Q2 2019 Earnings Call
Good morning, and welcome to the second quarter 2019 Service Corporation International Earnings Conference call.
My name's spread and I'll be your operator for today at this time all participants are in listen only mode. Later, we will conduct a question and answer session during which you can tell star one if you have a question.
Please note. This conference is being recorded and I will now turn it over to Sci management you may begin.
Thank you good morning, it's steady young director of Investor Relations at Sci.
Thanks for joining us today, as we discuss our second quarter results.
I'll quickly go over the customary safe Harbor language before we begin with prepared remarks.
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 yes.
See that are available on our website.
Today, We may also talk about certain non-GAAP measurements, such as adjusted EBITDA, 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 it's also in our press release and 8-K that were filed yesterday.
With that I'll now turn the call over to Tom Ryan <unk>, Chairman and CEO .
Thanks, Debbie and thank you everyone for joining us on the call. This morning.
Today as usual I'm going to begin my remarks, with a high level overview of the quarter.
Followed by more detailed analysis of our funeral and cemetery operations and finally comment on our outlook for the back half of 2019.
So let's begin with an overview of the quarter.
As you saw in our press release yesterday adjusted earnings per share grew three cents for almost 7% to 47 cents per share.
This was in line with our expectations as growth in our cemetery segment and a lower tax rate helped to offset higher interest expense.
Summarizing the quarter at a high level, we had a solid operating income growth in our cemetery segment by recognizing a higher amount of Preneed cemetery sales production through income as we purposely drove more sales into a higher percentage of already developed property.
Funeral profits were flat as an increase in funeral volume in both our core and non funeral home channels and continued focus on cost offset a decline in the sales average caused by rising cremation mix.
The good news is that our non funeral home operating channel Sci direct is back on track with an increase in preneed sales production of over 15%.
Below the operating on a lower tax rate more than offset anticipated higher interest expense from higher variable rates tied to LIBOR as well as refinancing some shorter term variable rate debt into five in a 10 year notes.
Now shifting to some more detail around the funeral operating performance for the quarter.
From a topline perspective, we grew comparable funeral revenue over $5 million or about 1% compared to the same period last year.
Primarily related to higher recognized preneed revenues.
Core funeral revenues grew slightly over the prior year quarter.
We were pleased that comparable funeral volume increased 1.1% against the prior year bouncing back from the first quarter.
This was partially offset by a decline in the sales averaged 5.8%.
The organic revenue per case at the customer level before mix change grew about 90 basis points, but was more than offset by 170 basis point increase in the cremation mix.
I believe part of this larger cremation mix change is a result of our success in gaining market share for core information customers in certain of our markets.
Recognized preneed revenues rebounded nicely in the quarter, an increase more than $5 million or over 50%.
Recall this represents products sold on a preneed basis, primarily by our non funeral home channel.
That are delivered at the time of sale, resulting in immediate revenue recognition.
I believe the anticipated distractions of converting the sales associates at Sci direct from independent contractors to employee status are largely behind us now and we're back to full strength and growing again.
Special Thanks to Tim and the Sci direct management team for their leadership on that.
Revenues from our non funeral home channel. These are the services performed at need by Sci direct.
Grew over $1 million or 10.3% led by a strong increase information services performed both from an immediate atneed cases, as well as from cases service from our preneed backlog.
Finally, other revenue predominantly general agency revenue fell a little more than $2 million quarter over quarter, primarily due to a decrease in preneed funeral insurance sales production, coupled with a lower cremation rate.
Well the commission rate was lower in the quarter. The General Agency Commission rate for the first six months is in line with our expectations and prior year.
From a profit perspective operating profit was essentially flat and operating margins decreased 30 basis points to 19.5%.
Considering the limited revenue growth for the quarter I was proud of our team's focus on managing our variable and fixed costs, which affords us the ability to match last year's profitability.
The good news is that we continue to focus on cost reduction initiatives, which we believe will have a continuing benefit throughout the remainder of 2019.
Finally, total preneed funeral sales production, which gets deferred into our backlog grew 3% for the quarter.
The increase was primarily driven by Sci direct which grew an impressive 15.5% again, reflecting that our sales team is back to full strength.
Preneed sales at our core locations were relatively flat to the prior year quarter as trust production grew offsetting the insurance production decline.
However, keep in mind that we were up against a tough comparison as last year, we reported a 10.4% increase in preneed sales that our core locations compared to the second quarter of 2017.
Now turning to cemetery operations.
Comparable cemetery revenue grew $2.4 million or just under 1% in the quarter.
This consisted of operating revenue growth of about 3%, which was partially offset by lower perpetual care Trust fund income due to the timing of distributable capital gains.
In terms of the breakdown of cemetery revenues recognized preneed revenue grew $8 million or nearly 4%.
This growth is primarily due to the higher revenue recognition rate.
Recall that higher recognition rates means more of what we're selling is getting recognized in earnings.
This higher rate is a result of our sales team selling a larger percentage of existing developed property versus undeveloped.
As well as achieving the down payment criteria for some of the strong sales production for the first quarter.
Cemetery Preneed sales production was lower by $7 million or 2.9% against a tough comp as the second quarter of 2018 with the strongest production quarter, we've reported in several years.
The largest decline was in the large property sales category, which as Weve explained before can ebb and flow from quarter to quarter.
While we're not pleased with our second quarter sales production.
The preponderance of the missed expectation was isolated to a few big markets, where for the most part regulatory or structural challenges created temporary setbacks and we are confident improved performance is on the way.
Additionally, on a global basis, we implemented some healthy long term focus behavioral changes around sales goals discounting and customer relationship management tools that may have been temporarily distracting during the quarter.
Which should drive improved efficiencies and productivity in the back half of the year and for years to come.
For the first six months of 2019, our cemetery preneed sales production has grown about $6 million or 1.3%.
It is our belief with momentum into the back half of 2019, we should be able to achieve the lower end of our annual cemetery preneed sales guidance of 4% to 6%.
Finally, as it relates to revenue, we experienced a $5.9 million decrease in perpetual care Trust fund income following a $7.5 million favorable increase in the first quarter of 2019.
As we said before the timing of capital gain distributions.
Quarter to quarter.
Comparable cemetery operating profits grew $2.3 million or 2.4% and margins expanded 50 basis points to 30.4%.
Primarily resulting from the operating revenue increases I just described.
The benefit from various ongoing cost reduction initiatives helped to offset the decline in high margin Trust fund revenue and prevent additional growth in fixed costs.
So to wrap it up.
We delivered on the more challenging app of 2019 on a comparable basis, especially in light of the challenging first quarter funeral volume.
We would expect the second half to generate a double digit percentage increase in earnings per share.
Driven by profit growth in the funeral segment in both quarters.
Profit growth in the cemetery segment predominantly in the fourth quarter as the third quarter of 2018 had a significant revenue impact from completed construction projects that will be lighter in the coming third quarter.
As well as lower general and administrative costs in the back half the year.
Higher comparable tax rates should mute the impact somewhat but we should still show very impressive earnings per share growth.
We continue to believe that we are on track to deliver solid results for the full year 2019 and are updating our adjusted annual earnings per share range to $1.90 to $2 with a midpoint of $1.95.
The dollar 95 represents a 9% increase over adjusted 2018 earnings per share of $1.79, even as we expect a slightly higher tax rate for this year.
We are confirming our adjusted operating cash flow guidance of $550 million to $610 million and Eric will talk more about the shorts.
In the meantime, we'll continue to pursue our three core strategies of growing our revenues leveraging our scale and deploying capital in a disciplined manner towards the highest and best use for the long term benefit of our company and our shareholders.
With that I will turn the call over to Eric.
Thanks, Tom and good morning, everybody.
I'm going to now give you some color on our cash flow results during the quarter I also want to provide some insights our trust funds I'll cover our capital deployment for the quarter and then more importantly, I'll touch on our financial position and our outlook for the remainder of the year. So as you saw on the press release, we have generated adjusted operating cash flow of $84 million in the quarter. This was in line with our expectations. It was down about 20 million from the prior year quarter as growth in operating profit was more than offset by anticipated both higher cash tax payments as well as higher cash interest from the debt refinancing activity that we did during the quarter.
Quarter over quarter cash tax payments increased $20 million and as I said that was expected in the first half of 2019, we have incurred $50 million of cash taxes as compared to about $25 million in the first half of last year.
So we refined our estimates for the full year, we now believe cash tax payments will be closer to $90 million for the full year of 2019, which is a $10 million reduction from what we previously guided in terms of cash tax payments.
Therefore, looking at the balance of the year.
We estimate $40 million of cash taxes in the back half of 2019 compared to $30 million, which are spent and cash taxes in the back half of 2018.
Now also related to taxes, we noted in our press release and adjusted effective tax rate for the quarter of 23.3%, which declined from 26.7% in the prior year as we primarily benefited from higher excess tax benefits on increased exercises of stock options.
Keep in mind, though as you compare the second half and 19 versus the second half of 18, we are expecting an adjusted effective tax rate of around 25%, which compares unfavorably to the back half of 2018, which is about 20% that again was reduced by unusually high excess tax benefits last year.
Cash interest payments increased about $8 million during the quarter.
About $2 million. This was expected due to the higher interest rates on our floating rate debt, but the remainder related to our recent financing transaction that I will now address so in May we issued new $750 million of five 508 senior notes. They are 10 year notes due in 2029, and we use these proceeds to pay off $425 million of our five and three eight notes that were due in 2022 as well as refinance about little over $300 million on our credit facility.
We also entered into a new 1.65 billion five year credit agreement.
Consisted of $1 billion revolving credit facility and a $650 million funded term loan.
These transactions significantly enhanced our liquidity as well as our debt maturity profile, while reducing our floating interest rate exposure. This again sets us up nicely to execute our capital deployment plans going forward.
So by converting from the 2022 notes with interest payments that would have been made in January 2020 next year. So the new notes that will pay interest in December of 2019. Therefore, we will experience a one time pull Florida cash interest of about $7 million to $8 million for calendar year, 2019, which essentially washes the reduction in cash taxes for fiscal year 19 that I just noted.
From an earnings perspective interest expense rose $6.6 million year over year in the first half of 2019, driven in large part from interest on our floating rate debt increasing from 3.5% in the first half of 2018% to 4% now and the first half of 2019.
With the benefits from the refinancing we expect the interest on our floating rate debt to be 4% in the second half of 2019 and to also be generally flat to the second half of 2018.
Now if the fed does elect to reduce rates depending on what you believe 25 or 50 basis points, we could have a tailwind here of about a penny in the second half of 2019 again, all else being equal.
So now let's move on to free cash flow.
Maintenance and cemetery development, Capex, combined which again are the two components that we define as capex and our free cash flow calculation was approximately $50 million for the quarter are flat to the prior year quarter and generally in line with our planned spending.
When we deduct these recurring capex items from cash flow, we calculate our free cash flow in the quarter to be about $33 million a year to date, our free cash flow calculates to almost $175 million.
So usually before I move on to capital deployment I'm going to take some time to address some of the trust related metrics for the quarter.
First I'll talk about perpetual care Trust Bank and Trust fund income in the Cemetery segment, which Tom also mentioned as well.
Our cemetery segment was impacted by $6 million reduction and perpetual care Trust fund income during the second quarter. This compares to $7 million increased in the first quarter of 2019. So on a year to date basis were slightly up compared to the prior year and in line with our expectations similar to what I mentioned last quarter. The second quarter was impacted by fluctuations related to the timing of capital gains and other distributions.
But looking forward to the balance of the year, while we don't expect large swings the timing of distributions from perpetual care funds not held in our total return states is somewhat uncontrollable as portfolio managers have the discretion to trigger capital gains that are then generally distributed to us and recognized as earnings and most states.
So now I'd like to spend a moment addressing our preneed funeral and cemetery Trust funds as you saw in the press release, they are up a healthy 13% year to date.
After a tough fourth quarter of 2018, where our trust funds dropped about 10% we have projected some recovery in our trust returns during the first half of 2019 in excess of our typical mid single digit growth expectations of about 6% nominal return prior to feeds.
The actual returns we have experienced though again, the 13% have exceeded our expectations by around 5%.
So using our rule of thumb of about $1.25 million of EBITDA impact per 1% return change again this is above or below the trailing 10 year, 6% return. This would equate to just over $6 million on an annual basis half of which should occur in the second half holding all else equal.
So now moving on to capital deployment during the quarter.
We deployed about $88 million towards acquisitions, new location built dividends and share repurchases. Also included are some open market debt repurchases as we continue to our focused on modest deleveraging. So psyched about the breakdown of the components first we deployed $14 million towards acquisitions and real estate purchases during the quarter, which included several funeral homes purchased a new Jersey, Scott UAN and Ontario.
We believe acquisitions like these continue to be our highest and best use with mid teen after tax returns I'd like to welcome. These associates to the PCI and the Damian Memorial family.
Year to date, we've invested $33 million towards acquisitions, and we continue to guide this spend to about $50 million to $100 million for the full year given the acquisition pipeline. We currently have.
In the quarter. We also invested an additional 10 million or 4 million over prior year on a new build an expansion of several funeral homes included new funeral homes in Texas, Florida, Colorado, California, and Georgia.
This increase in growth capital really has been a trend for us over the past several quarters and is intentional. These newbuilds not only provide us with great low double digit returns, but also expand our footprint into desirable markets to meet the needs of the customer increasingly looking to celebrate life.
Over the latter part of 2019, you expect continued increased deployment on these types of projects by just under $5 million over five prior year levels.
Dividend payments in the second quarter totaled 33 million, representing an increase of about 5% over the prior year. This reflects the one cents per share or 6% increase in our dividend to 18 cents per share per quarter, which we announced in February .
Next we returned $15 million of capital to investors in the form of open market share repurchases, which are approximately 337000 shares at an average cost of about $44 per share.
Our current number of shares outstanding is just over $182 million at the end of the quarter and today, we have about $160 million of remaining share repurchase authorization.
Finally, we repurchased almost $16 million of debt in the open market to manage leverage as well as reduce some higher interest expense debt interest will benefit by almost $600000 associated with these repurchases in the second half of 2019.
And on the topic of leverage we began the year toward the higher end of our desired range of three and a half to four times net debt to EBITDA due to the robust capital deployment that we had in 2018.
This capital deployment was driven in part by almost $195 million of acquisitions last year that are financed with cash our quarter end leverage was about 3.89 times and when we look towards the second half of this year, we expect a naturally de lever as our performance grows when compared to the second half of 2018. This will provide us with effect flexibility to deploy capital to the best use for the remainder of the year, which will include sharing share buybacks, but also will get us closer to our expectation of 3.75 midpoint of our leverage target range by the end of the year.
We also finished the quarter with tremendous liquidity about $1.2 billion consisted of just under 244 250 million of cash on hand, and just under a billion dollars availability on our new revolver.
So in closing.
Cash flow results continue to be strong through the first half of 19 were aligned with our expectations I'd like to thank all of our 24000 of our Sci associates for helping to achieve these stellar results. While we've not changed our 2019 guidance range for adjusted cash flow of 515 to 610 Thats million dollars, we have updated the components slightly.
By taking into account the $10 million of lower anticipated cash taxes that substantially offset by almost the same amount of higher cash interest payments.
Our cash flow. In addition to 1.2 million of liquidity that I, just mentioned sets us up very nicely to deploy capital over the remainder of the year by investing in highly accretive acquisitions as well as new build projects, while funding the dividend and returning capital to our shareholders in the form of share repurchases.
So with that operator that concludes our prepared remarks, we'll now go ahead and turn the call over to you to take questions. Thank you. Sir we will now begin the question and answer session. If you have a question. Please press star one on your telephone keypad.
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From Oppenheimer, we have Scott Schneeberger. Please go ahead.
Thanks, Good morning, everyone.
I guess I would start out on the on the lower cemetery preneed growth in production specifically in the quarter.
Tom could you go over again, please the drivers of that maybe give us a sense of magnitude of each and then and some thoughts about.
The the corresponding turn and then benefit in the second half and thereafter. Thanks.
Sure Scott Thank you.
First of all I guess and level set with and I think ahead of prepared comments. If you look back at the second quarter 2018, it's our highest production quarter for cemetery Preneed Cemetery in the last five years for sure maybe forever. So second quarter is always generally a very strong quarter on a seasonal basis. So we had a high hurdle to get over the second thing we did touched upon a little bit but didn't go into great detail with regards to.
Some changes that we made.
Associated with our targeted one we raised the targets.
For achievement in order to give bonuses.
We we recognize the fact that interest rates are can be a form of discounts and so.
In in the equating that to the way that we compensate the salesforce and driving.
Fair interest rates as we financed these things over time.
And then finally, some discipline around utilizing the salesforce product, which is the customer relationship management. So we did a lot of things that are that are tough. Good behavioral changes that I think is going to drive productivity enhance our salesforce ability to sell and again when you do those things than we did these predominantly in April or may they can be temporarily distracting and so.
I think that had an impact but again as I mentioned I think those are things are going to benefit Q3, and Q4, when you think about our ability to achieve those production levels.
And then we just mentioned again that.
From time to time, you're going to have markets and particularly big markets. We mentioned in the first quarter.
Challenges in Vancouver, as it relates to reaching targets of previous years and those things just are going to happen from time to time and we've got plans that we believe are going to allow us to to lift our game even in the bigger markets. So we're excited about the back half of the year I think.
We are confident that number one we're generating probably the best leads we've ever generated the history of the company.
They are going to be very productive as you think about the back half of the year by the way those leads cost less than they used to cost they're better leads we're now globally on a customer relationship management system, it's going to allow us to be more productive in.
Handling those leads and managing over time.
And so we feel really really good about the momentum as we enter the back half of the year tough second quarter, but.
I think we made some changes there that are positive for the long term benefit of our company and in our sales counselors.
Thanks, Ed appreciate that the.
The the cemetery recognized to revenue.
Was with certainly elevated benefited the quarter I suspect that might be a little bit more volatile in the back half could you. Please.
Discuss that a little bit.
Sure Scott I think first of all when you think about cemetery construction projects.
A higher proportion of them tend to occur in the back half of the year, particularly in the fourth quarter and a lot of just has to do with whether obviously a lot of work can get done in the summer months, when you think about certain markets.
And so a lot of the completions will occur thats. The case, we expect it to be the case last year, we had an unusual amount hit in the third quarter and so I just kind of highlighted for you guys. We don't believe we will see the same level of constructed revenue recognized in the third quarter. So we think our production will be great, but the GAAP revenues, probably will be closer to flat or slightly down.
But in the fourth quarter I think we will pick that back up so.
A lot of the reasons why we can recognize more revenue today is because weve invested in the cemetery projects I mean, we've now gone multiple years of significant development of great projects and so now there's more inventory on the ground to sell and we're selling into it and we can recognize it faster. So I think thats a little bit of what you're seeing in the first half of this year.
And.
So that should smooth it out a little bit as you think about having a full countries worth of of good.
Existing inventories so.
Okay. Thanks, and then one more if I could I'll leave the funeral side for others to ask but the cost savings initiatives that benefited the quarter could you touch upon that a little bit more and perhaps how that should affect the second half.
Yes, I think some of it I'd touched upon we've done a really good job of finding more efficient ways to generate leads.
Through digital leads that are that are cheaper than historical we've got significantly more leads in the quarter related to seminars, we've lowered the cost and the effectiveness of our direct mail programs. So a lot of things around.
Lead generation that have helped.
We also have seen.
From a from a customer facing cash cost perspective, we said initiatives both in the field and in the home office to reduce the what we call non customer facing.
Costs, So think of travel entertainment things of that nature, and we've seen successes to the level of.
20% to 30% type of reductions year over year.
So again I think what we're really doing as a company is to say look we're going to begin to invest in some new and exciting things that relates to digital strategy focusing on driving more customer behavior, let's find ways to fund.
These investments that we see coming.
Another thing I think you'll we'll talk a little bit more color that happened in the third quarter, but.
We purchased cemetery land Ross Cemetery land for the first time in a long time.
In some of our couple of our key markets.
That.
Again, we want to long term make sure that we have the right type of inventory to continue to sell and so you think about putting capital to work organically in some of these markets now even in some cemetery instances.
This is just really an effort to rally everybody around let's let's generate cash to invest in our future and continue to.
Lead the industry.
In a direction we want to go.
Okay. Thanks, it will be by balancing maybe some sales of cemeteries now that you mentioned that you're purchasing some land or is it existing opportunistic and one offs you think.
Yes, I think this the land that we purchased is really around the loan having a long term.
Print that works in some of these big markets. So think of the the outlays. The Houston's places like that where we have significant presence is big cemeteries lot of growth in those markets and just making sure that we've got to develop property to meet the needs of those consumers their wants and needs.
So I think these are kind of one off they're not big ones, but.
These are the types of things that and like I mentioned before kind of the digital strategy that that we're embarking upon from.
Generating leads to also just the customer experience.
Finding ways to fund those projects with.
Our hard earned dollars and making sure that our shareholders get the right returns.
Okay. Thanks, very much I'll turn it over.
Thanks Scott.
And from Bank of America, we have Joanna could you. Please go ahead.
Good morning, Thank you for thank you.
Yes, Hi, good morning can you hear me now.
Yesterday was China.
Great. Okay. So I guess on downs.
First on the quota on this segment that core cremation.
I should step down 170 basis points, so thats better than 200.
Let's talk about in Q1.
So I guess, maybe can you just.
Sorry to ask the items you were talking about the last two quarters in terms of the impact of the acquisitions and also.
Your own actions they were impacting the last two quarters in terms of what was the magnitude of the impact.
This quarter.
Sure James So I think last quarter, we talked about this and we saw a 200 basis point shift.
In my comments were around that we believe 30 to 40 basis points of that shift was associated with some.
The changes we made in selected markets I think we had 30 markets, where we made changes to I'd say the starting at.
Pricing as it relates to the cremation consumers in those markets.
We saw volume lifts in those markets associated with it.
Another 30 to 40 basis points. We believed was the mix of acquisitions as I think I mentioned before the average cremation rate in the acquisitions over the last two years was probably about 65% higher than than our traditional so those two things we thought combined and I'd tell you that that's proving out believed to be.
Accurate what we're seeing now is for instance, even within the quarter. Joanna you sold 170 basis points in June it was significantly lower than that and Thats. Just anniversary compares we we made these changes throughout the year last year. So you are seeing some.
Year over year overlap now as it relates to that pricing being in place in those markets and therefore, you've gotten your initial lift in you've maintained so we still believe that the cremation mix in our business is probably changing about 100 to 150 basis points give or take a quarter and the additional.
Volume or I should say mix its been driven is incremental volume where were getting customers. We weren't getting so that's why even though the mix changes there that we're pretty excited about it we think it's adding to profitability versus a detracting from it.
Right. So I'm sorry, so are you, saying that theres still.
Thank you anniversary the impact of the changes you are making that 30 markets or are you still.
No I never seen it fully.
I think I think you'd probably see it fully sometime in the fourth quarter I think there's probably still a shift again shifting more to normalize trends in the third quarter, but you still got some anniversary pricing that we did in the fourth quarter of 2018 that will impact that and again I'm not.
Perfectly familiar with the cadence of our acquisitions, but but again I think you'll see it normalize back within that 100 to 150 basis point range, probably at the top of that in the third quarter and and again, maybe to a midpoint by the time you get to the fourth quarter that would be an expectation.
Alright Thats helpful.
And I guess.
Staying on CNO segments, so the margins to decline year over year.
And then I guess said the decline was that.
Yes in Q1.
And to your point does this revenue is comparable revenue was actually up nicely. So what kind of revenue growth that you need to keep margins flat in that segment.
I mean, we we if you look at the second quarter were down I think 30 basis points on the margin percentage.
And we did it with I think a 1% revenue growth I think if you can get in the closer to 1.5%.
Than you can begin to grow your revenues on that side of the business. So if you think about the back half of the year should extent weaken.
Flatten out the average and continued to grow volumes, which again I think we feel like that's something that can be achieved then you'll see.
Margin growth in the back half of the year.
Alright, and then I'm done if I had my.
Follow up on the on the statements you're making in terms of your investments in in a digital strategy. So can you flush out a little bit more in terms of what are you doing different or is just a continuation of what we heard it before in terms of you know search engine optimization, improving or a website or anything new or anything you know you're accelerating thank you.
We're really.
Digital strategy is going to be a longer term transformation, that's probably right.
Multiple multiple years and will will ultimately also be.
About the customer experience and how we handle.
The entire process from.
Onboarding customer until we've received the feedback from that customer, but what I'm talking about now that we're spending some time and money on was.
The the updated web sites and the effect of that because we've seen for instance in the first half of the year, we've grown about 33%.
Over 61 million sessions on our website.
We also have had a acute focus on our online reputation.
And done some things to again.
No solicit feedback from our customers.
Steve those ratings.
We're driving those scores up which again drives.
More traffic and more.
Search engine.
Results for Us when you think about on a paid basis and even again on a non paid basis. So it's things like that that are we believe going to generate more leads.
More effectively.
Build our reputation.
And so allow us to compete more effectively and and.
Obviously against our competitors, which.
I don't have the ability to do some of these things. So that's really what we're talking about and today I think we'll do more as it relates to.
Customer segments, and being able to find ways to.
Engage with consumers and drive more customers to our business as time goes on and again.
It will continue when you think about the way that we interact and service our customers.
It's just going to be continued stream of investment that I think is going to again.
Put further gap and our performance versus.
With the rest of the industry can do.
So over time will you be able to kind of pinpoint too.
Any changes in market share in Brazil, as a result of these or I guess you quoted some stats in terms of.
Visits on your website, but any anything you will.
Track over time and put back to work in terms of how that's it.
Back to your your market share.
Okay. That's surely the goal Joanne I think you know, it's really early days, but I think we we talked a little bit about this customer segmentation study that we've done and we've we've completed that we've had multiple groups.
Study this.
Looking at different ways that we can take this information.
Use it to our advantage to to service customers better and focus on the things that we can do to drive future behavior, and we mentioned a couple of things that I think are secrets to our industry, but we believe.
Based upon our study that.
Theres, a higher products that people that want to celebrate and not more and we think theres a higher preponderance of people that want to more simplified versus complicated so taking those learnings and saying how can we better communicate provide information transparency to the consumer.
Where they view us as the place to go when you want to celebrate they view as the place to go.
Because it's simple and.
Thats easily said hard to do and I think now we're trying to do is articulate that strategy develop ways to.
To engage the consumer and to the extent, we can do that.
I believe that's going to drive market share for us in differential ways. We continue to compete like we are.
I still believe pre need is a huge driver of future market share and we're the best at it and we're going to continue to get better.
So think of that combined with what I, just said and as you get excited about what the future can hold for us.
Thank you I'll go back to the queue.
Thanks.
From credit Suisse, we have A. J Rice. Please go ahead.
Thanks, Hi, everybody a couple of questions if I could.
On the.
Thomas around the perpetual care Trust fund results and obviously the year to year.
Headwind that presented this year.
For this quarter I know part of what's been going on there as you've been restructuring some of the portfolio for your total return strategy is that pretty much played out and.
And maybe is this level, what we're likely to see or do you think this was unusually soft relative to what you'd expect going forward.
I think more of the latter AJ again, it was volatile in the first quarter in a positive direction as volatile as the second quarter in a negative direction a lot of that has to do with the timing of the capital gains that are distributed like I talked about in the remarks. The this this relates to the trust funds that are still in the old type portfolios with fixed income oriented asset allocation as opposed to the total return.
Portfolios, which are about it's all returns probably up to 40, 45% of the of the total assets. It's not played out yet we hope to have some larger states come online.
Next year or the following year that would maybe put us about 50%, but on the portfolio that is the old asset allocation again the way. It works under the state laws is the portfolio manager can decide to trigger capital gains and from that then gets distributed to US and is then earnings and cash flows to us from from those examples. So the more you got a total return the more you reduced the old fixed income portfolio and the less volatile it will be but all else being equal.
It's generally about 70 $75 million of earnings for us each year coming out of the perpetual care funds and they're somewhere between 10 or $20 million that could be capital gains. So there is that much volatility.
Through it and you saw that going opposite directions, and Q1 and Q2, but normalized for the entire first half versus prior year.
Good.
Right and then the same thing about the.
Agency fees I guess that was a drag this quarter. It had been positive in the first quarter I think that first quarter half you're up about 3% is that.
Just normal ebb and flow in your mind or is anything going on that made it a drag in the.
Current quarter that will and what are you thinking about the back half there.
I think it will normalize in the back half I think that ebbs and flows I mean, sometimes you have.
Mix change between what is being sold in states that are selling predominately trust fund oriented.
Versus insurance contracts now as a general statement you know our insurance going into our backlogs RPF sales are somewhere around 70, 75% is a very general statement, but dependent on geographically, which states are selling watch and how the 90 day quarter goes it can ebb and flow and when it does ebb and flow like it did this quarter and we actually had less of a mix of insurance funded contracts that can to a less it to some extent, although it never really would be material I think in my mind could affect your general agency Rep revenues. So we really expect that to be.
Normal as you as you exceed as you've seen it in the back half of this year.
Okay any update on the Beacon initiative.
There really isn't that much of a of a of a change in facts that I've described to you before from last quarter just to refresh everybodys memory.
Fuel is coming first cemeteries come in second we had funeral up to about 75% of eligible contracts being sold in 75% of usage, that's not new information and then we pivoted our resources towards the cemetery segment, which again, it's a little bit more difficult because each property in a cemetery that needs to go into the system is different and unique but more importantly, there is a lot more vendors and a lot more merchandise to be able to put into the system as well.
As I described to you last quarter, we continue to test just a handful of cemeteries as we build the application that will continue and it's kind of it's going to be the same message till we get to 2020 and really start seeing some of the tests and results and go from there.
Okay, and just my last thing.
So this is just a conceptual question if we look at the earnings trajectory.
In the first half its been in the single digit range. If you blend the two quarters together.
And then the expectation is as you move into the.
Low double digit range in the back half of the year.
It sounds like a lot of that is.
It's just easier comps.
But there is a lot of other moving parts is there.
A handful of things or one or two things that you would point to specifically that give you confidence that.
As you can see that youve is that acceleration in that.
Return to double digit growth is.
Is within reach.
Yes, I think two things on the funeral side, because we believe the the comp volume.
My question is going to be better.
We feel a funeral revenues will surprise, a little bit to the upside combine that fit.
We've got Sci direct back on the on the track of growth.
To put those two things together with our cost initiatives, we think funeral profits.
Grow in both the third and the fourth quarter, that's going to be one significant driver cemetery sales, we feel really good about I mentioned that the third quarter from a GAAP perspective will be more of a challenge because of the completed construction, but when you combine it with the fourth quarter, we see cemetery driving a lot of that improvement. We also think.
You know there's.
General and administrative costs will go down you may recall last year's third quarter, we had a huge adjustment to our.
Pump accrual because the stock price went up so we think we've got a favorable comparison when you think about general and administrative expenses in the back half of the year and it would be even greater except for the fact that Eric already mentioned, our tax rate's, probably going to be about 500 basis points higher as it relates to last year, because we had a low tax rate. So even with that high tax rate 500 basis point increase we see earnings per share growing double digits in the back half of the year. So a lot firing on all cylinders as it relates to segments and unit costs and just little bit of a drag on tax.
Okay, alright, thanks, a lot.
Thank you Ed.
And once again, if you do have a question. Please press star one on your telephone keypad.
And from Wells Fargo Duncan Brown. Please go ahead.
Hey, good morning.
Wanted to go back to cremation to make sure I understand you right. So the two sort of drags would be M&A and with higher with assets that have higher commission rates than the broader portfolio.
And then the 30 markets that you targeted to sort of expand the commission focus and if I'm hearing you right.
Most of that Annualizes, we think by Q4 and then after that we get back to more normalized.
Cremation rate of 100 150.
That's our expectation Dunkin' correct.
And then.
Yes, Anil had I think and again it just as we get further in the year, you got less year over year change though.
Great. Thank you and I guess the fall into that is two sounds like what you did with US 30 markets was successful.
Are there another 30 that you're looking at that we might see a rollout on.
Or something.
I don't know Theres 30, but theres, probably more that will test.
These are markets, where we started off with markets, where we felt like we were losing some share, particularly around that I'd say starting at price point for permeation as you will recall Duncan years ago, we kind of.
Took a strategy that said, we're going to let our core funeral home service at a at a at a service level. This high service level at a price point that is a little bit higher and we can service. These customers do Sci direct and that's worked pretty well, but what we found is there's still a consumer that value is going to that funeral hall.
That has a price point that may be a little bit below where we were.
In certain of these markets and the test proved out we saw that by lowered a little bit of that price. We saw the volume come in and so we're constantly we've got a team that full time deals with this.
Looking at the what's the optimum pricing in some of these markets and sometimes it.
We can raise prices and sometimes it's going to lower to be more competitive. So I don't foresee a wave of changes that we saw happen.
The latter part of last year and the early part of this year.
In our future, but but I think there'll be some tinkering around that as we go forward.
Okay. That's helpful and then on the I think it was in your prepared remarks, Tom you talked about some regulatory issues on cemetery pre need and I may have misunderstood, but can you give us some color on that.
Yes, I think what I was generalizing in certain markets, but as an example, I think we talked about in Vancouver last time, two things are I'd say impacting confidence in that market I don't want to I don't want to tell you that directly correlates to our performance in Vancouver, but theres two things people ought to be aware of one is theres a foreign buyers tax has been implemented in Vancouver, and it's to deal with.
Affordability of housing in the Vancouver market. So with that done is the Chinese and Hong Kong buyers, they're coming in they were a big part of.
Our growth in the Vancouver market.
It's tougher number one it's more expensive and you may see less of a migration over the last couple of years.
And then I think the other piece of that.
Again kind of touches upon.
Regulatory is that theres been a real clamp down on money movements out of China and again. This is a population of Chinese descent.
And in our either immigrants or relatives of immigrants and that's again I think put a damper on confidence in the Vancouver market and so while we don't think its.
Dollar for dollar correlated.
It's just a fact that we are dealing with and then you have from time to time things like that that occur in different markets and that's what we meant by that kind of general term of regulatory.
Got you that's a last one from me you mentioned or its in the press release, you bought back some bonds in the open market.
Wonder if you could tell us, which which tranche and if that sort of signal to the new appetite. If you all to look at buying in the open market or if it's just opportunistic.
I think it's opportunistic but I wouldn't be surprised if that continues I told you in my remarks stuck in that.
I think we want to work ourselves down around 3.75 got up to the upper end of the range on purpose last year, because we had wonderful acquisitions to deploy capital and use a lot of our revolver to do it.
Those were our 2027 notes, which carried a coupon at 7.5% so little bit opportunistic as well in terms of.
Bringing that higher interest rate down by taking those particular tranche is out but ultimately it's a value proposition and you look at where everything is trading at as you know, so well and try to pick off in the open market the ones with the best value for us.
Great. Thank you.
Okay.
And no further questions at this time, we'll now turn it back to Sci management for closing remarks.
Thank you everyone for being on the call today, we'll talk to you on our third quarter release in late October .
Im very weak.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.
Yeah.