Service Corporation International (SCI) 2002 Q4 法說會逐字稿

Please stand by, we're about to begin. Good day everyone and welcome to the Service Corporation International fourth 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 Waltrip. Please go ahead sir.

We'd like to welcome all of you and appreciate you participating in this call. After our prepared remarks, we'll have time for questions, so with that I'll turn the meeting over to Eric Tanzberger, and he'll proceed.

Thanks, Bob. I want to thank everyone for joining us today in our Q4 earnings conference call. I do want to say one thing before we begin before I pass it to Tom.

There will be statements today on our call today that are not historical facts. And our forward-looking statements that we have made in reliance of the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements that we will make today could be accompanied by words such as believe estimate project expect may anticipate forecast or other words of similar meaning. These words convey the uncertainty of future events or outcomes. The forward-looking statements we will make today are based on assumptions that we believe are reasonable.

However, many important factors could cause our actual results in the future to differ materially from the forward-looking statements made today, or any other documents or oral presentations made by the management of the company. There are important factors which could cause these actual results to differ from the forward-looking statements materially. Those are listed in our press release and in our 1934 filings and our 10-K filed last year for year under 2001. With that out of the way we're going to have a couple of prepared remarks and then we'll take questions as Bob said. This time I'll pass it to Thomas Ryan our President and Chief Operating Officer.

Thank you, Eric. It is very difficult to turn on a television set or read a business section of a newspaper these days, and not hear a story about financial difficulties or liquidity prices or credit down grade happening in corporate America. Now as many others in corporate America struggle for survival, we have a much-improved capital structure, healthy cash flows and strong liquidity. We believe that having already endured hard times, we're a stronger and wiser company for it today.

With these financial challenges behind us now, I am pleased to say that our industry and specifically SCI, enjoys many positive attributes that set us apart from other investment opportunities. First, we enjoy a very predictable revenue and cash flow stream due to the nature of our business, that subjects itself well to the healthy amount of leverage. This predictable base is further enhanced by the company's $6.3b backlog of deferred funeral and cemetery contract revenues.

In addition to the predictable nature of our business our network of funeral homes and cemeteries is strategically positioned to benefit from the ultimate graying of America as the baby boomers enter their late 50s and early 60s. Having said all this we do not as a company or as an industry lack for any challenges. Our biggest challenge like many other industries is growing our top-line organically. The number of deaths in North America is projected to be flat in the near term, and we continue to see down ward pressure on revenues from the increasing mix of cremation in both our funeral and cemetery businesses.

To date, we have not showed inability to deal with this issue in a manner satisfactory to us and while it will not be easy we see this as an opportunity for improvement in the future. We have developed action plans in the near term to deal with these issues and are developing comprehensive long term strategies that we believe will provide us a competitive advantage as we approach the graying of America.

Another challenge SCI faces came from developing one of our greatest strengths. We have the largest and highest quality network of funeral and cemetery businesses in the world. In our quest for growth we lack the proper emphasis on operational efficiencies and the processes and systems that support our field operations. The good news is that we have a tremendous opportunity as we make improvements this area to generate real improvement in our cash margins.

Acquisitions and new funeral home construction will play a key role in our success as we look out into the future. We believe there continues to be a demand for business sales in this industry due to a lack of consolidation over the past several years. We have substantial excess cash and further access to investment capital which allows us to acquire funeral, cremation and cemetery service outlets that fit our operation strategy.

However, we believe that there still may be an expectation gap that exists between our potential purchase valuations and those of the potential sellers. Therefore, our emphasis will be to find new avenues to grow our core revenues while diligently managing our cash expenses. We believe that over the next 18 to 24 months we have some very important tactical actions that we must execute in order to deliver near-term improvement in our earnings and our cash flows. These tactical actions will solidify the foundational base and help create a cultural environment on which to build and grow into the middle part of this decade. These tactical actions include developing and implementing the appropriate organizational structure which promotes teamwork, accountability and execution.

In addition, focusing our near-term training emphasis on leadership and key field management development. We are eliminating unnecessary costs and expenses and redefining our processes with a focus on efficiency and customer value. We are developing and implementing local market action plans which drive accountability throughout the organization with an emphasis on execution. We are redefining our sales organization with a strategic focus on people, profits, and productivity. We are aligning the compensation of our entire organization with clear and definable goals that are completely in sync with the objectives of our shareholders. We are further committing to our dignity brand and concept with particular emphasis on the success of our dignity memorial package plans. We are focusing our organization on the wants and needs of the cremation consumer, organizing our existing array of brands products and services into a cohesive trainable, deliverable set of offerings.

We are re-emphasizing our cemetery focus by significantly refining our tiered product strategy, the inventory development and reporting structure, and the processes and controls within each of our cemeteries.

In the meantime, we will be developing our long term strategic plan with an emphasis around three key concepts. Number one, where our capital should reside. Should we own or franchise, and in what markets? Number 2, how to grow our core revenues, utilizing branding, potential further segmentation, new marketing initiatives and affinity relationships, with a profound recognition of the wishes of the cremation consumer. And number 3 and probably most importantly, investing in our human capital. How do we attract, hire, develop, and retain the best and the brightest. These strategies will not have a meaningful impact over the next 18 to 24 months, but will be the key to our growth beyond the near-term horizon.

Now, let me turn to the focus of this call, our operational performance for the fourth quarter of 2002. Comparable North American funeral revenues for the fourth quarter increased slightly as compared to the fourth quarter of 2001. Although our comparable number of funerals performed was slightly down, we believe this is attributable to a lower number of deaths compared to the fourth quarter of 2001. This belief is based on the reported results of our publicly traded competitors, CDC statistics, information provided by certain of our suppliers, and local market knowledge obtained from our network. While these market share measures can be useful, we believe market share is a very localized issue.

Unfortunately, there is no accurate barometer of relevant market share available, and therefore we must manage our businesses based on year-over-year comparisons of volume. To date for early 2003, we have experienced soft case volume in our comparable funeral homes as compared to 2002. Our average revenue per funeral for the fourth quarter of 2002 increased by 1.3% above the prior year quarter. This is due mainly to the increased selection rate of our dignity funeral and cremation package plans which was partially offset by the negative impact from the cremation mix increase of approximately 140 basis points. For the fourth quarter, our comparable North American funeral margin was 17.3% versus 23.1% in the prior year. Although the company is experiencing higher personnel costs associated with pension, benefits, and insurance costs, the major difference as compared with the prior year quarter is due to 2001 increases in the recognition of net general agency insurance commissions.

Our full year margin of 20.5% is still slightly lower than the prior year margin of 21.5% but fell within the targeted annual guidance range of 18 to 23%. Comparable North American cemetery revenues for the fourth quarter decreased by 5.7% over the prior year quarter. This was primarily a result of the cancellation of a large cemetery property contract, a decrease in cemetery trust income, and reduction in levels of revenues recognized related to the changes in estimates of deferred cemetery contract revenues. Our North American comparable cemetery margin for the fourth quarter was 12.6%, versus 14.5% in the fourth quarter of 2001. The lower margins were impacted by the revenue shortfalls previously mentioned, as well as the change in the mix of revenue from a higher service mix to one more heavily weighted towards property.

Offsetting some of these negative impacts was a decrease in selling and commission costs associated with the significant changes made by our sales management to our sales operating structure and processes. Overall, our North American operations reported lower EBITDA while significantly improving the cash flows of the business. Non-cash charges and write-offs for the quarter had a negative impact on reported EBITDA while cash profits, interest savings and working capital improvements had a positive impact on recurring free cash flow.

Our French funeral operations continue to perform at levels exceeding our expectations. For the year ended December 31, 2002, we have achieved real revenue growth of 4.3% over 2001. Including the favorable impact of the strengthening of the &euro versus the dollar, the reported revenue improvement exceeded 16%. This resulted in a real increased EBITDA of over 10m &euro or 21% more than 2001. This increased EBITDA will provide enhanced leverage in which to recapitalize the business and create further value for any potential financial partner.

Now I would like to touch on our outlook for 2003, before I turn it over to Jeffrey. As I am sure you've seen in the news release, we have provided some financial guidance as it relates to our 2003 outlook. As you may have noticed, we will be careful to comply with the new regulation g. This regulation edge encourages GAAP and therefore we have paid great efforts to communicate in the most effective GAAP-friendly manner. What we see occurring in 2003 is very similar to what we saw in the fourth quarter of 2002. Further enhancement of the cash earnings of our business. We would expect to see higher quality, recurring cash earnings that are replacing non-cash earnings. This is an earnings base on which we can build future growth. Changes in levels of cemetery property construction and estimates in deferred pre-need cemetery revenues and an increase in the company's effective tax rate will all put downward pressure on reported earnings.

Meanwhile, we expect real cash earnings to improve through the impact of the consumer response to our dignity memorial package plans, savings from improved processing efficiencies, and a significant organizational changes implemented by our North American sales leadership during the fourth quarter of 2002. While it is still early to begin to quantify an annual impact from these changes implemented by our sales leadership, the initial results point to a much improved earning stream from currently recognized business, as well as an improved production backlog which will have a favorable impact on future reporting periods. While some of the impact is deferred in earnings, the cash flow impact is current. With that, I would like to thank you and hand it over to Jeffrey Curtiss our Chief Financial Officer. Jeffrey.

Thanks, Tom. At the beginning of 2002, we at SCI set out some financial targets for the year. Our first target was net debt which is total consolidated debt less cash and cash equivalents. And our goal was to be at or under $1.8b by December 31st, 2002. Later, when SCI decided to postpone the joint venture of its French business, we modified this target to a range of $1.8b to $1.9b . At year end of 2002, SCI's actual net debt was $1.78b, and our outstanding letters of credit under our bank credit facility were $886m. During 2002, SCI reduced net debt by over $721m, down 29%, from the end of the prior year.

During the fourth quarter of 2002, net debt was reduced approximately $77m, primarily from approximately $55m of recurring operating free cash flow, $23m of cash distributions from our U.K. affiliate, and $25m of proceeds from asset sales, partially offset by $25m of increased debt, resulting from capitalized leases in France, which replaced operating leases relating to our French vehicle fleet. During 2003, we would expect net debt to improve considerably, because of strong cash flow, a large tax refund, and possibly a successful joint venturing of our French business. Our liquidity is very strong, and our debt maturities are manageable without returning to the capital markets.

As of February 26th, our North American cash and cash equivalents was approximately $250m , and our near term and intermediate term bond maturities are as follows. March '03, $76m . April '04, $111m. December '04, $51m. And December '05, $366m. A second target set in early 2002 was recurring operating free cash flow, which we expected to be in the $160m to $180m range. Our performance in the fourth quarter in managing our working capital was good, and we achieved recurring operating free cash flow in 2002 of approximately $210m, about $30m or 17% higher than the high end of the targeted range. Recurring operating free cash flow in the fourth quarter improved $49m over the same period of prior year with approximately $80m of improved working capital management, and $14m of lower cash interest costs offset by the $45m of lower EBITDA generated during the quarter.

SCI's year end debt of $1.78b was only 8.5 times its 2002 recurring operating free cash flow of $210m, a significant improvement over the prior year's ratio of 14.6. During February, SCI received $92.4m of $94m in expected nonrecurring federal income tax refunds, and SCI has federal tax loss carryovers in the U.S.A. that should shelter it from U.S. income taxes for the next few years. SCI will pay up to $20m of taxes in 2003, to a number of states, and in some foreign countries.

Assuming SCI continues to own its French business during 2003, SCI's consolidated effective tax rate is forecast to rise from 31% in 2002, to about 37% in 2003. As SCI no longer has French tax loss carryovers which did not require tax expense accruals in 2002. Any gain on the joint venture of SCI's French business is likely to cause a reduced 2003 effective tax rate.

The third target relates to overhead cost control. The $15.1m increase in reported general and administrative expenses in Q4 of 2002 versus Q4 of 2001 was attributable to increased amortization of capitalized systems costs, and increased professional fees and legal accrual costs incurred during the quarter. Full year reported general and administrative expenses were up $19.5m in 2002, versus 2001, due to approximately $13.5m of increased non-cash amortization of capitalized systems costs and professional fees and legal reserve costs. Our efforts to reduce cash overhead cost is ongoing and we expect cash overhead savings during 2003.

In the fourth quarter, SCI incurred approximately $24.5m of costs reflected as impairment losses and other operating expenses. Approximately $21m of that charge relates to settling the put bond contract that was mentioned on our last conference call. Most of the rest of the cost relates to asset impairment charges and true-up adjustments to asset values for assets previously held for sale. Other income in the fourth quarter was substantially less than in prior year or previous quarters. This was due primarily to a decision to write down certain international, non-operating receivables that we now believe are impaired. Assuming SCI owns its French operations for the full year in 2003, we target 2003 consolidated cash flow from operating activities to be in the $350m to $400m range, including approximately $94m of nonrecurring IRS tax refunds.

Total capital expenditures of budgeted to be in the $110m to $130m range with approximately 80 million of those expenditures considered to be maintenance capital. SCI's French business is targeted to have about $55m to $65m of gross income, and about $20m to $30m of cash flow after considering French income taxes, and capital expenditures in 2003. SCI continues to improve its financial profile, and believes a credit rating of BA 2 by Moody's and double B by standard and poors(ph) are appropriate objectives. Our cash flow is strong and management continues to take actions to improve it while focusing on building shareholder value by reducing cost and seeking profitable growth opportunities. With those comments, we'd like to now take your questions.

Thank you sir. The question and answer section will be conducted electronically. If you would like to ask a question please do so by pressing the star key followed by the digit 1 on your touch tone phone. If you are using a speaker phone please make sure the mute function is turned off to allow your signal to reach our equipment. We will take as many questions as time permits. Once again press star 1 on your touch tone phone to pose a question. We'll go first to Bill Burns of Johnson Rice.

We had talked about this actually on the last conference call also, about your funeral and cemetery sales restructuring that you're doing. It looked like in this quarter it had a positive cash flow effect in the quarter, but then you caution in the release about the actions may have negative GAAP revenue and profit effects. And I wonder if I could just get you to relate on some of the changes and the impacts.

Sure, Bill. This is Tom. Let me answer this for you. First of all, re-describing for those of you that maybe weren't on the last call some of the changes that occurred. We've eliminated a lot of the what we felt were ineffective lead procurement programs, such as telemarketing, certain direct mail and advertising, and shifting our focus more to personal referrals, and generating sales leads that way. That eliminated a lot of cash expenses that were previously used, and we believe not used very effectively, to generate leads. We also restructured and aligned the compensation incentive programs for sales management. And that's really throughout all the ranks.

We have reduced the number of personnel in what we call our sales management positions, went from about 480 sales managers to approximately 300 today. We are focusing on things that reduce turnover, and therefore, have a more productive salesperson working within our group, again, generating leads off of referrals. In addition to that we had certain incentive programs and the like that we eliminated. A lot of this is sales changes that reduce the expense and increase the effectiveness and efficiency of the sales organization. So those will drop, Bill, to impact cash flow, and impact margins positively in the current quarter, as well, because some of these get deferred, they'll impact margins in future quarters.

Now, what we mean about the comment as it relates to impacting future revenues and margins, any time you make significant changes, you have revenues are going to be impacted by it. So what we are seeing today is in the production side, and you've got funeral production, which typically gets deferred until -- until we service it, and then you've got cemetery production, which has property, merchandise and service components. We are going to impact the production side of revenues, we believe temporarily. And how those flow through our income statement, which again vary depending on what it is, could be impacting this year's or I should say 2003's revenues, and therefore, impacting the associated profits. We believe, once we get through this, we've got a much more highly profitable cash profitable income stream into everything we sell. And that's -- that's the bridge between what the savings are and how they could potentially impact us in '03.

Bill Burns; Thank you, Tom.

You bet, Bill.

We'll go next to A. J. Rice of Merrill Lynch.

A couple of questions if I could ask them. Maybe Tom or someone elaborate on what will be the gating factors for deciding what to do with the French operations as this year progresses and will determine whether something happens or not on that this year. Can you refresh us on that a little bit?

Sure. A. J., what's happening today is, as you know, one of the reasons we deferred the transaction during '02 was because we believe that '02 is going to be such a strong year, we'd have a much better business to negotiate any sort of transaction that might occur.

Right.

We're dealing with LBO type of purchasers, financial time of purchasers, and these people finance highly leveraged transactions off EBITDA. And as you saw us speak to, we improved EBITDA in 2002 over 2001 by 21%. So I think the first thing that occurred is, we realized for banker's sake, as you know very well, a real EBITDA that can now be financed at a higher level for 2003.

The factors that will impact that are obviously our ability to finance, you know, with today's financial markets I guess depending on the timing of things that occur in Europe and Iraq and everywhere else in the world there could always be turbulence that could defer a transaction. And then of course the level of interest of buyers. And what we're hearing, you know, all the time, we're getting people that are very interested in looking at this business.

Okay.

We think we find the right buyer at the right price which we think we can do in '03 the transaction will occur.

Right. So you feel like you've got it on track in direction with the EBITDA in a level that is -- that you'd begin to undertake discussions again, and it's a matter of sort of if people come up with the price you're looking for?

Exactly. And as you know we're in the midst of with all our businesses finalizing audits and the like and with these types of transactions that involve banks and long term financing those things need to be put in order. But once those are in shape we'll entertain conversations with people. And if the right deal comes across, you know, we'll have a transaction in '03.

Okay. Obviously, up you've given some guidance on where you think you'll be on the revenue front in '03. Is there any comment on what underlying assumptions you're making about North American volume trends or revenues per case for this year?

Yeah. I think what we've said, and there is certain language in the press release. But you know what we're anticipating volume wise for the year, and we really believe it's important to look at a year because, you know, within any shorter periods of time you can have some volatility. We see slightly down volumes to flat volumes for this year. You know, we'd love to tell you turn in flat volumes, but historically we've seen at least in most recent years slightly less than 1% year-over-year reductions. Now that's improved dramatically over years past but we don't see anything that would change that direction for next year.

With regard to average sales, again, we continue to enjoy very positive impacts from the dignity memorial plans, both on the cremation consumer, and on the traditional. But that is, you know, negated somewhat by the cremation mix shift within funeral -- our funeral business. So we believe we're going to see comparable revenues, or I should say average sale per case, probably be somewhere in the range of, you know, anywhere from 1% to 2.%, 3%, depending on the mix and depending on our success in that arena.

And then just finally do you guys have an update on the situation down in Florida in the Minora (ph) gardens litigation that you can provide?

Sure, there's been some activity recently regarding the civil lawsuit filed in December of '01, you might recall. There have been a series of hearings that started late last year in conjunction with motions filed by the plaintiff's attorneys to certify a class and to allow for punitive damages. Last week, and many people may have seen in the press down there, the hearings resumed, and the judge ruled to allow the plaintiff's attorneys to proceed with the claim for punitive damages.

Now, that just means they can proceed for a claim. It doesn't mean they get punitive damages. The judge is not yet ruled on the motion for class certification. And this decision could take several weeks or possibly months. In addition to that, as you know, the Florida attorney general civil lawsuit remains outstanding. The company continues to work proactively with the AG's office to resolve this matter, but we have nothing further to speak to at this time. In addition it, the Florida Department of law enforcement has an ongoing investigation concerning the matters that have been publicized about Minora. We are continuing to cooperate with them and desire to see the matter resolved. But the expected timing completion of the investigation A. J. at this time is still unknown. So that's really the three pieces that we're dealing with in Florida. And obviously any time we have something material or new to report, we'll be communicating that to you.

Okay, great. Thanks a lot.

You're welcome.

We'll go next to Jennifer Childe of Bear, Stearns.

Good morning. I was hoping that you could give us some specific numbers for the fourth quarter of this year, and last year, with respect to the contribution from perpetual care trusts, the general agency fees, and also the changes in estimates that you referenced for pre-need -- deferred pre-need cemetery revenues. First question. Secondly, do you anticipate any exposure related to the Georgia cremation situation and third, do you have any thoughts on the proposed regulatory changes? Thanks.

Jennifer, it's sort of a mouthful to start with. Let me give you at least some of the information with respect to our trust matters, and then we can come back and revisit some of your other questions. Our perpetual care trusts are primarily invested in fixed income securities, to the tune of about 75% to 76%. They had an excellent fourth quarter of the year, which was positive to the tune on a total return basis of about 2.3%, and because they were so significantly weighted towards fixed incomes, they had a total return for the year of a positive 5.3%. If you look at the amount of income that we generate that goes through our P&L, it's about 4% of the amount under -- that is invested.

And the reason that's true is, there are some costs associated with these activities, and you only get to report the yield basis, not the told return. So our view, looking forward, is that next year will be similar to this year, in that regard. Obviously, these receipts in this area are intended to defray costs associated with cemetery maintenance and our cemetery maintenance cost may increase because a lot of those involve personnel and things like fuel, for example, that would be part of that cost. So at this point in time, in that particular area, I suppose there is some exposure if interest rates go lower. But we're generally pleased with where we stand.

Jennifer, I'll try to pick up some of the other pieces. I think one of the pieces was the changes in level of printing cemetery revenues. It was really a phenomenon in the prior year and we think that '02 is down to more normalized levels of that situation. For the quarter, we had about a $10m delta in revenues in our cemetery segment in North America comparable cemeteries. There was about 13.5 versus 3.5, that would be Q1 being 13.5-d I'm sorry Q4.'01 being 13.5 and Q4 of '02 being 3.5. It's easier to look at it for the year. For the year, we have revenue decreases of $45m related in these changes of levels of deferred [printed cemetery earns](ph). Its around $68m to $69m in 2001 versus $23m to $24m in 2002.

So you can see a significant decrease in the revenues of about $45m. '03 is forecasted to be similar to the '02 type levels, as we've gone to more normal situations as we've said. I think one of your other questions was the related to the levels of cemetery construction that we've mentioned, and Tom mentioned in his remarks as well. The levels of cemetery construction for the quarter, in the fourth quarter we actually had about $4m less in revenues, and fourth quarter of '02 versus fourth quarter of '01, it's about 16 versus 20. But for the year in 2002, as Thomas mentioned before, we had about $70m of revenues related to cemetery construction, versus about $50m to $53m in 2001. So we have kind of an opposite effect for this particular situation in '02 versus '01, as the changes in levels of printing cemetery ref news that I mentioned earlier. For '03 those levels will drop back to more normalized levels like the '01 level I mentioned which is around $50m . If there are other detailed questions why don't you throw them at us again.

General agency was the other one.

General agency, the net number for this year is around $13m. And for '01, that compares to '01, to about $6m if I recall correctly.

And is most of that in the fourth quarter?

I'm sorry?

Was most of that recognized in the fourth quarter?

In the prior year, you are correct. In the current year no, it was recognized ratably over the life of the quarters.

Okay. And then sorry to be lengthy. My other questions related to exposure in Georgia, and the proposed regulatory changes.

Okay. Jennifer, this is Tom. With regards to Georgia, generally, we don't expect to have, you know, any exposure there. But as with any litigation, it's really too early to make any specific comment. We don't feel like we've got any -- any exposure, but again, I think time will have to play out as in any litigation. And your last one I'm sorry was --

Any thoughts about the proposed regulatory changes, likelihood of passage?

You're talking about which specific regulatory changes? We always have --

The ones you highlight in the K -- I mean the last Q, senator Dodd's proposed regulatory changes.

I don't think we have anything more to say than what we've outlined in before. There's nothing significant I think to comment to at this time Jennifer related to that.

Okay, thank you.

We'll go next to Brian Mold of Morgan Stanley.

Good morning. In your prior remarks I think you mentioned first quarter volume so far is down somewhat. What was the magnitude of that and what's the time period you're referring to?

Well, and that's why I'd rather not speak to any magnitudes at this point, Brian, and the reason is this. You know, we're in the midst of February. And a lot of times, with your volume reporting, you know, a lot of these get done, cleaned up at month's end. Where people tend to turn in contracts and you can see actual levels of volume. So I'd rather not speak to that. But when I can say is on a hard number that we've seen for January, and just preliminary, you know, information we can gather on February, we're seeing some weakness, obviously year over year, as it relates to the number of funerals we performed. I don't think we have accurate enough information at this time to give any better data.

Do you track the CDC data at all?

We do. Like I've said in my comments, we don't place a lot of faith upon it. When we look at the CDC data for last year, for instance, what it tells us for the year is, that we improved our market share slightly, in 2002, as it compares to 2001. Now, keep in mind that's within the 89 markets that we do business and that they track, and it's on the data that they report. And that only represents, I believe, 43% of our entire funeral volume for North America. So it's a -- something to look at, not something to place a lot of accurate faith in. For the quarter, we showed relatively flat market share as it relates to the CDC statistics.

Okay, thanks. And what's the estimated cash commitment for non-compete agreements in '03 and is that captured in your cash flow from operations guidance?

Yes, it is. Any payments that we're making with respect to non-competes during the course of the year is imbedded in that cash flow from operating activities materials that we previously gave guidance on.

I think in your 2001 10-K you had a $45m number. Is there any reason that would significantly change for '03?

I really haven't worked out a number where I feel comfortable in putting out a number at this point. We are working on our current 10-K and I'm sure if we disclosed it last year we will disclose it again for this year.

Do you have rent expense for 02 yet?

What?

Aggregate rent expense for 2002.

I don't Brian. Again we are working on the ten K as we speak and I just want to be sure those numbers are solid before we give them out.

Thank you very much.

We'll go next to Debbie Dally(ph) of Miller Taybeck Roberts (ph).

Most of the questions have been answered. I want to go over the current liquidity (inaudible) and your cash at the present time.

Okay. As of today our cash is a little over $250m. And our credit facility is $185m in size. And we have used, in the form of letters of credit, somewhere a limb over 100 -- excuse me, a little over $86m of that. So we have about $100m of are availability on that. But obviously no reason to tap into that with all of the cash that I previously mentioned.

Thank you.

We'll go next to Henry Rokoff (ph) of Deutsche Banc.

Hi, guys. I know you hit on it but maybe you could walk me through it more exactly. The decline in sort of sequential the EBITDA, some of it is in SG&A, part of it is non-cash and some of it is in the funeral cost of goods. Could you just walk through that? Are there any one-time charges, or why the sequential drop?

Well, there are one-time charges in there. But we have been hesitant to identify them in light of the guidance that regulation G has put out. As we mentioned, one of the matters is that coming up with EBITDA, we add back other income. And other income for the quarter was very small, compared with prior quarters. And that was due to this decision to write-off some receivables. Now obvious that write-off of receivables doesn't have a cash computation but the way it shows up is EBITDA is reduced and working capital improves by the amount of the receivable written down.

There is -- there is, Henry, some significant amounts as Jeffrey just mentioned in terms of why EBITDA is down but cash flow is up related to that non-cash that are also up above but most of I it's in other income. The stuff that's up above is related to write-offs and receivables here in North America as well and as Jeffrey mentioned we have some stuff mostly international things that are written off as non-cash down in other income. We also, if you talk about more of an after-tax number as opposed to EBITDA, we also have some change in our tax rate as well for the fourth quarter, as we guide our year that we're running at about 28% of an effective rate, we had to get it up to about 31% by the end of the year.

So we have a significant amount in terms of our tax expense on our income statement. As you know, we didn't pay many cash taxes during the year. Those items, together, along with the SG&A that you mentioned, will reconcile you kind of the difference, big picture in terms of EBITDA and reported ETS under GAAP compared to the true cash flows of the businesses which were very strong in the fourth quarter.

The amount of the AR charge, can you say what that was, that you took?

It's somewhere around about $4m in North America, and we had items related to the international businesses, all combined, that were more in the range of eight to $10m.

And then just a couple of questions. One of your competitors the other day basically just came out and sort of cited difficulties in the broad industry which you did, too, for a change in their expectations in the future. There's a fairly severe reduction. Do you see similar changes like that? You seem to -- it seems a pretty good, you know, relatively good year going forward. Any difference, any reconcile -- can you reconcile the difference in that kind of expectation?

Well, do you want to talk -- you mentioned a lot of things, I know. Do you want to talk specifically to which changes you'd like us to talk to? Because you know, what I recall them mentioning, one is cremation mix changes. Obviously we anticipate those. We've seen them year over year. So within our forecasting we think we've got a pretty good handle on what those changes should be. As it relates to funeral volumes, like we said over time, from -- in shorter periods of time you're going to have some volatility. And our guidance and our thinking really looks out to 2003.

And I think lastly, you may have mentioned or I remember a recollection of speaking to sales, or I should say the difficult environment. And obviously, with anything, that's going to probably impact your backlog, and obviously how your backlog moves after that could impact your current earnings. But we look at sales as a production-driven -- production-driven effort. And you're always in economic times or times of uncertainty, I think it does become a little more difficult to sell things. And I think every business is experiencing a little bit of that. But we don't see that having a significant impact on our results in 2003.

No big surprise or change in the overall industry except for difficult economic times and the general trends of cremation and that sort of thing?

Yeah, I think that's really it. And really our own uncertainty is specific to us and it relates to what I spoke to before, which were the changes we made within our sales organization which can have an impact again on production. But we believe again that those changes are temporary, and as we work through that, we're going to have a much more profitable stream of business that we're riding on our production efforts.

Thanks very much.

Okay.

We'll go next to Brian Ebof (ph) of Prudential.

Good morning, folks. My question relates to your excess cash flow, and what changes to your current debt-related covenants need to occur in order to install a stock buy-back program and will this be a priority moving forward?

Yes, under our current bank credit agreement which is on file with the SEC, we don't have the ability to execute a stock buy-back program. We're prohibited in that agreement from doing that. At some point in time, it would be appropriate probably to talk to our bankers about whether or not we should get some flexibility in that regard.

However, I think the bankers and ourselves would feel better to get the appropriate level of credit ratings, which I mentioned on the call, as being a BA 2 by Moody's and a double B by S & P before we entertain those discussions.

Thank you.

We'll go next to Scott Parsons of Parsons Financial.

Hi, guys, I want to follow up on that last line of questioning relative to debt. I think that, you know, because the comments had been made that you might be looking at acquisitions, and then maybe even building, depending on, you know, building new facilities. And I think that given the state of the economy and what have you, wouldn't it be wise to be paying down even more debt at this time?

And how does that go to the credit rating agencies and the plan that you have to get your credit rating boosted at this point in time? Because it seems as though, you know, we're all looking here into the future, saying that interest rates are going to rise, not -- probably not fall. And it's probably time -- and when they do rise, I would say the real estate market is going to cool, not heat up any more. So wouldn't it be a smarter move to? You know, get our debt structure in place? And what do you think a comfortable debt level would be, given the rate of revenue that you have coming in?

Well, let me try to answer that. First, we are paying off our debt as we find it. We have no pre-payable debt at this point in time. And for us to reduce our debt, we need to go into the marketplace and buy it. And we've done a fair amount of that over the course of many quarters. And we continue to do that when we think the Price is appropriate. And will continue to do that going forward.

We are trying to get our ratios in line so that we can get a credit rating of the level that I just mentioned, BA 2 at Moody's and a double B. I don't know that there is any magic number in the ratios but I would expect that we're talking about the EBITDA to debt having a situation where the ratio there is somewhere around between 3 and 4 being necessary, as opposed to numbers higher than that. I think the rating agencies would like to see our free cash flow to debt to have something lower than the 8.5 we have, although I think we've made a lot of progress in that regard. It's an art, not a science. We have Moody's coming in March to meet with the manage many team and we'll be working with them as we go forward.

One of the events that would transform the company I think fairly significantly would be the joint venturing of the French business if we can find a transaction there that makes sense for us. And would give us additional liquidity and net debt reduction to the point where I would expect that there would be some favorable ratings action after something like that.

Scott I just -- this is Tom. I just add to that, as it relates -- you know because we're now at a point in our capital structure and liquidity and other things where we have some flexibility, we're always looking at the highest and best use of our capital. So from time to time, as we come across transactions that have the appropriate internal rate of return, you know, we're going to make those transactions, be it an acquisition or potentially a build. And typically when we talk about builds, we're talking about building a funeral home on an existing cemetery which doesn't have maybe as high a return in year one or year two as it would relate to in acquisition. But over a longer. Could have a very high internal rate of return.

Okay. I mean, the reason I brought that up, Tom, is because in the press release that you have, you said that generally, we viewed 2003 as a critical year to shift our focus away from managing our capital structure. And you know, I'm not holding you to every word in the sentence. But -- and running and improving the funeral and cemetery businesses, but I think it -- I think the market looks at you not only, you know, from a stock standpoint, and says, you know, I mean, we've come through a pretty horrific time here in the United States, and any company that, you know, first of all is questionable activities or anything like that, they get looked at.

But also, people that have debt, even though you're moving in the right direction, that debt is, you know, is an ugly word nowadays, you know. And I think the sentiment is that people don't want to come back looking at the stock, or the industry, if the industry's flat, and they're heavily in debt.

Right. And Scott, let me assure you, we'll never stop managing our capital structure. That is something that is part of our mantra. I think the preponderance of our focus from this day forward is to increase shareholder value and whatever that brings behind it.

I appreciate that because that's obviously that's where I'm driving my questions from. I'd rather see the stock heck of a lot higher at this point, you know. And anything we can do to get it there, I'm in favor of.

Okay, well, thank you, Scott.

Thank you.

We'll go now to Larry Burdsky (ph) of L. R. Burdsky and Company.

Good morning. It looks like you have done a good job of your target of free cash flow, sort of echo what was said by the previous person. It looks like the market is looking at debt and also GAAP earnings. And the GAAP earnings haven't come around. And I was wondering if there is going to be any more focus, any more emphasis especially with regard to bonuses, management bonuses on getting GAAP earnings which you people care about right now. If they cared about recurring operating free cash flow, then stock wouldn't have traded at $2.95 today. So that's my first question.

And the second question is, you've had -- you announced publicly that you hired a consultant in the corporate governance front several quarters ago. I was wondering if there was any work or progress made in that area and if you had any intention of publicly announcing anything in that regard. Thank you very much, and congratulations on your cash flow.

Thanks, Larry. I'll take, this is Tom and I'll take a shot quickly at talking about the targets for incentive comp and I'll turn it over to Mr. Waltrip our Chairman and CEO about Corporate Governance. The officer group in 2003 which were recently set there are two components to that. One, specifically relates to improving earnings per share of the company. And the second one, specifically relates to generating cash flows. I won't get into specific definitions, but it is centered around increasing our cash flow from operating activities.

So I think we're aligned with trying to do that, both grow our cash flows and grow our earnings per share in the future. And in a longer term incentive you may have noticed that we have not for the first time in many years issued stock options with all the uncertainties surrounding them. However, we have put together a long-term incentive plan for the executive officers that focuses us on shareholder value. It is completely aligned with the shareholders, in that it takes a comparison of the stock price performance of SCI against a peer group of companies. And we're rewarded solely based upon our ability to drive stock price better than a group of competitors. And with that I'll turn it over to Mr. Waltrip to talk a little about corporate governance.

Larry, as you know we have hired a consultant to help us with our corporate governance issues. We kind of jumped the gun on something that is now vogue, in that we started approaching this a year ago, maybe a little over a year ago, and retained this consultant to help us with a number of issues that we felt important in the corporate governance arena going forward. We've been working on a number of projects to strengthen our corporate governance practices and to guide the company going forward and to comply with all of the various laws, regulations and other things that come into effect. I think you will see some effect from this in the new proxy, I think you'll see some changes and some implementation that will stick out, and we continue to move forward in this regard.

Thank you.

We'll go next to George Vidalis (ph) of Sykes (ph) investment advisors.

My questions have been answered, thank you.

We'll go next to Jennifer Childe of Bear, Stearns.

Thanks. Could you tell us what's excluded to get to the recurring cash flow number?

There is nonrecurring items that are excluded, that sum to about $82m for the year of '02, which is primarily tax refund and special one-time trust receipts. There's also, in our total capital expenditures that you see on our cash flow statements, there's also capital expenditures which are considered growth CAPEX or over and above like a maintenance level of about 27. Those two items primarily are the differences that you would consider being excluded in a recurring cash flow calculation, which should be as simple as taking the cash flow from Ops less those nonrecurring items and taking CAPEX without the maintenance CAPEX basically without the growth CAPEX. And I'll get you to the number Jennifer.

Okay, thanks and just finally were there any bonding transactions during the quarter?

We run a bonding program continuously. So I'm sure there were Jennifer. They're relatively small in size, and our levels of bonding are essentially flat with prior periods.

Okay, thank you.

We'll take our final question from Brian Mold of Morgan Stanley.

Yes, I wanted to follow up on the receivables receivables write down that you talk about in the fourth quarter. Why do you simply take it now and do you expect anything more going forward?

Let me try and address it by describing the one larger one on the international front that might be worth talking about. We had a situation several years ago where an entrepreneur was developing crematories in certain foreign countries. And we had hopes of buying his crematories so we had guaranteed the debt associated with those crematories which essentially was bank debt. The bank became uncomfortable with the entrepreneur and called the guarantees which we stood in the bank's shoes with respect to that operator.

At the time, we thought those operations would be folded into the businesses that we had in the U.K. and Spain and perhaps some other countries and so we felt that the loans were good. As we have now joint ventured our U.K. operation and our Spanish operation and talked with our partners in those places, we made the decision in the final quarter of this year that we ought to be viewing those loans as impaired. And so we wrote them down to what we think will be their realizable value.

That's an example. There are others, but that's -- in going forward, I would say these are the types of items you review each year. We always have some smaller amounts out there of various types of receivables that we have. At this point in time, though, I think our balance sheet is pretty clean.

What's the level of bad debt expense, and has it changed significantly over the last, say, 18 months and do you expect it to change going forward?

I don't have the level of bad debt expense with us. But I can tell you that when you -- when you look at the block of receivables that we have in North America both on the cemetery side and on the funeral side, and as we have concentrated and incentive eyed our team, we have had significant reductions in the past two years which continued in '02 related to our day sales outstanding and with that you know we've had reductions in allowances, for example, the one that was disclosed last quarter, Q4 of -- Q4 of '01. So the block of business in terms of the receivables, Brian, in North America is actually stronger than it probably ever has been.

And do you have any color behind the $4m write-down for the North American --

It was one isolated sale on the west coast, which is a very large sale situation that, subsequent to that, things occurred, and we felt that it was best to take the conservative approach and cancel the sale in terms of the way the payments were going at the time.

And it was a property sale that occurred in 2001 that we cancelled in 2002. And with any kind of property sale, if you remember the revenue recognition criteria is, it's constructed and it has 10% down. So what we had here was an outstanding payable balance. And -- that we just felt, depending on the circumstances, we would reverse the impact of that sale.

Okay, thank you very much.

Gentlemen at this time, I'll turn the conference back to Mr. Waltrip for closing remarks.

Again, thank you for participating and we'll see you next time.

That does conclude today's conference call. We thank you for your participation. You may disconnect at this time.