Good day, and welcome to the Service Corporation International 4th Quarter 2019 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to SCI Management. Please go ahead.
Good morning. This is Allie O'Connor, Director Financial Reporting. Debbie is out today, so I have the honor of going over Safe Harbor language with you before we begin with prepared remarks about the quarter from Tom and Eric. 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. 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 ks that were filed this morning. With that, I will now turn the call over to Tom Ryan, SCI's Chairman and CEO.
Thanks, Ali, and thank you, everyone, for joining us on the call this morning. Today, as usual, I'll begin my remarks with a high level overview of the quarter, followed by a more detailed look at our funeral and cemetery operations, and then finally, comment on our outlook for 2020. So let's begin with an overview of the quarter. As you saw in our press release yesterday, we finished the year strong, reporting an impressive $0.06 or 11% increase in adjusted earnings per share over the prior year quarter. This was despite a $0.03 headwind from a higher effective tax rate.
A solid performance in our Funeral segment, coupled with lower general and administrative expenses were the primary drivers that led to a $0.60 of adjusted earnings per share. On the cash flow front, we generated almost $157,000,000 of adjusted operating cash flow or a 4.4% decrease over the prior year quarter as higher cash interest and cash tax payments more than offset our increase in operating results. Eric will provide more details in his remarks related to cash flow. When comparing these results to the prior year quarter, there are a couple of things I would highlight. First, our core funeral locations were hitting it on all cylinders this quarter as we saw an increase in comparable fuel services performed, an improved sales average and a more favorable cremation mix change as compared to the previous three quarters of 2019, all of which led to a 10% increase in comparable funeral operating profit.
In our Cemetery segment, while the reported revenues were somewhat muted due to the timing of completing construction projects as well as sales velocity into own constructive projects in the Q4, our comparable preneed sales production returned to the mid single digit growth rate that we're used to seeing, increasing 5.2 percent or over $12,000,000 compared to the prior year quarter. Finally, while not a major influence on our current earnings, we grew preneed funeral sales production over 12% for the quarter, enhancing the value of our future results by continuing to grow the preneed backlog and capture future market share. Now shifting to some more detail around the strong funeral performance for the quarter. From a top line perspective, we had a very solid quarter. Comparable funeral revenue increased more than $23,000,000 or 5% compared to the same period last year.
A little over half or $13,000,000 of this top line growth is attributable to an increase in our core funeral home revenue as we saw healthy increases in both services performed and average revenue per service. Core comparable services performed increased 1.3% compared to the same period last year. Additionally, we were very pleased to report a 2% increase in the core funeral pricing average revenue per case, I'm sorry, having lapped some of the strategic cremation pricing adjustments made during 2018 in certain markets, we were able to achieve 2.7% organic pricing growth at the customer level, which was partially offset by 130 basis point cremation rate mix shift. This mix shift has continued to taper down throughout the year as we anticipated, and we believe that you should see the cremation mix shift so back in the 100 to 150 basis point range for 2020. The remaining increase in revenue was driven by our non funeral home channel or SCI Direct, which reported strong increases in both contracts sold and average revenue per contract, resulting in recognized preneed revenue growth of $7,800,000 or almost 30%.
Recall, this represents products sold on a pre need basis, primarily by SEI Direct that are delivered at the time of sale, resulting in immediate revenue recognition. Last year, you may recall that during the Q4, we reported lower results as SCI Direct was transitioning preplanning advisors from independent contractor status to SCI employee status, which created a temporary slowdown in sales production. I think it is safe to say that we are back and better than we've ever been. Thank you to Tim and the team for their extraordinary leadership during this transition. We are very happy to have our counselors as official members of the SEI family.
Shifting to funeral profit. On the $23,000,000 revenue growth I just described, we generated an increase in operating profit of more than $9,000,000 and operating margins increased 100 basis points to 21.1%. Selling costs were a little higher year over year, partially because we grew preemie funeral sales production over 12% and partially with the new SEI Direct sales compensation structure, which includes the base pay component, we are deferring a smaller percentage of the overall sales compensation. Speaking of freaky funeral sales, this was a true highlight of the quarter, growing sales production $24,000,000 or over 12%. This increase was fueled by double digit growth in the number of contracts written for both our core locations and our SCI Direct channel.
For the full year, we grew preneed funeral sales production just under 5%, which is at the top end of our guidance range of 3% to 5%. As we move into 2020, we will continue to invest in the development of our sales organization with best in class tools and technologies. Now turning to cemetery operations. During the Q4, total comparable cemetery revenue increased nearly $2,000,000 or about 0.5%. Core cemetery revenue was essentially flat on both an atneed and a preneed basis.
This was despite our solid preneed sales performance, where we grew comparable preneed cemetery sales $12,200,000 or 5.2%. Historically, we've experienced preneed cemetery revenue recognition rates well above 100% in the 4th quarter, as previous quarter sales of unconstructed property were recognized as projects were completed late in the year. While some of that did occur this Q4, not as much did. And additionally, we sold a higher proportion of unconstructed property sales during this Q4. While our preneed sales production growth did not benefit the profit line this quarter, we will receive that benefit during 2020 when the projects are constructed.
From a profit perspective, comparable cemetery gross profits decreased $3,500,000 and margins dropped 120 basis points to 32.5 percent, primarily based on the flat cemetery revenue for the quarter caused by the low recognition rates, coupled with anticipated inflationary cost increases incurred during the Q4. Now let's shift to a discussion about 2020. Our guidance for adjusted earnings per share in 2020 is 1.96 dollars to $2.16 per share. The midpoint of that range or $2.06 represents an approximate 8.4% increase over 2019 earnings per share. This projected earnings per share increase is absorbing a higher adjusted effective tax rate of approximately 24% compared to the 22% rate we reported in 2019, which we estimate to be approximately a $0.05 earnings per share headwind.
Normalizing for the tax rate, the midpoint of our guidance from an operational perspective is projecting earnings per share growth more towards the upper range of our 8% to 12% annual earnings per share growth target. We believe this increase will come as it has historically, with the organic businesses contributing roughly 4% to 6% growth in earnings per share and contributions from recently acquired businesses as well as the effect of the 2019 20 20 share buybacks, contributing an additional 4% to 6% of earnings per share growth. Allow me to briefly discuss the underlying assumptions regarding the base business growth for 2020. 1st, core funeral revenues are anticipated to grow in the 1% to 2% range. We expect both funeral services performed and sales averages to be flat to slightly up for the year, with the 1st 2 quarters reflecting easier comparisons relative to the back half.
We expect SEI Direct to grow their revenues in the mid to high single digits, expanding their operating profit percentage and growing profits by $3,000,000 to $5,000,000 We anticipate total preneed funeral sales production to grow in the 3% to 5% range for the year. Next, after a challenging 2019, we would expect cemetery sales production and cemetery operating revenues to return to growth in the mid single digit percentage range, delivering impressive cemetery operating profit growth with margins exceeding 30% for the year. From a capital and strategic perspective, we will be focusing on staying relevant with consumers with an emphasis on the growing trends in our industry related to celebration, simplicity and transparency. Our ability to deliver on these both in personal interactions as well as online to create a seamless and engaging customer experience will only further deepen the trust we have earned with our client families as well as new potential customers. We will continue to invest in technologies and enhance how we interact with consumers digitally, providing a better customer experience from the first point of contact to the arrangement conference and beyond, while also enhancing efficiencies in our operations with the appropriate controls around cybersecurity.
Look for a slight increase in our spending around cemetery inventory development as well as new construction and development of funeral homes. These facilities are built with an emphasis on modern flexible designs that appeal to a broadening array of customer desires. With our increasing EBITDA and current debt levels, we would expect a larger share of free cash flow to go to share repurchase, the timing and cadence based on our perceived discount to fair value throughout the year. To wrap it up, overall, I'm very proud of our team's progress in 2019. I realize that none of this is possible without my 25,000 teammates and appreciate all that you do for our families and for SCI.
As we enter 2020, I am so excited about our company's future. With that, I'll turn the call over to Eric. Good morning. Today, I'd like to begin by addressing our cash flow results, which be for the Q4 and then the full year of 2019, followed by our capital deployment activities for the year, and then I'll end by providing details of our outlook for 2020 just as Tom did. So let's begin with a discussion of cash flow for the quarter.
In yesterday's press release, we reported strong operating cash flow of $157,000,000 for the quarter, which was better than our expectations, primarily from strong operating results from our Funeral segment and higher cash receipts from both cemetery installment sales and trust funds. When compared to the prior year, operating free operating cash flow for the quarter decreased by about $7,000,000 Increases in cash earnings in the quarter drove gross profit up by about $8,000,000 dollars but this was offset by expected headwinds from higher cash interest payments of $11,000,000 and higher cash tax payments of 7,000,000 dollars Maintenance and cemetery development CapEx for the quarter, which recall are the 2 components that we define as CapEx in our free cash flow calculation, were approximately $54,000,000 This is $5,000,000 lower than the prior year, but generally in line with our expectations. Deducting these recurring CapEx items from cash flow, we calculate our free cash flow in the quarter to be just over $100,000,000 which again was generally in line with the prior year. For the full year, we generated $635,000,000 in adjusted operating cash flow, exceeding the midpoint of our guidance range provided throughout the year, which is around $590,000,000 This also compares to $610,000,000 of adjusted operating cash flow for 2018.
The increase of $25,000,000 over the prior year resulted from higher cash earnings and favorable working capital impacts that were partially offset by higher cash interest and higher cash tax payments. So on the topic of cash taxes, as we look ahead to 2020, we are modeling cash taxes to increase by about $55,000,000 to approximately $120,000,000 which will be a significant headwind for our cash flow in 2020. This increase is driven by the higher taxable earnings we anticipate in 2020, tax planning benefits that occurred in 2019 that are not expected to reoccur in 2020 and expected decrease in benefits from stock option exercises. As always, we will try to minimize cash taxes, but we believe $120,000,000 is a good guidance number that represents an approximate 24% cash tax rate, which by the way also aligns with our normalized effective tax rate expectations for 2020. Maintenance and cemetery development CapEx combined were approximately $204,000,000 for 20 19, which was flat compared to the prior year, but a little higher than our target of $195,000,000 dollars These investments are important to our business and you should expect to see us spend at a slightly higher rate in 2020 that I'm going to speak to in a moment.
Deducting these recurring capital expenditures from adjusted cash flow, we calculate our adjusted free cash flow for the year at a healthy $431,000,000 or a 6% increase over the prior year. So now let's discuss our capital deployment for the year. In 2019, we delivered value by deploying more than $400,000,000 towards acquisitions, new location builds, dividends and share repurchases. So let me walk you through the components. 1st, let's start with acquisitions.
We deployed approximately $107,000,000 which exceeded our target range of $50,000,000 to $100,000,000 So I'd like to point out that $56,000,000 of this amount was invested in high quality business acquisitions in 6 states in the U. S. And in 3 Canadian provinces. The remaining $51,000,000 was invested in land for 2 cemeteries, 1 in the Los Angeles area and 1 in Texas, as well as other land purchased for the purpose of building new funeral homes. Acquisitions continue to be our best use of capital as they generally result in a low to mid teen after tax IRR.
Additionally, we remain optimistic about the acquisition pipeline as we enter into 2020. In addition to acquisitions, we invested $36,000,000 in 20 19 on the new builds and expansion of several funeral homes during the year, which we expect will provide positive returns to us going forward. Dividend payments in 2019 totaled $131,000,000 which was an increase of 6% over the prior year of 124,000,000 dollars Going forward, we expect to continue increase in the dividend as the company's earnings grow. And as a reminder, we target a payout ratio of 30% to 40% of recurring net income. During the year, we also repurchased almost $50,000,000 of our 2027 notes in the open market to manage our leverage and reduce some of our higher interest rate debt, which benefited 2019 by around $1,500,000 And finally, we returned $130,000,000 of capital to shareholders in 2019 in the form of share repurchases.
Over half of this amount or about $77,000,000 of these share repurchases dollars of these share repurchases actually occurred during the Q4 as we achieved our desired leverage ratio and then saw a value opportunity to deploy more capital here by repurchasing 1,700,000,000 shares at an average price of $44.66 Ultimately, for the full year, we repurchased about 2,800,000 shares at an average price of $44.54 which has resulted in the number of shares outstanding being approximately 181,000,000 shares. Subsequent to year end, we have continued this repurchase program, reducing our outstanding share count by an additional 400,000 shares for a total investment of about $19,000,000 Now let's shift to our outlook for 2020 in terms of cash flow and capital deployment. In our press release, you can see that we have provided operating cash flow guidance of $590,000,000 to $640,000,000 range. Benefiting our cash flow in 2020, our expected higher cash earnings being offset by expected higher cash taxes that I just mentioned. So normalizing 2019 adjusted operating cash flow of $35,000,000 by the expected $55,000,000 increase in cash taxes gets you to a starting point of 580,000,000 This 2019 normalized base then benefits by about $0.16 of earnings growth, which equates to about $35,000,000 to $40,000,000 of incremental cash flow, which gets you to the $615,000,000 midpoint of our guidance range.
Moving on to CapEx. Our expectations for maintenance and cemetery development capital spending in 2020 is $230,000,000 or about $25,000,000 more than our 2019 spend. Of this increase, we expect about $10,000,000 dollars of investment in developing a technology platform aimed at improving the customer experience. The remaining $15,000,000 increase will go towards cemetery development to continue building out new and unique cemetery inventory to help drive increased cemetery preneed production. This capital continues to differentiate us and help drive superior returns.
In addition to these recurring capital expenditures of $230,000,000 we expect to deploy $100,000,000 to $125,000,000 in acquisitions and other growth initiatives, including new funeral home construction opportunities, which together drive low to mid teen asset tax internal rates of return, well in excess of our cost of capital. We have currently modeled $75,000,000 for acquisitions and $50,000,000 for these other growth initiatives. So as we look forward to our capital deployment strategy in 2020, we feel we have the financial flexibility continue much of the same successful strategy you have seen from us for many years. We follow a disciplined and balanced capital deployment approach designed to yield the highest relative value for our shareholders. This strategy is based on our stable free cash flow, our robust liquidity, which was nearly $860,000,000 at the end of the year as well as our favorable debt maturity profile.
So in conclusion, 2019 was a good year for us. Cash flow strength continues to be a highlight for us. I echo Tom's comments that none of this would have been possible without the hard work of our dedicated associates, and we appreciate all of their efforts. So with that, operator, that concludes our prepared remarks. And now we'll go ahead and open the call up for questions.
Thank you. We will now begin the question and answer session. And our first question today will come from A. J. Rice of Credit Suisse.
Please go ahead.
Thanks. Hi, everybody. First of all, maybe just to ask you to comment on something you did mention in the prepared remarks, which is the notification that the FTC gave that they will reevaluate the funeral rule. If you obviously, they put out some material when they made that request for comment. Anything in that that you'd like to highlight that's different than what you were thinking?
Have you gotten any feel for the timeframe? I know the comments need to be in a certain limited number of amount of time, but any sense about what their process beyond that will be to review this?
Sure, A. J. This is Eric. Good morning. As you mentioned, the FTC is seeking comment on the fuel rule.
The comment there's a 60 day comment period, and so they're due on April 14. I think the punch line of your question is that of all the questions we asked us to comment on, which are publicly available, nothing really surprised us. We've been expecting this now for over a year. I think we've been talking about it for over a year. They did ask other questions about cemeteries, crematoria and things like that.
But again, that was somewhat expected in their last review. The timing is pretty tough to figure out. I think there was a review back in the late 90s that we submitted comments to and it was many, many years later that ultimately the FTC responded to that with no changes to fuel oil at that point in time. So what we do know is we have 60 days to comment. We're very well prepared for that.
For the most part, this is about price transparency, which I've described to you before on previous calls that we feel strongly exists in the industry. But there is no real surprises. We'll meet the deadline of April 14. And then we just don't know the timing thereafter of the Federal Trade Commission once they receive all of the comments, not just from the industry players, but anyone in the public that wants to comment, what exactly will happen from there is open for discussion.
Okay, great. On the one hand, you had a nice pickup in preneed cemetery sales production. On the other
hand, the recognition rate was a little bit light
relative to what you'd thought. What's happening with the Asian consumer, particularly in LA and Vancouver, those two large markets for you. Is any of what you're seeing either the easing of the trade tensions or anything related to the coronavirus and how people are reacting in terms of purchasing habits? Do you attribute any of what you're seeing to any of that? And if not, especially on the recognition, what if you drill down, what do you think is behind more moderate recognition in the 4th quarter?
A. J, this is Tom. As it relates to the Asian consumer, we called it out because particularly if you look at the 1st and third quarter comparisons, we saw year over year drops. And again, there's some seasonality of sales. As you look at the Q4, we actually had favorable comparisons this Q4 versus last Q4, in particular around the parks that predominantly service the Asian consumers.
Particularly, I'd point out that Rose Hills had a very, very successful Q4 and drove great performance. So you look at the Asian consumer relative to the population, they both grew in this kind of about mid single digit growth rates. So we're very, very pleased to see that. Having said it, I don't know that we have great visibility into what's driving any apprehension or if apprehension has gone away as it relates to the trade talks and settlements or now with the virus. But I will tell you that what we saw in the Q4 and we haven't seen anything different that says things look pretty good as it relates to that consumer and as it relates to cemetery sales.
Okay. And then my last question would be around maybe flesh out a little more of this IT investment program to improve on the consumer experience? I know there had been
a lot of talk over
the last few years about your Beacon initiative. Is this related to that or this something completely different? And is there any update on what's happening with Beacon
as well as this new initiative? Why don't we bifurcate that question. The first part, A. J, is what we're referencing now because obviously we're spending money on the digital experience through our websites and the mobile applications as such and other things as it relates to digital marketing interaction. What this specifically is calling out when I'm talking about the capital is the development of a system that's going to allow us to interact with the consumer on an add need basis in a much more effective way.
And it really is not related to Beacon or anything else. It's really about data capture and the ability of the consumer to communicate directly with us online in a private portal. And then further development as it relates to taking that initial contact, the arrangement process and really the entire, as you think about as the client family interacts with us all the way to the end of the process. So this is the beginning of developing that, which we believe is going to result in a more favorable interaction with the consumer and drive revenues. It also allows us to be more efficient when you think about integrating all that information in our system as it relates to scheduling fleets and vehicles.
So it's really a first step in developing that approach that Eric is referring to. And I'll let Eric talk to the Beacon part of your question. On the Beacon part, A. J, I'm not sure there's really that much of an update because we're continuing the development of the application. If you recall, funeral continues to be well utilized.
The last time I called, I said that there's some certain states in Canada that are not open for business yet on the funeral beacon application, but about 90% is, and it's being very well utilized. I think that with a lot of reasons are some of the drivers that are causing double digit growth, for example, in the 4th quarter related to our community and funeral sales. So that continues to be something that's very effective for us. On the cemetery side, it's more of the same. We're continuing to develop the application, not to be a broken record, but it's complicated by the numbers of vendors and different products that we have in the merchandise area as well as the uniqueness of each individual cemetery property within each of the 450 cemeteries.
So we hope to continue to develop that during this year and probably have maybe a better update late in 2020 as it relates to cemetery.
All right. Thanks a lot.
Our next question today will come from Joanna Gajuk of Bank of America. Please go ahead.
Good morning. Thanks for taking the questions. So a couple of other topics. So the funeral segment, obviously, was very strong in this quarter. So can you talk about the different pieces in Sysun Nuclear organic sales average?
I mean, I know you mentioned the easier comps in terms of the, I guess, the repricing of the reclamation business in the past. So is that kind of the way we should be expecting going forward? Or should it normalize to below the rate that was printed this quarter? Because, yes, 2.7% is a pretty strong number. So I'm just going to try to get a sense of how we should think about going forward on that organic sales average?
Sure, Joanne. It's Tom. Good to hear from you. As we think about average, we feel really good, I think, about 2020. I think we said in my guidance that we expect funeral revenues to grow between 1% 2%.
We believe that volumes are on a good trajectory and we believe sales averaging particularly is on a good trajectory. What I referred to in the comments were the preponderance of the big changes that we made and we made them stages, but we went into certain markets and I think it's about 300 locations where we adjusted particularly cremation pricing on what I'll call the simple consumer in those markets. And by making those one time adjustments, it resulted in what we felt like capture of market share, which was offset somewhat by the lower pricing. And then from that new pricing level, we'd be able to inflationary price and fund it on. So what you saw in 2019 was the fact that you had that pricing pressure flowing through the average.
And for the first time in the Q4, and John talked assured us this would happen and none of us believe me. In the Q4, it showed up like we expected or he expected. And so we saw a very good average. And I think as we look at 2020, we would expect that trend to continue particularly in the first half the year into the Q3. And then it maybe gets a little tougher, but we feel pretty good about our average.
We feel really good about where we're priced in these markets very competitively and now particularly with that, what I'll call, simple cremation consumers. On the volume front, we're feeling very good as we look at volumes for this year. If you recall, last year, we had a really bad Q1 down 5%, and we said, hey, if history holds, don't worry. And sure enough, the down 5% turned out to be relatively flat. So I don't get too excited as a company, we don't get too excited about flu season because again, they tend to push things into quarters.
But for the year, we're working effectively and we feel like doing a really good job capturing market share through preneed, capturing market share through the digital interactions that we're much more offensive about today and also just our incredible local leadership that's competing more effectively for the business.
Okay. And then as well, I guess, you mentioned the digital interactions, and I appreciate the comment about the investments you've been making in terms of the platform and how you want to try to improve the consumer experience. But is there anything specifically in those efforts or maybe anything else are you thinking or planning to do as you prepare for potential changes that might come from the FTC in terms of the funeral rule? Or you're just going to first wait and see where it comes out?
Hey, Jay, that's a good question. We'll deal with the funeral rule. Like Eric said, we've got a process. We want to be a good part of the industry to talk about what's great for the consumer. But between you and me, we want to do what's right for our consumer with or without the Federal Trade Commission, this ruling, because we feel like transparency is important.
And for us, the definition of transparency isn't totally related to price. As Eric said, I think, pointed out to you guys, we survey our customers, we get a lot of feedback. Sometimes price is very important. As an example, this simple cremation consumer price is very, very important. And if you look at a lot of our particularly SCI Direct and other, we have pricing already available online because it's very important to that consumer.
Our concerns are and we are starting at pricing, I think now at 300 going to 500 Dignity location. But our concern is what are you conveying to the consumer that finds value and reputation, quality of facility. If you're not providing that along with price, then are you really educating the consumer to the level or you can confuse the consumer more if you're not doing that. So I think our strategy is how do we convey in a transparent way all the attributes that are important to the consumer. And that's what we're beginning to do and to try to do.
One of the things that we're really emphasizing now that we talk about is reputation and our online reputation. And you're seeing now, I think our ratings are up to 4.7 stars, which is pretty impressive. And that wasn't a focus until about a year and a half ago when Jamie Pierce came and got us to focus on that. And I think it's been tremendous feedback. We have instances where people are saying, I selected you because you have a lot of reviews and you're 4.7 stars or you're 5.0 stars, whatever the case may be.
So these are little things as time goes on, people are going to utilize these tools more. We're going to be in a place to capture that, particularly as it relates to our competition. So those are the little things that continue to add up that allow us to compete more effectively.
That's great color. I appreciate it. And just 2 quick number questions. So the G and A, you flagged that that was down year over year because there was $3,000,000 of the insurance proceeds. But even if you adjust for that, it was still pretty good number.
So the question I have is, is $28,000,000 per quarter a good runway going forward? And the other numbers question, as you increase CapEx, how should we think about D and A for the full year to 2020?
D and A, I don't expect that big of an increase. I think D and A was just south of the $250,000,000 $250,000,000 is probably around $245,000,000 So maybe that goes to somewhere between $250,000,000 $255,000,000 in that area, but I don't see it moving that much. As you saw as you mentioned, G and A was down to about $120,000,000 which is down pretty significantly, maybe about $20,000,000 in the prior year. But that really the anomaly really Joanna was in the prior year. It had to do with the accruals that we had to make related to a total shareholder return plan or a performance unit plan.
And as the shares really move north in last year in 2018, we had to true up all those accruals. So we kind of had think of it as a one time bump in that accrual that really you can see in the $140,000,000 plus
of G
and A last year. So what do I think this year? I think it's maybe a little bit more obviously inflationary type increases in all of those costs. So maybe it's not $120,000,000 maybe about 125 $1,000,000 to $130,000,000 in that ballpark for 2020 in terms of G and A.
A.
Our next question will come from Scott Schneeberger of Oppenheimer. Please go ahead.
Thanks very much. Good morning. Guys, I guess, on I appreciate the outlook for preneed. It sounds like in both segments, you're looking for mid single digit in 2020. Know you don't give quarterly guidance, but curious if you could follow-up some of the prepared remarks with how you think about the cadence, particularly for cemetery preneed sales growth and consideration for recognition of that revenue?
Thanks. Sure, Scott. Good to hear from you. I think on the cemetery side, as you think about first of all, let's get into recognition rates because I think that's important for people to understand. The a lot of times what happens is we've got these plans on the books to construct this inventory.
And so in the early quarters, you're selling into that unconstructed. I'm generalizing here because it can happen at different times of the year. And so what typically occurs is your recognition rates will range between, call it, 85% 90% for the Q1. Again, I'm rounding here, so please don't hold me too literally. And the 2nd quarter tends to follow that pattern.
By the 3rd quarter, your recognition rate gets closer to 100% because you're actually completing some of these projects and you're recognizing some sales from a prior period. And then obviously, you're still selling in non constructive too. So about that's 100%. And historically, in the 4th quarter, you crescendo with this, call it, 110% to 115% recognition rate because you are you now have maybe 2 to 3 quarters or 4 quarters of selling into an unconstructed project and you complete a lot of them. And remember, construction in certain parts of the country is hard to do when you get into winter.
So a lot of activity in the summer months, a lot of activity in the fall months. So that's the typical cadence. What you saw in 2019 was a higher recognition rate earlier in the year. We were in the, I think, low 90s, as I recall, in the 1st part of the year. And we ended the 4th quarter at around a flat 100, which is probably the lowest we've seen.
So again, I think what really happened is we had inventory that was available to sell that was constructed on the ground and we sold a lot of that and we didn't sell as much of the unconstructed stuff and therefore that didn't flow through the Q4. I would expect next year to be a little more between the 2, probably a little more emphasis in the 4th quarter than the 100% we saw this year. But and probably the 1st part of the year in the high 80s, approaching 90 as you think about the recognition rates. On comparisons, you can go back and look and I'm speaking from history, so forgive me. I think the Q1 is a tough comp as I recall.
I think the middle of the year is a little easier. Correct. So I think that's the way you think about whatever that comparison may be. The Q1 may be one of the tougher comparisons. And quite honestly, the tail of the Q1 is going to be total March.
That's a big sales month for us as you think about particularly in some of the parks that have our Asian consumers. Again, I think we'll do well. There's always a crossover into April. We feel really good about coming out of the gate right now on both parts of our sales, on the cemetery side and on the premium.
Okay. Sounds good. Thanks. May or may not be a segue to my next question. The I'm curious what swing factors you're looking at when you consider the low end or the high end of the guidance range for this year?
Just what would have you most concerned? And then where do you have a good bit of confidence? Thanks.
So I think the biggest swing factor in any year is going to be preneed cemetery sales. That is the toughest one. Sales. That is the toughest one to predict. There's a lot of execution.
I'm probably less concerned when you think about funeral volume. Again, we get overexcited about flus and non flus. And the truth is, I think we're competing very effectively. We're pretty good at predicting that. I do think the we feel like we've got a little bit of momentum on funeral average this year.
That should probably give us better results than we've seen over the last couple of years. So again, that could be a thing that, that were to change in a significant way could have an impact. And then I think premium cemetery sales, those are the big ones. We're going to generate a lot of cash flow. We're going to deploy it wisely.
So as I think about risk factors, that's probably it.
Great. Thanks. And then last one, you just brought it up, Tom, kind of flu and ebbs and flows. Could you just address what you're seeing this year? I mean, a lot of headlines, obviously, around flu, international and domestic, in particular, is where this question is going.
But it seems like a lot of activity this year, but perhaps a lower mortality rate. Just curious what you're seeing, how it's impacting you and how we might want to think about that in the early half of the season?
Yes. My mom always wanted me to be a doctor, and I'm going to play one right now. So first of all, the flu impact actually began a little earlier than usual this year. But the surge in that was around influenza B strength. I've learned a little bit about these two differences.
Influenza B usually develops later in the cycle versus the beginning of the cycle. And it tends to be harder on kids. And again, this is the factor which flu strain impacts immunity systems or lack thereof. So it's hardest on kids than people under 25. So what you saw, while there is a higher incidence of flu, the hospitalization rates and mortality rates are actually pretty low even as the incident rate declines.
I think you see that in hospital numbers as well. What's really unusual about this is the last time this happened was 1993. So it's been almost 27 years since we've had this kind of influenza B strain come first. And so it's really, really unusual. So the flu is prevalent.
We're not necessarily seeing it in the deaths rate. Now remember, we're not comparing against a hard number. So, we're doing fine as it relates to volume, but you could have expected based upon what was going on with flu that it would be something a little more severe. But we're not seeing that at least so far. Obviously, flu season is not over.
And if influenza A strain becomes more prevalent, that tends to have more of an influence on the elderly and therefore will probably result in more hospitalization and probably result in more deaths. So we're watching those things, but that's kind of what we're seeing right now, Scott.
Great. Thanks. Appreciate the color. I'll turn it over.
Our next question today will come from John Ransom of Raymond James. Please go ahead.
Hey, good morning. My mother always wanted me to be
a funeral home director, so that's weird.
There's still time for
you. Just on the celebration of life, are you seeing a material trend in services you're performing that are now outside of your core funeral homes and maybe in 3rd party location?
Okay, John. Let me answer that. So I think we're seeing a little of both. I'd say that we're capturing a lot more celebration and I'll break that into what I'll call, traditional celebrators is a term we use around here a little more. So we're seeing a lot more people that are choosing to celebrate versus more, but it may be a little more subdued than it's appropriate to go to church or appropriate during the funeral home.
We're seeing another one that I'll call a party celebrator that again, we've got with these more flexible facilities and particularly in Florida in your area. And I'm sorry if I can't hear you, you get 10 burgers banging a bat on a trash can. But in those areas, we're seeing more of those and we're capturing a lot of that. And actually, as one of our initiatives today, we're looking at expanding the opportunity to capture that celebrant consumer that's willing to go to a funeral home as long as it's a modern, flexible facility. That's a lot of our strategy.
I do think from our research that we just did, there's an element of a consumer out there that we probably were never capturing as it relates to the event. What I do believe is that we're capturing the cremation in a lot of cases, where they're coming to us and say, I'd like a direct cremation. Can you perform the service for me and return the remains of my loved one. And then that they are going out and at a later date or whatever the case may be, having some form of celebration in a unique spot. So I do think there's a trend of people doing that, that is interesting.
But I think we're looking at ways to tap into, 1, are we capturing enough of the service itself? And then is there a way that we could be helpful in that celebration? And again, it's such early days, John, I wish I can tell you we have the perfect answer. I don't know if we can be helpful if they need our help. I don't know if they saw some of our more modern facilities, if they would think that's an acceptable place to have a celebration.
So I guess I would say we're seeing more celebrations that we're capturing, but we believe there are also more celebrations occurring that we may not be a part of that piece. And that's part of our thinking right now as to can or should we tap into that and what's the value proposition for health.
Okay. And just the last one for me. If I could pick on you
a little bit, you're probably a
year plus behind on rolling out Beacon to cemetery. And just kind of curious, I know it's complicated, but
do you
think that formal follow function here in terms of, say, maybe we don't need 197 blue urns, maybe we can simplify what we're offering and use Beacon as an excuse to streamline some of the complexity in the cemetery line?
I think we are doing some of that, but I think it's actually more complicated than you think. It isn't just earned. I mean, if you think about every cemetery property is going to be unique. They're going to be different sizes. They're going to be different names of gardens.
So it really is a truly complicating factor. And again, I think that's why we were hesitant to try to give a whole lot of how long this is going to take. What I will tell you, John, is my feeling is this is the right path for our company. It is going to take longer. That's okay.
I think we have a lot of other ideas about how we're going to drive cemetery sales. And right now Beacon doesn't need to be that reason. But I think when we have everything on the system, when our sales teams are up and running with this, we believe it's going to result in a better sale, more robust sale. And also I think a more efficient sale. But so I hear you and I think we are trying to simplify to the extent we can.
The cemetery is such a complicated animal as it relates to the property itself and the different options that we have in the cemetery that already exists. Because remember, some of these inventories are already built. You can't you're not going to throw it away. Could you be a little more streamlined in how you develop your future inventory? Absolutely.
And I think we'll do some of that. Great. That's it for me. Thank you.
Our next question today will come from Duncan Brown of Wells Fargo. Please go ahead.
Hey, good morning. Just two quick ones for me. One, looks like there was a divestiture in the quarter. Any color you have there would be helpful. And then just appreciate the guidance on M and A outlook for 2020.
Wonder if you could give us a little more color on what you're seeing, any changes in multiples, anything like that as you're headed into the rest of the year? Hey, Duncan. As it relates to the sale, I think I told you from time to time, we have real estate in some very nice areas of certain towns. And so from time to time, we get offers, as the godfather says, we can't refuse. And so this was a particular opportunity where we had a great business and a great location and real estate developers overwhelmed us with opportunities.
So we had a pretty significant gain as it relates to a location sale. Again, we have a strategy to continue to capture that business. But as you think about the multiples, it was one that we just had to take. So it's a nice generation of cash for us and we can redeploy it. As it relates to acquisitions today, we're still seeing a lot of activity.
I think because of the changes in information, because of probably the demographic of the ownership, we expect and continue to see people willing and wanting to sell. I will tell you, I think it's gotten a little more competitive in the last year or so, and we are starting to see a little price creep as it relates to certain opportunities that are out there. And again, we've seen some competitors face some pretty significant premiums. I would tell you that on the ones we really want, we get very competitive. Sometimes we are limited and restricted by the FCC and restraints around transactions that we've done previously.
So those consents can be an impediment for our ability to compete for some of those. So I think in a lot of our cases, you're seeing us beginning to build a lot more locations. We're going to spend $50,000,000 on locations this year. And that's one of the reasons because it allows us to compete in markets and it allows us to take, again, this concept that John was referring to, as you see more consumers that want celebration, you need a flexible facility. And some of these facilities you're buying, the buildings are 40, 50, 60 years old.
They haven't been remodeled. The rooms aren't set up the way you want them. So I think you're seeing a shift from us to say, let's build what we want and we're going to compete and buy the things that we think are the highest value for shareholders. So a little more pricey, but still seeing a lot of activity. We had a lot of activity in the Q4 and I think we've got a lot of activity in deals that will close in the Q1.
Great. Thank you.
Ladies and gentlemen, this will conclude our question and answer session. At this time, I'd like to turn the conference back over to SCI Management for any closing remarks.
Thank you so much, everybody, for being on the call today. We look forward to speaking to you again at the end of April. Have a great week.
The conference has now concluded. We thank you for attending today's presentation, and you may now disconnect your