Welcome to the First Quarter 2018 Service Corporation International Earnings Conference Call. My name is Maddy, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Question and answer session.
Please note that this conference is being recorded. I will now
start as usual with the customary Safe Harbor language before we begin with prepared remarks. The comments made by our management team today will include statements that are not historical and are forward looking. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in our press release and in our filings with the SEC that are available on our website. Today, we may also 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. I'll now turn the call over to Tom Ryan, STI's Chairman and CEO.
Thank you, Debbie. Hello everyone and thank you for joining us on the call this morning. Today, I plan to give you an overview of the quarter followed by a more detailed analysis of our funeral and cemetery operations, and finally, comment on our outlook for 2018. So, let's begin with an overview of the quarter. As you saw in our press release yesterday, we're off to a nice start in 2018 adjusted earnings per share grew $0.09 or 24% to $0.47 per share.
Within this $0.09 of growth quarter over quarter, I'll speak to 3 components. 1st and most importantly, higher operating profits from our funeral and cemetery operation contributed $0.05 or 13% of growth, which was led by increased services performed in our funeral and cemetery segments bolstered by a strong flu season and favorable cost trends, particularly in our cemetery segment. Next, earnings per share benefited by a net $0.02 primarily from the impact of new revenue recognition standard requiring us to defer certain selling costs. This benefit was slightly reduced as processing fee revenue that was previously recognized as income on SCI direct contracts is deferred under the new standard. Both of these items have a timing element that will normalize in 2019.
Finally, a lower tax rate, a reduced share count and slightly higher interest expense combined to benefit our earnings per share by an additional $0.02 We also reported strong adjusted operating cash flow of $206,000,000 which was an improvement of $18,000,000 or almost 10% over the prior year quarter. Finally, we continued our commitment to deploy our free cash flow to the highest and best use. During the Q1, we returned $150,000,000 to our shareholders in the form of share repurchases and dividends paid. Additionally, during the quarter, we deployed $39,000,000 of capital towards acquisitions and construction of new funeral home locations. The Q1 was a really successful one for acquiring great businesses and we currently are very active with others, both under letters of intent and active discussion.
The pipeline looks great in 2018 could shape up to be a really special one. I know we measure ourselves by numbers as a public company, but I am most proud of the business foundation and culture that we have created together. None of this would be possible without the collective efforts of my 23,000 teammates. Thank you for what you do every day for our families, your team and your shareholders. Now, let's talk about how funeral operations performed for the quarter.
We were very happy to report that comparable funeral revenue grew by $13,600,000 or nearly 3% compared to the same period last year, primarily from increased funeral services performed as a result of a stronger flu season in the Q1 as compared to the prior year. Of the $13,600,000 of funeral revenue increase, core revenue was higher by $14,000,000 or 3.4 percent due to a 3.3% increase in core funeral services performed during the quarter. While this higher funeral volume had a meaningful impact on the quarter, remember that in our experience, many of these flu related services are typically an acceleration of the end of life events that in many cases will likely have occurred in later quarters in 2018. So for now, we're still modeling funeral volume for the full year to be relatively flat to slightly up, which is within the range of our original 2018 guidance. The core funeral average was relatively flat compared with the prior year, An approximate 1% increase in the organic sales average was offset by 1% decrease caused by 120 basis point increase in the cremation mix.
Total non funeral home revenue increased over 12% with half of this increase coming from the rise in the number of services performed and the other half due to an increase in the average revenue per service. The increases in core funeral revenues and non funeral home revenues was slightly offset by a $2,300,000 decrease in other funeral revenues. In previous years, SCI direct preneed funeral contracts included a processing fee, which was recognized immediately as revenue in other funeral revenue. The new accounting standard requires the deferral of this processing fee revenue. So beginning in 2018, we recognized less revenue currently and deferred the amount to be recognized when we perform the service.
You should expect to see a similar variance in other funeral revenue over the next three quarters of 2018. So we lap this change in the Q1 of 2019. However, I should point out that this decrease in revenue is effectively offset in operating margin by the positive impact from the new revenue recognition accounting standard that results in lower selling costs as compared to the prior year. We will lap this change as well in the Q1 of 2019. So, for comparable funeral operating profits, we grew them $7,000,000 and operating margins had a nice expansion of 80 basis points to 23.7%.
Typically, on a $13,000,000 increase in revenues, we would expect to see somewhere around $9,000,000 or $10,000,000 increase in operating profit. Remember, the processing fee revenue change effectively offsets the deferred selling cost change. So, the remaining $2,000,000 to $3,000,000 difference can be attributed really to 2 things. First, with regards to labor costs, due to the growth in the call volume experienced during the quarter, we saw some additional overtime and part time labor costs incurred. Additionally, recall that we initiated some permanent wage increases for certain of our customer facing employees during the Q1.
2nd, we incurred higher marketing costs in SCI Direct due to the timing of direct mail advertising versus the prior year. This should normalize on a comparable basis for the rest of 2018. Finally for funeral, total preneed funeral production, which gets deferred into our backlog, grew just under 3% for the quarter, which is in line with our guidance of low to mid single digit growth for the year. We were particularly pleased that we increased the preneed contract count by 3% within the core funeral segment. Now turning to cemetery operations.
Total comparable cemetery revenue was relatively flat compared to the Q1 of 2017. Cemetery property revenues declined both on an atneedandapreeneedbasis. In total, cemetery recognized cemetery property revenue declined by $6,500,000 or 4.7%. This was more than offset by increases in both at need and recognized pre need merchandise and service revenues, which when combined grew by $7,300,000 or 6.1%. Recall that property revenues are generally recognized when they're sold.
On an annualized basis, we expect to grow pre need cemetery sales production, which includes property, merchandise and services in the mid single digit percentage range. And then as a function of that sales growth, we would grow cemetery property revenues in the mid single digit percentage range, which this can vary by quarter due to the timing of construction. Obviously, we were not pleased with the Q1 comparison as preneed cemetery sales production was down 3% and cemetery property revenues recognized were down 4%. Not to make excuses, but you should recall that last year's Q1 saw a 13% increase in preneed cemetery sales production. So, we had a pretty big hurdle to get over.
Also March April is the key selling time of the year for our Chinese clientele due to the festival of Ching Ming. We believe a higher percentage of Ching Ming sales activity fell in March of last year as compared to 2018. Bottom line, based on preliminary April activity and our internal assessment, we feel confident about the remainder of 2018 and our ability to achieve mid single digit growth. Now for the good news as it relates to cemetery revenues for the quarter. As you'll recall from our Investor Day presentation, we were excited about the growth potential of our cemetery merchandise and service revenues.
Remember that merchandise and service revenues are recognized upon delivery or service performance, not upon sale. Therefore, they will function much like funeral revenues and the delivery activity will drive performance. We communicated our belief that pre need matured merchandise services should grow in the 5% to 7% range and that at need merchandising services should grow in the 1% to 2% range annually. The excess growth trend of the matured pre need was a function of more velocity over time as we've written pre need with more customers. A more robust sales versus historical deliveries, and finally, trust fund income.
So, for the quarter, we saw atneedmerchandisealesgrowat5% above the 1% to 2% guidance and preneed matured merchandising services grow over 7%. And again, that's above the 5% to 7% range. The primary reason we performed above our annual guidance range was the increase in services from increased activity associated with the heavy flu season, just like funeral. So from a cemetery profit perspective, we were very pleased to report growth of over $10,000,000 for the quarter and we expanded operating margins 3.70 basis points to nearly 27%. Expectation wise, with flat revenues, you would expect to lose about $2,000,000 in operating profit, assuming a 2% increase in fixed costs.
So, we had a $12,000,000 upside performance to explain. First, remember that we benefited from the new accounting standard related to the deferral of preneed selling expense to the tune of about $5,000,000 The remaining $7,000,000 operating profit improvement is a function of 2 things. First, we effectively substituted $7,000,000 of cemetery property revenue for $7,000,000 of cemetery service revenue. This revenue mix change impacted margins positively as the incremental margin on service is higher as we have no property cost and incur a smaller sales commission. The final profit improvement item relates to a modest reduction in both variable and fixed costs, primarily favorable impacts from selling costs and a reduction in allocated overhead.
So to wrap it up, 2018 is off to a solid start with double digit growth in adjusted earnings per share and improvements in both our funeral and cemetery margins. On the preneed production front, preneed funeral sales were solid and preneed cemetery sales lagged a bit. It is our belief based upon preliminary April activity and feedback from our senior sales leadership that over the remaining 9 months of 2018, we will achieve mid single digit growth in preneed cemetery production as outlined in our guidance. We continue to remain confident in our earnings per share and cash flow targets for the full year 2018. However, consistent with our philosophy on guidance, we will plan to revisit this with you after the Q2 when we have 6 months under our belt.
In the meantime, we'll continue to pursue our 3 core strategies of growing our revenues, leveraging our scale, and deploying our capital 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, and good morning, everybody. Today, as usual, I'm going to begin by giving you some of my thoughts on our cash flow results and the capital deployment, both of which happened in the Q1. And then I'll touch upon our full year cash flow guidance towards the end of my remarks. So let's begin with this overview of the cash flow for the quarter. And as you saw in the press release, we are very pleased to report adjusted operating cash flow of $206,000,000 which was almost 18,000,000 percent increase compared to the same period last year.
In addition to the impressive cash earnings that Tom just walked you through in his remarks, we also had expected lower cash tax payments during the quarter as well as higher operating receipts, which were partially offset by other working capital uses. So let me give you a little more color on these results. 1st, when comparing our cash flow results to our earnings per share, remember that our earnings this year are affected by the non cash impact from adopting the revenue recognition accounting standard we just discussed. Recall, we told June February that we estimated the revenue recognition benefit to be a total of about $0.04 per share for the full year of 2018, which we continue by the way to believe is appropriate. Unlike 2017, where cemetery selling costs were expensed as incurred, under the new standard, selling costs incurred earlier in the year on unrecognized cemetery property sales are deferred until the associated revenue is recognized, which generally if you remember occurs in the back half of the year as cemetery projects are generally completed.
As a result of this expense deferral cadence, the $0.04 annual benefit therefore is heavily weighted towards the first half of the year. While there'll be no impact on cash flows, we expect to see a similar positive benefit to earnings in the Q2 as we saw in this quarter, but we'd like to point out that there will be some downward pressure on earnings in the back half of this year when these expenses are ultimately recognized. Next, recurring cash tax payments in the quarter were lower by about $16,000,000 compared to the same period last year. This reduction in cash taxes was primarily related to the timing of federal tax payments between 2017 and 2018 that will normalize later this year. And by the way, this does not reflect any benefits therefore from tax reform.
We will realize our tax reform benefits as we begin making 2018 estimated tax payments, which start in the second quarter, so for the last three quarters of the year. So for the full year, we still expect the benefit of approximately $20,000,000 from lower taxes in 2018 due to the December 2017 tax reform in the last three quarters of 2018. Accordingly, we are still guiding to a range of $110,000,000 to $120,000,000 in normalized cash taxes. Furthermore, as I mentioned on last quarter's call, we continue to challenge ourselves on cash tax planning and believe there may be an opportunity to ultimately pay less cash taxes than the current range that I just mentioned to you, but I'll update you on this as the year progresses. Working capital for the quarter was relatively consistent with the prior year as cash receipts benefited from the increase in funeral and cemetery services, primarily as a result of the stronger flu season.
But these were largely offset by working capital uses associated with the payment of a legal obligation, which was actually settled in 2017, as well as higher incentive compensation payments in the Q1 of 2018 compared to the same period last year. Finally, cash interest payments in the quarter were $25,000,000 compared to $20,000,000 in the prior year. This was due to a $5,000,000 payment early in the quarter to complete the redemption of our 2018 notes that we really did in the Q4 of last year. As you think about cash interest for the full year of 2018, it is worth mentioning that although we are generally comfortable with the amount of floating rate debt we carry and just remind you that's about 30% of our total debt is floating, But to the extent interest rates continue to rise, we may feel some downward pressure on earnings and operating cash flow. In our guidance for the full year, we did model a modest increase in rates, but we will be monitoring this closely throughout the year and we'll update you as appropriate.
Now shifting to free cash flow, 1st maintenance and cemetery development CapEx combined, again are the 2 components that we define as CapEx in our free cash flow calculation was approximately $41,000,000 for the quarter, which is about $7,000,000 higher than prior year, but in line with our planned spending for the quarter. So therefore, we are very pleased to report adjusted free cash flow in the quarter was 165,000,000 which was higher by about $11,000,000 or 7% over the prior year quarter. Now let's shift and talk about cash deployment capital deployment for the quarter. So we invested an impressive $189,000,000 towards acquisitions, new location builds, dividends and share repurchases. This investment represents a remarkable $42,000,000 or 29% increase in capital that was deployed in the Q1 of 2018 versus last year.
So in terms of the various components, keep in mind that acquisitions continue to be our best use of capital as they generally result in a mid teen after tax cash IRR. On that note, we proudly deployed approximately $34,000,000 towards acquisitions, including several funeral homes and crematories and a cemetery in Hawaii. We're obviously proud of these purchases and welcome all new employees of these acquisitions onto the SCI team and into the SCI family. We also invested almost $5,000,000 on the new building expansion of several funeral homes, which we expect will provide positive returns to us going forward. Dividend payments in the Q1 totaled $31,000,000 an increase of about 29% over the prior year of $24,000,000 which again reflects the $0.02 per share dividend increase that we just announced in February
of this
year. Finally, we returned an impressive 119,000,000 dollars of capital to investors in the form of share repurchases by purchasing approximately 3,100,000 shares at an average cost of $38.38 per share. This investment has reduced the number of shares outstanding to just over 184,000,000 shares at the quarter end. Now subsequent to the end of the quarter, we have continued our repurchase program, reducing our outstanding share count by an additional 600,000 shares for a total investment of about $24,000,000 or an average cost of $38.12 per share. As a foundation to our capital deployment strategy going forward, we finished the quarter with very robust liquidity.
After taking into account about $100,000,000 of our cash is encumbered primarily due to balances residing in Canada and expected minimum operating cash flows, we had about $120,000,000 of unencumbered cash at the end of the quarter. When adding this unencumbered cash about $780,000,000 of availability on our credit facility, we believe our unencumbered liquidity to be a strong $900,000,000 at March 31. This liquidity positions us very well to strategically execute our capital deployment plans for the remainder of this year. So in closing, I'd like to reiterate our capital deployment priorities as we just highlighted to you in February at our Investor Day. Our maintenance capital, we expect to deploy about $135,000,000 for maintenance CapEx and capital lease payments.
Growth capital additionally, we expect to invest about $180,000,000 to grow the company. This consists of a spend of around $100,000,000 for acquisitions and new funeral home construction opportunities, as well as approximately $80,000,000 for the development of cemetery property, all of which have very high returns for the company. Now returning capital to shareholders. Based on our current share count and dividend rate, we expect to pay around 90 $4,000,000 more in dividends for the remainder of the year, which will total then around $120,000,000 in dividends for 2018 as a whole. Any excess cash will be available for deployment to other value accretion opportunities, including share repurchases.
We currently have about $330,000,000 of remaining authorization in our share buyback program. And keep in mind that we will likely have additional capital to deploy perhaps as much as $50,000,000 to $100,000,000 range or even greater than that to deploy and keeping with our philosophy that we will maintain our leverage as our company and our EBITDA grows. And our leverage measured on a net debt to EBITDA basis at the end of the quarter was about 3.7 times and remains well within our targeted range of 3.5 times to 4 times. We reaffirm our outlook for the full year for 2018 in terms of adjusted cash flow from operations of $540,000,000 to $600,000,000 These strong cash flows as well as ample liquidity and a favorable debt maturity profile, the two areas that are fundamental to our capital deployment strategy give us confidence that we can and will continue to deploy capital to grow the company. We're growing to do this in a very measured disciplined manner.
For us, it's a focus on pursuing opportunities that yield the highest relative return. So with that operator, that concludes our prepared remarks. We're now ready to turn the call over to questions.
Thank And our first party with a question is Scott Schneeberger from Oppenheimer.
Good morning. This is Daniel on for Scott. Congratulations on a good quarter. I want to touch on margins first. Can you guys just discuss or give us an update on your expectations for funeral and cemetery margins for the full year and help us think about the cadence on each and the puts and takes?
Thank you.
Sure. I think we obviously feel very good about I think in our annual guidance, what we've always said is, look for funeral margins to wane between on an annualized basis 19% to 21%. We've experienced just north of 20% recently. And we'd expect over the near term for those to be relatively flat, because of the challenges of the revenue line item. On the cemetery side, we've guided people to say and historically we've done, we've been able to grow those in the call it the 80 basis points to 150 basis point type range because of our ability to grow cemetery revenues different from funeral.
Now from a seasonal perspective, the thing to remember, the Q1 is generally the best quarter from a margin perspective on a funeral basis. And the reason for that is, again, the flu activity tends to fall within that Q1. Cemetery is very different. Cemetery margins generally get better as the year goes on for a couple of reasons. 1, it's warmer outside in a lot of markets and you can have a lot more sales activity.
And 2, remember from a property perspective, construction tends to occur more rapidly in the 3rd Q4. So, you think about margins on a quarterly basis, think of cemeteries as getting better as the year goes on and generally, funeral has a good first quarter and a good fourth quarter. And in the middle of the year, it's a little harder because of, again, volumes of activity.
Thank you. On acquisitions, I mean, you had a pretty solid spend in the quarter. Can you give us an update how you think about the spend for the full year? And help us think about the model, how we should model this from a P and L perspective contribution from acquisitions in this quarter and how it might look like for the full year as well? Thank you.
Yes. So, I think, again, as we kind of said in my comments, we're very, very pleased with what we were able to close in the Q1. We've got a lot of activity out there. It's our belief that it's going to be a very good year. We've guided people to say, we think we could spend between $50,000,000 $100,000,000 in a given year.
But that's always going to be based upon the fact what size deal is going to close, how many deals are going to close. I would just tell you looking at the backlog today, we feel very good about achieving the high end or better, when we think about our acquisition spend and the impact. I think as you think about the impact within a year, remember, SEI having the scale that we do, most of our performance is going to be driven by our operations. Acquisitions are nice. They add to the value, but it's not going to be a material piece of our operations.
The other thing that I would I think from a modeling perspective, I just want to get out there, because we tend to not talk about it as much. You'll notice that we actually sell a certain number of businesses in a year. Again, a lot of these would be businesses that may not fit our model anymore, some changes that occur in markets. So, we look at the highest and best use for us and say, we believe selling this business or selling this real estate is a better deployment of capital than continue to operate in that market. So, keep in mind, we are selling businesses that are going to reduce revenues in those buckets.
But remember, they're generally going to businesses that don't make a lot of money and we're taking that free cash flow and redeploying it in places where we know you're going to get a return. So, as you build your models, I'd say, look at accretive acquisitions and divestitures that are not dilutive, but will put pressure, let's say, on your total revenues as you think about the entire year.
Got it. That's helpful. Thank you very much, guys.
Our next question comes from Joanna Gajuk from Bank of America.
Good morning. Thank you for taking the question. So can I just come back to the discussion around the cemetery production? I guess you said that is it indeed what somewhat disappointing, there was tough comp and then you talk about, I guess, some activity so far in April. So the outlook, the mid single digit, so I'm sorry, I just want to clarify.
So you're talking about the remaining of the year or I guess for the full year? Or I guess it's going to kind of average itself out with the Q1 and still it's going to be mid single digits. Just want to clarify that comment whether this was for the full year or the rest of the year to mid single digit?
[SPEAKER A
EDWARD K. ALDAG, JR.:] Aldag, Jr.:]
Yeah, Joanna. Hello, how are
you doing? And thank you for the question. I think what we're really saying is what we're trying to convey in the messages, we did have a tough quarter. We've got kind of this Ching Ming Festival slipping from March to April type of thing. So, I think what we're trying to convey back to you, one is, we feel very, very good about our preneed cemetery sales momentum.
And we're seeing that return based upon preliminary April. It's always hard to figure. I think, again, because we gave mid single digit guidance for the year that we can get back there. Now what's mid single digit guidance? It's I guess I'd define that as 4% to 6%, right?
Normally, I'd love to say we'd be at the high end of that. So, as I think about this and again, I'd never want to put a limit on what we can do, because we've got such a talented sales team. But because of the Q1, I think we'd be fighting to get back to the lower end of that guidance. Now what that would tell you is the next 9 months look pretty good, right, as I think about the next three quarters. The other thing I'd just point out is, again, back to the kind of the quarterly comparisons we tend to focus on as public companies.
Q2 of last year was a pretty high step in quarter. Q3 and Q4 really weren't. We had a great first half of the year and not so fantastic second half of the year. When you think about your quarterly comparisons, we'll have another tough comparison in the Q2. I feel good about our ability to compare against that, but it probably gets a little easier as you get to Q3 and Q4.
No, I agree with the comps because even in this quarter, right, the comp was pretty tough. And I guess if I look at the Q4 comp, kind of the delta is similar, 700 basis points to 600 basis points on the growth rate. So I just want to clarify how you feel about that. Because also coming back to your comments about the quarter and the outlook for the year, so would you characterize this quarter as sort of in line with internal expectations? I guess it was beat versus the consensus number.
So, I just want to get a color there.
[SPEAKER A. HAUDRICH OWENS ILLINOIS, INC.:] Haudrich Owens Illinois, Inc.:] Yeah. I guess I would define
the Q1 as in line with expectations or slightly better on an overall basis. As you think about the components of that, I would define it this way. From a funeral perspective, it was slightly better. From a cemetery property perspective, again, we're saying we weren't very pleased with the Q1. So, we feel like that can get better.
So, I think we're very, very pleased at having achieved what we believe was about where we thought we'd land or slightly better. And we feel very confident about the back half of the year. But as you know, Joanna, I think a quarter is not a year make and we just want to have another quarter under our belt before we look at where we are in cash flow, where we are in earnings per share to give you guys a little better perspective. But I would say we came out of the Q1 feeling very good about the rest of the year.
And if I may on the quarter, in terms of the shift to cremation of 120 basis points that you flagged there, is there something there in terms of the shift accelerating? Because I guess the prior two quarters, it was below 100. But again, I guess, you mentioned this in the past that it could vary quarter to quarter. So what's kind of your view in terms of the for the year for the cremation shift?
Yes, Jean, I think you're exactly right, what you pointed out. We see years where it's 50 basis points. We see years where it's 140 basis points. If you take long periods of time, it tends to get close to 100 basis points. And that's why we kind of use that nice round number.
We do not believe this tells us anything other than it's another slightly different than the average. So, we still believe that the year and the coming years will probably change it around, call it, 100 basis points year over year. So, yes, nothing that we're seeing that drastically believes it should change more. The one thing I would say is, and this has nothing to do with core, I think we define for you the core mix change and then the overall mix change. I will say that I think we are doing a great job as it relates to SCI Direct in growing our share of that customer segment.
So, from that perspective, I expect it to go up, because we think we're capturing more share versus our competition. From a core perspective, I think it's kind of same as it ever was. We expect a 100 basis point change annualized.
Great. Thank you. If I may, Chris, the last one. So at the Investor Day, you talked about the cemetery pressure or cash loss fund structure change from fixed income to equity. So did you see any benefit of that?
And I guess at this presentation, you mentioned that it would be like a $15,000,000 sort of benefit to cash flow, I guess, annually. So should we think about this benefit materializing this year?
[SPEAKER J. PATRICK GALLAGHER, JR.:] Patrick Gallagher, Jr.:]
I think the thing with ECF is there's a lot of moving parts in that number. I will tell you, I think we saw a little bit of impact from that. I think that $15,000,000 number you're talking about is upon complete conversion of where we're going to go. It even sounds a little bit high, but I do believe that we would expect to see 1,000,000 of dollars of improvement on an annualized basis year over year, because we have shifted those funds into equities. And unfortunately, we still got a few states to go.
And the big one, I think, California doesn't come effective until 2020. So, some of that is kind of pro form a once it's fully effective, but we do believe there'll be a few $1,000,000 of impact as we think about 2018 and you'll begin to see it. I think there is a comparable number in last year that caused our ETF not to look as good as it possibly could, but we expect that to be a more favorable comparison as we move throughout the year.
Thank you. I'll go back to the queue. Thank you.
Our next question comes from A. J. Rice from Credit Suisse.
Hi, everybody. A couple of questions, if I might. First, just sort of clean up a couple of things that have been talked around, make sure I fully understand them. So on the cemetery side, especially the preneed cemetery sales, I know on an annualized basis, they tend to be what they are, but from a quarter to quarter, they can be a little discretionary. Do you think weather had any impact?
I know we had some quirky weather in different parts of the country. Have you guys drilled down on that or that bubbled up as an issue in terms of your production numbers in the Q1?
Yes. I think, Ed, if you ask the question, you can come up with about 15 different reasons why, and that would be one of them. We've had some regional leadership changes. We've had a lot of things that I could paint some really sad, sorrowful excuses for you. But I think the truth is that stuff happens all the time and we manage through it.
There's weather, but I think you're right, there surely were pockets of the country when you think about the Northeast and you think about the Midwest. We had some pretty severe weather even in California. So, sure, those tend to bounce back, right? So, I think our belief is if you couldn't get out to the cemetery in March because of weather, we'll see in May. So, I think that's another reason why we feel like, look, it was a tough comparison.
There are a lot of wind in our face, but nothing fundamentally is broken. We've got a great sales team. We've got better sales tools. We've got really tremendous properties and inventory that we're putting out there. So, we feel really good about the last 9 months and your point well taken, you're exactly right.
I just it's hard because it's different in every market, right? Last year, there were some markets that had bad weather and we got over it. This year, we may have a little more, But that's kind of the way we feel about it.
And just on this Chinese festival impact, I don't remember hearing about that before and I would follow you guys for a long time. Did you have any way to quantify how much of
a headwind that was in
the Q1 and does that then reverse because in the Q2, you get all that back pretty much in the Q2?
Well, that's what's hard to tell because again, it depends on when you run your campaigns, right? So, Ching Ming is a sweeping of the tombs in a Chinese customer. I believe the actual date falls like generally April 4th or 5th, but it depends upon the weekend that you're having, let's say, these open houses. The biggest markets where we see this are going to be in Vancouver and then also at Rose Hill. Those are traditionally what we're finding now is we're expanding the Ching Ming celebration to other markets where our Chinese clientele haven't had exposure to this before.
And so, from a long term perspective, we see this as a much better opportunity to expand Ching Ming into many other markets. I will tell you though, so goes Vancouver and Rose Hills, so goes our Ching Ming production, because it is so big. And so, we believe that we can capture we have captured some of that back in April, but it wasn't a huge number. It was one of many things of why we didn't achieve. I don't want to put it all on Ching Ming.
I picked that one, because there was an unusual timing to this year when a weekend falls, where you have the opportunity to really have the Okay. On
Okay. On the acquisition page, you had a good year last year coming in toward the high end. It sounds like you'll be toward the high end again this year. Is that a function of more properties are available, less competition for properties? Is there anything that you can point to that's particularly driving a modest pickup in acquisition activity?
I think really two things. We definitely are seeing more activity, more discussions, but also it's really for us, it's a function of the size of the deal. So, I think what you're probably seeing are larger transaction opportunities in the most recent years, let's say versus where they were maybe a couple of years ago. But that generally is going to be the big difference for us is how big of an opportunity comes your way and those kind of come when they come. So, we feel good about seeing some relatively nice sized businesses that are interested in talking with us.
And again, we're at different levels of discussions with different parties. And I'm just trying to give you some feedback that we see a nice pipeline. We see a nice pipeline with some good sized businesses that we believe would be a great fit with SCI and we'd be excited to bring those management teams and employees into the SCI family.
Okay. And then my last one is, we had this ongoing discussion in the last 6 months about price transparency, what happened in the U. K. And I know you guys addressed this at the Investor Day and addressed it before. But I just want to ask, is there any update in your thinking there or anything you're seeing?
Or and I know there's some discussion around potentially updating the funeral rule. Has there been any update on that?
Yes. No update on the funeral rule. I think we're seeing the same thing, A. J. When we think about pricing, we talked about a little bit of our strategies that we're deploying in certain markets and we're seeing some, again, the favorable results in those markets where we've done it.
It's predominantly been being either more competitive, particularly as it relates to the cremation consumer and we're seeing some great results from that. And again, I think our long term strategy is really about capturing more share and capturing, what I'll call backlog inflationary pricing. You'll notice in the numbers that the preneed average and we said this in our Investor Day, we believe the preneed average is going to grow at a higher rate than the atneed average. It's competitive on an atneed basis and allowing people to pay over 3, 4, 5 year period allows them to buy up and be more satisfied with what they do and makes it more affordable. So, we view that as the best way to continue to go.
The other thing that you see is, from a mix change perspective, you see more of a mix change or a higher cremation mix in the atneed customer. So, there's a little more pressure when you think about that 120 basis point mix change. It's going to impact that atneed walk in at need average more than it's going to impact that pre need going at need average. So, those are just some of the things we deal with. I think we view it as it's tough sledding to get inflationary pricing, but we'll continue to do it.
And the upside is really going to be in what out of that backlog as time marches on and then our ability to compete more effectively for more volume. And we feel, I'd say the signs are that we're doing a better job competing for that volume and what's coming out of the backlog is very good business.
All right. Thanks a lot.
Welcome.
We have no further questions at this time. I will now turn the call back over to FCI Management.
We want to thank everybody for participating on the call today. We look forward to speaking to you again with our Q2 results in late July. Have a great week.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.