Service Corporation International (SCI) 2003 Q3 法說會逐字稿

Good day and welcome to the Service Corp. International third-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.

Thank you. I would like to welcome everyone to this call. We will have some prepared remarks, then we will have available time for you to ask questions. I would now like to turn the meeting over to Eric Tanzberger for his cautionary statements.

Thank you for joining our call today. I want to remind all of the participants on the call that certain statements could be made today that are not historical facts and are actually forward-looking statements made in reliance on the Safe Harbor protections provided under the Private Securities Litigation Reform Act of 1995. These statements are based on assumptions the company believes are currently reasonable. However, many important factors could cause the company's actual results in the future to differ materially from the forward-looking statements made today on the call or in any other documents or oral presentations made by or on behalf of SCI. There are important factors which could cause actual results of the company to differ materially from those in these forward-looking statements. Those factors are listed in our press release this morning, and also on our Form 10-Q which was filed with the Securities and Exchange Commission earlier this morning. With that, we will move to our prepared remarks and I will pass the meeting over to Tom Ryan, our President and Chief Operating Officer.

Thanks, Eric. As many of you will recall, from our previous communications, cash flow has been the principal element of our guidance and our driving objective to how we run our business. Cash flow has allowed us to delever the company historically and will afford us the liquidity to continue to delever and invest in high return on capital projects to grow the company over the long haul. For this reason, I am very pleased to report improved operating and free cash flow that continue to exceed our initial expectations.

Additionally, excluding litigation accruals made, we're pleased to report earnings of 5 cents a share this quarter. Our North American funeral profits were disappointing as lower volumes, trends in cremation mix, higher personnel costs took their toll. North American cemetery revenues were predominately where we expected them to be. As we anticipated, lower construction revenues as compared to the prior year. Finally, our operations in France continued to perform very well. Our thoughts and prayers continue to be with those families in France that were so dramatically affected by the national tragedy that resulted from the unusual heat wave experienced this August. Our company, our people, responded with honor and professionalism during this well-publicized tragedy. Being the largest Funeral Services provider in the country with a 165-year-old national brand, the spotlight was squarely on us. The response of our people was nothing short of spectacular. People from all facets of our organization came back from family vacations and worked tirelessly around the clock providing resources, facilities, vehicles, equipment, and grief counseling. Emergency temporary facilities were set up especially throughout Paris, and I personally want to thank each and every one of our employees for their extraordinary efforts.

As I have communicated to you previously in our 2003 outlook and guidance, we believe that over the course of 2003 and 2004, there are a number of tactical items that with appropriate focus and execution can drive near-term performance, improve the quality of our earnings, and the delivery of our cash flows. Most importantly, these items will also provide the solid foundational base that combined with the change in our corporate culture will provide the platform of our future growth. While reduced funeral and cemetery volumes, the cremation mix changes continue to put pressure on our revenues and margins. Some of these tactical items are having a favorable and meaningful impact on our results for 2003. The first item is the cost savings associated with the changes made to our sales operating structure and the related processes launched during the first quarter 2002.

Second, the continued success of our Dignity Memorial packaged funeral plan sales initiative. Third, the impact of our focus on developed 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 our future revenue growth. Finally the development of high-end private family estates and semiprivate family estates which enhances the value of our cemeteries and provides our client families with a variety of choices in selecting cemetery property.

As we look out over the coming 12 months, we expect to begin to see reductions in costs associated with the following. Number one, the outsourcing of our accounts payable, payroll and trust administrative functions. Number two, the implementation of our new financial and point-of-sale systems, and number three, the further refinement of our operating management and field support structure that is made possible by our upfront investment in technology and process improvement. Having simplified and standardized our sales approach and redesigned our financial, technical and administrative infrastructure, it is appropriate to further streamline our management overhead structure centered around our commitment to the Dignity brand. All of these initiatives are either currently in place or in the process of being implemented.

Now, I would like to review with you our operational performance of the third quarter 2003. Comparable North American funeral revenues were essentially flat for the third quarter as compared to the third quarter of 2002. Lower funeral volumes and increased cremation volume mix and lower levels of general agency revenues, associated with the expected decline in insurance-funded prearranged funeral sales were essentially offset by a healthy increase in the average revenue per funeral service.

We experienced a funeral volume decrease of 1.2 percent for the quarter as compared to the prior year quarter. We believe that this reduction in call volume for the quarter in year-to-date period is on a national basis primarily attributable to lower numbers 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 feedback from our major industry suppliers.

During the third quarter, CDC statistics for the 89 markets in which we operate show a 2 percent decline in the number of deaths reported while we experienced only a 0.6 decline percent decline in those same 89 markets. Data available from our public competitors shows similar declines during the quarter. While one of our major industry suppliers experienced more extensive declines during the period. While our comparable North American volume shortfall of 1.2 percent compares favorably to some of the available statistics, we believe marketshare can only be measured on a long-term basis and really is only relevant on a local basis. On a year-to-date basis, the CDC statistics on the relevant 89 markets shows a 2.8 percent decline while our comparable markets show a 2.2 percent decline.

We are seeing improvements in California, in the Northeast. And declines in Florida and parts of the Gulf Coast. Also, our customer satisfaction surveys continue to trend positive. Therefore, given our emphasis on local market action plans and the development of our local management, we believe that our local marketshare on a national basis is solid. Our average revenue per funeral for the third quarter of 2003 increased by 2.2 percent above the prior year quarter. This is due mainly to the increased success of our Dignity Memorial funeral and cremation package plans.

Today, approximately 16 percent of the total of consumers we serve on an at need basis select a Dignity Memorial package plan. Remember Dignity burial plans average approximately $2700 per case more than the non-Dignity burial plan. The Dignity cremation averages approximately $1700 more than the non-Dignity cremation average. This favorable impact is partially offset by the negative impact from a cremation mix increase of approximately 100 basis points during the quarter.

For the third quarter, our comparable North American funeral margin was 13.8 percent versus 16 percent in the prior year. The gross margin decline was primarily the result of the flat revenues from funeral operations compared against fixed cost structure of the company's funeral network. Increased salaries and fringe expenses primarily from higher pension benefits and insurance costs were somewhat offset by reduced expenses associated with the company's prearranged funeral sales efforts. Comparable North American cemetery revenues for the third quarter decreased by 11.7 percent or 18.3 million as compared to the prior year quarter. As discussed on our last earnings call, the anticipated reduction is primarily attributable to fewer cemetery property development projects constructed and recognized in the third quarter of 2003 as compared to the third quarter of 2002. And, to lower levels of cemetery merchandise delivered during the quarter.

North American cemetery gross margin decline was impacted primarily by lower level of revenues from cemetery property development projects and was partially offset by a reduction in selling costs. Additionally, cemetery fixed cost increased in the third quarter of 2003 as compared to the prior quarter. Personnel costs increased due to rising pension and health care costs and cemetery maintenance expenses were higher in our continual effort to bring certain cemeteries in line with company standards.

As I mentioned earlier, the French market was severely impacted by the tragic events associated with an unprecedented heat wave. Excluding the favorable currency effect, our funeral revenues increased by 15.2 million or 13.3 percent. Funeral cases were 18.5 percent or approximately 5600 cases above prior year quarter levels. Improvements in average case per contract of 4.3 percent were offset by reductions in revenues from monument installation revenues as people from all facets of our company were called upon to deal with this crisis. Our margin percentage increased by 140 basis points to 10.8 percent versus 9.7 percent in the prior year quarter. The gross margin improvement was predominantly caused by the absence of 4.6 million in depreciation expense as compared to the prior year as a result of currently pursuing a joint venture transaction in France.

Considering the growth in revenues, gross margin comparison was negatively impacted by changes in legal reserves, regulatory issues, and predominantly due to significant costs incurred by the company working with the public authorities to deal with this large scale crisis. As we move forward into the fourth quarter of 2003, and into early 2004, we will continue to execute on our near-term initiatives which should enhance the quality of our earnings and reported cash flows. Favorable impacts from the reduced through cash costs of our management and support services infrastructure will be partially offset by reductions in nonrecurring reported revenues from cemetery construction and from a higher effective tax rate. We will be in a position when we release the annual results to give more color and guidance as it relates to 2004.

Based on our experience to date this year, it is our belief that we will now be at the upper end or exceed the annual range of guidance for cemetery margins for 2003 of 9 to 13 percent. However, if we continue to see the funeral volume levels experienced in the first nine months of the year our funeral margins should fall in the lower half of the range of guidance provided of 18 to 22 percent. Let me be clear. Our revenues and margins are not where they need to be. We can do much better. We will do better. We surely recognize the long-term success of SCI can only be achieved by delivering top line growth in a challenging revenue environment. We are working diligently on our long-term growth initiatives which focus on delivering revenues, through three primary avenues. Number one, investing in revenue growth in our existing business through more contemporary marketing of Dignity Memorial brand which includes promotion to relationships with strategically aligned Infinity partners. Utilization of effective merchandising tools in our funeral locations and continued investment in strategic cemetery property in our existing cemeteries.

These strategies are our primary focus today. Secondly, growing our strategic acquisitions. Growing through strategic acquisitions of funeral homes and high internment cemeteries in large metropolitan markets. Construction of new funeral facilities and to the continued growth of our franchising network. This will come slowly as businesses come available and we solidify the Dignity standards, certification, training and value for potential affiliates. Number three ensuring that we attract, hire and develop and retain the best and the brightest we possibly can. This emphasis on leadership, development, 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.

Thanks, Tom. In our first quarter conference call we set a target cash flow from operating activities of 350 to 400 million for the year 2003. Including the 94 million tax refund received in the first quarter. Through September 30, SCI generated cash flow from operating activities of $304 million or 329 million year-to-date excluding litigation related payments. We still believe our 2003 target is appropriate, and expect to finish the year at the upper end of the range. SCI's total debt less cash and cash equivalents at September 30 was 1.55 billion which is only $25 million lower than such amount at June 30. During the third quarter, SCI funded over $21 million of litigation related payments net of 13 million of insurance proceeds, and over $32 million of capital expenditures which utilized most of our quarterly free cash flow.

SCI also received $18 million of divestiture proceeds during the third quarter of 2003. We increased cash deposits with insurance companies by $19 million to free up $19 million of letter-of-credit capacity and reduced our net interest cost. SCI's targeted capital spending of 110 to $130 million for 2003 which includes both growth and maintenance capital, still seems appropriate at this time. SCI's general and administrative expenses in the quarter included $32 million of litigation related costs. These litigation related costs pertained to settlements and expense accruals for certain litigation. Because certain of these cases are still pending, SCI is not able to provide further details at this time other than to say that the company accrued amounts appropriate under applicable accounting standards, based on the analysis of our legal counsel and discussions with our outside auditors.

The company has a substantial base amount of insurance coverage which it believes is applicable to these litigation related matters. Although there are various unresolved coverage issues relative to such insurance. For that reason, the company has not accrued an estimated receivable for insurance recoveries. Such receivables are recorded when they are likely to be paid and can be reasonably estimated. When the litigation related costs are excluded, third quarter general and administrative expenses are down about 7.6 percent or $1.7 million due to reduced maintenance costs relating to information systems. When litigation related expenses and accelerated amortization of systems costs of $4.6 million are excluded, year-to-date general and administrative costs are approximately $1 million higher than in the prior year. We expect these costs to decline in 2004 absent unusual items.

In the fourth quarter, SCI will not incur the $4.6 million of accelerated amortization of systems costs. In the fourth quarter, there is a possibility that SCI will receive proceeds from the sale of its interest in its Australian joint venture which is going public in Australia. A successful offering would provide 30 to $50 million in cash during the quarter as well as a substantial gain on this divestiture.

Also, in the fourth quarter, we expect to implement the newly required accounting standard FIN number 46 which will involve a pretax non-cash charge of 20 to $30 million. It will require that SCI consolidate some SCI managed but not owned, nonprofit cemeteries and possibly our trust funds. SCI's other income in the third quarter of 2003 was lower than in the same period of prior year due to gains in 2002 related to purchasing SCI debt securities at a discount to par. SCI's tax benefit for the third quarter loss was 40 percent as we incurred some low tax gains and income in international markets which impacted our rate favorably from the rate used in North America. We expect a more normalized tax rate to be in the mid 30 percent range for future quarters absent unusual items.

SCI's $2.3 million of funeral, cemetery and merchandise and endowment (indiscernible) trust performed well during the third quarter of 2003 with the following total returns for the quarter. These returns include the impact of both earned income and changes in portfolio value but do not include the trust management fees in related costs of 1.1 percent per annum. The funeral trust had a positive quarterly return of 2 percent. The cemetery merchandise and service trusts had a positive quarterly return of 3 percent, and the endowment care trust had a positive quarterly return of 0.8 percent. In addition, the current market value of our portfolio trust investments at September 30, 2003, exceeded our costs of the investments in the trusts. Our cash balance pension plan had a good total return performance for the quarter also up 4 percent. The fair market value of the assets in the plan at September 30 were about $74 million. The projected plan liability using a 6.25 percent discount rate is estimated in value to be approximately $111 million.

SCI's liquidity remains strong at September 30 with approximately $164 million of cash and cash equivalents and approximately $118 million of borrowing capacity under our bank credit lines. And only $132 million of debt maturing on or before September 30, 2004. We continue to work with potential partners in joint venturing our French business. We expect this transaction to occur late this quarter or in early 2004. With those comments, we will now turn to the question-and-answer phase of this call. +++ q-and-a.

Today's question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) A.J. Rice of Merrill Lynch.

Thanks a lot, hello everybody, just a couple of different questions. First of all to clarify, on the FIN 46 adoption, other than the onetime adjustment in the fourth quarter is there any ongoing accounting impact for you looking into next year?

I don't believe there will be material ongoing accounting impact but we need to understand how the rule applies better to our industry. There has been some recent developments in that and we are trying to get clarification from the accounting firms and perhaps even from the SEC as we speak, A.J.

Okay. I appreciate your comments about the incremental litigation costs and not being able to say a lot about it and I guess we did a quick check of your 10-Q, it doesn't seem like the disclosures materially changed on that unless we're looking at the wrong area. Is there any way to at least say when you might be able to disclose where you stand? Are most of the accruals that you are taking related to one of the outstanding issues or does it go across all of the issues?

It goes across a broad number of issues. I think we referenced footnote 6 says total accruals of about $32 million outstanding with respect to those items. We really can't say a lot about it. Obviously, the most opportune time to be more forthcoming in disclosures is either after something is litigated or after it is settled.

Okay. Is there any reason to think that there is some near-term announcement forthcoming on those issues? You just cannot get it done by the time you released the earnings or is that still sort of hard to predict?

There is nothing imminent. I can assure you that we're spending a fair amount of management time on those related issues.

Sure. Finally on the business, if I just look at the North American trend which obviously Tom talked about in the prepared remarks. Looking at it sequentially year-on-year I guess the dollar for dollar dip in revenues is met with similar amount and even greater amount drop in gross profit. And I understand there is a lot of leverage in the business, but is there some dynamic going on of underlying costs trends or somehow accelerating a little bit? Is your average yield on the prearranged funerals as it comes to fruition versus what you are getting on those prearranged funerals coming at need? Has there been a deterioration in the revenues there? I guess I'm trying to understand why the impact on gross profit is probably even more than I would have thought recognizing the business has a lot of leverage in it?

I think first and foremost we have highlighted a few expenses from time to time that occur. Number 1, and many companies are suffering this issue, health care costs have gone up dramatically. Insurance costs across all lines of business post September 11 probably as you recall have been up dramatically again. We continue to manage those down. The last piece that is unique to us and we mentioned it on a number of occasions is our pension cost year-over-year just continue to skyrocket. The reason for that is under U.S. GAAP accounting there is a deferred loss.

In other words, we have recognized losses within our pension fund and under U.S. GAAP accounting you amortize that loss over I believe it's a seven-year period. We are now seeing that amortization of loss flow through pension expense, and it is hitting us pretty hard as it relates to costs both in the funeral side and on the cemetery side. Those are predominantly it. The other issues I would say is from the revenue perspective, our previous backlog revenues continue to go up or get closer to our at need average. The one impact that is hurting us is probably (indiscernible)in cremation mix. Not a dramatic decrease in costs associated with that loss in revenue. So, I think adding those together probably explains a little more what is happening at least on the funeral side of the business.

Maybe I will just slip in the cemetery development projects completed you had said obviously that is impacting year to year, that you have less this year than last year. And you said that would be there for the fourth quarter, when do you anniversary those tough comps on that side?

I think it is kind of a trend, its a trickle-down effect. We had quite a bit in 2002. We are trending down a bit in 2003. I think our worst anticipated quarterly comparison was this one. I don't see the fourth quarter being all that punitive, as a matter-of-fact it can be slightly down to flat. As we get into next its always very difficult because you really have to sit back and think when are you required to build something and when should you build something. What is your business rules around building? We are putting that together today. One thing I know for sure from preliminary analysis is it won't be higher than this year, it will most likely be lower. We don't know the timing of that yet by the quarter, because we probably can give you better guidance about what we anticipate in the January or February call I guess we will have for the quarterly results.

Okay. Thanks a lot.

(OPERATOR INSTRUCTIONS) John Ransom with Raymond James.

Good morning. Just a couple of points of clarification. Do you all still believe that free cash flow even though it is non GAAP, is that still the best way for outsiders to measure your confusing business?

Good point, John. I think it is the best way to view it. We kind of feel like cash is what is going to keep you going, cash is going to allow you to delever. Cash is going to allow you to invest in a high return project. We sure monitor free cash flow. I think it is important to understand the components of free cash flow. (inaudible) the total we are continuing to drive, that, we have identified some things on the horizon that could have a negative impact on it. And those in particular are as you know when we switched from bonding to trusting in Florida, potentially we looked at the French business going away that is going to have a slight impact. But, in taxes as well, currently today we are not a taxpayer. We take into consideration all those things. We believe that our business plan and the way we are managing this business is going to have a dramatic impact and an increase. We don't see a big dip on the horizon.

From our standpoint, we would guess your 200 million in free cash flow, when you're fully taxed and your not bonded in Florida that kind of slips to the 125 to $150 million number a couple years out. Is that an accurate way to think about it?

I think the better way to look at it is this way. If you look back two years we did $160 million free cash flow if my memory serves me. Last year we reported $210 million. Through nine months this year its somewhere around 175, 180 here. So, as we look at 2003, we are sure excited about finishing the year out on free cash flow and you mentioned a better number. We have disclosed before that bonding changes impact us to the tune of 15 to 20 million.

Taxes are about 40, right, when you become fully taxpaying?

I think if you were a full tax payer assuming that all of your taxes were current taxes that that could be true. When that occurs I think is the real question and there is a lot of things in the air that I'm not sure when exactly when we will be a full tax payer, it could be sometime on the horizon.

If I know Service Corp the answer will not be clear it will be complicated and unclear to people with low IQs like myself. The second question is, we are looking at this business and we see 200 million of free cash flow, how much -- I guess a year ago, you guys were on a real good cycle in terms of year-over-year cost comparisons. Now because of some things you mentioned you are not presently in that cycle. But, as you look out over the intermediate term, how much residual costs do you think you can take out of this enterprise? Or do you think you fully maxed out kind of the FTE overhead cost opportunities that you have?

First, let me say I should not quantify at this point but I will answer it in two ways. One is, what you are seeing today when you think you are seeing cost increases you are seeing cost increases. We've got additional amortization that is flowing through our P&L. It's a cost increase but it does not cost us cash. That is why you're seeing some of the favorable cash flow impacts and maybe you don't see it in the margin. The second one is the pension expense. Pension accounting is a lot different than cash. We are amortizing a lot of loss through pension expense and the funding requirements are very different. Not to say at some point we won't have to fund some of the difference, but that is a different expense item without a cash result. When we talk about managing our expenses, we typically are talking about the cash expense position with the business.

If we were to look apples-to-apples year-over-year, where are your cash costs trending today where versus a year ago, versus two years ago? Do you have a sense for that?

Put it this way. They trended down and they will continue to trend down. We think a lot of the initiatives we put in place outsourcing some of these backoffice functions, I have briefly touched upon now that we have utilized more technology and improved our process, we will be able to continually focus on skinnying down the management structure as we standardize behind the brand it allows us to manage this thing with a much nimbler force.

To use a sports analogy in the third inning, are you in the sixth inning, I mean have you taken out 10 million of costs, 50 million of costs? What is difficult to analyze is you got all of this non-cash stuff rippling through your financials which creates -- and then you have year end true ups on reserves. It might make things simpler if people understood how much cash costs have been taken out of the business and how much there are left to do or at least directionally, are we a third of the way there, are we half of the way there or is it just not something you want to provide at this point?

You are right John, I think we would be able to talk a little bit more when the confusion is away, but the easiest way to do it is to look at the cash flow. The cash flow really shows you that those expenses are trended downward. You will begin to see some relief because the excess amortization stops as of September 30, so in the fourth quarter, we should not see I believe it is just over 4 million dollars in amortization expense that we have been absorbing. But I also point to you look at the cash and look at the margins in the quarters to come. Because we are going to begin to see the impact of these better processes, reduction in costs and expenses.

One unsolicited opinion if you will -- I think when people start focusing on quarterly GAAP margin trends they are falling right back into the trap of trying to analyze the unanalyzable. So, maybe we're trying to make things too simplistic, but when you get into all of these confusing explanations of what was in, what was not in and what is amortized, what is cash, what is non-cash, what is GAAP, it is very difficult to really see what is going on in the cost trends of the business. So, thank you.

(indiscernible) Glenview Capital.

I wonder if you would address your plans for managing the balance sheet and the cash balances? Pass the sale of the French operation into a joint venture. It seems like it is going to leave you with a great deal of cash and a fairly modest low-end degree of leverage. It isn't clear exactly what your plans are for those cash balances and the free cash (indiscernible) subsequently. I wonder if you can address that?

First of course we need to complete the French transaction so that we know what we have to work with. But, obviously once we have accomplished that, next year we will have debt I think of about 180 to 190 million that comes due and obviously, that will be paid in part from our accumulated cash balances. We will have the opportunity should we wish to avail ourselves of it beginning in June of next year to call either a portion or all of our convertible debt issue. We have not made any decisions with respect to that todate, but that certainly would be a possibility. Obviously as Tom mentioned there may be an opportunity to invest in some projects for growth. Which could potentially encompass that. And at the appropriate time, review with our board our policies on dividends and share buybacks. Of course, it would be much nicer to do all that if we had the litigation issues behind us at those times. Because that would add certainty as to what our liquidity needs would be. But, we will deal with that as we can.

Do you have any idea when you think that these various efforts in readjusting the way you sell and the focus on the Dignity brand and all that will actually produce some visible margin improvements and possibly improvements at the top line as well? Is there any time period in your mind in your budgets as they exist at the moment when you can say that that is when we should finally see an inflection point and see some improvement there?

I think as it relates to the top line growth, we have seen some improvement. I think the important thing to point out the Dignity plans and their uptake in the average increase have negated a lot of negative things in our business. We have seen down volumes, we have seen increased cremation mix changes occur, and so we're seeing some success in those plans that are negating some of the industrywide trends that we face. Having said that, we are doing some things today that relate to like you said putting some real meat behind the brand. Beginning to go out and market on these things. We're beginning to utilize some contemporary merchandising techniques both within our cemetery business and within our funeral business. All of these things are great but they take time, they take diligent training, and follow-up in certification and the like. So, I guess the way I would express it to you is we're monitoring these things, we think they are going to have impacts in the near-term, they are going to be rolling in though and it is going to take time to put into 1400 locations across the United States. So we're excited about these things. We think they will have incremental impacts on what is happening with our revenues. If our volumes are there, it is even more beneficial to us. The things we can control are how we train this, how we manage our costs, how we get efficient and that is what we are focusing on today. I would like to tell you we're out there now, and we're going to see initial successes and as we have better information to share with you we will. So, I would look for those things to be coming in the near future.

Also, on the margin that is implicit in the old pre-need sales, did I hear you say that the sales the pre-need sales happening now or was it implied that they are at better margins than some of the remaining book because they are closer to at need margins?

What I was speaking to particularly was the pre-need contracts that are rolling out of backlog today that historically has had some gap in the true at need average that we are serving customers. That gap is closing. The pre-need backlog is rolling out today in in a closer proportion to what we're seeing on an at need basis. What we are selling today is better than that.

To put some numbers on that, our average for pre need going at need for the quarter was about $4100 per case where the at need average was about $4300 per case, so they are very close to each other.

That's great. That helps quite a bit. One that last Hail Mary if I may, is there any possibility of separating the trust accounts and the management of those so that they no longer flow directly through the income statement and appear on the balance sheet so that we can get a better look or at least a clearer look like those of us that follow you and do this all the time, as John pointed out, it is a struggle. I wonder if there is any possibility for separating the trust management and related assets from the operating businesses. So that they appear separately?

They are essentially managed separately. We have an oversight or committee called the investment committee that promulgates policies with respect to the management of the trust funds. We have five independent trustees which have about 95 percent of those trust funds. We work with those trustees to appoint independent money managers who have the best majority of those funds. So, most of those funds are managed by independent money managers based on their track record, and we also have a consultant that we use to help us choose the money managers and this is a consultant that engages in this type of business for a living primarily consulting for pension funds.

I understand that. What I was getting at actually I'm sorry to make myself clearer, separated formally for reporting purposes, in other words, set up a structure so that the trust accounts and related activity do not go through consolidated Service Corps statements. Is there any chance any way that can be done?

It would be very difficult to do under the current accounting policies the SEC has promulgated to us for the industry. Let me give you an idea of what the numbers are. I think what you are asking is perhaps it's in the Q but perhaps in the release we need to be more forthcoming on the trust income. On the cemetery side, it is flat for the quarter it is flat for the year. It is 11.3 for the quarter versus 11.4 and for the nine months it is 30.6 and 30.8. That is the trust income from MSG, Merchandise and Service Trust and the perpetual care funds combined for the quarter and for the year to date. Now, the trust income on the cemetery side excuse me, on the funeral side is deferred until the funeral service is performed and then it comes through the P&L. There is about a 2 million dollar gap that just happened this quarter; for the quarter it's about 7.5 million versus 9.5 million and for year it is about 23 versus 26 million. I think the best way to accomplish that is just to give you those figures maybe in the release as opposed to the Q, but I will state that the Q was filed within minutes of the release this morning as well.

Are the cash flow impacts of that similar? All the ins and outs into the trust out of the trusts, would it be possible to also provide the cash flow impacts as well? That would be a big help actually and I think it would clarify a great deal for people. I am just hoping to attract a little bit more interest, it is you know well I don't have to tell you those of us who follow you for a long time, it is a chore for those of us who are not in your business and I just wonder if you can supply additional cash flow impact as well as what you just gave me, that would be great.

What I gave you is also cash, but I would like to hear more of your thoughts, why don't we talk after the call?

Great, thanks very much for the call. I appreciate it.

(OPERATOR INSTRUCTIONS) Henry Rukoff with Deutsche Bank.

I am just curious if you could tell me, if you could breakout on a year-over-year basis how much the pension healthcare expense increased? That flowed through the income statement?

On a year-to-date basis it’s a little over 7.5 million dollars.

Do you know what it was for the six month period then?

For the three month period it is 3.5 so you can back in.

3.5. Do you have the comparable number.

That is the difference is what I gave you, that is what to asked for is the increase.

You also have the total then?

The total for the year was about 9, and the total for the quarter was about 3.5 to 4 of that 9.

That was for the third quarter?

You're correct.

And 9 was for the year-to-date. Do you have it for last year?

I would have to pull last year, you would have to call me and I would have to get you that number.

Thanks. Just a refresher, is there any time that you are thinking the France sale may go through?

As I mentioned in my remarks, we expect it to occur either late this quarter or sometime in the early part of next year.

Sorry, I just missed that. Thanks a lot.

Jennifer Childe of Bear Stearns.

Hi, Andrea Newell for Jennifer Childe. I just have a couple more questions following up on the gross margin decline in North America funeral and also cemetery. It looks like the three kind of other costs that you cited healthcare, insurance and pension, that those costs accelerated from the second quarter to the third quarter. I'm wondering if they were greater than you expected in the third quarter, and if that kind of magnitude of increasing costs is expected going forward for the next couple of years?

I think there was a small increase versus what we expected in the pension area because we have been incurring more settlements where people terminate and leave the company and take their cash balances with them. When that occurs, under the accounting literature, we need to recognize the portion of the losses that Tom referred to that are attributable to those separated people. So as settlements do occur our pension expense does tend to go up and we budgeted the amount at the beginning of the year and we did step up the accrual as we have been monitoring the separations. In the other areas I don't know if it is significantly overaccrued, but I know in the insurance area we took some additional accruals either in the second or third quarter.

Okay. I guess healthcare was basically the same as it has been?

I don't have healthcare in front of me so I can't honestly answer that.

How about going forward into the fourth quarter and next year?

We are looking at various strategies obviously to deal with some of these costs. But if those are not implemented I think our pension costs including settlements next year will be in the range of perhaps even slightly higher than they are this year. Based on what we have been able to see from the accumulated losses that might well flow through. Other than for the pension ones, all I know on the healthcare area is that it’s still going up on a double-digit basis at least in most companies and I don't know that I have our numbers with respect to that.

Okay. Great. Switching gears a little bit. I noticed on the cash flow statement and your year ago number the unusual tax refund of $35 million. Was that in the year-ago press release because I just did not notice that in there, was kind of looking for whether that unusual tax refund had been broken out when you initially reported the third quarter of '02?

Yes, it has.

Great. Thanks a lot.

Having no further questions Mr. Waltrip I would like to turn the conference back over to you for any additional or closing comments.

Thank you for participating, and we will see you the next time.

This does conclude today's conference. Thank you for participation. You may now disconnect.