Service Corporation International
NYSE:SCI
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Service Corporation International
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Good day and welcome to Service Corporation International Fourth Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to SCI management. Please go ahead.
Good morning. This is Allie O'Connor, Director of Financial Reporting. Debbie is out today, so I have the honor of going over the safe harbor language with you before we begin with prepared remarks about the quarter from Tom and Eric.
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.
In today’s comments, 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, the appropriate measures calculated in accordance with GAAP is provided on our website and in our press release and 8-K that were filed this morning.
With that, I will now turn the call over to Tom Ryan, SCI's Chairman and CEO.
Thanks, Allie, and thank you everyone for joining us on the call this morning. Today, as usual, I’ll begin my remarks with a high-level overview of the quarter followed by a more detailed look at our funeral and cemetery operations, and then finally comment on our outlook for 2020.
So, let’s begin with an overview of the quarter. As you saw on press release yesterday, we finished the year strong, reporting an impressive $0.06 or 11% increase in adjusted earnings per share over the prior year quarter. This was despite a $0.03 headwind from a higher effective tax rate. A solid performance in our funeral segment coupled with lower general and administrative expenses were the primary drivers that led to a $0.60 of adjusted earnings per share.
On the cash flow front, we generated almost $157 million of adjusted operating cash flow or [4.4 decrease] over the prior year quarter, as higher cash interest and cash tax payments more than offset our increase in operating results. Eric will provide more details in his remarks related to cash flow. When comparing these results to the prior year quarter, there are a couple of things I would highlight.
First, our core funeral locations we’re hitting it on all cylinders this quarter, as we saw an increase in comparable funeral services performed in improved sales average in a more favorable cremation mix change as compared to the previous three quarters of 2019. All of which led to a 10% increase in comparable funeral operating profits.
In our cemetery segment, while the reported revenues were somewhat needed due to the timing of completing construction projects, as well as sales velocity into unconstructive projects in the fourth quarter, our comparable preneed sales production returned to the mid-single digit growth rate that we’re used to seeing, increasing 5.2% or over $12 million, compared to the prior year quarter.
Finally, well not a major influence on our current earnings, we grew preneed funeral sales production over 12% for the quarter, enhancing the value of our future results by continuing to grow the preneed backlog and capture future market share.
Now shifting to some more detail around the strong funeral performance for the quarter. From a top line perspective, we had a very solid quarter. Comparable funeral revenue increased more than $23 million or 5%, compared to the same period last year. A little over half or $13 million of this top line growth is attributable to an increase in our core funeral home revenue as we saw healthy increases in both services performed and average revenue per service.
Core comparable services performed increased 1.3%, compared to the same period last year. Additionally, we were very pleased to report a 2% increase in the core funeral pricing – average revenue per case, I’m sorry, [having lapped] some of this strategic cremation pricing adjustments made during 2018 in certain markets.
We were able to achieve 2.7% organic pricing growth at the customer level, which was partially offset by a 130 basis point cremation rate mix shift. This mix shift has continued to tapper down throughout the year, as we anticipate and we believe that you should see the cremation mix shift sell back in the 100 basis point to 150 basis point range for 2020.
The remaining increase in revenue was driven by our non-funeral home channel or SCI Direct, which reported strong increases in both contract solid and average revenue per contract, resulting in recognized preneed revenue growth of $7.8 million or almost 30%.
Recall, this represents products solid on a preneed basis, primarily by SCI Direct that are delivered at the time of sale, resulting in immediate revenue recognition. Last year, you may recall that during the fourth quarter, we reported lower results, as SCI Direct was transitioning preplanning advisors from independent contractor status to SCI employee status, which created a temporary slowdown in sales production.
I think it is safe to say that we are back and better than we’ve ever been. Thank you to Tim and the team for their extraordinary leadership during this transition. We are very happy to have our councilors as official members of the SCI family.
Shifting to funeral profit, under $23 million revenue growth I just described, we generated an increase in operating profit of more than $9 million and operating margins increased to 100 basis points to 21.1%. Selling costs were a little higher year-over-year, partially because we grew preneed funeral sales production over 12% and partially with the new SCI Direct sales compensation structure, which includes a base take upon it, we’re deferring a smaller percentage of the overall sales compensation.
Speaking of preneed funeral sales, this was a true highlight of the quarter, growing sales production $24 million or over 12%. This increase was fueled by double digit growth in the number of contracts written for both our core locations and our SCI Direct channel. For the full-year, we grew preneed funeral sales production just under 5%, which is at the top end of our guidance range of 3% to 5%. As we move into 2020, we will continue to invest in the development of our sales organization with best-in-class tools and technology.
Now, turning to cemetery operations. During the fourth quarter, total comparable cemetery revenue increased nearly $2 million or about 0.5%. Core cemetery revenue was essentially flat on both an atneed and a preneed basis. This was despite our solid preneed sales performance were we grew comparable preneed cemetery sales $12.2 million or 5.2%.
Historically, we have experienced preneed cemetery revenue recognition rates well above a 100% in the fourth quarter, as previous quarters sales of unconstructed property were recognized as projects were completed late in the year. While some of that did occur this fourth quarter, not as much it did. And additionally, we sold a higher proportion of unconstructive property sales during this fourth quarter.
While our preneed sales production growth did not benefit the profit line this quarter, we will receive that benefit during 2020 when the projects are constructing. From a profit perspective, comparable cemetery gross profits decreased $3.5 million and margins dropped a 120 basis points to 32.5%, primarily based on the flat cemetery revenues for the quarter caused by the lower recognition rates, coupled with anticipated inflationary cost increases incurred during the fourth quarter.
Now, let’s shift to a discussion about 2020. Our guidance for adjusted earnings per share in 2020 is $1.96 to $2.16 per share. The mid-point of that range were $2.06, represents an approximate 8.4% increase over 2019 earnings per share. This projected earnings per share increase is absorbing a higher adjusted effective tax rate of approximately 24%, compared to the 22% rate we reported in 2019, which we estimate to be approximately a $0.05 earnings per share headwind.
Normalizing for the tax rate, the mid-point of our guidance from an operational perspective is projecting earnings per share growth more towards the upper range of our 8% to 12% annual earnings per share growth target. We believe this increase will come as it has historically with the organic businesses contributing roughly 4% to 6% growth in earnings per share, in contributions from recently acquired businesses, as well as the effect of the 2019 and 2020 share buybacks contributing an additional 4% to 6% of earnings per share growth.
Allow me to briefly discuss the underlying assumptions regarding the base business growth for 2020. First, core funeral revenues are anticipated to grow in the 1% to 2% range. We expect both funeral services performed and sales averages to be flat to slightly up for the year with the first two quarters, reflecting easier comparison relatively to the back half.
We expect SCI Direct to grow their revenues in the mid-to-high single digits, expanding their operating profit percentage and growing profit by $3 million to $5 million. We anticipate total preneed funeral sales production to grow in the 3% to 5% range for the year.
Next, after a challenging 2019, we would expect cemetery sales productions and cemetery operating revenues to return to growth in the mid-single-digit percentage range, delivering impressive cemetery operating profit growth with margins exceeding 30% for the year. From a capital and strategic perspective, we will be focusing on staying relevant with consumer, with an emphasis on the growing trends in our industry related to celebration, simplicity and transparency.
Our ability to deliver on these both in personal interactions, as well as online to create a seamless and engaging customer experience will only further deepen the trust we have earned with our client families, as well as new potential customers. We will continue to invest in technologies and enhance how we interact with consumers digitally, providing a better customer experience from the first point of contact to the arrangement conference and beyond, while also enhancing efficiencies in our operation with the appropriate controls around cyber security.
Look for a slightly increase in our spending around cemetery inventory development, as well as new construction and development of funeral homes. These facilities are built with an emphasis on modern flexible design that appeal to a broadening array of customer desires.
With our increasing EBITDA and current debt level, we would expect a larger share of free cash flow to go to share repurchases. The timing and cadence based on our perceived discount to fair value throughout the year.
To wrap it up, overall I’m very proud of our team’s progress in 2019. I realized that none of this was possible without my 25,000 teammates and appreciate all that you do for our families and for SCI. As we enter 2020, I am so excited about our company’s future.
With that, I’ll turn the call over to Eric.
Good morning. Today I’d like to begin by addressing our cash flow results, which will be for the fourth quarter and then the full year of 2019 followed by our capital deployment activities for the year and then I’ll end by providing some details of our outlook for 2020 just as Tom did.
So, let’s begin with a discussion of cash flow for the quarter. In yesterday’s press release we reported strong operating cash flow of 157 million for the quarter, which was better than our expectations, primarily from strong operating results from our funeral segment and higher cash receipts from both cemetery installment sales and trust funds.
When compared to the prior year, operating cash flow for the quarter decreased by about $7 million. Increases in cash earnings in the quarter drove gross profit up by about 8 million, but this was offset by expected headwinds from higher cash interest payments of 11 million and higher cash tax payments of 7 million.
Maintenance and cemetery development CapEx for the quarter, which recall are the two components that we define as CapEx in our free cash flow calculation were approximately $54 million. This is $5 million lower than the prior year, but generally in-line with our expectations. Deducting these recurring CapEx items from cash flow, we calculate our free cash flow in the quarter to be just over $100 million, which again was generally in-line with the prior year.
For the full-year, we generated $635 million in adjusted operating cash flow, exceeding the midpoint of our guidance range provided throughout the year, which was around 590 million. This also compares to 610 million of adjusted operating cash flow for 2018. The increase of 25 million over the prior year resulted from higher cash earnings and favorable working capital impacts that were partially offset by higher cash interest and higher cash tax payments.
So, on the topic of cash taxes, as we look ahead to 2020 we’re modeling cash taxes to increase by about $55 million to approximately $120 million, which will be a significant headwind for our cash flow in 2020. This increase is driven by the higher taxable earnings we anticipate in 2020, tax planning benefits that occurred in 2019 that are not expected to reoccur in 2020 and expected decrease in benefits from stock option exercises.
As always, we will try to minimize cash taxes, so we believe $120 million hundred is a good guidance number that represents an approximate 24% cash tax rate, which by the way also aligns with our normalized effective tax rate expectations for 2020. Maintenance and cemetery development CapEx combined were approximately 204 million for 2019, which was flat, compared to the prior year, but a little higher than our target of 195 million.
These investments are important to our business and you should expect to see us spend at a slightly higher rate in 2020 that I’m going to speak to in a moment. Deducting these recurring capital expenditure from adjusted cash flow, we calculate our adjusted free cash flow for the year at a healthy $431 million or 6% increase over the prior year.
So, now let’s discuss our capital deployment for the year. In 2019, we delivered value by deploying more than $400 million towards acquisitions, new location builds, dividends and share repurchases. So let me walk you through the components.
First, let’s start with acquisitions. We deployed approximately $107 million, which exceeded our target range of $50 million to $100 million. So, I would like to point out that $56 million of this amount was invested in the high quality business acquisitions in six states in the U.S. and in three Canadian provinces. The remaining 51 million was invested in land for two cemeteries, one in Los Angeles area and one in Texas, as well as other land purchased for the purpose of building new funeral homes.
Acquisitions continue to be our best use of capital as a generally resolved in a low-to-mid teen after-tax IRR. Additionally, we remain optimistic about the acquisition pipeline as we enter into 2020. In addition to acquisitions, we invested 36 million in 2019 on the new builds and expansion of several funeral homes during the year, which we expect to provide positive returns to us going forward. Dividend payments in 2019 totaled 131 million, which was an increase of 6% over the prior year of 124 million.
Going forward, we expect to continue to increase in the dividend as the company's earnings grow and as a reminder we target a payout ratio of 30% to 40% of recurring net income. During the year, we also repurchased almost 50 million of our 2027 notes in the open market to manage our leverage and reduce some of our higher interest rate debt, which benefited 2019 by around $1.5 million.
And finally, we returned to 130 million of capital to shareholders in 2019 in the form of share repurchases. Over half of this amount or about 77 million of these share repurchases actually occurred during the fourth quarter, as we achieved our desired leverage ratio, and then saw a value opportunity to deploy more capital here by repurchasing 1.7 million shares at an average price of $44.66.
Ultimately, for the full-year, we repurchased about 2.8 million shares at an average price of $44.54, which has resulted in the number of shares outstanding being approximately 181 million shares. Subsequent to year-end, we will continue this repurchase program reducing our outstanding share count by an additional share 400,000 shares for a total investment of about $19 million.
Now, let’s shift our outlook for 2020 in terms of cash flow and capital deployment. In our press release, you can see that we have provided operating cash flow guidance of $590 million to $640 million range, benefiting our cash flow in 2020, our expected higher cash earnings being offset by expected higher cash taxes that I just mentioned.
So, normalizing 2019 adjusted operating cash flow of $635 million by the expected $55 million increase in cash taxes gets you to a starting point of $580 million. This 2019 normalized base did benefits by about $0.16 of earnings growth, which equates to about $35 million to $40 million of incremental cash flow, which gets you to the $615 million midpoint of our guidance range.
Moving on to CapEx, our expectations for maintenance and cemetery development capital spending at 2020 is $230 million or about $25 million more than our 2019 spend. Of this increase, we expect about 10 million of investment and developing and technology platform aimed at improving the customer experience. The remaining $15 million increase will go towards cemetery development to continue building out new and unique cemetery inventory to help drive increased cemetery preneed production. This capital continues to differentiate us and help drive superior returns.
In addition to these recurring capital expenditures of 230 million, we expect to deploy $100 million to $125 million in acquisitions and other growth initiatives, including new funeral home construction opportunities, which together drive low to mid-teen after tax internal rates to return well in excess of our cost to capital. We have currently modeled 75 million for acquisitions and 50 million for these other growth initiatives.
So, as we look forward to our capital deployment strategy in 2020, we feel we have the financial flexibility to continue much of the same successful strategy you have seen from us for many years. We follow a disciplined and balanced capital deployment approach, designed to yield the highest relative value for our shareholders. This strategy is based on our stable free cash flow, our robust liquidity, which was nearly 860 million at the end of the year, as well as our favorable debt maturity profile.
So, in conclusion, 2019 was a good year for us. Cash flow strength continues to be a highlight for us. I echo Tom's comments that none of this would have been possible without the hard work of our dedicated associates and we appreciate all of their efforts. So, with that, operator that concludes our prepared remarks and now we’ll go ahead and open the call up for questions.
Thank you. [Operator Instructions] And our first question today will come from A.J. Rice of Credit Suisse. Please go ahead.
Thanks. Hi, everybody. First of all, maybe just to ask you to comment on something you did mention in the prepared remarks, which is the notification that the FTC gave that they will re-evaluate the funeral rule. Have you – obviously, they put out some material when they made that request for comment, anything in that that you would like to highlight and it’s different than what you were thinking, have you gotten any feel for the timeframe. I know the comments need to be in a certain limited number – amount of time, but any sense about what the process beyond that will be to review this?
Sure A.J. This is Eric, good morning. As you mentioned, the FTC is seeking comment on the funeral rule. There is a [60-day] comment period and so they will do on April 14. I think the punch-line of your question is that, of all the questions they asked us to comment on, which are publicly available, nothing really surprised us. You know, we’ve been expecting this now for over a year. I think, we’ve been talking about it for over a year.
They did ask other questions about cemetery's, crematory, and things like that, but again that was somewhat expected in their last review. The timing is pretty tough to figure out. I think there was a view back in the late 90s that we submitted comments to, and it was many, many years later that ultimately the FTC responded to that with no changes to funeral at that point in time.
So, what we do know is we have 60 days to comment, we're very well prepared for that. For the most part this is about price transparency, which I’ve described to you before on previous calls that we feel strongly exist in the industry, but there is no real surprises so we will meet the deadline of April 14, and then we just don't know the timing thereafter of the fellow Trade Commission once they receive all of the comment not just from the industry players, but any one of the public that wants to comment, you know what exactly will happen from there is open for discussion.
Okay, great. On the one hand, you had a nice pickup in preneed cemetery sales production, on the other hand the right initial rate was a little bit like relative to which you thought, I know from time-to-time you guys have called out what’s happening with the Asian consumer, particularly in LA and Vancouver those two large markets for you, is any of what you’re seeing either the easing of the trade tensions or anything related to the coronavirus and how people are reacting in terms of their purchasing habits or do you attribute any of what you're seeing to any of that and if not especially on the recognition what – if you drill down what do you think is behind more moderate recognition in the fourth quarter?
A.J. this is Tom. As it relates to the Asian consumer, we called it out because particularly if you look at the first quarter and third quarter comparisons, we saw year-over-year drops and again there’s some seasonality sales, as you look at the fourth quarter we actually had favorable comparisons this fourth quarter versus last fourth quarter in particular around the parks that predominantly service the Asian consumers.
Particularly, I’d point out that road shows had a very, very successful fourth quarter and drove great performance. So, you look at the Asian consumer relative to the population they both grew in this kind of about mid single digit growth rates. So, we're very, very pleased to see that. Having said it, I don't know that we have great visibility into what’s driving any apprehension or if apprehension has gone away as it relates to the trade talks and settlement or now with the virus, but I will tell you that what we saw in the fourth quarter and we haven’t seen anything different that says, things look pretty good as it relates to that consumer and as it relates to cemetery sales.
Okay. And then my last question would be around, maybe flush out a little bit little more of this IT investment program to improve on the consumer experience. I know there have been a lot of talk over the last few years about your Beacon initiative, is this related to that? Or is this something completely different and is there any update on what’s happening with Beacon, as well as this new initiative?
Why don’t we bifurcated that question. The first part A.J. is what we’re referencing now, because obviously we’re spending money on the digital experience through websites and mobile applications as such. And another thing as it relates to digital marketing interaction with this specifically is called out when are talking about the capital is the development of a system that’s going to allow us to interact with the consumer on an atneed basis in a much more effective way.
It really is not related to Beacon or anything else. It’s really about data capture and the ability the consumer to communicate directly with us online in a private portal, and then further development as it relates to taking that initial contact, the arrangement process, and really the entire – as you think about as the client family interacts with us all the way to the end of the process. So, this is the beginning of developing that, which we believe is going to result in a more favorable interaction with the consumer and drive revenues.
It also allows to be more efficient when you think about integrating all that information in our system as it relates to scheduling fleets of vehicles. So, it’s really a first step in developing that approach that it’s referring to.
And I’ll let Eric talk to the Beacon part of your question.
On the Beacon part A.J., I’m not sure there is really that much of an update because we’re continuing the development of the application. If you recall, funeral can continues to be well-utilized from the last time call I said that, you know there are some certain states of Canada that are not open for business yet on the funeral Beacon application, but about 90% is, and it’s being very well utilized. I think that that with a lot of reason to some of the drivers that are causing double-digit growth for example in the fourth quarter related to our preneed funeral sales.
So, that continues to be something that’s very effective for us. On the cemetery side, it’s more of the same. We’re continuing to develop the application not to be a broken record, but it’s complicated by the numbers of vendors and different products that we have in the merchandise area, as well as the weakness of each and individual cemetery property within each of the 450 cemeteries. So, we help to continue to develop that during this year and probably have, maybe a better update late in 2020 as it relates to cemetery.
Alright, thanks a lot.
Our next question today will come from Joanna Gajuk of Bank of America. Please go ahead.
Good morning. Thanks for taking the questions. So, couple of other topics. So, the funeral segment obviously was very strong in this quarter, so can you talk about the different pieces and specifically the organic sales average, I mean you mentioned the easier comps in terms of the, I guess the repricing on the reclamation business in the past. So, is that kind of the way we should be expecting going forward or should it normalize to, you know below, by the way that was printed this quarter because you had 2.7%, is it pretty strong numbers, so I'm just trying to get a sense of probably how we should think about going forward on that organic sales average?
Hi, Joanna. It’s Tom. Good to hear from you. As we think about average, we feel really good I think about 2020. I think, we have said in my guidance that we expect funeral revenues to grow between 1% and 2%. We believe that volumes are on a good trajectory and we believe sales average in particular is on a good trajectory. When I referred to the comments where the preponderance of the big changes that we made and we made them in stages, but we went into certain markets and I think it’s about 300 locations where we adjusted, particularly cremation pricing on what I’ll call the simple consumer in those markets, and by making those one-time adjustments it resulted in what we felt like a capture of market share, which was offset somewhat by the lower pricing. And then from that new pricing level, we will be able to inflationary pricing from there.
So, what you saw in 2019 was the fact that you had that pricing pressure flowing through the average. So, for the first time in the fourth quarter, John talked assured that this would happen and none of us believed him, in the fourth quarter it showed up like we expected – where he expected and so we saw a very good average. And I think if we look at 2020, we would expect that trend to continue particularly in the first half of the year into the third quarter and then it maybe gets a little tougher, but we feel pretty good about our average, we feel really good about where we’re priced in these markets very competitively and now particularly with what I’ll call simple cremation consumer.
On the volume front, we are feeling very good as we look at volumes for this year. If you recall last year, we had a really bad first quarter, down 5% and we said, hey if history holds don’t worry and sure enough the down 5% turned out to be relatively flat. So, I don’t get too excited, as a company we don’t get too excited about flu seasons because again they tend to push things in the quarter, but for the year we have been seeing effectively and we feel like doing a really good job capturing market shares through preneed, capturing market shares through the digital interactions that we’re much more offensive about today and also just our incredible local leadership that is competing more effectively for the business.
Okay. And then so, I guess you mentioned the interaction and I appreciate the comment that I heard about the investments you’ve been making in terms of the platform and how you are going to try to improve the consumer experience, but is there anything specifically in those efforts or maybe anything else, are you thinking or planning to do as you prepare for potential changes that might come from the FTC in terms of the final rule? Or are you’re going to first wait and see where it comes out?
Hi, Joanna, that’s a good question. We'll deal with the funeral like Eric said, we’ve got a process. We want to be a good part of the industry to talk about what’s great for the consumer, but between you and me, we want to do what’s right for our consumer with or without the Federal Trade Commission, this ruling, because we feel like transparency is important and for us the definition to transparency isn’t fully related to price. And as Eric said, I think pointed out to you guys, we survey our customer, we get a lot of feedback, sometimes price is very important.
As an example, this simple cremation consumer, price is very, very important. And if you look at a lot of our particularly SCI Direct and others we have pricing already available online because very important to that consumer. Our concerns – and we are starting our pricing I think now at 300 going to 500 Dignity locations. But our concern is, what are you conveying to the consumer that finds value and reputation, the quality of facility, if you're not providing now along with price then are you really educating the consumer to the level or are you going to confuse the consumer more if you're not doing that.
So, I think our strategy is, how do we convey in a transparent way all the attributes that are important for the consumer, and that’s what we’re beginning to do and try to do, you know one of the things that we’re really emphasizing now that we talk about is, you know reputation, and our online reputation and you’re seeing now, I think our ratings are up to 4.7 stars, which is pretty impressive and that wasn’t a focus until about a year and a half ago when Jamie Pierce came and got us to focus on that. And I think it’s been tremendous feedback.
We get – we have instances where people are saying, I selected you because you’ve a lot of reviews and you’re 4.7 stars you're 4.0 stars, whatever the case may be. So, these little things as time goes on, people are going to utilize these tools more, we’re going to be in a place to capture that, particularly as it relates to our competition. So, those are the little things that continue to add up to last compete more effectively.
Good color. Appreciate it. Just a quick number questions. So, G&A, you flagged that those were down year-over-year because it was 300 million of the insurance process, but you're going to adjust for that it was still pretty good number. So, the question I have is, is 28 million kind of per quarter a good run rate going forward, and they have their numbers question as you increase CapEx, how should we think about D&A for the full-year 2020?
D&A, I don't expect that big of an increase. So, I think D&A was just south of the $250 million, it’s probably around $245 million. So, maybe that goes to somewhere between $250 million and $255 million in that area, but I don't see it moving that much. As you saw, as you mentioned, G&A was down to about $120 million, which is down pretty significantly, maybe about $20 million in the prior year, but that really – the anomaly really Joanna was in the prior year. It had to do with the accruals that we had to make related to a total shareholder return plan or performance unit plan.
And as the shares really moved north and last year in 2018, we had to true up all those accruals and so we kind of have to think of it as a one-time bump in that accrual that really you can see in the $140 million plus of G&A last year. So, what do I think this year? You know, I think it’s maybe a little bit more, obviously inflationary type increases in all of those costs. So, maybe it’s not a 120, maybe you got a 125 million to 130 million in that ballpark for 2020 in terms of G&A.
Great. I appreciate. I'll hop back in the queue. Thanks.
You're welcome.
Our next question will come from Scott Schneeberger of Oppenheimer. Please go ahead.
Thanks very much. Good morning. Guys, I guess, appreciate the outlook for preneed, it sounds like in both segments you're looking for mid-single-digit in 2020. I know you don't give quarterly guidance, but curious if you could follow up some of the prepared remarks with how do you think about the cadence, particularly for cemetery preneed sales growth and consideration for recognition of that revenue? Thanks.
Sure, Scott. Good to hear from you. I think on the cemetery side, as you think about first of all, I love to get into recognition rate because I think it’s important for people to understand. A lot of times what happens is, we’ve got these plans on the books to construct this inventory. And so, in the early quarters you’re selling into that unconstructed. I’m generalizing here because it can happen in different times of the year. And so what typically occurs is your recognition rates will range between call it 85% and 90% for the first quarter, and again I’m rounding here, so please don't hold me too literally.
In the second quarter, tends to follow that pattern, by the third quarter your recognition rate gets closer to 100% because you're actually completing some of these projects and you’re recognizing some sales from our prior period and then obviously you’re still selling into unconstructed too. So about – that's 100%. And historically, in the fourth quarter you cushioned though with this, you know call it 110% to 115% recognition rate because you are, you now have maybe two quarter to three quarters of selling into an unconstructive project, and you complete a lot of them. And remember construction in certain parts of the country is hard to do when you get into winter.
So, a lot of activity in the summer months, a lot of activity in the fall months, so that’s the typical cadence. What you saw in 2019 was a higher recognition rate earlier in the year. We were in the, I think low 90s as I recall in the first part of the year and we ended the fourth quarter at around a flat 100, which is probably the lowest we’ve seen. So, again I think what really happened is, we had inventory that was available to sell that was constructive on the ground, and we sold a lot of that, and we didn't sell as much of the unconstructed stuff, and therefore that didn't flow through the fourth quarter.
I would expect next year to be a little more between the two, probably a little more emphasis on the fourth quarter than the 100% we saw this year, but – and probably the first part of the year in the high 80s approaching 90, as you think about recognition rates. On comparisons, you can go back and look, and I'm speaking from history, so forgive me. I think the first quarter is the tough comp as I recall, and I think the middle of the year is a little easier.
So, I think that’s the way to think about whatever that comparison may be, the first quarter may be one of the tougher comparisons. And quite honestly the tale of the first quarter is going to be told in March that’s a big sales month for us as you think of that particularly and some of the parks that have our Asian consumers. So again, I think we’ll do well. There is a lot of the crossover into April. We feel really good about coming out of the gate right now on both parts of our sales on the cemetery side and on the preneed funeral.
Okay. Sounds good, thanks. May or may not be a segue to my next question. I’m curious, what swing factors you're looking at when you consider the low-end or the high-end of the guidance range for this year, just what would have you most concerned and then where do you have a good bit of confidence? Thanks.
So, I think the biggest swing factor in any year is going to be cemetery, preneed cemetery sales. That is the toughest one to predict. There is a lot of execution. I’m probably less concerned when you think about funeral volume. Again, we get over excited about flu’s and non-flu’s and the truth is, I think we’re competing very effectively. We're pretty good at predicting that. I do think the – we feel like we’ve got a little bit of momentum on funeral average this year. This should probably give us better result than we’ve seen over the last couple of years.
So, again that could be a thing that were to change in a significant way to have an impact and then I think preneed cemetery sales, those are the big ones. We’re going to derail a lot of cash flow. We’re going to deploy it wisely. So, as I think about risk factors that’s probably it.
Great, thanks. And last one just one, you just brought it up Tom, kind of flu and ebbs and flows, could you just address what you’re seeing this year, I mean a lot of headlines obviously around flu, international and domestic, and particularly the way this question is going, but it seems like a lot of activity this year, but perhaps a lower mortality rate, just curious what you're seeing, how it’s impacting you and how we might want to think about that in the early half of the season?
Scott. My mom always wanted me to be a doctor, and I’m going to play one right now. So, first of all the flu impact actually began a little earlier than usual this year, but the surge in that was around influenza B strain. I've learned a little bit about these two differences. The influenza B usually develops later in the cycle versus the beginning of the cycle, and it tends to be harder on kids and again this gets back to, which fully strain impacts immunity systems or like there off. So, it’s hardest on kids and people under 25.
So, what you saw, while there is a higher incidence of flue, the hospitalization rates and mortality rates are actually pretty low even as the incident rate climbs. I think you see that in hospital number as well. What’s really unusual about this is the last time this happened was in 1993. So, it’s been almost 27 years since we had this kind of influenza B strain come first, and so it’s really, really unusual. So, the flue is prevalent. We’re not necessarily seeing it in the deaths rate. And I remember, we’re not comparing against the hard number.
So, we’re doing fine as it relates to volume, but you could have expected based upon those on the flue that would be something a little more severe, but we are not seeing that at least so far, obviously flu season is not over, and if influenza A strain becomes more prevalent that tends to have more of an influence on the elderly, and therefore would probably result more hospitalization and probably result more debt. So, we’re watching these things, but that’s kind of what we're seeing right now Scott.
Right, great, thanks. Appreciate the color. I’ll turn it over.
Our next question today will come from John Ransom of Raymond James. Please go ahead.
Good morning. My mother always wanted to be a funeral home director. So, that’s weird.
There’s still time for you.
Just on the celebration of life, are you seeing a material trend and services you’re performing that are now outside of your core funeral homes and maybe in a third party location?
Okay, John. Let me answer that. I think we’re seeing a little bit of both. I’d say that we’re capturing a lot more celebration and I’ll break that into, what I’ll call traditional celebrators, is a term we use around here a little more. So, we're seeing a lot more people that are choosing to celebrate versus more, but it may be a little more subdue than it is appropriate to do in a church or appropriate to do in a funeral home. We’re seeing another one that I’ll call a party celebrator that again we’ve got with these more flexible facilities, particularly in Florida, in your idea, and I'm sorry if I can't hear you because [indiscernible] trash can, so I can’t hear.
[Indiscernible] we’re seeing more of those and we’re capturing a lot of that, and actually as one of our initiatives today, we’re looking at expanding the opportunity to capture that consumer is willing to go to a funeral home, as long as it’s a modern flexible facility. That’s a lot of our strategy. I do think from a research that we just did there’s an element of a consumer out there that we probably were never capturing as it relates to the event.
What I do believe is, we’re capturing the cremation in a lot of cases, where they are coming to us and say, I would like a direct cremation, can you perform the service for me in return, you know the remains of my loved one. And then they’re going out and at a later date or whatever the case may be, having some form of celebration in a unique spot. So, I do think there is a trend of people doing that that is interesting, but I think we’re looking at ways to tap into one or recapturing enough of the service itself, and is there a way that we could be helpful in that celebration?
And again it’s such early days John, I wish I could tell you we had the perfect answer. I don't know if we could be helpful, if they need our help. I don't know if they saw some of our more modern facilities if they would think that’s an acceptable place to have a celebration. So, I guess I would say, we’re seeing more celebrations that we’re capturing, but we believe there are also more celebrations occurring that we may not be a part of that piece. And that’s part of our thinking right now as to can or should we tap into that and what’s the value proposition for the company.
Okay and just the last one for me. If I could pick on you a little bit you’re probably a year plus behind on rolling out Beacon to cemetery, and just kind of curious, I know it’s complicated, but do you think that form will follow a function here in terms of, say, well maybe we don't need a 197 blue urns, maybe we can simplify what we’re offering and use Beacon as an excuse to streamline some of the complexity in the cemetery line?
I think we’re doing some of that, but I think it’s actually more complicated than you think. It isn't just urns. I mean, if you think about every cemetery property, it’s going to be unique. There are going to be different sizes, there are going to be different names of gardens. So, really is a truly complicating factor, and again I think that’s why we were hesitant to try to give a whole lot of, how long this is going to take? What I will tell you John is my feeling is, this is the right path for our company.
It is going to take longer. That’s okay. I think we have a lot of other ideas about how we're going to drive cemetery sales and right now Beacon doesn’t need to be that reason, but I think when we have everything on the system when our sales teams are up and running with this, we believe it’s going to result in a better sale more robust sale. And also, I think a more efficient sale.
So, I hear you and I think we are trying to simplify to the extent we can because cemetery is such a complicated animal as it relates to the property itself and the different options that we have in the cemeteries that already exist, because remember some of these inventories is already built, so you can't – you're not going to throw it away. Could you be a little more streamlined and how you develop your future inventory, absolutely. I think we’ll do some of that.
Great. That's it from me. Thank you.
Our next question today will come from Duncan Brown of Wells Fargo. Please go ahead.
Hi, good morning. Just two quick ones from me. One, looks like there was a divestiture in the quarter, any clarity over there would be helpful. And then appreciate the guidance on M&A outlook for 2020, wonder if you could give us a little more color on what you’re seeing, any changes in multiples, anything like that as you're headed into the rest of the year?
Duncan, as it relates to the sale, I think I told you from time to time, we have real estate in some very nice areas of certain towns and so from time-to-time we get offers as the Godfather says, we can't refuse, and so this was a particular opportunity where we had a great business and a great location and real estate developers overwhelmed us with opportunities. So, we had a pretty significant gain as it relates through a location sale. Again, we have a strategy to capture that business, but as you think about the multiples it was one that we just had to take.
So, it’s a nice generation of cash for us, and we can redeploy. As it relates to acquisitions today, we’re still seeing a lot of activity. I think because of the changes in cremation because of probably the demographic of the ownership, we expect and continue to see people willing and wanting to sell. I will tell you, I think it’s gotten a little more competitive in the last year or so, and we are starting to see a little price creep as it relates to certain opportunities that are out there, and again we’ve seen some competitors face some pretty significant premiums.
I would tell you that on the ones we really want, we get very competitive. Sometimes we are limited, but restricted by the FTC and restraints around transactions that we’ve done previously. So, those consents can be an impediment for our ability to compete for some of those. So, I think in a lot of our cases you’re seeing us beginning to build a lot more locations.
We're going to spend $50 million on locations this year and that’s one of the reasons because it allows us to compete in markets and it allows us to take, again this concept that John was referring to, as you see more consumers that want celebration, you need a flexible facility and some of these facilities you’re buying the buildings are 40, 50, 60 years old.
They haven’t been remodeled, the rooms are set the way you want them. So, I think you’re seeing a shift from us to say, let’s build what we want and we’re going to compete and buy the things that we think are the highest value for shareholders. So, little more pricey, but still seeing a lot of activity. We had a lot of activity in the fourth quarter, and I think we got a lot of activity in deals that will close in the first quarter.
Great, thank you.
Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I’d like to turn the conference back over to SCI management for any closing remarks.
Thank you so much everybody for being on the call today. We look forward to speaking to you again at the end of April. Have a great week.
The conference is now concluded. We thank you for attending today's presentation and you may now disconnect your lines.