe it was $10 million. And it's comparing to last year's quarter where we actually had a credit of $1 million. So this is a highly unusual mismatch of a slight credit last year versus a huge catchup this year. And again, I don't know if that holds. Again, it could come back. And we make get credit in the fourth quarter or credit in the first quarter. So we just wanted to point out that we've never seen a difference like this. And it all showed up in G&A. So it's easy to see. So hopefully that gives you a little better clarity around what's happening with that particular accrual.

The next question comes from A.J. Rice from Crédit Suisse.

First of all, I just wanted to go back to the guidance and what it implies for the rest of the year. I think when you -- on second quarter conference call, the comment was, we think we'll be toward the upper half of the guidance range that was in place. You've narrowed the range. And I guess kept the midpoint at about $1.81. And you've also now picked up this $0.04, it sounds like that's included in guidance, but it's sort of unusual. I guess how should we think about that comment in the second quarter relative to today. Do you still feel like you're probably in the upper half of your guidance range that you've offered now? Or is it in light of the $0.04, is that not as likely?

Yes. I think, A.J., the way that works is you're right. When we did the second quarter call, the stock hasn't moved yet. So our opinion was, we felt highly likely being at the top end of that range. So let's call it in the middle range was $1.81, and we had $0.04. We didn't know differential was going to happen. So maybe another way to say it is, we believe we're on pace using that map to get to $1.85. We now have this -- we now are aware of the $0.04. We don't know what's going to happen. We're not changing any opinion about our fourth quarter. And so hopefully, that guide -- again, the midpoint is still at $1.81 and for lack of a better term, you could go a lot $0.04 more as to -- so our expectation really hasn't changed. We still feel good about the fourth quarter. And again, I think I tried to point out and we're talking about. When I think about '19, '18 if ends like it is today, it's probably going to have a higher incentive compensation accrual than what we're going to incur in '19. So as I think about modeling '19, I might take that, if you believe the midpoint's a $1.81, I might add a few pennies to say, I know I'm going to get back a little bit of that unusual accrual. So maybe my starting base is $1.83, $1.84 or $1.85. And now I got to say, can I grow 8% to 12%, check the box. And what are the factors do I need to think about as you model 2019.

Okay. All right. That's helpful. And I know you talked a little bit about Beacon already. But I guess I'd love to hear you flush out a little more. Obviously, it's accelerated the growth in the cemetery side. What would be -- I mean, is it reasonable to think that you -- I mean on the -- accelerated growth on the funeral side now as you move to cemetery, which obviously, has, sort of, near-term earnings implications. Do you think some of the dynamics that led to accelerated growth on the funeral side apply on the cemetery side, I know it's a different business in some ways. Is there any way to flush out what it might mean in terms of accelerating the pace of growth in the cemetery business?

Sure, A.J. Yes, first of all, we have seen a significant lift on the funeral side. And as I think about cemetery. And again, -- with -- they may shoot me later, so I'll give you Tom's opinion. But if Jerry's in the room here and Bryan Bentley is the person responsible for rolling out Beacon. I think I would think of it this way. First of all, I'll give you the positive. We believe it's going to have a favorable impact as we go forward on cemetery for sure. The slight difference is, I would explain it this way. The funeral is a much more homogenous product. It's easier to roll out. There's not as much differentiation as you think about walking through the options. Cemetery is unique in the variety of options that are out there. And how you convey that value of different types of cemetery property in different locations, which are uniquely priced and they are different. So it's a little more complicated. However, as you work through that, I think it's at least my belief that as it comes to large sales, it's probably harder to see where you get much of an impact if the large sales has a lot of activity around, it's still going to happen. But as you think about the sales that are not large sales, but more traditional type sales, they're going to look a little more like a funeral. I don't know why you wouldn't have a similar impact as you think about that channel. Because we're going to become much more efficient and effective at presenting to the client families. It's going to be easier to process these. Again, I go back to the time it takes for a counselor to sit down and present and have a contract and have it funded and have it collected is dramatically reduced to what the old paperwork system used to work. So it's my belief, will be much more productive and it will have an impact particularly on the non-large sales cemetery side.

Okay. That makes a lot of sense. Just the last question. We've started to get questions, obviously, with the market volatility of last month or so, about how to think about that relative to your performance and results over time, given the exposure of the trust funds? I know you're moving the perpetual care trust fund to sort of a total return and that may be help you offset it. But just can you give us a little perspective on how we should think about, and how you would think about, budgeting, given the volatility that seems to be coming back to the market a little bit?

Sure. I mean, what it would obviously affect, and you're exactly right, A.J. You made a good point, which is ECF is going to be a little bit isolated because of the total return scenario, which generally under these laws allows you to take out 3% to 4%. Now over a period of time, if those returns are not there, then ECF could get affected as well. But what really happens, you're exactly right, on the MST trust, which is the merchandising service trust that support the funeral and the cemetery backlog and those specific contracts where the money's invested in those trust funds. Ultimately, it's a muted effect that we've said many times before. Because ultimately, the life of the contract is about 10 years. And so anytime you have a drop in the market, it doesn't immediately come through your EBITDA or your cash flow strength. Think of it as, it comes through over a 10-year period. So therefore, about 1/10 of it may come through in year 1. And that's the muted effect that we've tried to walk people through many times, which was indicative of what happened in the '08, '09 scenario. As a very, very general rule, all else being equal, and this is dangerous sometimes to use this metric. But as the trust funds come off at a 1% clip from where it's been -- where the trajectory has been over a long period of time, any 1% movement off of that trajectory generally turns out to be $1 million to $1.5 million of EBITDA loss. There's a lot of assumptions in that and a lot of things outside of that has to be equal for that to hold up. But generally, that gives you a quantitative feel for the muted effect as markets change and the trust portfolio changes.

The next question comes from John Ransom from Raymond James.

A.J. stole my question. So I got to go to a clearly inferior question, which is on your floating rate debt, Eric, what's the good rule of thumb? Every 100 bps of short-term rates, how much of an effect is that?

Generally, there's about -- we have about $650 million on the term loans. We have $400 million on the revolvers, call that $1 billion. You have about $200 million more in operating the leases that are floating. So think of about -- I call it about 1/3 of our debt is floating. So movement can be significant in terms of that. Most of that debt is LIBOR plus $175 million. It's already moved 20 basis points in the third quarter, as you know. It's about 3.8%. Now it's about 4%. So 1% movement in that will have...

$10 million. Yes, $10 million a year.

$10 million or so effect, and you've kind of seen that this year already as -- 2017 ended the year about $170 million. And if you do the math and trend it out where we are, '18 is going to end in kind of $180 million, $182 million, somewhere in that interest expense area. So that ratio we just talked about, holds true.

So there's no -- as you see 30-day LIBOR, there's no fancy caps or swaps or anything like that?

That is correct.

Good. That's easy for me. Okay. The other question I had is, I know most of the -- is the -- are the Beacon sales the same kind of mix of 70-30 third-party funded versus trust funded preneed sales?

No, I think a lot of the Beacon sales are tending probably a little more insurance in their writing right now. And some of that the function of where you put it. But some of that, I think, is function of simplifying the insurance process.

So you're getting some margin right. You get the commission payment less what you pay yourself, guys, so there's a little bit of margin that you capture up-front?

There is, John. You're exactly right. Probably a $1.5 million in this quarter. And that's up. And you probably could think about going forward as well.

I'm sorry. Is that revenue or is that EBITDA?

That's the net. So I think we're up $5.3 million in G&A revenue. And if you look at -- it's hard to measure the associated sales because of the change in that accounting for selling. But I would put it closer to $4 million is the real difference. So probably making a little over $1 million in a quarter as you think about the way you're [putting it].

Sure. And if you're -- and on the cemetery side, I know you can recognize the plot of land and some of the stuff you deliver. So if you grew your cemetery preneed $100 next year because of Beacon, approximately how much of that would fall to the bottom line?

Again, it probably depends on your -- if it's property. But if it's property, it's probably be somewhere around $650 to $700 of that $1,000.

So yes, there is an EBITDA effect and hopefully that kind of offset some of the interest expense comparison, so. Okay.

The next question comes from Duncan Brown from Wells Fargo.

Just wanted to go back to the change in the perpetual trust allocation. Obviously, there's not a lot of time on the sort of more standard impact -- the muted impact of 1% move on a broader trust fund. Is that -- how should we think about the potential impact for the change in perpetual trust is? Sounds like it was a nice impact, positive impact this quarter. The market stays weak. How should we think about that going forward?

Well, this quarter was really a function of incremental total return portfolios versus prior year, coupled with some capital gains that occurred, which is really kind of outside our control, Duncan, because that's really the professional institutional money managers that we outsource those funds to. But they happen to rebalance some things, create some capital gains and then at some stage that gets distributed to us. So first of all, that's what occurred this particular quarter. ECF, each one of the laws in internal care funds is a little bit different. But generally, in the total return area, we can pull out that 3% to 4%. And I think that will essentially continue to move in the positive direction. Ultimately, if you have a string in the market that's declining and there's not positive income, therefore, a positive return, if you will, to take out, ultimately after a period of time, maybe 1 year, maybe 2 years, maybe 3 years, it depends on the state law, you would have to cease pulling that out and that -- and let it settle for a while until it comes back positive. And that would have an effect on us. We don't have the crystal ball to try to predict that or try to quantify it. But certainly, that is a possibility under these state laws.

Okay. So maybe to simplify this for me. So if the market stays weak in Q4, you would still be able to pull out the 3% to 4%. It just wouldn't -- it would only become an issue over a longer period of time and vary by state. Is that the right way to think about it?

That's correct.

And then just lastly. And I should know the answer to this. But on Beacon, can you remind us -- this is something you all designed, right? This is not like a sales force that a competitor could go out and also implement, is that correct?

That is correct.

And to your knowledge, is there anything similar to that or any competitors trying to do anything like it? Or is it unique?

I think it's unique. And obviously somebody could try to create something like it. I think what's hard for people to do in order to get the bang for your buck, it's going to cost multi-million dollars to put in place. And I think with our scale, it's a great return on investment. A lot of our competitors because of their lack of scale, this would be a significant capital outlay for them. And so I think that's going to prevent, I'd say, the level that we've instituted it.

And then, I guess, just following on and maybe in markets where you're not currently at or have any plans to be at. Is this something you would consider licensing out or selling or is that not in the plans?

Surely not in the plans today. Never say never. But I think this is something we want to -- this is really about taking care of our client families, enhancing the productivity and the careers of our fellow associates. So that's where we're getting the bang for the buck today. One day it may be worth doing, looking at something like that. But not in the plans as we speak.

We have no further questions. I will like to turn the call over to SCI management.

Okay. Thank you, everybody, for being on the call today. We appreciate you being here. We look forward to talking to you on our fourth quarter earnings call, which I believe is going to be in the early February. Thank you, so much.

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