Welcome to the Quarter 1 2016 Service Corporation International Earnings Conference Call. My name is Yolanda, and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.
It's now my pleasure to turn the call over to SCI Management. You may begin.
Hi, and good morning, and welcome to our first quarter earnings call. This is Debbie Young, and I'm the Director of Investor Relations at SEI. As customary, let me begin today with the Safe Harbor language. The comments made by our management team today will include statements that are not historical and are forward looking. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
These risks and uncertainties include, but are not limited to, those factors identified in our press release and in our filings with the SEC that are available on our website. In today's comments, we may also refer to certain non GAAP measurements such as normalized EPS, adjusted operating cash flow and free cash flow. A reconciliation of these measurements to the appropriate measures calculated in accordance with GAAP is provided on our website and in our press release and 8 ks that were filed yesterday. With that out of the way, I will now turn the call over to Tom Ryan, SEI's Chairman and CEO.
Thanks, Debbie. Good morning, everyone, and thank you for joining us on the call today. I'm going to begin with an overview of the quarter followed by a more detailed analysis of our funeral and cemetery operations. So let's begin with an overview of the quarter. Today, we reported normalized earnings per share of $0.28 for the quarter, which was lower than the prior year number, but in line with our internal expectations.
We were facing a tough comparable earnings per share hurdle versus a strong Q1 of 2015, which was influenced by an unusually severe flu season. We anticipated this decline in funeral volume when we gave our guidance back in February and these results are in line with our expectations. At a high level, I summarized the $0.04 decline in the quarter like this. Lower funeral profits, primarily driven by lower funeral volume created a $0.06 decline in normalized earnings per share. This was partially offset by cemetery results, which added back just over a $0.01 We had another $0.01 contribution from fewer shares outstanding, reflecting the effects of our share buyback activity over the last 12 months.
And finally, we also had a temporarily higher tax rate, but that was offset by lower general and administrative expenses. The highlight of the quarter was our preneed sales success in both funeral and cemetery, which grew on a combined basis at about 8%. This is what should happen when you combine talented sales people with the right training and the tools like our customer relationship management system, Salesforce to help drive productivity. Thank you, sales team for your tremendous efforts. Let me mention a few other highlights of the quarter.
On the cash flow front, we generated $190,000,000 in adjusted operating cash flows only slightly below our prior year number, despite the lower earnings and higher cash tax payments year over year. With that robust cash flow, we're very proud to report that we continue to deploy capital in accordance with our strategy, utilizing $23,000,000 for growing our business through developing cemetery property and constructing new funeral home locations. Additionally, we returned capital to our shareholders through both share repurchases and dividends totaling just under $78,000,000 during the Q1 of 2016. Additionally, we enhanced our liquidity and improved our debt maturity profile by entering into a new $1,400,000,000 5 year credit agreement. This affords us continued flexibility in deploying capital in shareholder friendly ways, while reducing our overall cost of debt.
Finally, I would like to take a moment to announce that we were extremely honored to be presented with the prestigious J. D. Power President's Award in recognition of our dedication to service excellence. We have worked with J. D.
Power for the last 10 years to measure our customers' experience, satisfaction and loyalty. We joined a very small and elite group of just 12 other companies to receive this award in J. D. Power's 47 year history. My heartfelt thanks to my SEI colleagues for their commitment to delivering consistent, high quality customer service, which is the foundation of everything that we do.
Now let's shift to a deeper dive into funeral operations for the quarter. When compared to the prior year, comparable funeral revenues decreased by $14,700,000 or nearly 3%. This was expected as lower funeral volume, negative currency trends and lower funeral trust fund income put downward pressure on our funeral revenues. As noted in the table of our press release on Page 3, core revenues declined $26,100,000 or about 6%, due primarily to a decline in core comparable funeral volume of 6.5%. Slightly offsetting the negative effect that volume had on core revenues was a slight increase in the core funeral average.
When you break down the components of core funeral average, we're pleased to see a 2.4% organic growth at the customer level. This core customer growth was negatively impacted by 3 things. First, the Canadian dollar was $0.73 versus $0.81 in the prior year. This had a 70 basis point reduction in core average. The good news is at the profit level, it was not material and it should be a better comparison going forward.
2nd, the increase in the cremation mix had a 50 basis point negative effect on the core average. And finally, lower trust fund income of $1,500,000 negatively impacted the core average by another 40 basis points. So, these three negative trends took a 2.4% customer average growth down to 0.8%. While cremation mix should continue to have a negative impact, currency movements and trust income can become a tailwind at some point. Outside of core revenues, we saw growth of $5,700,000 in recognized pre need revenues, which is our nontraditional Funeral Home Business or SCI Direct.
Remember, these are the deliverable product components of the preneed contract that are delivered immediately after sale representing cremation merchandise or travel protection policy. And finally, other revenue grew $5,900,000 or 20%, which primarily consists of general agency commissions earned on higher pre need insurance sales production. So now from a profit perspective, comparable funeral profits decreased $20,400,000 On a core revenue decline of $26,100,000 assuming an 80% incremental margin as this now excludes selling costs, results in a profit decline of $20,900,000 Then we would anticipate our fixed cost base, which approximates $250,000,000 a quarter to grow at about 2% or $5,000,000 However, our fixed costs grew at about 1.3% and therefore only negatively impacted margins by a little over $3,000,000 for the quarter. The $5,700,000 revenue growth from recognized preneed revenues for SCI Direct generated about a 30% margin or a $1,600,000 increase in funeral profits. While general agency revenues grew by $5,900,000 these are offset by similar increases in selling costs associated with our pre need selling efforts.
While these can fluctuate some by quarter, the general agency revenue, which is only earned on insurance funded production, generally covers all selling compensation costs, including our trust funded production. Finally, comparable preneed funeral sales production, which is deferred into our backlog, grew an impressive $16,600,000 or 8.5% in the quarter. This is a great start towards our annual guidance of mid single digit growth. While we experienced a slightly higher selling cost percentage in the Q1, we expect that for that to normalize as we progress through 2016. Now moving on to cemetery operations, comparable cemetery revenue grew by $15,100,000 or 6.3%.
Recognized pre need revenue accounted for $11,000,000 of the increase aided by a $1,400,000 increase in atneed revenue and a $2,700,000 increase in other revenue, which is primarily trust fund income. Recall that from a seasonal perspective, we sell a lot more contracts than we recognized as revenue in the Q1 of the year, some $40,000,000 worth more in both 20162015. This is mainly because we are selling into projects that have yet to be constructed and seasonally the work gets initiated once the weather gets more conducive. Many projects finish in the back half of the year and those quarters will see higher recognized revenues versus the current sales production. Remember, we recognized increases in preneed revenue of $11,000,000 for the quarter, but preneed sales production or activity grew even more at $13,000,000 or 7.7%.
We started the quarter off slowly coming off the December close to 2015, but we had a strong finish in the last half of the quarter, particularly as we experienced a significant increase in large sales in the month of March. Now comparable cemetery profits increased $3,500,000 and the gross margin was essentially flat at 21%. Growth from the core revenue increase of $12,400,000 should produce 60% incremental margins as these would include selling costs or about $7,500,000 of profit for the quarter. However, our profit was slightly reduced this quarter by some 200 basis points or call it $4,800,000 due to higher selling cost rates and higher property and merchandise unit costs. Trust fund income increased by $2,700,000 and that is 100% margin.
And finally, our $100,000,000 a quarter of cemetery fixed cost base grew at an inflationary rate of 2.3% and reduced profits by just over $2,000,000 So, to wrap it up, we believe we're on track to deliver solid results this year. We're glad to have this tough first quarter comparison behind us. We expect to return to our normal pattern of earnings per share growth in the remaining quarters of the year. We're excited to see the growth in both our funeral and cemetery preneed sales programs. And at present, we remain confident in our earnings per share and cash flow targets for the year.
Lastly, we will continue to deploy our capital wisely, so we can continue to enhance the value of SCI for our shareholders. With that, I'll turn the call over to Eric.
Thanks, Tom, and good morning, everybody. This morning, as usual, I'm going to walk you through the details of our cash flow performance as well as our capital deployment for the Q1. And then I want to touch on our current guidance as we go forward for the remainder of 2016. So, let's start with some details on cash flow. As you saw in yesterday's press release, we generated $190,000,000 of adjusted operating cash flow during the Q1, which was just under $8,000,000 below the Q1 last year.
The main cause for the decrease was lower earnings driven by the decreases in funeral volumes offset somewhat by robust preneed cemetery sets. But additionally, we did pay about $4,000,000 more in recurring cash taxes during the quarter And both of these declines were partially offset by increases in cash receipts from preneed cemetery installment collections during the quarter. Now one cash flow item that I really wanted to touch on quickly was $7,000,000 of capital gains that we received from our cemetery ECF trust funds during the current year. A $3,000,000 increase compared to $4,000,000 of capital gains received from those same ECF trust funds in the prior year. And similar to what I've mentioned in the past, these capital gains distributions continue to relate to the liquidation of the trust assets at the end of 2014 when we implemented a change in the trust structure following the Stewart acquisition.
This $3,000,000 increase in capital gains over prior year was not contemplated in our models when we talked to you in February. Maintenance CapEx and cemetery development CapEx, which as you remember are the 2 components that we consider our recurring CapEx, for the quarter came in at $38,700,000 which was about $12,000,000 higher than prior year. The increase relates to the development of contemporary cemetery property, which of course enables our sales force to drive sustainable growth in our preneed cemetery property sets. However, we do view this increase in the Q1 as a timing issue, which really related to the timing of cash invoices being paid for these projects. So our 2016 full year recurring CapEx guidance remains unchanged at $150,000,000 When you deduct these recurring capital spending items from our adjusted cash flow from ops, we calculate our free cash flow for the Q1 to be just over $150,000,000 This was slightly below our quarterly expectations, but that's because of the timing I just mentioned of the cemetery development CapEx during the Q1.
So, let's talk about how we deployed that free cash flow during the quarter. And as we've consistently said, returning capital to our shareholders is a top priority for us. We returned almost $80,000,000 in the form of share repurchases and dividends during the quarter. Specifically, we paid a $0.12 dividend in the quarter funding just over $23,000,000 in dividend payments. And then we repurchased 2,300,000 shares for a total investment of about $55,000,000 during the quarter.
Subsequent to the end of the quarter, we have repurchased another just north of 400,000 shares additional shares for a total investment of about $10,000,000 So to update you on our program, we currently have about 194,000,000 shares outstanding and about $216,000,000 of remaining share repurchase authorization. Finally, during the quarter, we had no material acquisition activity. However, in April, we invested almost $12,000,000 in the acquisition of 2 premier funeral businesses that we welcome into the SCI network. So shifting now to the cash flow outlook for 2016. First, let me take a few minutes to discuss our full year cash flow guidance.
Our expectation for the full year 2016 cash flow from operations excluding special items continues to be 450 dollars to $500,000,000 When reflecting on the Q1 cash flow, remember that our Q1 cash flow is seasonally high due to cash interest payments that primarily occur in the second and fourth quarters each year. So during this quarter, we paid $16,000,000 in cash interest. We expect to pay about $64,000,000 in the 2nd quarter and about $75,000,000 to $80,000,000 in the second half of 2016. With regard to cash taxes, we still anticipate our full year normalized cash tax payments we previously communicated to you to remain unchanged at that level, which remember is at an expected $140,000,000 spent. Moving on to our recurring CapEx, I already mentioned this to you that our cemetery development spend came in higher, but also as I said, this is a timing issue.
So, we still expect our full year guidance to remain unchanged at approximately $150,000,000 So when you put all these pieces together and you deduct the recurring CapEx items from our 2016 recurring cash flow from operation expectations, this results in free cash flow for the full year in 2016 ranging from $300,000,000 to $350,000,000 which by the way equates to about $1.64 per share at the midpoint of this free cash flow guidance. So now let's move on to capital deployment for the remainder of 2016. And of course, the foundation to our capital deployment strategy is first have an adequate liquidity and a manageable near term debt maturity profile.
So, let
me tell you about a 2016 refinancing to help to bolster this. So in the month of March, we entered into a new $1,400,000,000 5 year credit agreement with a $700,000,000 revolving credit facility and a $700,000,000 term loan. In March, we drew $550,000,000 on the term loan and an additional $30,000,000 on the revolver, which was used to fund the outstanding balances on the old credit agreement. As a result, we finished the quarter with outstanding liquidity of just over $850,000,000 which consisted of just over $200,000,000 of cash and about $640,000,000 of availability on that new revolver. But subsequent to the end of the quarter, we refinanced our $295,000,000 of senior notes that were due in 2017 using this new credit agreement through an incremental $150,000,000 term loan funding and $170,000,000 additional drawn down on our revolver.
This leaves us as we speak with about $683,000,000 of liquidity. So, now I know there are a lot of moving parts in what I just described and of course I also said that it crossed over the quarter end. So, let me just summarize what I tried to say at the very high level in terms of how it impacted SCI. From a liquidity perspective, at the end of the year at December 31, 2015, we had about $335,000,000 of liquidity. Today, we have about $680,000,000 of liquidity.
Our weighted average interest rate came down at the end of 2015. It was about 5.2%. Today, it's about 4.7%. And our weighted average maturity pushed out from 5.5 years at the end of 2015 to 6.2 years today. So, of course, this transaction that we did positions us very well to strategically execute our capital deployment plans going forward.
Our leverage, which is calculated as net debt to EBITDA in accordance with our updated credit facility was 3.75 times as of March 31. This also sets us nicely at the midpoint of our target leverage range of 3.5 to 4 times. So therefore, our liquidity, leverage ratio, as well as our favorable near term debt maturity profile create a solid platform for us to continue deploying capital to achieve the highest total shareholder return. So from an acquisition perspective, I just noted acquisitions we've closed in April. We believe we have a healthy acquisition pipeline in place and therefore we are comfortable with our current $50,000,000 to $100,000,000 acquisition spending guidance for 2016.
Based on our outstanding share count and current dividend rate, we expect dividends to be paid about $100,000,000 in total for 2016 and therefore any remaining excess cash flow will be available to be deployed towards other value accretive opportunities such as the share repurchase program. So in conclusion, with the Q1 behind us, we are excited about the prospects for the remainder of 2016. Our robust cash flow coupled with the strength of our balance sheet will continue to provide us with a tremendous amount of financial flexibility to focus on deploying our capital to increase shareholder value. So we appreciate you joining us this morning. That concludes our prepared remarks.
And now we'll go ahead, operator, and open it up to
to Our first question comes from Scott Schneeberger from Oppenheimer. Your line is open.
Thanks. Good morning. I'd like to start out by congratulating you on the J. D. Power award.
The first question I'd like to ask is with regard to flu impact. We've kind of been tracking it and obviously we saw the results in the first quarter. Could you please comment on thoughts on a year over year comparison in the Q2, the relevancy and how you would consider looking forward to next year. Obviously, we've had a lot of volatility in the Q1. What you think appropriate run rate would be your thoughts just for modeling purposes?
Thanks.
Yes, Scott. So, as you think about the impact of severe flu and then you can go back and look at some of the data, particularly over the last 10 years, when you see kind of severe downturns like we're seeing in the core part of our business or call it around 6% down, when historically when that has occurred, we end the year close to down 1% to 2%, which bodes very well for your comparisons when you think about the rest of this year. I will say that last year, my memory is the second quarter was still a little strong, pretty close to flat volume. So that may be our harder comparison as you think about quarter over quarter. And then I think as we think of the long term, we've kind of said this historically, we generally tend to model somewhere between flat to down 2%, generally somewhere in that 1% to 2% down range until we see the what we believe is the demographic impact of what will happen in the United States.
And again, I point back to people, we're seeing that demographic impact our cemetery business already today. So, we know it's going to occur. What we can't predict is exactly when it's going to occur. And so, we run our businesses with an idea that we can ramp up when volume shows up, but we model tend to model down, call it 1% to 2% as we think near term.
Thanks. Appreciate that. And then, it's kind of a similar modeling question. Gross margin was a little lighter than we expected in the Q1 by some usual culprits and then of course the higher elevating the elevated expenses you mentioned with regard to pre sales, which is essentially a good thing. So just looking for a little bit more and thanks for what you've already provided with regard to cadence over the year how you would expect the gross margin to progress?
Thank you. And then drivers.
Yes. I think if you separate the 2 businesses on the funeral side, volume has such a big impact on what's going to happen to margin. So, I think we feel pretty good about the comparisons as we go forward when you think about funeral volumes. Now by pretty good, that probably means that they can be essentially flat when you think about the percentage gross margins. We expect to be able to grow revenue slightly and therefore the gross margin dollars should increase in funeral.
But as you think about that to really move the needle on funeral, you need volume. And so think of that as a very consistent predictable cash flow model. The one piece you'll notice, Scott, that I'm trying to talk to people too about the way to think about our margins and this is a little bit of an evolution in our thinking is think of funeral margins as being 80% incrementally on a gross margin level. So, that just includes your ancillary service costs and your merchandise costs against that revenue. Then we've got this, what I call a big fixed cost pool of about $250,000,000 on the funeral side, should grow at inflationary rates, call it 2% in today's world.
And what we do now is we take the selling cost with GA revenues and separate those out. Because if you think about it, that activity really has nothing to do with delivery of funeral services. It's a pre selling activity that generates a general agency commission for insurance funded and we pay our selling compensation costs and those tend to kind of offset one another. So as we grow pretty sales, Cemetery wise, we feel very good about our ability Cemetery wise, we feel very good about our ability to continue to grow cemetery margins in the near term. That's going to occur mainly because we believe we can grow preneed cemetery sales in the high single digit range.
And again, we've done that for 5 or 6 years. We believe we can continue to do it. We did it again this quarter. So I would expect that to continue. You did refer to selling costs.
We had selling costs a little higher than we wanted. We understand why that was. We think there's a fix in place to manage that. So we feel better about the back half of the year when you think selling costs related to production.
Okay. Sounds good. And looking forward to the balance of the year and I'll pass it along. Thanks.
Thank you.
Our next question comes from A. J. Rice from UBS. Your line is open.
Hi, this is Brandon in for A. J. Here. Question is really around the preneed sales. Your Investor Day last year, I think you talked about around 25% market share of preneed sales in terms of overall market that you have annually.
I was wondering if you had an updated figure on that. And then just also, I haven't heard really talk about just where you think the people over age 60, for example, how many bought a preneed cemetery contract at this point or preneed funeral, if you have any sort of data points around that? Thanks.
Yes. So first, as it relates to that 25%, I just want to make clear that relates to funeral pre need only. So cemetery most cemeteries that are for profit have a pretty substantial sales force and the customers preneed selling. But funeral is a little different and you see it in different parts of the country and different business and different philosophies about it. So that 25% was really an estimate from us.
There is not good national data. We do our best market by market to understand how people are selling. We can look at some of our larger public competitors. We see things and we're in the acquisition markets and we buy business. We know how active they are in preneed selling.
And what I would say is generally, we see that when we come in, we're going to have a more active selling preneed selling program than the people that we're acquiring. It's not always the case. We run across some really good preneed selling companies. But that's really how we have derived that data. And so I don't have a new number for you because again, it's predominantly an estimate.
But we feel very good about our competitive position in that market. Second question you had, I'm sorry,
was Just if you have any data around just people over 8 60, for example, they've already purchased a preneed cemetery contract, just sort of your overall market penetration, if you will? I mean, also on the funeral side, if you have any data there as well.
Yes. I think as you I don't have those specific data as to in the country how many have. But again, I would remind you, the average age or the age that we see is the sweet spot for selecting cemetery property is in that kind of low to mid-60s. So you think about the baby boomers who are now, I guess the first or about to turn 70 this year. Think about it this way that 6 years of an 18 year span have run through the first part of that sweet spot.
So as we view the world, there's 2 thirds of the baby members left to enter into that decision point. Having said that, that's the average age. So there are people that are 68, they're going to come preneed with us, but haven't done it yet. What we do know is this is that by the time people become atneed or we're burying them in the cemeteries, about somewhere between 65% 70% of those people have selected a final resting place before they show up. So a pretty high percentage before they pass away are selecting cemetery property in advance.
And again, we see a lot of activity in that significant level.
Okay. Thank you.
Our next question comes from Chris Rigg from Susquehanna Financial. Your line is open.
Good morning. Just wanted to get a little more detail on the current M and A environment and sort of it ebbs and flows every year? And just a sense for where you think you could end up this year. Is it more likely to be towards the lower end or towards the upper end of the target? Thanks.
Chris, you always ask the hard questions,
my friend.
I wish I could say with certainty, it's a hard thing to say because the difference between $50,000,000 $100,000,000 generally is going to be a large transaction that comes our way. So it is because we're going to do $15,000,000 dollars $3,000,000 transactions or $10,000,000 $7,000,000 transaction is going to be because we're going to do a $25,000,000 to $40,000,000 transaction. And that's what's so hard to predict. You've got some out there that we're speaking to, timing is always difficult to predict. So that's the way to think about it.
I think as we get one of those in the shoot, then you can have a stronger opinion about our ability to get to the higher end. So we'll probably know a lot better as the year goes on. I wish I could be more specific.
Okay. No problem. And then just one question around some of the larger sale activity that you described. What is there any rhyme or reason to that? Or is that just luck that certain things hit up at a random time?
Or is there a long lead cycle? Or just some details around how the higher end properties get sold would be helpful.
Well, I think we view I think our cutoff for analyzing large sales is $40,000 And I think if you went to different parts of the country, people would give you different opinions about what a high end sale is. So it's almost it's hard to define what that means. My reaction to this is a couple of things. We tend to see a lot of activity around Ching Ming, which occurs kind of at the end of the Q1 and the beginning of the second quarter. That's a very, very important time of year.
And so you can see a lot of activity from time to time depending on what's going on in those markets. The big markets for us are going to be Vancouver and California and different pockets there. And so again, if things are good in those cities, then you probably tend to see people with a little more confidence, a little more buying opportunity. The other thing is our available inventory. I think as you open a new park and you put in high end inventory, you tend to see a flock to the new place impact.
And over time, that's going to slow down the excitement. It's like the new ride at Disneyland, I'm going to have to go to someday soon. That is the way that you have that kind of effect when you think about large sales. So hard to predict, economically driven, confidence driven, availability and kind of new opportunities for sale is the way to think about it.
Got you. Great. Thanks a lot.
Our next question comes from Robert Willoughby from Credit Suisse. Your line is open.
Hi, Tom and Eric. Penny Willoughby in
for Bob. Can you tell us how the death rate trended in February March? And do you have any comments on the April trend?
You're going to ask, death rate in February versus March. I'm going to start with the last part of your question. We heard the February March death rate. Is there
a comment on the April trend as well?
Okay.
April trend, well, first of all, let's start with February March. Obviously, things accelerated in the back half of the quarter and that kind of comes across board. We've talked about sales, we could also talk about the number of funeral services being performed. I mean, when we talked to you, Bob, in February, I think it was February 10th around that time, things were kind of bleak. We just got January results, it was double digits in terms of down, in terms of the number of funeral services performed year over year.
That really flattened out towards the end of February and actually had a little bit of momentum going into March. So far, I would put that April is really kind of neither way. It's not that it's really accelerating, but it's also not going back towards the January February almost doom and gloom that we saw. So kind of just continuing to trudge along pretty consistent with prior year and our expectations are flat to slightly down in terms of funeral services.
And I can follow-up for Penny, if I could. The share repurchase, Eric, was a little bit lower in the quarter. You had a bigger CapEx number. Would we expect a bigger share repurchase going forward? Or maybe just remind us the target for the year potentially?
Well, I think it's obviously, we're going to throttle it up and throttle it down based on the share price in the market compared to what we think the intrinsic value is. At this level, we think that it's definitely something that we want to invest capital towards. However, we also believe in our history with our acquisition program is that was a better value for our shareholders over the long term in terms of return on invested capital. So we did have some in acquisition deployment in April. And of course, as I said, we've been excited about the pipeline, which means that we want that capital for that pipeline to some degree.
The dividend is pretty normal at the $100,000,000 annual mark that we said, and we'll always revisit that as we do kind of midyear. But ultimately, I don't think there's anything, reason one way or the other. I think when you're comparing it to the prior year, you have to remember, we had a significant cash balance from the Stewart divestitures that allowed us to go heavier in 2015. So I would call 20 15 being more of the anomaly, Bob, as opposed to 2016 being kind of right on mark where I expected it.
And maybe another last question, maybe, Eric. The cemetery trust did well, up 2% or so plus in the quarter, whereas the other ones were a bit flat. Any reason for the variability between the individual trusts? I mean, there's some differences in investments, I guess, but I thought they'd all be reasonably similar. Why wouldn't they be?
Well, the cemetery perpetual care is a different animal, as you know, between the preneed funeral and preneed cemetery. Both of those were somewhat flat excuse me, somewhat consistent with what you just described at 0.3% and 0.5% up for the quarter. Those are the 2 trust funds that back the contracts, the preneed contracts and the merchandise and services on those contracts. And those are invested over that 10 to 12 year life and have the equity, high equity component 50%, 30% fixed And so we invested differently, for a yield And so we invested differently for a yield perspective because as it creates interest in dividends and to some extent realized capital gains under state laws, that's when that earnings gets distributed to us to offset maintenance costs under those specific state laws. And of course, this year, we said this quarter, excuse me, we said it's a little bit higher because we had a little bit more realized capital gains come through than what we originally expected when we talked to you in February.
So it's a little bit different animal than and when you say when you really look at them together in terms of funeral and cemetery, you got to look at those first two line items, which the merchandise and service dress.
That makes a great deal of sense. Thank you.
Our next question comes from Duncan Brown from Wells Fargo. Your line is open.
Hey, good morning. On the non funeral home matured preneed pricing front down mid single digits. Is there anything you can talk about that? Is that just pressure on the pricing front in Neptune business? Or how should we be thinking about that?
Yes. I think that's a bit of if you think about Neptune and the way that we sell and this kind of gets into the functional aspects, you've got a service component and then you've got a, what I'll call, a merchandise component. The merchandise component consists of essentially an earn and away from home protection or travel protection policy. When we sell those Dunkin', they get recognized immediately in income because they're delivered. The The customer gets the earn, the customer gets the protection provided through a 3rd party insurance provider.
So we're done. The last piece is when the person actually is deceased, we have the responsibility to again perform that cremation and those funds are trusted over time. So what you're beginning to see occur is the backlog of that service component becoming a bigger part of our business. So we're seeing a volume growth because they did such a good job in grabbing market share. So it's profitable business, but it puts pressure on the overall average because there's more of those types of contracts.
But think of it as you'd rather do it because you're making a little bit of money on it than not do the business. Also year over year, as you think about comparing the two averages, we had a business that was in the direct cremation business, but it had a different model. It didn't have the same, I'd say, sales and marketing emphasis that Neptune had. So as we've begun to convert those businesses to look more like Neptune, their backlog is now running through the income statement is shrinking because we used to put more into trust, but more emphasis on the actual cremation itself. So it's not something to be concerned with.
It ought to level out at some point, but that's what's driving that. It's not a big number, so
we don't get a lot
of questions about it, but that's what's happening.
No, that's fair. I appreciate that. And then, Eric, I think I missed it. You mentioned earlier about some capital gains benefit that you received this quarter as you weren't expecting previously. Was that just a cash flow item or was there some impact to the P and L there?
Duncan, it was from the internal care fund. So the internal care fund when it gets distributed to us, it's both income and cash.
So was there a component of sort of one time income gains in the quarter that we should be thinking about?
Yes, I would say there was. I would say that we could always, as I described earlier on the earlier question, we'll always have our portfolio managers perhaps realize some gains on their own. We're obviously not managing the money or influencing them. But ultimately, in certain states, that gets distributed to us. But I do agree with you that it was elevated this year, because this is kind of some trail end pieces to it, from the original realized gains from the Stewart integration and whether the states distributed to us or not has just taken some time to get through it.
So the elevated part, I would call it $3,000,000 which is kind of
the increase year over year.
Great. Okay. Thanks a lot.
Thank you.
We have no further questions. At this time, I would turn the call back over to SCI Management.
I want to thank you all for participating today and we look forward to talking to you next time in July. Thanks so much.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.