Welcome to the fourth quarter 2017 Service Corporation International earnings conference call. My name is Victoria, and I'll 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. Please note that this conference is being recorded. I will now turn the call over to SCI management. You may begin.
Good morning. This is Debbie Young, Director of Investor Relations at SCI. We want to apologize for the technical difficulties this morning. The webcast provider was not able to get the phone line that we had secured working. We apologize for the delay. Sorry for the inconvenience. We'll get started now. Before I begin with the safe harbor language, I did also want to mention to you that many of you have seen we're going to host an investor day next week in New York on Tuesday afternoon. If you'd like to attend, please reach out to me via phone or email, and I can get you registered. With that, let me just quickly run through our safe harbor language. The comments made by our management team today will include statements that are not historical and are forward-looking.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in our press release and in our filings with the SEC that are available on our website. In today's comments, we may also refer to certain non-GAAP measurements such as adjusted EPS, adjusted operating cash flow, and free cash flow. A reconciliation of these measurements to the appropriate measures calculated in accordance with GAAP is provided on our website and in our press release and 8-K that were filed yesterday. With that behind us, I'll now turn it over to Tom Ryan, SCI's Chairman and CEO.
Thank you, Debbie. Hello, everyone. Happy Valentine's Day. We appreciate you joining us on the call today. I'd like to start this morning by reflecting on our accomplishments for the year 2017. I'll get into an analysis of the fourth quarter and end with some color on our outlook for 2018. First, some observations on the year 2017. It was an exceptional year from a financial performance perspective. We finished with a solid fourth quarter. From an SCI family perspective, it was an incredibly challenging one, considering the catastrophic events that occurred in a number of our communities in which we live and serve. It's been a year of significant headwinds, yet despite the multiple hurricanes, the extensive wildfires, the Vegas tragedy, and other various challenges, our team proved just how much can be accomplished when we all come together.
I was so proud to watch how you all reacted by supporting each other and your communities. My heartfelt thanks goes out to all of you for continuing to provide compassion to our client families day in and day out, even as you were dealing with your own personal tragedies. You guys are real pros, and I'm so proud to be a part of such an extraordinary team. Back to the financial stuff. During the year 2017, we generated an impressive $1.55 of adjusted earnings per share, which exceeded the top end of our adjusted guidance range. This amount included a little more than $0.09 of excess tax benefits from the new accounting standard for share-based compensation that was not reflected in the prior year and had the effect of lowering our tax rate in 2017.
We also enjoyed an even lower tax rate in 2017, primarily as a result of some nice work from our tax team, which improved earnings per share by an additional $0.05. I'm going to offset these $0.05 against the $0.05 of favorable special items in 2016's earnings per share. In trying to simplify and analyze the operating growth rate for 2017, I would use $1.46 for 2017, which is the $1.55 minus the $0.09 of excess tax benefits when we compare it to our adjusted earnings per share of $1.29 reported in 2016. This reflects a $0.17 or 13.1% increase in operational earnings per share growth even after absorbing the negative impact from the hurricanes, and is slightly higher than our long-term guidance range of 8%-12%.
Funeral operating profits improved over $14 million for the year 2017, and we expanded operating margin percentage by 70 basis points to 20.3%. We experienced solid funeral volume growth for the year of almost 1% without a flu impact. While average revenue per case was relatively flat as the 90 basis point increase in cremation mix and the relatively higher volumes from SCI Direct offset slight organic growth in pricing at the customer level. Although small in contribution compared to core revenues, SCI Direct continues to grow revenues in the mid to high single digits in non-funeral home operating revenue, as well as recognized preneed revenue. Cemetery operating profits improved by over $33 million for the year, and we expanded operating margin percentage by 140 basis points to 28.6%.
We experienced solid revenue growth of 5.1% for the year, which was primarily driven by the success of our preneed selling efforts. This resulted in property revenues of approximately 5% growth, as well as merchandise and service revenues exceeding 6%. This growth was slightly offset by a $5 million reduction in endowment care fund revenues, as anticipated, due to some special earnings and cash receipts in the prior year. These operating segment improvements, when combined with the negative impact of increases in general administrative expense and interest expense, still delivered approximately 7% of the 13% earnings per share growth, slightly above our long-term guidance range of 4%-6% growth for the base business. The remaining 6% earnings per share growth came from the impact of acquisition contributions and a reduction in share count.
Our adjusted cash flows results were also very strong for the year, $554 million, and exceeded the high end of our adjusted guidance range. Eric's going to speak in more detail about our cash flow in just a moment. From a capital allocation standpoint, during the full year of 2017, we returned an impressive $308 million to our shareholders through dividends and share repurchases. This should demonstrate to you our belief in the future strength of our business platform and the cash flow growth we expect to generate in the foreseeable future. Additionally, for the year, we invested $98 million in accretive acquisitions and the construction of several new funeral homes.
Finally, in 2017, our shareholders received an impressive 34% total shareholder return versus a 22% return for the S&P 500, continuing the company's track record of delivering a significant premium to the S&P 500 return when you look at the one, three, five, and 10-year periods ending December 2017. Now for an overview of the quarter. We reported an adjusted earnings per share of $0.50 for the fourth quarter, which is a $0.03 or 6% increase over the prior year quarter. There are a lot of moving parts to this, so I'm going to try to break it down as simply as I can. Within the $0.50 is a $0.05 benefit in the quarter related to a non-cash benefit in our tax provision, resulting primarily from various discrete items and hurricane tax credits.
Excluding the $0.05 impact, our adjusted earnings per share would have been $0.45, which was in line with consensus estimates. This $0.45 is absorbing about a net penny and a half of additional expenses related to the hurricanes that occurred in September. Absent the hurricane costs and the tax savings, we believe from a pure operational perspective, we are generally in line with the prior year quarter of $0.47. From an operating perspective, solid improvements in our funeral segment were, for the most part, offset by decreased cemetery profits. Recall last year, we had a couple of big construction projects that were completed in the fourth quarter of 2016, resulting in a significant amount of GAAP revenues and profits being recognized out of deferred revenue. This did not reoccur at those levels in our 2017 fourth quarter.
However, cash flows were strong as cash profits from both funeral and cemetery. Remember, the cemetery revenue decline is non-cash from constructed revenues. These cash flows were further enhanced by improved working capital performance. Shifting to some more detail around the funeral operating performance during the quarter. Our comparable funeral segment performed very well with revenue growing by almost $10 million or 2.2% compared to the prior year period. Comparable core operating revenue accounted for $5.8 million of that growth as core services performed grew by 0.8%, again, without an impact from the flu, as far as we can tell. Average revenue per case grew by 0.7%, absorbing a 90 basis point increase in the core cremation rate. Total non-funeral home operating revenue accounted for another $1.1 million of our revenue growth.
Comparable services performed as well as average revenue per case equally contributed to the 10% growth in this segment. Recognized preneed revenues were responsible for the remaining funeral revenue growth as it grew by $2.8 million or 11%. Comparable funeral operating profit increased by $8.4 million for the quarter on a $9.9 million revenue increase for about an incremental margin of 85%. This is what we should expect in such a high fixed cost business. This resulted in a 21% funeral operating margin percentage, which increased 140 basis points over the prior year quarter. Finally, from a preneed funeral sales production perspective, which gets deferred into our backlog, we produced almost $200 million, which was an increase of $2.7 million or 1.4% over the prior year quarter. Moving on to cemetery operations for the quarter.
Comparable cemetery revenue declined $6.9 million, or 2%, during the fourth quarter as compared to the 2016 quarter. This reported decline was primarily caused by an $11.4 million decrease in new construction revenues as compared to the prior year quarter, which included the completion of a few unusually large projects. During the first nine months of 2017, we experienced a higher recognition rate for cemetery property sales versus 2016, as we had more constructed inventory to sell. Through nine months, our property sales production grew at 7%, while our property revenue recognized grew at 10%. This again is just timing, and the fourth quarter regulated the result for the year. For the entire year, cemetery revenue, and even more specifically, property revenue and preneed property sales production all grew at about 5%, which was in line with our expectations.
Preneed cemetery sales production for the quarter grew by just around $2 million, or 1%. While this is not a growth rate we're excited about, the muted growth percentage was due to a strong fourth quarter 2016 comparison, as well as the impact from the sales disruption in the markets impacted by the hurricanes. For the year, preneed cemetery sales production grew 5.3%, which was in line with our expectations. Finally, cemetery operating profits in the quarter declined about $7 million, or 140 basis points. This decline is primarily a result of the new construction property revenue decrease I just described, coupled with normal increases in our high fixed cost structure. From a cash flow perspective, cemetery cash margins actually increased as the revenue shortfall versus the prior year was a non-cash revenue item. Let's shift to a discussion about 2018.
Our guidance for adjusted earnings per share in 2018 is $1.72 to $1.90. The midpoint of our guidance, $1.81, represents a 17% increase over adjusted 2017 earnings per share of $1.55. This increase includes the favorable 2018 impacts from a new accounting standard, as well as the new Tax Reform Act. It also includes the increased expense of a decision we have taken regarding investing some of the cash savings generated from the new Tax Reform Act by increasing the base pay of certain of our critical customer-facing associates. First, as a result of implementing the new accounting standard related to revenue recognition, we believe our earnings per share will benefit by an estimated $0.04 as we begin deferring some incremental selling costs that are currently expensed when incurred.
Second, our tax rate is expected to be reduced to 24%-26% in 2018 as a result of the Tax Reform Act. This reduction in our provision is a $0.135 benefit, slightly offset by an anticipated $0.035 reduction of excess tax benefits related to the expected exercise of stock options during 2018. On a net basis, we have a $0.10 anticipated benefit from a lower tax rate. In light of the almost $20 million of cash tax savings over 2017 related to the Tax Reform Act, we expect to invest approximately $7 million, or $0.025, which will have a negative earnings impact through salary expense during 2018. This is intended to permanently increase, not like a one-time bonus, the pay of some of our critical field customer-facing positions at both our funeral and cemetery operating locations.
Adjusting for all three of these items, the midpoint of our guidance reflects an almost 10% increase in adjusted earnings per share, which is within our long-term earnings growth framework of 8%-12%. We believe this increase will come as it historically has, with organic business growth contributing 4%-6% growth in earnings per share, contributions from recently acquired businesses contributing an additional 2%-3%, and the effect of the 2017 and 2018 share buybacks delivering an additional 2%-3% earnings per share growth. Allow me to briefly discuss the underlying assumptions regarding our base business growth for 2018. Funeral revenues should grow in the 1%-2% range, resulting in a stable funeral operating margin percentage of around 20% that generates slightly higher funeral operating profits.
Cemetery revenues should grow in the 4%-6% range, led by mid-single-digit growth in property revenue and mid-single-digit growth in merchandise and services. We also would expect slightly higher interest expense as we will have a higher average debt balance coupled with an anticipated higher rate on the variable rate bank debt that is tied to LIBOR. As we expect short-term rates to rise throughout the year. To wrap it up, we'll continue to focus on driving revenue growth and leveraging our scale, which should enhance cash flows that we will then utilize to grow our business and further enhance value for you, the shareholder, by returning capital back to you. With that, I'll turn the call over to Eric.
Thanks, Tom, good morning, everybody. I want to echo what Debbie started at the beginning of the call and apologize for the technical difficulties that we had this morning and really appreciate everybody being flexible and being able to join us about an hour later than originally planned. Shifting to the remarks, today I'm going to begin by addressing our cash flow results during the fourth quarter, followed by our annual cash flow results and capital deployment for all of 2017, finally, we're going to shift gears and provide some details of our outlook for 2018.
First and more importantly, as Tom did, I'd like to start by thanking all of our dedicated and talented associates who were able to help our company deliver what we characterize as very strong earnings and cash flow results in the face of a good number of challenges thrown their way during 2017. I'm proud that through the hurricanes, wildfires, and the other events, our associates collectively banded together and were able to help each other and their communities through this adversity. Now shifting to the financials, and we'll start with the cash flow overview for the quarter. We reported an impressive $124 million of adjusted operating cash flow, a $17 million increase over the prior year of $107 million.
You may recall, I mentioned last quarter that we deferred about $25 million of federal cash tax payments from the third quarter into the fourth quarter of 2017, as allowed by the IRS for businesses affected by Hurricane Harvey. Neutralizing for this impact, our business has produced nearly $150 million of cash flow during this quarter, which is about a $42 million increase over the prior years. The drivers for this increase include higher cash earnings for the quarter that Tom just mentioned, but it mostly resulted from strong execution of our working capital initiatives that primarily related to improved cash collections and down payments during the quarter in the preneed cemetery and in the at-need funeral areas of our business.
As I mentioned in last quarter's call, we had expected a rebound in the fourth quarter related to working capital from items that we said were temporary in nature, and that in fact did occur. Also included in working capital were some opportunities to withdraw cash from our trust funds in certain states where allowed under the laws. These withdrawals should be considered one-time in nature, and they resulted from a multi-year initiative working with existing trust laws that did not have any impact on our quarterly earnings. This initiative generated an incremental $16 million of cash flow in the quarter that you saw in the press release, but also $20 million in total for the entire year.
Maintenance and cemetery development CapEx, which again is the two components that we define as CapEx in our free cash flow calculation, came in at about $69 million for the quarter, which is about $12 million higher than the prior year. While about half of this increase relates to the impacts of the hurricanes, we continue to believe an increased investment in maintenance CapEx is a prudent use of our cash flow as we invest more to remain relevant with our customers through updated and more flexible facilities, allowing us to offer an expanded variety of contemporary services such as catered receptions and less formal gatherings where family members actively participate in the service. Now let's talk about an overview of the year in terms of cash flow as well as capital deployment.
For the full year, we generated $554 million in adjusted operating cash flows, $46 million over the prior year, and surpassing the high end of our guidance range, which was $515 million. As I just mentioned, though, cash flow results during 2017 benefited by $20 million of non-recurring cash flow from our trust funds. Adjusting for this, we generated about $534 million in adjusted operating cash flows, or about $26 million above the prior year. Backing out about $0.12 of non-cash earnings growth related to stock option accounting and share repurchases, our cash earnings per share grew about $0.14 per share, or about $42 million. Partially offsetting this was about $20 million of higher anticipated cash tax payments that you saw in the press release that occurred during the year.
Our liquidity and strong cash generation enabled us to continue our long-standing capital deployment strategy with a focus on creating long-term value for our shareholders. For the full year, we deployed over $400 million towards acquisitions, new location builds, dividends, and share repurchases. Let's talk about the breakdown of this $400 million. We deployed approximately $80 million towards acquisitions in 2017, reflecting an increase from the $75 million invested in the prior year and well within our targeted range of $50 million-$100 million. Remember, acquisitions continue to be our best use of capital as they generally result in a mid-teen after-tax IRR. Additionally, we invested almost $18 million on the new build and expansion of several funeral homes, which we expect will provide positive returns to us going forward into the future.
Dividend payments in 2017 totaled $109 million, an increase of 11% over the prior year of $98 million. Further, you also probably saw in our press release yesterday that our board approved a 13.3% increase in our dividend rate to $0.17 per share this quarter as we benefited from the impacts of recently enacted tax reform that Tom just mentioned. Finally, we returned an impressive $200 million of capital to investors in 2017 in the form of share repurchases, which has also resulted in the number of shares outstanding being reduced to just under 187 million shares. We repurchased approximately 6.2 million shares during the year at an average price of $32.15. Subsequent to year-end, we have continued this repurchase program, reducing our outstanding share count by an additional 1.7 million shares for a total investment of about $67 million.
Concurrent with the increase in our dividend announced yesterday, our board also approved an increase in our share repurchase authorization of up to $400 million, which gives us a substantial amount of flexibility as we move forward in 2018. With that, let's shift forward now to 2018 in terms of cash flow and capital deployment. In the release, we introduced our 2018 guidance range for adjusted operating cash flow of $540 million-$600 million. Adjusting 2017 cash flow from operations of $555 million for the $20 million of one-time trust withdrawals I just mentioned, our operating cash flow is growing about $35 million at the midpoint of our 2018 guidance, which would be $570 million. This growth is consistent with our adjusted earnings guidance that Tom spoke to earlier, as we expect to generate adjusted earnings per share growth of about $35 million during 2018.
Additionally, an expected $20 million of lower cash taxes will be offset by about $10 million of higher cash interest and about $10 million of incremental working capital uses. Let's talk about that and walk through some details of cash taxes and interest. Remember in 2017, we paid about $135 million of cash taxes with an adjusted cash tax rate of approximately 32%. As a result of the recently passed tax reform, we expect to pay an adjusted cash tax rate of approximately 25%-27% in 2018, or about $110 million-$120 million, which will result in a $20 million reduction of net adjusted cash tax payments in 2018 versus 2017. As Tom noted, we expect to use about $7 million of this cash tax benefit to provide wage increases to approximately 10,000 frontline employees in both our funeral and cemetery businesses.
The remainder will be returned to shareholders, primarily through the increased dividend that we announced yesterday. Lastly, we continue to challenge ourselves on cash tax planning and believe there is a possible opportunity to ultimately pay less cash taxes than our current range that I just mentioned. I'll update you on this as the year progresses. Our expectations for maintenance and cemetery development capital spending is about $185 million in 2018. This is somewhat lower than our capital spend in 2017, as we don't expect much more capital related to the impact of the hurricanes. 2018 capital spend includes approximately $100 million of maintenance capital as we expect to continue our emphasis on updating our facilities as we continue our keen focus to remain relevant to our consumers.
The remaining estimated $85 million of capital relates to cemetery development spending, which continues to drive superior returns for us as well. At the midpoint of our adjusted operating cash flow forecast guidance of the $570 million I just mentioned, and adjusting for these capital expenditure items, we calculated our forecast 2018 free cash flow to be $385 million at the midpoint, or roughly $2.04 per share, which is just under 10% higher than 2017. In addition to these recurring capital expenditures, we expect to deploy $75 million-$100 million in acquisitions and other growth initiatives, including new funeral home construction opportunities, which together drive low to mid-teen after-tax internal rates of returns for us. Finally, after taking into account the completion of the redemption of our 2018 notes in early January this year.
We have a favorable debt maturity profile and tremendous liquidity of over $1 billion, consistent of about $240 million of cash on hand currently, and around $800 million of availability on our long-term bank credit facility. In conclusion, we ended 2017 really on a high note. We generated strong free cash flow and deployed over $400 million in capital to drive total shareholder return. We continued identifying opportunities to remain relevant to our customers and drive long-term value for our shareholders. Looking forward to 2018, we really expect the same. Robust free cash flow and a focus on the consistent capital deployment philosophy we have been executing successfully over the last several years. With that, operator, that concludes our prepared remarks, and now we'll turn the call over to you to open the call up for questions.
Thank you. If you would like to ask a question, please press star then one on your touch tone phone. Once again, if you would like to ask a question, please press star then one on your touch tone phone. It looks like our first question is going to come from John Ransom from Raymond James. Please go ahead.
Hey, good morning. I had a bunch of snappy questions about the bridge from 2017 to 2018 and the tax rate and the cash tax rate. You hit all those, so thank you. The second line of inquiry I had, though, was we're hearing, just from the financial community, a bit more concern about the pricing transparency issue, particularly what happened with Dignity in the U.K., and then the potential move, as I understand, about the FTC and their working papers around transparency. Without asking a 17-part question, I think you understand the concern. Can you just address it? Is this something you'll hit in more detail on your annual statement? Thanks.
Yeah, John, it's Tom. How are you doing? Thanks for calling in.
I'm great, Tom. Looking forward to seeing you in March. I'm great. Thanks for asking.
Yeah. I know. I can't wait to see you.
Yeah.
Let's start with U.K., First I want to address some structural issues from their market to ours, then I'll get into some maybe decisions they made that in the rearview mirror, they wish they wouldn't have, at least from our perspective. First is, the U.K. has no regulation. As you think about competitors over there, you're able to open up. There is no licensure requirement. There's nothing. You can operate out of a garage. You can operate out of a bunch of different places. Here in the U.S., we have a two-year licensure requirement, generally in the U.S. Most of our funeral homes, if you visited them, are very nice businesses that require capital to put money into. Second thing that's different about their market, they have a large national competitor called the Co-op.
The Co-op is actually bigger than the U.K. and has a national presence. When you look at our footprint over here, we're about 15%, and our largest competitors aggregate around 1% as they exist. The third thing, again, I think this is a structural difference. Their funeral homes are very different than what we experience here in the U.S. They are predominantly arrangement offices. When you think about a funeral over there, you're going to a very small office to make an arrangement. Generally, you're going to have some form of service outside of there, particularly could be at a gravesite in a cemetery, which again, they do not own. A difference here, we obviously in the U.S. have a very wide variety of offerings.
We're used to having ample square footage in order to have a chapel or have a service or remembrance or the like. It's just a very different funeral service offering when you think about theirs versus ours. Again, if you wanted to do a graveside at the cemetery over here, well, we own the cemetery. We're going to get that business, and Dignity wouldn't have that benefit. Now, specifically to them with operating in that, I'd say, a little more difficult environment, the thing that I've been able to decipher from their disclosure is they've been raising prices on the funeral side about 5%-6% per year. Particularly over the last three years, they've seen 6% annual volume declines in their same stores. Over a cumulative three-year period, they lost about 20% of their volume out of their businesses.
Again, compare us, we generally are seeing 1%-2% type of funeral price increases over the last number of years. If you look at our same store volumes, they're actually holding up pretty good. Particularly in 2017, we're up 1%. 2016 was a little more difficult, I think 2015 was up. We're holding our own as you think about on a national basis. The other thing that I think is different over there is they sold preneed pretty aggressively, just like we would. When they sold preneed, they sold it on a discounted basis. You'll notice that a lot of their business that they sold the channel through was at a substantial discount to what they sell it.
I think when they did that, again, their accounting and trusting laws are very different from revenue recognition, trust really helped grow their earnings and cash flows. They created an expectation that funerals could be provided at that lower cost. I think, the bad news for them is by creating this lower cost option, I think they're bidding down their at-need offering. What happened is the Co-op came in and competitively priced them, they did the match. If you look at our preneed business, we sell at essentially the same cost. Actually, there's about a 3% differential between at-need and preneed reduction. I think we're very different than them. I don't want to say that we can't have issues around pricing from time to time.
We do in markets, and we react to those today and develop plans to be more competitive. Again, I don't see something on a national basis that looks like them. As far as the FTC potential ruling, again, I don't know how likely that really is. Again, we're experimenting now with online pricing, and it's not something we're afraid of. I think the one thing that's challenging, again, in a commoditized product, online is very easy. This is not a commoditized business. If you walk into a variety of our funeral homes or cemeteries, they're very different. How do you convey that value proposition over the Internet? We're not afraid of it. We've got the best properties and we'll do it. Again, see how likely that's going to be.
If you think about funeral home operators today, there's 26,000 in the U.S. and Canada, and a lot of these places don't have websites. You begin to get into complication on regulation is, how do you evenly apply that across the network? Hopefully that addresses it, John, and I'm sure you'll have another question in New York or in March, and I'll be happy to answer it then. Any other questions?
It looks like our next question comes from A.J. Rice from Credit Suisse. Please go ahead.
Hi, everyone. Thanks. Maybe just a couple quick questions here. First of all, when I look at comparable sales average revenue per service in the funeral side, on the at-need, you're down 1%. I think on the matured preneed, you were up 3.6%. That's a nice increase, obviously, on the mature preneed. Is that us finally getting to the point where the contracts written 10 and 12 years ago, right as we started to get into the 2008-2010 hit to the market, are starting to mature, and you're going to see that boost your averages for a period of time? Do you think we can look forward to that?
Yeah, A.J., I think you're exactly right. I think the differential you're looking at this year, though, there's a little bit of a difference I just want to point out. We changed our terminally imminent policy, if you recall, in how we deal with that customer. We used to take that customer through an at-need contract and not write them on a preneed. What you're seeing now is a little bit of a blip of that imminent flowing through into preneed and out to preneed. There's a little bit of lift in there related to that. Although, you're right on. The preponderance of that increase is exactly what you said, the increased returns from the preneed backlog.
I think the way to think about it is you ought to see a little bit of an improvement year-over-year on the at-need average and maybe a slight detriment on the preneed average. You are absolutely correct in your direction. I'd just say I'd mute it a bit for those two, taking the imminence into account.
On the at-need side, the down 1%, that's pretty much driven by the cremation continuing to uptick. I know you guys have put a lot of emphasis on additional services, the catering, et cetera. If we were to look at a normalized pricing trend, is that still running in the sort of CPI rate of increase on the at-need piece?
It's probably a little below the CPI. Again, it's being muted slightly, A.J., because in last year, we had some of those terminally imminent contracts that were higher average were in the at-need number. I think that'll get a little bit better. The other thing, and again, this is more of Tom's opinion versus I have great evidence. I think we're competing, and we'll talk a little bit about this in our investor day next week, but I think we're competing more effectively for business that is cremation-related that may or may not be a full-service cremation through our channel than we have historically. We might have a little bit more business than we would have had in prior years, and that little bit more business running through the core channel is cremation at not a super high average.
Again, the right move, but it does look like deflation, if you will, on the at-need walk-in business. It's tough. We're not increasing prices very much. We're trying to be very competitive, and I'd expect that to continue for the next few years.
Okay. Maybe just switching gears on a couple other quick topics. You mentioned in the prepared remarks that preneed cemetery sales production was impacted in the fourth quarter by hurricanes. Can you just explain, obviously, the hurricane really hit, and I guess in the third quarter. What lingered into the fourth quarter, and is whatever dragged you in the fourth quarter pretty much addressed at this point going into the new year?
I think so, A.J., because we're talking specifically about cemeteries. As you think about it, you got a couple of things. You have a lot of cemeteries that have damage, and may or may not be ideal for walking through and selling preneed. Probably more importantly, a lot of our sales counselors were personally impacted by this. Think of 250 employees in Houston that are impacted by the hurricane. I've got water in my house. I've got elderly parents that I'm dealing with. Say there was a time distraction as it relates to being back and up and running, and then you have the customer effect. If I've got water in my home or I'm dealing with something, it's probably not the ideal time for me to discuss my cemetery burial options. I think we view it as, this was a temporary deferral.
Some of that business may defer to the back half of the fourth quarter, and we capture it anyway. Some of it may push into the next year. We just highlight it because we saw numbers that, again, year-over-year, particularly October, I'd say as you look at the back half of the quarter, we saw normalized sales rates returning to those markets.
Okay. Just the last question from me. When I look at what you're talking about on the Tax Reform, the $0.14 of benefit, if I've got my math right, which is always dangerous, I think that results in about a 500- to 600-basis-point reduction in the tax rate. Obviously, the statutory rate's going down 14%. I know you've got a bunch of tax planning stuff you do. Can you maybe just bridge that a little bit for us? As we think going forward, all these tax strategies you've typically done in the last few years to reduce your tax rate as the years progressed, have they been taken off the table somewhat because of Tax Reform, or is that still a possibility as we go forward?
Hi, A.J. It's Eric. The way to bridge it is really, you're right. Going from 35% down to 21% probably gets us about $50 million, about $55 million, actually. There's some other tweaks to the tax law, which offsets that and makes it about 50 net. That's pretty close to your calculation. The way you have to think about it is, that assumes we're at a 35% rate, which as you know, in 2017, we were not. We're not a full cash taxpayer. If you come from it from your perspective, what I'd do is I would say $135 million of what we had in cash taxes in 2017, absent Tax Reform, would go up to about $165 million related to become a full cash taxpayer. You say Tax Reform comes in at that net $50 million that I just explained to you.
165 comes down to that 115, and I think I gave you a range in the remarks of about $110 million-$120 million. All that should kind of reconcile if you think of it that way. The second part of your question is, are there other opportunities related to tax planning that were underway that now are moot from that perspective because of the change in law? I think there were some that fall into that category, as I alluded to in the remarks qualitatively, without quantifying anything, I do think there's some other things that we're doing related to some intercompany and particularly related into some state taxes that could provide some benefit along the way.
I don't want to quantify that yet because, as you know, just like every other company, we are digesting the 1,000 pages or whatnot of this law and figuring it out. I do think that there's some opportunity that's left on the table, A.J., nothing that I'm willing to quantify at this point in time. I'll just keep you informed as we continue to work forward in this area.
Great. Thanks a lot.
Yep.
Our next question comes from Scott Schneeberger from Oppenheimer. Please go ahead.
Good morning. This is Daniel on for Scott. Can we do a high-level question? I'm curious on the guidance range, if you can discuss the swing factors that will put you at the high end and the low end of the 2018 EPS guidance.
Yeah, I think on the high-end, low-end question, I would start with the revenue drivers. One thing that could occur is an increase in funeral volume clearly would be a big factor. We have seen, as you would expect with the news on the flu, we've seen a definite impact as we look at the January preliminary numbers. Again, we're not in any position to talk about numbers other than we've been very busy in our locations. Again, history tells us that when you have a heavy flu season, generally you're going to give some of that back as you get into the summer months. I don't want to get overexcited, but that's probably one revenue trigger, if you will, that would drive to the high side. The second one is going to be preneed cemetery property sales.
Again, to the extent we can grow that number because it gets recognized when we sell it, for the most part, and the cash flow goes into our coffers, if you will, then those are the two big drivers that are going to push us to the high end of the guidance range.
Got it. Thank you. Can we talk funeral margins? If you can elaborate a little bit on the expense management you noted, and if you can help us think about the outlook for 2018, as well as the impact from the accounting change.
Sure. I'll touch on the margins, I'll let Eric touch the accounting change difference that you might experience in that line item. For the most part, as you think about funeral, remember, revenue recognition is really going to be tied to the event of death. To the extent the number of deaths are there, you can grow revenues, to the extent they're not, you cannot. Until you really see a demographic impact, our expectation is kind of 1%-2% kind of funeral revenue growth. On the variable cost line, again, those are just going to grow kind of commensurate with what's happening on the revenue line item.
There's one unusual item that used to be selling costs, now that we're tying the selling cost to the actual revenue recognition, I think that's going to correlate very well, again, with funeral volume, where historically you could see high levels of selling that actually eroded your margin. It was a good thing. We grew the backlog, Eric will tell you that that will change with the new accounting standard. Finally, you have a lot of fixed costs as you think about the funeral business. History tells us that those are going to grow in or around 2% year-over-year on those fixed cost increases.
This year, we may see a little bit more associated with our plan, again, to invest in our frontline facing employee group and enhance their pay packages to be more reflective of, again, what we can do to continue to drive customer satisfaction and be the best in our industry.
Related to the revenue recognition accounting changes, we really had two effects at SCI. One hits revenue, one actually hits expenses, as Tom just mentioned. The revenue piece is actually pretty small. It's related to an administrative fee or a processing fee we're charging in certain funeral homes and cemetery locations related to processing contracts and such. That's about a $3 million amount that now had an effect of $3 million to our revenue line in a negative fashion as we have to defer that fee until the contract turns that need in the preneed environment. The offset to that is down in expenses, as Tom just mentioned, pre-arranged funeral insurance contracts remain the same. Those selling costs will still be expensed.
As it relates to the trust-funded pre-arranged funeral contracts, and of course, the cemetery preneed contracts are all trust funded, that will have an effect where we are deferring selling costs and then recognizing them at the time those services are performed or that merchandise is delivered. That is about a $13 million reduction in expense. When you take the $3 million headwind to revenues and the $13 million reduction to expense, it nets to about $10 million to the bottom line in terms of operating profits that the revenue recognition accounting change has with us. It is about half and half between the two segments. Cemetery, think of that as about 5 or 6 million, and think of funeral as 5 or 6 million. Remember, it is the trust contracts for funeral.
Where that is predominantly sold, there is some still sold in our core operations, as you know, but most of them are sold in the SCI Direct part of our business. That tailwind reduction in deferred selling costs will affect SCI Direct disproportionately from the core funeral homes within the funeral segment.
Thank you very much.
It looks like our next question comes from Chris Rigg from Deutsche Bank. Please go ahead.
Good morning. I just wanted to ask about the trust funds. I know the inflation there doesn't directly hit the bottom line, but clearly you had a very good year in 2017 with the overall market. Was there any sort of excess earnings generated last year because of the strength in the market? When we think about 2018, is there some sort of reset we should be thinking about? Thanks.
The only excess earnings that we had, Chris, was related to the endowment care fund in the cemetery segment. If you remember, we reconciled that where we talked about, $1.29 in 2016 on a normalized basis was about $1.24. That related to both those ECF funds I just mentioned to you, as well as the loss of a sale of the Archdiocese properties that we discussed in California. No, there's no real effect that's making these earnings disproportional. I'll tell you that we're excited about the trust backlog growing the way it's been invested. We see the returns when we publicly announce them in the press release, and those ultimately will come through both our cash flow statement and our earnings statement as those contracts turn at need, which is on average 10 to 12 years, although much of them will turn prior to that.
That's just an average, that 10 to 12. Ultimately, though, I think you're going to continue to see I think A.J asked the question, and Tom answered the question about the difference between the sales average coming out of the backlog versus the walk-in at need sales average. We're going to give you a little bit more color on that and try to quantify it a little bit better next week, next Tuesday at the Investor Day. I think you get the story. I think you get the trend. We'll just try to put some numbers around it for you as well.
Great. Just on the acquisition environment, the last two years, including the 1031 exchanges, have been about $75-ish million. I know it's still early days in 2018, when you think about the pipeline for this year, is it going to be in that range again or more, less than that? Just any color would be helpful.
Chris, I think the difference between doing a 75 and doing something north of that generally is going to be determined by the size of the transaction. I would tell you that the activity level is very good. We are seeing a very nice pipeline of businesses come up. I would expect us to be able to continue to do something at that level for sure. I think if we were to over-perform that by quite a bit, it'll be due to the fact that we got a large one in the boat, if you will. I think that would change the dynamic of getting outside of that range.
Got you. Okay, thanks a lot.
It looks like our last question comes from Joanna Gajuk from BOA. Please go ahead.
Good morning. Thank you. Actually on the last point on acquisition, the commentary around the guidance details in terms of acquisition adding two to three. Is it a little bit higher than in the past when you kind of talk about it? Or am I just reading it too much, and I guess this is more in line with the 2017 contribution?
Yeah, I think two things. You'll notice this reflected in our comments. Previously, we used to say that share purchases would impact us at 3%-4%, I believe was the range. That was true when our stock price was a lot cheaper. Now that the stock price has gone up, I think achieving in the 4% range has not been a realistic target. As we run our models now, it's probably closer to 2-3. On the acquisition side, as we think about that, Joanna, two things. One, we're seeing a more robust pipeline, and that gets us excited. The second item that you'll see us talk about is constructing new funeral homes. We've actually begun to spend, in the last couple of years, $20 million a year.
As you'll recall, the IRRs on these businesses are a little bit lower because the first few years of cash flow are very different than an acquisition target. Still a very good deployment of capital and long term, maybe even a better opportunity because we can build it like we want, where we want it. What you'll begin to see is that pipeline of new businesses that we've built, where that cash payback may take year 3 to begin to pay back to us. It's a reflection of the class of construction homes that we're building each year that begin to contribute positively to the earnings per share growth of the company with a more robust acquisition pipeline.
Okay, that makes sense. You're saying that when I think about modeling, the growth CapEx should be around the $20 million. I guess it was $18 million in 2017.
Yeah.
new builds you're referring to, correct?
I think within our slides that we'll show you next week, we're tacking the two together, so you probably go from a range now of $75 million-$125 million when you begin to think about building funeral homes and buying businesses. I think $20 million-$25 million is a fair number.
Right. I want to follow up on the discussion around tax benefit and the potential upside, I guess, over time. Because when you talk about the $50 million or the net improvement yearly of $20 million, that doesn't include anything around the provision that would allow accelerated depreciation, or does it include? I guess if it doesn't, then is this one of the items you're considering that might create some benefits, at least for the next two, three years?
Those numbers do include that benefit.
Okay. The benefit is what the magnitude of it is for you guys?
I don't have.
How much CapEx as a percentage you can apply this accelerated depreciation to some of the companies in the healthcare universe that I cover. It ranges from 50%-80%.
I believe we're somewhere around 50% before. I think it's a differential of about 50%, Joanna.
Okay. That makes sense. Last point, the comment around the flu season, which is that Q4, you haven't really seen much, but then January, you've seen some increased activity. Should we assume that the guidance sort of also reflects at least the January activity to some degree, but maybe after that, you kind of assume that things kind of drop?
Yeah, Joanna, I would say we look at January this way. We're treating January, obviously, when I think about the quarters of the year, based upon what I've seen, I would expect the first quarter to be pretty good. We're going to see a lot of funeral volume, a lot of activity in the cemeteries. I think what history tells us because of a flu season is you're going to get that benefit and then probably may give back some of that in the middle of the year as you think about Q2 and Q3. As we think about it, we're not letting it impact our annual guidance at all. Again, we're going to assume probably a more robust first quarter that then give back a preponderance of it the rest of the year.
That may or may not play out, I can't tell you that, but that's the way we've addressed our guidance for this year.
There are no further questions at this time. I'll now turn the call back over to SCI Management for closing remarks.
I want to thank everybody for participating today. We really appreciate you being here. We look forward to speaking to you again. I guess that's going to be in April, correct? We'll see you in April. Thank you.
Thank you. Gentlemen, you may now disconnect.