Operator: Welcome to the Fourth Quarter 2016 Service Corporation International Earnings Conference Call. My name is Christine and I will be the operator for today's call. And 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 and welcome. This is Debbie. I'm the Director of Investor Relations at SCI.

Before we begin with prepared remarks about the quarter from Tom and Eric, 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. 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.

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. With that behind us, I will now turn the call over to SCI's Chairman and CEO, Tom Ryan.

Thomas Ryan: Thank you, Debbie, and good morning, everyone, and happy Valentine's day. We appreciate you joining us on the call today and I would like to start this earnings call by reflecting on our accomplishments for the year 2016, then I'll get into the analysis of the fourth quarter and end with some color on our outlook for 2017. First, some observations on the year 2016.

We finished the year strong with an exceptional performance of the fourth quarter after a tough first nine months. In 2016, we generated $1.29 of adjusted earnings per share which was at the top end of our adjusted guidance range of $1.20 to $1.30. Our adjusted cash flow results were also very strong and exceeded the high end of our adjusted guidance range of $450 million to $500 million. Our performance to 2016 reflected continued momentum in preneed cemetery sales which grew by almost 5% for the year. We continue to execute on our preneed sales strategy by investing in our sales team, investing in the tools we utilized to enhance our productivity and upgrading the customer phasing experience.

We continue to invest in developing our cemetery properties with a broad array of tiered product options. These investments are driving strong preneed cemetery sales growth against a growing demographic, which we believe will continue to serve as the primary catalyst for ongoing improvement in both growth and profitability. As we anticipated, our core funeral revenue was challenging to grow with tough comps in the first three quarters of 2016. However, a bright spot to damper [ph] this challenge has been impressive growth in our recognized preneed revenue. Additionally throughout the year, our operating teams have done a great job of improving efficiency and managing cost.

We also continue to grow our funeral preneed backlog, hosting a 4% growth in preneed funeral sales for the year as we utilize technology to remain more relevant to our employees, as well as our consumer audience. Finally, our funeral segment continues to generate significant cash flow. From a capital allocations standpoint, we returned an impressive $326 million to our shareholders through dividends and share repurchase. This should demonstrate to you our belief in the future strength of our business platform in the cash flow growth we expect to generate in the foreseeable future. Additionally for the year, we invested $73 million for accretive acquisitions and almost $18 million on the new construction of several funeral homes.

Now let's take a look at our performance in the quarter. As you saw on our press release yesterday, our fourth quarter performance was outstanding. We were very pleased to report adjusted earnings per share of $0.47, which is a $0.10 or 27% increase over the prior year and ahead of our expectations. The key drivers contributing to this growth include robust growth in cemetery revenues and profits, effective management of our field and back office overheard expenses, lower interest expense resulting from most recent debt refinancing and the reduced share count due to our ongoing share repurchase program. All these tells to offset a higher tax rate in the loss of earnings from Los Angeles mortuaries which were just divested in November.

Our cash flow results were also very strong and exceeded the high end of our targeted range. We generated an impressive $107 million in adjusted operating cash flow, representing a 20% increase compared to the prior year quarter -- which Eric will provide more color on in a moment. We are committed to deploying our shareholder's cash to the highest and best use. In terms of capital appointment for the fourth quarter, we returned $60 million back to our shareholders in the form of share repurchase and dividends paid. Additionally during the quarter, we invested about $8 million for growth capital including $3 million in acquisition and another $5 million in constructing new funeral home location.

Now let's look into how funeral operations perform for the quarter. Comparable funeral revenue grew by $4.1 million or approximately 1% compared to the same period last year. As shown in the table of our press release, core revenue increased 1.7% or $6.7 million. As we said on our last call, we anticipated the fourth quarter to be our best volume comparison during 2016, which held true. Comparable core funeral services performed were essentially flat as an October decline was almost completely offset by increases in November and December.

We also saw a healthy 2% increase in the core funeral average. When you break down the components of core funeral average, we experience a 2.6% improvement in organic growth at the customer level -- a 50 basis point increase in the core cremation mix for 48.1%; slightly offset the 2.6% organic revenue in the core funeral average, bringing the reported average to 2%. Outside of the quarter revenues, we saw continued growth in recognized preneed revenues of $1.7 million or 7.2%. Recall these are the products within the preneed contract which are delivered immediately after the sale, primarily representing cremation-related merchandize and travel protection plans sold by our non-funeral home network. Funeral agency revenues was down $4.5 million or 13.1% compared to prior year fourth quarter, primarily due to a mixed shift out of our preneed insurance and into our preneed trust sales production.

While the conversion from [indiscernible] as the insurance provider in our Southeast business unit is causing a temporary shift in our trust insurance mix, remember that now our terminally imminent contracts as well as our SCI Direct production is being predominantly written on a trust contract. Although funeral revenue increased $4.1 million, operating profits declined $3.5 million and operating margins drop to 100 basis points to 19.6%. The majority of the profit decline was due to the lower general agency revenue, which were associated with the shift from insurance trust production. Therefore, we still incurred the selling expense associated with sale, but had no general agency revenue to offset the expense. Finally, comparable preneed funeral sales production grew $3.6 million or 1.9% in the quarter.

As I mentioned earlier, year-to-date, our preneed funeral sales production grew 4%, which is in-line with our mid-single digit percentage guidance range. Now shifting to cemetery operations; our cemetery operations had exceptional growth during the quarter, as comparable cemetery revenue grew $36 million or nearly 12%. This growth was primarily driven by an increase in recognized preneed revenue of $28 million or 14%. While sales production growth was strong and accounted for just over $11 million of this increase, this performance was further bolstered by the completion of two large property construction projects in Vancouver Canada, which drove recognition of preneed sales that has occurred over the previous 12 months. This revenue increase of $36 million resulted in a comparable cemetery operating profit increase for approximately $27 million over the prior year quarter and operating margin percentage grew an impressive 460 basis points to 35.1%.

The operating margin produced was further enhanced by the production mix as property was the primary growth category for the quarter. Property not only typically had a higher gross margin in merchandise, but due to the large recognition of the deferred sales production from previous quarters in Vancouver, no selling cost for the deferred sales reduction was recognized in the fourth quarter, as it's already been reported in the previous period that it was sold. Now shifting to our outlook for 2017. I feel very positive about our momentum going into this year. Our adjusted earnings per share guidance of $1.29 to $1.43 as the midpoint represents an 11% increase over 2016 when adjusting for the $0.04 headwind from perpetual care capital gain distribution perceived in the first half of 2016 and the $0.02 headwind from the sale of the LA Archdiocese properties this last November.

When you summarize the year 2016, we've been benefited from strong cemetery results including the perpetual care capital gain distributions, on lower interest expense, the result of refinancing some of our public bond, as well as increasing our variable rate exposure to approximately $1 billion. Finally, we continued to reduce the outstanding share count through our share repurchase program. These items were partially offset by reduced funeral profits, the function of weak volumes and a slightly higher tax rate. So as we think about earnings per share in 2017, we would expect growth from our funeral segment as we expect a revenue lift of our 2016 while continuing to drive productivity and efficiency. We expect strong mid-single digit growth from our cemetery sale resulting in an impressive operating revenue and profit growth.

This should be partially offset by lower ECF income again from produced capital gain distribution. Our interest expense could slightly increase as we lap the impact of our debt refinancing and with $1 billion invariable rate debt; we could see a slight increase if rates were to rise in line with the consensus view. We would expect a healthy lift from our capital deployment actions as the 2016-2017 share repurchases take effect. And as of 2016, 2,000 acquisitions make their accretive effects felt. As you think about the quarterly layout of 2017, remember that the perpetual care and LA Archdiocese headwind, most of that impact will fall into the first half of the year comparison.

This should be more than overcome by the fact that the first half of the year will be the easier funeral volume comparison. As you think about cemetery revenue recognition, we would expect to see continued strong sales production and level recognition rates for the year. But for the first three quarters of the year, we should experience a high recognition percentage on a comparable basis, while the fourth quarter comparison should be challenging as we will be comparing to the completion of the Vancouver projects in 2016. And finally for 2017, we expect to continue to generate significant cash flow from a capital employment perspective. We anticipate a higher percentage being utilized for growth.

In the first six weeks of the year, we closed five transactions -- funeral homes of Vancouver, New York, Florida and Iowa, as well as multiple cemeteries in Wisconsin. These businesses generate approximately $4 million in EBITDA, so we are out of the gate very fast. Also, we intend to spend about $25 million on new funeral home construction this year which exceeds our historical pace of about $10 million. So to wrap it up, I would be remiss if I didn't mention how extraordinarily proud I am of our SCI team. Your dedication and focus enable us to deliver value and peace of mind to our client family, as evidenced by our ever-increasing JV power satisfaction source.

They help to implement valuable new systems and tools that will make us better and enhance the customer experience. And finally, they delivered outstanding operational and financial performance during a year of significant headwind and I want to thank them for their tremendous efforts. We will continue to drive the company forward with a focus on our three or four strategy. First, growing revenues by remaining relevant to our customers and how we interact with them, as well as the products and services we provide, like growing preneed sales and by expanding our footprint in front of the favorable demographic trend. Second, leveraging scale by implementing supply chain and process efficiency.

And finally, deploying capital in a disciplined and balanced manner for the highest and best-use for our company and our shareholders. This concludes my prepared comments and I'll now turn the call over to Eric.

Eric Tanzberger: Thank you, Tom, and good morning, everybody. Today as usual, I'm going to begin by addressing our annual cash flow results and capital deployment as well for 2016 and I'm going to follow with our cash flow in the fourth quarter and then finally cover our outlook for 2017. So let's start with an overview of the full year for 2016 in terms of cash flow, liquidity and capital deployment, and as Tom has already mentioned, we really finished 2016 on a really high note, delivering strong earnings and cash flow results which exceeded our internal expectations.

For the full year, we generated $508 million in adjusted operating cash flows, which again surpassed the high end of our guidance range, which to remind you is $450 million to $500 million. Furthermore, keep in mind our 2016 cash flows included a $20 million increase in recurring cash tax payments as we move closer to becoming a full cash taxpayer. Adjusting for these higher cash tax payments, our cash flows grew in 2016 primarily as a result of higher earnings which were particularly associated with increased cemetery profits, lower cash interest and higher installment in cash receipts from previous preneed cemetery sales. At the end of 2016, we had helping liquidity of $512 million, consisting of $195 million of cash on hand and about $370 million of availability on our long term credit facility. Our leverage measured on a net debt to EBITDA basis was approximately equal to the prior year at 3.8x and as well within our targeted range of 3.5x to 4x net debt to EBITDA leverage.

Our liquidity and strong cash generation enabled us to continue our long standing cash deployment strategy with the focus on creating long term value for our shareholders. For the full year, we reported a total of $470 million of capital towards acquisitions, new location builds, dividends and share repurchases. And in terms of the breakdown of that number, we deployed $73 million towards acquisitions in 2016 that includes some 1031 exchange funds, reflecting in a 6% increase from the $59 million [ph] invested in acquisitions in the prior year. And as always, I want to again reiterate that these acquisitions normally result in a mid-teen after-tax IRR. Additionally, we invested almost $80 million on the new build and expansion of several funeral homes in both the U.S.

and Canada, nearly doubling last year's investment. Dividend payments in 2016 totaled $98 million, an increase of about 12% over the prior year. Finally, we returned in impressive $228 million of capital to investors in 2016 in the form of share repurchases, which has resulted in the number of shares outstanding, being reduced to about 189 million shares at the end of the year. Subsequent to year end, we have continued this repurchase program, reducing our outstanding share count by an additional 1% by acquiring approximately 2 million shares for a total investment of about $57 million so far in 2017. We still have 310 million of remaining share repurchase authorization which gives us the substantial amount on capital deployment flexibility as we move forward in the rest of 2017.

So with that annual summary of '16, let's now look at the details of cash flows during the fourth quarter. During the fourth quarter, we generated an impressive $107 million of adjusted operating cash flow which was ahead of our expectations and an increase of $18 million or 20% over the prior year. The increase was primarily driven by improvements in our earnings, less cash taxes and less cash interest with all of these partially offset by higher working capital uses during the quarter. This higher working capital use was largely associated with our preneed cemetery sales, especially related to completed cemetery construction projects in which we recognize revenues upon project completion of received cash payments over several installment periods. Cash interest payments were 7.3 million lower quarter over quarter reflecting our refinancing activity which is early in 2016.

To remind you, in the second quarter, we refinanced our senior notes that we're doing 2017 to a lower interest rate using our newly expanded bank credit facility at that time. Also during the quarter, we paid $12 million in cash taxes, which was $10 million lower than the prior year quarter and also a little lower than our expectations. In total for the year, we paid $113 million in cash taxes, which was almost $20 million higher in 2015. Continuing with the quarter, maintenance CapEx and cemetery development CapEx which again are the two components that we define as CapEx in our free cash flow calculation came in at $57 million for the quarter. This was about $50 million higher than the prior year quarter and was predominantly related to increased investments in new cemetery property projects to drive increased property sales, as well as improvements at existing locations -- and these improvements were intended to assist in providing enhanced venues for family service offerings at our facilities which of course aligns with our strategy of remaining relevant with our clients' families.

Deduction in these capital spending items from our adjusted cash flow from operations, we calculated our free cash flow for the quarter to be about $50 million, which is a 7% increase from the prior year quarter. It's that on 2016. Now let's shift to an outlook and the discussion of 2017, and in our press release, we introduced our 2017 guidance range of adjusted operating cash flow of $465 million to $505 million. Keep in mind now, we're expecting to become a full U.S. federal cash taxpayer in 2017.

Our current expectations for cash tax payments in 2017 are approximately $40 million to $45 million higher or $155 million to $160 million in total -- compared to $130 million net of refunds paid in 2016. Now before I leave the subject of cash taxes, I want to mention an update related to our IRS audits that we have been disclosing in our filings for really some time now. We believe we have reached an agreement in principle with the IRS to resolve the issues under audit with respect to tax years 1999 through 2005. Yes, you heard that right, 1999 through 2005. Any expected settlement is not currently included in our cash flow guidance for 2017, but is anticipated to be funded when required using our credit facility.

Therefore, I want to make this point that we do not anticipate this potential settlement to affect our expected amounts of capital deployment in 2017. Now let's get back to our cash flow expectations for the full year. Recall that after our call, the items that Tom mentioned earlier related to special perpetual care gain distributions and a loss of the Los Angeles Archdiocese mortuaries. Similar to earnings, this will impact cash flow by about $20 million. When adjusted 2016's cash flow for this $20 million, 2016 is adjusted to be more like $488 million of cash flows, versus the reported $508 million.

You will then notice that this $488 million equates to the midpoint of our 2017 cash flow guidance and this is a result of the expected growth in the underlying cash flow of our businesses in 2017, being largely offset by the increase in cash taxes in 2017 that I just mentioned. Our expectations for maintenance in cemetery development capital spending in 2017 is approximately $180 million. Now, this amount is slightly higher than our 2016 spend of $176 million as we continue making investments that add to our ability to create new and unique celebration of life experiences for our client families. And lastly, in addition to these recurring CapEx items, we expect to deploy $75 million to $100 million in acquisitions and other growth initiatives including new funeral home construction opportunities. So in conclusion, 2016 was a great year for us as we generated very robust free cash flow and deployed over $400 million in capital to the highest relative return opportunity to continue to drive long term value for our shareholders.

Looking forward to 2017, we really expect the same robust-free cash flow and the ability to repeat the consistent capital deployment philosophy we have been executing successfully over the last several years. With that, operator, that concludes our prepared remarks and we'd like to go ahead and turn it over to you and turn it over to questions on the call.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from AJ Rice from UBS.

Please go ahead.

AJ Rice: Hello, everybody. A couple of questions, if I might. First of all, maybe just get to the comment on your acquisition pipeline coming into 2017. It looks like the pace of deals moderate a little in Q4, but based on the comments you made about capital deployment, it sounds like you expect that to re-accelerate.

Can you give us a flavor as to what you're seeing?

Thomas Ryan: Sure. Hi, AJ. This is Tom and John Fox [ph] is going to kill me, but we've done a tremendous job in the first -- like I said -- six weeks of this year. I think we have five transactions closed. That would be a heck of a pace and it's not even close to that.

We've been very successful in the ones that we had in our sights and got them closed. And we'd tell you that the remaining pipeline, there are still some good opportunities out there that we are pursuing, so we're not seeing this early kind of dramatic slowdown. It's just the pace that we've incurred; I'd say the first quarter was pretty hot. But we're still seeing a lot of conversations, a lot of interested people. So we feel like Eric said, very good about our ability to spend at the high level of our annual guidance as you think about acquisitions.

The other thing that sometimes gets lost, we're going to spend somewhere around $25 million on new construction of funeral homes, which is really a dramatic increase -- what we've done it historically. We're being a little more aggressive about that in places where acquisitions don't make the best sense from an IRR perspective or from what we know now as what a funeral home needs to be in today's more contemporary setting. So places where those aren't available, we're going to build new locations that fit the profile more effectively.

AJ Rice: Okay. And then I may have missed this in the prepared remarks, but the general agency revenues were off.

I know you had a lot of different things going on, moving Stewart's business over, you've had other things -- is that part of a conscious move, though? To push more the word trust or what would you say is going on there?

Thomas Ryan: It is a bit confusing and we touched upon it. There's one piece that is pretty significant and that is we shifted an entire region's book of business away from one vendor on to [indiscernible] and there were some complications in getting people the appropriate insurance license and the like to sell the product and the training. So there is a mix change that I think is going to come back. Having said that, there's two components there, probably a more permanent nature. As you think about funding terminally imminent contracts, we're riding those all on trust contracts today and also as you think about the growth of SCI Direct, SCI Direct is now predominantly 100% trust in what they're writing.

And historically, they've written a little bit of insurance. So I think what you'll see is probably a little bit of a cloud in the first quarter and second quarter stall and then as you get to the back half of the year, you get to see the insurance growing those more historical rates than we expect.

AJ Rice: Okay and then just my last question. When I looked at your preneed averages that came out of the funeral backlog and then also the growth in recognized preneed funeral sales, looks like there's an acceleration there and the averages are higher and then you're at neat averages. I know there's some impact from the terminally imminent, but I wondered if you can, say, are you beginning to see some of the shared grab and is the averages in part help by the rising market we're seeing in the last few years? Any flavor on that?

Thomas Ryan: Yes.

I think it's two things and I think your terminal imminent comment is also a good one. But I think one; we're seeing the good results of the market on the trust side. So you're seeing growth in those contract and also we're seeing a healthy increase of what's coming out from the insurance side, too. I think that's a function of we're now getting into those contracts that we wrote at a higher value for us. So you're seeing less of contracts that let's say, were written by somebody else and we acquired in the backlog.

This is something we've always hoped we'd begin to see and I think we're beginning to see up a little bit of that today. So we feel very good about our ability to continuously grow on that preneed going atneed, both on the insurance side and on the trust side.

AJ Rice: All right, sounds great. Thanks a lot.

Thomas Ryan: Thanks, AJ.

Operator: Thank you. Our next question comes from Joanna Gajuk from Bank of America. Please go ahead.

Joanna Gajuk: Hi. Good morning.

Thank you so much for taking the question. If I may just come back to the commentary prepared remarks on 2017 outlook specifically on the segment. You said that you have in fact like a strong growth in the preneed sales on the funeral homes side? And I guess you mentioned something about the -- there will be some factor. So can you just flush out that part? And also can you talk about cemetery segment trust outlook?

Eric Tanzberger: Yes. As we think about the growth for preneed, we would expect that in our modeling to see preneed funeral continue to grow in the low to mid-single digit range.

I think with this year, we saw 4% growth in preneed funeral and that wouldn't be unreasonable number to think about as you approach next year. And on the cemetery side, again, we've been guiding people to say, 'Look at the mid and maybe jumping into the higher single digit growth range as you think about preneed cemetery growth.' Historically, we've grown that rate at higher percentages around 10% or 11% of the last four or five years, but a lot of that was a function of having new cemeteries particularly from the Stewart acquisition to apply our tiered inventory strategy toward. With that data, it allows to differentially grow and now I would say that we have that tiered inventory product and predominantly most of our cemeteries will have opportunities to rotate that. Having said it, the differential impact is probably gone, so we're guiding towards the mid-single digit range on cemetery.

Joanna Gajuk: All right.

And then I guess on the core growth or the atneed business. I guess flu has just been quite strong in Q1. So is there a meaningful impact to your business from that activity if you are willing to share the color with us?

Eric Tanzberger: Yes. Joanna, this is Eric. It's too early to tell first of all for the first quarter.

I can tell you, as we get through closing January results and getting all the feedback that we normally get, really on an everyday basis from our field operations to management and that we really haven't seen what I consider a material impact from flu so far in the first -- let's call it -- 45 days or so for the quarter, first quarter. I think there's a little bit more activity than what you've seen in the prior year quarter, but in terms of a strong flu season, I characterize it more as probably not seeing that yet.

Joanna Gajuk: Okay. And then lastly on your commentary on CapEx and how your plan to spend more I guess on this new funeral construction. Overall, CapEx seems like to work about 6% of revenue in 2016.

Is that the right way to think about that ratio going forward? Or will it sort of accelerate to more 5% overtime at least in line with the last couple of years? Should we look at the 6% being at peak? And I guess '17 seems to be also kind of close to that range. So how should we think in terms of the longer period of time in terms of CapEx as percentage of revenue?

Eric Tanzberger: I think as I said on my conference call remarks, Joanne, I think $180 million is probably a good number for 2017. That lovely equates to 2016. I think 2016 was about $176 million. We're a little bit heavier in cemetery construction versus maintenance CapEx in the '16 versus we will in '17, but all of this spend -- I wouldn't expect it to jump more than a level that you're seeing.

In probably in a couple of years I almost expect it to maybe even trim down a little bit, because what we're really doing from a maintenance CapEx right now is really on the lines of remaining relevant and all the strategy that we've talked about before and Tom again talked about in his remarks, you have continued to make those venues relevant for those celebration of life experiences for our client families and we think it's a great investment to invest back in our businesses, but I think this level that you're seeing is probably a good level and not growing much more than this, going in at least the near future.

Joanna Gajuk: Great. Thank you so much.

Eric Tanzberger: You're welcome.

Operator: Thank you.

Our next question comes from Scott Schneeberger from Oppenheimer. Please go ahead.

Scott Schneeberger: Thanks. Good morning. Hey, Eric, just a clarification question to start off.

This IRS settlement for year 1999 to 2005, you mentioned that it should not affect any of your plan to deployment of capital this year. So I'm curious, are we to take away that you do not anticipate it to be a material financial impact? Or it's just that you will just use the line of credit to satisfy it? Thanks.

Eric Tanzberger: Well, if you listened to my comments carefully, Scott, what I said is we believe we have reached the agreement of principle. And what I really mean by that is we don't have a signature yet. Although I do believe we have reached that agreement.

So because of that -- and my general counsel is staring at me right now, I was really precluded from commenting any further than that -- but I think you got the gist of what I was telling you, that in no way do I think this will end up being something material for our company and the best way to talk about that is in the form of liquidity and capital deployment -- neither which I believe is going to be materially affected. If I did believe that, then I probably would have had a different one and said something a little differently.

Scott Schneeberger: Okay, thanks. You mentioned the EBITDA contribution from the five acquisitions already made year-to-date. Could you just speak to where you are trending on spend so far?

Thomas Ryan: I don't have the numbers in front of me, but I think a safe way to think about it, is to think that's $4 million to EBITDA and put a 7 or 8 on it and that would be the general range that are spending the first quarter on [indiscernible] and another way to look at that is last year, I think we purchased an entire year just over $9 million of EBITDA.

And like I've said, we've got four in the first quarter still open. So we feel good about our coming out of the gate and time will tell. We'll see if we get some more to the finish line and having more than back half of the year opportunities present themselves.

Scott Schneeberger: All right, thanks. I appreciate that.

And then kind of more fundamentally. I know you all were very active with developing sales tools in 2016. Could you just speak to the impact in '16 and what the impact may be in '17 as a result of all the activity there? Just leaving a broad open question on how you'd like to tackle that. Thank you.

Thomas Ryan: Sure, Scott.

When you think about the sales force, that is now implemented and it's the customer relationship management tools sales force. We've been utilizing that for a bit now and I would tell you that we're beginning to see some real traction across the entire sales force. It takes a while for people to get used to the new system and probably view it as a helpful tool from the sales force versus a management tool or a Big Brother tool that we can see what you're doing. So I would tell you we're in the early days of getting the productivity out of that system. The other system that we implemented during the year was a more of an atneed tool and it's called HIMS plus.

HIMS plus is a customer-phasing technology that also generates the contract and has been utilized by our funeral directors today as they sit down with families. And again, a better client experience, a better experience for our personnel and more contemporary experience if you think about trying it out on our people that come into this profession. So again, not something I'd say quietly, we roll those two things into. And with that comes some level of distraction. Right? When you roll it in.

So I would tell you that we're beginning to get the efficiency out of those two tools. We do have a couple of new projects that we're going to roll out this year. For instance, there's what we call Sales Enablement and this is taking a tablet and every sales counselor think of sitting in the home with somebody else, we'd utilize that technology to interface with the consumer and that tablet would give them the capability again to generate a contract and do those types of things. Contemporary tools that people expect, companies like us to have. So as you roll that out, again, I think you'll have some bumps on the road that you always do, but this is going to take us to a much better place.

I think about this year, I'd say sales force gives us productivity and growth and Sales Enablement is probably going to be able to be a little bit distracted for a while. But we're going to fight through it and I think the people that have implemented this technology are very excited about its capabilities and the results in those test markets. We're seeing more efficient presentations; we're seeing higher value sales, higher customer satisfaction being back. These are all real positives, but I will tell you, like anything, you're going to have some distractions as you implement these new tools.

Scott Schneeberger: Okay.

Thanks for that. One more final one. Just a quickie. Starting in 2018 as we're looking at our models. How should we consider revenue from contracts with customers? The new FASB rule potentially coming into place on how we may want to model, affecting preneed sales selling cost recognition.

Just modeled as if not happening now, or is that something that's a probability? And any thoughts initially on how we might want to effect on model? Thanks.

Thomas Ryan: I think, Scott, you kind of broke up a little bit. I apologize, but I think what you're asking about is the revenue recognition accounting rules that are changing that will affect our selling expenses. Is that the right question?

Scott Schneeberger: Exactly.

Thomas Ryan: Okay.

We're still working through that. There are some guidance issued on it and generally where we landed right now -- again, this is not signed off, we're still working through it -- but it appears as if any time we sold trust contracts on a preneed basis, which will include all cemetery and pre-arranged funeral with trust supporting contracts, we would defer those selling cost and have a specific identification method -- where, when the contract matured at that point in time, we would also recognize those specific selling costs. However, the other part of the other side of the equation is preneed insurance supporting pre-arranged funeral contracts. Again, we don't own the insurance company, those contracts are not on our balance sheet, they are on the insurance company's balance sheet, so think of us as a general agent, hence the general agency revenue we get. But from that perspective, we will lead to continue to expense those selling costs related to preneed insurance.

And just as a reminder to everybody, you know, we sell probably 70% insurance as opposed to trust on the funeral side. So I think if you look at the numbers that we filed with that guidance I think you will get in the ball park of which lead to model again subject to resolution as we continue to look at that pronouncements throughout 2017.

Scott Schneeberger: Thanks for the color.

Operator: Thank you. [Operator Instructions] Our next question comes from Robert Willoughby from Credit Suisse.

Please go ahead.

Robert Willoughby: Just with that cremation rate moving higher, you've mentioned that in some markets you will be able to rationalize the hard asset footprint. So is there a realistic assumption for what you might be able to realize from divestitures. I know you've got your CapEx numbers down, what kind of cash might come-off of some assets sales in '17, if any?

Eric Tanzberger: Surely detail we're going through that right now but I think a safe estimate is probably around $20 million to $25 million of proceeds Bob. So I think you probably say based on the run rate that we've been seeing that kind of include that when you're thinking about sources of cash.

Robert Willoughby: Right. That's perfect. Thank you.

Operator: Thank you. Our next question comes from John Ransom from Raymond James.

Please go ahead.

John Ransom: Good morning. Just a couple of questions on your CapEx. So the first one which is -- I think a little easier. Your $25 million you mentioned for [indiscernible] construction; what's your IRR or payback on that spend?

Eric Tanzberger: John, these generally are going to range -- I'm going to call it 11% and they are going to be different depending on the cost of land but probably 11% to 12% is a safe bet versus acquisitions which are trending now probably in the 14% or 15%.

And again, that's solely a function of the time by your money; you just tended to have a breakeven point that's going to take a little longer than existing business. But we find this -- it generally have the facility that you love and you can grow into and they look better and better as time goes on.

John Ransom: So that numerator is EBITDA and denominator is just total spend?

Eric Tanzberger: That numerator would be cash flow, free cash flow.

John Ransom: Okay. And then the other question, I'm probably going to mingle this question because it's been a long time I've been to accounting school but when we think about cemetery, you've stepped up here cemetery construction as you mentioned, so let's say for every -- again, just make up a number, $25 million that you've been increasing that spend, what's the -- so you've spend $25 million, what do you get back in terms of margin and what's the timing of those cash flows? I know you can get land sales back immediately but just -- what are the rules around when you can deliver that product and get that cash back out of the trucks? And I assume these are all trust sales and not insurance sales? Yes, of course, they are also trust sales.

So just help us think about the timing and the returns of cash flows on your stepped up inventory spend and a simple kind of cash-in, cash-out way.

Thomas Ryan: Mr. John, we think about cemetery, what we're talking about and we spend money, we're generally spending it on property. So there is no -- there is no trusting, there is no nothing as it relates to -- because you're thinking a merchandize, service type trust. So as you think of cash paybacks on a lot of these bigger projects, they are probably are going to be somewhere in there just over a year, you know, maybe up to two year type of cash flow paybacks, really high internal rates of return.

Now remember, you utilizing existing land you paid for a long time ago and that's what's making the return, so great because it's really the increment spend that you're putting on top of that land or to develop that land. So the returns on these things are really great. When we think about cash outlay, how quick we get it back.

John Ransom: I got you. Okay, thank you.

Operator: Thank you. Our next question comes from Ryan Halsted from Wells Fargo. Please go ahead.

Ryan Halsted: Thanks, good morning. And I apologize in advance, I topped on the call late.

So hopefully I don't ask you something that you've already covered. But my question is on the funeral segment. I was hoping you could comment on just your gross profits in the quarter; you know, just given the strength in the revenue growth, especially in the mature pre-need segment. I was just curious, what kind of profit margin contribution you are maybe expecting or better way to ask you is just -- were you disappointed with the profit contribution of your funeral segment?

Thomas Ryan: Yes, I think the way you think about it Ryan is, if we talk about giving longer term guidance around funeral, we've said that we would expect over long periods of times until the baby boomers impact this sort, so we have a demographic impact, far better word to say it. They think of same-store sales has been -- call it 1% to 2% revenue growth, manage your cost really tough, results in flat gross margin -- I'm sorry, operating margin percentage and generates a slight increasing bit of cash flow.

That's pretty much the case if you look over the last four or five years. What happened this year that was unusual was instead of having the 1% to 2% revenue growth, we had a revenue decline of 1.5% and that was driven primarily by the fact that 2.5% volumes down in our funeral case volume. So when that happened, we had a negative impact on our funeral margins and they dropped below 20% as you will notice as you look over the trend line. What I would tell you is, because this year was such a bad year, I would like to believe that this year -- and again, we need volumes of [indiscernible] has occurred; but if they were to come back somewhat, we'd see those margins kind of pop back up to historical levels that you expect. But I would tell you that 20% is a pretty good guess with the way we run this business.

Actually if you took away preneed funeral because remember we sell preneed funeral and particularly on the trust side we sell preneed funeral, it's a very negative experience on our margins. If we took away preneed funeral, our margin is really about 24%. We decide to erode our margins a bit and we cash flow neutral by grabbing that preneed market share today. So as I think about the future, I'd should say about 20%, we should grow cash and one day that 1% to 2% growth is going to get to 3% to 4% because volumes is going to start coming our way from the preneed backlog or demographics; and when that occurs, it's going to have a pretty dramatic impact on cash flows and cash margins of business.

Ryan Halsted: That's very helpful.

And then maybe you covered this already but the general agency revenue -- you know, was that expected to pick back up or is this kind of the new run rate?

Thomas Ryan: I think it's two components; there is a components that's a temporary mix shift related to going to a new vendor in one of our large geographic areas, so think of part of that as going to begin to come back in the beginning and the early parts of 2017. But there is another components that's important to understand, when we write terminally eminent contracts; we're writing those contracts on -- a trust contract almost exclusively now. The other thing to understand is that our SCI direct business which is growing at a faster rate than what I would call our core business; they are riding all trust contracts. So you think about it, trust is going to have a little bit of a natural growth curve as you think about 2017, so the insurance comparable is probably going to be a little weaker in the first half of the year but ought to get back to growth rate as you would expect, as you get to the back half of the year because you will have run through that cycle of the comparison and will be backup and running in the Southeast business unit with ample of contracts and people with the appropriate [indiscernible].

Ryan Halsted: Okay, great.

Thanks for taking my questions.

Operator: Thank you. I will now turn the call back over to SCI Management for closing comments.

Thomas Ryan: We want thank everybody for being on the call today and Happy Valentine's Day once again. We will speak to you at our first quarter earnings call which I believe will be in late April.

Thanks so much.

Operator: Thank you. And thank you ladies and gentlemen, this concludes today's conference. Thank you for participating, you may now disconnect.