Service Corporation International
Q1 2014 Earnings Call Transcript

Published: 24 Apr 2014

[Operator:]

Welcome to the First Quarter 2014 Service Corporation International Earnings Conference Call. My name is Ellen, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to SCI Management. You may begin?

[Debbie Young:]

Good morning, everyone, this is Debbie Young, with Investor Relations at SCI. Welcome to our call today as we discuss our results for the first quarter. As usual, before I turn the call over to Tom and Eric for their remarks, let me remind you that the comments made by our management team 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. In today’s comments, we may also refer to certain non-GAAP measurements, such as normalized EPS, adjusted operating cash flow and free cash flow. 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. Okay, with that behind us, I’d like to now turn the call over to SCI’s President and CEO, Tom Ryan.

[Thomas L. Ryan:]

Thank you, Debbie, and good morning, everyone and thank you for joining us on the call today. I’m going to begin my comments by giving you the customary highlights before, and I’ll provide some details on the Stewart onboarding and integration, including some very good news on our identification and planning of additional synergies. Finally, I’ll close by giving you some color on our outlook in the rest of 2014. Beginning with an overview of the quarter, we were pleased to start off the year by reporting normalized earnings per share of $0.28, which is in line with both the prior year, as well as our internal expectations. This is particularly significant knowing that we’re facing the toughest funeral comparison in several years. If you recall, the first quarter of 2013 had an exceptionally strong flu season. Although we felt the impact of this decline in the first quarter particularly in our funeral businesses, I’m pleased to tell you that the legacy Stewart business performance made up the difference, bringing in over a 117 million of combined funeral and cemetery revenues, which were slightly ahead of our expectations. I want to pause a moment to give my heartfelt thanks to the entire SCI team, both my legacy SCI, and my legacy Stewart teammates for all of their hard work and execution in the first few months of the integration. Let’s face it. Anytime you have an acquisition of this size, there is going to be some level of disruption as we work through the integration as well as the Federal Trade Commission divestiture process. Fortunately, this isn’t our first large integration, and I believe to-date we’ve performed admirably despite these distractions, and remain very confident in our ability to drive value. Now for an overview for funeral operations in the quarter. Overall, the results of our comparable funeral segment came in slightly lower than our projections for the quarter. When compared to the prior year, our first quarter funeral revenues declined by $23 million. As I mentioned earlier, we expected the majority of this decline in our core funeral revenues due to a strong flu season in the prior year. Funeral volume decreased 7.2% from 2013. That being said, if you compare this first quarter volumes to the first quarter of 2012, so we’re excluding the 2013 flu season anomaly, funeral volumes are relatively flat. This is encouraging for the remainder of the year as we put behind us the most difficult quarterly comparison of 2014. Partially offsetting the volume decline was a 1.8% increase in the sales average when you exclude Canadian currency impact and trust fund income. This was achieved despite a 200 basis point increase in cremation rate. The revenue shortfall was the primary reason the comparable funeral profits are down by $22.1 million. Gross margin percentages were also lower by about 370 basis points in the current year quarter. Last year, we had 26% gross margin, which was unique due to the high margin impact of incremental volume. We would have expected margins to be in the 23% to 24% range for the first quarter of 2014. However, increases in pre-need selling costs, and higher maintenance and utility costs associated with the harsh winter put additional pressure on our margins. On a pre-need basis, we grew comparable pre-need funeral sales by 1.3% in the quarter. In recent years, we’ve seen a higher growth rate on the pre-need funeral sales. We believe lower comparable volumes, which generate leads coupled with the high level of changed management in the quarter, temporarily impacted our ability to grow at these higher levels. So to summarize funeral results, we saw a decrease in comparable revenues, which we anticipated. We did a good job of managing costs, and we’re pleased with the performance of the legacy Stewart businesses that we started off a year. As it relates to the remainder of the year, we are still modeling funeral volumes for the year to be down in the low-single digit percentage range, which implies more favorable comparisons in the remaining three quarters of the year. Additionally, we would continue to expect to grow pre-need funeral sales production in the mid-to-high single digit percentage range for the remainder of the year. Now, let’s talk about cemetery operations, comparable cemetery revenue increased $1.2 million over the prior year quarter, and comparable cemetery profits declined $2.8 million in the quarter. As you can imagine, we had a few distractions during the quarter coming off the closing of the Stewart transaction at the end of December. The most noticeable impact of the quarter were the under performance in cemetery pre-need sales production, which fell short of both prior year as well as our internal expectations. As we rolled out changes in our sales management infrastructure, we had approximately one-third of our 38 sales directors that were new in their roles. So they were getting up speed on our sales program in their area of responsibility, they were also spending more time focused on the integration of our new businesses. This was particularly noticeable in January and February, we saw the largest decreases in our pre-need sales production. Conversely, in March, we saw lot of energy and focus in the sales team as they begin to hit strive. As a matter of fact, March of 2013 was our highest production month of 2013, and in March of 2014, we were able to match the prior year sales level. This has us very optimistic about the remainder of the year. Looking forward, we do anticipate there to be some additional choppiness in the second quarter as our sales force undergo the rollout of the new compensation plan in training on our updated point of sale system. Additionally, we are adding significant enhancements to our lead management capabilities by introducing salesforce.com. Absent these temporary changes, our sales team is beginning to hit stride, and we are confident about our ability to delivery exceptional growth in 2014 and beyond. So to summarize our cemetery results, our first quarter pre-need cemetery sales were lighter than we hoped to start out of our integration. But looking forward we reiterate, our March 2014 monthly performance has given us confidence that we can achieve our targeted levels of up, mid-to-high single-digit percentage increases for the year. Now, let’s shift to Stewart. We are very excited about the legacy Stewart business performance in the first quarter. As I mentioned a few minutes ago, legacy Stewart businesses generated over $117 million of revenue in the first quarter. Generally, I would say the margins and sales averages are in line with our expectations as these businesses experience the same decline in funeral volume as we did in the first quarter. While we are still ramping up our efforts on Stewart’s pre-need funeral and cemetery sales programs, we continue to believe this represents an area of meaningful opportunity for the company, and we should begin seeing the benefits in the back half of the year. In addition to the solid results from our acquired businesses, you may have already seen in the earnings release that we’re pleased to have identified and developed plans for additional synergies that will have a partial benefit this year, and a full impact in 2015. Recall, we originally estimated that the benefit of leveraging the back office scale combined with the purchasing synergies from the Stewart acquisition would be about $60 million. We now have increased our range to approximately $75 million to $80 million. These additional synergies are primarily related to procurement and opportunities to further leverage the back office scale of the combined companies. Of the new total synergy estimate of the $75 million to $85 million, we still believe that half will be achieved during 2014, and the remainder in 2015. Looking forward, we believe we can continue to fund additional value in legacy Stewart businesses to revenue synergies as we implement strategy pricing, dig any funeral packages, catering or reception events, and flower sales programs. Shifting to the divestiture process, the process is going very well. Maybe the timings are little slower than we expected. However, we remain on track to complete all sales within the next three to six months. We again reiterate that we still expect the divestitures to generate between $315 million to $340 million of after-tax proceeds. Keep in mind, we make about $4 million a month as long as we own. In summary, as it relates to the Stewart transaction, we believe that the acquisition was a big win for us, and for our shareholders, and we look forward to the future growth of these businesses once they are fully integrated. So to wrap-up for the first quarter behind us, we remain confident that our earnings per share and cash flow targets for 2014 communicated to you back in February. With the additional synergies identified, we believe that we are currently trending towards the high-end of our guidance ranges. We continue to be enthusiastic about the profitable growth that the Stewart acquisition will contribute in 2014, and again in 2015 as the full weight of the synergies are realized, which are now in the $75 million to $80 million range. And I’m optimistic about the potential for further synergies to be identified as it relates to implementing other SCI revenue strategy. As I think about the remaining quarters, we may experience some additional change in management distraction during the second quarter, which could be slightly disruptive from a sales perspective. However, the back half of the year should enjoy a large share of synergy impact as well as an integrated focused sales team that can generate impressive growth. Lastly, we expect to continue to generate strong cash flow, which Eric is going to update you on shortly. This cash flow along with anticipated divestiture proceeds expected in 2014 will support a quick deleveraging, and allows to return our focus to capital deployment strategies designed to enhance shareholder value. This concludes my prepare comments, and I’ll now turn the call over to Eric.

[Eric D. Tanzberger:]

Good morning, everyone. I’m going to start by commenting on our cash flow results for the quarter, and then talk about the remainder of 2014 as well, and I also want to touch on our current financial position, and capital deployment plans for the remainder of the year. So let’s start with cash flow, and talk about our adjusted operating cash flow, which grew $9 million in the first quarter to $164 million, which was in line with our expectations. So let me highlight some of the key items that are driving this. Cash flow in the quarter benefited from incremental cash flows related to the addition of Stewart, which performed in line with our expectations. Also as I mentioned on the February call that we had, cash flow benefited this quarter from lower payroll disbursements as we partially funded the January 2014 payroll in December of 2013, and that amount was approximately $18 million. These increases in cash flows were somewhat offset by anticipated higher payments for cash interest and cash taxes which collectively together grew $22 million over the prior year quarter. Cash interest payments increased 14 million, and this is related to the incremental debt associated with the Stewart acquisition. And cash tax payments increased from about $6 million to $14 million, so increased about $8 million, and again both of these items were in line with our expectations. If you deduct maintenance CapEx in the cemetery development CapEx of approximately 22 million, we calculate our free cash flow for the first quarter to be approximately $141 million or $7 million over the prior year, while slightly higher than last year, CapEx came in lower than we expected. So we expect our CapEx to ramp up later this year, and again expect our full year guidance to remain unchanged. Overall, we were very pleased with our first quarter free cash flow results. We recognize this represents the result of a lot of hard work on both the part of the legacy Stewart and or SCI associates as we work through the integration, and look forward to further cash flow growth with the new combined foundation. And again as Tom mentioned, I want to thank all of our associates for all the hard work during the first quarter as we are working through the Stewart integration. So now looking forward for the rest of 2014, I’d like to re-affirm our outlook for the full year 2014 cash flow from operations, again excluding special items of the range of $430 million to $480 million. Consistent with the updated EPS expectations, we now believe we will be trending toward the upper end of this cash flow range as a result of the additional Stewart synergy mentioned by Tom earlier as well as from a cash tax update I am going to mention in a second. So some things I would like you to keep in mind as you think about the annual range of cash flow. First, our first quarter cash flow is seasonally high due to cash interest payments that primarily occur in the second and fourth quarters. During the first quarter, we paid about $16.5 million in cash interest. We expect to pay just under $70 million in the second quarter and just under $90 million thereafter in the second half of 2014. So now turning to cash taxes. In February to remind you, I stated that we expect cash tax payments in 2014 to be approximately $70 million. During the quarter, we completed our first opportunity to not only confirm but refine at a very detailed level many of our tax assumptions that we made related to the Stewart operations during our 2013 diligence period. As a result of this more detailed analysis, we are now anticipating that our 2014 cash tax payment will be in a range of $50 million to $60 million. So, further positive refinement of the original cash tax assumptions related to Stewart would push us toward the lower end of this cash tax range. However, stronger operating performance would create higher taxable income and would push us to the high end of this cash tax range. As I mentioned previously, our recurring CapEx guidance of $135 million to $145 million also remains unchanged, and this results in anticipated free cash flow in 2014 to range from $285 million to $345 million. With the addition of the incremental Stewart synergies and expectations in lower cash taxes that I just mentioned, we do believe we’re currently trending toward the upper end of this free cash flow range. On a per share basis, our free cash flow guidance range equates to $1.32 to $1.59 using a fully diluted weighted average share count of about 217 million shares. We believe this represents a favorable high single digit free cash flow yield. Now, I’m going to shift to our financial position and give you a few highlights on our capital deployment. We continue to have robust liquidity. In March 31, we had $150 million of cash on hand and about $330 million of availability on our credit facility. In terms of deploying cash in the quarter, we funded a $110 million on a revolver during the quarter and use cash on hand as well to retire all of Stewart’s $132 million of convertible notes as well as the associated premium of about $36 million. Also during the quarter, we bought the remaining outstanding shares of Neptune. This cash deployment is reflected in financing activities on our cash flow statement. With this purchase, we now own a 100% of Neptune and I want to stress that we continue to be very excited and believe that SCI Direct has significant growth potential. Finally, we paid $17 million in dividend in the quarter which reflects the recent 14% increase in the dividend rate, which is now $0.8 per share per quarter. As Tom noted earlier we remain on track to receive around $315 million to $340 million of after-tax proceeds from the divestitures associated with the Stewart acquisition. We expect to close all these divestitures transactions and receive the associate proceeds this summer or early fall. We will use the first $200 million of the after-tax divestitures proceeds to pay down a portion of our roughly $600 million term loan as stipulated in our bank credit agreement. Also note that we have acquired quarterly payment on our term loan which remaining payment of approximately $23 million and the remaining portion of 2014. Now with these required debt payment as a backdrop we do plan to take a balanced approach to deploying our capital for the remainder of the year. This will be done through a blend of share repurchases and debt payments as we get closer to our targeted leverage around a mid three range on a net debt basis. This leverage which is calculated as net debt to EBITDA in accordance with our credit facility dropped to below four times to 3.95 times as of March 31. This being below our four times credit facility threshold give us increased flexibility in making capital allocation decisions this coming quarter, which includes our ability to reconsider share repurchases and just to remind you we currently have a $190 million authorized under our share repurchase programs. In addition to this, we will also consider specific market acquisitions as always as the appropriate returns, and continue to returning cash to our shareholders through our dividend. So in conclusion, with the first quarter now behind us, we are excited about the remainder of the 2014 and being able to deploy our capital in a way that we believe will create value for our shareholders. Our first priority however as we look at the remainder of the year will be to ensure we effectively and efficiently are able to complete the integration of the Stewart operations and most importantly achieve our robust synergy targets. So with that operator, that concludes our prepared remarks for this quarter and we’d now like to turn the call over to questions.

[Operator:]

Thank you. (Operator Instructions) The first question is from Bob Willoughby from Bank of America. Please go ahead.

[Robert Willoughby:]

Hey Tom or Eric, can you give us any forecast on what Neptune can do for you this year, it’s obviously well ahead of our expectations and what incremental economics will you be recognizing with the consolidation of that remaining interest?

[Eric D. Tanzberger:]

Bob I don’t have the numbers in front of me but I think you saw from the release or can conclude we’re growing in the kind of mid-teen digit range with in the direct now. We’ve got 80 locations opened, we’ve got five new ones openings this year and we’re very excited and would expect to be able to continue that type of growth rate, as we think about the rest of the year. So again on a consolidated basis, its pennies added to the base, but an exciting part of, I think a tremendous growth stories we think about the next, three or five to 10 years out. So that we’ll be kind of the growth rate I’d expect for this year.

[Robert Willoughby:]

Would you use a double-digit rate in the outline years as well?

[Eric D. Tanzberger:]

I think so I mean I think at some point obviously it gets, it starts to begin to slow a little more. We expanded now to 80 offices. I think we started today we had 30. So we think we can continue to open but that’s going to trend down over the years, but I think still its going to far outpace you know traditional business growth rates for us and for anybody else for that matter.

[Robert Willoughby:]

Okay. Can you comment just on inability what why reasons for slowing in the divestiture program and how that might impact your share repurchase plans, what’s a reasonable target for the back half of the year for share repurchases?

[Eric D. Tanzberger:]

Well I think two things there. Generally, it’s finalizing contracts with the buyers and more importantly the approval process as we go to the Federal Trade Commission about the credibility of the buyer. And again it just a process that you have to go through with the Federal Trade Commission and it only comes, once we submit a final contract. So that’s the little bit of the holdup. I tried to mention in there the good news is, we make about $4 million a month on every time we hold these businesses. So it’s not tremendous skin of our back from a cash flow perspective. I would say you should have no impact on our ability to buyback shares. That is something that is imminent.

[Robert Willoughby:]

Is a $40 million to $50 million buyback a realistic expectation?

[Thomas L. Ryan:]

Over what period of time. Plenty of period time you’re talking Bob.

[Robert Willoughby:]

Second half.

[Thomas L. Ryan:]

Yeah.

[Eric D. Tanzberger:]

Yeah, I say definitely I mean we have a $190 million of authorization available and even above the $200 million of proceeds that actually go to the term loan, there is another $120 million or so when you look at the guidance after-tax and then we have all of the free cash flow and the guidance that I mentioned in the call. So definitely yes.

[Robert Willoughby:]

Okay, wonderful. And then, just lastly your synergy numbers don’t include some of the revenue opportunities with the Stewart team as you rollout your products and services through their network. Any kind of guesstimate the magnitude of that opportunity?

[Eric D. Tanzberger:]

It’s hard to say Bob, similar things I tried to touch upon I’d say on the funeral side of the equation. So as you think about the effectiveness of the Dignity package program and again Stewart had packages and had an impact from that. But we learn from them, we learn from us and what we see historically as we come out a better product and a better ability to deliver additional products and services. We also have the catering program which at today is about $30 million run rate on revenues for our set of businesses. The other thing I think you’ll notice and there is regional issues, but when you think about pricing, we’ve got a much more I’d say centralized strategic approach to how we price both cemetery and funeral. It’s takes a lot of inputs from competitors in the area and the like. And I’d say Stewart’s pricing was a little more regional, little more local, and so our belief is as we get in there to do some of these things, there’s probably some opportunities on those equation. And finally and I think the biggest impact of all is as we can put the two sales forces together, get them on salesforce.com, get them on one contract system, get them on one pay plan, and that’s going to occur on May the 1st. Once we’ve got the run rate there, our expectations are that we can really grow, pre-need cemetery sales, once we get it altogether. So it’s hard to estimate because if I had a actionable plan, I would tell you but I’d tell you at this point, we’re excited and we think it’s a big opportunity and the question’s really probably when, not if.

[Robert Willoughby:]

That’s great, thank you.

[Eric D. Tanzberger:]

Thanks.

[Operator:]

The next question is from A.J. Rice with UBS. Please go ahead.

[A.J. Rice:]

Hi, everybody. Congratulations on how things are going so far, it looks like things are going very well. I know and Eric, you made some comments about this around your comments on cash taxes, but I know one of the uncertainties in the due diligence process on Stewart was the fact that they had this big deferred tax asset. Have you been able to, is part of your comment about better profile on cash taxes reflective – doing more due diligence there or is that still something that you’re looking at and having really determined what the impact would be?

[Eric D. Tanzberger:]

A little or both A. J. I hate to answer that way, but we’re still in the middle of really refining down at the real low level detailed level at a legal entity for Stewart. We had assumptions, we told you we had assumptions related to the deferred tax asset. Part of the refinement of the cash taxes is related to that issue as well as other NOL carry forward issues, but there is still more analysis to come we’re right in the middle of it right now.

[A.J. Rice:]

Okay, second I guess. What about the trust funds, I know they had managed their trust funds internally. You obviously use a multiple number of outside experts. Are you making any assumptions longer-term about change and does that have a financial impact on you, whatever you’re going to do with those trust fund assets?

[Eric D. Tanzberger:]

Well the first thing I’d say is they did a different philosophy by managing it internally, but they also produce very, very good trust fund returns. But we have made the decision and the integration to take the Stewart trust funds and merge them into our common trust funds and use our investment philosophy which is a philosophy outsourcing based on our asset allocation to call it 25 to 30 professional institutional money managers across that asset allocation. And we are in the process again there is a little bit of tax planning in terms of getting those assets into our funds that will work in through us well A.J. But I would anticipate this happening in the next probably three to four months.

[A.J. Rice:]

Okay. And there have been some discussion about looking at something more strategic with respect to the trust fund assets, I’m trying to unlock some value there, any update on that or any thoughts about that?

[Thomas L. Ryan:]

A.J. this is Tom, let me step back as I think there is a lot of questions around this area. Clearly our priority and focus over the last 18 months has been on negotiating a definitive agreement for Stewart and FTC review process closing in integration of a significant transaction. This in itself is materially increases our opportunity for further scale and long-term value creations for our shareholders, and we remain focused on delivering that values. At the same time we've realized we've enjoyed the tax shields of NOLs over more than a decade and by the way it's more fun using them than creating NOLs. And those days are coming to an end. So some months back we embarked on a comprehensive review with the assistance of external advisors on basically opening all options up and relooking in an effort to enhance long-term value for our shareholders and obviously as we conclude material things we'll provide update in the process. One of those that A.J. is touching upon is this trust monetization angle something that we can look at it accelerating money out of trust clearly we had conversations about REITs, there is leverage levels that we can look at, there is international expansion opportunities, so there is a variety of things that I think will be looking at and some can go together, some can't and so we're going through a I'd say comprehensive process and I want to hesitate to conclude anything or give partial answers at this point in time. But know that we are working very hard to see if there are other ways to enhance value beyond what we intend to is our traditional approach of maintaining leverage levels and using excess cash to get back to our shareholders.

[A.J. Rice:]

Okay. I’m just going to slip one last one in there. So you bought the minority position out of Neptune. I mean I guess their operating assumption has been that you sort of on hold for small mom and pop type of transactions even though the market did seem to be picking up a little bit prior to the Stewart deal. Is that still the case or are you, given that you’ve gotten your leverage down a little quicker than expected. Are you thinking maybe you would be open to some mom and pop deals as well?

[Thomas L. Ryan:]

We definitely would be open to mom and pop deals. We’re constantly keeping relationships that we’ve developed with people over time and as you know A.J. because you’ve been doing this as long as I have, these come when they come. And so we’re ready and waiting to allow these to be invite in, share our thoughts and welcome them into the SCI family. It just really hard to accelerable that action. So I think you’ll see us do that for sure strategically. I think you’ll see us in certain markets where we may have situations where it’s difficult to buy or we may look at expanding through a construction of new locations but again I would tell you that the significant cash flow that we’re generating is never going to be saturated by acquisition. And so that’s why I think we begin to look and say strategically what should we be doing, we know one thing particularly as these share prices buying ourselves back is a pretty good deal right now. But we’re going to explore a variety of options, but the short answer is yes we’re there. I just don’t think it’s going to be significant enough to spend our money.

[A.J. Rice:]

Okay. All right, thanks a lot.

[Operator:]

The next question comes from John Ransom with Raymond James. Please go ahead.

[John W. Ransom:]

Eric, do you mind just recapping, if you don’t mind, the timing of cash flows for the next couple of quarters in terms of your divestiture expectations? When do you think you’re going to get the final cash back from the buyers of those assets?

[Eric D. Tanzberger:]

So, you're asking the timing of the divestiture proceeds, John?

[John W. Ransom:]

Yes.

[Eric D. Tanzberger:]

What I would say is, I mean, as Tom said, it’s a process that we are trying to say to some degree is outside of our control. And so it’s hard for us then to really describe what the timing is? I would tell you though, we are far enough or long that we do expect the proceeds come in this quarter. We haven’t received any, as of now, as of April, but we would expect some to come in starting next month and a little bit heavier load in June. And I do think that continues in July and continues in August. We’re trying to step back and say what’s most important is

[Thomas L. Ryan:]

I think, John, one of the confusions out there is everybody knows that the first $200 million of our divestiture proceeds need to go to pay down debt and that is true. So that is attached to the divestiture process. It doesn’t mean you can’t spend money before that. So that is not something we have to wait on to begin to deploy our capital allocation strategies, just that the first two hundreds got to go there once you do it.

[John W. Ransom:]

Okay. Is the gating issue anything beyond the FTC? I assume all the buyers have warned up their financing. They should be able to move pretty expeditiously once they get through the FTC again? Or is there other thing to think about?

[Eric D. Tanzberger:]

I think – no, I think, you’re exactly right. The preponderance of these buyers are people you've heard of and know. And so, 80%, 90% of it would be fully confident. Obviously, there's going to be some smaller transactions that could have some risks to approval and could have risk to financing, but I would say they're de minimis.

[John W. Ransom:]

Okay. And could you just – I know you guys have been on a journey with you're trust funds, exploring monetization strategies, and then, maybe more recently you backing off from that thought process. Could you just kind of recap where you are now in that journey? And what may still be possible?

[Eric D. Tanzberger:]

Again John, I’d reiterate what I’ve said before. We’re still looking at that, I’d say the general statement I can tell you is this, those trust funds legally are the customers not ours, and I think that’s the one complicating factors to some of the things that I’ve heard spoken about outside the company. So, I think everybody need to keep that in mind the other thing that I think from a – just my perspective, if you take money out of trust early, they are not there when you want them later. So, anything that could be done albeit the short-term value creation. It’s going to damage our results in future periods. So, I think there is – we’re looking at it hard, but I’d tell you those are two things just from Tom’s perspective that, that hit me when you think about trust funds. Clearly, we are going to be very efficient in the way that we fund and take moneys out, but those are some complicating factors but we’re looking at everything like I said and we are not going to leave a stone on turn, but we’re going to look at that versus other opportunity versus opportunity and again be in a position to some point to say, what’s called play on one of these.

[John W. Ransom:]

Okay. Thanks a lot.

[Operator:]

Your next question is from Chris Rig with Susquehanna International Group. Please go ahead.

[Chris Rig:]

Good morning. Thanks for taking my questions. I hopped on a little late, so I apologize if this already been asked or you guys explained it, but on the tax side, when you think about where you could get from Stewart, are we talking about sort of pushing out you guys becoming a full cash tax payer by a quarter or to or it could potentially be longer than that.

[Eric D. Tanzberger:]

I think right now as we said we’re going to become from a run rate basis, just think of it that way right Chris. But, this fall we are looking at becoming a full cash tax payer and that’s where we stand today with Stewart’s deferred tax asset and be able to utilize the acquired NOL associated with that acquisition. As you know, I just want to reiterate and you know our track record Chris you known us a long time. We are consistently looking at ways to plan appropriately and reasonably in terms of deferring becoming a cash tax payer as long as we can, and that continues today to look at other opportunities and other defining measures to defer. But from a run rate basis, as we’ve said, we’ll be a full cash tax payer sometime late in 2014.

[Chris Rig:]

Okay, all right. And then just philosophically with regard to buybacks versus dividends, obviously you’ve been pretty consistent in both areas, and done a good job for investors, but is there any thought about some more meaningful increase in the dividend given the payout ratios still relatively low?

[Eric D. Tanzberger:]

Yeah, I think the way we think about that at this point is, it’s all relative to where your share price is trading. And I think, we think about it Chris, we do value creation versus in the share repurchase where we are today. The other issue is dividends, you know this better than I do. It’s very difficult to take the dividend backwards, and so when you go out there with a heavy dividend, it will limit your ability to be flexible for opportunistic things that we may want to take on. So, I think our strategy is, let’s grow the dividend every year, again with kind of our growth rate; and given expectation that, that’s something that will continue to grow out in the future, and at the same time kind of the excess funds it will lead to these price levels, we’d be in a position to buy back more shares. So it’s something, we’ll look at, but I think if you’re talking about a significant increase, I don’t think that’s something that’s on the horizon for us.

[Chris Rig:]

Okay, that’s all I have. Thanks a lot.

[Operator:]

The next question comes from Clint Fendley with NewBridge Group. Please go ahead?

[Clint Fendley:]

Thank you. Good morning, everyone; good results here. I was wondering that the cremation rate spiked quite a bit, and I’m wondering if your planned divestitures affected your mix here, I know the legacy Stewart had a lower rate on the cremations.

[Eric D. Tanzberger:]

Yeah, I think the cremation increase was tied back to our growth in SCI Direct and [Audio Gap] Clint?

[Clint Fendley:]

Yes. Hello, can you hear me?

[Eric D. Tanzberger:]

Okay, I can hear you now. So I think a lot of which you’re seeing in this growth rate is the success of particularly the historical success of the pre-need efforts of (indiscernible) and now we call SCI Direct. Because if you look at, they’re out there aggressively selling pre-needs and creating a backlog, and if you look at that growth rate of what their pre-need is going at-need, it’s a pretty significant growth rate. So I think that is probably putting more pressure on the growth of our global cremation rate. If we exclude that from let’s say the traditional SCI portfolio, you would see nearly the growth rate that we’re experiencing.

[Clint Fendley:]

Okay, that’s helpful. And I’m wondering on the salesforce implementation, just to be clear, is this a company-wide implementation or are you just moving the legacy Stewart over to your systems?

[Eric D. Tanzberger:]

Well two things, we’ve taken we were on HMIS and Stewart was on HMIS and we now, what we’ve done is created a best practices at both, I would say. And as you think about compensation plan that we’re going to put together is kind of the same thing; we’re shifting systems, we are shifting pay plans, and I mentioned the lead management system salesforce.com and that’s dramatically different from both. So that’s really what’s going on. So not only are we bringing our Stewart team based on board, but there is a little bit of change again for a legacy SCI, management of legacy SCI sales force. And again a lot of our on boarding process is about buddy system. So don’t forget just because we are on boarding Steward employees that is a function of the SCI employee to help that Stewart employee in that area getting up to speed on the simplest thing to first of giving our email system having used this form. So that’s what’s going on in our organization today and its all going to lead to a much better platform to grow the business. So that hopefully help identify, it is a company wide change in lot of these things.

[Clint Fendley:]

Okay. And it’s on both the funeral and the cemetery segments then?

[Thomas L. Ryan:]

You’re right.

[Clint Fendley:]

Okay. And last question here and this may be a little bit less filled and may be the last thing you want to talk about after the last several months, but I’m just wondering what your thoughts are on potentially any international acquisitions. I know you guys both have direct experience here. Do you see any opportunities here over the next several years?

[Thomas L. Ryan:]

It’s definitely certain that we are exploring, no doubt. I think there is tremendous opportunity internationally. I think it all boils down to optionality. Like I said before, we are evaluating a number of things that I think it takes the company in different types of directions and that’s definitely one that’s under study as we speak.

[Clint Fendley:]

Got it. Thanks guys.

[Thomas L. Ryan:]

Thank you.

[Operator:]

We have no further questions at this time. I’d like to turn the call back over to SCI management for closing remarks.

[Thomas L. Ryan:]

We want to thank everybody for joining us on the call today. We look forward to speaking to you again in July when we report our second quarter results. Thanks again. Have a great week.

[Operator:]

Thank you, ladies and gentlemen. This concludes the first quarter 2014 Service Corporation International earnings conference call. Thank you for participating. You may now disconnect.