Welcome to the 4th Quarter 2016 Service Corporation International Earnings Conference Call. My name is Christine, and I will be the 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 and welcome. This is Debbie Young, Director of Investor Relations at SCI. Before we begin with prepared remarks about the quarter from Tom and Eric, let me quickly go over the customary 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.
And in our filings with the SEC that are available on our website. 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. Reconciliation of these measurements to the appropriate measures calculated in accordance with GAAP is provided on our website and in our press release and 8 ks that were filed yesterday. With that behind us, I will now turn the call over to SCI's Chairman and CEO, Tom Ryan.
Thank you, Debbie. Good morning everyone and Happy Valentine's Day. We appreciate you joining us on the call today and I would like to start this earnings call by reflecting on our accomplishments for the year 2016. Then I'll get into the analysis of the 4th quarter and end with some color on our outlook for 2017. So, first, some observations on the year 2016.
We finished the year strong with an exceptional performance in the Q4 after a tough 1st 9 months. In 2016, we generated $1.29 of adjusted earnings per share, which was at the top end of our adjusted guidance range of $1.20 to $1.30 Our adjusted cash flow results were also very strong and exceeded the high end of our adjusted guidance range of $450,000,000 to $500,000,000 Our performance in 2016 reflected continued momentum in preneed cemetery sales, which grew by almost 5% for the year. We continue to execute on our pre need sales strategy by investing in our sales team, investing in the tools we utilize to enhance our productivity and upgrading the customer facing experience. We continue to invest in developing our cemetery properties with a broad array of tiered product options. These investments are driving strong preneed cemetery sales growth against a growing demographic, which we believe will continue to serve as the primary catalyst for ongoing improvements in both growth and profitability.
As we anticipated, our core funeral revenue was challenging to grow with tough comps in the 1st 3 quarters of 2016. However, a bright spot to temper this challenge has been impressive growth in our recognized preneed revenue. Additionally, throughout the year, our operating teams have done a great job of improving efficiency and managing costs. We also continue to grow our funeral preneed backlog posting a 4% growth in preneed funeral sales for the year as we utilize technology to remain more relevant to our employees as well as our consumer audience. Finally, our Funeral segment continues to generate significant cash flow.
From a capital allocation standpoint, we returned an impressive $326,000,000 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 $73,000,000 for accretive acquisitions and almost $18,000,000 on the new construction of several funeral homes. Now, let's take a look at our performance in the quarter. As you saw in our press release yesterday, our 4th quarter performance was outstanding.
We were very pleased to report adjusted earnings per share of $0.47 which is a $0.10 or 27% increase over the prior year and ahead of our expectations. The key drivers contributing to this growth include robust growth in cemetery revenues and profits, effective management of our field and back office overhead expenses, lower interest expense resulting from our most recent debt refinancings and a reduced share count due to our ongoing share repurchase program. All these helped to offset a higher tax rate and the loss of earnings from Los Angeles Mortuaries, which were divested in November. Our cash flow results were also very strong and exceeded the high end of our targeted range. We generated an impressive $107,000,000 in adjusted operating cash flows, representing a 20% increase compared to the prior year quarter, which Eric will provide more color on in a moment.
We are committed to deploying our shareholders' cash to the highest and best use. In terms of capital deployment for the Q4, we returned $60,000,000 back to our shareholders in the form of share repurchases and dividends paid. Additionally, during the quarter, we invested about $8,000,000 for growth capital, including $3,000,000 in acquisitions and another $5,000,000 in constructing new funeral home locations. Now, let's look into how funeral operations performed for the quarter. Comparable funeral revenue grew by $4,100,000 or approximately 1% compared to the same period last year.
As shown in the table of our press release, core revenue increased 1.7% or $6,700,000 As we said on our last call, we anticipated the 4th quarter to be our best volume comparison during 2016, which held true. Comparable core funeral services performed were essentially flat as an October decline was almost completely offset by increases in November December. We also saw a healthy 2% increase in the core funeral average. When you break down the components of core funeral average, we experienced a 2.6% improvement in organic growth at the customer level. A 50 basis point increase in the core cremation mix to 48.1%, slightly offset the 2.6% organic growth in the core funeral average bringing the reported average to 2%.
Outside of the core revenues, we saw continued growth in recognized preneed revenues of $1,700,000 or 7.2%. Recall, these are the products within the preneed contract, which are delivered immediately after the sale, primarily representing information related merchandise and travel protection plans sold by our non funeral home network. General agency revenues was down $4,500,000 or 13.1% compared to the prior year Q4, primarily due to a mix shift out of our preneed insurance and into our preneed trust sales production. While the conversion from forethought to Amelic as the insurance provider in our Southeast business unit is causing a temporary shift in our trust insurance mix. Remember that now our terminally imminent contracts as well as our STI direct production is being predominantly written on a trust contract.
Although funeral revenue increased $4,100,000 operating profits declined $3,500,000 and operating margins dropped 100 basis points to 19.6%. The majority of the profit decline was due to the lower general agency revenue, which were associated with the shift from insurance to trust production. Therefore, we still incurred the selling expense associated with the sale, but had no general agency revenue to offset the expense. Finally, comparable preneed funeral sales production grew $3,600,000 or 1.9% in the quarter. As I mentioned earlier, year to date, our preneed funeral sales production grew 4%, which is in line with our mid single digit percentage guidance range.
Now shifting to cemetery operations. Our cemetery operations had exceptional growth during the quarter as comparable cemetery revenue grew $36,000,000 or nearly 12%. This growth was primarily driven by an increase in recognized preneed revenue of $28,000,000 or 14%. While sales production growth was strong and accounted for just over $11,000,000 of this increase, this performance was further bolstered by the completion of 2 large property construction projects in Vancouver, Canada, which drove recognition of preneed sales that had occurred over the previous 12 months. This revenue increase of $36,000,000 resulted in a comparable cemetery operating profit increase of approximately $27,000,000 over the prior year quarter and the operating margin percentage grew an impressive 460 basis points to 35.1%.
The operating margin produced was further enhanced by the production mix as property was the primary growth category for the quarter. Property not only typically has a higher gross margin than merchandise, but due to the large recognition of the deferred sales production from previous quarters in Vancouver, no selling costs for the deferred sales production was recognized in the 4th quarter as it had already been recorded in the previous period that it was sold. Now shifting to our outlook for 2017, I feel very positive about our momentum going into this year. Our adjusted earnings per share guidance of $1.29 to $1.43 at the midpoint represents an 11% increase over 2016 when adjusting for the $0.04 headwind from perpetual care capital gain distributions received in the first half of 2016 and the $0.02 headwind from the sale of the LA Archdiocese properties this last November. When you summarize the year 2016, we've benefited from strong cemetery results, including the perpetual care capital gain distribution, a lower interest expense, the result of refinancing some of our public bonds as well as increasing our variable rate exposure approximately $1,000,000,000 Finally, we continue to reduce the outstanding share count through our share repurchase program.
These items were partially offset by reduced funeral profits, a function of weak volumes and a slightly higher tax rate. So, as we think about earnings per share in 2017, we would expect growth from our funeral segment as we expect a revenue lift over 2016, while continuing to drive productivity and efficiency. We expect strong mid single digit growth from our cemetery sales, resulting in an impressive operating revenue and profit growth. This should be partially offset by lower ECF income, again from reduced capital gain distributions. Our interest expense could slightly increase as we lap the impact of our debt refinancing and with $1,000,000,000 in variable rate debt, we could see a slight increase if rates were to rise in line with the consensus view.
We would expect a healthy lift from our capital deployment actions as the 2016 2017 share repurchases take effect And as the 2016, 2000 acquisitions make their accretive effects felt. As we think about the quarterly layout of 2017, remember that the perpetual care and LA archdiocese headwinds, most of that impact will fall into the first half of the year comparison. This should be more than overcome by the fact that the first half of the year will be the easier funeral volume comparison. As you think about cemetery revenue recognition, we would expect to see continued strong sales production and level recognition rates for the year, but for the 1st 3 quarters of the year, we should experience a higher recognition percentage on a comparable basis, while the 4th quarter comparison should be challenging as we will be comparing to the completion of the Vancouver projects in 2016. And finally, for 2017, we expect to continue to generate significant cash flow from a capital deployment perspective.
We anticipate a higher percentage being utilized for growth. In the 1st 6 weeks of the year, we closed 5 transactions, funeral homes in Vancouver, New York, Florida and Iowa, as well as multiple cemeteries in Wisconsin. These businesses generate approximately $4,000,000 in EBITDA, so we are out of the gate very fast. Also, we intend to spend about $25,000,000 on new funeral home construction this year, which exceeds our historical pace of about $10,000,000 So to wrap it up, I would be remiss if I didn't mention how extraordinarily proud I am of our SCI team. Their dedication and focus enable us to deliver value and peace of mind to our client family as evidenced by our ever increasing JD Power And finally, they delivered outstanding operational and financial performance during a year of significant headwinds, and I want to thank them for their tremendous efforts.
We will continue to drive the company forward with a focus on our 3 core strategies. 1st, growing revenues by remaining relevant to our customers and how we interact with them as well as the products and services we provide. By growing preneed sales and by expanding our footprint in front of the favorable demographic trend. 2nd, leveraging scale by implementing supply chain and process efficiency. And finally, deploying capital in a disciplined and balanced manner towards the highest and best use for our company and our shareholders.
This concludes my prepared comments and I'll now turn the call over to Eric.
Thank you, Tom, and good morning, everybody. Today, as usual, I'm going to begin by addressing our annual cash flow results and capital deployment as well for 2016. Then I am going to follow with our cash flow in the Q4 and then finally cover our outlook for 2017. So, let's start with an overview of the full year for 2016 in terms of cash flow, liquidity and capital deployment. And as Tom has already mentioned, we really finished 2016 on a really high note, delivering strong earnings and cash flow results, which exceeded our internal expectations.
For the full year, we generated $508,000,000 in adjusted operating cash flows, which again surpassed the high end of our guidance range, which to remind you was $450,000,000 $1,000,000 to $500,000,000 Furthermore, keep in mind our 2016 cash flows included a $20,000,000 increase in recurring cash tax payments as we move closer to becoming a full cash taxpayer. Adjusting for these higher cash tax payments, our cash flows grew in 2016 primarily as a result of higher earnings, which particularly were associated increased cemetery profits, lower cash interest and higher installment cash receipts from previous preneed cemetery sales. At the end of 2016, we had healthy liquidity of $512,000,000 consisting of $195,000,000 of cash on hand and about $317,000,000 dollars of availability on our long term credit facility. Our leverage measured on a net debt to EBITDA basis was approximately equal to the prior year at 3.8 times and is well within our targeted range of 3.5 times to 4 times net debt to EBITDA leverage. Our liquidity and strong cash generation enabled us to continue our long standing cash deployment strategy with a focus on creating long term value for our shareholders.
For the full year, we deployed a total of $417,000,000 of capital towards acquisitions, new location builds, dividends and share repurchases. And in terms of the breakdown of that number, we deployed $73,000,000 towards acquisitions in 2016 that includes some 1031 exchange funds, reflecting a 6% increase from the $69,000,000 invested in acquisitions in the prior year. And as always, I want to again reiterate that these acquisitions normally result in a mid teen after tax IRR. Additionally, we invested almost $18,000,000 on the new build and expansion of several funeral homes in both the U. S.
And Canada nearly doubling last year's investment. Dividend payments in 2016 totaled $98,000,000 an increase of about 12% over the prior year. Finally, we returned an impressive $228,000,000 of capital to investors in 2016 in the form of share repurchases, which has resulted in the number of shares outstanding being reduced to about 189,000,000 shares at the end of the year. Subsequent to year end, we have continued this repurchase program, reducing our outstanding share count by an additional 1% by acquiring approximately 2,000,000 shares for a total investment of about $57,000,000 so far in 2017. We still have $310,000,000 of remaining share repurchase authorization, which gives us a substantial amount of capital deployment flexibility as we move forward in the rest of 2017.
So with that annual summary of 2016, let's now look at the details of cash flows during the Q4. So during the Q4, we generated an impressive $107,000,000 of adjusted operating cash flow, which was ahead of our expectations and an increase of $18,000,000 or 20% over the prior year. The increase was primarily driven by improvements in our earnings, less cash taxes and less cash interest with all of these partially offset by higher working capital uses during the quarter. This higher working capital use was largely associated with our preneed cemetery sales, especially related to completed cemetery construction projects in which we recognize revenues upon project completion, but received cash payments over several installment periods. Cash interest payments were $7,300,000 lower quarter over quarter reflecting our refinancing activity, which is early in 20 7, 2016.
To remind you, in the second quarter, we refinanced our senior notes that were due in 2017 to a lower interest rate using our newly expanded bank credit facility at that time. Also during the quarter, we paid $12,000,000 in cash taxes, which was $10,000,000 lower than the prior year quarter and also a little lower than our expectations. In total for the year, we paid $113,000,000 in cash taxes, which was almost $20,000,000 higher than 2015. Continuing with the quarter, maintenance CapEx and cemetery development CapEx, which again are the 2 components that we define as CapEx in our free cash flow calculation came in at $57,000,000 for the quarter. This was about $15,000,000 higher than the prior year quarter and was predominantly related to increased investments in new cemetery property projects to drive increased property sales as well as improvements at existing locations.
And these improvements were intended to insist in providing enhanced venues for family service offerings at our facilities, which of course aligns with our strategy of remaining relevant with our client's family. Deducting these capital spending items from our adjusted cash flow from operations, we calculate our free cash flow for the Q4 to be about $50,000,000 which is a 7% increase from the prior year quarter. So, with that on 2016, now let's shift to an outlook and a discussion of 2017. And in our press release, we introduced our 2017 guidance range of adjusted operating cash flow of $465,000,000 to $505,000,000 Keep in mind now, we are expecting to become a full U. S.
Federal cash taxpayer in 2017. Our current expectations for cash tax payments in 2017 are approximately $40,000,000 to $45,000,000 higher or $155,000,000 to $160,000,000 in total compared to $113,000,000 net of refunds paid in 2016. Now before I leave the subject of cash taxes, I want to mention an update related to our IRS audits that we have been disclosing in our filings for really some time now. We believe we have reached an agreement in principle with the IRS to resolve the issues under audit with respect to tax years 1999 through 2,005. Yes, you heard that right, 1999 through 2,005.
Any expected settlement is not currently included in our cash flow guidance for 2017, but is anticipated to be funded when required using our credit facility. Therefore, I want to make this point that we do not anticipate this potential settlement to affect our expected amounts of capital deployment in 2017. So now let's get back to our cash flow expectations for the full year. Recall that and we have to recall the items that Tom mentioned earlier related to special perpetual care gain distributions and the loss of the Los Angeles Archdiocese Mortuary. Similar to earnings, this will impact cash flow by about $20,000,000 When adjusted 20 16's cash flow for this $20,000,000 2016 is adjusted to be more like $488,000,000 of cash flows versus the reported $508,000,000 You will then notice that this $488,000,000 equates to the midpoint of our 2017 cash flow guidance and this is a result of expected growth and the underlying cash flow of our businesses in 20 17 being largely offset by the increase in cash taxes in 2017 that I just mentioned.
Our expectations for maintenance and cemetery development capital spending in 2017 is approximately $180,000,000 Now this amount is slightly higher than our 2016 spend of $176,000,000 as we continue making investments that add to our ability to create new and unique celebration of life experiences for our client families. And lastly, in addition to these recurring CapEx items, we expect to deploy $75,000,000 to $100,000,000 in acquisitions and other growth initiatives, including new funeral home construction opportunities. So in conclusion, 2016 was a great year for us as we generated very robust free cash flow and deployed over $400,000,000 in capital to the highest relative return opportunity to continue to drive long term value for our shareholders. Looking forward to 2017, we really expect the same, robust free cash flow and the ability to repeat the consistent capital deployment philosophy we have been executing successfully over the last several years. So with that operator, that concludes our prepared remarks and we'd like to go ahead and turn it over to you and turn it over to
Our first question comes from A. J. Rice from UBS. Please go ahead.
Hello, everybody. A couple of questions, if I might. First of all, maybe just get you to comment on your acquisition pipeline coming into 2017. It looks like the pace of deals moderated a little in Q4, but based on the comments you made about capital deployment, it sounds like you expect that to reaccelerate. Can you give us a flavor as to what you're seeing?
Sure, A. J. This is Tom and John Fox is going to kill me. But so, we've done a tremendous job in the first, like I said, 6 weeks of this year. I think we have 5 transactions closed.
That would be a heck of a pace, and it's not even close to that. So, we've been very successful in the ones that we had in our sites and got them closed. I would tell you that the remaining pipeline, there's still some good opportunities out there that we are pursuing. And so, we're not seeing necessarily any kind of dramatic slowdown. It's just the pace that we've incurred, I'd say in the Q1 was pretty high.
But we're still seeing a lot of conversations, a lot of interested people. And so, we feel like Eric said, very good about our ability to spend at the high level of our annual guidance as you think about acquisitions. And I wouldn't the other thing that sometimes gets lost, we're going to spend somewhere around $25,000,000 on new construction of funeral homes, which is really a dramatic increase what we've done historically. So, we're being a little more aggressive about that in places where acquisitions don't make the best sense from an IRR perspective or from what we know now is what a funeral home needs to be in today's more contemporary setting. And so, places where those aren't available, we're going to build new locations that fit the profile more effectively.
Okay. And then, and I may have missed this in the prepared remarks, but the general agency revenues were off. Is that I know you had a lot of different things going on moving Stewart's business over. You've had other things. Is that part of a conscious move though to push more toward trust or what would you say is going on there?
There's really a couple it is a bit confusing and we touched upon it. There's one piece that is pretty significant and that is we shifted an entire region's book of business away from 1 vendor on to Hamlet. And there were some complications in getting people the appropriate insurance license and the like to sell the product and the training. So, there is a mix change that I think is going to come back. Having said that, there's 2 components that are probably more permanent in nature.
As you think about funding terminally imminent contracts, we're writing those all on trust contracts today. And also as you think about the growth of SCI Direct, SCI Direct is now predominantly 100% trust in what they're writing. And historically, they've written a little bit of insurance. So, I think what you'll see is probably a little bit of a cloud in the Q1 and Q2, a stall. And then as you get to the back half of the year, you get to see insurance growing at those more historical rates that we expect.
Okay. And then just one last question. When I look at your preneed averages that came out of the funeral backlog and then also the growth in recognized preneed funeral sales. Looks like there's an acceleration there and the averages are higher than your Adneed averages. I know there's some impact from the terminally imminent, but I'd wondered if you can say, are you beginning to see some of the share grab and is the averages in part helped by the rising market we've seen in the last few years, any flavor on that?
Yes, I think it's 2 things. I think your terminal imminent comment is also a good one. But I think, 1, we're seeing the good results in the market on the trust side. You're seeing growth in those contracts. And also, we're seeing a healthy increase of what's coming out from the insurance side too.
And I think that's a function of we're now getting into those contracts that we wrote at a higher value for us. And so, you're seeing less of contracts that, let's say, were written by somebody else and we acquired in a backlog. So, this is something we've always hoped we'd begin to see and I think we're beginning to see a little bit of that today. So, we feel very good about our ability to continue to see growth on that preneed going atneed, both on the insurance side and on the trust side.
All right. Sounds great. Thanks a lot. [SPEAKER JULIEN DUMOULIN SMITH:] Thanks, A. J.
J.
Rice:] Thank you. Our next question comes from Joanna Gajuk from Bank of America. Please go ahead.
Good morning. Thank you so much for taking the question. So if I may just come back to the commentary on 2017 outlook, specifically on the segment. So you said that you expect, I guess, strong growth in preneed sales on the funeral home side. And I guess you mentioned something about there will be some offsetting factor.
So can you just flush out that part? And also can you talk about the cemetery segment sort of outlook?
So, yes, we think about the growth for preneed, we would expect in our modeling to see preneed and funeral continue to grow kind of in the low to mid single digit range. I think this year, we saw 4% growth in pre and age funeral. That wouldn't be an unreasonable number to think about as you approach next year. And on the cemetery side, again, we've been guiding people to say, look at the mid and maybe jumping into the higher single digit growth range as you think about preneed cemetery growth. Historically, we've grown that rate at higher percentages around 10%, 11% over the last 4 or 5 years.
But a lot of that was a function of having new cemeteries, particularly from the Stewart acquisition to apply our tiered inventory strategy towards. So, what that did is allow us to kind of differentially grow. And now we're I would say that we have that tiered inventory product in predominantly most of our cemeteries and we'll have opportunities to rotate that. Having said it, the differential impact is probably gone. So, we're guiding towards the mid single digit range on cemetery.
All right. And then, I guess on the core growth or the acne business, so I guess flu has been quite strong so far in Q1. So is there a meaningful kind of impact to your business from that activity if you are willing to share that color with us?
Yes, we really, China, this is Eric. We really, it's too early to tell, 1st of all, for the Q1. I mean, I can tell you as we get through closing January results and getting all the feedback that we normally get really on an everyday basis from our field operations and management and that we really haven't seen a what I consider a material impact from flu so far in the first, let's call it 45 days or so for the quarter, Q1. I think there's a little bit more activity than what you've seen in the prior year quarter. But in terms of the strong flu season, I characterize it more as we're probably not seeing that yet.
Okay. And then lastly on your commentary around CapEx and how you plan to spend more, I guess, on this new funeral construction. So overall CapEx seems like it was above 6% of revenue in 20 16. So is that the right way to think about that ratio going forward or will it sort of accelerate to more 5% over time, I guess, in line with the last couple of years. So should we look at the 6% to being kind of a peak?
And I guess 'seventeen seems to be also kind of close to that range. So how should we think in terms of the longer over a longer period of time in terms of CapEx as a percentage of revenue?
Yes. I mean, I think as I said on my conference call remarks, Joanna, I mean, I think $180,000,000 is probably a good number for 2017. That's roughly equates to 2016. I think 2016 was about $176,000,000 We were a little bit heavier in cemetery construction versus maintenance CapEx in 2016 versus we will in 2017, but all of this spend, I wouldn't expect it to jump more than the level that you're seeing and probably in a couple of years, I almost expect it to maybe even trend down a little bit because what we're really doing from a maintenance CapEx right now is really on the lines of remaining relevant and all the strategy that we've talked about before and Tom again talked about in his remarks, continue to make those venues relevant for those celebration of life experiences for our client families. And we think it's a great investment to invest back in our businesses.
But I think this level that you're seeing is probably a good level and not growing much more than this going into the at least the near future.
Great. Thank you so much.
You're welcome.
Thank you. Our next question comes from Scott Schneeberger from Oppenheimer. Please go ahead.
Thanks. Good morning. Hey, Eric, just kind of a clarification question to start off. This IRS settlement for years 1999 to 2005, you mentioned that it should not affect any of your planned deployment of capital this year. So I'm curious, are we the takeaway that you do not anticipate it to be a material financial impact or it just that you will use a line of credit to satisfy it?
Thanks.
Well, if you listen to my comments carefully, Scott, what I said is we believe we have reached agreement in principle. And what I really mean by that is we don't have a signature yet, although I do believe we've reached that agreement. So because of that and my General Counsel is staring at me right now, I was really precluded from commenting any further than that. But I think you've got the gist of what I was telling you that in no way do I think this will end up being something material for our company. And the best way to talk about that is in the form of liquidity and capital deployment, neither of which I believe is going to be materially affected.
If I did believe that, then I probably would have had a different tone and said something a little differently.
Okay. Thanks. You mentioned the EBITDA contribution from the 5 acquisitions already made year to date. Could you just speak to where you are trending on spend so far?
[SPEAKER A Steve Scherger I don't have those numbers in front of me, but I think a safe way to think about it is take that $4,000,000 EBITDA and put a $7,000,000 or $8,000,000 on it. And that'd be the general range that our spend in the Q1 on a comparable basis. And another way to look at that is last year, I think we purchased in the entire year just over $9,000,000 of EBITDA. And like I said, we got 4 in the Q1 still open. But so we feel good about our coming out of the gate and but time will tell.
We'll see if we can get some more to the finish line and how many more in the back half of the year opportunities present themselves.
All right. Thanks. Appreciate that. And then kind of more fundamentally, the I know you all were very active with developing sales tools in 2016. And could you just speak to the impact in 2016 and what the impact may be in 2017 as a result of all the activity there?
I'll just leave it a broad open question on how you'd like to tackle that. Thank you.
Sure, Scott. So, we had a sales tool, when you think about the sales force that is now implemented and it's the customer relationship management tool sales force. And that's we've been utilizing that for a bit now. And I would tell you that we're beginning to see some real traction across the entire sales force. It takes a while for people to get used to the new system and probably view it as a helpful tool for the sales force versus a management tool or a big brother tool that we can see what you're doing.
So, I would tell you, we're in the early days of getting the productivity out of that system. The other system that we implemented during the year was a more of an atneed tool and it's called HMIS Plus. And HMIS Plus is a customer facing technology that also generates the contract and that's being utilized by our funeral directors today as they sit down with families. And again, a better client experience, a better experience for personnel and more contemporary experience if you think about trying to hire people to come into this profession. So again, not something I take lightly, we roll those 2 things into.
And with that comes some level of distraction, right, when you roll it in. So, I would tell you that we're beginning to get the efficiencies out of those two tools. We do have a couple of new projects that we're going to roll out this year. So, for instance, there's what we call sales enablement, This is taking a tablet and every sales counselor think of sitting in the home with somebody else would utilize that technology to interface with the consumer. And that tablet would give them the capability again to generate a contract and do those types of things.
Contemporary tools that people expect companies like us to have. So, as we roll that out again, I think you'll have some bumps in the road that you always do, but this is going to take us to a much better place. So, as I think about this year, I'd say sales force gives us productivity and growth and sales enablement is probably going to be a little bit of a distraction for a while, but we're going to fight through it. And I think people that have implemented this technology are very excited about its capabilities and the results in those test markets. We're seeing more efficient presentations.
We're seeing higher value sales, higher customer satisfaction feedback. So, these are all real positives. But I will tell you, like anything, you're going to have some distractions as you implement these new tools.
Okay. Thanks, Kevin. One
more final one, just
a quickie. Looking at the tool rule potentially coming into place on how we may want to model affecting preneed sales selling cost recognition. Just model as if not happening now or is that something that's a probability and any thoughts initially on how we might want to affect our model?
Thanks. Okay.
I think, Scott, you kind of broke up a little bit, so I'm going to apologize, but I think what you're asking about is the revenue recognition accounting rules that are changing that will affect our selling expenses. Is that the right question?
Exactly.
Okay. So, we're still working through that. There's some guidance issued on it and generally where we landed right now, again, this is not signed off, we're still working through it, but it appears as if any time we sold trust contracts on a preneed basis, which would include all sanitary and prearranged funeral with trust supporting contracts, we would defer those selling costs and have a specific identification method where when the contract matured at that point in time, we would also recognize those specific selling costs. However, the other part of the side of the equation is pre need insurance supporting prearranged funeral contracts. Again, we don't own the insurance company.
Those contracts are not on our balance sheet. They're on the insurance company's balance sheet. So, think of us as a general agent, hence the general agency revenue we get. But from that perspective, we will need to continue to expense those selling costs related to preneed insurance. And just as a reminder to everybody, we sell probably 70% insurance as opposed to trust on the funeral side.
So, I think if you look at the numbers that we filed with that guidance, I think you'll get in the ballpark of what you need to model, again, subject to resolution as we continue to look at that pronouncement throughout 2017.
Thanks for the color.
Thank you. Our next question comes from Robert Willoughby from Credit Suisse. Please go ahead.
Hey, Tom and Eric. Just with that cremation rate moving higher, you've mentioned that in some markets you'd be able to rationalize the hard asset footprint. So is there a realistic assumption for what you might be able to realize from divestitures? I know you've got your CapEx numbers down. What kind of cash might come off of some asset sales in 2017, if any?
Yes. It's too early to tell. We're going through that right now, but I think a safe estimate is probably around $20,000,000 $25,000,000 of proceeds, Bob. So, I think you're probably safe based on the run rate that we've been seeing to kind of include that when you're thinking about sources of cash. Right.
That's perfect. Thank you.
You're welcome.
Thank you. Our next question comes from John Ransom from Raymond James. Please go ahead.
Hey, good morning. Just a couple of questions on your CapEx. So the first one, which is I think a little easier, your $25,000,000 you mentioned for funeral home construction, what's your IRR or payback on that spend?
John, these generally are going to range, I'm going to call it 11%. They're going to be different depending on the cost of the land, but probably 11%, 12% is a safe bet versus acquisitions, which are trending now probably in the 14% or 15. And again, that's solely a function of the time value of money. You just tend to have a breakeven point that's going to take a little longer than existing business. But what we find is, you generally have a facility that you love and you can grow into and they look better and better as time goes on.
So, that numerator is EBITDA and the denominator is just total spend?
That numerator would be cash flow, free cash flow.
Okay.
And then the other question, I'm probably going to mangle this question because it's been a long time since I've been to accounting school. But when we think about cemetery, you've stepped up your cemetery construction, as you mentioned. So let's say for every again, just make up the number $25,000,000 that you've been increasing that spend. What's the so you spend $25,000,000 what do you get back in terms of margin And what's the timing of those cash flows? I know you can get land sales back immediately, but just what are the rules around when you can deliver that product and get that cash back out of trust?
And I assume these are all trust sales, not insurance sales. But yes, of course, they're all trust sales. So just help us think about the timing and the returns of cash flows on your stepped up cemetery spend in a simple kind of cash in cash out way?
Yes. So, John, when you think about cemetery, what we're talking about when we spend money, we're generally spending it on property. So, there is no trusting, there is no nothing as it relates to because you're thinking of merchandise and service type trust. So, as you think of cash paybacks on a lot of these bigger projects, they're probably going to be somewhere in the just over a year, maybe up to 2 year type of cash flow paybacks, really high internal rates of return. Now remember, you're utilizing existing land that you paid for a long time ago and that's what's making the return so great because it's really the incremental spend that you're putting on top of that land or to develop that land.
So the returns on these things are really great. When you think about cash outlay and how quickly you get back.
I got you. Okay. Thank you.
Thank you. Our next question comes from Ryan Halstead from Wells Fargo. Please go ahead.
Thanks. Good morning. And I apologize in advance, I hopped on the call late. So hopefully, I don't ask you something you've already covered. But, my question is on the funeral segment.
I was hoping you could comment on just your gross profits in the quarter. Just given the strength in the revenue growth, especially in the matured pre need segment, I was just curious what kind of profit margin contribution you are maybe expecting or better way to ask it is just were you disappointed with the profit contribution of your funeral segment?
Yes. I think the way to think about it, Ryan, is as we've talked about giving longer term guidance around funeral, we've said that we would expect over long periods of time until the baby boomers impact us or until we have a demographic impact is probably a better way to say it, Think of same store sales as being, call it, 1% to 2% revenue growth, manage your costs really tough, results in flat gross margin I'm sorry, operating margin percentages and generates a slight increasing bit of cash flow. That's pretty much the case if you look over the last 4 or 5 years. What happened this year that was unusual was instead of having the 1% to 2% revenue growth, we had a revenue decline of 1.5% and that was driven primarily by the fact that 2.5% volume is down in our funeral case volume. So, when that happened, we had a negative impact on our funeral margins and they dropped below 20%, as you'll notice as you look over the trend line.
What I would tell you is, because this year was such a bad year, I would like to believe that this year, and again, we need volume to have this occur. But if it were to come back somewhat, we'd see those margins kind of pop back up to historical levels that you'd expect. But I would tell you that 20 20 is a pretty good guess with the way we run this business. Actually, if you took away preneed funeral, because remember, we sell preneed funeral and particularly on the trust side, we sell preneed funeral, it's a very negative experience on our margins. If you took away preneed funeral, our margins really are about 24%.
We decided to erode our margins a bit and we can cash flow neutral by grabbing that preneed market share today. So, as I think about the future, I'd say it should stay about 20%. We should grow cash. And one day, that 1% to 2% growth is going to get to 3% to 4%, because volume is going to start coming our way from the premium backlog, from demographics. And when that occurs, it's going to have a pretty dramatic impact on cash flows and cash margins of the business.
That's very helpful. And then maybe you covered this already, but the general agency revenue, was that expected to pick back up or is this kind of the new run rate?
I think it's 2 components. There's a component that's a temporary mix shift related to going to a new vendor in one of our large geographic areas. So, think a part of that is going to begin to come back in the beginning in the early parts of 2017. But there's another component that's important to understand. When we write terminally imminent contracts, we're writing those contracts on a trust contract almost exclusively now.
The other thing to understand is that our SCI Direct business, which is growing at a faster rate than what I'll call our core business, they are writing all trust contracts. So, as you think about it, trust is going to have a little bit of a natural growth curve as you think about 2017. So, the insurance comparable is probably going to be a little weaker in the first half of the year, but ought to get back to growth rates that you'd expect, as you get to the back half of the year, because you'll have run through that cycle of the comparison and we'll be back up and running in the Southeast business unit with AML contracts and people with the appropriate licensure.
Okay, great. Thanks for taking my questions.
You bet.
Thank you. I will now turn the call back over to SCI management for closing comments.
We want to thank everybody for being on the call today and Happy Valentine's Day once again. We will speak to you at our Q1 earnings call, which I believe will be in late April. Thanks so much.
Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.