And welcome to the First 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.
Good morning, everyone. This is Debbie Young, Director of Investor Relations at SCI. We thank you for joining us today as we discuss our Q1 results. As usual, I'm going to go over the customary Safe Harbor language before we begin. 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 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 yesterday. With that, I'll now turn the call over to Tom Ryan, SEI's Chairman and CEO.
Thanks, Debbie. Hello, everyone, and thank you for joining us on the call this morning. Today, I'm going to begin my remarks with a high level overview of the quarter, followed by a more detailed analysis of our funeral and cemetery operations, and finally, comment on our outlook for 2019. So, let's begin with a few highlights of the quarter. As you saw in our press release yesterday, we reported adjusted earnings per share of $0.47 which was on par with the same period last year.
Our reported earnings per share was significantly higher than both our own and analysts' consensus expectation. Comparable cemetery revenue growth, primarily driven by preneed sales production into a higher percentage of already developed property, coupled with non customer facing purposeful cost reductions and a lower tax rate essentially offset reduced funeral segment profits impacted by a milder flu season as compared to the prior year. Now shifting to some more detail around the funeral operating performance for the quarter. As we discussed with you in February, we anticipated a challenging funeral volume comparison as we experienced a much milder flu season this quarter. Therefore, our teams were acutely focused on managing our fixed costs at the location, market and overhead levels.
Comparable funeral revenue declined about $28,000,000 or 5.5% compared to the same period last year. Core funeral revenue was the primary reason, declining over $30,000,000 led by a 5.5% decline in core funeral case volume. This decline was most pronounced in January February with March volumes trending back towards flat. Our core revenue per case absorbed a 200 basis point increase in the cremation mix, resulting in a 1.6% decrease in the core funeral average. The organic revenue per case at the customer level before mix change grew about 70 basis points.
Recognized preneed revenues declined by almost $2,000,000 or just over 5% as a result of fewer contracts sold through our non funeral home operating channel. This shortfall was caused by the temporary sales production issues from the conversion and onboarding of sales associates from independent contractors to employee status. This conversion puts us on the right path for growth as we now can provide enhanced benefits and training to counselors, which should result in higher retention and higher productivity. We saw a challenging January February followed by a strong March performance. We're at about 80% of our target sales force staffing and while it may take a few more months to fully staff our teams, I am highly confident we'll be back to impressive growth soon.
Finally, on the revenue front, other revenue increased almost $5,000,000 quarter over quarter. This is primarily due to higher general agency commissions on increased pre need funeral insurance sales production coupled with lower cancellations. Shifting to funeral profits, we experienced a decrease in operating profit of $17,000,000 and operating margins decreased 210 basis points to 21.7 percent, primarily due to the revenue decline I just described. The margin decline was partially mitigated by cost reduction initiatives implemented during the Q1, which we believe will have continuing gets deferred into our backlog grew just over 2% for the quarter. Preneed funeral sales production from our core locations grew approximately 4%.
This is particularly impressive considering a large percentage of our sales leads come from atneedcustomerinteractions, which was down about 5% at our core location. This is an encouraging sign for us and highlights the beneficial impact that Beacon is providing. Preneed sales production at our SCI Direct locations declined 3.5% in the quarter, primarily due to the temporary sales production issues from onboarding our sales counselors as employees. Now turning to cemetery operations. Before diving a little deeper, I would like to give a special thank you to our sales and cemetery operation teams for the strong cemetery preneed sales production performance during the quarter.
They were a key reason why we were able to close earnings per share gap created by the mild flu season as compared to the prior year flu season, which had positively impacted both funeral and atneed cemetery revenue. This team stepped up to the challenge and I couldn't be more pleased with their performance. Total comparable cemetery revenue grew nearly $21,000,000 or 7.5 percent in the quarter. Included in this $21,000,000 increase is a $17,000,000 or 9% increase in recognized preneed revenue, which was a function of strong sales production as well as higher revenue recognition rate. 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 sales production from the Q4 of 2018. Cemetery preneed sales production grew a healthy $13,000,000 or 6.3%. The majority of our sales production growth came from almost 6% growth in our core cemetery sales which is inclusive of property, merchandise and services. This was enhanced by high single digit growth in our large property sales. As you can see, we continue to benefit from our tiered inventory property strategy.
Also helping the top line growth, we had just over $7,000,000 in the increase in perpetual care trust fund income due to strong market performance as well as the timing of capital gain distribution. Partially offsetting the higher pre need revenue and perpetual care trust fund income was a $3,000,000 decline in at need revenue as there were fewer walk in sales during the milder flu season in the Q1 compared to the prior year quarter. Comparable cemetery operating profits grew an impressive $11,000,000 or nearly 15% as we expanded margins 190 basis points to 28.8 percent, primarily resulting from the revenue increases that I just described. Fixed cost growth in cemetery segment was generally in line with expectations as lower cost helped to offset higher maintenance and allocated overhead expenses. So to wrap it up, I want to thank and congratulate our team for their focused execution in a challenging revenue environment.
I also want to thank them for their continued focus on serving our client families during one of life's most difficult times and providing peace of mind for our preneed client families. I feel really good about our momentum and our focus as we execute during the rest of the year. While we exceeded consensus analysts as well as our own internal expectations for earnings per share and cash flow in the Q1, we were only 3 months into the year. At this point, we remain very comfortable with our annual guidance. And in July, we should be in a better position to evaluate how we're stacking up against those annual ranges.
In the meantime, we'll continue to pursue our 3 core strategies of growing our revenues, leveraging our scale in 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. Today, as usual, I'm going to begin by discussing our capital deployment for the quarter and then I'll follow with some thoughts on our cash flow results and then briefly touch upon our full year cash flow guidance as well as plans going forward for
the rest of the year in
terms of capital deployment. So let's begin with capital deployment, but talk about the quarter. So we deployed about $75,000,000 towards acquisitions, new location builds, dividends and share repurchases. In terms of the various components, first, we developed we deployed $19,000,000 towards acquisitions and real estate purchases during the quarter. The acquisitions relate to several funeral homes purchased in Ohio and in Quebec, and we certainly welcome these associates to the Dignity Memorial family.
We believe acquisitions like these continue to be our highest and best use with mid teen after tax IRRs. We also invested an additional $7,000,000 on the new build and expansion of several funeral homes, including 2 new funeral homes that completed construction in both Dallas, Texas and Shreveport, Louisiana. These new builds should provide us with great low double digit percentage returns going forward and expand our footprint into desirable markets. Dividend payments in the Q1 totaled $33,000,000 representing an increase of just over 5% over the prior year. This obviously reflects the $0.01 per share or 6% increase in our dividend to the now level of $0.18 per share per quarter, which was announced by our board in February.
Finally, we returned $15,000,000 of capital to investors in the form of share repurchases by purchasing approximately 350,000 shares at an average cost of $40.97 per share. Our current number of shares outstanding is just over 182,000,000 shares at the end of this quarter. And today, we have about $180,000,000 of remaining share repurchase authorization, which gives us ample capacity as we move forward in 2019. So, a little bit of color here. Our capital deployment during the quarter was somewhat modest when compared to the Q1 last year, as well as our normal quarterly track record.
I have to tell you this was intentional. As a backdrop, our leverage increased during 2018 towards the higher end of our desired leverage ratio range of 3.5 to 4 times as we absorb some large acquisitions and we're actively repurchasing shares. So remember, we deployed almost $200,000,000 towards acquisitions in 2018 as compared to our $50,000,000 to $100,000,000 guidance and we repurchased 7,300,000 shares for a total investment of $278,000,000 and by the way that was at an average price of $37.78 So as we entered 2019, we recognize that we are facing a tough towards 4 times, which is not where we want to be. This in addition to higher share prices observed earlier in the quarter compelled us to make a conscious effort to delever and improve our leverage ratios while maintaining significant liquidity. The result was a net reduction of total debt by approximately $125,000,000 during the quarter, which brought our leverage down closer to the midpoint of our desired leverage ratio range.
As a result of this, we have also benefited by increasing our total liquidity by about $75,000,000 to just over $845,000,000 So while we don't unilaterally use our leverage ratio to govern our capital deployment levels, the actions taken in this quarter provide the flexibility we desire to deploy capital for the remainder of this year to the highest relative return opportunities, including share repurchases. So again, although we're off to a little bit of a slower start than normal, I'm confident that we are now well positioned with the financial flexibility for the remainder of this year. So now let's shift gears here and talk about cash flow for the quarter. We are pleased to report better than expected adjusted operating cash flow of $185,000,000 in the quarter, which is primarily due to the higher than anticipated earnings that Tom just discussed. Compared to prior year, operating cash flow was down about $20,000,000 which was due to an expected $4,000,000 reduction in operating profit, primarily a result of the lower operating and funeral performance because of the weaker flu season and a net $16,000,000 increase in pre need and other working capital uses in the quarter.
In particular, we had about $12,000,000 of higher working capital use from financing the strong growth and recognized preneed cemetery property sales production using customer installment sales contracts. And as we've discussed this in the past, recognition of revenue from preneed cemetery constructed properly generally occurs at sale while the associated cash is typically received over a period of time. In addition, we had an expected $12,000,000 of other working capital uses largely related to our payables, which generally support the growth of our business. These working capital uses were partly offset by a cash source of $8,000,000 from trust funds in the quarter as a result of our ongoing working capital initiative. Cash interest payments were flat quarter over quarter and recurring cash taxes declined modestly in the quarter.
And just a quick note on taxes, our guidance for cash tax payments for the year remains unchanged at approximately $100,000,000 Moving on to free cash flow, maintenance and cemetery development CapEx combined the 2 components that we define as CapEx in our free cash flow calculation was approximately $45,000,000 for the quarter, which was just over $3,000,000 higher than prior year, but generally in line with our planned spending for the quarter. Deducting these recurring CapEx items from cash flow, we calculate our free cash flow in the quarter to be about 100 and $40,000,000 So now let's shift to the outlook for the rest of the year. As Tom mentioned, we remain confident in our guidance, specifically in our existing 2019 guidance range of adjusted operating cash flow of $550,000,000 to 610,000,000 dollars This in addition to almost $850,000,000 of liquidity sets us up nicely to deploy capital over the remainder of the year by investing in highly accretive acquisitions and new build projects, while funding the dividend and of course returning capital to our shareholders in the form of share repurchases. So in closing, I think we're off to a great start in 2019. I am proud of our team's performance despite the challenges that we faced coming into a tough comp for the Q1 because of the more mild flu season this year.
I'd like to specifically thank all of our 23,000 SCI associates for helping to deliver these results. So with that operator, that concludes our prepared remarks for this quarter and we'll go ahead and shift it back to you now to open up the call
And from Credit Suisse, we have A. J. Rice. Please go ahead.
Thanks. Hi, everybody. First, maybe just to ask about the trend in cremation. Again, like the 4th quarter, a little elevated relative to historical norms. I wonder if you've had any chance to sort of look at what is happening there?
And do you think there has been a little bit of a shift in the market? Or is there some other way to attribute it? And when you look at the 5% year to year comparable case volume decline. Is there any reason to think that would be more skewed toward your traditional cases than cremations? I'm not sure why, but I just wondered if that might be part of the factor.
[SPEAKER THOMAS E. SALMON BERRY GLOBAL GROUP, INC.:] Salmon Berry
Global Group, Inc.:] Sure, A. J. Good to hear from you. It's Tom. Let me so, we talk about cremation, obviously, the mix is changing and we know which direction is changing and the question is the velocity of that change.
And historically, what we've experienced in our own businesses it's about 80 to call it 120 basis point range of shift. So, we talk about it long term. We've historically used 100 basis points as what we thought would happen. The U. S.
Rate, if you look at the market itself, has probably been growing at about 150 basis points when you look back over the last few years. We talked a little bit about Investor Day, but if you think about the cremation consumer and historically at least the last 15 years, I think we've competed really well for the cremation consumer that's focused on quality and reputation. And we've done that through our core businesses and competed very effectively. We've also, I think served the customers through SCI Direct and Neptune Brands that are very value oriented. And I think we've done a really good job of communicating to those consumers and competing.
Where I think we probably missed the boat a bit and this is probably a function of some of our pricing changes we did 10, 12 years ago and we talked a little bit about this at Investor Day. You'll remember John Fogg giving this presentation. We have found in certain markets and in certain locations in those markets, where maybe our pricing as it relates to what I'll call the simple cremation, and this is probably about 30 markets over the last 12 months, 18 months that we've looked at that we weren't at the right price point to compete effectively for that simple cremation consumer. We have rolled that out, like I say, in certain of these test markets, if you will, and markets that we felt were being impacted. And the results of that, again, they're staged at different times.
But if you look at, let's say, a 4 to 6 month look back in some of these test markets, we saw increases in case cremation case volume of about 13% versus the rest of our network that's essentially flat. So, we know by making these changes, we were driving more business through these locations, but we also adjusted those pricing. So, we experienced those markets is pretty flat revenue, with a lot more volume and a little less price for that particular customer. We believe that by initiating those changes in those 30 markets, it's probably responsible for call it 40 basis points of change. In addition to that, another thing that we've noticed is in our new acquisitions, take 2016, 2017 2018, the average cremation rate in those businesses that we've acquired is probably in the mid-60s just in the markets that we're looking at.
So, as you think about onboarding those and then putting them into your mix, it's probably responsible for another 30 basis points, 40 basis points. So, I think our opinion is we've probably accelerated the rate temporarily. I would expect as time moves on, it may move closer to the national rate, which is about 150 basis points. But then again, that's my speculation. But hopefully that's helpful, A.
J. And the same thing on preneed, I would just point out, we're seeing some similar trends. And I think the way to think about that is that obviously cremation mix is changing with the consumers. But on top of it, the lead source, probably 40% of the time, the lead source for our pre need is coming from an at need interaction. So, as you see increased simple cremations being performed in our network, we're probably following up with that family and there's a pretty good likelihood that they may select the same simple cremation package.
So, we view it as an opportunity. We view this as we believe that we're capturing share that we weren't getting previously and that's accounting for some of this mix change, which is a positive thing.
Okay. That's interesting. Yes, thanks. 2nd, maybe just to ask about the trend in the perpetual care trust fund. I think you guys said in the prepared remarks, it ended up being a little better than you thought and certainly was a little better than we thought as well.
I know part of it probably just the market rebound as you alluded to, but part of it is also your change in the strategy to where how you're managing that trust fund. Any way to comment on sort of I'm assuming you would say don't extrapolate Q1 through the next 3 quarters, but any sense of what a run rate might look like on that line?
[SPEAKER THOMAS E. SALMON BERRY GLOBAL GROUP, INC.:]
Salmon Berry Global Group, Inc.:] Hey, A. J, this is Eric. So as you correctly noted, ECF was up the income quarter over quarter by a little over $7,000,000 I agree, I wouldn't really extrapolate that and I'll come back to that and comment. But I do think some of that is a little bit outperformance maybe by our particular portfolio managers versus market. But the vast majority of that is really just timing.
It has to do with the just refresh your memory and level set this. A lot of the ECF income, for example, last year is $75,000,000 of ECF revenues, maybe $15,000,000 to $20,000,000 of that maybe distributions of capital gains. And that timing is somewhat out of our control because that's obviously controlled by the underlying portfolio managers. And going back to when we shifted the total return in 2017, we moved a lot of assets and created different gains and such by moving those assets from the traditional funds into the total return funds. What really happened quarter over quarter is that the Q1 of 2018 should be considered artificially low because of the capital lack of capital gain distributions and some of the noise around that area.
And so this is more of a normalized rate. Although comparison purposes, it looks to be up. But when you look at it full year, I think this variance will kind of give back throughout the rest of the year. And so, the $75,000,000 of revenues that are occurring last year in ECF is a pretty good proxy, all else being equal without having a crystal ball and able to predict the market to what it would be in 2019 as well. The volatility though that could be created outside of our control again is any type of capital gains that are distributed to us from the trustees, but ultimately are the portfolio managers during the years that will choose in their normal activities whether those gains are realized or not.
So hopefully that gives you a little bit more color.
Yes. That's good. Thanks. And maybe just a last question for now. I know last quarter, you wanted to signal that the Q1 comp because of the flu related cases a year ago was particularly a tough comp and you did something you don't normally do, which is give quarterly outlook.
I know you're probably not ready to you're not going to do that for second, 3rd and 4th quarter. But do we have now a series of somewhat easier comps? Is 2nd quarter still a little bit of a tougher one than the back half? Or how any way you'd like to characterize the relative comps since a lot of pull forward happened last year, presumably making the second, third and fourth quarter a little easier comps for you?
Yes, A. J, I believe all we can really do is we obviously have some April vision into that, but history is really what drives this for us. We've got a lot of data that goes back. So, the last year, they kind of look like this one was 2016. We're down 10% in January.
We finished the quarter down 5% and we ended up down less than 2% for the year. So, what you experienced in that and that's not unlike trends that were even previous to that is you tend to gravitate back towards flat, probably not quite getting there. But that would say that look for generally to be flat to slightly up for the rest of the year. That's what we would expect, and would probably push us to that somewhere between 1% and 1.5% down. But again, a lot of things are happening and it could move one direction or another.
I'd tell you that April looks pretty good, as far as snapping back to what we'd expect normal trends to be. So hopefully that's helpful in your thinking.
Yes, great. Okay. Thanks a lot.
From Oppenheimer, we have Scott Schneeberger. Please go ahead.
Thanks. Good morning. I just want to follow-up on A. J. First question and then I have 2 others.
Could you discuss you mentioned that we're seeing a bit of elevation in cremation. Could you talk about what you factored into the guidance for the year? Was it in fact your 100 basis points or did you factor something higher based on the high 4th quarter?
[SPEAKER HENRY A. C. DURRANT:] C. Durrant:] Yes. We run a variety of models.
So, we don't I wouldn't tell you that we have a perfect exact we generally ran scenarios that range from, I'd say 100 basis points to 160 basis points. I don't think we believe 200 basis points is the new normal. But again, we don't know. I would tell you that it's our more common belief that we should revert to the norm of what we're seeing in the United States if we're competing for all customers and that will push it this 150 basis points. And that's well within our guidance range that we've provided you guys as you think about earnings and cash flow.
All right. Thanks. Appreciate that. Could you give a progress update on Beacon penetration, how we should think about its impact on funeral preneed sales growth in the quarter? And going forward, certainly a progression from Q4 to Q1 on pre need funeral.
Just want to get a better understanding of the Beacon impact there?
Sure, Scott. This is Eric. I'll go ahead and take that one. Let me level set too, because there's a little bit of confusion on last quarter's call in terms of where it's rolled out. So remember to level set funeral beacon is going first with the prearranged funeral sales force and ultimately we're working on cemetery.
What is rolled out? What is eligible to be used in terms of Beacon? First of all, it's rolled out in most of our network in the United States. We don't yet have it rolled out in Canada from a funeral perspective. We don't have it rolled out in certain states from a geographic perspective because of some complex trust laws and a handful of the states.
And we also don't have it rolled out in terms of a language differential from English. So for example, we don't have rolled out in Spanish, we don't have rolled out in Chinese for our West Coast Asian consumers as well. We asked like how should we think about it. So there's really 2 metrics that we're managing to when we think about Beacon. 1 is eligibility and one is usage.
And what we mean by that is of all the contracts that are sold from a prearranged funeral perspective for all the various reasons I just mentioned, how many contracts are eligible to use the Beacon software, the Beacon platform in that interaction with that client family. And that right now is about 75%. Then another metric that we use is okay, for everything that is eligible, how much is it being used by our sales force? That also is about 75%. So those two metrics are how we're managing to it.
Ultimately, what our goal in 2019 from a management perspective is to increase that usage from 75% to a higher number. And our sales teams and our sales management are working proficiently to go ahead and increase that usage during 2019. Now what we also knew is that we pivoted to working on the cemetery module earlier in 2019 as well. This is a little bit harder and a little bit more complex. There's really two reasons in terms of that in front of the bill.
One is the uniqueness of the cemetery property itself at each and every one of our 450 cemeteries. And one is the different very numerous vendors that we use and merchandise itself that we're selling individually from each of the cemeteries. And believe it or not, when you really talk to the team that's building it, it's the latter one of those two scenarios that's really getting to be more complex in terms of interacting with the numerous merchandise vendors and all the products that they are selling along the way. So, I don't particularly we're continuing to work on cemetery like we said very proficiently. We pivoted away from funeral late last year early this year in terms of the technical resources to really push cemetery and we'll get to hopefully at some point giving you an update later in 2019 with hopefully some with a possible effect thereafter.
But for right now, it's a work in progress in terms of cemetery.
All right. Thanks. Appreciate that. My final question is relating to the FTC's pending review of the funeral rule. It's our understanding that the FTC will request for comments at some point in 2019.
Could you please discuss the process during the comment period and how SCI will be involved? Thanks.
Sure. Maybe set the table for everybody to give them a flavor for this, because I think it's a topic some people are very educated on. But the Federal Trade Commission reviewed the funeral rule essentially every 10 years. Last time they did it was 2,008 and we recognize that certain consumer groups are pushing for changes to the funeral rule and wishing to require to put prices online. At this point, we're not so sure how valid a concern these consumer groups have, because it's our understanding that total customer complaints at the Federal Trade Commission across all industries has been increasing over the past few years from about 2,800,000 complaints to 2,900,000 in 2018.
And the number of funeral specific complaints has actually declined from 1300 to under a1000 complaints in 2018. So, I think as you think about a priority, it begins to look less of like one. This may be because quite honestly, pricing is already available to our customers. We've got a general price list that's been available at our locations and we've been providing that since 1984 when the funeral rule was first implemented. That being said, when the FTC takes a look at this funeral rule process and we anticipate that will happen in 2019, We look forward to working with them and continuing to work with the industry groups and providing insights into particularly for us the relationships around 300,000 atneed families we service and 200,000 preneed families that we sell to each year.
And so, we've had ongoing dialogues within the industry. We have not we've had interactions with the pieces of the Federal Trade Commission and that process should again initiate. It may take quite a bit of time in gathering the data over a period, but we're prepared to help them and are already helping a variety of industry groups in providing input. Today, we send out about 245,000 J. D.
Power surveys received back almost 70,000 of those. And in our interactions with consumers, the primary things they're concerned about are quality of service and reputation of the provider and convenience. And those three things actually rate higher than pricing when it comes to things that they're concerned about. So, I think the way I think about this is, for many consumers providing price without quality and reputation could actually be misleading. Today, we provide online pricing at many of our direct cremation locations, where pricing is a top priority for the consumer.
So, we think that's a better way to think about it. We have several initiatives underway today evaluating approaches through our websites and addressing these numerous customer preferences. We even got including starting at pricing in certain markets, where we believe the consumer wants that information in conjunction with other data. So, really ultimately, we believe putting prices online should be voluntary and accepting cases where you're selling online, where obviously you'd provide those pricing to the consumer. So, we'll continue to work within the funeral industry groups and we stand ready when the FTC is ready to review the funeral rule and we anticipate that again to happen sometime in 2019.
All right. Thanks for that. I'll turn it over.
From Raymond James, we have John Ransom. Please go ahead.
Hey, good morning. Just looking over the last eight quarters, your atneedfuneral ASP has dropped a couple of $100 from the peak and your matured pre need has flattened out. I know it's kind of hard to pick apart all the strands, but how much of that is cremation? How much of that is acquisition mix, other stuff? And if you were to hazard a guess over the next 2 to 3 years, where do you see the blended funeral ASP growing on a percentage basis from here?
Thanks, John. Hope you're well. I think you're right, we've experienced 2 things. Cremation mix is the primary reason I would tell you that the average sales price, particularly on the atneed, that's the number one reason. We've also, as I mentioned earlier, we think we've put another, call it, 30 plus, 30 basis points between acquisition mix and between, again, competing more effectively for that simple cremation consumer by having the right price point to do that.
Those I view those as somewhat temporary that I think will fade from that. So, I think on the atneed front, because of the cremation mix that we'd anticipate, our belief is as you look out the next few years that that's going to be flat to slightly down, but slightly down, I'd say, less than 1% when you get to that point. And again, I'm speculating at this point. I think on the preneed going atneed, our anticipation is that that's kind of the opposite. It can grow at very slight levels.
So, as I think about the blended mix, once you work through this, you're probably in a position where you're between 0% and 1% type of growth in your average when you blend the 2 together. Now things could get better. I don't want to paint a picture, but I think it's competitive. I think we're going to find ways to enhance that value. I think you can do it through additional revenue streams that we've done historically and we'll continue to work on.
But I think that's probably the reality. And then our hope is that we're going to capture more share as we see these volumes tick up and that allows you to have some really good revenue growth when you think about the funeral side.
Hey, thanks. And this one, this may be kind of an unfair math question and I struggle to do math down here in Florida. But the obviously, you had some elevated trust income with in the cemetery side relative to a year ago and some of that would bleed into your funeral revenue. So if you had to say, looking at the year versus the quarter, how much of the year was represented in the quarter from kind of the outsized capital markets gains? And how should we think about that flowing through the P and L for the rest of the year?
Let's assume the market is flat from here or something. How would the sequential trends work with trust and investment income flowing through the P and L?
[SPEAKER CHRISTOPHER ELLINGHAUS:] Okay.
John, the way to think about it is really this, especially I already answered the question on ECF, I think earlier in the call. So let's talk about preneed funeral and preneed cemetery. And as you saw in the release and you're mentioning now, it was up 10% in terms of the 3 months. But you have to remember, the 4th quarter was down 10%. So you're really just kind of almost breaking even.
The way to think of this as you remember and you know this very well about how it feels out over a trailing 10 years. So, the way we think about it is what has been our trailing 10 year kind of nominal return to these trust funds and that's been about 5.5%. And then the metric that we talked about before as a very general statement holding a lot of things equal frankly is that if that 5.5% increased about 1%, then that's about $1,000,000 to 1,500,000 dollars of EBITDA on an annual basis. And so, one thing to really take away with this is it's just not that volatile. And we've said that before, when you see it down 10%.
It's a very long term 10 year peel out of this trust fund income that affects both cash flow and earnings. And it really is a lack of volatility if the trust goes down or go up. You need a bunch of quarters go in a certain direction for a certain period of time for it to really affect it. But as a general statement, the simple rule that you're asking about, I believe, is that when you look at that trailing 10 year return, again, 1% movement in that is almost about $1,500,000 in EBITDA, all else being equal. Jonathan And just to be clear, that's Go ahead, sorry.
I was going to say the other point to keep in mind is cemeteries all trust. So, it's probably got a little more of this volatility in it versus the funeral contract where maybe 55% or 60% of what's come out of the backlog is an insurance product with a fixed return. So, there's probably even less volatility when you think about the funeral backlog rollout.
Right. Last one for me and I appreciate the color is, it's hard for us to get obviously real time market share. And I know you segment, so there are certain parts of the market that you don't really worry about. But I think it's probably a generally true statement that your comparable volumes have lagged the overall U. S.
Death rate. So how do you think about market share on a real time basis? And how should investors think
about that?
Well, the way we do it, John, is it's the reporting is so inconsistent by jurisdiction. I hear you on the national statistics and I agree and we look at those too. So, I think more effectively for us is we try to track it by market. And so, you've got market leadership teams and regional leadership teams effectively looking at what's happening in these markets and reacting to those or proactively putting in programs. I would just generally tell you this, I think in our relevant markets, we are better today, particularly because of, I'd say, beginning to reach out to this simple cremation consumer in a more effective way that we believe we're beginning to capture more than we have historically relative to the market.
And obviously, every market is different. We believe that's a consumer that's going to continue to grow. So, we think it's very important that we have the right mix of product service and customer interactive tools to compete more effectively for that consumer. So, I think we're getting better and better. I think the pre need will continue to be an advantage for us because we're selling it more aggressively than our competitors.
So, I guess, I'd put you on that track is, I would expect that even with the national statistics, you should see an enhanced comparison. And again, they're tracking markets that we may or may not compete in and I'm talking about income level markets, I'm talking about geographic markets. So, it's really hard to put them together. I would tell you, we generally feel we're competing effectively and we're moving to a more effective competitive position by utilizing interactions over our websites, interactions over search engine opportunities, more effective ways of getting our consumers through leads and pre needs, particularly on the pre needs side. We've really embraced sales force as a tool.
I would say it was an optional criteria and now you don't get paid for your sales commission unless it's the leads followed up in sales force. So, I think there's a lot of positive things that we're beginning to, I'd say, flex our scale muscle a little more to compete more effectively and we think drive enhanced performance on market share.
Hey, last one for me. I'm a little dated on Neptune, but when you bought it, I think I remember a number, something like $125,000,000 of revenue. Can you give us a general idea of how big Neptune is now and how much it's growing and how much of I mean, even though it's small, I assume it's growing at a much outsized rate relative to your core and just how much how we should think about that channel growing out in the future?
Yes. First of all, I can have a counselor come see you and talk to you more about that if you want to know everything. But we've got one in your area.
So second
of all, I would tell you the growth rates, I don't have last year's revenues in front of me. My memory would say it's around $175,000,000 So call it $175,000,000 in revenues. What we've experienced, John, for the most part is we've been growing in the, what I call, mid to high single digit rates as it relates to that business over the last few years. What you're going to see is a we had a temporary pause as you think about 2018 2019. And the 2018 pause was related to what we sell on a contract.
So, the recognized GAAP revenues took a temporary pause, because we allocated more to deferrable trusted items versus a service product that got recognized. So, we took a little dip. And then in the beginning of 2019, as we've talked about a lot, we've onboarded our sales force. And in doing that, like any good change, you have a temporary distraction. We feel like we're on a path to grow again And it's our belief that, that business should grow in the high single digit revenues and probably put an additional $4,000,000 on the bottom line over the next few years.
2019 will be a little less than that, but that's the kind of growth rate that we've seen with that business.
Okay. Thanks a lot.
From Bank of America, we have Joanna Gushu. Please go ahead.
Good morning. A couple of questions here remaining. So you mentioned the cost cutting that you initiated in the funeral segment on the fixed costs in anticipation of the pressure from the, I guess, weaker top line. So can you help us quantify how much, I guess, occurred in Q1 and what you had been assuming for your in your guidance for the full year guidance previously? And how do you feel about that number currently after initiating those efforts in Q1?
Sure, Joanna. Hope you're well. And what we I think the way to think about it is this. Clearly, we went into the year like we do every year looking hard at ways to drive value for the shareholders. And we have things that leverage our scale and reduce our costs and that's a normal part of what we're doing in the guidance that we're providing you guys.
I think what we tried to convey here is, we had a focused effort at every level to say, as we think about, we make this very important, non customer facing costs and I'm sure everybody that's an employee on the line right now is choking, listening to me say this. We've talked about it a lot and we're trying to find more effective ways to meet more effective ways to coach, more effective ways to develop people. I think sometimes you can get into a mode of having a development dinner or having a meeting because we want to talk about this. And this was a conscious effort at every level of 24,000 employees of saying, let's be smarter about the way that we think about these things. And let's not, for instance, cut back on customer facing things like leads.
And that's really the concept is we want to fund opportunities to grow our revenues. And we pitched it as a collective effort to say, let's create the funding mechanism. And so, that's what you're seeing. And I would just tell you, as normally happens with this great group of people that I get to work with, they over performed. And I think we're finding that, maybe there's more there than we originally thought.
And so, we did probably see a little bit of an impact in Q1. I wouldn't even round it to a penny when you think about what was already baked into our plans. But I do think we believe it's going to continue. And so, as you think about when we set guidance to you, there could be a $0.01 or $0.02 of better performance for the year that we think we're now structured to deliver. That's the way I think about that piece.
Okay. That's helpful there. And then in terms of the discussion that was happening here just a few minutes ago in terms of the FTC funeral rule review, and I guess you mentioned that you do provide already a lot of the online, at least base pricing or starting prices in some of your markets. So is there a way for you to quantify things there in terms of the experience to say there was a market where you make a decision to do that? And then how does that affect your market share?
Because I guess that's maybe what the concern would be from something like that in terms of or if you don't want to talk specifically about just in general terms in terms of what you had experienced when you do provide online pricing and how does that affect your market share or any other metrics that you might be able to share with us?
Sure, Joanna. What we've done, I referenced that we have rolled out online and we're rolling out online, starting at prices in certain locations in certain markets. That actually had already existed in the form of a landing page. And so, it was available on the internet. It wasn't on the website itself.
If you searched a term that said, I want pricing or whatever, you could find it and get to it. So, it isn't new. I think what we're doing there is utilizing some of this starting ad. And the reason we like starting ad and it makes sense is it gives people a concept of if price is your discussion, by all means, we want to help you. But what we understand about the product and service that we provide is there's a wide array of choices you can make.
There's big differences in quality. There's big differences in reputation. There's all sorts of things that the consumer should know. So, to provide comparison pricing of 2 locations, it's like taking the high end steakhouse and price shopping that against a sizzler and product sizzler may not exist anymore if I said that. But you get the point is, it's hard to you have to convey what's the ambiance of the restaurant, where is consumer.
We to the consumer. We think price by itself could be misleading without having backing that up with the rest. So, starting at is a great discussion point. It allows the consumer to provide more data to them and they can make the choice to buy at that starting ad or they can move up a more robust selection of products and services.
Great. That's helpful. I guess if you at some point can give us some numbers around performance in those markets, I guess, to just prove the point that will be helpful. But in terms of just coming by one last thing, in terms of seasonality through the year. So last year we talked about, what was last year, the Chinese holiday timing versus Easter and there were some issues around that.
So can you talk about where we are on that front this year and what I guess you've seen already around those events?
[SPEAKER HENRY A. C. D. BAER PETTIT MSCI, INC.:] C. Durrant:] Yes.
So, Ching Ming is the holiday that Joanna is referencing. And for the most part, the mix between quarters wasn't much of an issue. There was some mix between months, but obviously that as a quarterly report, it's not much to talk about. I will point out this and I think one's not so good and one's offset by a good, Joanna, that's helpful. With our Ching Ming, we saw a reduction in the amount of sales, particularly in the Vancouver market, which is the biggest market when you think about Ching Ming.
And it's being influenced by a couple of things that's happening in Vancouver. And if you look at the local real estate market, you'll see similar things. They implemented a foreign buyers tax in that market, which has, I'd say, slowed the economy as it relates and changed the opinion about people buying real estate and settling roots in those markets. It probably puts a little bit of a pause as it relates to people wanting to conduct even buy a cemetery property because where they may finally land. The other thing is China and again, we have a big Chinese and Hong Kong presence in Vancouver, has implemented some restrictions on its citizens and their ability to withdraw funds from the country and bring them over to invest.
And so, those two things we believe had a dampening effect on our ability to really excel in the Vancouver market. We still did very well, but it was a negative carry as we think about that. We hope that those things get better. I think we're most impacted in the Q1 because of the Ching Ming presence. The positive of that is we've taken the great learnings in Rose Hills in California and Vancouver and transferred that knowledge into a variety of new markets.
We rolled out Ching Ming in 6 new markets this year that we've never done before and we sold, I believe, over $6,000,000 as it relates to those markets. Some of the big performers are Houston, Seattle, Las Vegas. So, we're really encouraged by our ability to push this initiative for Ching Ming into a variety of new markets as we move forward. And our hope is, I think Vancouver is going to stabilize. It's just a temporary pause.
We've got great people, great properties and we'll continue to work very hard to grow. So, the things I'd say are looking good. We feel really good about the rest of the year. I think we think by embracing the sales force tool universally, utilizing leads through there, we believe we have higher quality leads, which will be followed up with a better process. So, we're excited Joanna for the rest of the year and look forward to reporting hopefully good results next quarter.
That's great color. And just to wrap it up to your comment, so in terms of the pre sales production outlook, right, so you still expect mid single digits growth for the year?
[SPEAKER HENRY A. FERNANDEZ MSCI,
INC.:] Fernandez MSCI, Inc.:] Yeah, Joanna. At this point, we still expect we were very pleased with the Q1, but I wouldn't change any opinion as we think about moving forward. And hopefully, again, with 6 months behind us, you can compare better to that annual guidance. And if there's something positive to report, we will. And if there's a concern, we'll report that too.
Great. Thanks so much.
From Wells Fargo, we have Duncan Brown. Please go ahead.
Hey, good morning. Just one quick one for me. In the press release, you highlighted 8,000,000 dollars of legal expenses in the quarter in G and A. I just wonder if you could provide any color on that and then confirm is this one time or should we see more of this leak into future quarters?
Hey, Duncan, it's Eric. Obviously, it's hard to discuss active litigation and legal accruals in a public environment while those cases are still going on. So, I'll try to answer as best as I can. I mean, obviously as part of our process, we review our legal accrual each quarter and each quarter you're going to see some movement based on any movement that we've seen in active cases. There was obviously a good amount of movement in this Q1 that caused us to isolate that $8,000,000 that you're referring to.
Well, I don't want to talk anything specific, maybe I could say it this way. I don't believe that this situation related to that $8,000,000 is anything that is systemic across our organization. I think it's a somewhat isolated matter and very specific matter as well that caused the vast majority of that movement. And so with that, that may give you a little bit of comfort in terms of not being systemic. And that's all I could probably say in terms of commenting on litigation that's active at any point in time.
So hopefully that's helpful to you.
No, that's fair.
Thank you. Okay. Thanks, Tim.
And it appears there are no more callers in queue. We'll now turn the call back to SCI Management.
Thank you everyone for being on the call. We look forward to talking to you on our Q2 call, which will be sometimes in late July. Thank you everyone.
Have a great week.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.