Service Corporation International (SCI) Q2 2017 Earnings Report, Transcript and Summary

Welcome to the Second Quarter 2017 Service Corporation International Earnings Conference Call. My name is Elaine and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to SCI Management. You may begin.

Good morning. This is Debbie Young, Director of Investor Relations at SCI. As usual before we begin today let me quickly go over the customary Safe Harbor language. The comments made by our management team today will include statements that are not historical and are forward-looking. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include but are not limited to, those factors identified in our press release and in our filings with the SEC that are available on our website. Today we may also refer to certain non-GAAP measurements such as adjusted EPS, adjusted operating cash flow and free cash flow. A reconciliation of these measurements to the appropriate measures calculated in accordance with GAAP is provided on our website and in our press release and 8-K that were filed yesterday. That on the way, I will now turn the call over to, Tom Ryan, SCI's Chairman and CEO.

Thank you, Debbie. Hello everyone and thank you for joining us on the call today. As usual I'm going to begin my remarks with an overview of the quarter followed by a more detailed analysis of our funeral and cemetery operations and finally I'll comment on our improved outlook for the year 2017. Let's begin with an overview of the quarter. Yesterday we reported adjusted earnings per share of $0.35 for the second quarter which is a $0.07 or 25% increase over the prior year quarter. Keep in mind that this operational growth achieved despite a few penny headwind from perpetual care capital gain distributions and the loss financial contribution from the LA Archdiocese property in the prior year quarter. This $0.02 headwind in the quarter was offset by a $0.02 non-cash benefit and our tax provision related to revised accounting standard for share-based compensation which we discussed last quarter. Considering these two offsets, we had true operational growth of $0.07 during the quarter. So let's talk about the $0.07 growth. We achieved higher operating profits in our comparable business led by an increase in preneed cemetery revenue coupled with effective cost management in both business segments. This contributed $0.07 change of growth in adjusted earnings per share. Below the line, fewer shares outstanding and a lower adjusted tax rate was offset increases in both G&A and interest income. On the cash flow front, we generated $76.3 million and adjusted operating cash flow which was an 11% increase that Eric will touch on in more detail in just a moment. Now let's talk about how funeral operations performed for the quarter. Comparable funeral revenue decreased by 1% compared to the same period last year. Comparable core funeral services increased slightly quarter-over-quarter. In comparable core funeral average during the quarter our organic growth at a customer level was 0.3%. This improvement was more than offset by 110 basis point increase in the core cremation mix which resulted in a slight decline in the core funeral average of 0.6%. We continue to see growth in recognized preneed revenues a little over $1 million or 3.8%. Recall these are the products within the preneed contract which delivered at the time of sale primarily representing cremation related merchandize and travel protection membership plan sold by our non-funeral home network. Other funeral revenues preponderance of which is general agency revenue was down $5million compared to the prior year quarter on lower insurance funded preneed sales production. Comparable preneed funeral sales production increased $6.1 million or 2.8% in the second quarter of 2017 compared to 2016. This decline was primarily due to a $15.7 million decrease in core preneed funeral insurance production which was offset by $7.8 million increase in core preneed funeral trust production. The decline overall funeral production as well as the mix shift between insurance and trust is primarily due to the recent changes in our sales compensation plan. Earlier in the year, we introduced sales counselor productivity metrics into our sales compensation plan. As anticipated, this resulted in more emphasis being placed on preneed cemetery property sales, as well as terminally eminent funeral trust sales. We believe these changes in our compensation plan align with our emphasis on customer service, as well our current earnings in cash flow growth strategy as evidenced by the growth in cemetery pre-need sales and terminally eminent funeral sales in the first half of the year. However, with many of our counselors writing contracts for both funeral and cemetery, the new changes have had the effect of slightly drawing attention away from growing core pre-need funeral production. On a positive note, we grew funeral operating profit $3.4 million over the same period last year. The reduction in preneed funeral sales production coupled with enhanced selling cost efficiencies, reduced our selling cost for the quarter by $4.4 million. Additionally, we did an excellent job of managing other variable and fixed cost all of which drove our operating margins higher by 90 basis points from 19.4% to 20.3%. Now moving on to cemetery operations. Our cemetery segment continue to deliver outstanding results during the quarter. As topline comparable cemetery revenue grew $28.7 million or 10%, this was primarily driven by a $27.6 million or 15.4% increase in recognized preneed revenue. Higher preneed property revenue accounted for $14.9 million of the increase, and higher merchandise deliveries accounted for another 7$.9 million. Of the $14.9 million increase in preneed property revenue, $9 million is a direct result of the continued momentum of our sales team selling into developed inventory projects. The remaining $6 million increase was a result of recognized revenues sold in a previous quarter where revenue recognition was triggered during the current quarter as the property developed or met the 10% collection threshold. Preneed sales production or sales activity continue to have strong growth of $12.1 million or 5.5%. Of this $12.1 million increase in preneed sales production, $5.7 million is related to preneed property sale, and $6.4 million related to pre-need merchandise and service sales. Of the $5.7 million increase in preneed property sales, $10.4 million was driven by the increase in large sales velocity as the number of contracts of $40,000 for the quarter approached 400 versus 267 in the prior year quarter. We attribute this to higher demand coupled with more available inventory to present for our client family. This large sales increase is partially offset by decline in other property sales. Finally, cemetery operating profits grew an impressive $18.7 million, and operating margin expanded 360 basis points to just over 29%. Our revenue growth of $28.7 million, this represents a 65% incremental margin which is about what we’d expect in this high fixed cost business. Now let’s reflect back on our performance this far. For the first six months, our same store funeral profits are up over $9 million or 5%, and funeral margins have expanded by 90 basis points. In the same six months period, comparable cemetery profits have grown an impressive $27 million or 21% and margins have improved a remarkable 270 basis points. This has resulted in a year-to-date adjusted earnings per share growth of $0.17 or over 30% at $0.73 per share. Even after adjusting for the $0.05 of excess tax benefit from the accounting change, we were organically grown by $0.12 or just above 21%. So on the hills of this strong year-to-date performance, we feel comfortable raising our full year 2017 guidance range or adjusted earnings per share. Our current expectation is that adjusted earnings per share will range between $1.42 and $1.52 versus our previous expectation of $1.29 to $1.43. The new mid-point of our guidance is up by $0.11. Included in the new mid-point of a $1.47, the $0.07 of excess tax benefit resulting from the new share based accounting guidance, $0.05 of which has already been recognized. Even when back GAAP of $0.07 of excess tax benefit, the $1.40 represents an expected 13% increase over our 2016 adjusted earnings per share. We believe this is impressive considering our normal annual 8% to 12% growth expectation. This would not be possible if it was not for the 23,000 dedicated members of our team. That display of passion for taking care of our client families on their worst day and provide peace of mind and protects into our preneed family, as well as the members who support all our field services. Together, we're making it work really well. Thank you, team. In conclusion, we had communicated back in February that the first half of 2017 was the easier comparison and the back half of 2017 will have a more challenging comparable hurdle. However, we feel very good about our ability to continue delivering solid performance. And we’ll continue deploying capital for the benefit of our shareholders to enhance the long term value of the company. With that, I’ll turn the call over to Eric.

Thanks, Tom, and good morning everybody. I'd like to begin by echoing Tom's comment about how pleased we are with the performance in the quarter, as well as the first six months of the year. In my remarks for you today, I’m going to address some details of our cash flow performance and capital deployment specifically in the quarter. And then I’m going to touch on our outlook and financial position for the remainder of 2017. So let’s start with the overview of cash flow for the quarter. As you've seen, starting with this was a solid quarter for us in terms of cash flow. During the second quarter, we're excited to report we generated $76 million of adjusted operating cash flow which was an increase of about $7 million or 11% versus the prior year quarter of about $69 million. This increase is impressive when taken into account the $6 million, the special perpetual care trust fund distribution that only occurred in the prior year quarter. It’s also important to note that the absolute levels of adjusted operating cash flows in the second quarter should not be annualized as the majority of our cash interest payments occur in both the second and fourth quarters of each year. So driving this $7 million of cash flow growth during the quarter refers strong operating result that generated $0.07 of recurring earnings growth over the prior year quarter. And, again, that’s what Tom just detailed in his remarks. This $0.07 of cash earnings growth equates to about $21 million of cash flow growth, and was somewhat offset by the expected $10 million increase in recurring cash taxes which grew from $54 million to $64 million in the current year quarter as well as other normal working capital usage. Maintenance CapEx and cemetery development CapEx, and these again are the two components that we defined as CapEx in our free cash flow calculation, came in about $40 million for the quarter which was about $3 million higher than prior year, but well within our expectation. Deducting these capital spending items from our adjusted cash flow from operation, we calculate our free cash flow for the second quarter to be $36 million, and impresses 16% higher than the $31 million generated in the prior year quarter. Now let’s talk about deployment of cash in the quarter. So moving on from free cash flow, our capital deployed to acquisition, new location builds and to shareholders was significant in the quarter totaling roughly $88 million. We’re pleased to note that we invested almost 18 million for the acquisition of five funeral homes and one crematory as well as the purchase of the remainder of a minority non-controlling interest reflected in finance activities are on cash flow states. Remember, as we’ve said in the past, accretive acquisition remain our highest priority for capital deployment due to the significant after tax cash returns we generate on these investment. We also invested $5 million on the construction or expansion of several funeral homes during the quarter. And shifting to capital returns to shareholders during the quarter, we paid just over $28 million in dividend payment. And after our last conference call, we increased our quarterly dividend rate $0.15 per share reflected an impressive 15.4% increase over the prior year quarters dividend. Last but certainly not least, we repurchased a little over 1.1 million shares for a total investment of 37 million during the quarter. We currently have about 187 million shares outstanding and just under 250 million of remaining share repurchase authorization. Now let’s shift to the remaining part of 2017. In mid-year through 2017, adjusted cash flow from operation has grown 6 million from $259 million in the prior year to $265 million, and is ahead of our original expectation. Similar to the quarter, impressive year to date cash earnings growth of about $0.12 per share after removing $0.05 of non-cash excess tax benefit, yielded roughly $35 million of adjusted operating cash flow. This increase is partially offset by an increase in cash taxes of about $22 million. And again, those numbers were 83 million in the current to date versus $61 million in the prior year, and was also influenced by other working capital usage. Consistent with what Tom said, based on our strong first half results, we are raising our 2017 guidance range for adjusted cash flow from operation. We currently expect that adjusted cash flow will range between $480 million and $520 million, an increase of $15 million at the mid-point of our guidance to 500 million. This is versus our previous expectation range of $465 million to $505 million with a mid-point of $485 million. In addition to strong earnings growth, supporting this increased guidance is a $10 million reduction in our full year cash tax estimate for 2017 which now range between $140 million to $145 million from our previously disclosed range of $150 million to $155 million of cash taxes paid. This decline is primarily related to our continuous efforts and effective tax planning. In briefly, while in the topic of taxes, you’ll notice in that quarter we’ve made the bulk of the expected payment to the IRS for the settlement of the audit of tax years 1999 through 2005 that I described to you last quarter. We’ve paid $34 million during the second quarter which was funded using our bank credit facility. We anticipate additional payments to incur in the back half of the year. And in addition to the amount already paid will bring us to our total net IRS settlement amount of approximately $40 million which will finalize the settlement. And, remember, these payments I just described to you are excluded from our guidance for adjusted cash flow from operation that I just mentioned to. Our guidance for capital spending in 2017 for maintenance and cemetery development continues to be at $180 million for the full year. And when you’re deducing these recurring CapEx items from our 2017 adjusted cash flow from operation expectation, will calculate the free cash flow in 2017 ranging from $300 million to $340 million with a mid-point of $320 million which is $15 million or about 5% higher than our previous mid-point of $305 million of free cash flow. So before closing, let me provide a high level view of our financial position as we close out the quarter. We began the second half of 2017 on sound financial footing. We finished the quarter with $225 million of cash on hand and $206 million of availability on our long-term bank credit facility. Taken into account the fact that, some of our cash is encumbered due to ban in Canada and our minimum operating cash flow threshold received, we believe our unencumbered liquidity to be approximately $365 million at the end of the quarter, which we view very favorably. Our leverage which is calculated at net debt to EBITDA in accordance with our updated credit facility definition was 3.71 as of June 30, which is right in line with our targeted leverage range of 3.5 to 4 times. So we're very proud of our performance in the first half of the year and as we look forward, we are excited about the remainder of 2017. We assure that our management team will continue to work hard to increase the value of your investment in our company, in particular by deploying capital to the highest relative return opportunity. So with that, operator that concludes our prepared remarks and we will now open the call open to question.

[Operator Instructions] Our first question comes from A.J. Rice with UBS.

First maybe just ask, appreciate the details around the updated guidance and all. If you think about it, we got second half, you added $0.10 range there, $1.42 to $1.52. What do you see as the variables that would get you the higher end or the lower end of that range, whether, I know volumes is always an question mark. But is that the primary variance. Is there anything else that we should know of?

This is Tom. I think the primary reason we'll get to the higher end of the range is going to be, how successful we are with our cemetery sales production, that’s probably the number one driver and shortly behind that being volume. But those are going to be the real levers, I’d say A.J. that push you one way or the other. Everything else probably would be material event as it relates to that.

You guys have talked about the acquisition, well, you're seeing a decent acquisition pace this year. Can you sort of characterize where you’re at in terms of the pipeline, are you seeing any competition for deals that's noteworthy the pricing about the same. Give some flavor for that, if you don’t mind?

Sure, A.J. I think through the six months, Eric would spend $51 million, if I remember that number correctly.

$51 million without the growth CapEx for the new field construction, but acquisitions…

So acquisitions were 50 and you know we guided 50 to 100. I am feeling pretty good about getting close to that 100 if not getting there. When you think about the pipeline today. As it relates to deals, really depends on the deal. But we see quite a few deals where we may just be the only bidder. There are other occasions where we do have competitive bidding I’d say, the deals that we’ve seen are coming in at about the same bifurcation if you will. So we continue to see people approaching us and want to be part of our network with the appropriate pricing and we see some competitive bids. But it looks very good. I’d say pricing wise, it’s pretty much the same. You are seeing deals coming in about the same level that they came last year and the year before. So we feel very good about our ability to compete for those and I'd say the pipeline is robust and we are optimistic about our ability to close some deals in the back half of the year.

Okay. And then maybe just lastly, also an acquisition related. I know this has been part of the strategy over time but it seems like to me and maybe I'm wrong that it's been a little more in the forefront of these at 1031 exchanges. Can you just remind us, what the opportunity with those are and is there any particular reason why you are seemingly maybe seeing a little pick up in that activity?

I think A.J., we've just disclosed it more to you. We’ve always had this exchange fund. Of course just to remind you to answer your question, when we divested assets real property at some point in time, we can redeploy, those funds that we receive from the divestiture in a tax efficient manner and that’s really what the 1031 exchange funds are. When you look at our cash flow statement, year-to-date it was 24 million of acquisition. What you actually had to add about another $22 million to get to the full amount from the 1031 exchange funds of 46 million in terms of acquisition. And then if you remember I mentioned in my prepared remarks that we also bought the last remaining piece of the minority interest in a separate business and that’s about $5 million and that was done in the finance activity. So, just a little4 confusing on the cash flow statement. But at the end of the day, it’s a great economic decision, because you have taken divestiture proceeds and you are redeploying them in a tax efficient manner to accretive acquisition, but after an after tax IFR in the mid teens. So anytime we can do that we will definitely continue that.

The next question is from Chris Rigg with Deutsche Bank.

Just hoping to get some more color on, when I look at the comparable funeral results. The revenues down 1%, but the margin was up 3.8%, even the percent margin was also better by about 100 basis points. I guess, is that just a mix shift dynamic or how would you describe that?

I think the first way to think about it is, part of the reason it’s down 1% is that, as you get $5 million decrease, generates about, if you think about general agency revenue you are affectively getting a agency fee that’s going to offset a selling cost. So with comparatives, you got a revenue that had no margin affectively because we had a similar reduction selling cost that’s finally up. So that’s probably the biggest piece to understand is that, if you take that out, that’s actually funeral revenues was up a little bit as you think about the core and you think about the SCI Direct and its impact. So that’s part of it, you are making up, you are actually making a little bit of a margin from the packaging core businesses are operating that way and couple that with the effects of our other cost management opportunities which are really around utilizing FTE metrics, as well as supply chain opportunities that we’ve been able to take advantage of.

And then just thinking about changes to preneed selling compensation and the structure there. I mean is the desired outcome to see the number of sort of core funeral preneed contract sold decline like it did in the quarter or do you expect that will actually begin to climb at some point?

I think there is a couple of reasons why it's down, Chris. Let me be very clear. It is very important to us and you’ll see it grow again. We had some temporary changes that have occurred. One of which is in our selling comp changes. We've seen some increase in our selling cost as they particularly on the funeral side and we’re focused on a couple of things. One is, minimizing some of the discounts and really becoming much more efficient and the cost of sales as it relates to funeral. The other thing is, we bought Stewart, we inherited an insurance contract that we honored over a couple of years and we had a transition less than 12 months ago from [indiscernible] in certain regions of the country and that transition of venders caused some turbulence if you will. Again, I think we’re working through and will get through as well. So, I think these are temporary. I think we’re going to grow with a much more efficient cost of sales as we look forward. So, that is a plan and we just want to do it in most cost effective way to enhance value for shareholders and also a process that create customers friendly.

And then just one on the preneed cemetery production, obviously another very strong quarter. We disclosed the data sort of on a three month, quarterly basis only, not a six month period. But can you give us a sense for if we were to think about that in a six month basis, where you would be and how you expect the second half of the year to trend on a year-to-year basis? Thanks.

Sure, Chris. So, the first half of the year if I remember correctly, our preneed, if you think about sales production which is probably the most important thing of the livelihood of what we do, it’s up about 9%. But this quarter, it was 5.5%. In the first quarter I think it was something bigger, 12, 3, 14. So blended for the first half of the year, we’re very pleased with 9%. As you know, we kind of guide long term, think around 6% or 7%. We’re still very good about the back half of the year. I think the other dynamic that occurred in the second quarter which was a little unusual is you noticed that we have a lot more recognition rate as it relates to what we sell. And we believe that is the function of we spend a lot of money in CapEx if you will, developing cemetery property over the last two years. So maybe a million a year. And now you’ve got a pretty robust inventory level that we're able to sell, develop property today. So higher proportion of the second quarter was recognized in the prior year quarter. And I think you’ll see that’s going to continue into the third, and maybe a little less lumpiness as you think about the long term of when you recognize this developed inventory property. So 9% first half of the year. We still feel very good about the kind of guidance in the 6%, 7%, maybe in the back half. And we may surprise to the upside.

The next question is from Erin Wright with Credit Suisse.

This is Adam Krasner on for Erin. I just wanted to touch on share repurchase which was down sequentially in the quarter it looked like. And I’m just wondering how we should think about the level of repurchase relative to 2016 for the full year.

When you look at 2016, and look back at it, and generalize for the whole year, but you're pretty much in the mid-20s. And the way we philosophically look at deploying capital, we’re always going to deploy the highest relative return opportunity. And obviously we have certain metrics that we look at in terms of valuing our company and form an opinion on the intrinsic value, compare that to where we’re trading in the marketplace. And the size of that discount we view as the opportunity to deploy capital. And when we quantify the size of that opportunity versus other relative opportunity, that’s philosophically how we deploy capital. So I think we’re very disciplined in the way we do share repurchase program. We’re not doing it just to do it. If we are deploying capital towards it, we think the value, and to some degree, we think it’s the higher value than other relative return opportunity. So that’s the way I would describe it. So when you get back into 2017, the first quarter was a little heavier. Part of the first quarter was in the high 20s. So, in terms of the share price and now we’re into where we are today that doesn’t mean that we’re not in the market. We’re in the market yesterday as a matter of fact under our 10B51 because we are. And we believe we should be at these levels. But that doesn’t mean we’re not going to throttle up when the opportunity gets bigger and throttle down in terms of the size of the deployment to that particular opportunity based on the metrics that I just described to you.

And maybe just shifting gears a bit to average revenue per funeral service which was down a little bit year-over-year. I know there were some dynamics with cremation mix there. I’m wondering if you could just unpack a little bit maybe into those two segments, what kind of pricing you are seeing kind of on an individual product level.

Well, I think really what we’re seeing is - first of all, we had a tough comparison as well. I think a lot of what we were seeing was the more softness in the cremation customer as well which we’ve been seeing, and we’re addressing that with all the products and services that we have. What's the highlight of it clearly we bifurcated a little differently in terms of the true at-need customer where death has occurred and are walking into the funeral home versus the customer that’s walking in with a matured pre-arranged funeral contract in their hand. And I think we are continuing to see a little change in the growth essentially of what’s coming out of the backlog, again, continues to be very impressive in terms of the average revenue per sale. But in terms of the at-need customer, I think we’re seeing probably a little bit more softness than we seen in other quarters in the cremation consumer walking into our core funeral homes. But, again, I think we have a lot of initiatives, a lot of product offerings that we're constantly updating and working on to turn that corner. And I do expect that to maybe turn that quarter in the back half of the year as well.

The next question is from Joanna Gajuk from Bank of America.

So if I may just come back to the discussion around the change you made in terms of the incentives for the sales force, and how it resulted in a fewer or a lower growth in funeral sales production, while the cemetery production clearly accelerate. So is there something you’re doing to try to swing the pendulum back to where it’s - the funeral sales production growing faster, or it’s just there is going to be continue for the same cemetery?

I think you’ll see obviously continued focus on the cemetery for a variety of reasons. One, a heritage cemetery sale develops a real long term relationship with our client families. If we sell that applied, we’ve got a real good chance to go back and get a funeral because remember you’re interacting with them in an earlier age. And we also have the ability to network to that family. So that’s one of the reasons cemetery is very important to us, and therefore the emphasis that we have. So if you think about funeral, we put a little more emphasis on, one, competing more effectively for the terminally eminent contract. So, again, we want to make sure our sales force is dealing with those families that are having a near term need and ensure that that’s met. So we incented our sales force to more effectively deal with those client families. We incented the sales force more along the cemetery focus. And the other thing, at the same time, we’ve been doing this focusing on discounting on the funeral. So there are a lot of things that probably were hard medicine - funeral customer. Having said that, we think it’s healthy days that we now will begin to grow our firm in a variety of ways. We’re going to utilize our sales tools, we’ve got bills enablement going out in the field that’s going to allow us to present better to our client families. We’re going to continue to focus on growing that pre-need customer on the funeral side in the right way. So we believe this is going to continue to grow. It’s going to grow in new and different ways. Lot more of our lead management now is be search engine optimization. The emphasis is on direct mail, but probably less so. So I think as we transition, you’re going to see us grow in a different way, but continue to grow that pre-need backlog. It’s’ very important, and we’ll continue to do so.

And then if I may just a very, a number that to your question - I’m not sure whether I missed it but did you talk about the actual number of shares you bought during the quarter?

Yes, we bought about 1.1 million shares during the quarter, Joanna. And our amount that’s outstanding is about 187 million shares that are outstanding.

Did you buy anything after the quarter ended?

We have under a 10B51 plan, the answer is yes. But it was somewhat minimal.

And actually one last little question too. Following up to the earlier discussion around acquisition phase, and you’re saying that you’re seeing sort of similar trends in terms of competition and multiples. But is there anything in your mind that maybe changed in terms of going back internationally?

No, Joanna, we’re focused on the U.S. and Canadian market where we exist today. We just think there’s ample opportunities from a risk to reward profile that will maintain our focus in the coming year.

The next question is from Scott Schneeberger with Oppenheimer.

This is Daniel in for Scott. Most of my question has been answered here. But can you elaborate a little bit on the expense management in the quarter and help us think about the funeral margins here in the back half and discuss some puts and takes please.

So in terms of expense management, I think Tom has already hit on a couple of our programs. One relates to selling cost where we continue to do things in terms of making our selling efforts more productive as a outcome of investing capital into salesforce.com and some of the other programs that were using. And I think that’s starting to have an effect in terms of a reduction - a little bit over 100 basis points frankly in the funeral segment in terms of total selling cost and may be about half that in the cemetery segment. So that's going to be drop to the bottom line and increase margin as well. Some other thing that Tom has already mentioned is, we’re very much a metric driven organization and looking at staffing metrics including full time equivalents and those types of metrics that we utilize as the company continues to be successful for us. And other thing that Tom has already mentioned is our supply chain function. Our supply chain function continues to do what I characterize as really stellar work in terms of using our purchase power and it could be just anything it could be large items all the ways down to the small spend at the individual core, funeral homes, and cemeteries and it can relate from moving waste to electricity and to the large items in granite for the cemetery has been everywhere in between. So that’s been a very successful program for us all of which Tom has just mentioned. We’re also using technology and we spent some capital to implement some new systems here new Oracle systems that we’re getting efficiencies at the support level. And the most important thing that I probably described to you is a lot of our cost initiatives are clearly what we characterize as non customer facing costs. So really want to make that point is that these aren't costs that are going to interrupt the relationship that we have at the location touch points to the customer, that's the most important point for our cash flow stream into our revenue stream. This is about the support function of those people that interact with the customer every day and we just had a mentality and a culture making ourselves more efficient. And that’s the list of examples that I can give to you today to support that.

And if we think about the funeral margins in the back half, you had pretty strong performance in the second half can you help us think about that in the back half?

It’s really seasonal so if you think about the third quarter margins are probably going to dip a bit because generally we’re not going to have the impact of flu. And it is the fourth quarter we had to climb back towards what you see in the first-half of the year. Obviously the first quarter is generally going to be the strongest in margin quarter for us. So, again probably a little different than third and back to where you seen them now in the fourth.

And final one from me on HMIS plus and salesforce.com can you give us some progress update there and the impact you’re seeing so far?

I think as far as HMIS plus we've seen on that front I think we’re about 90% implemented - Steve is there somewhere - 95% now so we did get a little bit of a benefit we believe in last year certain of these markets you’re lapping that this year. It’s one of the market we expect to see some impact from that the ones that really implemented it. And so we're excited about the opportunity to do that. And like any other technology rollout the first time you do it some people are very effective at it and some people aren’t and you go back and retrain. And that’s where in the midst of now. So we know one thing, it's a much better way to communicate with our customer no matter what the impact is on the topline and we’re also excited about what we think we could at the topline once it’s full trained and implemented. Sales force has been out there now you know for couple of years and I guess I would say that it was something that I think again people felt like they didn't understand the power of it, they didn’t understand there is probably a little resistance to try to use it every day. And I feel like now we’re in the sweet spot of people really beginning to understand the benefit and utilizing it more effectively. So we again believe that the biggest impact in sales force in days ahead but today I would tell you that is making us a much more accountable better company in a particular sales force direction.

The next question is from John Ransom with Raymond James.

Just to go back to the subject and that you’re not at all trying to talking about, just as you step back and look at the sales force how on a scale of 1 to 10 how hard is it in a 4.5% unemployment economy to attract people that you - versus say two or three years ago and there was a little bit more slack in the economy?

Yes, I think John it’s always hard to find good people and retain them it is a big effort but we’ve been trying to do with a lot of these salesforce.com and other is what those tool allow us to do is enterprise training opportunity. What we would love to see is a higher retention of our sales force we got great people and we want to see them succeed. So a lot of these tools and design to say hey we don't want to have to have of the thing of hiring and that we have to do all the time. So our focus has really been on training and developing our existing people with an idea as we generate more leads going forward with search engine optimization and utilization of the Internet with mobile device that is going to generate and ability to grow. So today I would say we've actually shrunk our sales force a little bit probably over the last six months but I’d say that's more reflection of training and developing. And I would tell you today it might be slightly harder to find people but there are still good people out there because these are great job, great opportunity within the company. So I wouldn’t say it’s a struggle it was always hard it’s a big part of job but we’re not seeing any diminishment of opportunity that fund.

Is it the 80/20 rule in terms of production?

Pretty much always right it is showing 70/30 but.

So that 70% that probably you had making a ton of money what’s the turnover on that piece and is that gotten better or worse or stayed about the same?

I would say it's slightly better, I think if you look at all statistics we look at it from kind of inside sales and outside sales and the outsides sales probably still turnover to 70% to 80% and the inside sales are probably around 40% to 50%. You’re exactly right the churn within that 70% is a lot higher and we’ve probably got 30% that has been with us a long time and are very successful.

It doesn’t seem like the industry is really I think it’s cracked back - on the 70% it’s like they get in and they sell to the eight people right now and they run out of weeks, and have to get something else.

There is a little bit of that, I feel like we are getting better and I feel like - but it’s a struggle and I think you see it in a lot of industries and a lot of sales force people have nice things and they still ride I don’t think anybody has cracked the curve yet.

And so my last question would be if you look at say life insurance salesman they have recurring revenue, so they latter up there income overtime. This is kind of one and done sales so it’s just tougher I am sure you guys have thought about or maybe we need to give these guys some other things they can sell that provide a steadier income is that A, am I just making this up and B, is there a reason why you don’t think that would work whether you think it would just dilute their attention away from the core business or am I just crazy thinking about this?

First of all yes you're crazy.

Well that's my wife we’ll agree with you that a separate topic.

No, John really - I think long-term you’re exactly right I think there are other things that could be sold but I would tell you this is a very lucrative and successful model for sales people I mean there are ample opportunities to make it. Having said what you said, I think some day you could sell other products to your sales force I think that’s a possibility, I really do but I’ll tell you today there is ample opportunity to make money against the organization and it’s a matter of us doing a better job of developing people in the skills that they need and we’ll continue to focus on it but yes, you’re crazy but yes you’re probably right.

I would suggest leading with like the Rascal Scooter and maybe a [indiscernible] burger doll at all I think that would be great sell.

They sold out John, they sold out.

The next question is from Duncan Brown with Wells Fargo.

Just sort of one area from me wanted to talk - go back to core funeral pricing and Eric I appreciate your comments there, is any of that due to the decrease in general agency revenue or is that carved out of that 0.6 number you quote?

No, that’s not included in that. General agency revenue is a separate line item and tax flow stream coming from a third-party life insurance company.

And then when you talk about, I think you said maybe turning the corner in the back half. Do you think that can get back to sort of 1% to 2% pricing growth and two half 2017 or no?

I don’t think so, I think the way we we're looking at this is right now nothing is the worst thing we’re probably competing a little more heavily in capturing more customers. So I think I’m in frontline we’re trying to serve more clients families, we've got a little more discretion obviously cremation mix is changing too but I think a function of this is we may be doing a better job competing in the marketplace. So we feel pretty good about where we are. I do think pricing will get back at some point but right now I think our focus is really on capturing as many client families as we can and developing those relationships.

So little more focus when competing on price?

Yes, I think we’re always competing so I don’t want act like we’re doing something very different. I just think people feel like we want to make sure we win because when we do we’re developing a long-term relationship which lead to opportunities and the likes. So I think there's an acute awareness of that and again I'm generalizing but we’re competing more flexible in the marketplace.

And we have no further questions at this time. I'd like to turn the call back to SCI management for closing remarks.

I want to thank everybody for being on the call today we really appreciate it. And we look forward to speaking with you again at the end of October. Have a great week.

Thank you. Ladies and gentlemen this concludes today's conference. Thank you for participating. You may now disconnect.