Aug 7, 2008
Executives
Debbie Young - Director of IR Thomas L. Ryan - President and CEO Eric D.
Tanzberger - Sr. VP, CFO and Treasurer
Analysts
John Ransom - Raymond James Mike Scarangella - Merrill Lynch Clinton Fendley - Davenport & Company Llc
Operator
Good day ladies and gentlemen and welcome to the Quarter Two 2008 Service Corporation International Earnings Conference Call. My name is Robin and I will be your coordinator for today.
At this time, all participants are in a listen-only mode and we will be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you.
I would now like to turn the presentation over to your host for today's call SCI management. Please proceed.
Debbie Young - Director of Investor Relations
Hi good morning. This is Debbie Young, Director of Investor Relations.
Thanks for joining us today as we discuss our second quarter results. First of all I want to bring your attention that during the opening remarks today Tom and Eric will refer to a couple of slides that have been posted on our website.
So you might take a moment now to go access them while I read to you our cautionary statements. Our website is www.sci-corp.com.
During our call today, we will make statements that are not historical facts and are forward-looking. These statements are based on assumptions that we believe are reasonable.
However, there are many important factors that could cause our actual results in the future to differ materially from these forward-looking statements. For more information related to these statements and other important risk factors, please review our periodic filings with the SEC that are available on our website.
In addition, during the call today we may use the terms normalized EPS and normalized operating cash flow. These are non-GAAP financial terms.
Please see our press release and 8-K that were issued where we have provided detailed reconciliation's for each of these measures to the appropriate GAAP term. And again for those slides, supporting materials, the website is sci-corp.com.
With that we will begin with remarks from President and CEO, Tom Ryan.
Thomas L. Ryan - President and Chief Executive Officer
Thanks, Debbie and thanks everybody for being on the call today. On my comments today, I am really going to touch on four topics.
First of all, I am going to give an overview of the quarter on the funeral operations and the cemetery operating highlights. In addition to that I am going to address certain recurring concerns that have been raised by shareholders regarding economic sensitivity, financial market exposures, and lastly commodity pricing pressures within our business.
The third item I will touch upon is to provide an outlook for the reminder of 2008 and lastly I would like to touch upon our use of excess cash and the proposed Stewart transaction that everybody knows about. So, starting off, we will touch upon some highlights for the quarter.
For the quarter, our normalized earnings per share were $0.14 versus the $0.11 in the prior year. We obviously are very pleased with those results.
It's a solid quarter if you think about in a very difficult economic environment. The primary reasons we were able to accomplish the results we did were the continued strong revenue for funeral service that we are enjoying today and continue to enjoy throughout the year.
Secondarily, we are enjoying the Alderwoods transaction synergies that were realized... were truly realized and on time for that matter.
And lastly, we are seeing very positive things in our sales production growth despite again difficult economic times. So, I want to first of all thank each and every one of our 20,000 employees for the tremendous efforts they put forth not only in this quarter, but also over the last few years.
Now, turning specifically to our funeral operations. Our revenues for the quarter on the funeral side were very strong, they were up 2.5% on a comparable basis.
These are generally in line with our expectations as we continue to see our strong average revenue per case somewhat offset by the continuation of soft volumes that we have been experiencing within our relevant markets. Our overall comparable average revenue per case was up $212, or 4.4% for the quarter.
Now I would like to steer you towards the slides that we mentioned. We have the slide on the website that's titled Comparable Funeral Sales Averages and there is four graphs and then I guess some data at the bottom of the page.
First of all, I want to turn your attention to the green bar on the graph, which shows a steady sequential growth in our true atneed average. So, as you can see, quarter-over-quarter that thing continues to grow.
The average towards the second quarter of 2008 as compared to 2007 is up 5.6% and now is about just over $5,200. This green bar represents 70% of our funeral revenue stream.
So this is the preponderance of it. Historically, as you can see from the chart as well, we experienced more sequential growth in the back half of the year.
And this is because typically our annual pricing occurs in the third and fourth quarter as it relates to inflationary pricing within the market. As we anticipated and have talked about over the last few quarters, we continue to see no material evidence of a consumer spend down because of the economic conditions that are out there today.
Now we would point you to the red bar on the graph. You can see here this shows the matured preneed contracts that turned atneed in the quarter and therefore recognized into the revenue stream.
The average on this bar is up 2.2% over the prior year quarter to approximately $4,800 in the second quarter of 2008. This represents the other 30% of the revenue stream that currently run through funeral operations.
Half of this or 15% is trust funded contracts and half of this, the other 15% is insurance funded contracts. Sequentially, notice the nice growth trajectory entering in the fourth quarter of 2007 followed by a slight downturn in the first two quarters of 2008.
The insurance funded contracts were able to maintain approximately their year-end average at this 15% of our business running through funeral is not subject to market risks. The trust-funded maturities were lower by about 4% to 5% in the first half of the year somewhat mirroring our trust performance as you would expect.
Because of the investment allocation and the diversification and Eric will get more into this later, our negative trust returns for the quarter as you can see from the chart were down about 4% compared to a 12% loss in the S&P 500 index. So, I guess the moral of the story from this slide and as it relates to funeral averages is while negative trust returns have an impact on our average, as expected, it is immaterial to the overall average as it pertains to only 15% of our revenue stream.
And it is invested in a prudent asset allocation in a diversified manner. Now on to the comparable funeral volume.
We saw comparable volumes down 2.6%, or just over 1,800 calls for the quarter. Based on our analysis, we believe that our relevant markets were down around 1% for the quarter.
The number of contracts under a $1,000 were down almost 1,000 calls. Again remember, this is low price cremation business, which we have strategically exited in certain markets.
Most of these 1,000 contracts to be isolated to a few markets, in particular we see heavy concentrations in Seattle and San Diego and predominately relates to legacy Alderwoods locations where strategic pricing were put into place in 2007. Overall, volumes were strong in March and April as we experienced a somewhat more normal flu season, but again started to tail off in May and June and in July they also apparently are coming in little weak.
Our funeral profits for the quarter were relatively flat on an $8.8 million funeral revenue growth, which reduced the gross margin percentage by 50 basis points to 20.2%. This happened as we experienced higher sales and marketing costs of about $3.4 million and this was associated with our 20% preneed funeral production growth.
While this is the short-term negative to margins we believe it's a very positive for the future market share growth over the mid and long-term period that we will experience through 2009 and 2012 and beyond. This trend should continue as we grow our preneed backlog in the future.
Secondarily, another thing that impacted funeral profits were higher energy costs such as utility, gasoline, and natural gas. These increased $1.8 million for second quarter in the funeral segment and again we believe this should give better comparably as the year goes on.
Keep in mind, energy costs began to rise in the back half of 2007 and therefore I think on a comparable basis this should get better. In the face of a very difficult retail environment.
We are very pleased to report an over $20 million and an over 20% increase in our preneed funeral production. As we discussed in the May call, this is due to a number of items.
Number one, increased number of sales count versus sales managers. Secondarily, we have seen increased productivity to enhance training and development initiatives, and lastly as we talked about...
we've made a lot of investment in our sales infrastructure that had a longer run rate if you will for preneed funeral and now we are really beginning to see that pay dividend. Now, I would like to turn you back to our comparable funeral average slide.
I want you to take a look at the blue bar. The blue bar represents business that we are riding today and deferring into our preneed backlog.
And as you can see over the last four quarters that is averaged in excess of $5,500 and when you compare that down below to the red bar where you are seeing maturing preneed contracts flowing through the revenue stream at $4,800 today. What that tells us is we have accumulated growth overtime for the preneed production that will roll through our revenue stream in the future.
This chart would tell you we believe that is going to be very, very strong. You can see why that we're rolling the preneed backlog at a much higher average and therefore ought to have a very positive impact on the black graph as you can see the total funeral average that runs through again our profit and loss statement.
So, we feel very positive about preneed. We are riding good business at high averages and I think it bodes well for future margins.
Now moving onto cemetery operations. Our comparable cemetery revenues increased $6.3 million, or 3.5%.
As we experienced increased sales production of about 1.6% overall and 2.6% specifically for property sales. We also saw increased recognition rates of 93.4% in this quarter versus 90.4% in the prior year quarter, as higher levels of constructed inventory are sold.
Keep in mind property doesn't get recognized until it's built. So, again the capital investments we've made overtime, we now have more inventory that's available for sale and therefore available for revenue recognition.
These two positives were partially offset by a lower eternal care trust fund income because of the lack of capital gains that are allowed to be recognized in certain states that happened in the prior year, it didn't happened in this year. We expect that higher completed construction levels in the back after 2008 and are very pleased with the sales production momentum that we've created in the first half of the year, especially considering the economic environment we are operating.
This is being driven by more of the right inventory, increasing number and productivity of our sales professionals. Cemetery profits were up 2.9 million for the quarter, 9%, and the revenue increase was partially offset by, number one, an anticipated increase in merchandise cost of approximately $2 million and secondarily increased selling cost of about $2.6 million as the increase in fixed cost associated with more sales counselors resulted in only a modest increase in sales production levels to this point.
And lastly, a rise in energy-related cost of approximately $1 million was a negative impact on our cemetery model. Now I'd like to move to the specific concerns that have been raised by shareholders as it relates to our industry and maybe more specifically SCI.
The first concern that's been raised is that our revenues are going to be impacted by economically sensitive consumer. Legitimate question.
First of all, how I'd like to address this, if again you go back to our comparable funeral sales average chart, looking at the green line, our funeral atneed average continues to grow on a sequential basis and on a year-over-year basis. In year-over-year that's up 5.6%.
We told you that history has shown us that people do not spend down any material way through difficult economic times and I think that is proving out as the numbers so far. Secondarily, as it relates to revenues being impacted by economically sensitive consumer, the cemetery sales production continues to grow, it's up 1.6% for the quarter and property sales which typically get recognized currently upon sale and are not required to be trusted grew even more at 2.6%.
And lastly on the preneed funeral side, we saw preneed funeral production grow 20% given that was against a difficult Q2 '07. But again very strong growth in that category.
So, in conclusion, while there surely is some impact from the economy, the impact we believe is generally immaterial and is being overcome by operational execution. The second concern raised by shareholders is revenues impacting...
being impacted due to trust funds from negative equity market returns. The first thing I'd say is if you look again at the slide, our year-to-date performance for the trust funds are down on all three categories of trust year-to-date about 4.4% versus the S&P 500 being down almost 12%, has a diversified asset allocation, huge equity market volatility.
Secondarily, industry accounting did take the revenue recognition is generally associated with delivery of product or services. Therefore, trust funds accumulate returns over several years.
And lastly, of the current funeral revenue stream, only 15% of the revenues are exposed to financial market returns in any given period. Therefore, in conclusion, bear like financial markets surely have some impact to the overall performance.
As we have always said, the diversification in the long-term nature of our portfolios mutes this impact on our financial results during volatile periods in the marketplace. The last concern raised by shareholders and again a good one, higher commodity prices have negative impact on our margins.
While we surely have experienced higher energy costs like many other businesses, it's important to keep this financial impact in perspective. For all of 2008, the impact should not exceed $0.02 per share.
Additionally, we are reflecting this increased costs in our annual inflationary retail pricing. Furthermore, we're in the process of implementing new technologies in our location to better manage energy usage across our network.
The second commodity impact is higher copper and other raw materials, which have resulted in increased costs associated with some of our cemetery products. Again, to put this in perspective, this should have an impact of something less than $0.02 per share for the entire year.
This too will be reflected in our retail inflationary pricing and we will diligently work to manage this cost effectively in future. For the remainder of 2008, and what should you look for?
We continue to be very comfortable with all the guidance we provided for 2008. We would tell you to look for continued average revenue per case growth on the funeral side of the equation, which will be driven by the true atneed average and insurance funded contracts going atneed from the preneed backlog.
We should experience slight headwinds from trust funded contracts that are going atneed, but remember, only 15% of our case volume is impacted by this. Preneed going, we also would tell you that to look for further labor efficiencies in both the funeral and cemetery segments particularly in the fourth quarter of this year.
Energy cemetery merchandise and higher selling cost due to preneed funeral and cemetery production growth should continue to have a slightly negative impact on margins and earnings per share, but not much more than a penny to two pennies for the quarter. We also would expect to see continued momentum on preneed funeral sales production with strong year-over-year growth.
Preneed cemetery production, we also would expect to see modest growth in that segment as enhanced sales efforts are somewhat negated by difficult economy. Keep in mind that the third quarter from a seasonal perspective tends to be the weakest performing quarter for the year.
As we implement initiatives throughout the back half of the year to combat higher commodity costs we are experiencing, we would expect the preponderance of the initiatives to be in place by the fourth quarter of this year. Now I would like to briefly touch upon our use of capital and specifically the Stewart transaction.
Excess cash generated we would expect to be utilized in our proposed transaction with Stewart Enterprises. We continue to believe that the timing is right for combination of our two businesses and that the offer we've made is very compelling.
We believe it is in the best interest of both sets of shareholders and would create tremendous opportunities to both sets of our employees. An independent committee of Stewart's Board is evaluating our proposal and we have not had access to any other information at this time.
While we believe the Stewart transaction as proposed is the best alternative to create shareholder value, in the event such a transaction were not to take place, we believe the best alternative is the return of cash to our shareholders through the continued use of our share repurchase program. That concludes my prepared comments and I will now turn the call over to Eric Tanzberger, our Senior Vice President and Chief Financial Officer.
Eric D. Tanzberger - Senior Vice President, Chief Financial Officer and Treasurer
Good morning. I am going to really talk about three general areas this morning on the call.
The first one relates to our cash flows for the quarter and I will cover capital expenditures as well within that discussion. Tom, as you just heard, covered most of the highlights from the Q2 operating performance.
But I am going to discuss one more income statement item, which is our effective tax rate for the quarter and with that I will also touch on cash taxes for the mid-year report as well as the rest of the year. And of course, I'm going to give a little bit more detail as it relates to our trust balances and specifically our performance for the quarter.
So, let's start with cash flows. First, our cash balance at June 30 was about $105 million as you see on our balance sheet.
Our cash balance as we speak today is about $115 million. So, the balance appears to have grown only modestly since our reported $100 million cash balance on our last earnings call in early May, which you have to take into account that the growth was offset by $42 million spent on share repurchases subsequent to this May call.
So, we actually had increases in growth in our cash flows, but our cash balance is affected by spending about this $42 million for the share repurchases. For the full-year of 2008 to date, we have now repurchased a total number of 7 million shares spending just under $80 million to buy these shares.
Today, we currently have about $66 million left on our current share repurchase authorization from our Board. However, as Tom mentioned, we plan to build our cash balance for potential Stewart transaction for now.
The share repurchases would be our first alternative outside of a possible Stewart transaction. Now looking at our cash flows, our cash flow continues to be solid in the second quarter just like our recent quarters.
From a year-to-date perspective, so looking at it mid year, we have to back out three items to really look at normalized cash flows. First back out a $90 million federal tax payment that we made in March of 2008 that we described on our May conference call, also adjust for $16 million less of Alderwoods transition cost and also adjust for $11 million that was paid for the premium to extinguish debt in 2007.
So, backing those three items out, our cash flows were about $210 million in the first half of 2008 versus $222 million in the first half of 2007. However, you have to remember that in 2007 amount of $222 million that contained over $17 million of cash flows from discontinued operations, which specifically related to the Mayflower Insurance operations.
So, after taking into account the Mayflower cash flows, our cash flow generated by our continuing operation was slightly higher in 2007 levels thought mid-year and in line with our internal expectations. Now a few general comments I'd like to make on our expectations for the back half of 2008 as it relates to cash flows.
We do have some pressures on our cash flows from a macro economic perspective primarily associated with energy costs and cemetery merchandise costs, Tom walked you through the details of that. We also continue our investments in growing our businesses organically to higher preneed funeral and cemetery sales in this investment, which it will be funded from our working capital.
We also believe that our cash taxes will be less than we originally anticipate, and I will describe that shortly. From a capital expenditure standpoint, our total CapEx for the quarter was up $39 million in total, this consists of $3.5 million in growth capital expenditures, $23 million in what we refer to as maintenance capital expenditures and $12.5 million of cemetery development CapEx for cemetery construction projects.
Our year-to-date CapEx is about $68 million, which is detailed in the press release that we issued last night. Now shifting to taxes.
From an income statement perspective and our normalized earnings per share of $0.14 for the quarter, we had an effective tax rate of about 35% for the second quarter. This effective tax rate was below our annual guidance of 38% because we are required by GAAP include certain discrete tax items in the quarterly period as a benefit rather than blending those items to the annual effective tax rate.
The discrete item in the second quarter, which reduced our effective tax rate specifically related to an adjustment to our tax accrual after filing our 2007 Canadian tax return, which was filed during the second quarter. Looking forward, our current models project an effective tax rate of 37% to 39% for the third and fourth quarter of 2008.
This should result in an overall 2008 full-year effective tax of 36% to 38%, so just slightly below the 38% original guidance that we gave you. I will also mention to you though that this full-year effective tax rate will be positively or negatively affected by the third quarter filing of our 2007 federal tax return.
And we hope possibly further effective positively by tax planning initiatives that we currently have underway. Now as I mentioned just a little color on cash taxes.
In the first quarter of 2008, we paid $90 million of US federal cash taxes. This was primarily related to some of the dispositions we completed in 2007.
As I mentioned, we are currently preparing the filing of our US federal tax return next month and we will be truing up our 2007 tax accruals accordingly. We also are currently in the process of applying the bonus depreciation expense provisions, which have been provided by the 2008 economic stimulus package to our 2008 estimates as well.
So with these two facts that I just mentioned, we expect along with other tax planning initiatives that we have underway to continue to put downward pressure on the US federal cash taxes that we will have to pay in 2008. From a state and foreign tax perspective, we have paid $12 million in cash taxes during the first half of this year.
We expect to pay another $10 million to $20 million more in state and foreign cash taxes in the second half of 2008. Now I would like to shift to the third topic, which is related to our trust funds.
As we all know in the second quarter, the stock and bond markets experienced negative performance doing another quarter of market uncertainty. However, we believe our trust funds perform relatively well versus the overall market with the combined positive return in the second quarter of up 0.4%.
The year-to-date return is still down 4.4% as Tom mentioned in his comments. Our preneed funeral and preneed cemetery, MST trust funds had very strong performance in the second quarter versus the overall market and both gained approximately 1.3% in the second quarter.
Our cemetery eternal care trust fund is more oriented towards fixed income and other yield oriented securities and they had a return more in line with market conditions, which was a negative return of about 1.7% in the second quarter. We believe the overall positive second quarter trust fund performance was primarily a result of the diversification in the portfolios, which I am going to get into more in a second.
Some highlights for the second quarter in terms of the trust performance include strong performance from large cap and small cap growth managers for domestic equities within our portfolio. Both our inflation protected securities and our diversified pool of commodity exposure both added value during the quarter as well.
And our convertible securities provide a good downside protection during the volatile quarter. Most importantly, in terms of the trust fund earnings that goes through our income statement, we have not seen any material degradation in these amounts.
Now remember, these are earnings that accumulate over several years within our trust funds and are only recognized in our income statement once the services are performed or the underlying merchandises deliver. And this is usually several years after the original funds from the customer are initially invested.
We do believe we have significant disclosures in our Form 10-Q related to the underlying investments within our trust funds. As Tom did earlier, I also today want to point you to the slides that are on our website and specifically slide number three that we have placed on our website, which contains more detailed information on these trust investments.
This slide details our preneed funeral, preneed cemetery, and our eternal care trust assets combined by asset class as you can see the equity and fixed income and other and by investment styles within the asset classes. So, you can see the growth, the value, the small cap, et cetera.
We also detail on this slide a number of different institutional investment managers that manage the trust funds by asset class. We also have three major trustees that we employ at SCI, which essentially hire these institutional investment managers for SCI.
I hope this slide details again and reiterates to you the significant diversification that we have within these trust funds. I also hope that you also take away the manner in which they are professionally managed.
In conclusion, we again believe we have delivered solid financial results to the second quarter in a difficult economic environment. As Tom mentioned earlier, we continued to be comfortable with our 2008 annual guidance that we issued in February of this year.
Couple of additional comments that I will make to you on our guidance. First, as we continue to generate for investment purposes such as the possible transaction, Stewart transaction, or our share repurchase program.
We are prudently managing our maintenance capital expenditures. Because of this I believe our total capital expenditures will end the year at the low-end of our annual guidance range, which was $165 million to $195 million in total CapEx.
Secondly, you may recall that our annual guidance range was $380 million to $410 million for operating cash flows. After taken into account the $90 million US federal cash payment that we paid in March of '08, I believe we will end 2008 on the high-end of this range, which is primarily because of the lower cash taxes than we originally expected to pay in 2008 as I mentioned earlier.
So, I believe that concludes my comments and Tom's comment. Now Robin I think we will turn the call over to questions.
Question and Answer
Operator
Ladies and gentlemen [Operator Instructions] Your first question comes from John Ransom from Raymond James. Please proceed.
John Ransom - Raymond James
Hi, good morning. Eric, you can talk faster than I can type.
Could you just... the cash taxes, what is the total number when you...
I know you have first year or second year of foreign and state and federal, but can you just give me some information of what you think your total tax payments are going to be this year versus what you thought they would be?
Eric D. Tanzberger - Senior Vice President, Chief Financial Officer and Treasurer
Yeah. I think for the most part, John, we really haven't made a federal cash tax payment other than the $90 million that I described to you.
From a state and foreign perspective, we spend right around $12 million to $15 million first half of the year, we are... we don't know exactly where we are going to end up on federal for the reasons that I have mentioned in my comments.
It could be possible that we don't have any other federal cash tax payments, but unlikely we will have some in the back half of the year, from a state and foreign perspective, I think we will have $10 million to $20 million cash taxes that we have paid in the back half of the year.
John Ransom - Raymond James
And you paid about $12 million... so basically you could have as much as...
as low as $25 million in cash taxes this year roughly, if you had no federal taxes and you doubled what you paid in the first half so basically $25 million or so?
Eric D. Tanzberger - Senior Vice President, Chief Financial Officer and Treasurer
Yeah, that's possible, but I think it will be higher than that... I really do...
I think it will be in the $30 million to $40 million range area in all likelihood John.
John Ransom - Raymond James
The $30 million to $40 in cash taxes, that was the number I was looking for. Okay thank you.
I guess some other... just a couple of other questions, looking at the CDC information, they were suggesting a 5% growth in volumes this quarter and you guys talked about a 1% down, do you have any...
how to explain that disparity and what the CDC was showing and where your numbers were shown?
Thomas L. Ryan - President and Chief Executive Officer
Yes, I think we always CSD weekly data is very, very difficult to provide a lot of insight to begin. For those of you who haven't practice before this is a voluntary reporting mechanism, what tends to happen is...
if someone goes on the vacation in Los Angles, there is no death in Los Angles for two weeks and then there is a load of them when they come in on the third week. So it's very unrealizable data.
Now CDC does put out final statistics, it tends to take about two years. I think the latest data 2006 that we have seen.
So, I think that's very specific data that we use and monitor against our specific markets and if you go back to those years 2005, 2006, we were tracking right at what the CDC data would tell you. So, we don't use the weekly data we obviously look at it, but it is just...
it's not for reliable information and I would say you are getting from our comments, we saw strong March and April numbers, we saw begin to tail off advantage and June really was a kind of a month where we saw the comparable number of deaths with in our market fall off. So, there is nothing more specific than that and ...
so I don't think you can correlate necessarily to the CDC data.
John Ransom - Raymond James
Okay, and neither just kind of go into funeral preneed production, which is certainly been higher than we would have anticipated, a couple of questions there. First of all how much is that costing you, is that the right word, this year in terms of working capital build relative to your cash flows?
Eric D. Tanzberger - Senior Vice President, Chief Financial Officer and Treasurer
I think generally we believe, John, that it's relatively neutral. If you think about it, we wrote about $20 million more for the quarter.
It cost us about $3 million more for the quarter as it relates to preneed funeral. So, that's about a 15% selling cost.
If you look at our insurance products, the G&A revenue that we tend to get approximates 15% to 16% to 18% and on the trust side on average, if you look at our backlog the assets are about 85% of the deferred revenues. That tells you that you tend to average about a 15% retainage state-by-state law.
So, I think I would tell you that generally the cash flows on the funeral side are somewhat cash flow neutral. It might be slightly negative, but again I think as it relates to the selling cost in particularly that's how we would look at it.
John Ransom - Raymond James
So, I mean just to put that in other way, some of your drag on the funeral side, on the trust side will be offset by payments from the insurance side, is that right?
Thomas L. Ryan - President and Chief Executive Officer
That's right and there is a little... obviously there is timing delays there.
Also I think as you think about working capital, it's working capital in and out of trust is another thing we have to manage. Also recollect from our consumers, we've put money is in the trust and take money out of trust based upon doubts of new contract sales.
So, that can be a working capital onus you have to consider quarter-to-quarter that I think Eric has touched upon. And as it relates to the pure selling cost generated and be negated by retainage, G&A revenues, and on the funeral side for sure that's what we are seeing.
On the cemetery side, I would tell you that it may have been slightly negative for the quarter because we built up a fixed cost as it relates to people and we haven't seen the growth in production that we anticipated. Some of that we think is economy driven and also it's development of our folks as we are hiring new counselors, it takes a lot for those people to get production.
So, it's an investment we want to make and we think it's a smart thing to do for the future and so that had a slightly negative cash impact I would say, but generally these selling costs are offset by retainage in G&A revenue.
John Ransom - Raymond James
Okay. And then lastly just on Stewart and I will drop back and get into the queue.
We calculated... I am not asking you to sum up on our numbers, but ballpark, if you are going to pay a $11 a share for Stewart versus paying a $11 a share to buyback a bunch of SCI stock, I mean it's obviously out of the box a lot more accretive and you are buying a heck of a lot more cash flow if you are buying your own stock versus buying Stewart.
And what we did is we assumed roughly $80 million in synergies and a little over $100 million in additional interest expense and then looked at their existing free cash flow. So, you're paying...
you will be paying a pretty happy multiple out of the box of their free cash flow even with $80 million in synergies. So, could you just help us understand maybe the longer-term, benefits of doing a transaction like that versus buying your own stock.
We're obviously out of the box, we are paying much more multiply free cash flow. Thanks.
Thomas L. Ryan - President and Chief Executive Officer
First of all John, if I'm going to evaluate your numbers I'd like it M&A to be, but in our reality...
John Ransom - Raymond James
Not I actually you know.
Thomas L. Ryan - President and Chief Executive Officer
I agree. I guess what I was telling you is this there is probably three things to think about.
Number one, Stewart transaction is again a company of a quality of Stewart size and Stewart properties that they have is not something that comes along everyday. Share repurchase, it is a great time to be in share repurchase, but again it's a strategy that we have deployed historically and we will continue to deploy in the future, we think it is a good idea particularly at these levels.
Second thing I'd say on your numbers is you have to understand the specific synergies and the timing of those synergies. And probably which you don't factor in is while we are going to take on we'd take on a lot of data that relates to the transaction or hope would be that very quickly we would deleverage that transaction and eliminate a lot of that interest right out of the gate with the combined free cash flows of both companies.
And I think the last thing I have to consider is that pro forma of Stewart at $11 is obviously north of $1.3 billion and $1.4 billion in total transaction value, and as you think about share repurchase and deploying $1.3 billion to $1.4 billion, albeit the share price very attractive, I don't think you can assume that you could buyback that many shares at current level. So, I think you have to consider all three of those things.
We think the most meaningful impact for the shareholders, for us, is Stewart transaction, but to your point, buying back our shares at these levels is very accretive, a very positive for our shareholders and again would be a strategy we would deploy if and when the Stewart transaction is over, or when that transaction didn't occur.
John Ransom - Raymond James
Thank you very much.
Operator
And your next question comes from Mike Scarangella from Merrill Lynch. Please proceed.
Mike Scarangella - Merrill Lynch
Hi, good morning guys. I just have one quick question on the very helpful charts you provided on the funeral averages.
So obviously your preneed average is quite a bit higher than your atneed. I am wondering if that was always the case I guess it's my assumption is I think that the industry practice was that preneed sales people tended to discount a little bit to encourage a sale and I feel like you guys have talked about having that issue in the past.
I am just wondering if you now fixed that or what's driving that big premium now on preneed averages?
Thomas L. Ryan - President and Chief Executive Officer
I think there is two…a couple of things to consider. One is to answer your question, we are much better at selling here today than we ever were.
We probably discount it less from an industry perspective than we ever did because if you go back in time, there probably was a practice of doing that. Secondarily, you have to consider that some portion of the backlog that we have today was acquired during acquisition and therefore those trust funds were sometimes maybe not all there, sometimes not invested in the most prudent investment allocation and therefore didn't have the accompanying growth.
Also I think geography has a lot to do with this. If you look at a lot of the heavy preneed selling that went on, a lot of that were in geographies such as Florida where the average funeral tends to be lower than other parts of country and there you are seeing a much more I think dispersed preneed effort across many jurisdictions.
So, I think a lot of those would tend to tell you what they were doing a little bit better and I think specifically for SCI, we also would have to consider the advent of the Dignity package, the ease of use of those packages of bundling products and services together, the consumers find useful and again that allowed us, I think over the last few years to drive [ph] business at much higher levels. So, you raised a great point, Mike, I think when you take that...
those factors into consideration and then you think about accumulated growth over a number of years as those contracts come atneed, it does very well for the 30% of our business that today it's coming with the preneed backlog.
Mike Scarangella - Merrill Lynch
Okay. They are very impressive numbers there.
And then I just had a couple around the proposed Stewart transaction and I understand you are kind of insensitive time of that deal. So, you answer whatever you can, but I was wondering about three things, obviously we are trying to get our arms around what synergies might be?
I think someone just threw out a $80 million number and I think Alderwoods was around $65 million and I think Alderwoods was similar size to what Stewart is now. So, any comments around synergies?
Also your required asset sales... I don't if you have a sense as to what the FTC would say to you, but again bigger or smaller is similar to what you had to do with Alderwoods would be helpful?
And then last point you mentioned, you probably be able to delever kind of quickly…I guess maybe the question would be how quickly you think you get back to your current leverage after a deal with Stewart?
Thomas L. Ryan - President and Chief Executive Officer
Mike, that is a great question, let me answer for you after we announce some sort of deal that would be great time to talk about. I think again, those are things we clearly are in a position to talk about today.
I think, I mentioned, we will not had any further access to data. So again we would be very premature...
I think from the one piece that we can tell you, we would surely structure this I think from a financing perspective, we would like to structure very similarly to way we did Alderwoods, and look including permanent debt that allows us to maintain similar ratios that we have today and the rest of it to be prepayable and again the cash flows we generate are going to be contingent upon things you said, the synergies that are available on the transaction and the like. So they are now studying this offer and comparing this to other things that are gotten in the committee, we want to give them the time to evaluate that and we would expect sometime in the very near future, let them get back to us.
Mike Scarangella - Merrill Lynch
Okay. So it's not crazy that you use Alderwoods just kind of a proxy for some of these measures?
Thomas L. Ryan - President and Chief Executive Officer
I don' t think it's crazy, but I think again synergies can be different with every company and so I just caution you... without access to more specific information, it becomes little more difficult, but again if you think about how we structure the deal, it probably would be very similar to that.
Mike Scarangella - Merrill Lynch
Good. I understand.
Thanks for the help and good luck.
Operator
And your next question comes from Clint Fendley of Davenport. Please proceed.
Clinton Fendley - Davenport & Company Llc
Good morning guys. Nice quarter here on a tough environment.
I wondered if... if you could comment, obviously very good strong results in the preneed funeral side, still positive on the cemetery side, but a bit of a discrepancy between the results there, if you could provide some color as to why?
Thomas L. Ryan - President and Chief Executive Officer
Sure, I think, first of all, it goes back to the comparable nature and we are always comparing back to the prior year quarter, and if you go back and look, I think it was 18 months ago we began to talk about investing in the sales infrastructure of the company, and I guess re-investing within that space. If you look historically over the last few years, our cemetery sales have actually held up very well.
We have done pretty good traditionally, we've probably... I think for the most part...
we are performing pretty well and if you could look at 2007, we saw some growth there, and on the funeral side, you really saw, slight dip [ph], we really were impacted more I think from the Alderwoods transaction and the change over of sales force and a lot of things we've done historically. So, I would first say that your preneed funeral production this quarter is comparing to a much weaker 2007 on the funeral side than it is again from the cemetery side.
So, a lot of the percentage growth should be explained in that way. And I think the other thing and again Dan Garrison can speak a lot better to this than me, but when times are tough economically I think people begin to look at planning under the light, and I think on prearrange funeral side, again a lot like your will and stayed and things like that, you tend to get bucked up on those types of things.
Cemetery land is more of the purchase. I think it's a different type of sale and I think maybe that does see a little bit more of a negative impact from the eyes of the consumer.
But generally I think the preponderance of the reason is you've got an easier growth mechanism on the funeral side we're creating as an example what we call community service sales forces. So, as you think about selling within the funeral market, historically we may have sold within the funeral home themselves and now we are beginning to develop sales force that sell an entire market from multiple placing.
So they aren't tied to any one location, they aren't getting their leads necessarily from people walking through the doors. So, I think we are seeing opportunities to really grow that part of the business again against a more treacherous 2007.
Clinton Fendley - Davenport & Company Llc
Thanks, that's helpful. On the cemetery side you had I think on the last call indicated that there was a pretty good pipeline of activity that would occur in the second half of this year.
I mean is that still in the plan here?
Thomas L. Ryan - President and Chief Executive Officer
What you say on the funeral side or cemetery side?
Clinton Fendley - Davenport & Company Llc
I am sorry, on the cemetery side.
Thomas L. Ryan - President and Chief Executive Officer
I think two things on the cemetery side, we would continue to believe that we are going to execute there. I think what we were talking about in the back half of the year is this you will recall cemetery property gets recognized when we have 10% down and something destructive [ph] and there are a quite a few projects that are due to be constructed in the back half of the year and there weren't many in the front half, but I think the point of that was we are selling today into a project that aren't constructed and therefore those sales are being deferred.
And we will construct probably to the tune of $14 million, $15 million worth of inventory that will get recognized, in otherwords, as already been sold and will be recognized once it's finished construction. So, that's what we mean by I think a solid back half of the year.
Obviously, we continue to work very hard at development of our folks, and hiring good folks, and we hope to see some traction and get on the sales production side too that result in further growth.
Clinton Fendley - Davenport & Company Llc
Would you expect that to be spread fairly evenly between the third and fourth quarters and then --?
Thomas L. Ryan - President and Chief Executive Officer
I think it's probably more fourth quarter.
Clinton Fendley - Davenport & Company Llc
Okay. On the energy commentary I guess intuitively I would think there might be a little bit more pressure given some of the heating cost in winter and that might have a bigger impact, but it seems...
your comment seem to indicate that you might be able to deal with these costs better, so if you could maybe provide some more color there?
Thomas L. Ryan - President and Chief Executive Officer
Yeah, I think two things, one is obviously we are doing our inflationary pricing and preponderance of that happens in the back half of year, and because we recognized there is higher energy cost, we've got to try to pass some of that on ultimately to the consumer like many other retailers they are having to do today. So, as we put that in place, that will defray some of the cost increases.
The other comment I made is again like a lot of other businesses, we are looking at ways to conserve usage of energy as you think about electricity and things like that, there is technology today that allows you to utilize energy more efficient. And we are going to begin to...
we have tested ways of doing that and we are beginning to look at ways that we can distribute that throughout our network and again we can't do a whole lot about the pricing of it. We can do something, but we can't...
again try to contain some of the usage of energy as it relates to operating our business.
Clinton Fendley - Davenport & Company Llc
Okay. Thanks that's helpful.
And then any color on the labor efficiencies that sounds like our plan for the fourth quarter?
Thomas L. Ryan - President and Chief Executive Officer
Yeah, I think it's no different that we've always told you. We've begun over the last few years to utilize metrics and more efficiently managed personnel, and from those metrics, we learn and we create best practices.
And on the funeral side of the business what we found is, as we implemented this we saw great success, but we saw opportunities that didn't come to fruition in certain markets. So it's kind of refining our tools, implementing best practices in markets where we maybe didn't get it right first time completely.
And on the cemetery side, it's the beginning of applying some of those metrics, applying technology to begin to look at ways that we can be more efficient. So not a whole lot different than what we have always said, it's utilizing metrics, best practices, and technology to be more efficient in the way that we operate our business.
Clinton Fendley - Davenport & Company Llc
Okay. And I guess then on the Stewart transaction, have you received any kind of indication from them as to the timing of a decision here?
Thomas L. Ryan - President and Chief Executive Officer
No, the last thing we've heard from Stewart is everything you might also have heard is that they have created a special committee and it is our anticipation that again they will conclude that some time in the near future and we will have some sort of response from them [ph].
Clinton Fendley - Davenport & Company Llc
How long do you guys intend to grow your cash balance for the transaction here?
Thomas L. Ryan - President and Chief Executive Officer
Well, I think we are clearly going to build the cash balance until we know something different and I don't know when that day is going to be and I don't know what event could trigger that. So, I will look forward us to continue to build cash all the way up until the Stewart transaction closes or up until to the point where we determine that's not going to happen.
Clinton Fendley - Davenport & Company Llc
Okay. And then last question, I'm sorry if I missed this, but did you all give the trust fund performance since the quarter end?
Whether you... essentially I guess the last month of July or...
Eric D. Tanzberger - Senior Vice President, Chief Financial Officer and Treasurer
We didn't quite... I don't have an insight into that economy right here.
Clinton Fendley - Davenport & Company Llc
Okay. Great, thanks guys.
Nice quarter.
Operator
Ladies and Gentlemen. At this time, I would now like to turn the call back over to SCI management.
Thomas L. Ryan - President and Chief Executive Officer
We want to thank everybody for being on the call today, and we look forward to talking to you again I guess at the November. Thanks again.
Happy weekend.
Operator
Ladies and gentlemen, this concludes your conference. You may now disconnect.
Good day.