Welcome to the Third Quarter 2016 Service Corporation International Earnings Conference Call. My name is Hilda, and I will be your operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.
I will now turn the call over to the CSI Management.
Good morning. This is Debbie. I'm the Director of Investor Relations at STI. Before we begin today with prepared remarks about the quarter from Palm and Eric, let me read 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. 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 conference, we may also refer to certain non GAAP measurements such as adjusted earnings per share, adjusted operating cash flow and free cash flow. A reconciliation of these measurements to the appropriate measures calculated in accordance with GAAP is provided on our website and in our press release and 8 ks that were filed yesterday. With that behind us, I will now turn the call over to FTI's Chairman and CEO, Tom Ryan.
Thanks, Debbie, and good morning, everyone. We really appreciate you joining us on the call today. And as usual, I'll begin my remarks with an overview of the quarter, followed by a more detailed look at our funeral and cemetery operations. Let's begin with an overview of the quarter. As you saw in our press release yesterday, we were pleased to report adjusted earnings per share of $0.26 for the 3rd quarter, which is a $0.03 or 13% increase from the prior year and within our range of expectations.
Solid operating results were driven by growth in revenue from our cemetery operations, further bolstered by effectively managing our controllable field and back office overhead expenses, resulting in about a $0.01 operational improvement for the Q3 of 2016 over 2015. The remaining $0.02 increase in earnings per share can be attributed to 2 things. 1st, lower interest expense resulting from our recent refinancing of our 2016 2017 notes and a reduced share count due to our ongoing share repurchase program. Let me also mention a few other notable items during the quarter. We generated an impressive $143,000,000 in adjusted operating cash flows, representing a 14.5% increase compared to the prior year quarter.
We are committed to deploying our shareholders' cash to the highest and best use. In terms of capital deployment for the Q3, we invested about $20,000,000 for growth capital, $14,000,000 in acquisitions and another $6,000,000 in constructing new funeral home locations. This brings our year to date total to $70,000,000 for acquisition and over $12,000,000 for new funeral home construction.
Additionally, during the quarter,
we returned $137,000,000 back to our shareholders in the form of share repurchases and dividends. This should demonstrate to you our belief in the future strength of our business platform and the cash flow growth we expect it to generate. When looking at our results achieved in the 1st 9 months of the year as well as the expectations for the Q4, we are confident that we will finish the year within our 2016 guidance range for adjusted earnings per share of $1.20 to 1 $0.30 adjusted operating cash flows of $450,000,000 to $500,000,000 Now let's look into how funeral operations performed for the quarter. Comparable funeral revenues decreased by $6,900,000 or 1.6% compared to the same period last year. As shown in the table of our press release, core revenue declined 1% or $3,700,000 due primarily to a 2.3% decline in core comparable funeral services performed.
This decline performed occurred in July, underperforming our expectation, while August September trended flat within our expectation. Helping to offset the negative effect of the lower funeral services performed was a 1.4% increase in the core funeral average. When you break down the components of the core funeral average, we were pleased to continue to see a 2.1% improvement in the organic growth at the customer level as we expand the use of our new point of sale system, HMIS Plus, taking advantage of technology that allows us in a very concise way to walk families through a variety of memorialization options. We're seeing people select more options and that's generating higher levels of revenue. This 2.1% organic growth in the core funeral average was reduced to 1.4% as it was negatively impacted by a 70 basis point increase in the core cremation mix to 47.5%.
Outside of core revenues, we saw continued growth in recognized preneed revenues of $1,900,000 or 7.5%. Recall these are the deliverable product components of the preneed contract, which are delivered immediately after the sale, primarily representing cremation related merchandise and travel protection plans sold by our non funeral home network. General agency revenue was down 9.5% compared to the prior year Q3, primarily from a decline in preneed insurance sales production. We experienced a temporary mix change between insurance and trust sales production as we transitioned one of our business units from Stewart's insurance vendors, which we were obligated to use under the contract until it expired, to our preferred insurance vendor. General agency revenues were also impacted to a lesser extent by our decision in August to discontinue sales of preneed insurance contracts at the Catholic Mortuaries in the LA Archdiocese that we have agreed to sell.
So on the total funeral revenue decline of $6,900,000 funeral gross profits declined $3,200,000 and margins declined slightly to 17.2%. The majority of the profit decline was due to the decrease in higher margin core revenue as a result of funeral services performed, combined with lower general agency revenues from a reduction in preneed funeral insurance sales production. These profit declines were partially offset by continued profit increases from SEI Direct as well as lower expenses from effectively managing our fixed cost structure in a low funeral volume environment. Finally, comparable preneed funeral sales production grew a modest $1,600,000 or about 1% in the quarter. Year to date, our preneed funeral sales production has grown about 5% and is in line with our mid single digit percentage guidance range.
Now shifting to cemetery operations. Comparable cemetery revenue grew $10,900,000 or 4.1% during the 3rd quarter, led by an increase in recognized preneed revenue of $8,500,000 or 5.3%. This growth in recognized preneed revenue resulted from an increase in preneed cemetery sales production as well as higher merchandise delivery. For the quarter, preneed cemetery sales production grew $9,100,000 or 5.1 percent, led in part by an increase in large property sales activity as well as an increase in preneed merchandise sales. Other cemetery revenue, which is comprised primarily of trust fund income, grew $2,400,000 as a result of improved financial market conditions.
From a profit perspective, comparable cemetery gross profit increased $1,900,000 over the prior year quarter, while the gross margin percentage declined slightly to 23.7%. Growth from core revenue period to slightly lower gross profit than we would have expected, as a substantial portion came from merchandise revenue, which carries a gross margin which is approximately 1 third less than the gross margin on property sales. This gross profit increase was partially offset by increases in fixed maintenance, sales and administrative costs. We believe the maintenance expense increase generally relates to a temporary overlap of costs as we continue to transition the 3rd party vendors for cemetery maintenance services that will drive future synergies. That concludes our cemetery operations review for the Q3.
Now as we step back and think about our overall business for the remaining 3 months of 2016, we believe the 4th quarter will be a strong earnings quarter driven by improved operations as compared to the prior year. Operationally, on the funeral side, we would expect to see more favorable trends in funeral services performed and continued strength in the organic funeral sales average. We do expect to lose slightly less than $0.01 from losing the operating contribution of the LA Archdiocese business. In our Cemetery segment, we expect to see continued preneed sales production growth in the mid to high single digits as well as significant seasonal revenue recognition from cemetery construction projects completed during the Q4 as we've experienced in prior years. Lower interest expense resulting from our previous refinancing as well as a lower share count from our share repurchase program should also positively impact earnings per share by $0.02 for the Q4, while a slightly higher tax rate could reduce earnings per share by about a penny.
Finally, I feel very positive about our momentum going into 2017. After what we believe will be a strong finish to 20 16, when we look back at the year, it was a tough one. Funeral volumes through 9 months are down 3.5% and preneed cemetery sales, while they're up 4.3% year to date, have trended towards the lower end of our mid to high single digit percentage growth guidance. Disciplined capital allocation, leveraging our scale and delivered expense management allowed us to deliver the results that we did. In the meantime, we implemented a more efficient financial system in Oracle, continued to identify new categories to leverage our scale, both in the supply chain and through metrics that will drive workforce and process efficiency.
We rolled out and trained our people to use a more contemporary customer facing point of sale system, HMIS Plus. We fully implemented a new customer relationship management system, Salesforce, through our 4,000 plus strong sales organization and have allocated $82,000,000 towards new businesses to expand our network. Therefore, with easier funeral comps, implementing the supply chain and process efficiencies, capturing the full year impact of HMIS Plus on funeral average and more experience with Salesforce as a customer relationship tool, I would expect that we could deliver growth at the upper end of our 8% to 12% earnings per share growth range next year in 2017. Before applying that upper end of the range earnings per share growth to your model, be sure to remember to adjust your base 2016 for the following two items. First, the sale of the LAR Stysys properties will result in a headwind of approximately $0.02 per share as compared to 2016.
And second, we received $13,500,000 or about $0.04 per share in the first half of twenty sixteen from cash distributions of capital gains from Cemetery Perpetual Care Trust that from what we know today will not repeat in 2017. As we get into finalizing our plan for next year, we will always be looking for ways to enhance our earnings and cash flows in our quest to maximize shareholder value. So to wrap it up, I'd like to thank our entire team as we had a great quarter and delivered solid growth, both adjusted earnings per share and adjusted operating cash flows in the face of a challenging volume environment. But we look forward to a strong finish to 2016. And with that, I'm going to turn the call over to Eric.
Thanks, Tom, and good morning, everybody. Today, as usual, I'm going to provide you with some details performance and capital deployment specifically for the Q3. And then I'd like to touch on our financial position and also have a few comments surrounding our outlook for the remainder of the year as well as 2017. So let's start with some details around cash flow for the Q3. We generated an impressive $143,000,000 of adjusted operating cash flow.
This was an increase of $18,000,000 or 14.5% from the prior year and this was ahead of our expectations. The increase was primarily driven by improvement in our earnings and working capital, which more than offset the expected increase of almost $8,000,000 in recurring cash tax payments. So a little bit more color on this. The working capital improvements in the quarter primarily related to 2 things. First, we identified opportunities to reduce processing times for our trust withdrawal activity.
In other words, become more efficient and we're able to pull more funds quicker out of our trust fund. As we highlighted to you last quarter, due to the way the July 4 holiday fell this year, we benefited from lower payroll funding in the 3rd quarter by about $8,000,000 Again, we mentioned we're going to have that tailwind on our last call. Maintenance CapEx and cemetery development CapEx, again the 2 components that we define as CapEx in our free cash flow calculation came in at $42,000,000 for the quarter, which is about $5,500,000 higher than prior year, primarily related to increased investment and what we characterize as high return cemetery development projects. Deducting these capital spending items from our adjusted cash flow from operations, we calculate our free cash flow for the Q3 to be just over $100,000,000 or almost $13,000,000 over the prior year Q3. So during the quarter, let's shift to how we deployed this cash flow and we're very proud of the significant amount of capital that we deployed towards acquisitions and other growth initiatives in the quarter, summing to a total investment of roughly $157,000,000 As Tom has already mentioned, we invested just over $14,000,000 towards acquisitions during the quarter, which primarily was related to one transaction to buy 2 funeral homes and 1 crematory.
This brings our total acquisition related spending in the 1st 9 months to about $70,000,000 of capital deployed. This is well into the range that we've talked about and I've guided before for the full year of $50,000,000 to $100,000,000 towards these accretive acquisitions. And remember, we normally expect to have a mid teen after tax cash IRR on capital deployed towards these acquisitions. Most importantly, we continue to remain very optimistic about the pipeline of acquisition opportunities that is available to us in future quarters. Additionally, we spent almost $6,000,000 on the new build and expansion of several funeral homes in both U.
S. And Canada during the quarter. We also deployed just over $25,000,000 in capital towards dividend payments during the quarter. This $0.13 dividend rate per quarter reflects an 8% growth over the rate in the prior year quarter. And last, but again certainly not least, we repurchased 4,200,000 shares for a total investment of $112,000,000 during the quarter.
This was at an average price of $26.34 per share and has also included a 3,000,000 share block that we purchased in mid September. Since the beginning of 2016, we have repurchased 7,500,000 shares for a total investment of just over $190,000,000 at an average price of $25.61 per share. So to summarize, we currently have about 190,000,000 shares outstanding and about $88,000,000 of remaining share repurchase under the current Board authorization. Now let's shift the forward looking and let's talk about cash flow in terms of the outlook for the Q4 and the full year. In the 1st 9 months of 2016, we have generated over $400,000,000 of adjusted cash flow from operations, which was slightly ahead of our internal expectation.
We remain confident achieving our guidance range for the full year of 2016 for adjusted cash flow and that range is $450,000,000 to $500,000,000 One item I do want to mention to you at this time that has changed is our expectation for cash tax. We have consistently guided you over the past year that cash tax payments for the full year of 2016 would be in the ballpark of about $140,000,000 Due to our continued efforts and our tax planning initiatives, I do think this could be as much as $15,000,000 to $20,000,000 less than what we originally anticipated and all of this will benefit the Q4. As a reminder though, next year in 2017, we do expect to pay more cash taxes as we continue the journey to becoming a full cash taxpayer. Also as it relates to the Q4, keep in mind that in the Q4 of 2015, cash flow benefited from $15,000,000 of accelerated non earnings merchandise and service trust withdrawals that will not repeat in this year's Q4. So the lower taxes that I just mentioned will really help to offset this headwind related to the merchandise and service truck withdrawals that occurred last year in Q4.
Lastly, our capital spending for maintenance and cemetery development is trending a little bit higher, reflecting increased investment in new cemetery property projects that carry very favorable returns on this capital deploy. We currently believe we will end the year at approximately $160,000,000 versus our previous guidance of 100 and $50,000,000 So finally, let me provide a little bit higher high level view of our financial position currently. We continue to enjoy great liquidity at SCI and a very manageable near term debt maturity profile, both bolstered by our recent refinancing. Our liquidity at the end of the quarter remains robust at $520,000,000 This consists of about $178,000,000 of cash on hand and just over $340,000,000 of availability on our long term revolver. Our leverage, which we calculated net debt to EBITDA in accordance with our updated credit facility, was about 3.9 times as of September 30.
We expect our leverage ratio to trend
to trend modestly
downward though during the Q4 as our EBITDA grows. And we remain confident we will end the year well within our targeted range of 3.5x to 4x. This again gives us our continued flexibility to execute our capital deployment strategies well into the future. So in conclusion, I want to echo Tom's comment that it was a strong quarter for us, but particularly on the cash flow front with a 14% increase over prior year. And we sincerely appreciate the efforts of all of our 24,000 team members at SCI that are driving these stellar cash flow results.
In 2017, we expect continued strong cash flows after considering a continued increase in cash tax payments to a full cash taxpayer level. And as always, we commit to you that we will aggressively work to deploy our cash flow to continue to deliver significant long term value for our shareholders. So we appreciate you joining us this morning and we will now open it up for questions.
Thank you. We will now begin the question and answer session. We have a question from Joanna Gajuk from Bank of America.
Good morning. Thanks for taking the question. So first, if I may, did I hear you that you said that you expect the next year EPS to be at the upper end of the 8% to 12% range?
Yes, Joanna, this is Tom. Thanks for that question. What I was saying is, I feel very good about our ability to grow at the upper end of that range. What I cautioned everybody about is there's some unusual factors to consider when you take the base 2016 number. One of them is we're going to lose the benefit of the Catholic Mortuaries in the LA diocese.
So that's a $0.02 headwind that you ought to take out of the base. And then we had some, internal care distributions out of our trust funds that again probably aren't repeatable in the first half of last year, which totaled another $0.04 But absent those things, I think what I was trying to the point I was trying to get across, we implemented a lot of initiatives last year, probably too many to look back from wearing this out. But these are tools that are really going to allow us to compete more effectively as you think about 2017, 2018. We've got a new point of sale customer facing system that allows us to be more effective in front of client families and expanding what we believe they'll want to spend on their funerals. We've got salesforce.com, which is a very effective tool that our sales force can use now in managing leads and distributing strategy and training.
And when you combine those things with the continued opportunities to leverage our scale with new systems and abilities to negotiate new supply agreements further down the chain, we get pretty excited about our ability to deliver results. So that I did say upper end, but again, I would caution you, make sure to understand there's some things in 2016 that you need to take into consideration.
Okay. Great. That's helpful. And then in terms of just your outlook, I guess, you're saying that the I guess the preneed sales production year to date maybe that's in line with some other things. So can you just talk about sort of your view in terms of comparable sales growth by segments kind of the way you usually talk about things, how you see it trending next year?
Yes. I think if you look at and I'll talk really to cemetery on this one. On cemetery sales, if you look over the last 4 or 5 years, we've been able to, I think on a compounded basis, to grow that at about a 10.5% clip. I think what begins to occur and one of the reasons we talked about this before in giving guidance is that's probably not a long term sustainable number when you think about our ability to grow. So we've always said mid to single digits, we've always outperformed that.
I think this year we're running into the rule of large numbers. Outperformed that. I think this year we're running into the rule of large numbers and that we're at about 4.5%. It's not where we think we should be. We think it should be higher than that.
But we should be normalizing, we believe, over the next few years in a range of somewhere between mid single digits and high single digits. So call that a 4% to 8% range. And of course, we could upside surprise, we could have a bad quarter. But our thoughts are with our opportunities to continue to develop tiered inventory, the demographic opportunities to sell into that, the effectiveness of utilizing our customer relationship management tool to be more efficient and be able to manage more people and grow that sales force gives me hope to believe we can achieve at the upper end of that range. So I think it's just we're getting to a point where we've implemented the tiered strategy in a lot of cemeteries.
We had that pop when we first got to Stewart Cemeteries and beginning to put in some inventory in those places. So I'm excited. I think you'll continue to see mid to single digit is what we're guiding over the next few years.
Great. And then the last question, just broadly speaking, are you seeing any pressure on labor, I guess, because of some minimum wage increases? And maybe is there anything to think about in terms of the overtime rule that's taking us at December 1? Would that be impacting any of your employees at all?
Yes. I think there's a few components to some of the rules changes that are going on out there. I think from a minimum wage perspective, we're not as concerned. And the reason for that is almost all our customer facing employees earn well above the proposed changes. So we're not too concerned.
We do we are concerned with some of our maintenance employees. And again, I kind of view that as Walmart turned this into a positive. I think we're going to comply with those rules. We're going to do what's right and we're going to make this a net positive. It's not a big number when you think about the minimum wage change.
As you think about the manager exemption change under the new FLSA, that is going to have an impact on some of our management. And if you don't what that encompasses is how much base pay that we have versus how much incentive pay that we have. So we have strategies in place to begin to bolster some of that base pay to meet the requirement of what we need to do under the new rules and shift that from the incentive side. So I think there's tools to deal with this stuff. We don't expect it to have a material impact, albeit it will have an impact.
And again, as it relates to labor, we've got 24,000 people and they're what make this company run. So we're going to do what's right by the employee. But again, we don't think these rules are going to harm us in any way that they're going to be an opportunity to do things better.
Great. Thank you. I'll jump off.
Thanks, Joanna.
We have a question from Ryan Halstead from Wells Fargo.
Thanks. Good morning.
Good morning, Ryan.
Just another follow-up on the pre meat sales production. I was wondering, I think the production was a little bit lighter than expected. And I thought maybe you could talk about the sales infrastructure and if there's any change you're seeing in turnover rates or any other reason that sort of resulted in the quarter not having kind of the upside surprise that you can sometimes expect?
Thanks, Ryan. Yes, as it relates to turnover rate, that's been a challenge in our sales organization and really throughout the industry and probably a lot of sales organization over time and one that we want to pick. We've not seen any increase in that. Our expectation was to begin to manage that down and we believe ultimately this sales force tool is going to allow us to do that. It's going to allow us to have better visibility as it relates to the challenges that we're facing in markets as it relates to sales counselors, sales managers and be in a position to apply the training to be more effective earlier on so that people, once they're onboarded, are going to stay.
So nothing like that occurred in the quarter. I think the quarter was really again more of a function. I relate this to we've got a lot of new tools that we are putting in front of people. There's a lot of new initiatives. And with new initiatives sometimes you're doing more training, you're taking your eye off the ball, you're not beating your goals and objectives.
As an example, we have a sales enablement tool that we're rolling out today, which is going to allow our counselors to have tools in the field, new technology to implement contracts in someone's home through a computer and be able to pay and collect. So we've got a lot of things that I think are going to enhance our ability to 1, be more relative in the customer's eyes by utilizing current technology and allowing our counselors to be much more productive with their time. And so I view this as kind of a pause and a suggestion, if you will, of a lot of things that are going on. And I know at the end of the day, we expect great things from these tools. So I wouldn't get too bogged down in the numbers.
We're always looking on the horizon and trying to see what's going to make us great the next 3 to 5 years. And sometimes that requires a little bit of indigestion in the end.
Okay. That's helpful. Then on the funeral services performed, you did call out kind of an intra quarter trend with July, I guess, representing most of the sluggishness, and then August September being more closely in line with your expectations. I mean, is there any way you can kind of lay out how those actual year over year growth rates trended intra quarter? And how that sort of bridges into your Q4 expectations?
Yes. I think we still if you go back and look and again it's always on a comparable basis, right Ryan, so it's hard you're comparing to the prior year. July of 2015 was still a very, very strong year. So So we were comparing it to a pretty tough number and we're down, I don't recall exactly, but somewhere in almost the 6%, 7% range. And then August September, I forget, but they were essentially flat.
1 was up a little bit, one was down a little bit. And that was the time period where we saw the adjustment down in the 2015 number. So as I think about the Q4, we feel, put it this way, I probably feel the most confident of any of the quarters yet that we've got a better shot at a better comparable number. So we feel pretty good about what we're compared to. Having said that, if you look at us for the quarter, we were down 1.8% in volume.
The CDC data, which again doesn't perfectly correlate, was down 1%. The flu deaths were down 5% even for this Q3. So I just want to say, I still believe this generally is a phenomenon of with death rate and what's happening. And we're going to compete as effectively we can in these markets. And we're always trying to find better ways to compete within the marketplace.
Preeti is a key component of that. And so we're going to continue to drive it. So I feel I guess I would say for the Q4, I feel as confident as I have all year about our ability to try to show better volume numbers.
Okay. That's very helpful. And then the last one for me. On the pricing for the average funerals performed and the HMIS plus it sounds like you're fully rolled out at this point. Can you just give a sense of utilization?
How many of your locations are fully utilizing this? And what do you think is a good expectation for a full year impact on the average revenue per service that you think this can drive?
Okay. And again, Ryan, remember, this was kind of rolled out in phases. So as an example, I think the 900 and something locations went live just at the end of September. So we're not fully implemented. We still have some markets that we have some regulatory issues.
We've experienced some issues as it relates to bandwidth, Wi Fi, because as you can appreciate, we're trying to run data from these presentations in order to generate contracts. So there's some logistical issues with getting this up and running and working right. What I will tell you is in the test markets, this HMIS Plus was a very, very effective tool in expanding what people bought. I'd say as we roll it out, like anything, people that really embrace it have a very favorable big impact. In some other markets, we didn't have a favorable impact.
That requires us to go back and say, what's the problem? Is it training? Is it bandwidth? That's where we find out some of these problems. They say, well, I can't gee, Mr.
Ryan, I'd love to be able to do that, but I can't it takes forever to get to our Wi Fi system. We need more capacity. So those are the types of, I'd say, learnings that are occurring today. I'd say once we're up and running, our belief is that this could have as big an impact on average all in is to move the whole average 1% to 2%, to be fair to say. But again, I think it's going to be larger in some places and that would be against our previous expectations.
So there's a lot of expectation riding on this. And again, it's going to correlate with J. D. Power loyalty scores. It's going to correlate with our ability to generate revenues.
It's going to correlate with our counselors' ability to earn more for them. So this is a win, win, win across the network if it goes right. And everything is telling us that it is very effective, and we've got to work out some of the kinks and we're excited about
it. All
right, great. Thanks for taking my questions.
Thanks, Ryan.
We have a question from Scott Schneeberger from Oppenheimer.
Hi, everyone. This is Greg on for Scott. I was just wondering if you could touch upon how the acquisition pipeline looks and maybe speak to the level of competition acquiring prospects in the current environment?
Sure. Greg, this is Tom. I would tell you that the pipeline still looks very good. We've got a lot of deals working in different stages of progression. Let's say we're busy out there talking to people from an introductory perspective, evaluating financial statements, negotiating letters of intent, things of that nature.
So we feel very good and continue to see pretty good visibility on the deal flow. I'd say from a competitive perspective, again, it all depends upon where it is and who the target is. We've got deals where we're the single bidder that they've approached us and want to what they view as a very fair bid and they don't want to go to an expanded process. And then we'll always have a few where we'll show up and see some competitors. But I'd say just as often that competitor could be a local or regional person versus a public or national chain, so across the board.
But we still feel very good about our ability to deploy capital in that arena. We also hopefully you've seen kind of a pickup in our spending as it relates to new funeral homes built. I think again you'll see a trend of more money being spent the remainder of this year. And as we look into 2017 2018, similar types of opportunities to continue to deploy capital for great returns to expand our network.
Great. Thanks for that. And could you maybe touch upon the drivers of the lower G and A in the quarter, general agency revenue and what you view as permanent cost reductions and how we should think about that going forward?
Well, a lot of that is what Tom has already mentioned. It has to do with a metric driven organization that's not just in corporate G and A, but also in the actual field operations, funeral and cemetery in terms of managing costs. A good amount of it really has come lately from supply chain. It has to do with the initiatives that we have, not just from the working capital perspective, it also has an expense positive effect as we continue to manage our network diligently using metrics and driving our entire spend of our entire company towards larger contracts that are negotiated and ultimately have more synergies. The best way to say it, to use our tagline is leveraging our scale.
And you've seen that all through our organization, whether it's in the supply chain or all the other ancillary functions that we have.
Great. Thanks for that. I'll hop back into the queue.
We have a question from Chris Rigg from Susquehanna Financial.
Good morning, everyone. Just one question here. This trend has been at least for the last couple of quarters. When I look at the comparable funeral services performed, the at need obviously remains the weakest component. But I don't fully appreciate why there's a divergence between the volumes that are maturing out of the backlog versus the true add need.
Yes. Are you talking about the volume itself or the average?
The volume. So you look at the volume at need was down 3.6% and then the funeral home matured pre need was up 0.2% and then the non funeral home matured pre need was up 3.4. I'm just trying to wonder or figure out what's causing the divergence between the true at need versus the other 2 cohorts?
Yes, Chris, a couple of things. 1 is if you first I'll talk to atneed versus core preneed maturing and then I think you've got a separate issue as it relates to non funeral. When you think about true Agni versus our preneed backlog, think of the history of the way the preneed backlog was built at SEI. The first bucket of backlog relates to people that we acquired. So we acquired a lot of funeral homes that pre need programs that probably were highly cannibalized.
They were people that we would have written. It's the wife of the husband that passed away. And so we she would have walked through the door, but now she's a preneed backlog person. The second phase of SCI was what we sold once we came in. If you roll back 20 years, we were a highly we focused our efforts on family service.
So again, people that were getting leads were coming from our funeral homes. So you think about what's coming through the backlog now is probably a highly cannibalized previously written preneed or an SCI pre need they had written some time ago, again with a focus on leads that came out of the funeral home. In recent years, we've expanded to more of a market based approach where we're generating leads outside of the funeral home through whether it be through search engine optimization, whether it be through direct mail, we're generating different types of leads. So what you're seeing flow through today is again our more aggressive approach to preneed showing up as a preneed going atneed and not necessarily moving the needle on the overall volume, if that makes sense. The last non funeral home piece relates really to Neptune, and Neptune life because again, we had some businesses that were like that.
As you think of Neptune's volume, their ability to sell preneed contracts, I believe, Steve, is versus that need is like 3 to 1. Does that sound right, Jay? 2 to 1? So they were always a highly aggressive preneed rider of contract. And so on a 3:one ratio, and if you look at, let's say, our base business, and again, that's what the consumer wants, we're not 1 to 1, right?
We're 0.6 to 1 or something like that. So they have incredibly tied up that customer through a preneed contract. And because they're out there more aggressive than anybody else, you're seeing a pattern of growth that exceeds the death rate. So those are kind of my from the hip analysis of what I think those trends are. And again, there's always dynamics locally that are going to change things, but that's generally the way I view it.
Okay. That's great. And then, just a question on the cash taxes here and maybe I just lost track of this because I can't recall what the difference is. But when I look at even if you the $140,000,000 could be $120,000,000 this year in cash taxes, But when I look at the book rate, it's trending at a level lower than that. And I guess, is there a point in the future where at least what we're seeing in the reported income statement sort of roughly matches what you're going to pay in cash taxes?
There is always going to be adults. I'm just trying to get a sense for at this point, it's actually the cash taxes are trending higher than what you're reporting on the reported income statement. Thanks.
Yes. Well, Steve, let me just level set for you, Chris. Year to date, we paid about $100,000,000 in taxes. And you said, right, it could be about $120 ish is the way it looks now based on some tax plan initiatives that we've done and continue to find. That is that $20,000,000 that we pay in the Q4 would roughly equate to a similar number that paid in the Q4 of 2015, but ultimately we would end up much higher than we did last year.
So the 120, we compared about $93,000,000 or $90,000,000 ish in 2015. So still $30,000,000 what I would characterize as a headwind complete year over complete year. Now in terms of the provision, the provision was actually a little bit lighter this quarter, which was related to a return to accrual adjustment that occurs when you file your tax return. And when you file that, you true up your provision through your current quarter income statement. So I would consider Q3 to be somewhat low in nature.
I think the more correct provision to use when you look overall is in that 37% to 38% area. I think as we become a full cash taxpayer, which we've been successful and continuing to defer for several years as you and I have talked about this for many, many times. I do think that what you would consider a cash tax rate is going to approach your provision rate. There will always be a little bit of separation because of temporary and permanent differences between tax and book accounting. But generally, it is going to start creeping up that cash tax rate towards the provision and get close to or just underneath matching the income statement provision.
Okay, great. Thanks a lot.
We have a question from John Ransom from Raymond James.
Good morning. I had to jump off for 2 minutes, so just tell me that you've already answered this. But I know you touched on the pre need coming out of backlog, but I don't know if you said, one of your tailwinds has been that you've gone from a deficit to a surplus in terms of the revenue per funeral coming out of backlog. As we look out over the next 5 years or so, how much juice is left in the maturing pre need going out need to help the overall ASP?
John, we already answered that question. I'm kidding. I had to do it, Steve. You're a
funny guy, Tom.
I know. Thanks, Tom.
And I think as we think about that, we think there's more juice to answer your question. And we're trying to become better at the predictability of what we believe is going to come out there. But as more and more and one of the things I did touch upon, I don't know if you're on the call, was kind of the buckets of backlog. We've got the acquired contracts that we've got that probably weren't as robust and probably weren't invested as the same way we would. Get the SCI written stuff from 15 years ago and previous that was probably again highly cannibalized, better written contracts, better invested.
And then you've got what we're doing today, which is probably a more growth oriented approach to preneed, hopefully new market share approach to preneed that again we believe is invested pretty wisely. So as more and more of those contracts become what's coming out of the backlog, I would expect that we've got a little ways to run as it relates to what's coming out of there. And the one factor you do have to keep in mind is that, your contracts aren't going to grow at the same level as trust contracts. So your growth assumption on those contracts is less at 1%. But remember, it's written at a pretty high ticket price, probably in the $6,000 range and growing over time.
Yes. So that was
my question. So you're writing stuff at $6,000 today versus your blended So that's and so we should think about most of that being thrown into the 1% growth a year category with your Assurant and then the rest being maybe 30% being thrown into your trust where it might earn 3%, 4% a year, something like that?
I think that's right. But what's coming out of the backlog today is more trust than you just said. So call it 55%, 45%, maybe insurance versus. Again,
over time,
we're trying to get better at doing is that's going to that difference is going to grow. And so there'll be inflection point way out there where insurance isn't growing at the same rate trust and you'll have a difference. Now the benefit is that we can't stand up to pay and we're deploying it wisely. Sure.
My other question is, the M and A has been a bit better than I would have thought this year. I know you did one big one. Is there anything going on with the environment that would explain that or is it just one of those years?
My gut history tells me it's probably just one of these years. I will tell you that I think the industry is going through the same thing the world is going through, the baby boomer impact. A lot of these owners are probably baby boomers or just in front of them. A lot of what we're seeing when you look at the different, mortuary schools that are out there, enrollments have changed dramatically over time. You're not seeing as many sons and daughters of funeral directors going into the business.
And so with that, I think there's a lot more inflection points where owners are saying, hey, I'm working my tail off. I care about my legacy, but my kids don't want to run the business. Who's the best at maintaining our legacy? Our belief is we're that group that can do that. We're going to give the opportunities to the employees to grow.
We're going to spend money and make sure that reputation is still a solid one. So we're just seeing more opportunity to tell that story. I'd like to believe it's going to be a continuing trend. But again, as history tells us, sometimes you go through a slow patch again. Right now, we're still seeing a lot of opportunities to go out and talk to people.
And then my last question would be, I know you had a tough comp this year on your preneed cemetery because of the Stuart work you did. What's a I know you've called you were growing it at 5% to 7% in the past. Do you think that's a good number to think about for next year? Is it going to be a bit better than that, do you think?
Yes. So on the cemetery side, we've always called for mid to high single digits, which I guess you could put your own definition on it. I'd call that 4% to 9%, I guess. We've outperformed it.
It's a pretty big range.
And again, it really depends upon it's really hard to tell 4 to quarter and even on an annual basis. But we beat it for so many years. I think people got to the point where it's like, yes, they say mid single digits, but they'll really do low 10% to 12% or something. I really believe that we can achieve mid- to high single digit. You're seeing 4% so far this year.
We're not satisfied with that. We think it should be higher than that. As I think about realistic long term numbers, you get into the 6%, 7%, 8%, Those are areas where we'd like to achieve. Now can you have a 12% along the way? Sure.
Can you have a 4%? Yes, we're seeing one right now. So my point is we're going to get back to that and the reasons behind it are going to be we've got a customer relationship management system that is allowing us to reduce turnover in our sales force to manage people more effectively and apply that training and then eventually grow the number of people in the sales force with that more effective tool. So if that occurs like we believe, then the numbers we're talking about are very, very achievable and upside surprises are achievable too.
And just for Eric, I know you said 190,000,000 shares. Just to be clear, is that a good 4th quarter number? Is that fully diluted shares? Just trying to make sure we got that figured out.
Fully diluted would be about 3,500,000 more shares than that. That was just the actual number outstanding, John.
Great.
Thank you. Yes.
We have a question from A. J. Rice from UBS.
Yes. Thanks. Hello, everyone. And since you already used your joke on John, I don't have to worry about telling you that I got on a little late, too, so I may have missed something. But anyway, okay.
A couple of things. On the commentary that the agency revenues were off a little bit in part because of the Stewart transition. Does that turn or is this sort of the new normal on the agency revenues?
No, that will turn. So that was really a temporary transition where it was a geography where we still had to use Steward's previous provider. And in the switch, we have to get everybody licensed appropriately to sell the insurance product. So what happened was we wrote a lot of trust instead of insurance in that transition period. Our belief is that all that's going to convert back into insurance.
So that piece will flip back around. We do have the issue as it relates to the as it relates to the mortuary, which will be something we have to overcome in 2016. And think about the Catholic Mortuary is writing, Mike, about $1,000,000,000 a month. So probably $12,000,000 a year in previous insurance production that will go away.
Right. Okay. And you mentioned the new tool, which will help you on the organic growth side, I guess, on the funeral side. I'm just trying to think about underlying pricing trends. I know there was an effort, at least there has been an effort to sell a more fulsome service package to those choosing cremation.
And so your averages on the cremation side of your atneedfuneral business were growing a little faster than the traditional business. Is that still the case as well? And any flavor for how much of
a differential there might be? Yes, it is the case. And again, I'll use round numbers, A. J, because you heard me say these over the years and I've always used round. But today, our average burial to the funeral home contract is probably approaching $7,700 Our average cremation through the funeral home is averaging close to $5,300 a day.
So the difference now is about $2,400 and if you recall, because you've been around me long enough, this difference used to be about $3,000 So we've made quite a journey, if you will, on the cremation side in getting a wider array of relevant products and services in front of that cremation consumer. Now combined with that, as you know, the direct cremation consumers still spend about $2,200 but that's generally going to be done through our non funeral home network.
Okay. And just the last question on the CapEx increase. I see that some of that's development of cemetery properties. Is that new properties? Or is that making changes to existing properties to prepare them in a different way?
It's the latter, A. J. It's the development of the undeveloped property. In other words, it's building mausoleums on our new mausoleums on our cemeteries and projects like that, And it is developing new acreage in terms of creating the inventory for the sales force to sell.
Okay. That sounds great. Thanks a lot.
You bet.
Looks like we have time for one more. The question comes from Robert Willoughby from Credit Suisse.
Thanks Tom or Eric. Can you I think you gave the production number for the Catholic facilities that are going, it was a $12,000,000 pre need number. But is there a kind of a revenue run rate for atneed, any type of event volume that we need to adjust our models for?
Yes. I think the revenues associated with the Catholic Mortuary business on an annualized basis is about $29,000,000 Does that sound right? And from an EBITDA perspective, it was close to about $9,000,000 or $10,000,000 something along those lines. So that was the added funeral business, Bob. And what we're talking about is the preneed sales were $1,000,000 a month.
So as you think about the G and A revenue impact, we're going to lose $12,000,000 from not writing through this facility.
And can you remind us on the cash flow then coming in here in the Q4, and I assume that shows up in investing activities?
Cash, no, we first of all, in the Q4, we're going to effectively sell those businesses and therefore it's going to be we've already written down the business what they're going to pay us. So I think it's going to from a cash flow perspective, I guess it would show up in
the proceeds we will receive will be done investing, yes.
And that's $30,000,000 or so?
Yes, it's about $27,000,000
Yes, I think it's $27,000,000 and then they're going to pay us annually for a year about $1,000,000 depending upon production levels and things like that.
Okay. And Eric, you usually give us a share repo number to date in the quarter. Is there any update there?
Yes, it was, you're talking about year to year?
In the Q4.
In the Q4? We're out there in the market. We did a big block in September, so we're going a little bit slower during the quiet period that we set up. But ultimately, we will pick that up and expect to finish very strongly.
Okay. Thank you.
Okay.
Thank you. We have no further questions. I would like to turn the call back over to the CSI team management team.
Thank you so much. We appreciate everybody being on the call. We look forward to talking to you again in 2017.
Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.