Service Corporation International (SCI) 2004 Q3 法說會逐字稿

Good day, everyone. Welcome to the Service Corporation International third-quarter 2004 earnings results conference call. Today's call is being recorded. Now, at this time, for opening remarks and introductions, I would like to turn the conference over to the Chairman and Chief Executive Officer, Mr. Robert Waltrip. Please go ahead, sir.

Thank you. Welcome to our third-quarter earnings report conference call. I'll now turn the meeting over to Eric Tanzberger for his remarks.

Good morning.

Before we begin, I would like to remind everyone that there will be statements made today that are not historical facts and are forward-looking statements made in reliance on the Safe Harbor provisions provided under the Private Securities Litigation Reform Act of 1995. These statement that we will make today may be accompanied by words such as 'believe', 'estimate', 'project', 'expect', and other similar words that convey the uncertainty of future events or outcomes. The statements we will make today are based on assumptions that we as management 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 made today. Such factors are listed in our press release, which was filed on 8-K this morning and available on our Web site and other factors that are listed in other filings with the SEC.

I'd also like to remind everyone of our Web site address of www.SCI-corp.com. On that, you can find our conference call replay of the call made today and also under the page subheading news, you can find this press release that was issued this morning and filed on 8-K.

With that, I am going to pass the call over to Tom Ryan, our President and Chief Operating Officer.

Thank you, Eric.

Before I discuss the quarterly performance, let me say how pleased we are to be able to announce two significant court approvals for class action settlements regarding our securities and (indiscernible) litigation. Both of these approvals were obtained over the last two weeks and resolve the matters as previously disclosed. With these major litigation items largely behind us, we can now devote our entire focus to creating value for the shareholders of SCI.

Now, for my quarterly comments -- in the third quarter, our North American operations delivered a solid operating performance. After a very strong first quarter driven by higher numbers of client families served, the last two quarters brought us back to a more normalized nine-month period that is within our expectations and leads us to believe we are on track to meet our annual guidance for earnings per share and free cash flow.

On a consolidated basis, the loss of operating results from joint venturing our French operations had a 3 cents per share negative impact on our third-quarter results as the proceeds from the French transaction for the most part remained in our cash balances throughout the third quarter. Successfully completing this transaction afforded us the opportunity to reduce our net debt below $1 billion and reduce our net debt-to-cap to approximately 34 percent. This enabled us to get back to our shareholders with the August announcement of the $100 million share buyback program, which Jeff will discuss in more detail in his comments.

While we still have much to accomplish, we move into the final quarter of 2004 with improved financial flexibility, a streamlined infrastructure, and a more disciplined operating structure. From this operating platform, you should expect continued margin improvement in the final quarter of 2004. By simplifying and standardizing our operating profits in 2003, we have reshaped the Company to develop a more efficient infrastructure that is yielding the benefits we projected. It is leaner, reduces bureaucracy and focuses us on accountability. We are very pleased with the progress from these changes.

Now, I would like to review with you our operational performance for the third quarter and nine months ended September 2004. Comparable North American funeral revenues were slightly down in the third quarter as compared to the third quarter of 2003. The reduction was due to reduced revenues from our Kenyon adapter systems subsidiary and from a decline in general agency commission associated with insurance funded prearranged funeral sales.

Pure funeral revenues were essentially flat. A decrease in the number of funeral services performed and an increase in our cremation mix were offset by an increase in our average revenue per funeral for both burial and cremation consumers. We experienced a funeral volume decrease of 2.7 percent for the quarter as compared to the prior-year quarter. We felt strong comparable volume comparison from the West and Southwest in markets such as Austin, San Antonio, Dallas, and the Bay Area. We saw poor comparables in markets in the East such as Washington D.C., Baltimore, Atlanta, and New York City.

On a year-to-date basis, our comparable funeral volume is slightly down .7 percent versus the first nine months 2003 and within our expectations of the period. This trend is consistent with those experienced by our public competitors and feedback from our major industry suppliers.

Our average revenue per funeral for the third quarter of 2004 increased by 2.8 percent above the prior-year quarter. This is partially due to the increased success of our Dignity Memorial funeral and cremation package plan. For the third quarter of 2004, approximately 17.2 percent of the total consumers we served on an at-need basis collected a Dignity Memorial package. Remember, Dignity Memorial Package plans provide our consumers with expanded contemporary products and service offerings and results in a higher average sale than the non Dignity customer selection. This favorable impact, partially offset by the negative impact from the cremation mix increase for approximately 90 basis points for the quarter. For the year-to-date period, our average revenue per funeral increased by 2.3 percent, again in line with our expectations on a year-to-date basis.

For the third quarter, our comparable North American funeral margin is 16.9 percent versus 14.6 percent in the prior-year quarter. Funeral gross profit improvement is primarily the result of reduced overhead pension expenses partially offset by the decline in Kenyon results and the reduction in general agency commission.

For the year-to-date period ended September 2004, our comparable North American funeral margin was 20.4 percent versus 19.2 percent in the prior year-to-date period. We expect our funeral margins to finish in the lower half of our 2004 guidance of 20 to 24 percent for the year. Although pre-need funeral sales production was relatively flat this quarter, our production in the first nine months of 2004, on a comparable basis, improved by 17.2 million, or approximately 6.6 percent. This reverses the downward trend experienced in 2003 as we went through some major changes to our sales organization. A substantial portion of this improvement is attributable to increased Dignity plan sales being added to our the pre-need funeral backlog. For the nine month ended September 2004, over 24 percent of pre-need funeral sales were Dignity sales.

Comparable North American cemetery revenues for the third quarter decreased by 5.4 (ph) percent or $7.3 million as compared to the prior-year quarter. This decrease is primarily attributable to anticipated lower levels of revenue associated with cemetery development projects. For the year-to-date period, comparable North American cemetery revenues are $3.3 million behind prior year period levels. This is ahead of our expectations for the year-to-date period, as increases in recognized property sales have more than offset the anticipated revenue reduction from peer completed cemetery development projects.

For the third-quarter, our comparable North American cemetery margin was 17.8 percent versus 8.7 percent in the prior-year period. Cemetery gross profits almost doubled. This improvement was primarily due to reductions in overhead costs, selling costs, and maintenance expenses. For the year-to-date period, our comparable North American cemetery margin was 16.2 percent versus 14.9 percent in the prior-year period. We expect that our full-year cemetery margin will be at the upper end of our 2004 guidance of 13 to 17 percent.

During the first nine months of 2004, preneed cemetery sales production at comparable locations decreased by $14.7 million, or 5.8 percent, versus the first nine months of 2003. The good news is that at-need cemetery sales production increased by 28.3 million during the same period. The entire preneed reduction occurred during the third quarter and was primarily attributable to lost production during sales counselor changes implemented on the West Coast that were effective July 1 and to a lesser extent to the hurricane related issues that have plagued the Southeast ,where we have a significant presence. While some of these sales (indiscernible) an immediate recognition, most get deferred into the preneed cemetery backlog. This is an important barometer for future growth in our cemetery business.

We recognize the long-term success of SCI can only be achieved by developing topline growth in the 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 our capital in revenue growth in our existing business through more contemporary marketing of the Dignity Memorial brand, which includes promotion through relationships with strategically aligned (indiscernible) 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 cemetery in large metropolitan markets, construction of new facilities through the continued growth of our franchising network. This will come slowly as businesses become available and we solidify the Dignity standards, certification, training, and the value for potential affiliates. We have a very strong liquidity, over $300 million in cash on hand, strong free cash flow, and less than 140 million of debt maturing during 2004 and 2005, which gives us significant flexibility to invest in construction and acquisition opportunities or when these opportunities are not readily available, we will look to other forms of delivering value to our shareholders, such as the recently announced share buyback program.

Number three, ensuring that we attract higher developed 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, which officially opened its campus doors on July 1. This could have the greatest impact of 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.

SCI generated $46.3 million of free cash flow in the third quarter of 2004. In the same period of 2003, excluding SCI's French operation, free cash flow was approximately $12 million higher. About half of the decline in the 2004 quarterly free cash flow is attributable to SCI's decision to trust new Florida sales in 2004 rather than use surety bonding as SCI did in 2003. The rest of the lower free cash flow is attributable to increased 2004 costs such as the cost of complying with the Sarbanes-Oxley Act and declines And our Accounts Receivable collections, predominately in Florida. SCI's definition of free cash flow is included in the third-quarter earnings press release issued this morning.

Year-to-date free cash flow for 2004 is down from 2003 by approximately $14 million, excluding SCI's French operations. Most of that difference is attributable to trusting in Florida on new sales in 2004 while using surety bonding in the prior year. Net SCI trust contributions in Florida were $5.8 million in the third quarter of 2004 and $11.9 million on a year-to-date basis. SCI began trusting in Florida on February 1, 2004. SCI still expects to achieve its 2004 free cash flow within the target range of 200 to 245 million. However, working capital changes in the fourth quarter of 2004 will include an $18 million payroll payment that was not necessary in 2003. This additional payroll payment occurs once every 11 years.

One key use of free cash flow during the quarter has been our open market share repurchase program. Since August, we have acquired 9.5 million SCI shares at a cost of $59.5 million, or $6.24 per share. On October 15, 2004, Moody's increased SCI's credit rating to BA-3 from B-1 and increased our liquidity rating from SGL-2 to SGL-1, the highest noninvestment grade liquidity rating. SCI has been working successfully with its surety companies to secure the return of cash collateral as previously deposited with them. We also made an $11 million loan repayment on the life insurance relating to our supplemental executive retirement program, increasing the cash surrender value of such policies to approximately the same value as the projected benefit obligation. The $51 million face value of these life insurance policies exceeds both the cash surrender value of the policies and the projected benefit obligation under the retirement program by approximately $18 million.

SCI recognized over $2 million of pension income in the third quarter as its pension plan year came to a close on September 30. Our pension income is essentially the difference between the actual pension trust earnings during the plan year and the interest costs on our projected plan obligation adjusted for any changes in actuarial assumptions. The only significant change in actuarial assumption was to reduce the planned discount rate from 6.25 percent to 6 percent.

SCI's General and Administrative expenses for the third quarter of 2004 increased over the same period of 2003 by less than $1 million when adjusted for quarterly litigation accrual in both years and accelerated systems amortization expenses in 2003. Increased Sarbanes-Oxley costs and incentive plan accruals more than offset Information Technology and other cost savings. The current estimate of Sarbanes-Oxley Section 404 (ph) compliant costs is 5 to $7 million for our 2004.

Interest expense declined in the third quarter of 2004 versus the same period of last year by approximately $6.9 million due to debt reduction in 2004. SCI's approximate 25 percent effective tax rate for the third quarter of 2004 was favorably impacted by a $2.4 million adjustment which reconciled the quarter's effective tax rate to position statement on the federal tax return filed in September of 2004. We expect our full-year 2004 tax rate to be in the 11 to 15 percent range although it is possible that the rate could be less.

We are hopeful that our Argentine business will be sold before year end. Its assets and liabilities are currently classified as discontinued on our September 30, 2004 balance sheet. SCI's $2.6 billion of funeral, cemetery merchandise and endowment (indiscernible) trusts had a mixed performance during the third quarter of 2004. Year-to-date, trust fund returns are reasonably good because of the strong performance in the first quarter. These returns include the impact of both trust 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 returns also exclude trusts that have invested in life insurance policies.

In the third quarter of 2004, the funeral trust had a negative quarterly return of .71 percent. The cemetery merchandise and service trust had a negative quarterly return of .53 percent and the endowment care trust had a positive quarterly return of 3.28 percent. Year-to-date returns of these trusts are a positive 3.32 percent, 2.06 percent and 4.59 percent respectively. In addition, the current market value of our portfolio of trust investments at September 30, 2004 exceeds our cost of these investments in the trust by approximately $90 million.

SCI currently has cash balances of approximately $300 million and currently has a very in modest amount of debt maturing during the remainder of 2004 and 2005. Our liquidity, modest debt maturities and new credit agreement, which was discussed on our last call, provides SCI with significant financial flexibility to consider capital structure modifications or strategic acquisitions.

With those comments, April, we will now go to the question and answer phase of this call.

(Operator Instructions). We will first hear from A.J. Rice of Merrill Lynch.

Good morning. It's actually Chris Rigg (ph) for A.J. Could you guys comment on what you've seen in the acquisition market -- just the (indiscernible) spread and how things are progressing there?

Yes, Chris. This is Tom. I'll answer that one. As a matter of fact, we've seen a little movement in that Arena. We actually, as you can probably tell from the 10-Q, closed one acquisition in the third quarter out in California that we very pleased to come aboard. We continue to see a (indiscernible) spread, albeit we're seeing more and more conversations occur in and around this area.

The way we look at this is we're going to examine the markets that we want to compete in, Chris, and then determine the best place to be. If that just so happens to be a competitor that's willing to be part of our Dignity brand and network, we're going to interact with that potential candidate. In addition, we're looking at opportunities to build within markets, again in proper locations and markets where we want to compete. So we are seeing it come down a little bit but I don't want it to look like acquisitions is the only opportunity we have to grow the business, going forward.

Okay. Then could you just give us your thoughts on the buyback? Obviously, you've done more than half of it at this point in a fairly short period of time. I'm just wondering if you think that pace will likely continue into the fourth quarter and then if you probably could (indiscernible) reload that authorization and/or more seriously consider paying a dividend.

Well, the dividend or reload decision would be that of the Board of Directors, and we haven't had a chance to discuss it with them since the last Board meeting. However, in terms of the pace at which we're going, it in part depends on the availability of blocks of shares, because we are limited under the SEC rules -- I think it's the P-18 -- to buying a limited amount of volume based upon our us historical volume absent a block becoming available. We've had some success on that in the third quarter and then through the early part of the fourth quarter, but whether that success will continue is unclear for the rest of the year. We do take think share price, at the values that the market is placing on it today, is correct.

Okay. The last one -- I'm not sure if I missed this but on the Sarbanes-Oxley, I know you said 5 to 7 million for the year and you gave us the quarterly figures. I'm not -- maybe I just dismissed what you've done year-to-date. Then, how was that -- how will that look in 2005 relative to 2004, and I'll leave it at that. Thanks.

Well, the rules seem to be changing as we come into the final stretch of what is compliance here, so it is difficult at this point in time to know exactly what next year will cost us. I hope it will be less than 2004, but it will be a substantial cost in future years because of the way the rules have been interpreted and set up.

In terms of the quarterly cost, I think that was in the press release, and on a year-to-date basis, it's probably somewhat higher. Eric, do you have a figure on that?

It's about 1.8 for the quarter and I think it's about 2.5 for the year, and the pace will accelerate into the fourth quarter.

Okay, thanks a lot.

Our next question comes from Bill Burns of Johnson Rice.

I want only your growth oriented capital spending. I wondered if you might elaborate. It looks like you spent year-to-date 20.4 million. What exactly or in general did you spend that money on?

Bill, this is Tom. Generally, that growth CapEx is being spent on new funeral home and crematory construction project.

So It's on hard assets?

Well, yes, it's on hard assets. Part of it's on the new funeral home construction. About $8 million of it is cemetery inventory development; this is some of the high-end project that we talked about before. In addition, somewhere in the neighborhood of 4 to $6 million is being spent on these new displays that we talked about that we're rolling out across the country, the Dignity displays. So that makes up the proponents of the 20 million you are seeing on a year-to-date basis.

Thanks Tom.

(Operator Instructions). We will next hear from John Ransom of Raymond James.

Good morning. I guess a little bit of a follow-up from an earlier question. Jeff, could you help me with a math question? Math was always a struggle for me. If we add up all of the items for fiscal 2004 that are not subtracted from your recurring free cash flow calculation and we compare those to 2005, what does the net of that look like? I mean, are you looking at a headwind or a tailwind on comparisons?

Well, we haven't given 2005 guidance at this point, but obviously we're getting these litigation issues behind us in a major way. So I would hope that those type of items would not recur. We are also doing some things this year that obviously wouldn't recur. For example, paying off the insurance policy loan is a one-time event that won't recur to future years. So I guess I would hope that a lot of the one-off items will be resolved in 2004. The pension issue has been resolved I think this year and should not recur next year, so that would be another example of a voluntary pension contribution. Most of it's behind us, but I'm sure there will always be things come up that we can't foresee at this point in time.

I guess this is -- as a follow-up -- I guess is a question for Tom. Do we think we are where we need to be relative to the comp structure for your sales force. I guess, in particular, your preneed numbers coming out of cemetery are very good. I wondered if we needed to think about having to have more cash flowing out to those people to try to get the results back in line with what your expectations are. Thanks.

Thank you. It's a good question John. Our changes in our sales comp structure really kind of evolved over time. What I mean by that, as you'll recall, we talked about going to a waste plus program whereby, first of all, the Department of Labor requires us to pay internal salespeople, obviously, for their hours worked. So, we had to have a program that wasn't primarily commissioned based but allowed for an incentive. So we rolled this out across the country beginning in the East. The final phase of that family service compensation program was rolled out July 1 to the western part of the United States, which had continued to operate in a commissioned environment. So I think we've now got a national plan that's stabilized. We surely don't anticipate any more disruptions. From a cash return on investments basis, we're very pleased with the plan we have in place now. We're seeing those selling costs trend down to an area that we wanted and so we think the -- we look forward to the sales moving upwards from this point forward.

Just finally, I guess, Jeff, you guys will give guidance after you report fourth quarter or will you do something before then?

That's normally when we would do it. It's either at the fourth-quarter press delays or slightly before.

Okay. All right. Thanks a lot.

(Operator Instructions). We will next hear from Lee Cooperman of Omega Advisors.

Thank you. I have three question for you. I'm kind of high, I've always been on stock repurchase program when they result in a reduction of the shares outstanding. I understand, because of the call, the converts, that that's not happening right now, but I would like to go through the capitalization and to just basically understand the following questions -- number one, what is the exact shares outstanding as of this reporting date, number one? Number two, if I'm right, the only convertible securities now left in the capitalization are converts to convertible in excess of $13 and above per share. Three, what kind of option creep are we looking at? In other words, the typical option grants annually that the Company issues and whether you're still using options or whether we're moving towards restricted stock. That would be the first set of questions, if we could just zero in on that.

Okay, Lee. Our 10-Q, when we file it, will reflect that as of November 1, there were 330 million -- 339,308 shares outstanding net of (indiscernible) shares. So that would be in answer to your first question.

Right. Then am I correct that the only converts in the capital structure now have convertible in (inaudible) 13 and above?

I don't believe that's true because I think there were some convertibles issued on private transactions that occurred, but the amounts involved are relatively modest inside.

I got you. Okay, and then in terms of the existing options outstanding are how many and what is a typical option grant?

I would have to get for you that information. We could do it off the call.

That would be perfect. I'm sorry. Go ahead.

I could just supplement that by saying that, in 2003, we didn't grant any options, and in 2004, the compensation committee did a combination of phantom program, restricted stock, and option grant, so the option granting that is occurring today is very modest in size.

Very modest, okay. Directionally -- and I realize you have not given guidance for '05 and I'm not really looking for very specific guidance, but would you expect directionally that your free cash flow -- the number you are using in the release this morning of 2 to 245 million, would it be higher? The question is by what amount, or is it that not clear yet at this point in time?

Well, again, we haven't given guidance. I guess what I would say is when we plan it and present it to the credit rating agencies, we did give them forecasts of future years and they seemed satisfied with those forecasts in deciding to raise our credit rating.

The other issue that I did mention on the call is that, in the fourth quarter of this year, we're going to have one extra payroll payment that's in the amount of roughly $18 million and that type of a payment only occurs in one of each eleven years because of the leap year phenomenon, so we will have the benefit in 2005 of not having to make that payroll payment next year that we will have to make this year.

All right, so that 200 to 245 million includes an $18 million cost that you won't have the next year, which will be the -- another gentleman on the phone asked about headwinds and tailwinds -- so that would be a tailwind helping us next year. But specifically, you're not prepared to say whether directionally it will be flat up or down at this point?

I think we'd rather give a more comprehensive -- (multiple speakers).

Good. No problem. I'll accept that. No problem with that. Third, you made a very leading statement in the bottom part of the first page of your press release where you talked in terms -- we have significant flexibility to consider investments or capital structure related transactions that will create value for our shareholders. Are you -- is this a vague reference to a possibility of a recap of the Company or something like that?

I don't think that our Board of looking at those type of possibilities. It has been reviewing share repurchases obviously by the one we've approved, and has also discussed the dividend.

I got you. The only point I'd make is you're one of the few companies that has 330 million shares outstanding that might have difficulty in buying back stock. If you're having typically, just pick a price you are willing to pay and make an offer to the public. The smartest guy I knew who has passed away is an old Texan by the name of Henry Singleton. On eight occasions, from 1972 and 1984, he made large visible public offers to his shareholders to buy back stock, sometimes with cash, sometimes with bonds. So pick a price, make an offer and see which shareholders want to stick and which ones want to kick.

We will give it some thought.

Okay. Thank you for your responses. I appreciate it.

Tor Williams of Omega Advisors has our next question.

Hi. Some of my questions have been answered. I saw that ,sequentially, the revenues per funeral seemed to have declined in the third quarter. Is there any seasonal things impacting it in the third quarter?

I think generally what we expect is volume seasonality, clearly but I think, from an average perspective, it should be -- I don't have those numbers right in front of me. Eric, is it pretty flat?

Secondly, is there any potential obligations for 401(k) which will result in more stock being issued for the foreseeable future?

We have been issuing freshly issued shares to our 401(k). The value that we have been putting into it (indiscernible) in the 15 to $20 million range. We are now looking at whether we should use (indiscernible) stock that we've been buying for those contributions rather than freshly issued shares. However, that decision has not yet been finally made.

I'm looking back at this sequential funeral average and for the year-to-date period, our year-to-date funeral average comparable is 42-48 (ph) versus the core 42-89 (ph), so actually, the third quarter is trending ahead of the year-to-date. I don't have the second quarter in front of me but -- (Multiple Speakers).

But it was slightly lower, so there's nothing -- just a volume type thing? Okay.

Yes, sometimes that's just a cremation mix issue or where the calls are coming from. A perfect example would be -- and you may recall from my comments -- the West Coast had an uptick in volume and on the West Coast -- (Multiple Speakers).

More cremations, yes. Thank you.

(Operator Instructions). We will now hear from Mike Scarangella of Merrill Lynch.

Thank you. Tom, just a question on your outlook on volumes, funeral volumes at this point in time. You mentioned that you were year-to-date tracking with your previous guidance, which I believe was kind of flat to slightly down, but you also acknowledge that that's thanks in part to a strong first quarter. So, as you sit here today, is the year a little softer than you thought on volumes? If you could just look a little bit into next year for us without giving guidance, are you still thinking kind of flat to slightly down? Thanks.

We're still thinking flat to slightly down. To give you some perspective, historically, what we've seen on a comparable basis is erosion year-over-year. We've reduced the amount of that erosion I think over the last couple of years. This year, our internal guidance, we really (indiscernible) planned upon somewhere between 1 and 2 percent decline. Where we sit at nine months, I think we're relatively pleased. As we think about the fourth quarter, you would expect to see that trend more towards the 1 to 2 percent down.

As we look out over time, just to give you some guidance, we believe we've got the appropriate structure in place and a lot of new initiatives in place behind the brand that we can begin to compete more effectively within our local markets. So, we anticipate improvements there -- slow but sure AND as we look a few years out, we begin to hope to see a more competitive environment where we can take that number and make it a positive year-over-year comparison.

Okay, so next year, even if you don't the benefit of an unusually strong first quarter, you are still thinking flat to slightly down because it will be offset by improvements in your business? Is that what you're saying?

That's a fair assessment, yes.

Okay, thank you.

Next we will hear from Lee Cooperman of Omega Advisors who has a follow-up.

Yes, I guess I want to return to this issue of share creep. Can you explain the working of this 401(k) or plan that you have ?

Our 401(k) is a very traditional plan. We basically match in Company stock. That Company stock that we match in for our employees can be either acquired through freshly issued shares or it can be -- you can use treasury shares to accomplish it. As I mentioned previously, the amount of dollar value of the shares that we've been putting into the client the last several years is in the 15 to $20 million range. Obviously, you put in whatever is needed under the plan to provide the appropriate match but we have historically been using freshly issued shares, but we're now evaluating whether we should use treasury shares since we're acquiring shares on the open market.

Would you think -- stepping back, what is the financial objective of the Company? To take -- are we buying back stock because we think it's attractively valued, which is synonymous with saying it's undervalued and we want to reduce the shares outstanding? Or are we just going to merely transfer ownership of the Company from one group to another group?

I think we're buying the shares back because our Board of Directors believes that it's an attractive proposition to do that on behalf of our shareholders.

So the 401(k) plan -- we can just give them cash? Why do we want to issue shares?

We could give them cash and then have them buy the shares in the open market I believe.

Yes, but by giving them cash, we essentially don't increase the share count by the time we think the shares are undervalued. Doesn't that seem to make more sense?

We will considerate it, Lee.

In other words, I want to make sure we're just not transferring the ownership of the Company. We kind of agree with you that the securities are undervalued but if we're not going to pay a cash dividend and we are going to buy back stock that's merely offset by dilution we by issuing stock and other means (ph), that doesn't really accomplish anything. But we could talk about that off-line.

Anything further Mr. Cooperman?

No, that's it.

That doesn't conclude the question-and-answer session for today. Mr. Waltrip, I'll turn the call back over to you for any additional or closing comments.

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

That doesn't include today's teleconference. Thank you all for your participation. You may now disconnect.