Welcome to the Third Quarter 2018 Service Corporation International Earnings Conference Call. My name is Hilda, and I will 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 that this conference is being recorded.
I will now turn the call over to SCI Management.
Good morning, and thanks everyone for joining our call today. I'm Debbie Young, Director of Investor Relations. I'll quickly go over our customary Safe Harbor language before we begin with prepared remarks about the quarter from Tom and Eric. The comments made by 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. We may also refer to certain non GAAP measurements such as adjusted EPS, adjusted operating cash flow and free cash flow. A reconciliation of these measurements to the appropriate measures calculated in accordance with GAAP is provided on our website and also in our press release and 8 ks that were filed yesterday. I'll now turn the call over to Tom Ryan, SEI's Chairman and CEO.
Thank you, Debbie, and hello everyone and thank you for joining us on the call this morning. Today, I'm going to begin my remarks with a high level overview of the 3rd quarter followed by a more detailed analysis of our funeral and cemetery operations. Then I'll comment on our outlook for the Q4 as well as take a little deeper dive with you regarding the rollout and impact of Beacon, our new customer facing technology that we've been referring to over the last few quarters. So, let's begin with an overview of the quarter. As you saw in our press release yesterday, adjusted earnings per share grew $0.02 or 6% to $0.35 per share compared to the same period last year.
From a revenue and operating profit perspective, this was a very strong quarter, growing revenues over 6% and operating profit at 11%. Comparable operations contributed about $0.06 of earnings per share growth as strong cemetery revenue growth was partially offset by higher than inflationary fixed cost increases in both the funeral and cemetery settings. These increase were associated with higher wage and benefit costs as well as an increase in marketing spend. In addition, our recent acquisitions contributed an additional $0.01 to growth for the quarter. This robust operational improvement of $0.07 was somewhat offset by a $0.05 increase in general and administrative expense for the quarter.
$0.04 of this general and administrative increase was generated by higher long term incentive compensation expense associated with 3 separate years of a performance unit plan, whose value is tied to total shareholder return. We experienced this significant increase as SEI's stock price appreciated over 23% for the quarter, which was more than 3 times the percentage growth of the S and P 500, moving our relative ranking quite significantly in all three plans. Additionally, higher interest expense effectively negated the positive contribution of a lower share count and a slightly lower adjusted tax rate. If we were to exclude the unusual increase in long term incentive compensation, our earnings per share would have been $0.39 or an 18% improvement over the prior year quarter. Eric will provide some additional color on our cash flows and provide some details around our robust capital development activities for the quarter and for the 9 months in his comments.
Now, let's talk about how funeral operations performed during the quarter. Comparable funeral revenues increased more than $8,000,000 or approximately 2% compared to the same period last year. Revenues from our core and non funeral home businesses were relatively flat in the 3rd quarter as slight increases in the average revenue per case were effectively offset by slight decreases in comparable volume. Our core revenue per case absorbed 170 basis point increase in the cremation mix, putting downward pressure on the average. Exclusive of the cremation mix change in currency, the average revenue per case for our customer increased a solid 2%.
Recognized preneed revenues grew approximately $5,000,000 or 18% during the quarter. Recall, these are the products sold on a preneed contract, which are delivered at the time of sale, primarily representing cremation related merchandise and travel protection membership. Finally, on the revenue front, other funeral revenue increased $3,500,000 compared to the prior year quarter. Included in this amount is an increase of $5,300,000 in general agency revenue resulting from higher insurance funded preneed sales production of $18,700,000 or 16% over the prior year quarter. As it relates to funeral profit, we experienced a decline in operating profit of approximately $3,000,000 and operating margins decreased 100 basis points, mainly due to an anticipated increase in funeral fixed costs.
Similar to last quarter, beyond expected inflationary fixed cost increases, we continue to see slightly higher labor costs due to the deliberate raises we made earlier in the year to key customer facing employees as well as higher healthcare costs. In addition, we continue to make investments in marketing and sales lead development, both of which are helping to drive growth in our preneed funeral sales production. Speaking of preneed funeral sales production, I am extremely pleased with our sales team's performance for this quarter. We grew production an impressive $27,000,000 over the prior year quarter or almost 14%. Both our core funeral home channel and our non funeral home channel delivered double digit percentage growth.
We continue to see a noticeable increase in production in markets where we have Beacon, our new customer facing technology rolled out. We believe Beacon is responsible for approximately half of the growth that we're experiencing in the Q3. Our sales teams are utilizing this great tool alongside valuable leads generated from our website redesign, digital marketing campaigns and search engine optimization results delivering exceptional preneed funeral sales production growth for our company that we believe will drive enhanced market share in future periods. Turning to our cemetery operations now, total comparable cemetery revenue grew $29,000,000 or about 10% in the 3rd quarter. This was primarily driven by a $20,000,000 increase in recognized pre need property revenue as well as higher perpetual care trust fund income of about $9,000,000 About half of the trust fund income growth was a result of our new total return strategy, which shifts the asset allocation of our trust fund by state requiring legislative authorization to a more diversified portfolio mix versus the previous income based approach.
The $20,000,000 of recognized preneed property revenue growth over the prior quarter was both a function of increased cemetery property sales production during the quarter as well as an increase in revenue recognized from completed construction projects where the sale occurred in an earlier quarter. The capital that we deploy towards the development of new cemetery property continues to have great returns for us and our sales team has done an excellent job of selling into newly constructed cemetery property projects. We are happy to report that we returned to mid single digit growth for preneed cemetery sales production for the quarter. We grew over $10,000,000 or about 5.5%. Remember, this production includes property sales that are generally recognized currently as well as merchandise and services sales, which are generally deferred into backlog and monies are placed into trust accounts.
From a profit perspective, comparable cemetery operating profits grew almost $17,000,000 or 21% and the margins expanded 2 80 basis points for the quarter. We were able to achieve a 60% incremental margin on our $29,000,000 revenue increase, which is very good. The incremental effect of the even higher margin trust fund income was partially offset by higher fixed costs from the items we cited in funeral operations, increased wages, higher medical costs, and increased marketing spend. Shifting to our outlook for the remainder of the year, our updated annual guidance range from the press release results in a 4th quarter earnings per share range of 0.51 dollars to $0.59 per share compared to the $0.50 per share we reported in the Q4 of 2017. At the midpoint, this would imply a 10% growth over the prior year quarter.
While we're not ready to provide specific guidance on 2019, we believe you could adjust your 2018 base earnings per share slightly higher for the unusual long term compensation expense incurred in the quarter and then apply the 8% to 12% earnings per share growth factor. Keep in mind the impact of potentially higher interest rates for our variable rate debt tied to LIBOR as you model 2019. As far as color for the Q4, we would expect a slightly challenging funeral revenue result as we will be comparing against a reasonably strong prior year funeral volume due to the early flu season impact in 20 seventeen's Q4. We anticipate a strong cemetery sales production 4th quarter that should be somewhat muted by a lower recognition rate effect of completed construction revenue as compared to the Q4 of 2017. On the cost side, we should continue to see slightly higher than inflationary growth for wages, healthcare costs and marketing spend impacting both segments.
As many of you already know, our three core strategies are growing our revenues, leveraging our scale and deploying capital to its highest and best use. I wanted to take a moment to take a deeper dive into a current initiative that is having an impact on our business and our financial results. Our customer facing technology for our sales team, Beacon. Beacon was capital put to its best use that both leverages our scale and grows revenues, truly a trifecta. It's a tablet based prearrangement tool that guides the consumer through the entire preneed sales process.
Beacon is a seamless digitized presentation tool that really brings our product and service offerings to life. The tool enables the customer to make informed decisions with various payment options, while automatically generating the insurance application and purchase contract and then accepts credit card payments on-site. This significantly enhances the productivity of our sales team allowing them to focus more of their time with our client families versus administrative tasks. So, why are we so excited about Beacon? Well, number 1, the tool showcases to our customers our entire suite of products and service offerings.
Additionally, it's dynamic enough to allow our products and marketing team to add new products and services quicker than what we've been able to do in the past. 2nd, Beacon provides our sales leadership with greater insights into the productivity of our sales associates. For example, we can see where counselors are spending time with the consumer and better determine where we should focus more of our selling activities and training. And lastly, we believe Beacon is a differentiator for us in our industry. This type of technology is what our customers should expect in today's technology focused fast paced world and it will help recruit the best and the brightest sales counselors to SCI, a differential advantage versus our competition.
Just to give you a few stats, at the end of the 3rd quarter, Beacon was live in 878 funeral locations across 24 states, achieving nearly 60% of our rollout plan for the United States and Canada. We anticipate approximately 95% of all funeral locations to be live at the end of this year. In markets where Beacon has been introduced, we are experiencing an impressive increase in the number of printed funeral contracts sold along with a modest improvement in average sale per contract. Additionally, we are in the final stages of developing the pre need cemetery portion of the Beacon application, which we anticipate to roll out to our cemetery sales associates beginning in 2019. As I close, I think it's worth mentioning that once again we were certified as a great place to work for 2019, which says a lot about how our employees feel about the culture at SCI and their job satisfaction.
We could not be more proud of this recognition. So to summarize, we are pleased with where we are after the 1st 9 months and continue to believe that we're on track to deliver solid results for the full year 2018. I want to again thank our 23,000 associates for their ongoing commitment to the customers we serve and to the success of SCI. With that, I'll turn the call over to Eric.
Thanks, Tom, and good morning, everybody. Today, as usual, I'm going to provide some color on our cash flow results during the quarter, then I'm going to touch on our outlook for both cash flow and capital deployment and then end with discussing our financial position for the remainder of 2018. But first, I'd like to start with our continued progress on the capital deployment front. And as a reminder, our capital deployment philosophy focuses on opportunities that will yield the highest relative returns for our company. We are already off to an outstanding start in terms of delivering value to our shareholders and the 3rd quarter results have further enhanced this progress.
So during the quarter, we invested nearly $108,000,000 towards acquisitions, new location builds, dividends and share repurchases. This is an impressive 20% increase of capital deployment over the prior year's quarter's investment of roughly $90,000,000 So let's talk about the breakdown of this deployment. We were able to deploy $30,000,000 of capital towards acquisitions and new builds during the quarter. About $20,000,000 of this was for 2 notable acquisitions, one in the mid Atlantic area for a combination funeral and cemetery operation and another was here in Texas for a funeral home. Remember that acquisitions are our highest and best use of capital as a general result in after tax cash IRRs that meaningfully exceed our cost of capital.
We are proud of these acquisitions and most importantly, we welcome all of these new associates into the Dignity Memorial and SCI family. In addition, we are delivering on our strategy of building new funeral homes and we spent nearly $10,000,000 during the quarter. This spend is going to develop our footprint in important markets, for example, such as Texas, Florida, California and other states through the construction of new funeral homes and crematory operations. As we look ahead, we remain positive about our acquisition and new build opportunities. Other deployments during the quarter, dividend payments in the Q3 totaled $31,000,000 which by the way was an increase of 9% over the prior year of 28,000,000 dollars really reflects the $0.02 per share dividend increase announced in February earlier this year.
And finally, we continue to be opportunistic with our share repurchase program, investing $47,000,000 during the quarter, reflecting the purchase of approximately 1,200,000 shares at an average cost of just under $38 per share. We currently have about 181,000,000 shares outstanding and about 195,000,000 of remaining share repurchase authorization at the end of the quarter. So let's step back and look where we are for the year. We have deployed an impressive $578,000,000 consisting of $209,000,000 on acquisitions and growth opportunities and $369,000,000 being returned to our shareholders in the form of share repurchases and dividends. So now let's shift to an overview of cash flow and we'll start for the quarter.
As you saw in yesterday's press release, we reported adjusted operating cash flow of $137,000,000 which is below the prior year quarter by about $30,000,000 This decline was primarily driven by a $21,000,000 increase in cash taxes paid during the quarter. Keep in mind, this is really just a timing issue, as we have actually paid approximately $31,000,000 less in recurring cash taxes year to date in 2018 versus 2017. The remaining decrease in cash flows during the quarter relates to decreases in working capital related to our preneed programs. While recognized preneed property revenue increased by an impressive $19,800,000 or 15.3 percent. The majority of these sales are made on an installment basis, having the effect of the related cash being received generally over the next 3 to 5 years.
Now I also want to address the $9,000,000 increase in endowment care trust fund income over the prior year quarter. We are excited to highlight that about half of this increase relates to the implementation of the total return asset allocation structure that we have discussed with you and will benefit us going forward as well. The remaining increase relates to the recognition withdrawal of capital gains related to the normal rebalancing of our portfolios. Let's talk also about cash taxes again. Year to date, we have been able to realize about $15,000,000 of lower taxes due to tax reform, with another anticipated $5,000,000 benefit to be realized in the Q4 of this year, which again is in line with our expectations for the full year $20,000,000 positive impact at our company from tax reform.
Also due to ongoing tax planning efforts, we now believe our full year cash tax estimate for 2018 could drop slightly below the low end of our previous guidance range, which was $85,000,000 to $95,000,000 that we discussed with you last quarter. So I think a better range now is our expectation of about $75,000,000 to $85,000,000 of cash taxes that we expect to pay during the year. And finally, as it relates to cash flow in the quarter, cash interest payments were higher by about $2,000,000 mainly due to the impact of higher interest rates on our floating rate debt. Looking at maintenance and cemetery development CapEx, which combined are the 2 components that we use in our free cash flow calculation. This is approximately $53,000,000 for the quarter, which was in line with the prior year as well as with our forecast.
So looking forward in terms of cash flow, we are expecting a solid Q4 as Tom already mentioned. Thinking about our original guidance for adjusted operating cash flow at the beginning of the year, we are projecting $570,000,000 at the midpoint of our guidance. In my remarks to you last quarter, we increased the guidance range by $25,000,000 to a midpoint of $595,000,000 mostly reflecting the efforts of our tax team. This guidance of $575,000,000 to $615,000,000 that range remains unchanged And the midpoint of $595,000,000 represents an increase of a little more than 7% over the prior year adjusted operating cash flow of $554,000,000 Our expectations for capital spending also remain unchanged at approximately $195,000,000 Deducting these recurring CapEx items from our adjusted cash flow from operation expectations calculates to a free cash flow in 2018 ranging from $380,000,000 to $420,000,000 again reaffirming the midpoint of free cash flow of $400,000,000 So on the cash flow front, we're very pleased with our ability to continue to generate very robust cash flow, which again allows us to continue our capital deployment program. So now let me provide you a high level overview of our financial position.
We finished the quarter with very strong liquidity of $730,000,000 at September 30. This consists of $158,000,000 of total available cash on hand, as well as $572,000,000 of availability on our long term credit facility. Our leverage, which is calculated as net debt to EBITDA in accordance with our credit facility, has crept up somewhat to about 3.86 times at the end of the quarter. We expect to manage this down during the Q4 as well as into 2019 closer to the midpoint of our target leverage ratio range of 3.5 times to 4 times. We will also monitor interest rates while evaluating leverage as we close the year out with approximately 35% of our debt currently floating, which has pressured our earnings somewhat as you know during the year.
So lastly, in closing, we are proud of our performance year to date. We expect to finish with a very with a strong Q4. We believe we are well positioned to continue to strategically execute our capital deployment plans as we move forward focusing on maximizing total shareholder return. So with that operator, that concludes our prepared remarks. We'd like to turn it back over to you to generate the Q and A session.
Thank you. We have a question from Joanna Gajuk from Bank of America.
Good morning. Thanks so much for taking the questions here. So first on the quarter and I guess the outlook, just to, I guess to reaffirm what you just said in terms of G and A, because you kind of talk about 2019 commentary, but should we assume that for Q4 this year, the G and A will come back to call it $30,000,000 range for quarter that we've seen in earlier first half of the year?
Yes. We do think that Joanna, I think this is more of a one time event that occurred during the quarter as it relates to the performance unit plans that of course are disclosed out there in the proxy, which really resulted from, as Tom mentioned, the differential run-in our stock price during the Q3, which is about 3 times the S and P performance. So that's considered that kind of a one time event. And I think you should consider us going back to kind of the normalized levels, which are kind of about $30,000,000 to $33,000,000 right now in general agency G and A expense, I should say, per quarter. So kind of around that rate for the Q4 would be good.
Great. It makes sense. And on the point of guidance, so I understand before EPS you narrowed the range, but still there is a range. So can you flash to us maybe what are the drivers to get to the higher end versus the lower end?
I think that Joanna, this is Tom. I think the key driver the number one key driver is going to be cemetery sales production and particularly around the property portion of that. And we feel very confident as we look to the Q4, we believe we've got the right momentum to deliver on that. The things that are going to be a little bit in our face are we know based upon the timing of construction contracts that we're going to be a little bit backwards compared to prior year as it relates to recognition of constructive projects. But we believe we're going to overcome that and then some with our cemetery sales production.
So, I think that's the key number that pushes you towards the top or in the event of not doing well, we'll push you back towards the bottom.
Thank you. And if I may squeeze the last one, a quick one, I guess, on the endowment trust fund strategy changes that benefited this quarter. Can you flush out, I guess, where you are on that shift? Or is there a goal in terms of how many of these states will be willing to do that? Because I know when you introduced this concept at the Investor Day, you talk about some states might take really long time.
So kind of are you on track? Is there more opportunity to shift more of these, I guess, trust funds to that strategy? Thank you.
Well, we're always trying. We continue to lobby. We think it's a benefit for our company. But most importantly, we think it's a benefit for the consumers that will benefit for the long term maintenance that the trust funds will produce through perpetuity. So that makes it a win win situation and that's how states are receptive to changing the laws.
We've done a significant amount of movement with those states to move it toward to allow the total return asset allocation. I would characterize it as kind of about half the states are there in terms of the dollars in our trust funds. We did have a major movement in California this year and a positive direction towards that, which was approved, but that's not effective Joanna until the 2020 year under the law that they passed. So, I would think of it as kind of 60% to 2 thirds having
the total return opportunity as you
get to 2020. Opportunity as you get to 2020, which bodes well for us. We think that's a higher return opportunity to us as you saw in this quarter where we had a good amount of movement, half of which was probably related to that total return asset allocation.
Great. Thank you. I'll go back to the queue. Thanks so much.
Sure.
The next question comes from Scott Schneeberger from Oppenheimer.
Thanks very much. Good morning. So start out asking on funeral preneed sales growth. That was a significant second quarter in a row, very large and accelerating. Could you discuss kind of compare and contrast how much of that is Beacon versus how much of maybe some of your other initiatives?
And then the previous expectation for the year was low to mid single digit growth rate. You clearly have surpassed that. How should we think about that growth rate going forward? Thanks.
Hey, Scott. It's Tom. Thanks for the question. I think and again, it's always hard to measure, but based upon the markets where we're rolled out, it's our belief that about half, so we have 14% growth in the quarter, but half of that was driven off Beacon Markets, which we're going to attribute then to Beacon's impact, which is pretty huge, particularly since we're only at 60% of the markets with a target to be in 95% by year end. So, that is a big driver.
And a lot of that I think is what it does in front of the customer, it also really increases the efficiency of our sales force. They're allowed to spend more time in front of families and less time with administrative tasks and burdens. And I think you're seeing a real shift of emphasis, if you will, to the prearranged product, because it's easier to do. I can meet my quotas and objectives as it relates to funeral side of the business, quite possibly to the detriment of cemetery, I mean, in certain markets. So, we're excited about that.
As you think about next year and again, we haven't put out any formal guidance and I don't want to put any pressure with Jerry sitting in the room across from me. But I do think we should particularly on the first half of the year have a really nice comparable, which then should in my opinion, settle into that kind of mid single digit growth. So, next year again could be mid to high with an emphasis on, I think, real execution in the first half of the year as you think about the rollout of Beacon. The most exciting point Scott for me is, we're going to roll it out to cemetery next year. And it could begin at some point to impact our results as you think about sales production growth on the cemetery side of the equation, which is exciting and particularly exciting to earnings, because again, when we sell bringing cemetery property, we're generally going to be able to recognize those earnings.
We don't get that And having Beacon in our funeral production toolkit, and having Beacon in our funeral production toolkit is a huge advantage and we see it continuing to benefit into 2019.
Thanks. A few more from me if I could. Acquisitions has been very elevated this year versus your evergreen model. How should we think in Q4 and perhaps looking out to next year, how active is the pipeline? Clearly, it has been.
Is there more to go? And any margin implications in the Q4 or things to think about from all that you've done this year? Thanks.
Yes. Thanks, Scott. First on the ones that we've done, we did highlight, as you know, we got a penny in the quarter from the effect of acquisitions. And again, that's because of the size and the number of acquisitions we've been able to close. So, as you think of the Q4, we believe it will have an effect at least that much as you think about the impact on Q4.
And obviously, that's going to lap over into 2019. So, that's a real opportunity for us, we believe to deliver. As you think about the pipeline today and talking to John talk about this, we're still seeing an active pipeline and feel good about the Q4. Like we said before, your visibility only goes so far, but right now, we're continuing to see a pretty robust activity. The difference is probably going to be in the size.
The number of deals we probably are seeing, but we had a very unusually large transaction this year. I don't know if that's repeatable. Having said that, I think the activity is good. I think the price discussions are good. And so, we feel pretty good about putting a significant amount of money to work as it relates to both acquisitions as well as growth opportunities to construct new funeral homes either on cemeteries or another market.
So, we're excited.
All right. Thanks. I'm going to throw one more in and turn it over. But the it looks like the on the EPS guidance, it looks like most of the reduction of the high end was affiliated with the incentive comp related to SAI stock price. And then also, you're talking about probably paying less cash taxes this year, yet you maintained cash from ops guidance and obviously the incentive comp is non cash.
So is it working capital or conservative? Help us think why understand why that guidance did not increase for the year? Thanks. Yes.
Let me I want to address 2 things. I want to make sure everybody understands the incentive comp piece too. But first of all, I think the real difference this time is think about the level of the way we delivered the earnings this time absent the compensation, which I'll touch upon a little more, Scott, if you let me. And that is, we are doing it through pre need cemetery revenue recognition. So, there's 2 components.
1 is the pre need sale, which Eric touched upon earlier that said, when we sell cemetery, we get all the revenue, but we don't get all the cash. We get cash over a longer period of time. And the same thing on the construction, we may have received a lot of the cash earlier that we're now recognizing with no cash associated with it. So, there's a lot of there's a real mismatch between and timing on cash and earnings as relates to cemetery. So, anytime you see that move, expect it to look one way or the other.
As an example, if our Supreme Court cemetery sales were ever go down, we would look like we're cash collectors really good, which isn't necessarily a healthy thing, right. We'd rather have the sale. So, that's probably the biggest driver of the cash change. And then Eric touched upon a little bit. We have higher interest rates and those are cash interest rates because of the variable rate nature of our debt.
The one thing I just want to clarify Scott on these plans, just to give people a little more color, because I know they're not as apparent as they are to us. So, this is a performance unit plan that's based upon our total shareholder return related to a competing pool of stocks. So, what happens is think about there's 3 plans, right, because these are 3 year plans. So, we have 1 to 3 years old, 2 years old and 1 year old And we have to accrue every quarter based upon our relative performance and the relative payouts. And we can be paid up to 200% or down to 0 depending on that relative rank.
But we sat at the end of the second quarter for the most part at about a one time payout. And what happened in the Q3 was that our stock performance was 23% versus a pool of let's call it generally 7%. That pushed all three plans to 200% payout, which again is good for shareholders. But what that did is a normal quarter for all three plans, the accrual will be $3,000,000 if you did evenly over time. So, for instance, in the Q4, we might expect $3,000,000 from last year and $3,000,000 from this year, we'd never talk about it.
It might be off $1,000,000 or so. What happened in the Q3 is we had to accrue up $9,000,000 I believe or maybe it was $10,000,000 And it's comparing to last year's quarter, we actually had a credit of $1,000,000 So, this is a highly unusual mismatch of a slight credit last year versus a huge catch up this year. And again, I don't know if that holds. Again, it could come back and we may get credit in the Q4 or credit in the Q1. So, we just wanted to point out that we've never seen a difference like this and it all showed up in G and A, so it's easy to see.
So, hopefully that gives you a little better clarity around what's happening with that particular accrual.
Okay, thanks. I'll turn it over.
Thank you. The next question comes from A. J. Rice from Credit Suisse.
Hi, everybody. First of all, I just wanted to go back to the guidance and what it implies for the rest of the year. I think when you on second quarter conference call, the comment was we think we'll be toward the upper half of the guidance range that was in place. You've narrowed the range and I guess kept the midpoint at about $1.81 and you've also now picked up this $0.04 that sounds like that's included in guidance, but it's sort of unusual. I guess, how should we think about that comment in the Q2 relative to today?
Do you still feel like you're probably in the upper half of your guidance range that you've offered now or is in light of the $0.04 is that not as likely?
We felt highly likely being at the top end of that range. So, let's call it, if the bill of the range was $1.81 and we had $0.04 we didn't know differential is going to happen. So, maybe another way to say it is, we believe we were on pace using that math to get to $1.85 dollars We now have this we now are aware of the $0.04 We don't know what's going to happen. We're not changing any opinion about our 4th quarter. And so hopefully that guide again, the midpoint is still $1.81 and for lack of a better term, you could go a lot 0.04 dollars more as to where so our expectation really hadn't changed.
We still feel good about the 4th quarter. And again, I think I tried to point out and what we're talking about, when I think about 2019, 2018 if it ends like it is today, it's probably going to have a higher incentive compensation accrual than what we're going to occur in 2019. So, as I think about modeling 2019, I might take that if you believe the midpoint is $1.81 I might add a few pennies to say, I know I'm going to get back a little bit of that unusual accrual. So, maybe my starting basis is $1.83 $4 or $0.05 And now I go say, can I grow 8% to 12% check the box and what are the factors do I need to think about as you model 2019?
Okay. All right. That's helpful. I know you talked a little bit about Beacon already, but I guess I'd love to hear you flush out a little more. Obviously, it's accelerated the growth in the cemetery side.
What would be I mean, is it reasonable to think that you I mean, on the accelerate the growth on the funeral side, now as you move to cemetery, which obviously has sort of near term earnings implications, do you think some of the dynamics that led to accelerated growth on the funeral side apply on the cemetery side? I know it's a different business in some ways. Is there any way to flush out what it might mean in terms of accelerating the pace of growth in the cemetery business?
[SPEAKER SHACEY PETROVIC INSULET CORP.:]
.:]
Sure, A. J. First of all, we have seen a significant lift on the funeral side. And as I think about cemetery and again, let's they may shoot me later, so I'll give you Tom's opinion. But Jerry is in the room here and Brian Bentley is the person responsible for rolling out Beacon.
I think I would think of it this way. First of all, I'd give you the positive. We believe it's going to have a favorable impact as we go forward on cemetery for sure. The slight differences, I would explain it this way. The funeral is a much more homogeneous product.
It's easier to roll out. There's not as much differentiation as you think about walking through the options. Cemetery is unique in the variety of options that are out there and how you convey that value of different types of cemetery property in different locations, which are uniquely priced and are different. So, it's a little more complicated. However, as you work through that, I think it's at least my belief that as it comes to large sales, it's probably harder to see where you get as much of an impact, because the large sale has a lot of activity around it, it's still going to happen.
But as you think about the sales that are not large sales, the more traditional type sales that are going to look a little more like a funeral. I don't know why you wouldn't have a similar impact as you think about that channel, because we're going to become much more efficient and effective at presenting to the client families. It's going to be easier to process these. Again, I go back to the time it takes for a counselor to sit down and present and have a contract and have it funded and have it collected is dramatically reduced to what the old paperwork system used to work. So, it's my belief we'll be much more productive and it will have an impact, particularly on the non large sale cemetery side.
Okay. That makes a lot of sense. And then just the last question. We've started to get questions, obviously, with the market volatility of the last month or so about how to think about that relative to your performance and results over time given the exposure to the trust funds. I know you're moving the perpetual care trust fund to sort of a total return and that may be help you offset it.
But just can you give us a little perspective on how we should think about and how you would think about budgeting given the volatility that seems to be coming back to
the market a little bit?
Sure. I
mean, what would it obviously affect and you're exactly right, Adrian, you made a good point, which is ECF is going to be a little bit isolated because of the total return scenario, which generally under these laws allows you to take out 3% to 4%. Now over a period of time, if those returns are not there, then that ECF could get affected as well. But what really happens, you're exactly right, on the MST trust, which are the merchandise and service trust that support the funeral and the cemetery backlog and those specific contracts where the money is invested in those trust funds. Ultimately, it's a muted effect that we've said many times before because ultimately the life of the contracts is about 10 years. And so anytime you have a drop in the market, it doesn't immediately come through your EBITDA or your cash flow strength.
Think of it as it comes through over a 10 year period. So therefore, about 1 tenth of it may come through in year 1. And that's the muted effect that we've tried to walk people through many times, which was indicative of what happened in the 2,008, 2,009 scenario. As a very, very general rule, all else being equal, and this is dangerous sometimes to use this metric. But as the trust funds come off at a 1% clip from where it's been where the trajectory has been over a long period of time, any 1% movement off of that trajectory generally turns out to be $1,000,000 to $1,500,000 of EBITDA loss.
There's a lot of assumptions in that and a lot of things outside of that have to be equal for that to hold up. But generally, that gives you a quantitative feel for the muted effect as markets change and the trust portfolio changes.
Okay, great. Thanks a lot.
You're welcome.
The next question comes from John Ransom from Raymond James.
Good morning. A. J. Stole my question. So I got to go to a clearly inferior question, which is on your floating rate debt, Eric, what's a good rule of thumb, every 100 bps of short term rates, much of an effect is that?
Generally, there's about we have about $650,000,000 on the term loans. We have $400,000,000 on the revolvers, call that $1,000,000,000 You have about $200,000,000 more in operating leases, excuse me, that are floating. So think of about, I call it about a third of our debt is floating. So a movement can be significant in terms of that. Most of that debt is live war plus 175.
It's already moved 20 basis points in the 3rd quarter as you know, it's about 3.8%, now it's about 4%. So, 1% movement in that will have
10,000,000 10,000,000 or so Yes,
10,000,000 effect. And you've kind of seen that this year already as 2017 ended the year about $170,000,000 And if you do the math and trend it out where we are, 2018 is going to end in kind of $180,000,000 $182,000,000 somewhere in that interest expense area. So that ratio we just talked about holds true.
So there's no just use 30 day LIBOR, there no fancy caps or swaps or anything like that?
That is correct.
Good. That's easy for me. Okay. The other question I had is, I know most of the are the Beacon sales the same kind of mix of seventythirty and third party funded versus trust funded preneed sales?
No, I think a lot of the Beacon sales are tending probably a little more insurance in the right now. It's some of that's a function of where you put it, but some of that's I think a function of simplifying the insurance process.
So, you're getting some margin, right? You get the commission
$1,500,000 in this quarter and that's something you probably could think about going forward as well.
I'm sorry, is that revenue or is that EBITDA?
That's the net. So, I think we're up $5,300,000 in G and A revenue. And if you look at it's hard to measure the associated sales because of the change in the accounting for selling, but I would put it closer to $4,000,000 is the real difference. So, probably making a little over $1,000,000 a quarter as you think about the way you're doing it.
Sure. And if you're and on the cemetery side, I know you can recognize the plot of land and some of the stuff you deliver. So if you agree your cemetery pre need a $100 next year because of Beacon, approximately how much of that would fall to the bottom line?
Again, it probably depends on your if it's property, but if it's property, it probably will be somewhere around $650 to $700 of that $1,000
Okay. So yes, there is an EBITDA effect and hopefully that kind of offset some of the interest expense comparison.
So okay.
All right. That's all I had. Thank you.
Thanks, John.
Thank you. The next question comes from Duncan Brown from Wells Fargo.
Hey, good morning. Just wanted to go back to the change in the perpetual trust allocation. Obviously, I spent a of time on the sort of more standard impact, the muted impact of a 1% move on the broader trust fund. Is that how should we think about the potential impact for the change in perpetual trust? It sounds like it was a nice impact, positive impact this quarter.
The market stays weak, how should we think about that going forward?
Well, this quarter was really a function of incremental total return portfolios versus prior year, coupled with some capital gains that occurred, which is really kind of outside our control, Duncan, because that's really the professional institutional money managers that we outsource those funds to, but they happen to rebalance some things, create some capital gains and then in some states that gets distributed to us. So, first of all, that's what occurred this particular quarter. ECF, each one of the laws and internal care funds is a little bit different. But generally, in the total return area, we can pull out that 3% to 4%. And I think that will essentially continue to move in the positive direction.
Ultimately, if you have a string in the market that's declining and there's not positive income, therefore a positive return, if you will, to take out ultimately after a period of time, maybe 1 year, maybe 2 years, maybe 3 years, it depends on the state law, you would have to cease pulling that out and that and let it settle for a while until it comes back positive and that would have an effect on us. We don't have the crystal ball to try to predict that or try to quantify it, But certainly that is a possibility under these state laws.
Okay. So maybe to try to simplify at least for me. So if the market stays weak in Q4, you would still be able to pull out the 3% to 4%. It just wouldn't it would only become an issue over a longer period of time and would vary by state. Is that the right way to think about it?
That's correct.
And then just lastly, and I should know the answer to this, but on Beacon, can you remind us this is something you all designed, right? This is not like a sales force that a competitor could go out and also implement. Is that correct?
That is correct.
And to your knowledge, is there anything similar to that or any competitors trying to do anything like it or is it unique? [SPEAKER HENRY A.
C. D. BAIRD AND CO, INC.:] D. Baer Pettit MSCI, Inc.:] I think it's unique and obviously somebody could try to create something like it. I think what's hard for people to do in order to get the bang for your buck, it's going to cost multi $1,000,000 to put in place.
And I think with our scale, it's a great return on investment. A lot of our competitors, because their lack of scale, this would be a significant capital outlay for them. And so, I think that's going to prevent, I'd say, the level that we've instituted.
And then I guess just following on maybe in markets where you're not currently at or have any plans to be at, is it something you would consider licensing out or selling or is that not in the plans?
It's really not in the plans today. Never say never, but I think this is something we want to that's really about taking care of our client families, enhancing the productivity and the careers of our fellow associates. So, that's where we're getting the bang for the buck today. One day, it may be worth looking at something like that, but not in the plans as we speak.
Great. Thank you.
[SPEAKER J. PATRICK GALLAGHER, JR.:]
Patrick Gallagher, Jr.:] Thanks, Doug.
Thank you. We have no further questions. I would like to turn the call over to SCI Management.
Okay. Thank you everybody for being on the call today. We appreciate you being here. We look forward to talking to you on our Q4 earnings call, which I believe is going to be in early February. Thank you so much.
Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.