Service Corporation International (SCI) 2002 Q2 法說會逐字稿

Good day, everyone, and welcome to the Service Corporation International second quarter 2002 earnings results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Robert L. Waltrip. Please go ahead, sir.

Hello, everyone and welcome to this call. As usual, we have some prepared remarks and then we will open the meeting for questions. With that, I'll turn the call over to Eric Tanzberger for a few remarks.

Before we start the prepared remarks, I'd like to read a cautionary statement on forward-looking statements. This conference call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not, however, guarantees of future performance and actual results may differ materially. The most important factors that may cause actual results to differ from the company's expectations are listed in our earnings release you received yesterday afternoon, also in the company's Form 10-K for the year ended December 31st, 2001 filed with the SEC. The company assumes no obligation to update or revise any forward-looking statements made herein or any other forward-looking statements made by the company. Before I pass it over to Jeff and Tom, I'd like to say that on August 1st, we sent a notice to our shareholders, investors and financial analysts that we will be hosting a series of company-sponsored meetings in New York, Boston and Los Angeles on August 15th and 16th. On Thursday, August 15th, Thursday morning at 9:00 a.m. we'll host a meeting apt the New York pal Lass on Madison Avenue and that afternoon at 2:00 p.m. Eastern Time we'll host a meeting at the Meridian on Franklin Street in Boston, Massachusetts. The next morning, on Friday, August 16th at 9:00 a.m. Pacific Time, we'll host a meeting at the Regent Beverly Wilshire in Los Angeles, California. We encourage all of you and our investors and shareholders to attend those meetings. They will last approximately one hour. If you're not able to attend the New York meeting on August 15th at 9:00 a.m. Eastern time, we'll be available via conference call and via web cast, and that was sent out on this notice and we'll send the notice out again, as well as do a press release with those numbers for the conference call and the web cast. At this time, I would like to pass the call for a few remarks to our newly-elected President and Chief Operating Officer, Tom Ryan.

Thank you, Eric. Operating performance in our North American comparable businesses was generally in line with the targets we set for our 2002 plan. Comparable North American funeral revenues for the second quarter were essentially flat as compared to the second quarter of 2001. Our comparable number of funerals performed was down approximately 2%, which was in line with various available market mortality information. Our average revenue per funeral was approximately 2% above prior year quarter levels. This is due mainly to the increased takeup rate of our Dignity Memorial package plans offset by the negative impact from the cremation mix increase. Our comparable margin was 19.7% within the annual guidance range of 18 to 23%. In North America, we continue to focus on a variety of funeral growth initiatives. It is our intent to sharpen our focus on growth initiatives that can drive near-term growth. This, while focusing on stream lining our processes which should reduce our costs. A number of client families selecting our Dignity Memorial package funeral and cremation plans continues to improve. The second quarter of 2002 the takeup rate exceeded 19% of our at-need sales opportunities in Dignity markets. Our takeup rate as a percentage of our funerals performed in Dignity markets increased over 12%. This measure will be more relevant when we evaluate the future performance as prearranged Dignity plans that became at-need can be measured, increasing our penetration rate. Due to the positive response we received from both our internal and external customer association with package plan offerings as well as the favorable financial impact, we intend to step up our commitment to this initiative. Our North American prearranged funeral sales revenues have been positively impacted by the rollout in improved takeup rate on Dignity Memorial package plans selected on a pre-need bases. Our takeup rate for the second quarter of 2002 exceeded 26% of all prearranged funeral contracts sold. As is the case on our at-need averages, the Dignity averages exceeds the non-dignity average. Offering funeral information merchandise in a package has allowed us to develop a more simplified and consistent presentation, which enhances the customer experience during the prearrangement process. Our French funeral operations continue to perform at levels exceeding our expectations. For the six months ended June 30th, 2002, we have achieved revenue growth of 7.2% over the six months ended June 30th, 2001. This has resulted in increased gross profits of 8.8 million or 46.6%. This unusually large gross profit increase is due to the high fixed cost, low margin nature of our French business. Comparable North American cemetery revenues for the second quarter increased by 13.9%. This was primarily as a result of increased completion of cemetery property development projects in the second quarter of 2002. This was offset by a decrease in revenues recognized as a result of changes in estimates of deferred pre-need cemetery contract revenues as compared to the second quarter of 2001. This change in revenue mix had a negative effect on gross margin percentage that resulted in a lower than anticipated gross profit dollars improvements of $1.7 million or 7.9%. With our cemetery growth initiatives, we continue to increase the focus on property sales. We are currently investing in strategic targeted property development projects which we believe will enhance our ability to meet customer expectations and demands and deliver additional revenues and positive cash flow in the near term. Our longer term initiatives involving the development of strategic affinity partners and the expansion of our network in addition to the affiliate partners continue to make meaningful progress towards our goals. We will focus our efforts in these areas to attempt to deliver tangible financial results in a more expedient manner. Keep in mind, we believe these initiatives will have a profound effect on our long-term results as our network will afford us a significant strategic advantage. As more people contemplate retirement, relocation and estate planning, which includes preplanning funeral and cremation services, our Dignity provider network is the only one of its kind that can meaningful deliver funeral merchandise and services as well as cemetery products and services on a national basis. In conclusion, I want to express on behalf of both Mike Webb and myself the enthusiasm we share in taking leadership roles in the exciting future of future that we believe holds great opportunity for our company. Now, I would like to hand it over to Jeff Curtiss, our Chief Financial Officer. Jeff?

Thanks, Tom. Hopefully you have received SCI's second quarter earnings press release last night. As you can see from it, we continue to make progress in debt reduction, reducing overhead and increasing cash flow. I also hope you have received the second press release discussing our proposed bond swap transaction. I'll address this transaction later in my remarks. Net debt, which is total SCI debt less cash and cash equivalents was reduced to $2 billion at the end of the second quarter. This is a reduction from $2.5 billion at the end of 2001, and $2.1 billion at the end of the first quarter of 2002. SCI's liquidity is strong. Cash and cash equivalents at June 30th were $162 million. Since the end of the second quarter and through August 5th, SCI purchased approximately $103 million of face value of its bonds. It also completed during the third quarter a new $185 million revolving bank credit facility. SCI's term maturity schedule as of August 5th for its outstanding bonds is as follows. 99 million of bonds are due in March of '03. 129 million of bonds are due in April of '04. 52 million of bonds are due in December of '04, and 579 million of bonds are due in December of '05. The decreases in debt in the second quarter resulted primarily from settling debt of a subsidiary in France with non-cash French assets and debt reduction with cash flow from operations supplemented by proceeds from asset sales in North America. With SCI's cash on hand and credit availability under our new credit facility, it is possible for SCI to prepay now in full all debt maturing prior to April of 2004. Further, we expect to generate significant operating free cash flow over the next 20 months, as well as complete our North American asset sale program and joint venture our French business. As I previously mentioned, SCI announced its intention to swap up to $300 million of '05 binds into '09 binds. The terms of the proposed swap are outlined in the press release issued yesterday. Assuming SCI is successful with this swap transaction, its debt maturities for the next five years should be substantially less than its expected five years of operating free cash flow supplemented by the likely proceeds from announced asset sales and expected joint venture transactions. The reason for the proposed bond swap transaction is to defer a meaningful amount of debt to a later maturity at a reasonable total cost, while maintaining our existing debt structure and terms. SCI's accounting for this swap transaction is complex, as the swapped '05 bonds result in an extraordinary gain in the third quarter of 2002, and the newly-issued '09 bonds are mark to market creating original issue discount interest accretion on those bonds in future years. Reported second quarter general and administrative expenses were down $3.3 million or approximately 18% from the same period of prior year when adjusted for the $4.5 million of additional existing systems amortization costs associated with the announced decision to implement new HMIS contract management and upgraded Lawson accounting systems. This accelerated systems amortization cost is approximately $4.5 million per quarter, and will continue through the third quarter of 2003, which is the expected time frame remaining to use the existing systems before replacement. In conjunction with the implementation of these new systems, SCI is increasing its effort to reengineer its processes to reduce costs and improve effectiveness with a program we are calling Project Delta. The comparative decrease in general and administrative costs for the second quarter were primarily attributable to reduced systems costs, franchise tax savings, and reduced international-related overhead costs. Recurring operating free cash flow for the second quarter was $59 million, and for the year-to-date was $110 million. This compares with recurring operating free cash flow in the second quarter of 2001 of $57 million, and last year's six months of 2001 of $118 million. Changes in EBITDA and working capital continue to be the primary reasons for the comparative decline this year versus last year in the six-month recurring operating free cash flow, although we made progress on working capital improvements in the second quarter. We continue to believe our target range of 160 to 180 million of recurring operating free cash flow for 2002 is appropriate. Our current expectations are that 2002 tax payments will be 40 to $50 million lower than the previous guidance of 65 to $75 million. SCI recently received an Internal Revenue Service approval to change its tax accounting method to be somewhat similar to that reported for financial purposes under SAB 101. This change will add approximately $115 million of total benefit to our cash flow from this ruling over several years. Cash taxes in 2002 will benefit by approximately $30 million. Cash taxes in 2003 will benefit by approximately $15 million, and $70 million of the benefit will be realized when the IRS audit of past year's tax returns are finalized. The expectations for 2002 maintenance capital spending increased with SCI's decision to retain its French business this year. French maintenance capital spending will be in the 10 to $15 million range, increasing expected consolidated maintenance capital spending to approximately 70 to $75 million in aggregate. As consolidated debt may be somewhat higher than previously expected, so will cash interest expense. In the second quarter, we finalized the accounting charge for our additional North American property divestitures. This 232 million non-cash charge also included the writeoff or reserving of certain non-compete and consulting arrangements, as well as some smaller asset valuation adjustments. When adjusted for accounting changes in 2002 when excluding non-recurring charges and extraordinary items, earnings per share in the second quarter of 2002 was 9 cents, compared to a pro forma earnings of 11 cents per share in the same period of prior year. This 2-cent per share decrease was a result of four factors, number one, reduced operating income due to asset sales and joint ventures, number two, slightly reduced comparable levels of operating income impacted primarily by lower comparable North American funeral volumes and reduced cemetery operating income in Latin America due to the Argentine currency devaluation, partially offset by number three, reduced interest expense of nearly $13 million and four, a lower effective tax rate. Reduced interest expense is due to lower debt levels resulting from proceeds from asset divestitures and joint ventures and SCI's production of operating free cash flow. The lower tax rate is due to the goodwill accounting change, which no longer requires amortization of non-tax deductible goodwill, coupled with the current utilization of tax loss carryovers previously reserved for and related to our international businesses. Excluding the nonrecurring charges and extraordinary items, North American segment operating results for the second quarter were within the operating income margin guidance parameters we provided to you earlier this year. In North America, as Tom mentioned, comparable funeral revenues per case was up 2%, but comparable volumes were down approximately 2% for the second quarter versus the same period of prior year. Second quarter North American comparable cemetery sales exceeded those of the same period of prior year due to the completion of a number of cemetery construction projects, but comparable margins declined due to the reduced amounts recognized today's European highly- leveraged transaction market. With these remarks, we'll entertain your questions. Keri, will you open the call to 00:21:54 questions.

Certainly. The question and answer session will be conducted electronically today. If you would like to ask a question, please press star one on your touch tone telephone. Again, if you would like to ask a question, please press star one and we'll pause for just a moment to assemble our roster. Our first question comes from John Ransom with Raymond James.

Good morning. I have three quick ones. First of all, it looks like you have essentially reduced your guidance for recurring operating free cash flow net of all the other changes by about $40 million. Is that true and if so, what triggered that? The second question is, could you remind us again what triggered your change in the estimate of deferred cemetery revenues and if that's just an accounting issue or if that has actual financial and cash reality, and then thirdly, looking at your change in net debt, your net debt changed by about 20 million sequentially, but you generated about almost 60 million in free cash flow, so I just wondered what happened to the other 40 million, if there's something wrong with my math. Thank you.

Thanks, John. Yeah I think we can answer all of those questions. First, we have simply not decided to increase our guidance with respect to recurring operating free cash flow, and you are correct that we've had a number of positive elements occurring during the quarter. The decision to keep the French business will add to our operating free cash flow because it generates more than the interest savings would be on it. In addition to that, we have this tax benefit that we have described, which is clearly different than our original expectations. However, at the same time, if you remember our original expectations, were that volumes for the year would be relatively flat, and what we saw in the second quarter was volumes were down 2%, and we don't know where volumes will go in the latter part of this year. So we are somewhat behind our original expectations in the areas of working capital management and in the areas of generating EBITDA, and we think it would be premature when, if you look at it on a comparison to last year, we're down about $8 million on recurring operating free cash flow at the six-month time period to last year, and last year, we generated for the full year a little over 170 million of recurring operating free cash flow. We think it would be premature at this time for us to increase guidance until we get more clarity as to how we will perform in quarters three and four. With respect to the items associated with the cemetery liability relief efforts, as you know as we go back through and review each of our cemeteries for the amount of revenue that was deferred and the associated costs, what we find is that in certain instances, we have not recouped the money out of trust associated with those deferred revenues. So they not only have an income statement impact, but in some instances, they have a cash full impact in that it allows us to retrieve money from various cemetery trusts when we find that that money has not been previously taken. So it has both an income statement benefit and a potential cash flow benefit. Unfortunately, as we mentioned in the press release this year, in the second quarter, we had less of that this year than we had in the same period of prior year. And finally, you had raised a good question about when we had a fair amount of operating free cash flow during the quarter, why couldn't we reduce debt more than what we did, and the answer was that during the quarter, there were certain financial obligations that we needed to put up collateral for which we have accommodated during the quarter, and I might add that with the completion of the new credit facility, the new credit facility has an availability to use letters of credit where our old credit facility did not. So in many instances we've been able to go back and substitute letters of credit for those collateral deposits that we made during the second quarter.

And Jeff, could that be $40 million worth of collateral deposits? Because that's the discrepancy.

I think it was in that ballpark range.

It was about 45 million, John.

Just a follow-up, if I look at France, take me through the simple math of EBITDA. You have more EBITDA. You'll have more interest and you have more maintenance CAPEX. What is the net of all three of those things in terms of positive benefits or recurring free cash flow. It looks like you've got 15 million more of EBITDA but you've got 15 million more of maintenance CAPEX. It looks to me - what exactly is the benefit of keeping France from a cash flow standpoint?

I they we think the net benefit is in the 10 to $15 million range. The EBITDA we issued in a previous press release, the total European French EBITDA would be in the 50 to $55 million Euro-range. If you subtract off the maintenance CAPEX from that, you can see it generates a fair amount of free cash flow. It is currently not paying taxes, although we accrue taxes, it's not paying them because of its tax loss carry-forward. There are some costs to bringing the money back to North America, but our belief is by getting this year of improvement behind us, we will end up getting better joint venture terms next year in terms of both price and having no requirement that we provide any financing, where at least as we perceived it this year, that was going to be difficult to accomplish.

The last thing, Jeff, if you looked at the GAAP numbers fully scrubbed, what is the fully taxed GAAP number comparison, if you used a 35 to 45% tax rate, the non versus 11 would be what?

The effective tax rate for the quarter if you exclude the restructuring charge was in the 26, 27% area, a little lower but I would say that as you look forward to future years where we won't have the capability of utilizing the tax loss carry-forwards that I talked about on my call, I would look at a consistent feature looking type of effective tax rate being in the low 30s.

What was the effective rate last year?

I'd have to double check that. I don't have that at hand but we can get it for you.

I'm looking if you fully tax both years, I guess it knocked about a penny or two off of this year's numbers?

That could be correct.

I wondered what the comparison was for last year. Thanks. I'll jump off now. Thank you.

We'll go next to Bill Burns with Johnson Rice.

Good morning, all. Tom and Mike, congratulations. I just wondered if you could maybe shed some light and update us on the lawsuits that you have ongoing in Florida to the extent you can.

Sure, Bill. Generally the answer is there's no significant updates to communicate to you at this time. For those of you that aren't as familiar or didn't listen to the last conference call. Let me quickly point to three different pieces of information. First, we're still waiting to hear from the Florida Department of Law Enforcement regarding the plaintiff's attorney will make a motion to certify a class. This hearing was originally set for early July, but was rescheduled due to a personal conflict of the judge. That's our up date for Florida.

Thank you.

Our next question comes from Jennifer Childe with Bear Stearns.

Good morning. I apologize if I'm asking something that you answered. I missed your comments, but, why, can you explain why there are more noncompetes being charged off? I mean, why not just do them all? Why the piecemeal nature of these charges?

Well, essentially what we have attempted to do is to scrub our balance sheet to make sure it's in as good a shape as it can be, and we had a number of instances where we didn't think it was any longer important for the people to compete with the firm. It may be that the people had retired or where previously we didn't know whether or not they would retire. It could be a variety of facts and circumstances. Our field operations reviewed all of our decisions in this regard in terms of which ones to retain and we have quite a number that we've retained and which ones to release, and those that we released allow us to clean up our balance sheet in two respects. If they are on the balance sheet as a deferred asset, this accomplishes the writeoff associated with those, and if for some reason they were not on the balance sheet, this allows us to record the appropriate liability for those, and that's the primary reason to do it.

But the cash payments that will continue, are those flowing through cash flow from operations?

They will be part of restructuring charges is what they will be and we will disclose those each quarter, and we may in some instances choose to negotiate settlements of some of these, but we haven't, and we've done a little bit of that in the past but we aren't doing that at this point in time on a broad scale basis.

Okay, in terms of the cash balance, how much of that is restricted?

None. We don't classify any restricted amounts as cash or cash equivalents. Anything that's deposited as collateral is put into the other assets.

Was there any depreciation expense on the income statement related to France?

No, although we may have to reconsider that in future quarters in light of our decision to hold it.

And what would that number - what was that say number in Q2 '01?

I don't know.

Jennifer I think it's about $3.5 million for the quarter.

Any bonding transactions during the quarter?

Sure, we do bonds on a regular basis, and as you know in a number of jurisdictions.

Could you quantify that?

I could say that our increase in bonding during the quarter compared with last year, I think was very modest. I think it was about a $1.6 million increase in bonding this year versus the previous year. In terms of the absolute numbers, do you have them here?

It's about $23 million in absolute numbers for the quarter.

Okay, and then finally, now that it seems that your operations just in terms of the number of properties that you all have going forward are somewhat stable. Would you be willing to provide some income statement guidance or revenue guidance?

At this point in time, we still have a number of properties yet to divest, Jennifer. You know, we can look at that in future years but I think we've given the guidance we're going to give for this year and our goal now is to try to execute to achieve the guidance we've given.

Thank you.

Moving on to Brian Knolt with Morgan Stanley.

It's actually Bill Reilly. Good morning. A couple questions for you. One, your decision to not to raise your guidance on recurring free cash flow, notwithstanding the $55 million of benefits between the tax issue in France, I guess I read that to suggest that you're pretty concerned about these volume trends. Can you update us on anything close quarter end in terms of what you're seeing in volumes?

July volumes in North America in the funeral business was strong. I might add that the benefit we see from the France transactions, excuse me, from the tax accounting change for this year is about 30 million. The rest of the lowered tax payments this year are attributable to the fact that we didn't sell France, so we will have more interest expense in North America, and quite frankly, the second quarter in North America came in weaker than our original business plan had contemplated. So the reason for less tax payments can't be all additive, because part of it's due to the reduced level of performance.

Okay.

I will admit that, you know, under other circumstances, we might feel that we could raise the guidance, but again, I would reiterate, we are currently eight years - excuse me, $8 million behind last year's recurring operating free cash flow at June 30th, and last year, we did 170 million. So although, you know, it is possible we could exceed the 160 to 180 00:35:53 million range, I think at this time it's premature to increase the range.

Okay, but net net, if things were to develop over the rest of this year the way that they relatively developed over the course of last year, then you would be slightly ahead?

Well, we are 8 million behind last year as we, on a year-to-date basis, we gained ground to the tune of 2 million in the second quarter. We started, if you remember the first quarter, they were 10 million behind. We gained 2 million in the second quarter. You know, if I only gained 2 million in the third and fourth quarters, we won't exceed the 160 to 180 range. If I continue to see the type of progress we had on the working capital part in the second quarter and we have some progress on generating more EBITDA in the last two quarters, it is possible we could exceed the range but at this point in time our guidance is the same range, 160 to 180 million.

When will you create the $30 million tax benefit, this quarter?

We have paid very little taxes in the United States so far this year, and we were contemplating that we would have to make some tax payments in the latter half of the year. It now appears that those tax payments will be considerably smaller than they otherwise would have been. So that benefit will occur relative to our original expectations in the last two quarters of the year.

Okay. Next, what kinds of transactions did you need the collateral for, the 45 million?

Transactions related to insurance companies.

About 40.

Last question. I know that the writeoff in equities of $16.9 million, can you talk a little bit about what that related to and also, if you were performing that calculation today, would there be a further writeoff, given where the equities markets have gone?

Yes, what we have, that involved two equity investments that we made in North America. I'd rather not go into their names, because at some point, we may want to monotize them, and essentially what it is doing is taking those investments down from our cost to what we think is a potentially realizable value for those and they are private companies. They are not a matter of public companies. It has nothing to do with stock market valuations. It's simply our assessment based on I think reasonable standards that the amount we've invested in those companies will not be realizable at this point in time.

So this isn't related in any way to any of your portfolio investments? It doesn't relate to the trusts?

That's correct.

And generally, what are the trusts investments?

Well, we have in total about $2.2 billion of trust investments. Of that, about almost 600 million is approximate perpetual care trusts that are not on our balance sheet, and during the first half of this year, obviously given the stock market conditions, our performance wasn't stellar. In the funeral trusts we were down through the six-month period a little over 3%. In the cemetery merchandise trust we were down about 2.5%, and in the perpetual care trust, we were up about 2%, but as we look at that against an index which has approximately the same mix of equities and debt as ours does, we think that the relative performance against which you compared it yourself was down 6%. So relative to our comparison target, we think we've performed reasonably well.

Just to make sure I understand, the index was down 6%, you were only down 3% so you outperformed on a number of those measures?

Yes for that six-month time period. Remember our funeral trust versus about a twelve-year life and our cemetery trusts have an even longer life. So looking at any six-month time period is not terribly relevant but that's true for the six-month time period we think we performed reasonably well relative to a comparable index.

What is the mix of equity and debt in that index?

If you take all of our trust funds, about 41% are equities. About 51% are fixed income, about 5% alternatives and about 4% was cash at the end of June.

Anything further, Mr. Knolt?

Thank you very much.

Once again, if you would like to ask a question, please press star one on your touch tone telephone. And our next question comes from Debbie Downey with Miller Payback Roberts Securities.

Just a quick question. What was your actual D and A for the quarter?

29 million.

And what was the rate for D and A for the full year?

Debbie, it's probably going to be around 115 to 120 for the full year.

The number that you gave of the maturities, those are actually what's outstanding of the senior notes for the next three years, right?

That was the bonds. We have some other private notes in addition to that that we pay off from time to time but we can give you the total maturities if you want to hang on.

Sure, that would be great.

Okay, we have $12 million remaining this year in total. In 2003, we have a total including the bonds that I talked to you about of 189 - excuse me, 112 million as of August 5th, which was the date I was quoting from before, and on 2004, as of August 5th, we have 199 million in total. I gave you the two bond issues previously that are the components of that.

Right.

Then our total for '05 is 605. It may not be adjusted. I'm not sure whether it's adjusted for the transaction we did for the (inaudible) 600 million.

That does includes the 559 of '05 that you're hoping to do in exchange for the 300 million, right?

That's correct.

Brian Ferguson with Boston Company.

Hi, I apologize if you've gone over this already, but what is the full year EBITDA guidance?

We did not give EBITDA guidance for the year because of the divestiture programs.

Okay, I mean had you given it in the past?

Not in recent past. I don't believe we've given EBITDA guidance since I came with the company in 2000. They may have given it prior to that.

Okay, but just in the press release when you cite the expectations, you know, lower exceptions from EBITDA -

Well, we gave guidance with respect to recurring operating free cash flow, and to develop that number, we used our business plan, and what we were doing is giving you some of the components that gave us rise to that. We've had some favorable results in terms of recurring operating free course of business flow, in terms of cash taxes.

Yes.

And also in terms of keeping our French business, but our performance relative to our original expectations in terms of working capital management and in terms of generating EBITDA have not met the expectations we had at the beginning of the year so far.

What are the factors that will likely cause that EBITDA to be, you know, short of the expectations for the remainder of the year? Is it the death rates or what are you actually sort of referring to to drive that?

The number of deaths in North America, if you remember our original guidance, we said we assumed the number of deaths would be flat. In fact, they were down 2% in the second quarter -

So the guidance that you gave on the operating free cash flow targets, is that assuming sort of a status quo on the death rates, you know, down 2 or 3% for the remainder of the year when you model out the EBITDA as well as the components to get to the operating cash flow? I'm just trying to understand the assumptions that you may be using for the balance of the year on the EBITDA, you know, that are allowing you to get to the operating cash flow, you know, ranges that you did put out in the release.

We have not prepared any revised business plans or revised budgets. We simply think that in light of the fact that we are half way through the year and essentially 8

We haven't disclosed our plan in that level of detail and I would be hesitant to put out those numbers. As I said it was below, I don't think I want to get into describing the exact dollar amounts.

Even though it's historical, not the projected plans.

Well the plan is still projected.

I know.

I'm not sure our phasing of the - first we developed an annual budget and then we phased it by quarter. I'm not sure our phasing by quarter was necessarily scientifically done.

Okay, I mean, would it be fair to assume, though, that the short fall in EBITDA probably wouldn't have been dramatically different than this overall $8 million short fall year-to-date that you refer to in the free cash flow line?

I think what I would say is that we had given some views that we expected working capital not to be a material use during the course of this year, and it turned out to be a use to the tune of $55 million in the first quarter. We have recouped a portion of that, about 37 million of that. So it still remains a use to the tune of 18 million. So essentially a big piece of our reduced recurring operating free cash flow is that we are not hitting our working capital management targets yet, all know we are working on it.

So that's been the bigger driver of the short fall at least bigger than the ending EBITDA short fall?

They both contribute.

Okay, thank you.

We'll go next to Christian McCall with Boston Partners.

When you completed your new credit facility mentioned that you had exceeded 70 million held with third parties that you could potentially release that, if I understand the situation properly, that is increased by 45 million in the second quarter and then I guess you mentioned to a previous caller that you have released 40 million of that 45 million from the second quarter. So I guess could I just understand what the current balance of these funds are that can be released given your new credit facility, how much you expect to be released, and weather when that occurs, ie, 2002, 2003, et cetera?

I think as of today or at least as of yesterday, we had actually issued letters of credit and had released somewhere around $80 million.

That's 80 million of the 60 to 70 million at the time of the press release plus the 45?

I don't know the exact dollar numbers, but I would say that we have released most of what we can release, and that we have only modest amounts left on deposit with various parties relating to collateral issues, and as I mentioned, those are classified in other assets. Our cash balances today are fairly significant. I think as we speak, our cash balances are a little over $120 million, somewhere in that ballpark range.

Okay, thank you.

Moving on to Susan Marte with Goldman Sachs.

Good morning. Hi. Is the company planning to sell some of the international assets? Does the company have a specific plan or program to sell them?

Well, we certainly have a plan and program to sell or joint venture them. I think our focus has been on joint venturing our French business, which we have now deferred until next year; however, I think we still have a small German business to sell. We have actually a joint venture which we have a majority ownership in Singapore that under some circumstances we would be willing to consider selling, and we have businesses in three countries in South America that we'd consider selling our joint venturing at the appropriate point in time, given the uncertainties in Latin America, particularly in Argentina which is where our largest business is, is probably not timely to do that in at least this year.

You are planning to actually sell some of the as nets South America, specifically with the focus on Argentina, given the turmoil?

If you have a client that would like to bias et cetera down there, feel free to call us.

Thank you.

Henry Reupop with Deutsche Banc.

Hey guys, just getting back to the EBITDA, I guess EBITDA I think you had put a target on recurring EBITDA for North America for about 390 million for the year, and then I guess there's a 40 million deficit between that and working capital utilization. About 18 million of the working capital deficit is from working capital. Does that mean the balance of 22 million is off of your original 390 recurring North American EBITDA estimate?

The 390, I believe, was the 2001 EBITDA retained North American operations. We had expected this year that we would, at the beginning of the year, we knew that some of that would be divested as we completed what we called our North American facilities review number one. We had hoped at the beginning of the year that the pieces that we weren't showing pursuant to that would grow somewhat, and then during the course of this year, we decided to sell additional operations, the additional 140 facilities that we announced both in the first quarter and finalized in the second quarter, so there will be more EBITDA loss ultimately when those particular properties are sold. So you have a number of factors going on here that are impacting EBITDA. You're having property divestitures from our first program, property divestitures from our second program, offset by at least hopefully growth in EBITDA in what we're retaining and I would add that the growth of what we retained hasn't lived up to the expectations we had at the beginning of the year forward, and that's one of the reasons that we haven't been forecasting EBITDA is there's too many moving parts to it.

Okay, but it is correct to say that the working capital, the $ 40 million deficit is between the working capital and EBITDA?

Yes.

And then just one more, I guess. Availability, current availability or availability under the revolver right now?

I think in light of the letters of credit that use capacity, we have around 100 million of availability.

Is there a direct drawing or is the difference all in LCs?

There are no drawings on the facilities. It's all LCs.

Mr. Reupop, anything further?

That's it.

We'll go next to Jennifer Childe with 2001, and I believe that our United Kingdom EBITDA was around the $40 million mark. The other piece, you asked to talk about operations in the past that we have sold. Australia had about 20 million of EBITDA. Spain and Portugal had about 15. Uruguay had about 2, Netherlands had about 2 and Belgium had about 2. That's pretty much all of the components of the operations through the present day.

But we didn't have a full year of Australia, Spain and Portugal, Netherlands, Belgium, right, in 2001?

That's true.

I mean, do you happen to know what the contribution was?

It's in our 10-Q but I'd be happy to talk to you about it. Australia was May and Spain and Portugal were in August for the big ones and Norway and Belgium were also in August, but I'd have to go through the records to get if for you.

UK, that was for full year '01?

What I just stated was a full year of '01.

We joint ventured it earlier this year, if you remember, Jennifer.

The North America of the 390, can you give us a guestimate of what the contribution from the properties that have been sold was?

From the original North American facility view that we talked about, we thought that we had EBITDA of about $13 million, in that ballpark. We have close to 87% of that done, but in terms of EBITDA, it would represent probably between 10 and $11 million of EBITDA. As we mentioned on NAPR 2, we have about $8 million of EBITDA associated with that, and while we have made some progress, obviously the program is in its infancy, but we probably have sold with letter of intent probably 2 to 3 million of that 8 million EBITDA.

Okay, and then review three?

Sorry?

And then the third review of EBITDA with regard to those properties?

There's only two.

October of 2000 and the one we've just announced.

All right, thank you.

Next to John Ransom with Raymond James.

Hi, this is in the category of beating the proverbial dead horse. The working capital usage of 18 million through six months, would that have been still the same 18 million had you had your letter of credit in place? Is the letter of credit release monies accounted for working capital or is there some other accounting treatment for those dollars?

The items that we put into deposit and that we take out of deposit with respect to collateral go through the financing line. They don't go through the cash flow from operations line, John.

Okay, so and even the surety bonding, doesn't that contribute - letters of credit for surety bonding, wouldn't that contribute to working capital?

Obviously, to the extent to what you're talking about, us receiving payments from customers because we have bonded the sale, that would be from cash flow from operations.

You're saying the line of credit did not contribute to your ability to increase surety bonding? I thought you said that it did but I may have misheard that.

No, our surety bonding capacity was all in place before we got these lines of credit. What it did allow us to do is in certain instances release some collateral.

Would you expect to see on a cumulative basis positive or negative working capital usage by the end of the third quarter?

Well, our hope, we are working very hard on improving our working capital, and obviously our hope is to achieve the type of performance that we had in our business plans, so we would hope that over time, we would be able to pull down our networking capital usage, you but you know, I don't think we can tell you for sure that's in the bank.

I want to re mind you, John, at the end of the first quarter we had a negative $55 million use of cash from recurring working capital and obviously we were disappointed in that, but we did have a $37 million source? The second quarter to get to that 18, and while we can't predict the big variable is the number of desks in Q2, Q3, but certainly with the other components that you can control working capital, we'd like to see the $37 million momentum continue through Q3 and Q4 and at that point in time, it would be we'd have more clarity in terms of revisiting the 160 to 180.

And then finally, let's go back to 390 million of retained North American EBITDA last year. Is the only difference between that number and this year sort of run rate is the 8 million and appertude? Is there any other number we should net out of the 390 rate?

No, it's just the EBITDA numbers I gave earlier with Jennifer and what has been sold of that earlier is the only difference in the 390.

Sorry, so I'm slow, the 390, I thought that netted all the sales other than appertude.

The 390 was the actual EBITDA of '01 and then what I did for Jennifer was tell her what the projected EBITDA was with NAPR 1 and NAPR 2 which was 12 million and 8 million representatively and I updated her, the 10 million to 12 million and about 1 to 2 of the 8 is gone.

Assuming nothing else changed, what's your guess is the run rate, let's say just no growth, no change. What's kind of the run rate or the '02 EBITDA versus the '01 EBITDA, trying to net the asset sales.

What we reported in North America as you know for the six months ended, it's about 203 versus 209. That includes the loss in EBITDA, but again, what the variable is that's uncontrollable is when you talked about extrapolating that for the rest of the year is what are the number of desks going to do.

Okay. So basically, it's flat, EBITDA is about flat if you net the sales, net NAPRs, is that a fair statement?

When you're talking versus prior year, you're correct, but what we were talking about earlier was our expectations.

I understand. So really the big delta, I mean, sorry this is so painful, but the big delta year-to-date has been working capital, not EBITDA?

The bigger change has been in working capital and EBITDA, but EBITDA is slightly down.

But you guys are being very conservative about second half despite the fact that I guess volumes have gotten a little better, and you have significantly less cash taxes in the second half of the year. So I mean, you're building in quite an amount of cushion for yourself it seems like relative to last year.

Last year John we revised our guidance in the third quarter for the last year. I would feel much more comfortable waiting to see how we do in the third quarter before I consider revising guidance. pay very little.

Thank you very much.

That does conclude the question and answer session today Mr. Waltrip, I'll turn the conference back over to you for closing remarks.

Thank you very much. We appreciate your attendance on this look and look forward to talking to you again at the third quarter when we announce our earnings. Thank you very much.

That concludes today's teleconference. Thank you for joining us.