Mar 1, 2010
Executives
Debbie Young – Director, IR Tom Ryan – President and CEO Eric Tanzberger – SVP, CFO and Treasurer
Analysts
John Ransom – Raymond James Robert Willoughby – Bank of America Clint Fendley – Davenport Vimal Nair – Wisco Research
Operator
Good day, ladies and gentlemen and welcome to the fourth quarter 2009 Service Corporation International earnings conference call. My name is Colby and I will be your coordinator for today.
At this time, all participants are in listen-only mode. We will conduct a question-and-answer session at the end of this conference.
(Operator Instructions). As a reminder, this call is being recorded for replay purposes.
I would now like to turn the call over to SCI Management. Please proceed.
Debbie Young
Good morning, everyone and welcome to our call today. This is Debbie Young, Director of Investor Relations for SCI.
As usual, before we begin with our prepared remarks, I need to walk you through our Safe-Harbor language. In our comments 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 risk factors, please review our periodic filings with the SEC that are available on our website at sci-corp.com. In addition, on the call today, Tom and Eric may use the terms like normalized EPS or normalized 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 term.
And now, I'll turn the call over to President and CEO, Tom Ryan.
Tom Ryan
Thanks, Debbie and thanks, everybody for being on the call today. Today, I thought I'd give you some thoughts on our performance through the quarter, as well as some of the factors that are driving those results.
And then I'll give you a few comments about our updated earnings per share, which you may have already seen, hopefully in our press release. So first, an overview of the quarter.
In 2009, our company got stronger and our results improved as the year went on. Culminating this quarter was an outstanding performance.
We significantly exceeded the high end of the updated earnings per share and cash flow guidance ranges back the first week in November, our normalized earnings per share of $0.14 versus $0.09 in the prior-year quarter. Now, keep in mind, last year's fourth quarter was a scary one, not a great one on performance and the financial markets were in turmoil.
So this wasn't a – the most appropriate comparison. Having said that, it did exceed our expectations and really grew, I'd say, on a sequential basis more than we would have anticipated.
The drivers of our performance for this quarter were the same three that we have seen drive our performance throughout the year. What I would tell you that is different this time is that in the fourth quarter, I would change the order of magnitude of these drivers.
The number one driver of our performance was improved cemetery sales productions this quarter. Secondarily, I would say it was expense management, which has driven a lot of the performance year-to-date.
And lastly, a favorable trust performance. We saw decent market returns in the fourth quarter, compounded on top of the ones that we've seen throughout the entire 2009.
First, I'll turn to our funeral operations. Comparable funeral revenues for the quarter were up slightly.
Same-store volumes were down approximately 3.6% for the quarter. This continues to be a concern of ours.
Having said that, we go back and look at all the comparables that we can and we noticed throughout the year, we started with dramatically down volumes that have progressively gotten better. Unfortunately, there is still negative comps.
We still believe that these are generally reflective of the deaths in the market place. We've seen our cemetery interments continuing to be down, which are less competitive than funeral markets.
We've seen our preneed-atneed comparable numbers go down as well. We have seen our competitors and vendors, similar trends downward.
And again, evaluating the CDC data, we see the same types of trends – not exactly with our numbers, but trending in the same direction and approximately within the range. We finished the year down 6.7% at same-store funeral services.
And not only is this the first in my career, but Bob Waltrip would tell you it's probably the first time he's seen in his career and that says something about 2009 and what's happening with the relative deaths in the market place. Out of the gate in 2010, we continue to see softness.
We think we are down probably in the low-mid single-digits through January and preliminarily looking at the first two weeks of February. This, however, is in line with the guidance we provided for 2010.
We've set that expectation in our numbers. Although funeral volumes were challenging in 2009, the good news is that funeral average continued to grow.
It was up 1.2% for the quarter and 2.7% for the year when you exclude currency movements and the trust fund impact. So this tells you that we continue to be able to pass along inflationary price increases to our consumer.
I won't tell you it's easy, but it's happening. This includes absorbing a 140-basis point increase in our cremation rate and selective market pricing pressures that we are dealing with.
Our outlook for 2010 assumes that we continue to grow the average in the low-single digit range. On the funeral profits front, we actually grew $7 million or 9.6% and our gross margin improved 190 basis points, 23.5% from 21.6% in the prior year's fourth quarter.
We continue to benefit from the cost reduction initiatives with lower variable costs and workforce initiatives. Keep in mind also that our margins were stronger and despite higher preneed selling costs as a result of increased preneed sales production.
Preneed funeral sales, and remember these are deferred into the backlog – grew some 20%. Now given this is comparing back to a very challenging fourth quarter in 2008, that may not be impressive, but they grew to $114 million for the quarter.
Now, this exceeded our expectations by a very reasonable amount of selling. And again, we are very, very pleased.
The other part of our solid performance that I would point out is the preponderance of this growth is due to contract volume growth. So we are seeing more consumers choosing to preneed for a variety of reasons, but that's the primary driver of this and not necessarily the average.
Now, I'll shift to our cemetery operations. Cemetery segment finished strong in the fourth quarter.
Comparable cemetery revenue increased 10% quarter-over-quarter. This was primarily attributable to outstanding execution on preneed sales production side, much stronger than anticipated and was the primary upside driver for the quarter.
Our sales team really delivered and I want to thank them and give them the appropriate recognition for their extraordinary efforts, especially during the most challenging times we've seen in 2009. We grew our comparable preneed sales production over $26 million for the quarter or up over 36%.
It's really a continuation of what we saw in Q3 just exemplified. We improved consumer sentiment that we were facing.
We also saw better counts of productivity from training and better sales management. We also saw selective customer incentives that were effective in the quarter and continued to be as they were throughout the year.
We also saw the resumption of large sales activity. And all of these things kind of came together to allow us to drive those sales to a level that's much further than we would have anticipated.
We also had reasonable trust returns for the fourth quarter, which led to higher trust fund income, again – we – for the first time in a long time, we saw our earnings outpace the prior year's quarter. We are trying to make up for that fourth quarter of 2008, which took the markets down so dramatically.
So now, we are back to the par, if you will, and beginning to hope that we grow in the future. The strength on the preneed production side and the higher trust fund income more than offset small declines in our atneed cemetery revenue.
On this success, cemetery profits improved 81%. Our gross margin grew 820 basis points to 20.7% from 12.5% in the fourth quarter of 2008.
In addition to the increased revenues, our team executed on cost savings, primarily related to cemetery maintenance initiative and lower merchandise and personnel costs from leveraging our scale of metrics. Going forward, we still expect further cost savings on the cemetery side related to our cemetery administration and maintenance initiatives.
As you will recall, we are streamlining the arrangement of recordkeeping process with technology improvements and we are standardizing the maintenance function partly through outsourcing, partly through driving interment efficiency. As you saw on our press release, we provided updated earnings per share guidance for 2010.
Our new earnings per share guidance range is $0.48 to $0.56. As you recall, the old range was $0.45 to $0.53.
The primary reason for this increase is based on the trends we saw in the second half of 2009 and what we are seeing in preliminary 2010 as we believe that cemetery preneed sales productions will be better than we originally anticipated. We finished 2009 at $0.51 earnings per share.
And I want to build a little bridge for you so you will understand where our guidance is taking you. When you think back about 2009, we benefitted from a couple of things that won't be able to repeat themselves.
Number one, we had a one-time insurance reserve reduction. And again, this is something that we've been building on for years, but finally realized a one-time benefit that helped us in the third quarter in the tune of about $0.02.
Also, we obviously had some cost reductions that occurred in 2009 that were not sustainable. This was, again, launched in late 2008 when everybody through the world was going to end.
We clamped down on costs, we clamped down on CapEx, and we are going to turn those things back on. So when you take those two things out, you will probably get a more normalized 2009 in the – call it $0.45 to $0.46 range.
So from there we believe we can build. We are going to build number one, from the contribution of our acquisitions.
Both Palm and Keystone are going to be accretive to 2010. Secondarily, operating improvements are going to allow us to grow the business.
Let me highlight a few of those areas for you. Number one, we anticipate better cemetery sales production in 2010 that should add to earnings.
Our cost reduction initiatives, particularly around the cemetery administration area and to a lesser extent, cemetery maintenance again should be added to its earnings per share and cash flow. Also, higher trust fund income.
When you take all these positives into effect, they are expected to outpace other inflationary cost increases, as well as a difficult funeral volume environment that we anticipate for 2010. Lastly, an update on our strategic acquisition.
On December 3rd, 2009, we closed on Palm Mortuaries in Las Vegas. This is one of the premier firms in the United States in a high-growth retirement area of Las Vegas.
Historically, they’ve had over $30 million in revenues and again, Charles Knauss founded this company, and his son Ken continued on the tradition. They've been providing exceptional service to the Las Vegas community for more than 50 years.
We want to welcome the Palm organization and its many talented associates in the Dignity Memorial family and thank them for their successful integration into our network of businesses. And I can tell you from having been there and visited these folks, these are a talented group of people that are very excited to be part of our organization and we are excited to have them.
And no, I didn’t go to Vegas to gamble. I went there to visit them.
I know a few of you are laughing out there. But it was a great visit and we are really excited to have Palm as part of our family.
With regard to our pending acquisition of Keystone North America, it's the fifth largest provider with about $125 million in revenues. We still believe we can close this transaction in March.
We are excited about the opportunities that Keystone brings to us. We look forward to working with their associates.
And finally, to conclude, during 2009, we significantly exceeded our financial goals that we set for ourselves at the beginning of the year and despite the challenges in the macro environment, we still accomplished those goals. This is a testament to the resiliency and strength of our business model and to the remarkable efforts of our 20,000 employees.
In the face of the global economic slowdown, we put in place clear action plans and today's results clearly demonstrate disciplined execution of those plans. Furthermore, our strong performance in 2009, which is one of the most challenging we've ever seen, gives me great confidence for continued success in 2010 and beyond.
This concludes my prepared comments. And I'll turn the call over to Eric.
Eric Tanzberger
Thanks, Tom. Today, I'm going to briefly highlight our cash flow and our trust performance for the fourth quarter.
I'm going to talk a little bit about our 2010 cash flow guidance and outlook and then I'm going to discuss our current financial position and liquidity, especially as Tom just mentioned, as we prepare for the Keystone acquisition to close imminently. Our cash flow performance was very impressive this year, especially in light of the challenging environment.
This again we want to reemphasize, we believe is a distinguishing characteristic of SCI that really sets us apart from other companies in today's market. And first of all, I want to pass on a "Thank you" as Tom did to our 20,000 associates and employees for their efforts during 2009.
Very tough year, they were asked to significantly contain costs, and they have done an outstanding job. That resulted in an outstanding cash flow performance, especially in the fourth quarter as they grew $38 million year-over-year to $67 million, which exceeded our expectations.
When I do that math, you have to normalize the fourth quarter of '08 for one-time items, which is the tax refund received and pension termination costs, and that's in the press release that you will see in the back related to the reconciliations. But what's the key reasons for this $38 million increase in cash flow?
First of all, it's the higher earnings, the higher EBITDA that Tom certainly talked about earlier in his remarks. The other thing is we had a payroll timing issue.
And recall that we prepaid part of our fourth quarter payroll in the third quarter and I mentioned that in our November call and this resulted in about $15 million more cash flow in the fourth quarter of '09. We also continued to keep a tight rein on our capital spending in the quarter.
Our total CapEx is about $21 million, which is about half of what we spent in the prior-year quarter; and with maintenance and cemetery development, was about $17 million of this $21 million. So when you do the math and deduct the recurring capital spending of $17 million that I just described form the cash flow of operations, we calculate our free cash flow of the fourth quarter to be a very healthy $50 million.
This is certainly significant better than the fourth quarter of '08 when we had negative normalized free cash flow of $9 million and we all remember, fourth quarter of '08 was an extremely tough quarter for us and other companies. Free cash flow for the year for 2009 ended just about $300 million, about $82 million or 37% higher from last year.
This is, again, considerably higher than our original expectations. If you remember, when we first gave our expectations in February of 2009, we expected cash flow of $130 million to $220 million.
So just a great year compared to that original expectations, helped by the cost containment initiatives, but especially the rebound in the consumer and the marketplace, the financial markets as well. Outstanding operating improvements really drove this significantly lower capital spending.
We, again, had to be very disciplined in 2009 and our team really delivered. We also successfully executed though on cash management and working capital initiatives throughout 2009.
So looking ahead to 2010, we expect to continue to generate very attractive operating cash flow. Our actual 2009 cash flow from operations is about $372 million and we are expecting $300 million to $350 million of cash flow from operations in 2010.
So recall that the incentive compensation payments were minimal in 2009 and that in 2010, we anticipate returning to more normal incentive compensation experience of payments. This will result in a decrease of cash flows in 2010 when you compare to 2009 of about $20 million to $25 million.
Also recall in the third quarter of '09, we liquidated certain life insurance assets, which produced $15 million of proceeds that will not reoccur in 2010. These two work cash flow items, coupled with higher cash taxes, which I will discuss in a minute, are the primary reasons why I believe our operating cash flow will be in the $300 million to $350 million in 2010.
Although we've just modestly raised the earnings per share guidance for 2010 today, the primary reason we are not increasing cash flow guidance is due to higher cash taxes than what I originally antiquated back in November. So in November, I expected – I discussed $20 million to $25 million of expected cash taxes in 2010.
I now think it's going to be higher than that, probably in the range of $30 million to $40 million of cash taxes in 2010. Reasons for this is, first of all, we increased our earnings expectations to have more taxable income in 2010; and the second reason is the fourth quarter '09 earnings were higher than we expected and therefore we ended up fully utilizing our allotment of net operating losses that we previously thought some of those would be carried over to 2010.
From a working capital perspective in 2010, when you think of our cash flow statement, working capital in 2010 will be a use of cash, primarily because we will have incentive compensation payments in 2010, we will have less working capital from enhancements in our trust area that I also mentioned in the November call and because we anticipate the continuation of the current trends of lower down-payments on premium property sales. Our assumptions regarding capital spending in 2010, though, remain unchanged.
So just to reiterate, when you do the math, we anticipate our free cash flow in 2010 to be in a range from $205 million to $265 million. And again, using an $8 share price, this presents a 10% to 13% free cash flow yield on SCI shares, which we think is just quite significant.
Now, shifting to the trust funds, we continue to see good trends in the trust fund performance. As we disclosed this in our release last night, the combined trust fund assets increased by just under 4% in the fourth quarter.
For the year, the trust in total were up about 25%, which is pretty comparative to the S&P 500, which I think ended up right around 26% for 2009. Total trust fund income recognized in our income statement for the fourth quarter was $21 million, which compares to about $11 million in the fourth quarter of '08.
And for the full fiscal year, the trust fund income recognized in our income statement in 2009 was about $70 million versus about $83 million in 2008. So while this amount was lower than in the prior year – again, this is much better than our original projections.
Our guidance for the trust fund returns and their performance in 2010 remains unchanged as I discussed in November and recall that we are assuming that our consolidated trust funds will realize an annual return in the low-single digit percentage range. Now again, this could be affected positively or negatively by the financial market changes in 2010 and already preliminarily in January, the results showed that the trust in total were down slightly, probably about 1%.
But again, February is not available yet. Now, shifting from – to our liquidity and financial position as we prepare for the closing of the Keystone acquisition, our cash balance at the end of the quarter and the year was about $180 million.
Today, we have about $165 million of cash on hand. The slight decrease in cash from the end of the year primarily reflects the dividend payment that we had in January, which is about $10 million and a $30 million payment that we did to reduce our outstanding revolver balance.
These two things were also offset by positive free cash flow we had so far in 2010. In addition to this $165 million of cash we have, we also have a $150 million of proceeds that is held in escrow from the new senior notes that we issued in November of '09.
I just want to pause there and explain some things we've had related to that – questions that we've had recently about this. This restricted cash that I mentioned, the $150 million is in deferred charges and other assets on our balance sheet.
And that's the reason why balance sheet line item increased about $154 million since September 30th. Although our net debt, which we define as our total debt minus cash, appears to have increased for the quarter by about $200 million, when you add in these bond proceeds in escrow, which we will receive, the net debt really only increased for the quarter by about $50 million.
And that equates to the decrease in our cash balance, which again is due to the acquisition that we funded with cash in the fourth quarter of 2009. So we currently have about $230 million of availability also to use in the acquisition on our $400 million revolver, which again is a long-term revolver, which matures in 2013.
This revolver is currently used to support about $50 million of letters of credit and we also have drawn about – have drawn about $120 million of our revolver today. That amount was again $150 million at year-end, which we used to pay off our private placement notes; but as I mentioned, we paid that $150 million down by $30 million.
So today, it's about $120 million even though it was $150 million at the year-end. Our plan is to continue to pay down this revolver, but again, we'll probably leave it at a balance of about $100 million and keep that as kind of permanent financing from the re-financing of the $150 million of the private placement notes that I mentioned that we paid down.
We did direct a significant amount of cash flow in 2009 towards opportunistic debt repurchases. We did about just over $90 million in open market purchases during 2009 and our total payments of debt include schedule maturities in 2009 of about $143 million.
In terms of looking forward on further debt repurchases in 2010, I think going forward you'll see less of this activity as we are currently operating at our – at kind of our net debt leverage ratio of about 3.5 times or less. But we will also be opportunistic with our capital.
So good things come along in terms of debt repurchases, and if there are good opportunities for us, we will consider those. So lastly, just to conclude, again I want to reiterate, we finished 2009 with really robust cash flows.
And again, I want to thank our frontline employees throughout the organization for executing on the cost containment initiatives. And as we look forward into 2010, SCI enters 2010 with a strong balance sheet, great liquidity, a favorable debt maturity profile with no real maturities due until November 2013 and a very attractive cash flow yield as I mentioned, which positions us to take advantage of opportunities that again will increase shareholder value in 2010.
So again, Colby, for that – I think that concludes our prepared remarks. And I think we are ready to open up the call to our investor questions.
Operator
(Operator Instructions). And thank you for your patience while we assemble the list.
Your first question comes from the line of John Ransom with Raymond James. Please proceed.
John Ransom – Raymond James
Hi, good morning. What is your kind of cash and revolver balance, like, adjusted for Keystone that you anticipate, let's say, by end of April?
Eric Tanzberger
Well, we have – it's a $250 million, $260 million deal. We have $150 million coming from proceeds and to tell you the truth, John, we really hope to use the $165 million and not draw on our revolver balance by the time this closes.
So I think our cash will drop into the $100 million-ish range. You still have the $120 million out there on the revolver.
As I just mentioned, we will probably pay that down to kind of a permanent $100 million, but we just don't see a significant drop on the revolver to complete the acquisition. And with the bond proceeds and the cash available, I think that would be the game plan.
John Ransom – Raymond James
And the reason for the escrow is this deal was done to fund the acquisition. Is that right?
Eric Tanzberger
That's correct. It was done to fund the acquisition and on the very, very remote chance, that we don't believe now, at that time that the deal did go through, it gave us the ability to give the bonds back and not have that long-term debt.
John Ransom – Raymond James
Okay. And can you give any color on the acquisition in terms of timing, the original time frame you expected and what you expect now and has there been any unexpected issues with the FTC just in terms of process?
Tom Ryan
No, John. I think – these things always take time and we've worked early with the Federal Trade Commission and we've always wanted to a Q1 closing and I think March has probably been the month that we thought it would happen and we still believe that.
So we are hopeful that we'll have some good news here in the coming weeks.
John Ransom – Raymond James
Okay. And just remind us, share repos, is that back on the table at some point with your net debt being 3.5 times?
Tom Ryan
Yes, I think from a ratio perspective, John, we are entering that period where that's an option for us. Clearly, as we think about priorities, we are investing back in our business, we are looking at acquisition opportunities, because growth with the appropriate returns may have higher cash returns that even share repurchases can.
And in absence of those two things, I think share repurchases makes a lot of sense like Eric mentioned. When we look at free cash flow yield, we are looking at 10% to 13% after-tax cash return on our shares.
So to the extent we can't invest better, that's an attractive alternative for us.
John Ransom – Raymond James
And I would think the fact that you are almost a full taxpayer now would shift the balance in favor of the share repos versus the deductible interest expense and debt reductions?
Tom Ryan
That would be correct.
John Ransom – Raymond James
Okay. And I guess the last question, just more of a business question.
You guys did that this deep dive on death rates. For the good people at Harvard, what kind of lessons have you drawn out of that that you can share and can you talk about your outlook or are we looking at probably a down 2% [ph] or so death rates through the end of the decade, just looking at the demographics and people living longer?
Tom Ryan
I don't think that study has concluded anything like that. We are still in the process of completing that.
But I will tell you, based upon on that and some other things, it's our clear opinion and again, year-to-year, it's impossible as you will know. Something can trigger an event that could give you comparable volume increase.
But if you ask our expectation over the next three to four years, we would expect generally those numbers to be down for the continued reasons we've told you before. One is the – again, the medical advances that someday that's going to slow down as well.
But number two is this lack of bursts that occurred between 1929 and 1936. We know those two events are going to put downward pressure on the numbers of death in our relevant market.
As those can be overcome temporarily by big flu seasons, other types of things that could drive death. But I think that's kind of the backdrop under which we are operating the business.
And the good news is it doesn't change anything, because our businesses have the capacity if we are wrong and the numbers of deaths go up, we will handle that and that will be a nice way to run our business. Having said that, I think we are operating under the assumption that we are probably going to see down comfortable volumes generally for the next few years.
John Ransom – Raymond James
Okay. And I guess the last – if you look a the dollar gross profit – not the percentage gross profit, the dollar gross profit between your non-casketed and casketed funerals, have you been able to narrow that difference at all to offset those 140 death annual cremation trend?
Tom Ryan
We have over the last few years and the preponderance of that has been because of our strategic pricing; putting less pricing on product versus service. The second thing that we've done, which I think is a little more positive in the long term is focusing more on the cremation consumer.
We've been able to sell a higher average cremation consumer. Part of that is because we are not servicing as many at the low end, but part of it is also because we are interacting in a better way with our consumers through merchandising techniques, through new products and services, and by offering those types of products and services, we are seeing some of those consumers buying up and we think that trend can continue.
Now, we are all – we all live in this economy and understand it's tougher times. So we realize we are selling against a more challenging consumer.
At the same time, I think this is something that's very important to people, it's emotional to people and if we can put the right types of products and services, I think it’s something they will find value in and will purchase. So yes, we are seeing it close.
It will never completely close, because again, I think the casket is a product that's hard to duplicate on the cremation side.
John Ransom – Raymond James
How would we think about that difference? Maybe a couple thousand dollars per funeral, around that range of gross profit difference now between funeral and non – or excuse me, between casketed and non-casketed?
Tom Ryan
That maybe today close to what it is. Again, I think that can narrow, but that's not just all casket, that also reflects some of the loss margin from not presenting all the options to the cremation consumer at every transaction that we do, so as we that improves that will narrow.
I think ultimately this gap could be as small as, say, $700 to $1,000 if we do our job right over a long period of times.
John Ransom – Raymond James
Okay. Thanks a lot.
Operator
Your next question comes from the line of Robert Willoughby with Bank of America Securities. Please proceed.
Robert Willoughby – Bank of America
Hey, Tom. I don't think it's a BofA [ph] conference if there is not a funeral home facility tour, so we look forward to seeing you in Vegas next year.
Tom Ryan
That's great.
Robert Willoughby – Bank of America
The – assuming the government weighs in on our behalf – but the – can you give us any updates on Keystone performance since you announced the deal? I mean, have they been – it sounds like they are hitting their numbers, but any color anecdotally on the kind of momentum they bring to your – or lack of momentum they bring to your organization?
Tom Ryan
I'd say generally from what I've seen in the third quarter and what I've heard about in the fourth quarter, again, we are somewhat careful on the ways we communicate, obviously, between now and closing. But I would tell you that I think the trends are generally the same.
I think there – the challenges they see are some of the same challenges that we see and I think some of their success line up well with ours. Obviously, they did not have the impact from cemeteries that we have.
So I would suspect that Keystone would not benefit as we did as it relates to the efforts of our sales organization and what they are able to do to drive earnings per share. I would say on the funeral side, they look a lot like us.
Robert Willoughby – Bank of America
Okay. And then maybe a similar question on Palm.
Can you give us something on the – just the growth characteristics of Vegas, what they do well, what they do not do well and maybe kind of a growth trajectories? I assume it is a much better market than some of your others.
Tom Ryan
Yes, I would say Vegas is a great market, these are great folks. And so – they run the business very well.
I think some of the things, it's like everything that you see, Bob, it's – we learn from each other and I think one of the things that they like is our Dignity University. We have been able to – they have noticed very quickly, they've embraced that training better than we've seen anybody.
I know when we did the Alderwoods transaction, the same thing occurred. There are a lot of things that I think we can bring to help in the development of their people and we've begun to see some of that already.
As far as growth goes, we continue to see Vegas as a growth market, particularly for our demographic segment. While you see unemployment continues to rise and unemployment impacts the youth, not the elderly.
And so the retirement population in Vegas continues to look good, people are exiting out of California and go into other markets for obvious reasons. Vegas has no income tax – or the State of Nevada has no income tax.
So these are all things that we factor in our decision in why we like Las Vegas, and we continue to see that. So we've seen early results of those business is very good, we are not – we really don't want to share those results yet, it's kind of early.
We've owned them really about two months, but we are very excited, we see positive things happening on the funeral side, positive things on the cemetery side, maybe some opportunities as it relates to sale that we could help out on. So we are excited, it should be a good first year return for us and a great long-term addition to the SCI team.
Robert Willoughby – Bank of America
And maybe just lastly, I've still seen nothing on the estate tax. That has not been fixed, correct?
Tom Ryan
No, this is the year to die. And we should say, this is the year for somebody to give you money to die, but not for you to die.
I have sent a note to my father, and he so far has not written back, but –
Robert Willoughby – Bank of America
It could be a good sign.
Tom Ryan
Yes.
Robert Willoughby – Bank of America
Okay. Well, we will wait for news on that front, I guess.
Looks great to me. Thanks, guys.
Eric Tanzberger
Yes, thanks, Bob.
Operator
(Operator Instructions). Your next question comes from the line of Clint Fendley with Davenport.
Please proceed.
Clint Fendley – Davenport
Good morning, guys.
Tom Ryan
Hey, Clint.
Clint Fendley – Davenport
I wondered if you – I'm sorry if I missed this, but how has Keystone been factored into your earnings guidance?
Eric Tanzberger
Keystone is accretive in the first year. I don't know if we have given exact numbers or not but, it's in there – it's probably about $0.03 to $0.04, $0.04 in that area probably, Clint, that's factored in there.
Tom walked you through the bridge that the '09 $0.051 has got non-recurring items such as the temporary cost containment [ph]. So to grow from $0.45 into the guidance, $0.45 being kind of the normalized type level of '09, that would be part of it.
The other part would be the operating improvements and further cost initiatives that we talked about.
Clint Fendley – Davenport
Okay, thank you. And then could you guys remind us where we stand now as to the percentage preneed that is funded by the third-party insurance providers and how that has changed during the last few quarters?
Tom Ryan
I think right now, probably what we write – and this will be approximations, 70% or so, give or take, is insurance funded. 30% is probably trust-funded and that's trended more towards the insurance, let's say, over the last few years not dramatically.
And when you think about what's coming out of the backlog, Clint, this is a little different number, so I just want to make sure you understand both, the input is probably close to 70-30, the output is probably closer to 50-50 because a lot of the stuff is maturing now coming out of that trust backlog is getting smaller and smaller.
Clint Fendley – Davenport
Okay. And so what are your – what is your expectation as to the gross margin implications of the trend here?
Tom Ryan
Well, again, I think the gross margin expectations are very positive when you look at the numbers that are being put into the backlog versus – for the long term versus what's coming out of the backlog. Keep in mind, when we grow preneed funerals in the near term, it puts pressure on your current margins simply because you are incurring the selling costs and particularly on the trust side, you are not getting any income to offset that.
On the insurance side, you are. That's the good news.
So in the current mode, you are going to deteriorate margins slightly to benefit the future. In the long term, it's going to be very, very positive.
We are seeing averages well above our walk-in averages and they will also have a growth component to that average that should reign in some very, very good margins. Also, preneed allows you more predictability with regards to staffing and everything in long term.
So we see this as a very positive event for us when you think out a few years and what margins could possibly look like.
Clint Fendley – Davenport
Thank you. And last question here, obviously you mentioned in the intro there, Tom, that the volumes appear to be down in the low-single digit range for January and early February.
If I'm not mistaken, in the year-ago quarter, down around 11% or so. Are you surprised that we are not up from a volume standpoint at least a bit in the early part of the year?
Tom Ryan
Yes, I'd say so. I mean – and again, it may just be the optimist in me, I was hoping that we would see a little better first quarter because of exactly what you said.
We saw the worst first quarter we've ever seen in our life last first quarter. So I was hoping for that, but again you just don't know.
The things that are going to drive this are flu season, the weather changes. Now we did see a pretty cold February.
And so we expect the numbers to be a bit different, but I think – yes, I'd say I'm somewhat surprised, but we planned for this. So we are not overreacting to it by any stretch.
Eric Tanzberger
Clint, the other thing I would add is that when you look at that 11% down, it really was down significantly in February and March and what we are really quoting so far is more of January and a very preliminary look at February.
Clint Fendley – Davenport
Okay. Thank you, guys.
Operator
Your next question comes from the line of Vimal Nair with Wisco Research. Please proceed.
Vimal Nair – Wisco Research
Good morning, guys. And firstly, congratulations on a great quarter.
My first question is regarding the average revenue per funeral service, and do you think we can continue to expect this increase that we saw the last few quarters going forward? Or do you think it remains flat or may even come down in a deflationary environment?
Tom Ryan
I would say that our expectations are that it's becoming more challenging to grow it. We fully expect to be able to grow it.
When you think about a couple of things, one, we – when we talk about it, we like to take currency expectations out. The movement of the Canadian currency can have an impact on our average.
So lot of the times we talk about it, we remove that because remember, the currency at the top also translate into the expenses at the bottom. So it doesn't have as big an impact on our bottom line.
So excluding currency, we would expect the walk-in business to probably grow in the lower end of the low-single digits going forward, because not only do you have the pressures of pricing, but you have the cemetery mix change that's going to have impact on it. So when you think about that average, you may want to think in the 1.5% to 2.5% growth opportunities for us.
Then there is another component of preneed and the preneed growth will be a factor – will be impacted predominantly by movements in the market because that 50% of the backlog is coming out of trust, is impacted by trust earnings going forward. So as far as the market is going north, that's going to have a positive impact on our ability to grow it.
If the markets were to go backwards in a significant way, that would have a negative impact. So we expect it to grow, we expect it to grow in the 1% to 2% to 3% range at best.
Vimal Nair – Wisco Research
Thank you. And just a follow-up to that, so regarding the trust investment returns, what exactly do you think is the sensitivity on net income with respect to the trust investment returns?
You said you were down 1% in January and if that trend continues, what do you think would be the impact on the bottom line?
Tom Ryan
It's probably – every 1% is probably in the $1 million, $2 million range. That's a very rough figure that we did in a calculation, because it depends on the mix of exactly where the – which investments were down and which investments were up.
That's kind of rough EBITDA figure that you can model so to speak.
Vimal Nair – Wisco Research
All right. Thank you.
That's all I had. Thank you very much and congratulations again.
Tom Ryan
Thank you.
Eric Tanzberger
Thank you.
Operator
At this time, there are no further questions in queue. So I will now turn the call over to SCI management for closing remarks.
Tom Ryan
Everybody, thank you for being on the call today. We appreciate you taking the time and we look forward to talking to you again soon, probably in late April or early May, we'll let you know.
Thanks again and have a great day.
Operator
Thank you for participation in today's conference. This concludes the presentation, you may now disconnect.
Good day.