Welcome to
the Second Quarter 2016 Service Corporation International Earnings Conference Call. My name is Christine, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.
I will now turn the call over to SCI Management. You may begin.
Good morning. This is Debbie Young. I'm the Director of Investor Relations at SCI. Thanks for joining us today as we discuss our Q2 earnings. As usual, I'll begin with the Safe Harbor statement.
The comments made by our management team today will include results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in our press release and in our filings with the SEC that are available on our website. Today, we may also refer to certain non GAAP measurements such as adjusted EPS, adjusted operating cash flow and free cash flow. Reconciliation our press release and also in our press release and 8 ks that were filed yesterday. With that out of the way, I'll now turn the call over to Tom Ryan, SCI's Chairman and CEO.
Thank you, Debbie, and hello, everyone, and thank you for joining us on the call today. As usual, I'm going to begin my remarks with an overview of the quarter followed by a more detailed analysis of our funeral and cemetery operations. And finally, I'll comment on our outlook for the back half of twenty sixteen. So, let's begin with an overview of the quarter. Today, we reported adjusted earnings per share of $0.28 for the 2nd quarter, which is on par with the prior year and within our More specifically, moderate growth in core cemetery revenue, higher recognized preneed funeral revenue and effective fixed cost management were offset by lower cemetery trust fund income and lower than anticipated funeral services performed.
You may recall that the unusually strong 2015 flu season extended into the 2nd quarter, particularly in the month of April and the first half of May. Let me also mention a few other notable items during the quarter. We generated $69,000,000 in adjusted operating cash flows, which was a reduction as compared to the prior year quarter as it absorbed higher cash tax payments that we had anticipated and timing difference is associated with payroll and other working capital items. This cash as well as some of the significant cash generated in the Q1 afforded us the ability to deploy capital to enhance shareholder value. First, we invested just under 50 $3,000,000 in 2 transactions, resulting in the acquisition of 8 funeral homes and 1 cemetery.
Furthermore, we invested just over $19,000,000 for growing our business through developing cemetery property and constructing new funeral locations. And finally, we were able to return capital to our shareholders of almost $52,000,000 in the form of share repurchases and dividends. Also within the quarter, we refinanced our near term 2017 debt maturities, which resulted in a $21,900,000 loss on early extinguishment of debt. This transaction lowered our weighted average interest rate, increased our weighted average debt maturity and significantly enhanced our liquidity. Finally, during the quarter, we took an impairment charge for approximately $31,000,000 associated with the recently agreed upon sale of our 6 funeral operations, which operate on leased properties on Catholic cemetery grounds of the LA Archdiocese.
By selling these operations to the Archdiocese, it resolved the litigation surrounding the lease terminations they delivered us shortly after our acquisition of Stewart Enterprises. We will receive approximately $27,000,000 since our ownership of Stewart in December 2013. While this transaction should not have any material impact to our 2016 17. Now diving deeper into funeral operations for
the quarter.
Comparable funeral revenue decreased by 4,700,000 dollars or 1% compared to the same period last year. Funeral revenue and particularly core funeral revenue continues to be squeezed from lower funeral volume, higher cremation rates and continued pressure from lower trust fund income and negative Canadian currency comparisons. Higher recognized $8,300,000 or about 2%, due $8,300,000 or about 2%, due primarily to a decline in core comparable funeral volume of 3.4% as we funeral average. When you break down the components of core funeral average, we're pleased to see a 3% or 300 basis point improvement in organic growth at the customer level as we've continued to focus on enhancing our merchandise and service offerings for both the cremation and the burial customer. This 3% organic growth in the funeral average was reduced to 1.3% in arriving at reported core cremation mix had a 90 basis point negative effect on the core average.
2nd, the Canadian dollar was 0 point 7 $8 versus 0 point 8 $1 in the prior year. This had a 40 basis point reduction in our core average. The good news is at the profit level, the impact is less significant than what we've experienced in the past few quarters. As we start to lap some of the lowest currency we should see a better comparison in the second half of twenty sixteen. And finally, lower trust fund income of $1,700,000 negatively impacted the core average by 40 basis points.
Outside of core revenues, we are pleased to see continued growth in recognized pre need revenues of $3,600,000 or 14%. Recall, these are the deliverable product components of the preneed contract, which are delivered immediately after primarily representing cremation related merchandise of SCI Direct and travel protection policies sold by the non funeral home network as well as within the core funeral home network. From a gross profit perspective, comparable funeral profits decreased $7,200,000 quarter over quarter and margins were 19.1% compared to 20.5% in the prior year quarter. The majority of the decrease in funeral profits is a direct result of the lower funeral volume I just described, along with higher selling costs incurred as preneed funeral sales production grew by 5.3%. On a positive note, we experienced lower expenses by effectively managing both our variable and fixed costs in this low volume environment.
As I mentioned, comparable preneed funeral sales production
grew
an impressive $11,100,000 or 5.3 percent in the quarter. If you recall, our funeral
volumes are hard to overcome.
However, I am encouraged by the organic growth in the funeral average as it is being enhanced by our investment in technology, HMIS Plus and our great people presenting valuable options to our client family. As we look at the back half of for lower costs. Now shifting to cemetery operations. We were very pleased to see revenue growth in our cemetery segment in the face of a tough comparison over the prior year quarter. Comparable core cemetery revenue grew $4,900,000 or 2%, which was a combination of higher atneed and preneed revenue.
Preneed revenue grew 1 $600,000 resulting from higher preneed cemetery sales production of 1%. While this is not the level of growth we're used to, we're still pleased as we faced a particularly tough comparison over prior year as the Q2 of 2015 was up some 17%. Large sales for the quarter were down about $4,700,000 So, excluding that impact, we increased our contracts written by about 3% and our average price grew by about the same, 3%. So again, overall, not a bad result. For the 6 months of 2016, comparable preening cemetery sales production increased $15,200,000 or about 4% compared to the first half of twenty fifteen.
Atneed revenue for the quarter increased $3,300,000 primarily due to a higher average sale per contract. The decrease in other revenue of $3,900,000 was primarily related to the decrease in cash distributions of capital gains from perpetual care trusts. So, comparable cemetery gross profit increased about $900,000 over the prior year quarter and the gross margin increased 20 basis points to 25.7%. Profit growth from the core revenue increase was offset by the reduction in other revenues or lower capital gains from our trust funds. Additionally, we benefited from lower merchandise and healthcare costs during the quarter.
Again, as it relates to the cemetery segment, the first half of 2016 was a high hurdle to get over. In the first half of twenty fifteen, we grew preneed cemetery sales production by 17%. Now on top of that growth, we grew an incremental 4% in 20 16. So remember, in the back half of twenty fifteen, growth slowed to about 8%. So as you think about our hurdle in the coming 6 months, the comparison should be a little bit easier.
So now to wrap it up, we continue to believe that we're on track to deliver solid results for the full year of 2016. We knew coming into the first half of the year that we had a very high hurdle to overcome on both funeral volumes and preneed cemetery sales production as compared against the first half of twenty fifteen. When we gave our original guidance of $1.20 to $1.36 the $1.36 assumed a lot of things go our way and the $1.20 represented a scenario where most things did not. The 1st 6 months of this year, we performed admirably, but in a challenging funeral environment. Taking this into consideration, we believe it is prudent to reduce the higher end of our guidance range and narrow our range to $1.20 to $1.30 for normalized earnings per share.
We expect to be able to show impressive growth in earnings per share in the back half of twenty sixteen and intend to continue to deploy capital wisely to generate shareholder value for you. With that, I'll turn the call over to Eric Tansberger.
Thanks, Tom. As usual today, I'm going to provide you with some details of our cash flow performance and capital deployment for the quarter. And then I want to touch on our financial position and then our outlook for the remainder of 2016 similar to what Tom just did as well. But let's start with the details of cash flow for this current quarter. And as already mentioned and as you've already seen, during the Q2, we generated $69,000,000 of adjusting operating cash flow, which was a decrease of about $33,000,000 from the prior year.
However, it was generally in line with our expectations. So now I'd like to give you some details on why cash flow declined year over year, while earnings were generally flat. 1st, and as you know as expected, we paid about $18,000,000 more the the July 4 holiday fell last year versus this year. So the way you should think about this is that this will result in an $8,300,000 cash flow benefit in the Q3 of this year, so just a timing difference there. Another cash flow item during the quarter I wanted to highlight relates to trust fund income.
Although total capital gains during the quarter were less than prior year, we did receive $6,000,000 of cash distributions of capital gains from our cemetery
of
These special capital gain distributions relate to the liquidation of trust assets at the end of 2014 when we implemented a change in our trust structure following the Stewart acquisition. We do not expect that we will see these levels capital gain cash distributions of this magnitude in future quarters or future years. So this topic is generally behind us at this point. Moving on to other parts of our cash flow statement, maintenance CapEx and cemetery development CapEx, which again is what we call the 2 components that we defined as CapEx within our free cash flow calculation. These components came in at $38,000,000 for the quarter, which is about 2 dollars higher than prior year.
When you deduct these capital spending items from our adjusted cash flow from operations, we calculated our free cash flow for the 2nd quarter to be just over $30,000,000 So now let's talk about deploying this free cash flow and our capital during the Q2. Our capital deployed to acquisitions and to shareholders prior year. And Tom has already mentioned, we are pleased to note that we invested a robust 53,000,000 dollars on priority for capital deployment due to the significant after tax cash returns we generally receive on these investments. These are all great businesses and we are very excited to have them on board with SCI. We also paid just over $25,000,000 in dividend payments.
And as a side note, by the way, the 2nd quarter dividend rate of $0.13 reflected an impressive 30% increase over the prior year quarter. Last, and again, certainly least, we repurchased a little over 1,000,000 shares for a total investment of $27,000,000 during the quarter. Subsequent to the end of this quarter, we have repurchased about 300,000 additional shares for total investment about outstanding and about 192,000,000 of remaining share repurchase authorization. Now, let's shift away from the quarter and talk about the second half of the year as it relates to cash flow. So in terms of our full year cash flow guidance, our expectation for the full year 2016 cash flow from operations excluding special items remains unchanged at 4 $50,000,000 During the quarter, we paid $64,000,000 in cash interest, bringing our first half of twenty sixteen cash interest payments to about $80,000,000 But in the second half of twenty sixteen, we expect to pay around $5,000,000 less or about $75,000,000 of cash interest, which will result in our full year cash interest of about $155,000,000 being about $9,000,000 less than the prior year.
And this reduction is primarily a result of our refinancing transactions that we completed earlier during 2016. Finally, we still expect our cemetery development and maintenance CapEx full year guidance to be approximately $150,000,000 So when you exclude these CapEx items from our 2016 full year adjusted cash flow from operations, our full year expectations for free cash flow remains in the $300,000,000 to $350,000,000 range. So in closing, let me provide a high level view of what we consider our financial position. 1st, we begin the second half of twenty sixteen on sound bolstered by the recent refinancing of our near term twenty bolstered by the recent refinancing of our near term 2017 debt maturities. We finished the quarter with strong liquidity of 5 $89,000,000 and this consists of $172,000,000 of cash on hand and about $417,000,000 of availability on our long term revolver.
Our leverage, which is calculated as
as
us within our target leverage range that we've discussed before of 3.5 to 4 So in conclusion, our liquidity, leverage ratio and favorable near term debt maturity return. From an acquisition perspective, while we have already achieved the low end of our acquisition spend target for the year of 50 $1,000,000 to $100,000,000 we believe we have a healthy acquisition pipeline in place, yielding further opportunities to possibly finish at the midpoint or upper end of this range as we progress through 2016. We expect full year 20 16 dividends paid to be around $100,000,000 based on the current dividend rate and share count, and we will continue to deploy we appreciate you joining us this morning. And now operator, we'd like to return the call over to you for questions.
Thank And our first question is from Scott Schneeberger of Oppenheimer. Please go ahead.
Thank you. Good morning. The guidance implies, as you mentioned, accelerating earnings growth in the second half of the year. Can you discuss the drivers that are the major swing factors there that could put you at the high end or the low end of the range? Thanks.
Sure, Scott. This is Tom. And the things that I think are going to drive that are really a couple really a plethora of things. One is, we think we're going to have better comps as it relates to funeral volume in the second half of the year. Because as you recall, in 20 15, we had a lot of funeral volume growth in the first half, which then kind of tracked off on the second.
The second thing is, we believe we're going going to continue to grow cemetery, particularly preneed cemetery sales in the back half of the year like we have historically. Again, we've got a little better comp to go against. It still grew 8% last year, but we're excited about the momentum in our sales force. And then some natural things that are just put into place that Eric talked about, from a balance sheet perspective. We've lowered our interest rate, as it relates to last year and we're going to see a better year over year comparison in the back half of the year.
And then the impact of our share repurchase program, we've been pretty aggressive out there over the last few years. And so as you think about share count, that's going to be better. So, you put all those things together and we feel pretty good, particularly the last 2, because they're already in place. The first 2, we've got to execute, but we feel really good about our position and the momentum we've got, like I said, within our sales force and within our ops team. [SPEAKER HENRY A.
FERNANDEZ MSCI, INC.:] Fernandez
MSCI, Inc.:] Great. Thanks, Tom. You guys noted that in the quarter, you had some fixed cost management assisting margins. Just curious, could you elaborate on that? And is that something just managing in a relatively lower volume environment on the tough comps?
Or is that something that we may see persisting as we go forward? Thanks.
Yes, guys. It's a lot of things. So, if you think about it, when we have lower volume, we can manage, for instance, our labor costs within that environment. So, we can share people a little better, not use as much part time help. We can utilize our fleet a little more effectively.
The other things that happened in the quarter, again, kind of go back to supply chain and our good people there that are every day working harder to get better deals inked as it relates to some of our supplier costs. So, we were able to negotiate and renegotiate some good terms on suppliers. So, the effects of that are in that number. So, it's a cumulative thing and I think in a low volume environment, we're just able to manage the particularly the fleet and the people costs a little more effectively.
All right. Thanks. And then just one more follow-up and I'll pass it on. In light of these first two questions, how are you thinking about funeral and cemetery margins in coming quarters and any swing factors of note for either of them? Thanks.
[SPEAKER THOMAS MONROE PATTERSON:] Yes.
I mean, funeral volume is going to drive the margin side of this thing. So, you think about the Q3, it's generally a quarter as it relates to seasonality, where you're going to see lower margins and they should pick up a little bit as you get to the Q4 and you get into flu season and a little change in the weather. Cemetery is again very seasonal related to construction. So, as you think about margins, what happens typically and again, this changes year to year and we're always comparing seasonality periods, but in the first half of the year, we're selling into projects that aren't built. And so, a lot of times, we're actually selling maybe 20% or 25% more than we're recognizing.
And then as you get in the back half of the year, particularly the Q4, a lot of those projects get finished. And as they get finished, we're going to recognize more revenue. So, in the Q4, you should see more recognition than sales. So, that's a much higher margin quarter historically. We would expect similar patterns for the back half of this year.
Thanks very much.
Thank you.
Thank you. Our next question is from Chris Rigg of Susquehanna Group. Please go ahead.
Good morning, guys. Just wanted to sort of better understand the normal sort of seasonal patterns in the preneed cemetery sales. I mean, forgetting about the comp component year to year change, I mean, it looks like the absolute level of production on a dollar basis swings around quite a bit from quarter to quarter and it's probably something I really haven't focused on in terms of absolute dollar production. Just can you give us a sense for the normal selling patterns there and how we should think about the back half of the year?
Thanks. Sure. So, that's a very good question, Chris. And so, when you think about, we typically see the best cemetery sales around you have particular days, like you think about Mother's Day and events like that, you're going to see a lot of activity in cemeteries. When you think about ethnicity and customs, Ching Ming is a massive event for that segment of the population.
So, those are going to be drivers in particular quarters. So, for us, you generally are going to see in March or April a big swing in the seasonality of those types of events. So, now stepping back a little further and just saying, let's look at the general population, you're going to sell a lot more cemetery property when people are home and not on vacation and when the weather is good, because you're going to give cemetery tours. So, if you think about walking a cemetery in February in Chicago, there's not a lot of people out there. They're staying inside.
But in the summer months, particularly if they're home, that's a great activity for our business. So, you're generally going to see when the weather is good, you're generally going to see when people aren't on vacation or away on holiday. And so, you miss some sales, if you will, over but cemetery sales production. So, you tend to see very good activity in the probably a little tougher activity as you think about the Q4. But from a revenue recognition, that's where it's a little bit confusing.
We're finishing a lot of these projects, because they get drawn up. They get a lot of the activity happens when the weather is good and they finish in the Q4 of the year. So, think about it from a sales perspective is kind of front heavy and think about it from a recognition perspective kind of back heavy.
Okay, great. And then just on the M and A environment, I mean, I would from my point of view, it's sort of slow and steady and has been for a while with exceptions obviously now and then. I mean is there any reason to think that the overall selling dynamic is poised to change or is it just more of the same where it will be somewhat lumpy? And then really just what I'm trying to get at is if it remains in the same sort of pattern, is there any appetite for potentially accelerating the share repurchases with maybe taking the leverage up above the 4 times? Thanks.
Yes. I'll speak to the acquisition. I'll let Eric speak to the leverage. But on the acquisition side, you're right. The reason it looks lumpy most of the time is because of the size of the transaction.
So, the pipeline is pretty consistent and we get deals closed, but every once in a while, you get a pretty big deal close. And that's why Eric mentioned, we spent $53,000,000 but it was 2 transactions. So you can do the math and say, that was a pretty big transaction on one of these. That's the stuff you can't predict, because we don't know when that big acquisition is going to come. What I would tell you is we're seeing a lot of activity.
We're not surprised by that, because if you think about the ownership level of these businesses, it's not unlike our customer. The typical ownership of these businesses is a baby boomer and they're reaching a point in their life where they're beginning to say, what's the next move? And we're probably seeing less and less generational passing of the baton. And so they've got to look and say, do I want to sell it to my employees? Do I want to sell it to somebody else?
Or do I want to sell it to SCI, who's going to take that property, put some money, put some love, put some investment, it's going to take care of my people. And I think we're a great option, because people look at us and say, it's an advancement opportunity for our folks. They're going to take care of it. They're going to be here for a long time and maintain the great name in our community. So, we think we have a real advantage as we go around.
And again, because of the demographic of the owners, we would expect, again, not a massive acceleration, but we expect more and more of these deals to begin to come up and we think we're going to win our
fair share of that. Chris, in terms of leverage, what we want to do obviously is deploy all our free cash flow to the relative highest after tax cash return. And that's why acquisitions most of the time, especially with these deals that we have in front of us now, ends up winning over share repurchases purely from a return perspective. Absent that, if you have excess cash flow, I think we will deploy it towards share repurchases and we have a track record of it. In terms of going above 4 times, I think we're pretty comfortable where we are between 3.5 to 3 times to 4 times, I think we've certainly considered that in the past and have thought that it's more reasonable for several factors to stay where we are.
However, we're always open minded. I think a couple of years ago, we discussed on the call with you that we're kind of more around the 3.25 times leverage and now we're up to about 3.75, 3.75. So, we looked at it, we looked at the enterprise risk associated with it and we saw the shares with a certain amount of value to them and we kind of took our methodology up a half a turn and we deployed that capital in 2015 and in my opinion, very effectively with the correct return associated with that capital deployment. So that kind of gives you some insight into our methodology and our thinking. I'd never say never, but right now I think we're pretty comfortable with where our leverage and our methodology is.
Okay, great. Thanks a lot.
Thank you. Our next question is from A. J. Rice of UBS. Please go ahead.
Hello, everybody. So maybe just to follow-up first on the acquisitions. Can you just give us any update on what you're seeing competitively? Is there any emerging private equity or otherwise money that is competing with you? How is mentioned
the
in your mind? Yes. Hey, Jason, this is Tom. In your mind?
Yes, A. J. So, this is Tom. Good to talk to you. So, I would say that, again, from a competitive environment, we're seeing kind of the same players.
There's a little bit of private equity that we see from time to time on deals. Clearly, you're going to see from time to time Carriage and Stone more and other people. But our acquisition opportunities kind of come in 2 different buckets. We are seeing we do see quite a few deals where we have relationships with people, where they're going to approach us say, let's make a deal. And generally, what they'll say to us is, give me a fair price, don't try to nickel and dime me and we'll go to the dance and not seek other partners.
And surprisingly, we see a lot of those and that works really well, but that's generally through the efforts of hard work of developing relationships over time with different people in our organization that are out there in the industry events, getting to know people. And people just want to go with SCI, because they think we're the best. Then I think there's a competitive environment too, where we're going to be competitive with others. What we're seeing is generally people are staying within the lines. You're not seeing a lot of overpayment like you saw in the 1990s.
Generally, we're seeing deals trade at somewhere between 7 8 times EBITDA. And depending on where that business is, whether it's in a large city or a small town, depending on whether it's a cemetery or a funeral home, but generally, you're seeing those types of transactions and we're not seeing necessarily any higher prices as you think about those types of things. And A. J, your second question
was? Just the returns, thinking about you're saying that you get better returns on acquisitions. I wonder if there's any way to quantify that.
It's hard to do. What we're generally seeing is the internal rate to return on these things, which is the primary way we evaluate it. So, we're always looking at discounted cash flow and what we think the return is. So, most I'd say most of our deals range somewhere between 12% 16%, call it 17 percent internal rates of return, which are well in excess of our weighted average cost of capital. So, those are great returns for our shareholders.
You can look at share repurchases 100 different ways. We try to quantify that a little better. We've got various different methodologies to do that, but we kind of view our cost of equity and call it in the 8%, 8.5% range. And then we do models that say discounted cash flow, where do we think the company is worth. So, we can kind of quickly figure out based upon what we're paying versus what we think the company is worth and then evaluate that against our cost of equity, call it 8%, 8.5%.
And so, with these types of ranges, if you try to compare those two things, you're getting into low double digit types of returns as we buy back our shares, but probably not at the 15% range. So, to Eric's point, we think acquisitions are the best use of our funds that, let's say, the current price. Now, you do get to a price that you'd say, I'd much rather back up the truck and buy back a hell of a lot more shares. And we're blessed with enough cash where we can do both. So that's how we look at it.
Okay. And maybe I'll just ask you as well about the buyback of the properties by the Archdiocese, I guess I call them buyback. Is the $27,000,000 is that net proceeds to you? Is there any cash state or whatever taxes that you have to pay? And I know you said it was a couple of cents, I think, headwind.
How much revenues are we talking about that come off? And is there anything else, Legacy Stewart that's like this that you might have to redo?
Okay. So first of all, let me answer the last question first. There's nothing like this in Stuart. This was a pretty unique situation that Stuart had negotiated some time ago. The revenues associated with these businesses are in the high $20,000,000 of revenue as I recall.
And so clearly, this is a business that we would have liked to have kept. This was an unusual situation where in a public transaction, like we did, we did our due diligence. We read the contract. Our lawyers thought we had the right to buy this and there wasn't a minimum control. And at the end of the day, after 3 years of going through all this, the judge disagreed with us at the lower court.
And it wasn't about the written contract. They took the word of some people that said, this is what we meant, even though it wasn't written that way. So, we were very pleased with the way this rolled out, but we think this is a really good resolution to a problem. We're going to get $27,000,000 I think the taxes will be $3,000,000 as it relates to what we're going to pay. But the way we look at A.
J. Is this, we were able to maintain owning this business for 3 years. If you think about it, we were able to generate cash, pretty significant amount of cash that approximates what we've got. And so effectively, we ended up selling this business for 6 times able to retain and the money that we're going to get above closing. Again, we would have loved to have kept it, but we think this was best for our shareholders and best for us to move on with the lower court ruling that we had and the prospects of what the appellate court would do.
So bittersweet, but we're going to move on and the $0.02 really reflects the fact that we're going to lose some EBITDA, but we've got some cash to redeploy and invest in other businesses or buy back shares. And that's really how we come to the $0.02 Okay. All right. Thanks a lot.
Thank you. Our next question is from Robert Willoughby of Credit Suisse. Please go ahead.
Hey, Tom and Eric, you've answered half my question already. But just the deal spending to date, what you did in the quarter, can you give us some ideas what it was that you exactly required? And can it take any kind of bite out of that $0.02 hit? Won't these things be somewhat additive for you or too early to say that?
I like the glasses half full, Bob. That's good. No, you're exactly right. I would have said that and you said it for me, but that's the way we think about it too. Think about what we did in the first half of this year and what we'll probably do in the next month is going to replace that or more.
So, it's a bump in the road. We don't like it. But think it's best to move forward. And you said it exactly right. We feel very good about the pipeline.
Obviously, this year is going to be a great acquisition year. Right now, I bet 2017 is going to be a good one too. And we're going to continue to work hard at growing this business and take, like Eric said, just continue to redeploy that cash in the highest and best use. And so you're going to see a growing robust acquisition pipeline and continuing to shrink that equity and own more of these great business.
What did you buy actually though, Tom, in the quarter?
There was 2 transactions where we bought 8 funeral homes and 1 cemetery and they're located in the states of Connecticut and Indiana is the 2 transactions. So, again, we've got more to come in a variety of other states in different levels. We've got letters of intent signed and I think about 3 transactions and negotiating other deals as we speak. So, we're very excited, Bob, and think there's more good news to come as it relates to acquisitions. Quarter.
Yes. I mean, I think as it relates to volume, we're not seeing a big turn yet. I don't think it's as bad, obviously, as the Q1 comparison. And again, we're still looking at a few weeks in July, so that could turn around. On the sales front, it looks pretty good.
I think as it relates to prior year, we feel good about getting back at it. And we're excited to, again, get to into the Q3 and continue to grow our sales activity. And like we talked about, some of the other things are in place. Like Eric said, we've got lower interest rate. We've got more capacity in our lines and we're continuing to reduce that share count.
So, we feel good about the 3rd and 4th quarters and our ability to get back to the growth levels that you guys get excited about.
I would have thought the searing heat here would have done more for you in the current month, but
thank you. [SPEAKER HENRY A. FERNANDEZ MSCI, INC.:]
Fernandez MSCI, Inc.:] Not yet. That and having to watch these conventions, I think, drive a lot of volume. You said it.
Thank you. And our next question is from Duncan Brown of Wells Fargo.
Just a few from me. You talked earlier about the core funeral pricing of about 3%. I guess, would love any color or flavor of how sustainable you think that is going forward?
I think it's very sustainable as it relates to the core, Duncan. I think the thing that we're excited about is we're continually One thing One thing that we did is we rolled out a new point of sale system called HMIS Plus. And what it does, it takes advantage of technology that allows us in a very concise way to walk people through the variety of options. And this technology really enhances our ability to walk rolled this out and it's getting to more and more places all the time, rolled this out and it's getting to more and more places all the time, we're seeing people select more options and that's generating, again, higher levels of revenue and it's supported by loyalty and customer satisfaction surveys that say people are more satisfied with this. So, we view this as a real win for the customer, a real win for us.
And we're seeing a variety of impacts in different markets. Some people embrace it quickly, some a little bit longer, but our great people are using a great tool and getting higher customer satisfaction and higher revenues per case. The headwinds we've got, we talked about them on the call, Canadian currency, which should end. I mean, I don't want to talk about Canadian currency ever again, if I can, but it was pretty big on the revenue line, again, not so impactful on the bottom line. Trust fund income ought to get better as time goes on and we're seeing the markets participate a little bit more effective.
And the one thing that we're always going to have is that cremation mix change. That's going to continue. So 3% of the customer level ought to be knocked down by, call it, 80 to 100 basis points by cremation mix and that ought to be our sustainable growth in average, that number. We haven't seen that for probably 7 or 8 quarters now. And so, I feel good about our ability to continue to utilize HMIS Plus and I expect that to have an impact all the way through next year as it relates to year over year.
And again, just a better tool in the hands of our great people to do our customers right.
So maybe to follow on there, that 3% again before cremation, etcetera, is that would you view it as pure pricing or is it more a reflection of adding an additional element to the cart, I. E, new products and services?
It's really both. I think why you're seeing it get to 3% is because of more products and services. So, Duncan, I mean, a great example would be, we may have sat down with the cremation family before and we may be we may think in our minds as an arranger and you're doing this all the time and people have different skill levels and knowledge levels. And so, I may sit down with cremation family and think I know what they want. What HMIS Plus forces us to do is walk through the options.
So, you're going on to and you're being able to show here is a variety of options. And so, you're showing more choice, you're presenting it in an informed manner and what you find is customers say, I want that. I didn't know I can do catering. I didn't know I could do that. And so, it's really kind of forces the conversation and forces the training, because I'm going to make sure I understand all the things that I have to explain to a customer.
So, I'd say a lot of this is the fact that people are choosing more options, because we're having to present them through the use of our point of sale system.
Okay. That's helpful. Appreciate it. And then just switching gears, back in June, you announced, I think, a $40,000,000 investment in Texas. And I wonder if you could spend a few seconds characterizing that.
Is most of that spend growth related? Or is it more sort of maintenance renovation? And I know following further, I know you reiterated your 2016 CapEx guidance, but should we maybe expect higher levels in 2017 beyond in part due to this?
No, I mean, we reiterated the $150,000,000 and the component of that Dunkin' as you know is cemetery development. And you can that's obviously a recurring CapEx spend, but you can also consider it as growing more inventory for our sales folks to sell and create revenues. I'd also point you to how we did the CapEx in the press release this quarter where we kind of broke out some growth capital expenditures, which is primarily related to the construction of new funeral home facilities, which we're starting to ramp up and we're excited about those opportunities. In fact, the spend year to date is probably up about $5,000,000 as we speak. And of course, you should assume that those projects have a great return and the proper IRR after tax cash return as State of Texas, I think that was a specific press release aimed at some local markets, but primarily that relates to a couple of more I think it was 1 funeral home and the cemetery development spend, which is more ongoing.
So, I don't think I'd take that particular announcement that was aimed at specific Texas markets and extrapolate that anything differently than what we're normally what you and I are talking about in terms of deployment of capital and maintenance and cemetery development CapEx.
Yes, Duncan, I think that release was again, like Eric said, geared to local investment. With the oil downturn in Texas, I think a lot of people here are looking at what are companies doing to invest back in the communities. And that number was probably cumulative, not necessarily for 2016, but an overall investment over a period of time in those markets. So, like Eric said, it's hard to correlate. It wasn't intended to enhance our disclosures as it relates to overall spending.
Perfect. That clarifies it. Thank you. Thank
you. And our next question is from John Ransom of Raymond James. Please go ahead.
Hey, good morning. Just a quick one for me. If you look at your M and A in the first half
of the year, what's
the EBITDA contribution through the 6 months? I know there's timing versus what you think it will contribute in the back half of year. And then a follow on to that is, you say you pay between 7x 8x. What do you hope to drive that multiple to over, say, 3 or 4 years? And how do you what's the main lever you pull to get that multiple down?
Okay, John. How are you doing? Good to talk to you. I'm great.
Yes, sir.
Good. So, the transaction timing, the larger of the 2 transactions occurred very So, again, not a lot of impact. So, So again, not a lot of impact. So, most of it's going to happen in the back half of the year. As you think about acquisitions in our hands, and again, everyone's a little bit different.
But I think the way to think about it for us is, as you think about a funeral acquisition, these are preponderance of funeral transactions. We're going to take those businesses. The first thing we're going to do from an impact of value is going to be, we're going to take our buying power and transfer that into the business day 1. So think about caskets, we buy them a lot cheaper. Think about really every supply that they may use.
We also take those businesses and we tie them into our network as it relates to payroll and accounts payable and a lot of the administrative duties surrounding those businesses. So, a lot of times when we buy businesses, we may not need all the employees to come onto the payrolls. And again, we're talking about those in the transition before we buy them and before we bring them online. So, almost immediately, you can take a transaction and knock it down into the 6s. And now we get into the top line stuff.
So, on the funeral side, you'd say, can we using our Dignity showrooms, can we begin to sell packages to these customers through now our HMIS Plus system where people are buying more. And we find that, that takes a little bit of time and training. But again, as you get into 3, 6, 9 months, you begin to see impact as well. So ultimately, I'd say as you get into year 3 or 4, from an EBITDA multiple, you may be down into the high fives and Cemeteries are kind of the same, Cemeteries are kind of the same, probably less leverage on the cost side, but generally because we've got such a great sales force great leadership, we can take a lot of experiences that we've had in other markets and look at those markets maybe a little differently than the former owner would. We may see ethnic opportunities where that they weren't exploiting in those markets as well as we think they should.
And again, not because we're better or smarter, but we just see a lot more with the large network that we have and we can take that learning and apply it to the market. So, that's why these things are so valuable. Probably a little more cost leverage on the funeral side, a little more top line growth as you think about cemeteries.
So if I were to about the question then, if you spent $52,000,000 and you paid 8 times, I mean, or 7 times, there should be $7,000,000 plus of incremental EBITDA in the back half of the year that wasn't in the first half. Is that fair?
On a 12 month basis, yes. So you enjoy half of that in 2016 and then the full rack in 2017.
Okay. Thank you.
Thank you, John.
Thank you. I will now turn the call back over to SCI Management for closing remarks.
We want to thank everybody for calling in today. We really appreciate it. We look forward to talking to you again, I believe at the end of October. So everybody have a great week and thanks again for being on the call.
Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.