Service Corporation International (SCI) 2003 Q4 法說會逐字稿

Good day everyone, and welcome to the Service Corporation International fourth-quarter 2003 earnings result conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like 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 conference call. As usual, our management team will be available to answer any questions after our prepared remarks. With that I will turn the call over to Eric Tanzberger for his remarks.

Good morning. I would like to express a cautionary statement on forward-looking statements. The statements made today that are not historical facts are forward-looking statements made in reliance on the Safe Harbor protections provided under the Private Securities Litigation Reform Act of 1995. These statements today may be accompanied by words such as believe, estimate, project, expect or other similar words that convey the uncertainty of future events or outcomes. These statements 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 in any other documents, or oral presentations made by us.

Important factors which could cause actual results to differ materially from the forward-looking statements made today are listed in our press release, which has been filed on 8-K and are also listed in our 10-K which has also been filed this morning.

Additionally, a replay of this conference call will be available on our website for approximately 90 days on the investors page under the subheading conference calls at www.sci-corp.com/investors.html. This earnings release that was released this morning will also be available on our Web site, on the homepage, under the subheading -- in the news -- at that same website, www.sci-corp.com.

For the prepared remarks I would like to pass the call over at this time to our President and Chief Operating Officer, Tom Ryan.

Thank you, Eric. The year 2003 was one of very solid performance for SCI. We met or exceeded all the operating and financial goals we established in early 2003. We resolved key litigation issues. In early 2004, we successfully joint-ventured our French operations. This hard work and execution has brought us to a position of financial strength and flexibility that we have not enjoyed for sometime. We had the lowest level of net debt since 1994. We had the strongest free cash flow this company has ever seen. For this. I would like to thank each and every one of my fellow 28,000 employees -- because, without their tremendous efforts, we would not be where we are today.

I also want to say a special thank-you to our friends at PFG in France. Thank you for your nine years of faithful service to SCI, and we look forward to watching your business grow. As a 25-percent owner of the new French entity. I would like to personally thank Mr. Philip LaRouge, the President of PFG, for his incredible leadership over the past 3.5 years.

Now for the exciting part. With this much-improved financial structure and the hard work of the past 18 months, we move into 2004 with financial flexibility, a streamlined infrastructure and a more disciplined operating structure. We believe these changes will bring significant improvements to our operating margin 2004. Most importantly, they establish the platform upon which we can grow our business long-term behind the discipline of our brands and the development of our number-one resource, our people.

Now I would like to review with you our operational performance for the fourth quarter of 2003. Comparable North American funeral revenues increased for the fourth quarter as compared to the fourth quarter of 2002. An increase in the number of funeral services performed and an increase in the average revenue per service performed were partially offset by an increased cremation volume mix and lower levels of general agency revenues associated with the expected decline in insurance-funded, prearranged funeral services.

We experienced a funeral volume increase of 1.6 percent for the quarter as compared to the prior-year quarter. We believe that this increase in call volume for the quarter-to-date period is, on a national basis, primarily attributable to a higher number of deaths in our relevant markets. This belief is supported by the trends experienced by our public and local competitors, CDC statistics and feedback from our major industry suppliers. While our comparable North American volume increase of 1.6 percent generally compares favorably to these available statistics for the quarter, we believe market share can only be measured on a long-term basis and really is only relevant on a local basis.

On a year-to-date basis, we experienced a 1.6 percent decline in the number of funeral services performed, which is consistent with, and in certain instances less than, the declines reported by our public and local competitors, CDC statistics and feedback from our major industry suppliers. Also, our customer satisfaction surveys continue to trend positively. Therefore, given our emphasis on local-market action plans and the development of our local management, we believe our local share on a national basis is solid.

Our average revenue per funeral for the fourth quarter of 2003 increased by 1.3 percent over the prior-year quarter. This is due mainly to the increased success of our Dignity Memorial funeral and cremation package plan. For the year 2003, approximately 16 percent of the total consumers we serve on an at-need basis selected Dignity Memorial's package plan. Remember, Dignity burial plans average approximately $2800 per case, more than a non-Dignity burial plan. Dignity's cremation averages approximately $1700 more than the non-Dignity cremation average. This favorable impact was partially offset by the negative impact from a cremation mix increase of approximately 110 basis points for the year. The quarterly change was only 50 basis points.

For the fourth quarter, our comparable North American funeral margin was 18.2 percent versus a 17.7 percent in the prior year. The gross margin improvement was primarily a result of increased revenues from funeral operations compared against a higher fixed-cost structure of the Company's funeral network. Increased salaries and fringe expenses, primarily from higher pension, benefit 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 fourth quarter decreased by 5.4 percent or $720 million as compared to the prior-year quarter. This decrease is mainly attributable to lower levels of cemetery merchandise delivered during the quarter.

For the fourth quarter, our comparable North American cemetery margin was 9 percent versus 11.9 percent in the prior-year period. In addition to the reduction in revenues, personnel costs increased due to rising pension, health care and insurance costs, while cemetery maintenance expenses were higher, in our continual effort to bring certain cemeteries in-line with company standards.

For the year 2003 cemetery gross margin percentage was 13.5 percent, which exceeded the 2002 gross margin percentage of 11.9 percent. This improvement was achieved despite an anticipated decline in revenues from lower construction revenues and the changes made to our sales organization. The significant decrease in pre-need selling costs as a result of the changes made, helped to more than overcome increased employee benefit costs, increased insurance costs and increased maintenance in our cemeteries.

Hopefully, you have all had the opportunity to review our outlook for 2004. Due to a number of anticipated items which may occur during 2004, our guidance includes certain caveats that are described in the press release and in our annual report filed on form 10-K. I refer you to those caveats for a full understanding.

Taking into account those caveats, my summary of 2004 is as follows. From an earnings-per-share perspective, we anticipate significant improvement in our North American operating margins. This is mainly due to cost savings resulting from the infrastructure improvements we have been putting in place over the last 18 months as well as the effects of the recently announced changes in our field management structure. While we expect increases in our pre-need cemetery sales year over year, this is more than offset by the fact we should record 30 to 35 million less in constructed cemetery revenues.

While our North American operations showed meaningful margin improvement, the loss of ten months of operating performance from our French business has a sizable negative impact on our earnings per share. Keep in mind that the French transaction affords us much greater financial flexibility as we move into the future.

Lastly, reduced interest expense and a much lower effective tax rate, 15 to 18 percent for 2004, versus 25.6 percent in 2003, results in a 2004 earnings-per-share range of 42 cents to 50 cents.

From a free cash flow perspective -- and here I would refer you to our company's definition of free cash flow that was included in our press release as furnished on Form 8-K -- improved results from our North American operations and lower cash interest should negate the unfavorable impact from the joint venture in France and the discontinued use of surety bonding in Florida. Our operating cash flow guidance of 270 million to 310 million with maintenance CapEx of 65 million to 75 million. This results in a free cash flow range of 195 million to 245 million and does not include litigation payments or reimbursements related to, nor any impact from voluntary contributions to our frozen pension benefit plan.

Let me be clear. Our revenues and margins are still not where they need to be, and we can do better. We will do better. We surely recognize the long-term success of SCI can only be achieved by delivering topline growth in a challenging revenue environment. We are working diligently on our long-term growth initiative, which focuses on delivering revenues through three primary avenues. Number one, investing capital and revenue growth in our existing business, through more contemporary marketing of the Dignity Memorial Brand, which includes promotion through relationships with strategically aligned affinity partners, utilization of effective merchandising tools in our funeral locations and continued investment in strategic cemetery properties in our existing cemeteries. These strategies are our primary focus today. Second, growing through strategic acquisitions of funeral homes and high-interment cemeteries in large metropolitan markets, construction of new funeral facilities and through the continued growth of our franchising network. This will come slowly as businesses become available and we solidify the Dignity standard certifications training and value for potential affiliates.

And number three, ensuring that we attract, hire, develop and retain the best and the brightest people we possibly can. This emphasis on leadership, development, training and certification will be delivered through our Dignity University, and 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. At our first-quarter conference call last year, we set a target cash flow from operating activities of 350 to $400 million for 2003, including the $94 million tax refund received in the first quarter. During 2003, SCI generated cash flow from operating activities of $374 million or $401 million, excluding litigation-related payments. SCI's total debt, less cash and cash equivalents, at 2003 year-end was $1.47 billion. At year-end, 2003 SCI also had 333 million of surety bonds outstanding and $67 million of letters of credit outstanding.

On March 12, 2004, SCI's North American excess funds were $453 million, and our total debt, less cash and cash equivalents, was less than $1.3 billion. In February, SCI funded a $100 million payment related to its proposed Florida class-action litigation settlement. Also on March 12, we funded a $20 million payment to our cash balance pension plan. These payments are reflected in the $453 million cash balance. In March we entered into a settlement arrangement with one of our insurers, which provides 25 million of potential reimbursement to SCI. That amount is not included in our cash balance.

In December of 2003, SCI received approximately $46 million for the sale of its interest in its Australian affiliate. On March 11, SCI received over $300 million of net proceeds from joint venturing its French business, while retaining our EUR10 million note and a 25 percent equity interest in the acquiring Company. In April, SCI expects to receive approximately 50 to $60 million, from the sale of its UK affiliate in a London-based IPO transaction.

SCI's general and administrative expenses in the fourth quarter include $48 million of litigation-related costs, net of insurance proceeds available. These litigation-related costs pertaining to our Florida class-action lawsuit settlement. 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 accrued only for the 25 million of insurance recoveries already made available to the Company.

When litigation-related expenses and accelerated amortization of system costs are excluded, 2003 general and administrative expenses were approximately $3 million higher than the prior year, due to accruals for SCI's long-term incentive compensation program. In prior years, SCI's long-term incentive program provided stock options that had no recognized accounting costs associated with them.

In our 10-K, filed today, SCI restated 2000, 2001, 2002 and nine-month's results in 2003, to reflect two accounting changes. First, cemetery revenues associated with merchandise deliveries or services performed are now reflected in the period such delivery occurs or service is performed. Previously, certain revenue amounts related to out-of-period deliveries were reflected as changes in estimates, when such amounts were discovered and booked. Such estimates were disclosed in our 10-K filings and appropriate 10-Q filings when material.

Second, our amortization of deferred selling costs, associated with trust-funded pre-need funeral contracts, are no longer being amortized over 12 years, but rather are being amortized on a proportionate basis, relative to the recognition of pre-need trust funeral income going at-need.

The effect of these accounting changes primarily impacts 2000 and 2001, with only a modest impact on 2002 and 2003, and it does not change cash flow during any of the periods. In the first quarter of 2004, we expect to implement a newly required accounting standard named FIN 46R. It will require SCI to consolidate some SCI-managed, but not owned, not-for-profit cemeteries and certain trust funds. We are currently working with the SEC to understand fully how FIN 46R should be implemented. SCI is also in discussion with the SEC relating to its accounting for pre-need funeral insurance. It is possible that our pre-need insurance receivables and related deferred income should not be reflected on our balance sheet. Generally, the effect of removing them from our balance sheet would be to reduce assets and the corresponding obligation by similar amounts. We hope to resolve these accounting issues this quarter.

SCI's tax rate for the fourth quarter of 2003 was lower than expected, as the quarter included some low-tax income from SCI's international jurisdictions, which impacted our rate favorably from the rate used in North American. We expect SCI's tax rate in 2004 to be in the 15-to-18-percent range because of the tax benefit of selling or joint venturing international businesses or investments. This estimate does not include any tax-rate impact from the adoption of FIN 46R.

SCI's $2.3 billion of funeral, cemetery merchandise and endowment care trusts performed well during the fourth quarter of 2003. These returns include the impact of both earned income and changes in portfolio value, but do not include the trust management fees or related costs of approximately 1.1 percent per annum. The funeral trusts had a positive quarterly return of 8.14 percent. The cemetery merchandise and service trusts had a positive quarterly return of 6.90 percent. And the endowment care trusts had a positive quarterly return of 4.56 percent. Total year 2003 comparable returns were 17.90 percent, 17.15 percent and 12.62 percent, respectively. In addition, the current market value of our portfolio of trust investments at December 31, 2003 exceeded our cost of the investments in the trust by approximately $167 million.

Our cash balance pension plan had good total return performance for the fourth quarter also, up 9.58 percent. It had a one-year return in 2003 of 25.86 percent. The fair market value of the assets in the pension plan, at December 31, where about $77 million. The projected plan liability, using a 6.25 percent discount rate, is estimated to be approximately $111 million. Beginning January 31, 2004, SCI has changed its accounting methods prospectively to recognize the plan's investment income gains and losses on a current basis. This will result in a non-cash, after-tax change in accounting charge of approximately $35 million in the first quarter of 2004.

With a different asset allocation in the pension trust, we believe that these actions will reduce SCI's pension cost considerably from the 11.2 million amount reflected in our 2003 financial results. SCI's liquidity remains strong, as we hold over $453 million of cash and cash equivalents and have approximately $115 million of borrowing capacity under our bank credit line and have only 183 million of debt maturing during 2004.

This liquidity provides us with significant financial flexibility to consider capital structure or other alternatives. With those comments we will now go to the question and answer phase of this call. Tony?

Thank you, sir. (OPERATOR INSTRUCTIONS). A.J. Rice with Merrill Lynch.

First of all, I guess, in the remarks -- there was just some -- said that you had 453 million of cash-on-hand. Of the things that have occurred since the year end, the only thing that has not come in yet is the proceeds that you expect sometime in April, I guess, from the UK sale. Is there any of those other one-time sort of additional items? I guess, you got the 25 million as well from the insurance. Is there anything else that has not come in yet, that is in that 453 number?

Well, let me just clarify -- the 25 million from the insurance Company is not in that number. Nor is the UK proceeds from the joint venture. And obviously, if we were to settle with any other insurance companies, that is not in that number.

Can you just maybe -- is there any background on the discussion about the prearranged funerals with the SEC? What prompted you to review that? I realize it would not make that much difference. But I'm just curious, why that is under discussion again.

We had some comments from the SEC with respect to our 2002 10-K. And as we were interacting with them with respect to that, we involved the national office of PWC and conferred with them. And in conjunction with that discussion we decided to change those two accounting (technical difficulty).

And then maybe just a broad question. So you will end up with this cash balance of probably in excess of 500 million, when it's all said and done, when these last two items and anything else comes in. And then, obviously, you have got the free cash flow that you will generate this year. Can you expand at all on what types of things you are thinking about, in terms of capital structure, shareholder value that you sort of alluded to?

Well, certainly the broad categories would include debt reduction either through calling debt when it's callable or tendering for it, potential dividends, acquisitions, I suppose, theoretically, a share buyback, although that is not permitted -- nor is a dividend under our current credit agreement. But we obviously are interested in gaining more financial flexibility. And I would expect we will be reworking our credit agreement in the near future.

Okay. So well -- you said near future. I was going to ask, is there any timeframe for evaluating these various options?

Well, certainly we would like to do it reasonably soon. I would hope it would be done by midyear. But, obviously, we have some income-recognition issues with respect to FIN 46R and other things that I need to also understand, so that we would make any covenants in a new credit agreement meaningful to ourselves and to the lenders.

Bill Burns with Johnson Rice.

My question -- I was trying to get a base cash flow from operations number for this year. And I am coming up with like 306.7 million off your published release this morning. And then comparing that to guidance of 270 to 310. I wonder if you could just expand on your thoughts of looking at what you did, versus where your guidance is. Obviously, we're losing some cash flow from France. Just what other pieces went into that puzzle?

Well, one of the pieces that went into the puzzle, which we mentioned, was that we began trusting in Florida rather than surety bonding. And, obviously, that is going to reduce our cash flow in Florida. I think we have estimated the amounts to be roughly around 25 million. Is that correct, Eric?

Around 15 to 20.

15 to 20. So that's a piece of it. Obviously, next year we will benefit from reduced interest costs, which should mean reduced cash interest. And from the operational savings, that Tom mentioned. Those would be the other important element of helping us achieve the guidance that we set out in the guidance press release.

And another quick one, Jeff. I know, on your balance sheet, you obviously have no assets held for sale. But on the cemetery side of the business, would you consider selling some underperforming cemeteries?

Bill, this is Tom. We consistently evaluate our businesses in the normal operations, as we review performance. And so, whether it be a funeral home or a cemetery, as we uncover businesses that are not operating appropriately, we look at alternatives -- some of which may be to dispose of them. So, yes -- I would look for it. We will still have cemeteries to sell, not in any tremendous, large amounts. But as we evaluate the businesses, we will dispose of them as they deem appropriate.

Tom, you surprised me on the up volumes. I congratulate you on that.

(OPERATOR INSTRUCTIONS). John Ransom with Raymond James.

It's been a long road since 1999. But, you guys have certainly persevered and stuck to it. So, my congratulations there. And you know, I have been hard on you. The question I have relates more to 2004 guidance. There's a fairly broad -- if you work through the numbers, we're coming up with about a $100-million-range for EBITDA, between -- say 3.44 and 4.44 is how we are calculating it. Could we think about a 3.70 to 3.80 EBITDA number for 2004 as being in the ballpark of your guidance?

Well, I don't think we gave guidance on EBITDA, I guess, would be the starting point. And if we did, we would have to reconcile it under Reg G to a GAAP number. I guess what I would say is -- as you say, from the information we have given you, you can't compute what we think it is. A lot of the issue of EBITDA guidance depends on what happens to our Latin American properties -- which, I think you know, we're holding at least available for sale under some circumstances, if we can end up with terms that we are happy with.

I guess I was looking for a simple yes or no, but that wasn't going to --

We don't do that often for you, John.

The second question I had was the interest expense number for 2004 -- should we look for something around $100 million?

I think guidance we have given is in the guidance press release.

I'm sorry -- did I miss that?

And that assumes that we don't have a major capital structure change. Obviously, if we decided to call or buyback our convertible issue, depending on when we would do that, you would have reduced interest expense. But, then you would have some sort of a cost in other income, to reflect the premium we would pay over par.

Right. Now, looking at the 104 premium to call the converts, we assume in theory the convert holders are indifferent at about $7.15 a share to convert to cash or hold their bonds. Have you seen any or much tendering for stock, as the stock has traded in the high sixes and low sevens?

I don't believe we've seen any. They would give up their interest income, if they were to surrender it at this point.

So at this point, no tendering? Okay.

I would expect the only time someone would tender the bonds is if we were to put a call on them or make some sort of an offer for them.

And then, finally, looking at your 2004 free cash flow guidance -- I know you have given a cash flow from ops and a CapEx number. We should use something like 65 million for maintenance CapEx, take the midpoint of your cash flow, subtract the maintenance CapEx number of 65. And that would be an implicit free cash flow guidance. Is there anything else we are missing?

No. I think it's 65 to 75. So your midpoint that is safe, is probably around 70, John, in terms of maintenance CapEx.

John, this is Tom. The important things to remember, and I've had it in my comments, was that would exclude any impact from litigation payments, which would flow through cash flow from operations (Multiple Speakers) through reimbursements from insurance companies and that one point that Jeff mentioned -- we have voluntarily put $20 million into our frozen pension plan. And so that would exclude that from free cash flow.

It looks like your CapEx outside of maintenance was about 30 million -- your growth CapEx was about 30 million. But in this guidance, it would imply that you are stepping up your growth CapEx to about $60 million. Is that correct?

Yes, we are. And we are also dropping maintenance down as we kind of caught up what we needed to in our network. In addition, a little over 10 of that is also related to France, in terms of maintenance that drops off.

So, my last two questions, and I will be quiet and get back in the queue, would be, could we expand on what the 60 -- the additional dollars -- are going toward? And secondly, the last numbers we had -- and this is a confirmatory, hopefully, yes or no -- is that France -- between France and surety bonding, it looks like collectively you're losing about 35 million of free cash flow from 2003 into 2004. So, could we just quantify the kind of same-store growth in free cash flow? It looks like a little bit higher than what we were looking for. So could we talk about sort of the things that are going into the plus ledger in 2004, that are growing your cash flow -- maybe over and above what the market is anticipating? And I'll be quiet. Thanks.

I'll try to take those on, John. This is Tom. As far as our growth CapEx spending for 2004, a couple of things to understand -- I think, as you think about some of the increases. Predominantly, it's going to be -- we are going to have funeral home construction. I think we're going to see somewhere in the neighborhood of 12 to $15 million of increased funeral home construction over the coming year. In addition to that, we are going to be investing in our high-end cemetery inventory. This again, we talked about private family estates. These tend to be items that we build and sell in a rather quick turnaround. And they are high-end, inventory-type items.

In addition to that, we spoke, and I know you heard us talk about this before -- about our new Dignity displays. We're investing in the showrooms of our funeral homes, and we are still in a testing mode. But, they are quite a bit of our business, whereby we're changing the way our showrooms look, to more aligned with consumers' preferences. And again, by doing that, we're investing some money. But we believe these have great cash returns. So, those predominantly are the things that we're investing in, over and above related to last year.

Your second question, I believe, related to our free cash flow. And really, there is two items that are driving -- I think you hit on one. France and Florida, the cessation of Florida bonding -- those two things to the negative impacts that we're absorbing. The two very positive impacts are -- one, reduction in interest expense. Again, we have given that guidance just based upon scheduled debt maturity. But most importantly, the changes that we have made, both from an infrastructure perspective over the last 18 months, and the reorganization that occurred in November of 2003, where we simplified our management structure -- those two events resulted in increased margins and, to a slightly lesser extent, positive cash flows. So, those are the real drivers as we look to 2004 of being able to make up the loss of France and the loss of bonding proceeds for Florida.

So, again working through a bunch of complicated adjustments, it does look like your core free cash flow, despite some 35 million of head winds, is growing in the 20 to 30 million range. Are we right in those numbers?

You're talking about for 2004 versus this year?

Yes. You imply in your guidance, compared to what your free cash -- we have free cash flow of 220 in 2003. You subtract, say, 35 million. You start with a 190 base, and your free cash flow guidance for 2004 is in the 220 range. So, it looks like your base is growing about $30 million?

That's fair to say, the way you describe it, yes.

John, I would just that one additional thing. And that is on page 4 of our guidance release. We are evaluating our surety bonding program as we speak. And we may choose to do some different things there, because the cost of surety bonds has gone up considerably. But, we have made no decisions in that regard yet.

And your 1.3 billion of net debt -- that did not include not include France, correct? So as it stands today, we calculate your net debt at -- when you receive the UK proceeds -- at around 1 billion. Are we missing something?

Yes. You are too low at 1 billion. Debt -- France had only about $25 million of capitalized leases associated with it. So, that was the only debt associated with France.

And what you may be missing, too, John -- don't forget the 100 million payment that we made to Florida.

Because your net debt was 1.38 at year end, correct? That's just a straight calculation.

No. I believe it was 1.4-something.

1.47, John. And where we get the 1.3 is, subsequent to year-end, we have received -- in US$ -- about 300 from France. And then have paid out the 100 million in February, related to litigation.

I'm sorry -- you're including current maturities in your debt. I apologize -- that's what I was missing. Thank you.

Jennifer Childe with Bear Stearns.

Good morning. Can you give us an update on your litigation -- where you stand exactly in Florida and what is still outstanding there? And also what is happening with the ACI litigation?

Jennifer, this is Jim Shelger. I'm the Company's General Counsel. The Florida litigation, as I'm sure you have read, is presently postured to obtain a court approval of the settlement of the class action and the related cases. There is a hearing scheduled on that matter this week, as mentioned in our 10-K. And it is anticipated that, ultimately, the court will grant or make some determination on time of approval later this year.

But that's just the class action. Aren't there a couple of other suits pending in Florida?

Yes, but they don't require court approval. There some other related cases that we are still working to settle. But the class action and the cases that were brought by the same group of lawyers is postured to settle later this year, subject to the court's approval of the class settlement.

Could you refresh our memory of what those other suits are, that are still pending?

There are group of cases brought by a different law firm, relating to the same two cemeteries, known generally as the Graulnit (ph) Case. And we reported on that in our 10-K today. Those cases were in discussions. But there has been no agreement reached with respect to settlement of that cluster of cases. They have the same basic claims as the Menorah Cases. But we don't have a settlement in hand with respect to those cases. Discussions are ongoing with that lawyer.

And I apologize if this is in the 10-K -- I have not had a chance to read it yet. The ACI litigation?

The shareholders litigation pending here in Houston, which I assume you are referring to as the ACI litigation -- that case is still pending. There has a motion to dismiss, filed in 1999. And the court has not ruled on that. We're engaging in discussions from time to time with plaintiff's counsel and have a further discussion scheduled for next month.

With respect to the change in pension accounting, what income statement benefit are you expecting in 2004?

Well, I think that it depends on how our investments perform, because we're going through a mark-to-market basis. But our hope is that with the change in our allocation in the plan, that we could reduce pension expense from somewhere around $11 million in 2003 to somewhere in the 3 to $5 million in 2004. It may be less than that.

Jeff, will France be reported as a discontinued operation in the first quarter?

I don't believe so.

We will just record the first two months, Jennifer, of what it is, since it has already been closed.

Has the bonding program been completely curtailed in Florida? So, assume no contribution whatsoever to 2004?

On a prospective basis only, we have a right to maintain the existing bonds that are out there until those contracts essentially go at-need. So we have been renewing bonds associated with that prior business. But on new business, we are using trusting.

And last question -- did sales of any domestic underperforming homes or cemeteries contribute to 2003's cash flow?

No. No.

Abe Brontein (ph) with Glenview Capital (ph).

A couple of just loose ends here. Can you give us the mix between need -- at-need and pre-need in funerals and cemeteries?

At-need -- at-need looks like --

This is Debbie Young. The mix of the total funerals we did for 2003 that were previously pre-arranged was arranged was 31.4 percent, compared to 31.7 percent in 2002. So not a material change.

Those were the pre-need?

Debbie Young Correct.

And what about cemetery debt?

The cemetery is roughly in the 60 to 70-percent range, consistent with 2002.

60 to 70 pre-need?

Correct.

Pre-need is about 54 percent in cemetery for the quarter, versus 59 for the year. It's more like 56 versus 59, as a percent of the total, in terms of pre-need cemetery, Abe.

That is for the year?

That is for the year -- the second part I mentioned.

And are the margins -- can you compare -- like, give us an idea of the compared margins between the at-need and pre-need in the two categories?

Well, it would be very difficult to do on a cemetery basis. We will have to do some work. And you will have to call us and we will get back to you on that, Abe. In terms of the averages themselves, we still have -- our traditional averages are still, obviously, higher than the premium averages as a whole. But that gap is closing as we speak. I think there is only about -- probably 300 -- just barely over $300 difference between the total, all-in average for at-need and the premium average on the funeral side.

With respect to the debt on the balance sheet going forward, what level of debt in either dollars or percent of assets do you feel comfortable operating with? Do you need to bring the debt down any further in absolute dollars or percent?

Well, our goals as stated in our 10-K, were to arrive at a particular credit rating. B/A-II with Moody's, where we are currently rated B-I and BB with S&P, where we are currently rated at BB-. So I think that reduction is a part of the answer. However, I think it's also fair say that the Company is satisfied with its existing level of debt and is trying to improve its margins and improve its business and grow it at this point in time. So further significant debt reduction is not the primary way we will achieve the change in ratings that I just mentioned.

The tax rate -- the press release suggested that a good part of that tax rate might be coming in the first quarter, related to France -- or at least it inferred that. Is that correct? Will the tax rate vary widely through the year by quarters?

Yes, it will. In the first quarter, our joint venture transaction has a $30 million tax benefit associated with it. And that will be reported in the first quarter. We're still working through some of our numbers on the UK IPO, to where we need to be sure of what the tax rate is on that. That may impact the tax rate for the second quarter, if that IPO occurs in April, as we expect. And then I think we think the latter part of the year will have a tax rate that is more comparable to our typical North American tax rate, which is around 35 percent.

And will you accrue then, on what you think your average will be for the year? Or will you report the actuals as we go through the year?

The first quarter will reflect the impact of the French transaction, as I think I just described.

And also, in the early press release today, there was a statement that you are going to be reducing expenses through outsourcing. Could you give us an idea about what the size of the benefit might be?

Well, there is really three things that I think we can talk about, that we have previously discussed in outsourcing. This is Tom, Abe. The payroll function is something that we reengineered to outsource. Also, the accounts payable function is now done externally, over the Internet. In addition to that, we resource to our trust administration group. Between those three functions, that were all put in-place in 2003, those are some of the savings. And I think cumulatively, you know, you're talking about 7 to $9 million -- combined -- of savings that roll into the 2004 benefit.

Is that 7 to 9 the same in 2004 as in 2003? I'm not sure on the same --

No. I think what we're saying -- in 2003, we put it in as dirt throughout the year and actually probably incurred some investment doing so. So the true benefits can roll into 2004.

One last thing. Tom, your very, very early introductory remarks today sounded that you were cautioning us on the gain in numbers of funerals done on the comp basis to not assume that it was sort of your sales efforts -- but might be attributed in part, if not in whole, to simply a greater number of debts. Could you just maybe clarify -- do you think you're able to generate growth now internally? Or you're just not willing to make that statement at this point?

Let me say it this way. Number one, as it relates to the fourth quarter -- we have evidence that in late December, influenza that was a big factor in driving the number of deaths. So we know, on a national basis that the number of deaths and went up. So, we attribute -- really -- most if not all of our gains to that fact. I would like to tell you -- I believe -- that we have, now, a structure in-place -- a management structure -- that is much more focused on growing market share. And I think we have got a lot of things that are going to help us do that. I think it takes time to really tell whether you are gaining market share. It's not something you can measure in a quarter or six months. So, again, it is our gut belief that we are more competitive than we were a year ago. I think time will tell whether or not -- how much market share we are going to grow. So, as it relates to the fourth quarter, I would tell you that it's predominantly driven by the number of deaths in our markets.

This is my third last question. Acquisitions -- what is going on in the market there? Are asking prices coming down? Are you actually talking to any that look like they are truly alive and well? Or is that still -- time -- a little bit away?

It's really the same. On a selective basis, we see potential transactions. And again, I think there is still a bit of an expectation gap. I think it is closing slowly. But, I reiterate, slowly. So we are out there, and we will be looking. And when the right deals come along, at the right prices, that fit our strategy, you'll see us entering in.

And, as far as the rating agencies go, you're debt-to-EBITDA ratio is really crunching down on top of three. I guess you are about 3.3, sort of, implied here. What is it that they think they need to see you give you the ratings you want?

Well, I think they're interested in seeing improved operational performance, in terms of a growth in margin enhancement. But they also would view -- they would capitalize a number of our operating leases in looking at our debt. They would look at our surety bond exposure and free debt as debt equivalent. So the amount of actual debt that we have is looked at differently by rating agencies, than it is looked at in our financial statements.

How much do you think they believe you have?

I don't have those exact numbers at hand. I just know what they tell me, in terms of what they do.

Lee Cooperman, Omega Advisers.

Thank you and good morning. I was wondering if I could pin you down a little bit more, in terms of the priorities that exist at the Board level. Because, you pretty much gave the laundry list of what you could do with your free cash flow -- debt-reduction, acquisitions, dividends, maintenance CapEx, share repurchase, et cetera. Then you made some allusion to your convertible outstanding. And your convert basically, I think, is the one we are talking about -- the 6.75 of Juno 8 is 345 million outstanding with a conversion price of 7.08. I would assume -- I would interpret any decision to try and retire those as a form of stock repurchase. And I would look at that being constructive. Because what you're saying is you would rather not have a convert -- convertible at 7.08 and come into the equity account. So, can you help me a little bit? Am I on the right track -- that you would like to take out that convert, if you could? And how would you prioritize the use of this 60 or 65 cents a share, whatever it may be, of free cash flow usage in 2004?

There is 313 million of it outstanding. The stated conversion rate is 6.92. If we were to call it in June, when it first becomes callable, at a price of 103.8, that 103.8 price converts, I think, to about 7.18. Of course, if we would want to do something before June of 2004, the only way to effectively do something before that would be with some sort of a tender offer. And I would say, it's something that we have seriously considered and continue to seriously consider.

Is that the same way of saying that you think your stock is undervalued and we would like to buy it back, if we can get it back at the effective price of 7.18?

Well, I think there is a lot of different ways to look at it. One way to look at it is that, since it's basically is almost in the money as we speak, it's the equivalent of stock. But it has a cost to us of 6.75 percent -- cash payment.

Okay. But you probably have other debt that has equivalent cost or higher? That's not convertible, that would be senior?

We have some, but not much.

Sam Cooper, Summon Investment (ph).

I was cut off briefly, while you were talking about your credit agreement. I hope that I don't ask the same question over. This is fairly technical. If I'm not mistaken, your coverage covenant steps up in the third quarter of this year -- or March of this year. And just sort of my back-of-the-envelope -- and I believe the coverage number that was in the back of the 10-K is short of the -- I believe it's three times where the step-up is. I just want to make sure that my calculations are right and, if there is an issue with that covenant? And if it is something that will be addressed? And what the timing of that is.

Certainly. Our credit agreement is on file, and the definitions included in the credit agreement are somewhat different than the conventional way you prepare things. For example, on litigation-settlement related issues, it's not in the period that the accrual is made -- but it's in the period that the payment is made, that the payment essentially is accounted for as an outflow for credit agreement-computation purposes on the ratios. And so I think we should not have any difficulty with respect to our current coverage and covenant compliance. We think we are in-compliance as we speak and will remain so. I would say, as I did earlier on the call, that we would like more flexibility in the future on our credit agreement then we currently possess. And so my hope is that somewhere during the second quarter, we will have an opportunity to renegotiate it, in its total terms.

And then anything with that step-up -- what is that, like a -- when is that report due to be, I guess, to the banks? I guess there's no real concern with your bank liquidity at this point, I guess, is the fairway to put it -- is that correct?

I have no concern relating to our bank liquidity.

We are standing by with no further questions at this time. I would like to turn the conference back for any closing or additional comments.

All right. Again, we would like to thank you for participating in this call. And we will see you next time.

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