Service Corporation International (SCI) 2003 Q1 法說會逐字稿

Good day. And welcome to this Service Corporation International First Quarter 2003 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.

Welcome to this conference call to discuss our first quarter 2003 results. We'll have some prepared remarks and then as usual, there will be time for to you ask questions, and we will try and answer those for you. I'd like now to turn the meeting over to Eric Tanzberger for his opening remarks.

Good morning. I want to remind everyone on the call today that there will be statements that are forward-looking in nature and not his historical fact made in reliance of the Safe Harbor projections, provided under the Private Securities Litigation Reform Act of 1995. The statements you could hear today that are forward-looking may be accompanied by words such as believe, estimate, project, expect, or words of similar meaning, that convey the uncertainty of future events or outcomes. The statements we're making this morning that are forward looking are based on assumptions that we believe are reasonable; however, there are many important factors that could cause our actual results in the future to differ materially from the forward-looking statements that we will make today, in this conference call, or with any other oral presentations made by or on behalf of the company. Important factors that could cause our actual results in the future to differ materially than the forward-looking statements we're making today are disclosed in the press release that we issued this morning, as well as in our 1934 SEC filing.

With that in mind, we'll start with the prepared remarks. I will introduce Tom Ryan, our President and Chief Operating Officer.

Thank you. And welcome, everyone.

As we talked about last quarter, we as a global economy are experiencing an unusually turbulent and difficult period with a lot of uncertainty surrounding the capital markets. The emphasis on financial health of companies, cash flows, and the integrity of management has rarely been as acute as we see it today.

Against this backdrop, I'm very pleased to community your company's achievements for this quarter. We have reduced total debt, less cash and cash equivalents a further 198.2 million during the three-month ends March 31st, 2003 and now that balance resides below $1.6 billion.

As we communicated to you last quarter in the 2003 outlook and guidance, we believe that over the next 18 to 24 months, there are a number of tactical items that with appropriate focus and execution, could drive near-term performance and improve the quality of our earnings, and the delivery of cash flows. These items will also provide the solid foundational base that combine with the change in our cultural environment will provide the platform for our future growth.

In the first quarter, the quality of our earnings and our cash flows reported turned out to be better than we expected. Even with comparable funerals performed down over 5%, we were able to generate $28 million more in cash flow from operating activities as compared to the prior year period. This excludes unusual tax refunds of $94.4 million in the first quarter of 2003, and $22 million received in the first quarter of 2002.

Some of the significant drivers of this improvement were as follows: First, the cost savings associated with the changes made to our sales operating structure and the associated processes that was launched in the fourth quarter of 2002; secondly, the impact of our focus on delivered cemetery property sales, which are the most powerful in terms of GAAP revenue recognition and cash flow. This provides a higher quality profit stream as compared to other forms of cemetery revenue, and is the genesis for future revenue growth. The third item is is the development of high-end private end family estates and semi-private family estates which enhance the value of our cemeteries and provide our client families with a variety of choices in selecting cemetery property. And last our continued emphasis on improvement of collections of cemetery and funeral accounts receivable.

The success of our reduced debt levels in improved cash flow have not gone unnoticed. Over the last few quarters, the prices of our bonds have rallied as the debt markets have recognized the significant improvement in our capital structure.

Now, I would like to review with you our operational performance for the first quarter of 2003.

Comparable North American funeral revenues decreased for the first quarter, as compared to the first quarter of 2002. The 5.3% comparable decline in the number of funeral services performed was well below our expectations, but we believe it is primarily attributable to a lower number of deaths in our relevant markets. This belief is supported by the consistent negative trends experienced by our public and local competitors, CDC statistics, and the impact from our major industry suppliers.

We believe market shares can only be measured on a long-term basis and really is only relevant on a local basis. Our customer satisfaction surveys continue to trend positively, and we believe with our focus on local market action plans, and the continued development of our local management, that our local share is solid.

Our average revenue per funeral for the first quarter of 2003 increased by 2.6%, up from the prior year quarter. This is due mainly to the increased success of our dignity memorial, funeral, and cremation package plans. Specifically, we are seeing improving results from our cremation package plans as the average revenue per cremation increased by 3.7%. This favorable impact was partially offset by the negative impact from a cremation mix increase of approximately 190 basis points over the prior year quarter.

For the first quarter, our comparable North American funeral margin was 22.9%, versus 26.3% in the prior year quarter. The gross margin decline was primarily as a result of the reduced revenues for funeral operations compared against the fixed cost structure of the company's funeral network. Increased salaries and fringe expenses, primarily from higher pension, benefits, and insurance costs, and facility expenses, predominantly from the unusual amount of snowfall experienced in the first quarter, were somewhat offset by reduced expenses with the prearranged funeral sales efforts.

Comparable North American cemetery revenues for the first quarter, decreased by 3.6%, or $5 million, as compared to the prior year quarter. Revenues delivered from our core operations were specially strong, considering the significant changes implemented by our sales management during the fourth quarter of 2002.

With sales compensation focused on selling developed cemetery property, with an emphasis on cash flow, we were able to increase the amount of revenues from property sales during the quarter. This was partially offset by reductions in merchandise delivered and services performed. In addition, we experienced 3.2 million dollar decrease in earnings from cemetery trust income related to current financial market conditions.

Our North American comparable cemetery margins exceeded our own expectations. For the first quarter, the gross margin percentage increased to 18.1%, versus 11.9% from the first quarter of 2002. Improved margins from newly developed cemetery property sales, along with significant reductions in expense levels associated with the changes in our cemetery sales organization and processes were the primary drivers in the cemetery margin improvements.

With appropriately aligned compensation plans, cemetery management drove the elective cemetery property sales better than expected and managed controllable expenses in accordance with our plans. These dramatic improvements were slightly reduced by the impact of reduced cemetery trust fund earnings that were mentioned earlier.

Increased profits recognized from cemetery construction were predominantly offset by lower profits from changes in estimates of deferred cemetery revenues; and therefore, there was no material impact from year-over-year changes in non-core cemetery items.

Our French operations performed admirably in a difficult funeral volume environment. With funeral volume down by 4.2%, we were able to keep our Euro revenues flat and delivered profits and cash flows in line with our expectations. From a U.S. dollar perspective, the 21% appreciation of the Euro from the prior year quarterly period had a favorable impact on revenues, profits and cash flows.

As we move forward in 2003, look for continued execution in the associated impact of our near term initiatives that should enhance the quality of our earnings and our reported cash flows. Favorable impacts from reducing the true cash cost of our infrastructure will be partially offset by reductions in non-recurring reported revenues from cemetery construction and from a higher effective tax rate.

We surely recognize that the long-term success of SCI can only be achieved by delivering top-of-the-line growth in a challenging rv knew environment. Remember, we are working diligently on our long-term business plan which focuses on delivering revenue through three primary avenues.

First, growing through strategic cemetery property development in our existing cemeteries; investing in new facility construction, acquisitions of funeral homes and high internment cemeteries that are located in large metropolitan markets, and through the continued growth of our franchising network. Secondly, by investing capital in revenue growth from our existing businesses, through more contemporary marketing, merchandising, and affinity association. And lastly, through ensuring that we attract higher, developed and retain the best and the brightest people we possibly can. This emphasis on leadership, development, and training could have the greatest impact on the long-term opportunities for SCI.

With that, I would like to thank you and hand it over to Jeff Curtiss, our Chief Financial Officer. Jeff?

Thanks, Tom.

On our conference call -- the last conference call and in the press release relating to the final 2002 results, we provided some financial targets for 2003. With the results of the first quarter now reported, we believe those targets are still appropriate for SCI in 2003.

Assuming France is owned for the entire 2003 year, we set forth a target of cash flow from operating activities of $350 to 400 million, which included approximately $94 million in tax refunds, which were received in the first quarter of 2003.

Our cash flow from operating activities in the first quarter slightly exceeded $183 million. This cash flow, coupled with excess funds on hand at year-end allowed SCI to reduce net debt which is total debt less cash and cash equivalents by about $193 million during the quarter, a reduction of net debt of more than 10.8%. SCI's net debt at March 31st was under $1.6 billion.

Capital expenditures for 2003, are still targeted in the 110 to 130 million dollar range. In the first quarter, SCI spent approximately $21 million on capital expenditures. Our existing near to intermediate term public bond maturities, as of April 30th, are as follows: April 4th, maturity, 111 million dollars; December 4th, '04 maturities $51 million; December '05 maturities $282 million. As of April 30th, our North American cash and cash equivalents was approximately $92 million.

General and administrative expenses for the first quarter of 2003 were $5.7 million higher than in the same period of 2002. Primarily due to increased systems amortization costs of $4.6 million and third-party professional fees associated with cash flow and profit improvement initiatives. We continue to experience increased costs in the insurance, pension and professional fee areas, although we have initiatives in place to try to reduce other overhead costs to compensate for these increases.

During the quarter, we received approximately $29 million of asset sales in North America and approximately $5 million of distributions related to debt refinancing of our Australian joint venture. We expect to be actively involved in joint venture discussions with respect to our French business during the second and third quarters of 2003. This business continues to perform very well, and we hope to find a partner that understands the significance value of this business.

Other income for the quarter was favorably impacted by $2.3 million of gains on purchases of our debt securities, and adversely impacted by $3.4 million of foreign currency losses on short-term intercompany transactions. The effective tax rate for the first quarter of 2003 was significantly higher than the rate in the same period of 2002, due primarily to the utilization in 2002 of SCI's tax loss carryovers in France.

SCI's trust funds had mixed performance during the quarter, with funeral trusts total investment returns down 2.25%, cemetery trust total investment returns down 1.81%, and endowment care trusts up 1.57%. Total investment returns include both yield and changes in the value of our securities during the quarter. The equity market rebounded in April so we are hopeful of better trust performance in the second quarter.

In conclusion, SCI's first quarter had strong cash flows, significant debt reduction and reasonable operating margins. The first quarter's decline in funeral volumes was mitigated in part by cost containment and improved cemetery margins.

With those remarks, we'd like to open the conference call to your questions.

If you would like to ask a question or make a comment, you can signal us by hitting star one on your telephone keypad at this time. Once again hit star one if you would like to ask a question or make a comment. We'll pause a moment to assemble the roster. We take the first question from Merrill Lynch's AJ Rice.

It's actually Chris Reed filling in for A J. Just a high-level question. The CDC data doesn't look quite as bad as what you guys did in terms of volumes. I was wondering if you you could make any general comments as to why you think your markets are worse than what we are seeing across the, you know, 120 markets the CDC polls.

Sure, Chris. This is Tom. I think when you look at CDC. First of all, I think we need to probably make sure everybody understands what this is. We operate in 89 cities within the CDC world and we monitor that. Within those 89 cities, you know, we're probably seeing slightly worse comparables to the CDC but we also base our market share because that's only 35% of the businesses that we manage.

So we have to look to other leading indicators. And as we look at those other leading indicators and consider the CDC statistics, information from our suppliers, looking at the results of some of our competitors, we believe the market share is very stable. It is very difficult to look at any one period.

Now, I will give you an example. Last year, the CDC reported in the first quarter of 2002, we reported that we had comparable number of funerals up. A lot of our competitors were down 2 and 4%. So we're comparing back against a quarter where we supposedly -- again, if you rely on CDC statistics, were growing our market share.

We really don't manage our business to the CDC statistics. It's a nice indicator but based upon all of our relevant research and the things that we control, we feel like our market share is stable.

Okay. Great. Do you -- is there any color on the outstanding litigation that you could provide, especially with regard to Florida? Is there anything there that you can talk about?

Really all I can say, Chris, is this. We work diligently every day. We're spending time on this issue, and, we're going to continue to do so. I really don't have any other information at this point in time that I can share with you. Only to tell you -- just to let you know that it's something we're dealing. With it's something we're working on every day.

Okay. And then the last maintenance question here and forgive me if you've talked about this in the past, but how much longer can we expect the -- you know the accelerated systems amortization costs. How long will that go on into the future.

I can tell you exactly. The accelerated depreciation will flow through the third quarter. So beginning of the fourth quarter this year we no longer have accelerated depreciation associated with the systems.

Great. Thanks a lot.

Moving on we go to Bill Burns with Johnson Rice.

Good morning. I'd like to circle back and follow up on Chris's first question. I would tend to agree, it looks like to me the mortality environment has been very soft for actually a very extended period of time. And I was just wondering what your thoughts were. Do you have any thoughts on why this is? Looking into the future, how is does your crystal ball look? Could we see a turn around and maybe more specifically, Tom, what's your strategy? How do you -- how do you deal with this?

Really, Bill, it's a lot of -- a lot of good questions and, you know, we never know what's going to happen with these things. You can only manage within the environment that you have.

You know, there's a couple of things out there, but all of it is theory. There's a lot of statistics that show, for instance, influenza deaths continue to trend down and, again, I think it's medical advances and the like. Influenza is the type of things that -- that make it very seasonal -- seasonable in our business. It would be a driver. So in the winter months, we're typically sought after. It appears on CDC and talking to suppliers and other people that that can have an impact.

We can't control it. All we can do is try to gain market share, and when the number of deaths and markets are there, we want to be there to service the client families. And so the things we can do is, again, focusing on our people, giving them the best tools possible for focusing on market share, actually asking for accountability through these local market action plans and begin to track it.

The other things we are doing, as you continue to see in anticipation for these types of things is taking could haves out of our business. If you look at the quarter, you know, we're constantly focused on improving our processes, in managing our cash expenses. So focus on that infrastructure can't ever be important enough in these types of environments and that's why we're very pleased with 5% down comp volume, which nobody could have predicted, we're delivering our results and we're improving our cash flows so that's what we can do and we'll continue to do.

No, no, I thought y'all did very well. And as a baby boomer, I'm not 100% disappointed in the soft mortality trends. I agree with you. Thank you.

Okay.

And moving on we'll go to Raymond James' John Ransom.

I was just sitting here thinking of the perversity of this conversation that we're disappointed that more people didn't die.

You said it, John, I didn't. [ LAUGHTER ]

It's amazing. The insular world of Wall Street. Just a couple of things. The -- could you give us -- just refresh us on the -- when we look at North America, and we break the funeral business down into cemetery and cremation could you give us an average price point for each in the first quarter and what the percentage growth was? I know you broke out cemetery but it would be be helpful to have the dollar numbers and kind of the -- so that we can get a better sense of the intraservice pricing trends, if you will.

John, this is Eric. There are really two pieces. We'll look at the traditional type internment funeral call and the two pieces of cremation. As you know, we [vipricate] cremation in our statistics in terms of an immediate disposition and then a cremation with some type of memorialization or service as well. The average revenue for the traditional-type service that I mentioned is about $5600. And 4.3% up compared to the prior year. And as Tom mentioned we continued -- and in the press release, we continue to see traction with the types of products and services that we're offering in our dignity memorial package funeral plans.

What is your dignity percentage now, Eric?

The dignity percentage on a [pre-dignity] basis up around 18%. And on [INAUDIBLE] basis it's a little less than that, it's about 16%. And both of those instances are carrying averages of about 26 to 2700 dollars over the traditional non-dignity type plan.

Now, is that -- that 18% that's down, wasn't that more like 30% in quarters past?

John, actually, we've redone the definition of the terms. I think when we reported it in prior years we talked about percentages of relevant cases and so we used to talk about it, and talk about people who had a pre-need would be excluded. We felt it more appropriate because what really impacts the revenue to begin disclosing the total percentage of funerals that we perform.

And the Q1 '02 percentage on an apples to apples basis on the pre-need would be 14. So we went from 14 to 18 and the other went 12 to 16.

Okay. That's helpful and on the cremation side.

Continuing with cremation. The immediate disposition is carrying an average of about 1400 dollars and that's basically flat quarter over quarter.

Yes.

Cremation with service is carrying an average of $2500 and that's up 6.3% and when you blend those two together that's where we quoted the 3.6% total cremation increase in the press release and, again, going back to the cremation with service, you are starting to see success in the cremation packages as well in terms of dignity memorial packages.

Is it two-thirds the cremations with memorials running two-thirds of cremations.

Yes. Well, it's a little less than that. It's probably around 60% cremations with service.

60%. And is that up or down, quarter over quarter?

Flat.

That's flat. Okay. And then just moving on to cemetery gross margin, not to descend into the weeds of cemetery GAAP accounting on a quarterly basis but I think people who don't live their life in this business every day continue to be surprised by the quarterly bounces and gross profit dollars both positive and negative. How much of -- I mean, an imprecise question, if you will, but how much of the move in margin do you attribute to non-material changes in, you know, GAAP relative to, you know, selling different types of merchandise, versus true improvements in terms of day-to-day cost reductions. Could you give us a little more color on the cost reductions. Are these kind of gross margins indicative of what we ought to be looking for or will we continue to see big bounces on a quarterly base basis.

Well, you will see big bounces from time to time, and let me explain what the big bounces should be.

Number one, cemetery construction is a highly volatile item and you may recall from talking about it in the past, we finished constructing something that's been pre-sold, we recognize that revenue in the period. So you could see from quarter to quarter spikes related to that. We'll always separately disclose that and talk to the numbers.

The other thing that could be slightly volatile are the trust earnings. You know, this year we talked about it being down $3.2 million. The things that are very predictable and our core cemetery business, we go back to what are we selling and what does it cost to sell it. And we've got, what I define as two real successes here. Really -- really three, but I will put two together.

One is we made some dramatic changes to the infrastructure cost. We reduced the cost associated with the cemeteries pretty dramatically. That's cash flow, it's recurring and it impacts your margins. It doesn't impact all the margins, because some of the cash savings get deferred into the backlog.

The second piece that we're really excited about is we're really investing in our cemeteries to diversify the opportunities for our client families. We're putting in, you know, different tiers of inventory within the cemeteries and we're finding that client families are selecting much higher value properties on average. They like investments we're putting in and so we're beginning to see some traction, even though we're interrring less people because of the death rate, we're able on the property side to grow our revenues because we better value products that our client families are selecting.

So the -- how -- you know, just to go back to you're tenure of how much costs have you taken out of the business on a permanent sustainable basis since you started this process back, you know, mid-last year?

I'm sorry, could you repeat that? I just didn't hear you.

I'm sorry. How much costs have been taken out of the company since mid2002 do you guess?

Well, I think from there's a variety of areas and do have any specific cost for you. I will tell you this --

I was just looking for one simple answer. [ LAUGHTER ]

One simple answer I can't give you.

That's too bad.

I will say, we believe they are significant. They continue to trend the direction you like to see.

Okay.

The things that you are seeing today are probably more related to the sales changes we made. We believe there's further enhancements that you are going to see in some of the true infrastructure costs. We have a lot of projects right now focusing on the processes behind the field that we believe will begin to show some traction in the latter part of '03 and really in the beginning part of '04. So...

Do you think you've taken half the costs out you will take? Have you taken a third of the costs out, two-thirds of the costs out? What should we look for there?

Over what time period?

Well, let's say mid '02, to the end of 2004.

I would guess the way I would define it is from a cost perspective, you know we're somewhere in the midpart of that range. I think there's more to go, but we're not -- we're not close to finishing line yet.

So what you started with with sales force, payout, sales force infrastructure and now you're moving into the structural G&A side, is that a fair characterization.

That's a very fair characterization.

And then finally on France, how deep is the lineup of prospect prospective buyers? Is it bigger than a bread box? When you mention second and third quarter, is that kind of a process that -- where you might have -- a transaction closed or you might have a transaction circle with an end-of-the-year closing and do you have any more conclusion as to when you might become a cash taxpayer? Is there any more clarity on your cash/tax position and I will stop there.

Okay, I will let Jeff answer the last one. To your first question, it's -- it's quite a line. It's -- we're very pleased. We have a lot of interest, and so we -- we believe we surely will have some form of transaction.

With regard to timing, we've always said look for it probably in the very late third quarter, or probably more realistically in the early part of the fourth quarter. But we're going to be working on now, like we said before, we're focused on the due diligence, focused on getting all that buttoned up and to begin a marketing process sometime here in the near future, which can result, eventually, in in the closing of the transaction.

You may recall in Europe, you know, a lot of times the summer months are difficult to move along and so we're anticipating, you know, as it drags into the summer, it will probably fall, like I said the latter part of the third quarter and the fourth.

And I will turn it over to Jeff for your tax question.

Our taxes are currently under audit for the years 2000 and 2001, John. And obviously we don't know to what extent we will get adjustments proposed by the Internal Revenue Service with that. But if -- if the adjustments there are not consequential, I think there's a good possibility the company may not be a cash taxpayer through 2005. That would be based not only on the deductions that we have claimed on the various returns but on the potential deductions that we would have available, should we joint venture or sell our South American properties.

Thank you very much.

And before moving on, I would once again like to remind our phone audience to press star one on the keypad if you want to make a comment. We go to Bear Stearns' Jennifer Childe next.

Thank you. Could you break out France from the total international revenues and gross profit?

It will be in the Q this afternoon. That will be filed. I don't have those -- those revenues exactly in front of me. The -- on this South American side, we had about $7 million of international revenues, and on the -- on the international side, on the funeral side, it's about $139 million of international revenues.

I think about $135 million, Jennifer, of 139 is related to France and the funeral in the quarter and that compares to 112, but have you to remember there's a lot of currency FX effects in there where we got a benefit. If you take out the currency, then your revenues are just slightly up, probably a couple million dollars. So around 112 to 114 for France this year, versus 112 last year in terms of revenues.

Okay. And I may be asking John's question a different way. Is it possible to break out your cemetery results according to property sales, changes in estimates, trust earnings, et cetera?

The mix has definitely shifted to property, as Tom has mentioned. I mean, when you look at the total mix itself, from a pre-need revenues, it's close to 60% is coming from property and this time last year, and the first quarter of '02, was more in the low 50s. So there's been a significant shift to the property and, of course, that's come out, equally out of merchandise and services as well. As far as trust income, I think that was one part of your question. Tom already mentioned it's down about $3.3 million which is about 30%, it's significant. It's down to about $8 million from $11 million range.

I think --

Liability relief is not material for the quarter, nor was it -- I think from a gross profit line, Jennifer, it's about a $1 to 2 million difference and I think we had a million for the quarter so it was probably 2, 2.5 last year. Its not a big piece to this puzzle going forward.

Jennifer, on the revenue side, we had an increase in construction revenue, but as you compare this quarter to last quarter, we had an offsetting decrease in the changes in estimates of deferred cemetery revenue so we look at those two items as kind of unusual items, that don't necessarily reflect the success of the cemetery. So -- so those two really offset each other, so I think what you are seeing is a real apples-to-apples within our cemetery margins.

Also, remember, Jennifer, that the cemetery -- the trust earnings are very high margin, obviously from the aspect there's very little cost associated with that.

All right. Okay. Were there any other non-recurring components of cash flow, any special trust receipts, anything like that?

No, there was just the two tax refunds that we disclosed, Jennifer. As -- as what we would call some you would back out if you want to do that type of calculation.

And finally, what was restricted cash at the end of the quarter?

We had a little over $30 million in restricted interest bearing accounts and that compares to year-end of about $24 million.

Okay. Thanks a lot.

And up next we go to Debbie Downey with Miller Tayback.

Hi, can you hear me?

Yes.

Great, congratulations on paying down your debt, you're doing a good job in this environment. Three easy questions. One is basically on your debt, looking at the balance sheet, it looks like the -- at year end, the 6.3 in '03 is gone and your sixes of '05 are down to $282 million outstanding are those the only significant changes that I make to your debt?

We'll be publishing in the 10-Q a complete listing of our debt and that will be filed shortly.

It will be filed tonight.

Okay.

So you will be able to lock at all of those numbers for each of the issues, the bond issues at that time.

And after the end of the quarter did you make any more purchases of debt?

Yes, but not -- not -- well, we normally don't disclose that. Yes, we have.

Okay. And then second, if you can just go over when you talked about your revenue growth, you said that you hope to do it from a strategic property development in cemeteries and investing in new funeral homes and maybe some acquisitions in certain metropolitan areas. Can you give a little more detail.

The only detail I will give you at this point in time, is we are currently investing in the cemetery property and some of that is showing up in the results today and we anticipate continuing to do it. As far as acquisitions go I think we mentioned the last quarter, we're in a position where we're able to do that and we have conversations with folks from time to time. We do -- we are seeing, continue to see, a marketplace that just hasn't come back to prices that we want to participate in. So we'll continue that to have conversations and we may do an acquisition from time to time here. It's not something we think is going to be significant in the very near term.

And obviously, you know, you will finance that with -- you know, not with debt, right?

We'll finance it out of our parent cash flows.

Okay. And I see during the quarter, S&P, I think changed your outlook to stable which is a good direction. Have you been speaking with Moody's?

Yes. We are speaking with both credit rating agencies and I think they see the trends with the company are favorable and I would hope that they'll continue to react to that.

Okay. Great. Thank you so much.

And once again as a final reminder, press star one on your telephone keypad if you would like to ask a question or make a comment. Up next we go to Lord Abbott's Gregory McCostco.

Yes, thank you. Very nice quarter. Could you talk a little bit about the cemetery with regard to the property -- the developed property sales? That -- I guess that clearly accelerated. Can you continue to do that going forward?

Yes, we think we can. We're -- we're beginning to -- like we said before, invest in the property development of cemeteries and really offer our client families a wider array of choices. We're finding them selecting better properties. We're also investing a lot in our people. We've got focus on training our people, and they will be trained in -- in the areas of cemetery and funeral.

So we look to continue to increase our sales on the prearrangement front, both on the funeral and the cemetery side because we've gone through a lot of changes and with change, we've seen some revenue dropoffs and production revenue dropoff and we're focused on developing our people, and we -- with those investments in the cemetery, we look for it to be a continuing trend.

Would you say that the -- is this where some of your capital expenditures are going to develop that property so it's sort of inventoried and ready to be sold.

Correct. I think you will see some of these being called the strategic investment in our cemeteries and we classify that historically.

Is -- would you say that is where the difference -- I mean, I notice that you had about $4.1 million in capital expenditures beyond sort of maintenance level. Is this where that goes or is that within the maintenance area?

No that's where it goes and you are seeing some of that investment. Again, these are things that get invested and have a long, useful life because these items in the cemetery take time so sell but we believe we're starting to see the results and it's showing up in the profits and revenues.

And in effect you're seeing sort of a higher dollar sale per plot or piece of property?

That's very fair to say, yes, sir. And I would also add on, we mentioned a little bit earlier, we also continue today to build funeral home facilities on our cemeteries. When we talk about the strategic investments we're investing in the funeral home building sites today in the cemetery property, and we're not yet, like I said, very active in the acquisition world but we believe over time, that that will change.

Okay. And in the release, you talked about increases in G&A, for third party, for cash flow and IT investments. What was that? I mean, could you give me a sense of third party?

I guess you said it in the release, excuse me, in your discussion here. Could you talk about that for third party cash flow and IT improvement?

Yeah, I think the comment was that part of our increase in G&A expenses were payments made to third-party professionals to improve our cash flow and our earnings and we had several consultants that we engaged last quarter. We actually had some of these costs occur in the fourth quarter too where they had given us some advice and we had made some changes in our business to improve our cash flows and to improve our income. Some of the benefit of that will come throughout 2003 and into 2004. But the fees that are associated with it were paid in either the fourth quarter or the first quarter primarily. And I would think those fees will go away; however, I might add that in light of section 404 certifications for Sarbanes Oxley, we're also having to retain some additional professionals in that area so we will continue to incur some professional fees going forward. That hopefully eventually will decline as we, basically meet all of our needs here.

Good. And then on the other current assets line, there was a change on the year-over-year basis of about $93 million, I think.

That's the -- that's the $94 million tax refund that we received this quarter, Greg.

Okay. All right. Thank you. I didn't understand that. Okay. Very nice. Thank you.

Thank you.

Moving on we'll go to Glenview Capital's Abe Brokgene.

Two questions that are housekeeping. I missed the first maturity in the debt structure $111 million what was the date of that?

April of 2004.

'04, thank you very much. Can you tell me what is the percentage split that's between cremations and funerals in the at-need customers?

Well, it's -- it's the -- within press release is that we had around 39%, and now that includes pre-need turn and the pure at-need, I think. I think you asked us to what the pure at-need, and I'm not sure I have that in front of us, we'll have to get back to you on that.

Do you know without knowing the number, necessarily? Is that percentage cremations still climbing?

Yes.

It is?

Yes, it is.

Does your survey or work or anything you've done give you any kind of a clue as to where you think that will level out?

Well, first of all, I think cremation is, again, a very local issue. It's real easy to try to nationalize an approach but you will find in certain markets, cremation even going the opposite direction. But for the most part, generally in North America, it's been growing between anywhere between 100 to 150 basis points a year. You know, the only evidence we ever have -- it's always difficult to tell, have but there there are societies like Australia and the United Kingdom that cremation has been prevalent for some period of time and those typically stabilize somewhere in the, you know, 65 to 75% range. Does that mean the United States will? We have no idea. You know, each country has got its own cultures and customs. But as the United States has immigration and from different parts of the world, that's what's going to impact it.

And is there any difference that you can effect in the -- that ratio with respect to the age of the -- of the people who are being buried or cremated? Are younger people more likely to go for cremation or older people? Is there anything of that?

That's probably generally true, yeah.

Younger more cremation?

Yes.

Okay. You didn't mention acquisitions, except briefly to -- can you just sort of update us on what that market looks like? Last time we heard the buyers were still hopeful of getting yesteryear prices. Anything getting close enough to reality to really be thinking that we might see some activity again?

Really nothing we can talk about, but I would say that we are seeing, in certain instances people becoming much more realistic and getting closer to where we want to go. But, again, we'll determine what the prices are, and when -- when people get within our range, we'll have transactions but we're seeing a little more realism in certain pockets of the world.

Okay. The cash, you said -- I'm sorry? Cash in North America, of $92 million.

Right, as of April 30th.

Right. Oh that's as of April 30th. And is it -- is the balance all in Europe or does the balance include the restricted cash?

No, we don't include the restricted cash but we have excess cash balances, both in Europe and Latin America that would have to be added to that to come up with the appropriate total numbers and I didn't add those numbers as of April 30th.

Okay. And -- and I -- there is some penalty for bringing that kind of cash back, generally. If you succeed in JV-ing France, will that give you an opportunity to, repatriate the cash through the purchase of the JV interest by the other party without a tax hit to that cash, or will there be a tax cost of that, any return of that cash no matter how it's done?

When you have a foreign operation that you sell, that has earnings and profits to the extent you have a gain under the tax code, you must report that gain as ordinary income to the extent of those earnings and profits. So we probably will have some small tax cost associated with joint venturing of our French operation; however, we have other tax loss carry-forwards that I mentioned previously, and as we have looked at what impact that will have on us, we don't think it will be that material to where it would affect the advice I previously gave on the call.

Okay. Great. And in -- did -- did I miss -- was there a number for the French operation EBITDA? I see the gross margin was about $16 million, but did I miss the EBITDA number?

The EBITDA number in France, if you go through, and -- and calculate it, you will have to do it in the Q, essentially to get the segments but it should be somewhere around 19, 20 million U.S. dollars.

And, of course, EBITDA is not a GAAP term, and I think what we're talking about there, as we reconcile that to GAAP the operating income we're reflecting in France is essentially like an EBITDA because there's no depreciation and amortization in our French numbers, as it is being held for sale.

I'm not sure I understand that. Could I -- is there --

Well, once --

Maybe I will do that offline. I don't want to burden everybody else. But you say $19 or 20 million. That's something that I -- I have trouble reconciling. Your statement on page three says that gross profits increased 2.7 million or 16.9% that grosses up to 16 million of gross profit, how is EBITDA greater than that by so much?

I think we include some other income as well in our calculation of EBITDA.

Okay. Okay. And forgive me for this one, but you reported diluted EPS of 13 cents?

That's correct.

If I take the net income 42,269 and divide by the diluted weighted average number of shares on that same page 7, it comes up 12.1 cent. Is there --

You have you to add --

Is there something --

You have to have an interest add-back. I don't have that calculation in front of me but that's your difference. I can do that offline with you.

Okay. It's not arithmetic error, there's something to be added.

When you treat the convertible securities as if they've been converted, have you to get back some interest.

Of course.

Associated with that.

Okay. Okay. That makes -- that was silly of me, I should have caught that.

Okay. Great. Thank you very much. Appreciate the call. Very detailed and very informative.

Moving on we'll go to Tack Chang with Searchlight Capital.

Yes, good quarter. Just a question regarding your North American comparable service numbers. I'm just wondering, what -- what kind of trends have you seen, you know, in the past month or so, and do you -- do you -- have you seen an improvement in -- and, you know what sort of numbers can we expect going forward? For comparable services?

I we could tell you going forward, Tack, we have no idea. But I will tell you for the month of April, what we saw was the early part of April went down not as severely and the latter couple of weeks in April we saw that trend, you know, go the other direction for us, in a positive way. What -- what May holds or June holds we have no idea at this time.

Would you be able to tell us exactly what April is or is -- if it's at least better than negative 5%.

I would rather not because a lot of the numbers I have seen are preliminary. Like I said, I think what I would guide you towards is, you know, April is not going to be as bad as the first quarter but we continue, at least in the first part of April to see a negative trend.

Okay. What about in terms of your average revenue per funeral? I mean, can you comment on what sort of increases we can expect for that going forward? For funeral?

You know, again, we did 2.6% in comparable North America for the first quarter. You know, I would think somewhere around that, you know, trend should continue, but -- but it will be volatile, you know quarter to quarter. But looking for those types of -- I think as I look out over the rest of the year that's not reasonable to assume something like that.

One more question on gross margins. Your gross margins was also in the high end of your guidance for North American funeral. I mean is that type of number sustainable for the rest of the year? And on the cemetery side, you know, what kind of gross margin can we expect, you know, going forward?

Well, keep in mind that the first quarter seasonally for funeral is the highest margin quarter so from an historical perspective, we always assume the first quarter to be higher than the year levels.

With regards to cemetery there can be some volatility. We talked about before associated -- associated with trust earnings and associated with completed construction contracts. What we try to do is really manage performance of our cemeteries based on the improvement in the core operations.

Predominantly the improvement you have seen is related to the core operations. We will have some volatility in the second and the their quarters related to year-over-year changes in the cemetery construction but we'll break those out for you and give you a real understanding of what's happening in the cemetery lines.

Okay. Great. Thank you.

Okay.

And at this point we have no further questions. Mr. Waltrip, I will turn things back to you.

Thank you for participating in this call. We look forward to talking to you at the next quarter. Thanks again.

That concludes our program. Thank you for your participation and have a pleasant day, everyone.