Oct 29, 2010
Executives
Debbie Young - Director of IR Tom Ryan - President and Chief Executive Officer Eric Tanzberger - SVP, CFO & Treasurer
Analysts
Clint Fendley - Davenport Robert Willoughby - Bank of America Merrill Lynch A.J. Rice - Susquehanna John Ransom - Raymond James
Operator
Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 Service Corporation International’s Earnings Conference Call. My name is Carol and I will be your coordinator for today.
At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.
(Operator Instructions). As a reminder, this conference is being recorded for replay purposes.
I’m now going to turn the presentation over to Senior Management. You may begin.
Debbie Young
Good morning, everyone. This is Debbie Young, Director of Investor Relations.
We want to welcome you to our call today. As usual I get the honor doing the Safe Harbor language.
So, go and get your coffee right now, go ahead. In our comments today, we will make statements that are non-historical facts in our 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 risk factors, please review our periodic filings with the SEC that are available on our website at sci-corp.com. Also in the call today, we may use terms such as normalized EPS, or normalized or adjusted operating cash flows.
These are non-GAAP financial terms. Please see our press release and 8-K that were issued yesterday where we have provided a detailed reconciliation for each of these measures to the appropriate GAAP terms.
Now, I’ll turn the call over to President and CEO, Tom Ryan.
Tom Ryan
Thank you, Debbie, and thanks everybody for being on the call today. What I’m going to do is what I traditionally do, talk a little bit about overview of the quarter and get into the some of the segment discussions.
And then give you a little bit of background and insight into our guidance that we’re providing for 2011. Before I do that, I want to thank everybody within SCI, the people that make it happen everyday, without them we wouldn’t be able to delivery these earnings.
They importantly enough take care of the client families that are going through very difficult time, so appreciate all your contributions, those of you that are listening in. So first with an overview for the quarter.
Third quarter, again, we delivered consistent positive performance. We’re please with what we were able to do.
The normalized earnings per share were $0.13 versus the prior year $0.13 a quarter. Now, recalling the third quarter of last year, we had a benefit of a little over $7 million, or converted to earnings per share $0.02, as a result of being able to reduce our long-term insurance reserves following a multi-year period of focus and comprehensive training to decrease our liabilities as it relates to auto, workman’s comp and other general liability claim.
So, because of that hard work we are able to reduce that liability on a one-time basis. It resulted in that $0.02.
So when you isolate that issue, we really grew our earnings this quarter by $0.02 when you compare to the last quarter. And the reason that we are able to do that year-over-year was primarily driven by three things.
First of which was the contribution from Keystone and Palm Mortuaries, the acquisitions that occurred in late 2009, early 2010. And those contributions obviously are somewhat offset by higher interest costs, and they predominantly benefited the funeral business, because again if you recall Keystone was primarily a funeral company.
And second item that drove performance in the quarter was higher cemetery and merchandise deliveries and more completed cemetery construction projects. You’ll recall we have to have the cemetery property has to be in condition and handed over to the consumer with 10% down.
So constructing these triggers that revenue recognition and a lot of what we constructed were things we sold earlier in the year And lastly, we had a lower effective tax rate in the quarter, which helped us about a penny, which has offset some, by the same amount, because of higher general and administrative cost. So overall, a good quarter in line with our external expectations and a little bit ahead of our own internal expectations for the quarter, as good expense management helped to offset lower performance on the cemetery sales production side, and we’re working hard to get back on track that we’re pleased with.
And I’m going to look at an overview of the funeral operations. Funeral operations performed well during the quarter relative to our expectation.
As we have expected and communicated all along, funeral revenue growth continues to be challenging, but we successfully continue to manage our costs. Comparable funeral revenues in the quarter increased 1.2% to $329 million.
Same-store volume was down about 1.6% for the quarter, so again, not exciting; we would rather see growth. But the decline continues to get smaller, so again a little better than we expected and that helped us achieve the results that we did.
For the nine-month period, same-store volumes were down 2.4%. We are tracking just about what we thought would happen for the year and a little bit better than what happens for the quarter.
Our funeral average grew 1.8%, which takes into account higher trust fund income and the positive Canadian currency effect. If you exclude those two things, our average grew 0.9%, just under 1%, which in this day and age isn’t so bad and was within our expectations.
We think we can do better and I’ll talk a little bit about that in our 2011 guidance. But remember this takes into account a 60 basis point growth in the cremation mix average.
And in addition, which is probably even a little more punitive than the cremation average mix change, but that’s not too bad, we’re seeing a shift within cremation towards more direct cremation. You’ll recall there was a time two and three years ago when three quarters of what we sold was cremation service and we’re seeing more people that are within the cremation segment buying down to direct cremation.
And again in recessionary times not to be unexpected, but we’re seeing a little more of that I think in our average. Last piece of revenue is the $3.2 million increase in G&A revenues driven by our insurance funded preneed production.
So, not only are we’re selling more but we’re selling more of an insurance mix in driving those G&A revenues. It doesn’t drop to the bottom line because of selling costs, but again, it’s growing that backlog which is very, very important to our long term strategy.
So from a profitability standpoint in the funeral segment, we reported comparable funeral profits that declined about $6 million and the reported margin decline was about 200 basis points. But if you take out the $4.5 million of savings that again ran through our P&L in the third quarter of 2009 relative to the insurance reserve reduction, the reduction was really $1.5 million or about 70 basis points, so potentially flat year-over-year, slightly down on a normalized basis.
This remaining decline in margin is partially related to the increased selling cost I mentioned before. We were selling more in the backlog and incurring more expense, which again is going to generate higher profits in the future.
We grew our preneed funeral sales by 3.1% or about $4 million for the quarter. And remember, again those costs get recognized now and the revenue is deferred until a later period.
We also saw as we would have anticipated higher field overhead costs associated with our new field operating structure. Remember, we now have Major division.
We have a Metro division, a Main Street division. And in setting those up, we’ve got a little more expensive management structure that we believe is going to be able to generate higher revenue in the future.
So, with all this in place in a tough revenue environment, we think it’s a good quarter. We believe we are poised with our new operating platform that’s focused on growing the preneed business as well as being able to enhance our at-need revenues, particularly on the cemetery side with this new structure.
And recall, in Major we’ve got embedded sales people now in city that are helping drive sales of those funerals and cemetery. We expect those investments are going to pay off.
Now I’ll shift to the cemetery operations for the quarter. Comparable cemetery revenues increased 3.6% quarter-over-quarter.
This is mainly attributable to the increased merchandise deliveries and completion of the cemetery property construction projects that I mentioned before in the current period that helps overcome lower than anticipated preneed sales production. Comparable preneed sales production I’m focusing just on preneed here, declined $5.7 million or about 5.7% in the quarter.
We expected to see a little bit of a slowdown. You recall we talked about this last quarter coming off four very strong quarters in a row, but we also feel like we could have done better this quarter.
This wasn’t our best performance, and we intend to focus on that and fix it moving forward. Half of the decline in the quarter was related to a decrease in Canadian sales production.
And if you recall, we had a significant acceleration of sales that took place in Canada in the second quarter when a tax law change drove that production. So, now we’re seeing the downside of that great production in the second quarter, a little fall off in the third, and again predominantly expected.
We are going to ensure that we have a good finish to the year and start off 2011 on the best foot we possibly can. If you take a step back, year-to-date, our total cemetery preneed sales production is up $12.4 million or 4.4%.
So this really is about where we modeled it, low-to-mid single digit with the preneed production and we are able to achieve that. And feel pretty good about where we are, but also excited about being able to do that.
So, a tough comparable for the fourth quarter, we had a lot of large sales last year, but we’ve got a lot of activity going on right now and feel pretty good about what we can deliver. Our cemetery trust fund income increased slightly for the quarter and was in line, essentially with our expectations.
A lot of the run-up in the markets occurred in September and October. It’s hard to remember now, by August it was tough.
Reported cemetery profits were up slightly on an increased revenue with flat margins at 19.5% But again if you carve out the insurance reserve reduction in the last year’s quarter that’s $2.7 million, if you remove that one-time benefit, our margins would have increased $3.9 million or 160 basis points on the cemetery side. So on a 5.9 million revenue increase, 3.9 million is about what you would expect to drop to bottom line.
And that’s really what happened when you put it in apples-to-apples. So savings on the maintenance side, which we’ve been talking about cemetery maintenance, we’re seeing that flow through, and those were somewhat offset again by the field overhead costs that increased year-over-year as it went to the new structure, so again, solid performance on the cemetery side.
Now, I’m going to shift to the outlook. As you probably saw in the press release, we provided guidance for the fourth quarter and an initial outlook for 2011.
We intend to finish this year strong and again have a great base to launch into 2011. Our updated earnings per share expectations for the year now are $0.53 to $0.55, which compares favorably to last year, as you recall, $0.51 for the quarter.
If you recall, when we set expectations for this year, we believe last year had some $0.06 of items that will recur. What I mean by that is, when you had the $0.02 of insurance reserve that couldn’t repeat, we probably had another $0.03 to $0.04 of estimated cost.
As you recall, in 2009 late 2008 or early 2009, we turned off the light switch. We put the kibosh on a lot of expenses within our organization.
And we put that switch back on. And I think, we knew they’re going to add some $0.03 to $0.04.
And when you put it in that perspective, we believe we’ve grown normalized earnings and we’re in the $0.08 to $0.10 for 2010 over the adjusted 2009. We think about that about half of it came from acquisitions of Keystone and Palm.
And the other half really was good business performance, particularly on the sales side. So, all in all we feel like we are having a good year.
If you look ahead to 2011, we anticipate growth in earnings and in cash flows. Earnings per share guidance is $0.53 to $0.61.
It is based on the following broad assumption. Funeral volumes will still be challenging.
It will be down low-to-mid single-digits within the range. Our funeral average will continue to grow in the low single digit range, absent currency and trust fund impacts which are a little more difficult to predict.
So, look for that to be in the 1% to 2% range. We believe that we can take it up from 2010 level.
Year-to-date on an ex-currency basis and we are looking at 0.9% growth, we don’t think that’s enough. We think we can do better, but you do have the cremation mix issue that we’re going work again.
So, look for improvement, but not a significant improvement in that arena. On cemetery preneed production, we expect to grow that in the low-to-mid single-digit range.
And the key variable between low and mid is going to be large sale. And to the extent we can find those and close those, you push yourself up in the kind of mid single-digit range of growth on the preneed side.
Our segment margins will be impacted by increased personnel cost, salaries and increases in health insurance costs. We really have anticipated and modeled a higher cost basis, particularly as it relates to insurance.
A lot of it’s due to some of the changes in healthcare, covering people up to 26 years of age, children, taking off the caps. We also rolled on Keystone employees in our full benefit.
So, those things are going to show a little bit of growth. We’re going to do some things that help knock back some of those costs.
These increased personnel costs again will be mitigated, particularly as it relates to our strategic initiatives regarding cemetery administration expense and the implementation of next-gen. Corporate G&A costs, we expect to increase somewhere in the, call it 3% range.
Primarily the increase are going to be associated with some legal costs, again with some increase in health insurance cost. For the concluding statement, we are very pleased with the performance for the quarter and the first nine months of the year.
And as we look ahead, we still face some challenges in our industry, namely sluggish funeral volumes and a challenging pricing environment. But today we believe we are better prepare than ever to deal with these challenges and grow the business And the cash flow characteristics of the business remains strong.
We plan to continue to capitalize on value enhancing opportunities in 2011. I said last quarter and I just want to repeat it.
We think about this business, the funeral business over the next couple of years, it’s going to be really challenging to grow on a comparable basis. The revenue opportunities are somewhat limited and we’re tied to the number of debt.
So it’s really hard to move the needle. We are going to do somethings.
We are going to try to sell some new products and services. We are going to try to expand what we can do for the customer base, but it’s going to gen a lot of cash.
Cemetery side of the business is really where we have the opportunity to invest and grow the revenue base and increase property sales. So, look first to focus on that.
If we’re able to move profitability on that side, probably a little more, all the more generating a lot of cash and we just got to be smart with it. So what are we going to do with our cash?
We are looking for strategic acquisition for the appropriate return. The pipeline was pretty good and we see an opportunity to continue to do that in 2011.
And in the absence of that, we believe in returning cash to our shareholders but through share purchases and through dividends. And I would expect to see more of that in 2011.
And lastly, we’ll be reducing liquidity risk and managing our debt maturity profile, again, as we do every year and the opportunity to present itself. This concludes my prepared remarks.
Now I’m going to turn it over to Eric.
Eric Tanzberger
Thanks, Tom. I’m going to pick it up by talking about our cash flow and trust fund performance for the quarter.
And then I’ll include our near-term and 2011 outlook in this comment. And then I am also going to briefly discuss our current financial position liquidity.
And then we’ll end the call before questions with some comments about capital deployment as well. So on a cash flow perspective, our cash flow from ops for the quarter was about $82 million.
And that excludes about $2.5 million of one time transition acquisition cost, they are related to our acquisition and integration of Keystone that are disclosed and reconciled for you in our press release. This represents a decrease about $12 million from last year, and keep in mind that this quarter is comparing to a very strong third quarter of ‘09, which remember was about $12 million to $13 million better than our internal expectations last year.
But the decrease was primarily related to this higher with higher cash taxes, which is about $9 million for the variance. And higher cash interest payments is about $2 million more this year than last year, which was again mentioned in our press release.
And by the way, the $7 million reduction in the prior year related to certain self insurance reserve reductions that Tom has mentioned in his comments, had no impact on cash flow it was just an earnings. Because of these taxes and interest cash taxes and cash interests being higher this year from a funeral and cemetery operating standpoint, therefore our cash flow is generally flat quarter-over-quarter.
It was slightly below our expectations primarily because of effect that cemetery production being softer than we anticipated and as Thomas mentioned in detail in his comments. Total CapEx for the quarter was about $26 million, with maintenance of cemetery development being virtually all of this amount at 25 million.
This is an increase of about $7 million more than the prior year, mainly reflecting new system integration costs that are currently underway at SCI, in addition to Keystone properties as well. Deducting these recurring capital spending items, which was the maintenance in cemetery development, from cash flow from ops, we calculate our free cash flow for the third quarter to be about $56 million.
From an outlook perspective, as our press release indicated, we’re expecting to generate about $60 million to $75 million of cash flow from ops in to fourth quarter. That would bring our full year 2010 expectations for cash flow from ops to a range of $330 million to $345 million.
And this new range essentially narrows the range that we provided to you last quarter. From a maintenance and cemetery development perspective in the fourth quarter, we think it will be a approximately $20 million.
And we said that in the press release and that’s really flat compared to the fourth quarter of ‘09. So that map will result in a revised free cash flow guidance of $245 million to $260 million for the full year 2010 and again just kind of narrows the range of the guidance that we’ve already given to you last quarter.
So that takes care of 2010, looking ahead to 2011 in terms of cash flow, we again continue to believe that we will continue to generate attractive operating cash flow. The guidance range that we’ve disclosed property cash flows, $320 million to $370 million for the full year.
And that’s streams that we’ve disclosed for operating cash flow is $320 million to $370 million for the full year of 2011. And that generally reflects the higher anticipated earnings that will be somewhat offset by lower working capital sources when we to 2010.
So the key assumptions for these ranges the EBITDA reflected increase which is consistent with the EPS range provided by Tom earlier Cash interest payments in 2011 will be consistent with about $128 million level in 2010. Cash taxes are also expected to be consistent with 2010 levels.
I remember our range for 2010 is $30 million to $40 million that should be our range for 2011 although I would also that in 2010 I expect to be somewhat in the lower into that $30 to $40 million range. Again, as we expect to end the year and this year Speaking of taxes from an effective tax rates standpoint in the third quarter, our effective tax rate was now 32.5% on a normalized basis because it benefited from certain discrete items in the quarter, which primarily related to ongoing tax planning strategies.
For the fourth quarter of 2010, we expect in the rate to be approximately 38% which is more in line with the previous guidance we have generated before. And for the full year of 2011, we’re also expect the effective tax rate to be in the range of 36 to 38% From a working capital perspective in 2011, we expect the working capital on the cash flow statement to be being more of a use of cash similar to 22 2010 levels that you have seen, which is primarily due to continuation of less working capital sources from ongoing trust fund initiatives, it probably has an effect of $10 million to $15 million in 2011 versus 2010.
As it relates to capital spending expectations, we said $85 to $95 million from maintenance and cemetery development. Finally an additional $10 million to $15 million for other growth initiatives as well in terms of CapEx.
Any again, both of those ranges and numbers is consistent for 2010. When you deduct the maintenance cemetery development expenditures from the operating cash flow range I just discussed.
We anticipate our free cash flow in 2011 to be a range of about $225 million to $285 million. On a per share basis, this free cash flow range equates to about $0.90 to $1.14 per share using a fully diluted share count of 245 million to 250 million shares that we anticipate in 2011.
And we currently have 246 million shares outstanding today. So our model assumes non to a very modest amount share buyback just as a modeling assumption in terms of the guidance.
But this $0.90 to $1.14 free cash flow per share represents a very attractive proposition as well as an attractive low teen free cash flow yield. So, 10% to 13% free cash flow yield, I am very proud of on a mid-$8 type share price.
We believe the free cash flow yield, again, coupled with historical consistent with discrete free cash flow stream really sets us apart and is the real value of owning SCI shares. Now turning to the trust funds, the combined trust fund assets of 3.2 billion increased 8% in the quarter.
That increase primarily resulted in the month of September. It compares to an S&P 500 return of up 11 and the Barclays aggregate index of up 2.5.
Year-to-date through September, the trust funds are now up just over 7%. And as Tom mentioned, the total trust fund income recognized was about 19.8 million in the third quarter, which is up $2 million compared to the third quarter of ‘09, which was in line to maybe slightly ahead of our expectations.
From an outlook perspective, keep in mind that projected amount of trust fund income that we will recognize through the income statement in any given period, is an extremely difficult task as there are so many variables and moving parts, such as determining which specific contracts are going to mature out of the backlog and making an assumption of the poor performance of the financial market. So it’s difficult, but that being said, our fourth quarter 2010 outlook for EPS and cash flow assumes that our trust funds will remain flat for the rest of the year at their current performance level which again is up 7%.
Our outlook for 2011 assumes that our trust funds will realize an annual return in the low single-digit percentage range which is very consistent with the 2010 guidance that we gave you at the very beginning of the year. Now shift into our financial condition and liquidity, our total cash at the end of the quarter is just over $135 million.
Today we have less than that, around $100 and that’s primarily related to $45 million of cash interest payments that we had to make in early October right after the quarter. We currently have about $140 million of borrowing capacity on our $400 million bank credit facility.
Again that matures in November of 2013. It’s currently used to support just under $45 million of letters of credit and we have drawn down about $215 million on a credit facility.
Total debt at the end of the quarter is 1.82 billion which is down slightly from June 30th levels. But most importantly again, there are no meaningful debt maturities until November 2013, which is primarily the bank credit facility that I mentioned earlier From a capital deployment perspective during the quarter, we continued our share repurchase program and we repurchased just over 4 million shares for a total investment of over $31 million.
We currently have just over 35 million remaining on the existing share repurchase authorization that we have today. In the quarter, we also continued to use capital towards opportunistic debt repurchases with repurchases of about $88 million of face amount of shorter-dated bonds that we did in the open market, that we believe are favorable market prices.
Our current leverage on a net debt basis at the end of the quarter is 3.3 times which again is our bank credit facility definition. We like where this is, we believe the leverage ratio has declined.
We are going to keep between 3 and 3.5 times as appropriate. However, probably in the current macro economic environment, we tend to continue to run the company more towards the lower end of this range.
So overall, just in conclusion, we are pleased with the success that we had in the first nine months of 2010. We are excited about our outlook of 2011.
Most importantly, we continue to believe our strong free cash flow really sets us apart with our strong free cash flow yield in the 11 to 13% range. Our current financial position is very strong with $100 million of cash.
We have very we have significant liquidity and a very favorable debt maturity profile which bodes well for our ability to deploy capital opportunistically to raise shareholder value that Tom detailed and mentioned in his comments the most exciting part as we look forward in 2011. So with that, Carol, that concludes our prepared remarks.
And I think we’ll go ahead and open the call right now for questions, please. Question-and-answer Session
Operator
Thank you, sir. (Operator Instructions) Gentlemen, your first question comes from the line of Clint Fendley of Davenport.
Sir, you may begin.
Clint Fendley - Davenport
Thanks. Good morning, guys.
Thanks for taking my question. Tom, I guess I’m a little surprised to hear that you’re saying that you are seeing a shift towards the direct cremation.
Why now? I guess, I would have expected to hear this maybe a year or so ago when consumers were under even greater pressure.
Tom Ryan
I’d say, Clint, it’s been a slight shift. And what we saw in the third quarter and again, one quarter doesn’t make a complete trend.
But we saw about a 200 basis point move out of cremation with service and into direct cremation. That hasn’t been the case, albeit there has been a slower trend towards it.
Again, it’s something we’ve always anticipate or expect, a lot of times we get questions, if people choose cremation because there is a recession and our general thought on that are no. People choose cremation or burial for very personal reasons most of times.
What they spend again can be impacted by recession. So, I guess what I’m trying to convey to you is, the cremation rate changes are changing faster, but within cremation we are seeing a buy down trend.
That can come back as people gain confidence, as the employment opportunities look better, a lot of different things can impact that number. We just thought we highlighted because it’s probably causing a little more consternation as it relates to our average revenue per case.
Clint Fendley - Davenport
You still dropped some of the alliances that you’ve had in the past, or you don’t have any new alliances I guess with like the direct cremation societies and things like that, correct?
Tom Ryan
Well, all these are kind of local market driven, but I think generally we have moved away from most of those agreements. There maybe a few locally in certain markets, but we are looking to again have some commerce with groups where we can make money and we can deliver superior service to those client families.
So seeing less and less of those, but again we want to take care of folks at this difficult time in their lives, and so we serve a lot of direct cremation to consumers in different markets.
Clint Fendley - Davenport
Okay. And then I guess next on the new field operating structure, did you add any salespeople under the new structure?
Tom Ryan
Well, when I talk about the new structure, we do from time to time the market add sales people. Well, this is really trying to get management structure.
What we did with the new op structure is begin to develop strategies that are more centric to the consumers within those market places and the footprints within we operate. So as an example, we said in major markets where we have got a lot of location, a lot of cemetery and funeral opportunities together.
We can afford a bigger sales force. If we’re going to have a bigger sales force, we need to have a management structure that’s able to mange the leads that we are going to generate more of because we are spending more marketing dollars.
We now have system to manage those leads. So what I’m really getting that here is less about the salespeople cost and more about the management structure to run it.
And with that may come some cost and that’s going to show up in selling cost, not as an overhead.
Clint Fendley - Davenport
Have you rethought the compensation methodology here, then?
Tom Ryan
I think we are constantly tweaking that looking at different ways to drive some of the behaviors that we want, but generally it’s been fairly consistent over the last three to four years.
Clint Fendley - Davenport
Okay. And then last question here, for Eric.
I wondered, any color on the 10 million to 15 million in capital spending for other growth initiatives? Is that one particular project or additional color there, please?
Eric Tanzberger
It’s not one particular project, Clint. It’s consistent with what we’ve trended before in that particularly above and beyond maintenance cemetery development CapEx.
It’s really related to Greenfield situations and building funeral homes, constructing homes on cemeteries and making combination facilities sometimes. It’s those types of projects that we’re constantly looking at to add value.
There has already been some that has been selected but generally there is some portion of that that we know that will common that’s unallocated right now
Operator
Thank you, sir. Gentlemen, your next question comes to you from the line of Robert Willoughby with Bank of America Merrill Lynch.
You may begin.
Robert Willoughby - Bank of America Merrill Lynch
Yeah, hey, Tom, you did reference again the higher costs associated with the field force here, and I think you have touched on parts of it. But I guess over the past few years you’ve spent a lot of time wiping out a layer of mid-level management, some other kind of corporate restructurings that have helped your margins here.
Can you just sort of and maybe you have hit on it in a few areas. Anecdotally, what have you taken down over the past years versus kind of what has come back in place and why this is now a better structure for you, I guess would be my question?
Tom Ryan
Yeah, Bob, that’s a long journey, but I’ll try to do it fast. A lot of what we did before is, we did have duplicative management structure.
We had sales organization, a pyramid all the way through and operating organization that didn’t work together as effectively as we liked it. We did eliminate some of those layers, challenge some of our management structure, and we’ve also introduced a lot of technology to allow people to better people capable of managing those areas.
So what we’re doing now is, I think, a reflection upon becoming more efficient, having new systems, having strong management team. We said to ourselves now the real challenge is revenue growth.
So, everything that we’re doing as it relates to adding in a little bit of management infrastructure here is about being able to generate more revenue. We see that as our biggest challenge like a lot of other companies.
So, if this is really about is having the people in place to really step on the gas as it relates to cemetery sales, step on the gas as it relates to funeral preneed sales, and even lastly to begin to raise our at need average. We’ve got more management time and the appropriate product and service mix within these segments.
Think about mainstream, you maybe selling a certain type of product now that we don’t offer necessarily in major or middle that we didn’t do before because we wanted to standardize. So, this is the real opportunity we believe to begin to address the similar needs of a mainstream market separately from a major market.
And so we view it as an opportunity to really enhance the profit. All we’re really saying is, we just started this in February of 2010, but it takes a little bit time to get the stuff in place.
And like you say, if it doesn’t work, there is always the ability to slim again. We think it’s going to work.
So, keep an eye on it and our hope is that you’ll see us raise our game as it relates to revenues in preneed sales production over the coming years.
Robert Willoughby - Bank of America Merrill Lynch
And that revenue side, Tom, it looks like the CDC data has been surprisingly strong. I have always had problems with the integrity of the data, but have you noticed any is that data surprising to you at all?
Or is it just more or less a blip over the last few weeks?
Tom Ryan
Yeah, I think our it does look a little I’ve seen the CDC data and I think it is up positive for the first time in a long time. But, again, like you said, it is in the perfect parameters, probably a good directional parameter for us.
And as you’ve seen, we’ve gotten the comps a little bit better. We’ve had some descent months here of late.
So I hope you are right; but I see the CDC data as well. But we are what, 28 days in the quarter and we’ve got a lot of quarter left.
Operator
Gentlemen, you next question comes to you from the line of A.J. Rice of Susquehanna.
Please proceed, sir
A.J. Rice - Susquehanna
Thanks. Hello, everybody.
Yes, Tom, you mentioned that you are seeing a nice pipeline on the acquisitions. Can you just give us maybe some more color on what is out there?
And does that mean you think there’s prospects for seeing a deal, I don’t know, in the next six months or anything?
Tom Ryan
Yeah, AJ, I think what we’re seeing here, what I’d call, a good size local operator type of deals that are out there. There is quite a few of them that are in different stages.
So very exciting opportunities and, let’s say, unlike we have seen in a numbers of years. So how many gets to the finish line?
We don’t know. But again, I would say, there is four to eight type deals that are out there that have some range of possibility of getting done this year.
And we will just see where it takes us. So we’re excited; we think the opportunity exists.
If the pricing isn’t right, there were other options to buyback shares. And as Eric pointed out to you, on an after-tax basis, those are yielding 12% and 13%.
So, no matter where we go, we think it’s a good use of cash as we look at 2011. Our hope is to get some of these businesses on board, because again we are excited about the potential of what’s going to happen in this industry overtime.
And so the more that we can have that fit our strategy makes sense [inaudible].
A.J. Rice - Susquehanna
What is there anything behind why there might be a pickup in activity? Is it seeing Palm Mortuaries and Keystone change hands?
Is it some other issue out there that you think?
Tom Ryan
No, I think Palm helps it somewhat because it was such a big name in the industry and I think that’s gone rather well for both sides of the aisle. But I think more it’s about there hasn’t been a lot of movement and, I would say, independent coming into corporate for a long time for a variety of reasons that you’re well aware of.
So I think a lot of its pent-up demand. A lot of times when the worm turns after 1999 everybody still has ‘99 pricing in their head for a number of years.
It takes a while to kind of figure out. Here is the real clearing price of some of these businesses.
As independent owners people get different stages of their life. I think there is tax considerations and fears that are probably getting people to look at this a little quicker, regulatory concerned fears.
So all that kind of pulls together, I don’t think there is any one reason, but we are actively out there pursuing these that can fit our strategy in markets that we want to operate. And so, we’re excited about it and we will see where it takes us.
A.J. Rice - Susquehanna
Okay. On your revenues per service in the funeral business, you were up 1.8%.
Do you have that broken out further by the year-to-year trend maybe in cremation versus traditional service?
Tom Ryan
I don’t have that in front of me, but we’ll get back to you on that. And W here or Eric or I will go over those with you.
A.J. Rice - Susquehanna
...whether one they are pretty close or whether one tended to be materially different than the overall average?
Tom Ryan
Yeah, I think, my recollection is cremation is hurt a little bit more because of what we talked about. We saw a shift out of cremation with service, which historically may have averaged $3,500 into a direct cremation average.
It’s probably south of 2,000. So that shift is a pretty big one, and I think it took a little bit of a toll on the cremation average as it relates to the quarter.
A.J. Rice - Susquehanna
Would that also one thing that jumped out at me is your revenue per new pre-arranged funeral contract was up 5.3% year-to-year; so much, much higher. Would that be just basically probably calling out the cremations?
Or is there anything else happening on the preneed side that is accounting for that big jump in average contract size?
Tom Ryan
Yeah, I think there is a couple of things. The cremation mix in that business is probably I don’t have the statistics of the quarter, but it’s been trending 52, 53%.
So, it’s what we’ve always said, if you give a complete presentation of the products and services that we offer and sales people are trained to do that, we are able to sell 5,300, $5,400 funeral with a more than 50% mix of cremation. So we think that’s why we don’t fear cremation, we embrace it.
And we are excited about the opportunities that can present themselves if we put the right products and services in front of consumers. They will spin and they will be very profitable book to business.
So that is an exciting trend for us and it becomes more exciting when it comes out of the trust funds and out of the insurance product and into our profit stream. So, good observation and we think our backlog just continues to be something that is hard for people to understand and grasp but really bodes well for future profitability.
A.J. Rice - Susquehanna
Sure. One last question.
On the guidance for next year, I guess you are saying that you are assuming funeral case volume is down low-to-mid single digits. Obviously that incorporates all the different variations we have seen this year.
But there seems to be sort of a steady trend to more moderate decline really going back the last 18 months. How do you reconcile that?
It seems like it could actually do better than that next year. I know you guys have been doing a lot of studying around this, demographic trends and otherwise.
Is there anything interesting to say there?
Tom Ryan
Yeah, I agree with you. You don’t know from year-to-year, it can move, as you know, you have seen it, a lot of basis points.
Over longer periods of time, it’s more predictable. I think what we say is, we’d rather err on the side of conservatism as it relates to giving you guys any guidance.
Like we said, we are modeling somewhere, call it down 2 to 4 or 5%. What’s going to happen next year?
I don’t know, if funeral volume is flat or funeral volume is up one, our guidance is going to be light, no doubt about it. And so that’s why we want to give you some color behind what we’re putting out there.
But we’d rather put out there, again the trend we have seen over the last few years has been 2 to 3 to 4% down. And until we see evidence to the contrary for longer periods of time, we are going to continue to model that way.
But again, you guys look at statistics as well as we can, and what’s going to happen next year we don’t know. But that could be an upside surprise if we were to see volume move in the right direction for us.
Operator
Thank you, sir. (Operator Instructions) Your next question will come to you from the line of John Ransom of Raymond James.
Proceed, sir.
John Ransom - Raymond James
Hey, Tom. Good morning.
If we were to look at next year, could we kind of net out the accretion from Keystone and Palm, net of the new infrastructure costs? Is there a number?
If we take those two things together and look at the year-over-year number, what does that look like?
Tom Ryan
I think they would offset. The new infrastructure costs are probably only these aren’t big numbers, but they slightly impact a quarter that’s relatively flat.
And we’re talking about spending an additional $4 million on infrastructure. And I would say that the incremental accretion in 2011 is really only three months of Keystone.
It’s probably a penny or so. So, the two probably offset to zero.
John Ransom - Raymond James
Okay. And then secondly, just drilling down a little more specifically into M&A pricing, your stock is currently, as you know, trading at about 8 times free cash flow, something in that range.
Are you able to find properties at prices that are cheaper than that on a pro forma basis?
Tom Ryan
Yes, I think, refining a lot of the in or around that area, some better. We probably don’t want to do a lot of them that are worse, because of like you said, the opportunity we have in our own business.
So, yeah, those are generally in the area that we are seeing things get priced. And again, we like the idea of getting the acquisition while you can, because we’ve lived through some areas where you can.
So we’re attentive. We’d like to see some deals fall our away and enhance the revenues and the EBITDA of the business.
John Ransom - Raymond James
Is there anything driving these sales other than just the normal flow of not a lot of M&A done, and now you’ve just got natural pent-up demand with businesses aging out?
Tom Ryan
We think that’s pretty much is generally again we’re talking about businesses that are in independent ownership and multi-generational a lot of times. So you get the generational points in time and if you think about a lot of these businesses, the people that own them are 10 years older than they were back the last time they are looking to sell.
Taxes, regulation, concerns that drive that behavior and again, I hope a more favorable opinion about SCI and joining the SCI family. We have seen, I think from an integration standpoint, huge success in onboarding these businesses and making them feel welcome and I think have a lot of exciting opportunities for independent funeral homes.
And when you think about it, if you are an independent owner, what better opportunities for people that work for you, put them in SCI, it opens up a variety of opportunities career-wise for them. So again if we can present those appropriately, be in front of folk at the right time, know the network, they are just starting to fall our way a little more.
I think I’d cautioned you on though as well is we are big enough where acquisitions aren’t going to dramatically move the needle anymore.
John Ransom - Raymond James
Right, right.
Tom Ryan
Core business is so big, and the most important thing we can do is enhance the core business. So, we are spending the performance and our time on that.
What product that serves that can we begin to offer to consumer to get them excited about buying these things and enhance the profitability of our current stream? What are our opportunities to provide more of these services and find better ways to package them in interface with consumer?
So those are probably the biggest opportunities in front of us, if some of that gets clicking, as you know the incremental profitability of that revenue dollar is huge. So we are working hard to do that.
And I think that’s the upside surprise for us, bring your volumes in, if we can get cemetery property sales going which we are going to focus on to get some of these products and pricing stuff right, that’s how we surprise you to the upside in 2011?
John Ransom - Raymond James
And just lastly, let’s just assume for a minute that the economy is not great, not horrible, kind of grinds along and that volume weakness because of demographics persists. So let’s say from now until 2015, we are just going to make that assumption.
In that environment and given the cremation growth, what’s the reasonable goal that you would give your people to say okay, we can grow our same-store operating income by X%; and then we will try to be clever with our free cash flow and enhance that below the line so maybe we can get to Y% growth. What’s the reasonable how do you think about it kind of looking out over a multi-year cycle given those headwinds?
Tom Ryan
I think the reasonable rate would be on a pre-interest, pre-tax basis just at the operating income level. You ought to be able to do that somewhere between 3% and 6%
John Ransom - Raymond James
Okay
Tom Ryan
I think the movement between 3% and 6% is going to be determined by most likely cemetery property sales. If you can give a good trend going there, you can push it at that level.
Now when you drop down to post-tax, and post-interest, you may be growing that number 7% to 8%, right? And now [inaudible] you have acquisitions, and you buyback shares.
If you can see a scenario where you can grow earnings per share in the low double digits in the 10% to 12% range. I think that’s very reasonable format for us.
And again due to a lot of hard work behind being able to do it, but that’s a reasonable expectation. And quarter-to-quarter, and year-to-year are going to be factors that impact your ability to achieve it.
But over long periods of time, I think that’s very doable.
Operator
Thank you, sir. Ladies and gentlemen, this concludes the question-and-answer portion of today’s conference.
I will now turn the presentation back to senior management for their closing remarks.
Tom Ryan
I want to thanks everybody for participating on the call and we look forward to talking to you again in 2011. Have a great week.
Operator
Thank you, sir. Ladies and gentlemen, this concludes your conference.
You may now disconnect. Have yourself a great day.