Morning, and welcome to the Second Quarter 2019 Service Corporation International Earnings Conference Call. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note this conference is being recorded.
And I will now turn it over to SCI Management. You may begin.
Thank you. Good morning. It's Debbie Young, Director of Investor Relations at SCI. Thanks for joining us today as we discuss our 2nd quarter results. I'll quickly go over the customary Safe Harbor language before we begin with prepared remarks.
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. Today, we may also talk about 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 it's also in our press release and 8 ks that were filed yesterday.
With that, I'll now turn the call over to Tom Ryan, SEI's Chairman and CEO.
Thanks, Debbie, and thank you everyone for joining us on the call this morning. Today, as usual, I'm going to begin my remarks with a high level overview of the quarter, followed by a more detailed analysis of our funeral and cemetery operations, and finally, comment on our outlook for the back half of twenty nineteen. So, let's begin with an overview of the quarter. As you saw in our press release yesterday, adjusted earnings per share grew $0.03 or almost 7% to $0.47 per share. This was in line with our expectations as growth in our cemetery segment and a lower tax rate helped to offset higher interest expense.
Summarizing the quarter at a high level, we had a solid operating income growth in our cemetery segment by recognizing a higher amount of preneed cemetery sales production through income as we purposely drove more sales into a higher percentage of already developed property. Funeral profits were flat as an increase in funeral volume in both our core and non funeral home channels and continued focus on costs offset a decline in the sales average caused by a rising cremation mix. The good news is that our non funeral home operating channel, SEI Direct, is back on track with an increase in preneed sales production of over 15%. Below the operating line, a lower tax rate more than offset anticipated higher interest expense from higher variable rates tied to LIBOR as well as refinancing some shorter term variable rate debt into 5.8th 10 year notes. Now shifting to some more detail around the funeral operating performance for the quarter.
From a top line perspective, we grew comparable funeral revenue over $5,000,000 or about 1% compared to the same period last year, primarily related to higher recognized preneed revenues. Core funeral revenues grew slightly over the prior year quarter. We were pleased that comparable funeral volume increased 1.1% against the prior year, bouncing back from the Q1. This was partially offset by a decline in the sales average of 0.8%. The organic revenue per case at the customer level before mix change grew about 90 basis points, but was more than offset by 170 basis point increase the cremation mix.
I believe part of this larger cremation mix change is a result of our success in gaining market share for core cremation customers in certain of our markets. Recognized preneed revenues rebounded nicely in the quarter and increased more than $5,000,000 or over 15%. Recall, this represents products sold on a pre need basis, primarily by our non funeral home channel that are delivered at the time of sale, resulting in immediate revenue recognition. I believe the anticipated distractions of converting the sales associates at SCI Direct from independent contractors to employee status are largely behind us now and we are back to full strength and growing again. Special thanks to Tim and the SCI Direct management team for their leadership on this.
Revenues from our non funeral home channel, these are the services performed at need by SCI Direct, grew over $1,000,000 or 10.3%, led by a strong increase in cremation services performed both from immediate at need cases as well as from cases serviced from our preneed backlog. Finally, other revenue, predominantly general agency revenue, fell a little more than $2,000,000 quarter over quarter, primarily due to a decrease in preneed funeral insurance sales production, coupled with a lower cremation rate. While the commission rate was lower in the quarter, the general agency commission rate for the 1st 6 months is in line with our expectations and prior year. From a profit perspective, operating profit was essentially flat and operating margins decreased 30 basis points to 19.5%. Considering the limited revenue growth for the quarter, I was proud of our team's focus on managing our variable and fixed costs, which afforded us the ability to match last year's profitability.
The good news is that we continue to focus on cost reduction initiatives, which we believe will have a continuing benefit throughout the remainder of 2019. Finally, total preneed funeral sales production, which gets deferred into our backlog grew 3% for the quarter. The increase was primarily driven by SCI Direct, which grew an impressive 15.5%, again reflecting that our sales team is back to full strength. Preneed sales at our core locations were relatively flat to the prior year quarter as truss production grew offsetting the insurance production decline. However, keep in mind that we were up against a tough comparison as last year we reported a 10.4% increase in preneed sales at our core locations compared to the Q2 of 2017.
Now turning to cemetery operations. Comparable cemetery revenue grew $2,400,000 or just under 1% in the quarter. This consisted of operating revenue growth of about 3%, which is partially offset by lower perpetual care trust fund income due to the timing of distributable capital gains. In terms of the breakdown of cemetery revenues, recognized pre need revenue grew $8,000,000 or nearly 4%. This growth is primarily due to the higher revenue recognition rates.
Recall that higher recognition rates means more of what we are selling is getting recognized in earnings. This higher rate is a result of our sales team selling a larger percentage of existing developed property versus undeveloped, as well as achieving the down payment criteria for some of the strong sales production from the Q1. Cemetery preneed sales production was lower by $7,000,000 or 2.9% against the tough comp as the Q2 of 2018 was the strongest production quarter we have reported in several years. The largest decline was in the large property sales category, which as we've explained before can ebb and flow from quarter to quarter. While we are not pleased with our 2nd quarter sales production, the preponderance of the missed expectation was isolated to a few big markets, where for the most part, regulatory or structural challenges created temporary setbacks and we are confident improved performance is on the way.
Additionally, on a global basis, we implemented some healthy long term focused behavioral changes around sales goals, discounting and customer relationship management tools that may have been temporarily distracting during the quarter, which should drive improved efficiencies and productivity in the back half of the year and for years to come. For the 1st 6 months of 2019, our cemetery preneed sales production has grown about $6,000,000 or 1.3%. It is our belief with momentum into the back half of twenty nineteen, we should be able to achieve the lower end of our annual cemetery pre need sales guidance of 4% to 6%. Finally, as it relates to revenue, we experienced a $5,900,000 decrease in perpetual care trust fund income following a $7,500,000 favorable increase in the Q1 of 2019. As we said before, the timing of capital gain distributions can be quarter to quarter.
Comparable cemetery operating profits grew $2,300,000 or 2.4 percent and margins expanded 50 basis points to 30.4%, primarily resulting from the operating revenue increases I just described. The benefit from various ongoing cost reduction initiatives helped to offset the decline in high margin trust fund revenue and prevent additional growth in fixed costs. So, to wrap it up, we've delivered on the more challenging half of 2019 on a comparable basis, especially in light of the challenging Q1 funeral volumes. We would expect the second half to generate a double digit percentage increase in earnings per share, driven by profit growth in the Funeral segment in both quarters, profit growth in the Cemetery segment predominantly in the Q4 as the Q3 of 2018 had a significant revenue impact from completed construction projects that will be lighter in the coming Q3, as well as lower general and administrative costs in the back half of the year. Higher comparable tax rates should mute the impact somewhat, but we should still show very impressive earnings per share growth.
We continue to believe that we are on track to deliver solid results for the full year 2019 and are updating our adjusted annual earnings per share range to $1.90 to $2 with a midpoint of $1.95 The $1.95 represents a 9% increase over adjusted 2018 earnings per share of $1.79 even as we expect a slightly higher tax rate for this year. We are confirming our adjusted operating cash flow guidance of $550,000,000 to $610,000,000 and Eric will talk more about the short ones. In the meantime, we'll continue to pursue our 3 core strategies of growing our revenues, leveraging our scale and deploying capital in a disciplined manner towards the highest and best use for the long term benefit of our company and our shareholders. With that, I'll turn the call over to Eric.
Thanks, Tom. Good morning, everybody. I'm going to now give you some color on our cash flow results during the quarter. I also want to provide some insights on our trust funds. I'll cover our capital deployment for the quarter and then more importantly, I'll touch on our financial position and our outlook for the remainder of the year.
So, as you saw in the press release, we generated adjusted operating cash flow of $84,000,000 in the quarter. This is in line with our expectations. It was down about $20,000,000 from the prior year quarter as growth in operating profit was more than offset by anticipated both higher cash tax payments as well as higher cash interest from the debt refinancing activity that we did during the quarter. Quarter over quarter cash tax payments increased $20,000,000 and as I said that was expected. In the first half of twenty nineteen, we have incurred $50,000,000 of cash taxes as compared to about $25,000,000 in the first half of last year.
So, we refined our estimates for the full year. We now believe cash tax payments will be closer to $90,000,000 for the full year of 2019, which is a $10,000,000 reduction from what we previously guided in terms of cash tax payments. Therefore, looking at the balance of the year, we estimate $40,000,000 of cash taxes in the back half of 2019 compared to $30,000,000 which was spent in cash taxes in the back half of twenty eighteen. Now also related to taxes, we noted in our press release an adjusted effective tax rate for the quarter of 23.3%, which declined from 26.7% in the prior year as we primarily benefited from higher excess tax benefits on increased exercises of stock options. Keep in mind though, as you compare the second half of twenty nineteen versus the second half of twenty eighteen, we are expecting an adjusted effective tax rate of around 25%, which compares unfavorably to the back half of twenty eighteen, is about 20% that again was reduced by unusually high excess tax benefits last year.
Cash interest payments increased about $8,000,000 during the quarter. About $2,000,000 of this was expected due to the higher interest rates on our floating rate debt, but the remainder related to our recent financing transaction that I'll now address. So, in May, we issued new $750,000,000 of 5.8 senior notes, their 10 year notes due in 2029 and we use these proceeds to pay off $425,000,000 of our 5.3.8% notes that were due in 2022 as well as refinance about a little over $300,000,000 on our credit facility. We also entered into a new 1,650,000,000 dollars 5 year credit agreement, consisted of $1,000,000,000 revolving credit facility and a $650,000,000 funded term loan. These transactions significantly enhanced our liquidity as well as our debt maturity profile while reducing our float in interest rate exposure.
This again sets us up nicely to execute our capital deployment plans going forward. So by converting from the 2022 notes with payments that would have been made in January 2020 next year to the new notes that will pay interest in December of 2019, Therefore, we will experience a one time pull forward of cash interest of about $7,000,000 to $8,000,000 for calendar year 2019, which essentially washes the reduction in cash taxes for fiscal year 2019 that I just noted. From an earnings perspective, interest expense rose $6,600,000 year over year in the first half of twenty nineteen, driven in large part from interest on our floating rate debt increasing from 3.5% in the first half of twenty eighteen to 4% now in the first half of twenty nineteen. With the benefits from the refinancing, we expect the interest at our floating rate debt to be 4% in the second half of twenty nineteen and to also be generally flat to the second half of twenty eighteen. Now if the Fed does elect to reduce rates, depending on what you believe 25 or 50 basis points, we could have a tailwind here of about a $0.01 in the second half of twenty nineteen, again, all else being equal.
So now let's move on to free cash flow. Maintenance and cemetery development CapEx combined, which again are the 2 components that we define as CapEx in our free cash flow calculation was approximately $50,000,000 for the quarter or flat to the prior year quarter and generally in line with our planned spending. When we deduct these recurring CapEx items from cash flow, we calculate our free cash flow in the quarter to be about $33,000,000 but year to date, our free cash flow calculates to almost $175,000,000 So usually before I move on to capital deployment, I want to take some time to address some of the trust related metrics for the quarter. First, I'll talk about perpetual care trust fund income in the cemetery segment, which Tom also mentioned as well. Our cemetery segment was impacted by $6,000,000 reduction in perpetual care trust fund income during the Q2.
This compares to a $7,000,000 increase in the Q1 of 2019. On a year to date basis, we are slightly up compared to the prior year and in line with our expectations. Similar to what I mentioned last quarter, the Q2 was impacted by fluctuations related to the timing of capital gains and other distributions. But looking forward to the balance of the year, while we don't expect large swings, the timing of distributions from perpetual care funds not held in our total return states is somewhat uncontrollable as portfolio managers have the discretion to trigger capital gains that are then generally distributed to us and recognized as earnings in most states. So, now I'd like to spend a moment addressing our preneed funeral and cemetery trust funds.
As you saw in the press release, they are up a healthy 13% year to date. After a tough Q4 of 2018, where our trust funds dropped about 10%, we have projected some recovery in our trust returns during the first half of 2019 in excess of our typical mid single digit growth expectations of about 6% nominal return prior to fees. The actual returns we have experienced though, again the 13% have exceeded our expectations by around 5%. So using our rule of thumb of about $1,250,000 of EBITDA impact per 1% return change, again, this is above or below the trailing 10 year 6% return, this would equate to just over $6,000,000 on an annual basis, half of which should occur in the second half holding all else equal. So now moving on to capital deployment during the quarter.
We deployed about $88,000,000 towards acquisitions, new location builds, dividends and share repurchases. Also included are some open market debt repurchase as we continue to our focus on modest deleveraging. So let's talk about the breakdown of the components. First, we deployed $14,000,000 towards acquisitions and real estate purchases during the quarter, which included several funeral homes purchased in New Jersey, Saskatchewan and Ontario. We believe acquisitions like these continue to be our highest and best use with mid teen after tax returns.
I'd like to welcome these associates to the SCI and the Dignity Memorial family. Year to date, we've invested $33,000,000 towards acquisitions and we continue to guide this spend to about $50,000,000 to $100,000,000 for the full year given the acquisition pipeline we currently have. In the quarter, we also invested additional $10,000,000 or $4,000,000 over prior year on the new build and expansion of several funeral homes, including new funeral homes in Texas, Florida, Colorado, California and Georgia. This increase in growth capital really has been a trend for us over the past several quarters and is intentional. These new builds not only provide us with great low double digit returns, but also expand our footprint into desirable markets to meet the needs of a customer increasingly looking to celebrate life.
Over the latter part of 2019, you can expect continued increased deployment on these types of projects by just under $5,000,000 over prior year levels. Dividend payments in the 2nd quarter totaled $33,000,000 represented an increase of about 5% over the prior year. This reflects the $0.01 per share or 6% increase in our dividend to $0.18 per share per quarter, which we announced in February. Next, we returned $15,000,000 of capital to investors in the form of open market share repurchases, which are approximately 337,000 shares at an average cost of about $44 per share. Our current number of shares outstanding is just over 182,000,000 at the end of the quarter.
And today, we have about 160,000,000 of remaining share repurchase authorization. Finally, we repurchased almost $16,000,000 of debt in the open market to manage leverage as well as reduce some higher interest expense debt. Interest will benefit by almost $600,000 associated with future purchases in the second half of twenty nineteen. And on the topic of leverage, we began the year toward the higher end of our desired range of 3.5 to 4 times net debt to EBITDA due to the robust capital deployment that we had in 2018. This capital deployment was driven in part by almost $195,000,000 of acquisitions last year that were financed with cash.
Our quarter end leverage was about 3.89 times. And when we look towards the second half of this year, we expect to naturally delever as our performance grows when compared to the second half of twenty eighteen. This will provide us with the flexibility to deploy capital to the best use for the remainder of the year, which will include share buybacks, but also will get us closer to our expectation of 3.75 midpoint of our leverage target range by the end of the year. We also finished the quarter with tremendous liquidity of about 1.2 $1,000,000,000 consistent of just under $250,000,000 of cash on hand and just under $1,000,000,000 availability on our new revolver. So in closing, cash flow results continue to be strong.
Through the first half of twenty nineteen, we're aligned with our expectations. I'd like to thank all of our 24,000 of our SEI associates for helping to achieve these stellar results. While we've not changed our 2019 guidance range for adjusted cash flow of $550,000,000 to $610,000,000 that's $1,000,000 we have updated the components slightly by taking into account the $10,000,000 of lower anticipated cash taxes that substantially offset by almost the same amount of higher cash interest payments. Our cash flow, in addition to $1,200,000 of liquidity that I just mentioned, sets us up very nicely to deploy capital over the remainder of the year by investing in highly accretive acquisitions as well as new build projects, while funding the dividend and returning capital to our shareholders in the form of share repurchases. So with that operator, that concludes our prepared remarks.
We'll now go ahead and turn the call over to you to take questions.
Thank you, sir. We'll now begin the question and answer session. And from Oppenheimer, we have Scott Schneeberger. Please go ahead.
Thanks. Good morning, everyone. I guess I would just start out on the lower cemetery preneed growth in production specifically in the quarter. Tom, could you go over again please the drivers of that? Maybe give us a sense of magnitude of each and then and some thoughts about the corresponding turn and benefit in the second half and thereafter?
Thanks.
Sure, Scott. Thank you. First of all, I guess, I'd level set with and I think I had in the prepared comments. If you look back at the Q2 2018, it's our highest production quarter for preneed cemetery in the last 5 years for sure, maybe forever. 2nd quarter is always generally a very strong quarter on a seasonal basis.
So, we had a high hurdle to get over. The second thing we did and I touched upon a little bit, but didn't go into great detail with regards to some changes that we made associated with our targets. 1, we raised the targets for achievement in order to give bonuses. We recognize the fact that interest rates are can be a form of discount. And so, in equating that to the way that we compensate the sales force and driving fair interest rates as we finance these things over time.
And then finally, some discipline around utilizing the sales force product, which is the customer relationship management. So, we did a lot of things that are tough, good behavioral changes that I think is going to drive productivity, enhance our sales force ability to sell. And again, when you do those things and we did these predominantly in April May, they can be temporarily distracting. And so, I think that had an impact. But again, as I mentioned, I think those are things that are going to benefit Q3 and Q4 when you think about our ability to achieve those production levels.
And then we just mentioned again that from time to time, you're going to have markets and particularly big markets. We mentioned in the Q1 some challenges in Vancouver as it relates to reaching targets of previous years. And those things just are going to happen from time to time. And we've got plans that we believe are going to allow us to lift our game even in those bigger markets. So, we're excited about the back half of the year.
I think we are confident that number 1, we're generating probably the best leads we've ever generated in the history of the company. They're going to be very productive as you think about the back half of the year. By the way, those leads cost less than they used to cost. They're better leads. We're now globally on a customer relationship management system that's going to allow us to be more productive in handling those leads and managing them over time.
And so, we feel really, really good about the momentum as we enter the back half of the year. Tough second quarter, but I think we made some changes that are positive for the long term benefit of our company and our sales counselors.
Thanks. I appreciate that, Tom. The cemetery recognized revenue was certainly elevated and benefited the quarter. I suspect that might be a little bit more volatile in the back half. Could you please discuss that a little bit?
Sure, Scott. I think, first of all, when you think about cemetery construction projects, a higher proportion of them tend to occur in the back half of the year, particularly in the Q4. And a lot of it just has to do with weather. Obviously, a lot of work can get done in the summer months when you think about certain markets. And so, a lot of the completions will occur.
That's historically the case. We expect it to be the case. Last year, we had an unusual amount hit in the Q3. And so, I just kind of highlighted for you guys, we don't believe we'll see the same level of constructed revenue recognized in the Q3. So, we think our production will be great, but the GAAP revenues probably will be closer to flat or slightly down.
But in the Q4, I think we'll pick that back up. So, a lot of the reasons why we can recognize more revenue today is because we've invested in these cemetery projects. I mean, we've now gone multiple years of significant development of great projects. And so, now there's more inventory on the ground to sell and we're selling into it and we can recognize it faster. So, I think that's a little bit of what you're seeing in the first half of this year.
And so, that should smooth it out a little bit as you think about having a full country's worth of good existing inventory to sell. All
right. Thanks. And one more if I could. I'll leave the funeral side for others to ask. But the cost savings initiatives that benefited the quarter, could you touch upon that a little bit more and perhaps how that should affect second half?
Yes, I think some of it I touched upon. We've done a really good job of finding more efficient ways to generate leads through digital leads that are cheaper than historical. We've got significantly more leads in the quarter related to seminars. We've lowered the cost and the effectiveness of our direct mail programs. So, a lot of things around lead generation that have helped.
We also have seen from a customer facing cash cost perspective, we've had initiatives both in the field and in the home office to reduce the what we call non customer facing costs. So, think of travel, entertainment, things of the nature, and we've seen successes to the level of 20% to 30% type of reductions year over year. So, again, I think what we're really doing as a company is to say, look, we're going to begin to invest in some new and exciting things as it relates to digital strategy, focusing on driving more customer behavior. Let's find ways to fund these investments that we see coming. Another thing I think you'll we'll talk a little bit more because it happened in the Q3, but we purchased cemetery land, raw cemetery land for the first time in a long time in some of our couple of our key markets that again, we want to long term make sure that we have the right type of inventory to continue to sell.
And so, as you think about putting capital to work organically in some of these markets now, even in some cemetery instances, this is just really an effort to rally everybody around, let's generate cash to invest in our future and continue to lead the industry in a direction we want to go.
Okay, thanks. Will you be balancing maybe some sales of cemeteries now that you mentioned that you're purchasing some land or is it just opportunistic and one offs you think?
Yes. I think the land that we purchased is really around having a long term footprint that works in some of these big markets. So, think of the L. A. S, the Houston's, places like that where we have significant presences, big cemeteries, lot of growth in those markets and just making sure that we have got developed property that meets the needs of those consumers, their wants and needs.
So, I think these are kind of one offs, they are not big ones, but these are the types of things that and like I mentioned before, kind of the digital strategy that we're embarking upon from generating leads to also just the customer experience, finding ways to fund those projects with our hard earned dollars and making sure that our shareholders get the right returns.
Thanks very much. I'll turn it over. Thanks, Scott.
And from Bank of America, we have Joanna Gachuk. Please go ahead.
Joanna. Good morning. Thank you for that. Yes, hi. Good morning.
Can you hear me now?
Yes, yes, Joanna.
Great. Okay. So I guess on the first on the quarter on the funeral segment, the core cremation shifted 170 basis points, so that's better than 200 basis points you talked about in Q1. So I guess maybe can you just flag to us the items you were talking about the last two quarters in terms of the impact of the acquisitions and also of your own actions that were impacting the last two quarters in terms of what was the magnitude of the impact this quarter?
Sure, Joanna. So, I think last quarter we talked about this and we saw a 200 basis point shift. And my comments were around that we believe 30 basis points to 40 basis points of that shift was associated with some changes we made in selected markets. I think we had 30 markets where we made changes to, I'd say, the starting at pricing as it relates to the cremation consumers in those markets. And we saw volume lifts in those markets associated with it.
Another 30 basis points to 40 basis points we believed was the mix of acquisitions. As I think I mentioned before, the average cremation rate in the acquisitions over the last 2 years was probably about 65% higher than our traditional. So, those two things we thought combined and I'd tell you that that's proving out, I believe to be accurate. What we're seeing now is, for instance, even within the quarter, Joanna, you saw the 170 basis points. In June, it was significantly lower than that.
And that's just anniversary comparison. We made these changes throughout the year last year. So, you're seeing some year over year overlap now as it relates to that pricing being in place in those markets and therefore, you've gotten your initial lift and you've maintained it. So, we still believe that the cremation mix in our business is probably changing about 100 basis points to 150 basis points, give or take a quarter. And the additional volume, I should say, mix that's been driven is incremental volume where we're getting customers we weren't getting before.
So, that's why even though the mix change is there, we're pretty excited about it. We think it's adding
still or did you anniversary the impact of the changes you were making in the 30 markets or you're still not anniversarying it fully?
I think you'd probably see it fully sometime in the Q4. I think there's probably still a shift, again shifting more to normalized trends in the Q3, but you still got some anniversary pricing that we did in the Q4 of 2018 that will impact that. And again, I'm not perfectly familiar with the cadence of our acquisitions. But again, I think you'll see it normalize back within that 100 basis points to 150 basis point range, probably at the top of that in the Q3 and again, maybe to a midpoint by the time you get to the Q4, that would be an expectation.
All right. That's helpful. And I guess the on staying on the funeral segment. So the margins declined year over year, but I guess the decline was not as severe as in Q1. And to your point, the revenues, the comparable revenues was actually up nicely.
So, what kind of revenue growth do you need to keep margins flat in that segment?
I mean, we if you look at the 2nd quarter, we're down, I think, 30 basis points on the margin percentage, and we did it with, I think, a 1% revenue growth. I think if you can get in the closer to 1.5 percent, then you can begin to grow your revenues on that side of the business. So, if you think about the back half of the year, to the extent we can flatten out the average and continue to grow volumes, which again, I think we feel like that's something that can be achieved, then you'll see margin growth in the back half of the year.
All right. And then if I may follow-up on the statements you're making in terms of your investments in digital strategy. So can you flash out a little bit more in terms of what you're doing different? Or it's just a continuation of what we heard before in terms of search engine optimization, improving your web sites, anything new or anything you're accelerating? Thank you.
Well, really, the digital strategy is going to be a longer term transformation that's probably going to take multiple, multiple years and will ultimately also be about the customer experience and how we handle the entire process from onboarding a customer until we've received the feedback from that customer. But what I'm talking about now that we're spending some time and money on was the updated websites and the effect of that, because we've seen, for instance, in the first half of the year, we've grown about 33%, over 61,000,000 sessions on our website. We also have had a acute focus on our online reputation and done some things to again solicit feedback from our customers, receive those ratings. We're driving those scores up, which again then drives more traffic and more search engine results for us when you think about on a paid basis and even again on a non paid basis. So, it's things like that that are we believe going to generate more leads, more effective leads, build our reputation, and so allow us to compete more effectively and obviously against our competitors, which don't have the ability to do some of these things.
So, that's really what we're talking about in today. I think we'll do more as it relates to customer segments and being able to find ways to engage with consumers and drive more customers to our business as time goes on. And again, it will continue when you think about the way that we interact and service our customers. It's just going to be continued stream of investment that I think is going to again put a further gap in our performance versus what the rest of the industry can do.
So over time, will you be able to kind of pinpoint to any changes in market share as a result of these? Or I guess you quoted some stats in terms of the visits on your but anything you will track over time and pour back to us in terms of how does it impact your market share?
That's surely the goal, Joanna. I think it's really early days, but I think we talked a little bit about this customer segmentation study that we've done and we've completed that. We've had multiple groups study this, looking at different ways that we can take this information and use it to our advantage service customers better and focus on the things that we can do to drive future behavior. And we mentioned a couple of things that I don't think are secrets to our industry, but we believe based upon our study that there is a higher preponderance of people that want to celebrate and not more, and we think there is a higher preponderance of people that want it more simplified versus complicated. So, taking those learnings and saying, how can we better communicate, provide information, transparency to the consumer, where they view us as the place to go when you want to celebrate.
They view us the place to go, because it's simple. And that's easily said, hard to do. And I think now what we're trying to do is articulate that strategy, develop ways to engage with the consumer. And to the extent we can do that, I believe that's going to drive market share for us in differential ways. We're going to continue to compete like we are.
I still believe preneed is a huge driver of future market share and we're the best at it and we're going to continue to get better. So, think of that combined with what I just said and you get excited about what the future can hold for FDI.
Thank you. I'll go back to the queue.
Thanks, Shannon. From Credit Suisse, we have A. J. Rice. Please go ahead.
Thanks. Hi, everybody. A couple of questions, if I could. On the comments around the perpetual care trust fund results and obviously the year to year headwind that presented this year or this quarter. I know part of what's been going on there is you've been restructuring some of the portfolio for your total return strategy.
Is that pretty much played out? And maybe is this level what we're
latter, A. J. Again, it was volatile in the Q1 in a positive direction. It was volatile in the Q2 in a negative direction. A lot of that has to do with the timing of the capital gains that are distributed like I talked about in the remarks.
This relates to the trust funds that are still in the old type portfolios with the fixed income oriented asset allocation as opposed to the total return portfolios, which are about total returns probably up to 40%, 45% of the total assets. It's not played out yet. We hope to have some larger states come online next year or the following year that would may even put us above 50%. But on the portfolio that is the old asset allocation, again, the way it works under the state laws is the portfolio manager can decide to trigger capital gains. And from that, it then gets distributed to us and is then earnings and cash flows to us from those examples.
So, the more you go to total return, the more you reduce the old fixed income portfolio and the less volatile it will be. But all else being equal, it's generally about $70,000,000 $75,000,000 of earnings for us each year coming out of the perpetual care funds. And there's somewhere between $10,000,000 or $20,000,000 of that to be capital gains. So, there is that much volatility through it and you saw that go in opposite directions in Q1 and Q2, but normalized for the entire first half versus prior year.
Okay. All right. And then same thing about the agency fees. I guess that was a drag this quarter. It had been positive in the first quarter.
Anything going on that made it a drag in the current quarter that will and what do you think about the back half there?
I think it will normalize in the back half. I think that ebbs and flows. I mean, sometimes you have a mix change between what is being sold in states that are selling predominantly trust fund oriented PAF versus insurance contracts. Now as a general statement, our insurance going into our backlogs, our PIF sales are somewhere around 70%, 75% is a very general statement. But depending on geographically, which states are selling what and how the 90 day quarter goes, it can ebb and flow.
And when it does ebb and flow like it did this quarter and we actually had less of a mix of insurance funded contracts, that can to some extent, although it never really would be material, I think in my mind, could affect your general agency revenues. So we really expect that to be normal as you've seen it in the back half of this year.
Okay. Any update on the Beacon initiative?
There really isn't that much of a change in facts that I've described to you before from last quarter. Just to refresh everybody's memory, funeral is coming first, cemetery is coming second. We had funeral up to about 75% of eligible contracts being sold and 75% of usage. That's not new information. And then we pivoted our resources towards the cemetery segment, which again is a little bit more difficult because each property in the cemetery that needs to go into the system is different and unique.
But more importantly, there's a lot more vendors and a lot more merchandise to be able to put into the system as well. As I described to you last quarter, we continue to test just a handful of cemeteries as we build the application, that will continue And it's kind of going to be the same message till we get to 2020 and really start seeing some of the test and results and go from there.
Okay. And just my last thing. So this is just a conceptual question. If we look at the earnings trajectory in the first half, it's been in the single digit range, if you blend the 2 quarters together. And then the expectation is that you move into the low double digit range in the back half of the year.
It sounds like a lot of that is just easier comps, but there's a lot of other moving parts. Is there a handful of things or 1 or 2 things that you would point to specifically that give you confidence that you can see that acceleration and that return to double digit growth is within reach?
Yes, A. J, I think, 2 things. On the funeral side, because we believe the comp volume situation is going to be better, we feel like funeral revenues will surprise a little bit to the upside. Combine that with we've got SCI Direct back on the track of growth. So, put those two things together with our cost initiatives, we think funeral profits grow in both the 3rd and the 4th quarter.
That's going to be one significant driver. Cemetery sales, we feel really good about. I mentioned that the Q3 from a GAAP perspective will be more of a challenge because of the completed construction. But when you combine it with the Q4, we see cemetery driving a lot of that improvement. We also think there's general and administrative costs will go down.
You may recall last year's Q3, we had a huge adjustment to our PUP accrual because the stock price went up. So, we think we've got a favorable comparison when you think about general and administrative expenses in the back half of the year. And it would be even greater except for the fact that Eric already mentioned, our tax rate is probably even with that high tax rate, 500 basis point increase, even with that high tax rate, 500 basis point increase, we see earnings per share growing double digits in the back half of the year. So, a lot firing on all cylinders, as it relates to segments and G and A costs and just a little bit of a drag on tax.
Okay. All right. Thanks a lot.
Thank you,
AJ. And from Wells Fargo, we have Duncan Brown. Please go ahead.
Hey, good morning. Wanted to go back to cremation and make sure I was understanding you right. So the 2 sort of drags would be M and A and with higher with assets that have higher commission rates than the broader portfolio and then the 30 markets that you targeted to sort of expand the cremation focus? And if I'm hearing you right, most of that annualizes, we think, by Q4 and then after that, we get back to a more normalized cremation rate of $100,000,000 to $150,000,000
That's our expectation, Duncan, correct. And then You hit the nail on it, I think. And again, just as we get further in the year, you've got less year over year change.
Great. Thank you. And I guess the follow on to that is, so it sounds like what you did with those 30 markets was successful. Are there another 30 that you're looking at that we might see a rollout on or something like that?
No, I don't know that there's 30, but there's probably more that we'll test. These are markets where we started off with markets where we felt like we were losing some share, particularly around that, I'd say starting at price point for cremation. As you'll recall, Duncan, years ago, we kind of took a strategy that said, we're going to let our core funeral homes service at a service level that's high service level at a price point that is a little bit higher and we can service these customers through FTI Direct and that's worked pretty well. But what we found is there is still a consumer that value is going to that funeral home that has a price point that may be a little bit below where we were in certain of these markets. And the test proved out.
We saw that by lowering a little bit of that price, we saw the volume come in. And so, we're constantly we've got a team that full time deals with this, looking at what's the optimum pricing in some of these markets. And sometimes it's we can raise prices and sometimes it's we're going to lower to be more competitive. So, I don't foresee a wave of changes that we saw happen at the latter part of last year and the early part of this year in our future, but I think there'll be some tinkering around that as we go forward.
Okay. That's helpful. And then on the I think it was in your prepared remarks, Tom, you talked about some regulatory issues on cemetery preneed. I may have misunderstood, but can you give us some color on that?
Yes. I think when I was generalizing in certain markets, but as an example, I think we talked about in Vancouver last time, two things are, I'd say, impacting confidence in that market. I don't want to tell you that it directly correlates to our performance in Vancouver, but there's 2 things people ought to be aware of. One is, there's a foreign buyers tax that's been implemented in Vancouver and it's to deal with affordability of housing in the Vancouver market. So, what that's done is the Chinese and the Hong Kong buyers that are coming in that were a big part of our growth in the Vancouver market, it's tougher, number 1, it's more expensive and you may see less of a migration over the last couple of years.
And then I think the other piece that, again, kind of touches upon regulatory is that there's been a real clampdown on money movements out of China. And again, this is a population of Chinese descent and are either immigrants or relatives of immigrants. And that's again, I think put a damper on confidence in the Vancouver market. And so, while we don't think it's dollar for dollar correlated, it's just a fact that we're dealing with. And you have from time to time things like that that occur in different markets.
And that's what we meant by that kind of general term of regulatory.
Got you. That's all. Last one for me. It's in the press release you bought back some bonds in the open market. I wonder if you could tell us which tranche and if that sort of signals a new appetite for you all to look at buying in the open market or if it's just opportunistic?
I think it's opportunistic, but I wouldn't be surprised if it continues. I told you in my remarks Duncan that I think we want to work ourselves down around 3.75, percent, got up to the upper end of the range on purpose last year because we had wonderful acquisitions to deploy capital and use a lot of our revolver to do it. Those were our 2027 notes, which carried a coupon at 7.5%. So a little bit and you look at where everything is trading at as you know so well and try to pick off in the open market the ones with the best value for
us. Great.
Thank you.
Yes.
Okay. And no further questions at this time. We'll now turn it back to SCI Management for closing remarks.
Thank you, everyone, for being on the call today. We'll talk to you on our Q3 release in late October. Have a great week.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.