Oct 27, 2011
Executives
Debbie Young – Director, IR Tom Ryan – President and CEO Eric Tanzberger – SVP, CFO and Treasurer
Analysts
A. J.
Rice – Susquehanna Financial Group Clint Fendley – Davenport Robert Willoughby – Bank of America/Merrill Lynch Nicholas Jansen – Raymond James
Operator
Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Service Corporation International Earnings Conference Call. My name is Keith and I will be your operator for today.
At this time, all participants are in a listen-only mode. Later, on we will have a question-and-answer session.
(Operator Instructions) As a reminder today’s conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, SCI Management.
Please proceed.
Debbie Young
Hi good morning, this is Debbie Young, Director of Investor Relations, and as usual we’ll start with some prepared remarks and then we’ll take some questions. Let me go through the Safe Harbor language real quick.
In our comments today, we’ll make statements that are not historical facts and are forward-looking. These are statements that are based on assumptions 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 filings with the SEC that are available on our website.
Also on the call today, we may use terms such as normalized EPS or normalized or adjusted operating cash flow. 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 to the appropriate GAAP measures. With that, we’ll get started with comments from Tom Ryan, our President and CEO.
Tom Ryan
Thank you, Debbie and thanks everybody for being on the call today. The topics that I am going to cover in my prepared comments are, to give an overview of key items in the quarter.
Then we’re going to follow it up with more detailed review of the funeral and cemetery operations, each segment. And finally, I’m going to provide a little additional color on our 2012 outlook that we provided in the associated press release.
So to begin with, we’re very pleased with the results of third quarter, especially during this very pessimistic economic and consumer sentiment environment that we’re operating in. So pleased to be able to execute the way we did.
If you look at free cash flow, it’s something that’s pretty exciting. We were able to increase that in the quarter by $35.7 million over the prior year and generated some approximately $160 million in free cash.
Our normalized earnings per share were $0.14 versus $0.13 in the prior year quarter. If you think about it, funeral profits were essentially flat, that’s what we had communicating to you I believe on the last call that we would anticipate that to occur this quarter, but we really knocked it out of the park for cemetery segment performance.
And that was primarily driven with cemetery profits by an outstanding pre-need property production in quarter and again I am very pleased to be able to do that. Speaking of sales production, pre-need funeral production and pre-need cemetery production both grew at very respectable high single-digit and low double-digit rates on a comparable store basis, so again a great execution.
And finally, we believe we’ll finish the year very strong. As we disclosed in our press release, we would increase our fiscal year 2011 earnings per share and operating cash flow guidance above the previous ranges and are projecting what we believe are very solid earnings per share and cash flow growth for 2012.
So now turning to funeral operations. Overall, the funeral segment performed as we anticipated during the third quarter.
We saw a strong growth in comparable sales average as well as an increase in general agency revenue on increased pre-need productions – pre-need funeral production which together more than offset the decline in volumes we experienced. Comparable funeral revenues for the quarter grew 2.7% or roughly $9 million.
Of the $9 million increase $2 million was attributable to the shrinking of the Canadian currency which gets offset as you know through translated expenses. So it really doesn’t generate any additional profit.
In addition to that, $3 million of the increase was general agency revenues. This again is essentially offset by associated selling costs to generate that general agency revenue.
So the remaining $4 million of revenue was the increase you’d expect we dropped to the bottom line. And this was driven by impressive increases in our comparable sales average of 3.9% if you exclude the currency.
So this is pretty high step and I believe again with the environment that we’re operating in, 2.9% of that increase is through walk-in increase and 1% was attributable to the fact that we had trust income. So remember we did this with the cremation mix rate that changed by 270 basis points.
So I would say that this exceeded our expectations and again allowed us to generate cash and profits. The increase in the sales average was offset by a 2.4% decline in same-store volume for the quarter which we believe is a reflection of the number of deaths that are occurring in our relevant markets.
Year-to-date our same-store volumes are down about 1.3% which is right where we’ve been modeling the entire year, somewhere between 1% and 2%. And so about where we thought it would be.
On the pre-need front, remember these pre-need revenues don’t get recognized, they go into the backlog. Our comparable pre-need funeral sales production continues to impress by increasing $10.3 million or about 8% for the quarter.
From a profitability standpoint, comparable funeral profits increased $350,000 so they are essentially flat. The relevant operating revenue remember that I talked about before about $4 million increase, that was generally offset by increase in advertising and lead generation expenses related to pre-need production as well as a little higher fuel burns spend and other inflationary cost increases.
As I pointed out in the last quarter’s call, we anticipated selling compensation, so this is a sales force costs to run about 14.5% from the quarter, it did. We thought comparable lead generation costs would run about $12 million in quarter and again it did this quarter.
As we looked forward into fourth quarter and into 2012, we would expect selling compensation remain at about the 14.5% level we would expect lead generation costs to level off as this $12 million rate and even maybe trend down into 2012. Now switching gears over to the cemetery operations.
Our comparable cemetery revenue increased $15 million or 8.8% quarter-over-quarter. This is mainly attributable to increased cemetery sales production, predominantly profit of sales as the trust fund income was generally flat.
It’s up about $0.4 million. We also recognized $3.5 million in other cemetery revenue that was associated with granting of property right easement at one of our cemetery location.
Comparable pre-need sales, and remember pre-need we can drive versus at-need, so we can go out and generate profits and cash. That production grew more than $21 million in the quarter or about 23%.
Keep in mind that we still – the last time I’ll it but we’re dealing with that Canadian tax change last year, so Canada was quite a growth over last year’s third quarter. But even in the U.S.
we’re able to grow $13.6 million or 15.3%. So the growth really is impressive even outside the Canadian operations.
But I can’t say enough about how proud I am with the outstanding efforts of our field management and our sales organization. It’s a tremendous team effort.
Our cemetery profits grew at $4.6 million or just under 14% for the quarter, and the margins increased 80 basis points to 20.3%. For the $15 million increase in revenues, one could expect more to drop to a profit line.
However we incurred $2 million in selling costs related to contracts written that the revenue was deferred and will be recognized in future period. Additionally, we had higher advertising and maintenance and bonus expense which puts a little pressure on the quarterly cemetery profits.
While traditionally one should expect lower cemetery revenues for the fourth quarter, sequentially from the third quarter, I would expect the margin percentage to be higher as we have a solid track record in managing these controllable costs when we apply the appropriate focus, and we will. Find the outlook that we provided in the release, we provided fourth quarter 2011 as well as our initial outlook for 2012.
We’re expecting for the fourth quarter, $0.16 to $0.19 in normalized earnings per share compared to $0.18 in the fourth quarter of 2010. This brings our earnings per share expectations for the full-year 2011 to $0.62 to $0.65 which compares very favorably with 2010 normalized earnings per share of $0.59.
So growing somewhere in the high single-digits with 10% year-over-year. So all in all, 2011 looks to be a very good year.
Looking ahead to 2012, we anticipate impressive growth in both earnings and in cash flow. Our earnings per share guidance range is $0.66 to $0.74 at the midpoint represents the 10% growth from the midpoint of our expected 2011 earnings per share.
As far as assumptions for you guys to begin to think about as you’re putting together your model, we would anticipate funeral volumes will still be a challenge probably down in low single-digit ranges as we model 2012. The funeral average will continue to grow in a low single-digit range absent currency and trust fund impact.
However we believe it’s going to grow more than what we’ve seen let’s say from late 2009 to early 2011, we’re kind of stuck in at 1% to 1.5% growth range. If you noticed the last couple of quarters we’ve been able to move that up a bit.
This has been driven by a refreshed Dignity packaging and freight and we’re going back up and returning, we changed up the Dignity packages. And we believe it’s going to allow people to buy more of them, and therefore generate more revenues and profits.
We also believe that our increase in backlog average is going to continue to go up because the quality of contracts that we’ve written over the last few years and the higher price that goes into the backlog again we’ll be rolling out as time goes on. For our cemetery pre-need production growth, we expect that to grow in the mid high single-digit range.
Funeral pre-need production should grow in the low to mid single-digit range in 2012. Pre-need sales growth will be driven by continued training and development, use of technology, rolled out sales tablets to our sales force, by institutionalizing our lead management system, by continuing to grow community service sales and expanding our seminar program.
These things we think can allow us to grow at those rates. We believe that marketing and advertising costs peaked in 2011 and they should moderate and trend down slightly as a percentage of sales production.
Segment margins will be impacted somewhat by increased personnel costs, salaries and increases to health insurance that every company is going to experience. So these inflationary costs increases would be somewhat negated by strategic initiatives or cemetery back office staffing and supply chain initiatives, we think could drive down some costs to offset some of the increase.
We forecast the trust fund performance to range from low single-digit negative returns from here to mid single-digit positive returns. Keep in mind our equity exposure is around 45% we’ll try to model that in that.
So in conclusion, we’re very pleased with our performance in the quarter and in the first nine months of the year. As we look ahead, we still see some challenges of macro and industry specific.
We believe we are well positioned to execute impressive growth and value creation in this environment. The cash flow characteristics to the business remains strong and we plan to continue to capitalize on value enhancing opportunities in 2012.
Remember our capital priorities. Number one, reinvesting in our core strategies on high return, low risk projects like cemetery development property.
Number two, strategic acquisitions and very appropriate returns. We’ve been able to execute on that for the last couple of years and no reason we can’t do it in 2012.
Third, returning cash to shareholders through share repurchases and the strategy of increasing our dividend overtime. And lastly, managing our debt liquidity profile by managing cash levels, credit facility availability and near-term debt maturities to minimize the risk of SCI.
This concludes my prepared remarks. And I’ll turn the call over to Eric.
Eric Tanzberger
Good morning. I am going to talk about cash flow and trust fund performance as I normally do for the quarter, but I am also going to give you some insight into what we think about those in terms of the fourth quarter as well 2012 initial outlook.
I’ll also briefly discuss the current financial position of liquidity and then comments about the capital deployment that we had during the quarter. So, let’s start with cash flow and let’s first talk about this current quarter, the third quarter.
So the cash flow results for this quarter are outstanding and exceeded our internal expectations. The operating cash flow grew nearly $36 million over the prior year quarter.
About $11 million of that increase was due to lower cash taxes and lower cash interests, but predominant factor in that was higher cash receipts associated with at-need funeral revenues and strong pre-needs cemetery production, which you saw in the income statement that bodes very well for our cash flow statement as well during the quarter. Total CapEx for the quarter as you’ve seen was $29 million but the recurring expenditures for maintenance cemetery development was $26 million of that $29 million which is pretty similar amount in the prior quarters sequentially.
If you dug in these recurring capital spending items from the cash flow from operations, we calculate our free cash flow for the third quarter to be about $90 million. So looking forward to the fourth quarter as well as 2012, first let’s talk about 2011.
As our press release indicated, we are expecting to generate about $75 million to $95 million of operating cash flow for the fourth quarter. This brings the full-year 2011 expectations for this cash flow from ops to range of $370 million to $390 million.
This is an increase from the midpoint of the guidance range which we provided to you and talked about last quarter. We believe the maintenance in cemetery development CapEx in the fourth quarter will approximate about $25 million.
And therefore when you look at an annual basis for 2011 the recurring CapEx will land in the upper end of the guidance range of about $105 million. So what will this result in?
It will result in a free cash flow revised guidance about $265 million to $285 million for the full-year of 2011. So in terms of per share basis, this represents approximately a $1.11 to the $1.20 of free cash flow per share for the full-year 2011.
And that’s using a fully diluted share account of about $238 million and that represents a growth of about 9% from fiscal 2010. Secondly, let’s look ahead to 2012.
We believe we’ll continue in 2012 our proven trend of generating attractive operating cash flow. The guidance range property cash flow is $375 million to $425 million.
It generally reflects higher anticipated earnings that Tom has described earlier today but will offset somewhat by higher cash tax. So cash taxes in 2012 are expected to get increased to a range of about $20 million to $30 million.
And this compares to cash taxes of about $12 million that we’re expecting full-year of 2011. The other working capital changes within the cash flow statements are expected to be somewhat similar to 2011 levels.
Capital spending in 2012 will also be similar to 2011 levels and $95 million to $105 million with a maintenance and cemetery development and will probably have an initial $10 million or so for other growth capital expenditures. So when you deduct our maintenance and cemetery development expenditures from the operating cash flow, we did anticipate the free cash flow in 2012 to range from $270 million to $230 million.
So again on a per share basis, this equates to about a $1.18 to a $1.45 for 2012 and that’s used in a fully diluted share account about 228 million shares that we are modeling for 2012. As a midpoint of this range, this represents a growth of about 14% over the expected 2011 free cash flow per share.
And I talked about cash taxes but I’d like to briefly shift back to the income statement and comment on the tax rates. From an effective tax rate standpoint in the third quarter, our normalized effective tax rate was lower than what we anticipated at about 34.7% and this is due primarily to changes in our tax accruals which resulted from filing tax returns during the third quarter and also various state tax planning initiatives.
For the fourth quarter of 2011 and for the full-year of 2012, we are currently modeling a normalized effective tax rate of approximately 37%. Now let’s get into our trust fund.
As we all know it was a tough financial market in August and September. Our combined trust fund declined below over 7% in third quarter bringing the year-to-date trust fund performance to down 3.3%.
The total trust fund recognized though in our income statement for the third quarter was just under $24 million, about $4 million higher in the third quarter of 2010 but in total was generally what we anticipated on a sequential basis. The down market in September did not materially impact our third quarter trust fund income because we recorded net realized and unrealized gains and losses on approximate 30 day lag.
So expect to see some downward pressure on trust fund income recognized in the early part of the fourth quarter. However, if the current October market performance holds, we’ll expect this to be somewhat offset during the fourth quarter as well.
For the next year in 2012, our outlook assumes that our trust funds will realize an annual return in the low single-digit percentage range. I’ll turn into our financial position and liquidity.
The cash balance at the end of the quarter was about $127 million and today we have about $100 million. During the third quarter, we funded about $65 million on our $500 million credit facility.
$40 million of this was reimbursed for our debt repurchase that we made year-to-date. Now this essentially converts 7% debt to roughly 2% debt.
And the other $25 million was used for acquisitions in the third quarter. This action allows us to use our free cash flow for share repurchases when the free cash flow yield spiked in August and September and I’ll update you on that in a minute.
But in terms of credit availability, we still have a little over $400 million of borrowing capacity on our bank credit facility. This represents a $65 million drawn I just discussed and about $33 million of letters of credit.
We intent to leave this $65 million drawn to enable us to pursue more favorable capital deployment opportunities with our free cash flow because remember this is essentially 2% debt. It doesn’t mature until 2016.
We continue to add substantial liquidity and a great deal debt maturity profile that positions us well to explore value enhancing opportunities as we have no meaningful debt maturities until 2014. Now let’s talk about the capital deployment during the quarter.
From an acquisition standpoint during the third quarter, we closed on transactions for a total spend of about $31 million, as you can see reported in our cash flow from investing activities. Remember about $25 million of this was funded through our credit portfolio [ph].
During our third quarter, we also continued our share repurchase program and repurchased about 9.3 million shares for a total investment of about $91 million. And subsequent to the end of the quarter, we bought another 1.2 million shares for approximately $11.7 million.
As of today, we currently have a 138 million remaining on our existing share repurchase authorization and our current shares outstanding are down to about 226 million shares. Debt repurchases during the quarter totaled about $15 million as again we modestly continued to proactively manage our near-term maturities.
In summary, from a capital deployment perspective thus far year-to-date in 2011 through today we directed over a $155 million towards our share repurchases, close to a $100 million to acquisitions, about $33 million to deploy related to our dividend and $43 million to debt repurchases as well. So in conclusion, this was a great quarter for us.
We expect to continue our momentum in the remainder of this year. Our outlook for 2012 is for positive growth in earnings as well as cash flow.
And again the cash flow continues to be the success story here and what sets us apart in this time of financial market uncertainty. We’re getting to 2005 and that’s when we really developed our current operating platform and we also embarked on our growth strategy.
Our free cash flow per share has grown around 9% on a compounded annual growth rate, and we are very proud of this execution. We believe this existing cash flow and high free cash flow yield coupled with a strong balance sheet, great liquidity and a favorable debt maturity profile raises a very attractive investment going forward.
So with that, that concludes our prepared remarks. And we’ll go ahead.
Keith can turn it over to you to get questions from the group.
Operator
(Operator Instructions) And your first question is from the line of A. J.
Rice with Susquehanna Financial Group. Please proceed.
A. J. Rice – Susquehanna Financial Group
Thanks. Hello everybody.
Maybe Eric, can you just break out or give us a little flavor at least for the impact that Neptune had in the quarter. I am assuming it’s consolidated now and it’s fully reflected in the quarter?
Eric Tanzberger
Yes, we’ve been obviously operating with Neptune since June.
A. J. Rice – Susquehanna Financial Group
Right.
Eric Tanzberger
What we had and it’s a little bit tricky to see where they get categorized but overall we got about $14 million of revenue reported in the quarter. And the preponderance of the revenue is going to be shown in other revenue because it’s the sale of what I would call merchandize.
And that merchandize gets recognized when we deliver it. And then the service side, the revenue again will get reported like every other funeral profit.
And that’s a contract that’s associated with the number of death [ph]. So but together it’s about $10.5 million in other revenue and then the preponderance or the rest of it $4 million is close through normal funeral operations.
And the way to think about Neptune because I think we told you before, they generally are going to earn about a 10% to 12% margin. So as you think about that from an OP perspective and a little more when you think about EBITDA.
So the run rate of $6 million and it would be probably closer to $8 million or $9 million in EBITDA. And the exciting thing about Neptune is the growth possibilities.
We actually have just opened three new offices, I think in Minnesota, Chicago and Detroit. And those where you’re going to see some of the growth as we go forward and open new sites in 2012 and 2013.
A. J. Rice – Susquehanna Financial Group
Yes, okay. And I may have missed it but talking about your assumptions for 2012, have you said anything about your thoughts on stock buyback?
Eric Tanzberger
I think our thoughts on stock buyback again depending on where the price level is which show you the velocity of our share buyback. But I think when we think about it we’ve built in kind of moderate approach to that for 2012.
And again the prices rise you’ll see an aggressive approach but we fully expect to be in the market buying back shares in 2012.
A. J. Rice – Susquehanna Financial Group
All right, and then my last question would just be, the mention about buying back some bonds. Is that driven by the recent volatility in the credit markets or is that sort of still part of the ongoing desire to deal with maturities through open market purchase.
Just give us some flavor for what you’re doing there?
Eric Tanzberger
It’s really the later A.J., as you could tell, it was a very modest and it’s when good opportunities come in the sense of pricing but in the sense of managing our near-term maturities but our first maturity is not till October 2014. You should, you know notice that the large discrepancy in terms of the spend buying our shares back at this free cash flow yield versus buying any bonds back.
So as the world is completely changing I think you should consider that as that trend is well going forward in 2012.
A. J. Rice – Susquehanna Financial Group
Okay. It sounds good.
Thanks a lot.
Operator
Your next question is from the line of Clint Fendley with Davenport. Please proceed.
Clint Fendley – Davenport
Thank you. Good morning guys and very nice results in a tough environment here.
First question, I wondered Eric, what your cemetery margins would have been actually you had excluded the benefit from the property rights easement.
Eric Tanzberger
The property rights easement was just around $3 million or so. So we’ll have to do that math, it would move in a little bit but it wouldn’t be overly material at all.
Clint Fendley – Davenport
Okay. And I guess any thoughts on how Neptune impacted the cremation mix during the quarter because I guess this is about the probably the third quarter when we really had an accelerated rate of change in that mix now?
Eric Tanzberger
Yes, it definitely impacted, they are consolidate somewhat but again its probably on that contract that probably might have (inaudible). So but I think there is a number of that we disclosed the year plan in the press release, it’s still the comparable numbers.
So it wouldn’t be in that. So we’re experiencing a lift in cremation, that’s more accelerated than I think anybody anticipated outside of Neptune.
Clint Fendley – Davenport
And is there any color that you guys can offer maybe even just on geography, I mean it’s just happening in more traditional areas like the Southeast or is it in higher acceptance markets like maybe Arizona or Florida?
Eric Tanzberger
Yes, surprisingly I’d say we’re seeing it more in the East Coast, both the Southeast and the Northeast, places like Maine which is already high rate but significant jump there and significant jump in the Southeast. But I’d say more in the East Coast but really everywhere, that’s where we’re seeing probably little bit more of acceleration.
Clint Fendley – Davenport
And I guess from a management perspective I mean given that the rate of change that we’ve seen the acceleration of that change, are you doing anything differently now to respond to what is now a higher rate?
Tom Ryan
Well I think what we’ve always done Clint is making sure that to us if the cremation or burials or choice it really doesn’t matter. The purposing is the foot, the products and services that may extend to safe line value in front of us.
So we’re doing that in a lot of ways through our Dignity packaging and obviously our pre-need basis through Neptune. But I wouldn’t say there is anything different on a national scale.
I think every market has a certain level of cremation, and when you look at the infrastructure there is always plans built in as that increases, it may changes away that you staff and it may change the way that you run your fleet, it may change the way you think about your footprint in that market. But that’s really kind of a local driven strategy.
Clint Fendley – Davenport
Okay. And last question, as you look at your business you guys historically have done a very nice job of gaining efficiencies taking out unnecessary costs.
Is there anything as you look across your business today when there are opportunities going forward that maybe we could look forward to think about for next year or even beyond for additional efficiencies?
Tom Ryan
Yes, I think there is quite a few surprisingly. I think every time we look back, a lot of its going to be driven by metrics.
You’ve heard us Clint talk a lot about putting metrics in different places so we can be more effective. And I’d say that continues to be the story on the sales front.
We’re very metrics driven. We started it kind of with our funeral operations and I’d say there is still more room there as we move markets to more efficient use of personnel.
But in particularly we’ve got a couple of things going. One is I think on the procurement side, we’ve done a great job.
The leadership there of finding new ways to stay on the way that we purchase items. We’re looking at a system that’s going to probably allow us do more of that as we move into 2012, 2013.
In addition, like I said before, we’re utilizing technologies to drive that. We now have sales tablets for all our sales counselors someday soon we’ll be writing those contracts on those sales tablets to eliminate a lot of the duplicate effort of pre-including contracts.
It will reduce mistakes that are made, that we have to go back and fix later. So I look for particularly on the cemetery side probably it’s going to be the bigger focus where you’ll see some cost driven down in 2012 and into 2013.
Clint Fendley – Davenport
Okay, thanks. That’s helpful and I am sorry, just one last more.
When I look back at your free cash flow growth, it maybe results growth of 9% in sense with 2005. We’re looking forward now to an environment where at least demographically it may be easier for the next two years to sell that the higher numbers of people but yet we may not see that the death rate moving up yet, I mean is there anything about that type of environment?
How should we think about your free cash flow growth prospects in the next couple of three years relative to what could be those demographic trends and the increased opportunities in pre-need before we actually see the volumes moving up here?
Tom Ryan
Yes, I think from a cash flow perspective, if we can grow pre-need funeral, I am sorry, pre-need cemetery properties for example, to the extent we can continue to grow that. That is very cash flow positive for us because as you know Clint, we don’t trust any money related to that so whatever we can sell and collect is cash flow growth.
On the funeral side, its slightly negative in the sense that we generate if we sell an insurance contract about 20% G&A revenue, to fund a lot of what we, we’re running right now for probably in the 22% to 23% all in with lead generation costs and the selling costs. We’re working on managing that down but as you grow pre-need funeral you may see a slight degradation in the cash flow, but we think it’s a smart thing to do.
So I think that coupled with the savings, that coupled with the fact that we’re pretty excited about some of the revenue opportunities. I really think we’re trying to find new products and services, new revenue streams to help us grow that very, very difficult comp revenue line.
So we model our cash flow, we’re still very pleased with I think over the next few years our ability to generate new cash. Eric will tell you we probably will pay a little more taxes as we go into future, not a lot.
And that’s going to put a little bit of pressure on cash flow. But I’d say our projections for operations will more than compensate for that and allow us to continue to grow the cash flow per share over the next few years.
Clint Fendley – Davenport
Great, thank you, and again nice quarter.
Tom Ryan
Thank you Clint.
Operator
And your next question comes from the line of Robert Willoughby with Bank of America/Merrill Lynch. Please proceed.
Robert Willoughby – Bank of America/Merrill Lynch
Hi Tom, Eric, did you spend the $31 million, was that all Neptune or was there anything else that you did in the quarter?
Eric Tanzberger
No, it wasn’t Neptune. Neptune was at the end of the second quarter.
It was about five different things, one was in the Virginia area that was the lion’s share of that. But it just various deals that we’re starting to do now.
Robert Willoughby – Bank of America/Merrill Lynch
Okay, that’s right. Neptune was June 3rd or something?
Eric Tanzberger
Yes, it was.
Robert Willoughby – Bank of America/Merrill Lynch
Okay, I got you, I am sorry. And just – yes, I’m sorry.
Tom Ryan
The deal in Alexandria, Virginia we believe it was a pretty significant about a $10 million revenue business, so we’re privileged [ph].
Robert Willoughby – Bank of America/Merrill Lynch
Okay. And just the pre-need cemetery production, that continues to track these high levels, what kind of expectations do you have on that side, I mean what kind of tampering have you done reflecting the economy, I mean do we keep running at this rate or would you model out in fact going forward?
Tom Ryan
On the cemetery job?
Robert Willoughby – Bank of America/Merrill Lynch
Yes.
Tom Ryan
I think we think this year has been an extraordinary year. I think it would be hard to replicate double-digit growth on the cemetery side, not impossible but not the way we model it.
I do think on the cemetery side, we think we can grow at a high single-digits with a lot of things that we’re doing and that again is the comparable store Bob, so it’s not going to be from acquisitions, it’s going to from better lease, bigger sales force and generating core profit. So that’s probably where we guide you the model.
I am not saying it can’t be done, just hard to do that consistently.
Robert Willoughby – Bank of America/Merrill Lynch
Okay. And just on the better cash receipts that I think you called out on the funeral business.
Can you give us – I mean are people are paying you sooner, why would they I guess would be my question?
Eric Tanzberger
It’s really just managing it as well as we can, I mean our field management has done a tremendous job of keeping up with our metrics such as days sales outstanding and now looking at the aging on the receivables. And they are really doing a phenomenal job continuing to make receivable collections even better.
And then of course when you’re selling pre-need cemetery property like Tom mentioned earlier, you’re not trusting that Bob. So you’re getting that cash right away for the most part and when we had the great spike in sales we’re getting a great spike in cash as well.
And those two things that really drove the cash flow increases for the quarter.
Tom Ryan
Yes Bob, Eric is right. When you think about almost the entirety of our growth on cemetery in all property.
So you think about revenues and the cash associated with those revenues. We’re putting – the growth we’re getting is the best cash flow growth.
Yes, I think that’s driving the cash relative to the earnings.
Robert Willoughby – Bank of America/Merrill Lynch
Wonderful. And you mentioned I think I thought I heard you say Tom, you are opening up more offices for Neptune.
Are there other kinds of things that you’re doing, is there some margin degradation we should expect to see for Neptune before we see more accretion coming in, what anecdotally are you looking to do with that asset?
Tom Ryan
Well we’re looking to grow it. I think that in fairness to Neptune we’d only been involved for four months.
So I think there are things that are already in motion. One is from a merchandize perspective we’re beginning to leverage that, we haven’t seen the numbers yet.
I think there is some other synergies that are going to take some time to get in the business probably we aren’t going to see those except in the 2012 but the thing we’re probably most excited about is the ability to grow this and put it in new markets, like I said we’ve got three new markets we’re going to enter, in 2011, we already entered them actually but we’ll begin to see those results. And I think we would expect to see somewhere in the 5 to 7 to 8 range of offices opened in 2012 and maybe the same in ‘013.
And those staff drive and I think Marco and his team know how to do it best, could be up and running profitable very, very fast. Particularly I was looking at Minnesota last night, out of the gates I think very, very well.
So we’re excited about that. But again I think you got to put it over the context what I said Neptune probably in year one, we are modeling call it $6 million in operating profit.
And we can grow that on a percentage basis I think pretty good, but when you put it with the SCI it’s going to be helpful but there is lot of things we’re going to have to do to drive future profitability.
Robert Willoughby – Bank of America/Merrill Lynch
Right, great. Thank you.
Tom Ryan
Thank you Bob.
Eric Tanzberger
Thanks Bob.
Operator
(Operator Instructions) Your next question is from the line of Nicholas Jansen with Raymond James. Please proceed.
Nicholas Jansen – Raymond James
Hi guys, thanks for all the color on the cash flow, just one quick question, a lot of its been answered already, but in terms of the M&A landscape, what are you seeing there, certainly you’re close to $100 million in acquisition spend this year. It’s a pretty good number with no maturities and so kind of 2014, just kind of your perspectives on balancing kind of share repurchase, dividends, and acquisitions?
Thanks.
Eric Tanzberger
I think on the balance question it all gets back to evaluation, what are the pricing and the deals that we see relative to the price of SCI stock from a free cash flow yield perspective with that. I think our expectation would be that we continue to see yields out there, we think we can execute on that.
I think it’s a level of $100 million if you back out Neptune, we’d probably spend somewhere closer to $50 million, $60 million this year. That’s probably a more realistic thought about next year in the sense that you’re not notifying something in the size of the Neptune every day.
So I think that’s very achievable. I think at those reasonable rates.
But it’s really hard to tell when these things are going to close and when people are going to be more excited. And I’d love to tell you little bit more maybe I will but at this point in time it’s probably a reasonable thought as you think about cash flow use in 2012.
Nicholas Jansen – Raymond James
And is there any – sorry, is there any increase kind of competition, obviously some of the public guys are certainly talking more and more about acquisitions. So just any upward pressure on the multiple for the one-off transactions and for let’s say a bigger one like the Alexandria one in Virginia?
Tom Ryan
We haven’t seen any of the deals in we’ve closed. I would tell you prospectively though that that would be my anticipation that you’re probably going to see a little more activity and when there is little more activity, you’re going to see that moving the price.
But we’re going to be very disciplined about what we want to buy and what we’re willing to pay for, because there are other options as you look at our share price and look at the free cash flow yields that Eric was talking about perform in 2012. If the deals aren’t there at the right prices, then we got something else to do with money.
Nicholas Jansen – Raymond James
Thanks. And then I guess just last one in terms of cash taxes, certainly you guys have done a great job managing that and it looks like it’s been flat to down over the last four or five years.
I know you’re expecting it to increase to let’s say $20 million to $30 million next year, but when should we think about that moving much higher than that because it seems like if you go back and looking at the model, looks like it’s been pretty steady around $20 million for last couple of years. So any thoughts on cash taxes would be helpful?
Thanks.
Eric Tanzberger
Well one of the reasons why it’s been helpful as we continue to execute on good tax planning and that has shielded some of our taxes, if you remember Nick I talked to you about in tax accounting change we did this year, sorry last year at this time and that’s helped us. In terms of the shielding from NOLs that we have, we still have – our estimates are at the end of this year we’d still have $225 million to $250 million of NOLs, the shield futures.
So you can’t use all of that right away because if you remember as we talked about before the Alderwoods situation, doesn’t allow you to use it all at once and that’s a good amount of that. But as you see we’ll start going a little bit higher in 2012 absent tax planning opportunities, but you could obviously say our track record is continue to tax plan and then as Tom said it will start creeping up in 2013 and 2014, absent things we don’t planning opportunities we haven’t executed as of now.
But we don’t think that it’s something that is just as huge win [ph] that’s coming that we can’t overcome with all of the free cash flow growth that we have built into the operational segments and all of things we are doing that Tom has mentioned clearly achieves to that.
Tom Ryan
Let’s say just by the nature of our tax balance sheet even at the higher levels, we’re really talking probably about spending $30 million to $40 million a year in cash taxes and again like Eric pointed to, operationally we can overcome that, that’s not a big number for us.
Nicholas Jansen – Raymond James
Well that’s all I had. Great quarter guys, thanks for all the details.
Eric Tanzberger
Thanks Nick.
Operator
And there are no other questions. So I’d like to turn the call back over to SCI management for closing remarks.
Tom Ryan
I want to thank everybody for joining us on the call here today. And we’ll be talking to you next year in 2012.
Thank you again.
Operator
Ladies and gentlemen that concludes today’s conference. Thank you for joining us and you can now disconnect.
Have a great day.