Service Corporation International (SCI) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for your patience. We would like to welcome you to the Service Corporation International first-quarter 2006 earnings release conference call. As a reminder, today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to the management team of SCI. Please go ahead.

This is Eric Tanzberger, and on behalf of the entire SCI management team, I want to welcome you this morning to our first-quarter 2006 earnings call. As usual, we will have a couple of prepared remarks first and then we will go to a Q&A session.

I want to remind everyone that today on this conference call, there will be statements that are made that are not historical facts and are forward-looking statements made in reliance of the Safe Harbor protections provided under the Private Securities Litigation Reform Act of 1995. Such statements that would be made today may be accompanied by words such as believe, estimate, project, expect and those types of words that convey the uncertainty of future events or outcomes. The statements 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 that we would make today on this call. These important factors are listed on our filings, including our press release and our 10-Q that were filed simultaneously yesterday and are available on our Web site, which is www.sci-corp.com. On that Web site, you can also listen to a replay of today's conference call, and again, pull up the filings of our press release and our first-quarter 10-Q that was filed yesterday. With that, we're going to start with our prepared remarks. I'm going to pass the call over to Tom Ryan, our President and Chief Executive Officer.

Thanks, Eric, and welcome everybody to the call. As is customary, I'm going to begin with a few comments about what I perceive for us are things that we're pleased with to date in the quarter, maybe talk about a couple of things that we're not so pleased with, and then do a review of the quarter by segment on the Funeral and the Cemetery side.

First of all, I think the things that we're very pleased with is, as many of you know, on April 3, we announced an agreement to combine with the Alderwoods Group, and we continue to be very excited about that opportunity. We're the number one and the number two providers in the death care industry. As we've pointed out previously, we recognize tremendous synergies that we believe are going to create shareholder value for years to come. And as we get closer to this and as we understand more, we see even more opportunities to create synergies and create, therefore, shareholder value.

A little update on some of the things that have happened. We filed our Hart-Scott-Rodino back in April 25, and as many of you know, it will be 30 days and we would expect to receive a second request here on or around May 25. Today, the Alderwoods shareholders are scheduled for a vote at the end of this month on May 31, and we are very excited about that.

Lastly, we have had some initial transition coordination with Paul Houston and his senior management team and it confirmed really what we already knew -- that there's a lot of quality folks, some great initiatives and ideas and we're excited about combining these two companies and taking the best practices, the best people and moving forward in our industry.

Secondarily, I think another thing that we're excited about for the first quarter is our average revenue per funeral service. Our average was right at $4600 and up $222, or approximately 5.1% in the way that we view it. There are some floral revenues that should be excluded; I think you will see in the press release as 6.6. But as an ongoing where we are with average revenue, 5.1% is what we are reporting for the quarter.

Secondarily, this is really being driven by our strategic pricing initiatives. As many of you have talked about before, we are currently in 44 out of 68 markets and we would anticipate that we will be through all our markets by the end of July of this year.

Another thing that we're very pleased about in the quarter was our Cemetery sales production. We had production on the Cemetery side of $133.4 million. This is up $6.7 million over last year's first quarter, or 5.2%, and this is right in line with what we expected and we are very pleased with the improvement there.

And lastly, our operating cash flow was slightly ahead of our expectation at $80.2 million, and I think that was something we were very pleased with for the quarter.

On the not so pleased side, we saw some increased costs. The costs were associated partially with our improved control environment. We've put a lot more controls in the organization with regards to SOX, and those costs continue to increase a bit. We would anticipate as the year goes on that we'll drive some of those costs down as we progress throughout the year.

Additionally, energy costs and health care costs were eroding some of our profits. What we're seeing on the utility side particularly is quite an increase. And again, in certain markets, we're seeing utility companies that have raised their rates three and four times and it's all related to energy. In addition, for our transportation vehicles, we incur increased energy costs -- impact us there with gasoline. Health care costs, we anticipated double-digit increases; unfortunately, they came in a little higher than we thought. So again not too pleased and that didn't help us drop a lot of our improvements to the bottom line.

And then lastly, I would say pre-need funeral production, it was flat for the quarter as it relates to revenues written. That is an area that we want to see some improvement in. We are investing as we speak in initiatives to help drive that that we hope we'll begin to see in the latter parts of this year.

So now I will turn to the Funeral segment for the first quarter. And Funeral profits were a disappointment, as you would expect. They are down $13.3 million, or approximately 420 basis points from the first quarter of 2005. Comparable funeral volumes were the main driver of this. They were down 5.1% and we gave you a little color on that as you will recall in March that we were beginning to see in February of last year and -- I'm sorry -- in February of last quarter, where the volumes were beginning to drop off. You will recall if you look at last year, we talked about this, we had very favorable comparable volumes throughout all of last year. We were up 1.4% for the year, and I believe pretty much every quarter. And as we talked about then, we believe that that was being driven by an increased number of deaths in our markets. And I would tell you the opposite is what is happening here as well. We believe in looking at all of the statistics of other industry participants, suppliers in the industry that predominately this 5.1% drop is being caused by the number of deaths within markets. And more specifically, what we're seeing is geographic concentration as it relates to the volumes.

So for instance in the West, we actually saw slight volume improvements and/or flat volumes and the real concentration of loss of numbers of funerals was in the Northeast and in certain parts of the Midwest. And as an example, in New York City, our comparable volumes were down 12% for the first quarter; in Quebec, they were down 13%; in Chicago, they were down 10% and in the Washington-Baltimore area, they were down 14%.

So very concentrated, and therefore we believe that has driven -- a lot of talk has been made -- about the mildest winter in 100 years I think that occurred in the Northeast. So again, we're not alarmed by the volume drop. We'd like to see it go back the other way. I will tell you that April continued to be soft as we looked at our funeral numbers.

As with regard to comparable funeral averages, we saw 6.6 improvement as we disclosed in the press release. And again, I would give you for future reference as you think about our averages and how they move, it's approximately 5.1% if we exclude the impact of floral revenues.

We successfully managed the trends that we saw and we talked about in August and September of last year. The strategic pricing realignment has had really the impact of reducing a lot of discount that we were seeing in our business. We're seeing also a higher pre-need going at-need average. It's up 6.9% for the quarter, and what is driving that are really two things, if you think about it. First of all, we're selling higher quality pre-need into our backlog. We actually have seen a 700 basis point increase in Dignity packages on the pre-need side. For instance in the first quarter of this year, we sold 31% Dignity contracts compared to 24% in the prior year quarter. That higher quality business turns at-need in the first few years. In addition, we have seen very positive market returns over the last three years. If you look at our trust funds, they've done rather well. And so, therefore, we have accumulated more earnings and when the contracts go at-need, we're pulling both the unrealized and realized portion into the funeral average. So we're very pleased with that.

If you bifurcate the averages into cremation and burial, we are seeing our cremation average up just over 11% for the quarter. The burial average is just over 6%. And so like we have talked about before, we expect to see that cremation average grow at a higher clip than we see in the traditional burial case.

All of this was accomplished while we had about a 130-basis-point cremation mix change, which is within our expectations. As you will recall, we gave guidance of 100 to 150 basis points.

And so with all that going on, for the most part, funeral expenses were in line other than the higher than anticipated cost as it relates to utilities, other energy and health care costs.

Moving to the Cemetery sector for the first quarter, we were very pleased with that result. Cemetery profits are up $4.4 million, or approximately 170 basis points and returned 16.1% in operating margin. Really it was driven on the revenue side. What we saw was sales production and recall, sales production is what we sell, a component of which gets recognized in the quarter -- but our production was up, like I mentioned before, 5.2%, or $6.7 million. And in addition to that, the GAAP recognition as a percentage of production moved up to 88.3% versus the prior year 84%. And what is driving that, why are we recognizing more of what we're selling as a percentage, are two things. One, better at-need selling efforts. We've been seeing that trend going on for a couple of years now. And secondarily, we talked about our property strategy. We are shortening the timeframe of when we build and when we sell. And by putting more high-end inventory out on the market, we are able to sell it and recognize it on a quicker basis.

Unfortunately, the revenue increase did not drop to the bottom line as much as we would like. While variable expenses were in line with our expectations, we saw higher than anticipated increases in our maintenance expense and our general administrative expense within the cemeteries. The drivers of this increase, again, I talked about them earlier, were predominately health care, energy-related expenses, and on the Cemetery side, certain legal costs that also went into that gross margin.

That concludes my comments as it relates to the first quarter, and now I would like to turn it over to our Senior Vice President and Chief Financial Officer, Jeff Curtiss.

Thanks, Tom. SCI generated approximately $80.2 million of cash flow from operating activities in the first quarter of 2006. This compares to approximately $127 million in the first quarter of 2005. The approximate $47 million difference is due primarily to two unique items.

First, a nonrecurring $29 million tax refund was received in the first quarter of 2005. Second, in the first quarter of 2006, SCI paid $16.5 million of long-term incentive payments required under the 2003 long-term incentive plan due to SCI's stock price appreciation relative to a peer group of companies. In 2003, 100% of our long-term incentive plan was in cash based on compensation -- excuse me -- was in cash-based compensation linked to relative stock price performance against this peer group. In subsequent years to 2003, long-term incentives for management include a combination of stock options, restricted stock and cash awards. We would expect the cash long-term incentive payments to be substantially less in future years as the long-term incentive cash amounts are only about one-third of the aggregate incentive grants. The range of cash required depends on SCI's relative stock price performance compared to the peer group, but it is likely to be in the zero to $5 million range in the future years.

SCI's debt increased during the quarter because in January, SCI amended its transportation equipment leases. As a result, these leases were capitalized. This adds approximately $100 million of debt and assets to SCI's balance sheet, making total debt approximately $1.3 billion. SCI also has approximately $500 million of cash and cash equivalents on its balance sheet at this time. Under existing Board authority, SCI currently has approximately $65 million of approved SCI stock repurchases yet to complete. SCI made no share repurchases during the quarter but did enhance shareholder value by completing several small acquisitions having a net cash cost of $14.7 million.

General and administrative expenses increased $2.3 million in the first quarter of 2006 over the same period of 2005 due primarily to our change in accounting policy that expenses stock option costs and also to increased audit costs. Other operating expense reflects a $2.8 million cumulative non-cash accounting adjustment to properly account for certain capitalized lease costs.

Interest expense increased by $2 million due to the capitalization of the transportation equipment leases discussed earlier. Interest income increased by $1.9 million due to the increased investable funds and higher interest rates earned on those investments. The effective tax rate for the first quarter was 36.3%, higher than the same period of prior year due to permanent differences in the tax basis of assets sold in North America. We believe a normalized 35% effective tax rate is appropriate for the recurring operations during 2006.

SCI's $2.8 billion of funeral, cemetery, trust and endowment care trust had acceptable performance in the first quarter of 2006. This performance includes the impact of both trust earned income and changes in portfolio value, but does not include the trust management fees or related costs of approximately 1.1% per annum. The returns also exclude returns on Canadian trusts and on trusts that have been invested in life insurance policies.

For the first quarter of 2006, the funeral trusts had a return of 2.91%. The cemetery, merchandise and service trust had a return of 2.72% and the endowment care trust had a return of 1.85%. For the same quarter, the S&P index had a return of 4.21% and the Lehman Brothers' aggregate bond index had a return of negative 0.65%. On a relative basis to similar portfolios, the performance of SCI's trust was acceptable. The current market value of our portfolio of trust investments on March 31, 2006 exceeded our cost of those investments in these trusts by approximately $105 million.

And with those comments (indiscernible), we will now go to the question and answer phase of the call.

(Operator Instructions). A.J. Rice, Merrill Lynch.

Thanks a lot, hello everybody. Two areas of questions. First of all, just to make sure I got the dates you were saying. You filed the Hart-Scott on the 25th, so the time you get a second request would be the 25th of April, so the 25th of this month? And then is there any time frame you think you would be looking for a final resolution or based on the feedback you're getting thus far?

A.J., I really think at this point in time, it's too early to tell. Depending on what the second request looks like has a lot to do with the time frame.

Okay.

So we're really not in a position to do that. But again, I think we'll know a lot more around May 25th and we'll work through that as expediently as we can.

Okay. On the strong performance in the revenues per case in the Funeral business, I guess it sounds like you are attributing that mostly to the pricing initiatives that have moved pricing away from caskets and more toward services. I know you have also got this segmentation plan that you have worked up with through some work that you've done with [Bain]. Is that having any impact yet, or is that still in front of the company? Can you sort of tell us where you're at with that?

Sure, A.J., you're right. Actually, when our long-term strategy that we talked about last fall, there is really two components of that that I will talk to. One was customer segmentation, and that is going to be something A.J. that's going to take some time. It really has -- it needs to be implemented within our infrastructure. We're not anticipating to see any material effect from that until probably 2008 as it relates to the segmentation piece. It really had a long-term payoff. It is something we're in the midst of developing today.

On the efficiency side, we talked about standardizing best practices within the field and the like. Those efforts are underway. We would expect to see some impact from that in the latter half of this year, and particularly in 2007. But to your point on this average, it is primarily related to the strategic pricing initiatives that we've been talking about. Like I said earlier, we have rolled that through 44 out of 68 markets to date and we would anticipate having them in all 68 markets by the end of July. So we're seeing the result we began to see last year. We continue to see very favorable responses from our front line employees as well as from consumers. Because, again, like we've talked about before, we've [seen] J.D. Powers surveys that support that talk around clarity of pricing and things that we provide, and we continue to see positive trends in all directions as it relates to this industry.

Sounds great. Thanks a lot.

Thank you A.J.

Robert Willoughby, Banc of America.

Good morning, this is actually Matt Jackson in for Bob. Regarding the $15 million in acquisition spend, what exactly did you buy in the quarter? And is there likely to be any additional deal spend ahead of the Alderwoods close?

Well I think, Matt, what we're doing is like we've always done. Our strategy has been, if we find deals that fit our strategy and the price is right, we're going to do them. We had a couple of deals close, I believe a cemetery as well as a number of funeral homes within the quarter. Again, they were in a market that we identified we wanted to expand in, the right opportunity was there. So I would tell you from time to time, yes, we probably will see smaller acquisitions. There's nothing of any material nature to speak of. But that could be the case. But, again, I think it's opportunistic. We also have a budget that we've talked about before building funeral homes in certain markets as well. So I think you will continue to see that trend, but not in any material way.

Okay. And you commented on the April funeral volumes looked soft as well. I guess do you have any additional comments as far as gauging the residual effects in the second quarter, as far as volumes?

Well, again, I think we've seen a full month of April and we've seen softness and a lot in the continued areas. We get -- as you would expect, we get updates more than monthly. We have seen a little bit of -- we believe a little bit [had] come back in earlier May, but it has only been, like I said, probably eight, 10 days of activity, so I don't want to declare it turned back the other way. At the same time, when we know we see continuing volume issues, we're constantly managing our variable expenses. And one thing I can tell you is I think you will see as the quarters go on that we will do a better job of managing expenses as it relates to both the Funeral and the Cemetery side.

Finally, if you could give us a sense of the drivers behind the higher health care costs, because I would have thought with the divestitures, these might have trended lower even with the macro pressures?

I think earlier -- we don't have a lot of intelligence on that. We're in the midst of researching that. We anticipated it because of the macro issues. And so, again, I think that is a primary driver for us. I don't have a great answer for you yet. I will tell you that that's something we're looking at constantly. I think companies I talk to all over the country and a lot of people in Houston are experiencing the same things, and it's just something that we've got to get behind and manage more effectively. So I would say, generally, it's macro-level stuff and, again, we have got a lot of employees and from time to time, those issues arise.

Thanks, I appreciate it.

Tom Bacon, Lehman Brothers.

I was just wondering on the volumes, you were down a little bit more than your competitors. And I know that you said that that had a lot to do with the regional effects. But I was the wondering, is the pricing realignment, are you losing any market share, just particularly from maybe the low end price conscious kind of customer?

Tom, that's something like we've talked about before. You always worry about that possibility. What we do as we talked about before is we survey everybody in these markets after we've priced in those markets. And based upon that intelligence, I would tell you, we're hearing nothing of that that's impacting us today. I will tell you, what is unique is, is you look at the 44 of the 68 markets that we have repriced, we started as I said before, on the West. Well in the West, we didn't have any volume issues. We had volume issues on the East Coast, and a lot of those markets have not been repriced. So from the first quarter intelligence, I would tell you, there is nothing yet that gives us any evidence that that's driving it.

Okay. And I think you said on the last call, I would think as far as the realignment that you're doing that in the markets where you are feeling the greatest competitive pressure. So over the balance of the year, would you expect the gains to sort of tail off a little bit from that pricing initiative?

Well, I think I would say it this way. Because these are -- we're doing about two a week, I think is the pace that we're doing today. And so you're constantly seeing a phasing-in. So what I would expect is continued numbers to roll in through the second and third quarter that are very favorable because you're actually going to have, even though we're in 44 markets today, some of those weren't repriced until March. So you're going to get the full effect of the second quarter year-over-year. I would tell you that as we get to the end on some of these, you're exactly right. The way we started this, we had a very scientific approach. It wasn't just in markets where we were seeing to issues as it relates to discounts. There were other drivers for those economics. So I would see a slight trend, but we feel very strong about how we will go throughout the rest of this year as it relates to comparable funeral averages.

Okay. And then I also noticed in the Q, you got another comment letter from the SEC. Is there anything you can say about that, or maybe sort of expand upon the issues there?

We did get a comment letter. We were reviewed, our 2005 10-K was reviewed. We had seven comments in total. We answered the comments back to the SEC within the required 10 business days. We highlighted three items just because we're not quite sure how the SEC will respond back to us. But we feel very good about our responses.

I think the only thing I would mention is that we have consistently applied the same GAAP throughout the industry as it relates to the cash-flow statement, and especially as it relates to the earnings from the trust funds that come through cash-flow from operations upon maturity or delivery of merchandise, or maturity of contracts or performances of services. And we know that there's others in the industry that have received similar letters. And that's really for the purpose of us disclosing that is just to give everybody a heads-up that you're usually always in consultations with the SEC on those matters. Certainly as you know, our accounting under death care was fully [bedded] for the most part with the SEC as an industry group during that [746] transition, which is a couple of years ago when we brought the assets of the trust on to everybody's balance sheets in the industry. So the only thing I would mention again is for that cash-flow particular issue, I would describe it as an industry issue because we're all consistent throughout the industry in terms of our accounting.

Do you think they're looking for more disclosure, or just reclassification, or don't really know?

We don't know. We had a question that asked us -- how do we account for the cash flows associated with the trust funds, and we pulled most of the information right out of our 10-K, because as you know, we have a pretty beefy section, three or four pages of describing that in our MD&A in our 10-K, and responded back to them as positively and as timely as we can. But we are not quite sure where it will go from here.

Okay, great. Thank you.

John Ransom, Raymond James.

In your first-quarter cash flows, was there any item there that we should think about as unusually contributing? I know about the timing of bond payments. Is there anything in there that we should think of as not recurring?

No, John. When you look at it compared to prior year, the working capital is somewhere positive, just south of $10 million. And last year, it was around $50 million. But as we've talked about before, we had a $29 million tax refund in the prior quarter, and then we had the long-term incentive comp payments were just over $16 million. So that is basically the difference. They're somewhat flat when you back those out, and they're probably about $3 or $4 million in the quarter above our expectations in terms of cash flows. We continue to see strong AR collections from our funeral homes and shrinkage in DSOs, but there is nothing that I would describe as unusual in the quarter, John.

Okay. What was the non-cash land amortization costs in the quarter? Do you know that?

About $5 million, if you're talking about the new capital leases.

No, the land amortization costs that you run through your P&L?

It's probably about $7 to $8 million in the quarter.

Okay, and cash interest in the quarter?

Give us one second and we will pull that for you.

No problem. And while you're looking it up, I guess my other -- as you guys have kind of tiptoed back into the acquisition market, what are the valuation metrics that people are now agreeing on? Is it free cash flow, is it GAAP EBITDA? What do you think that is right now?

Well, I think what most people are doing, and they're pulling this cash interest number. If we don't get it, we'll call you right back, John. But essentially what I think, as you know, we didn't really define free cash flow in our guidance in 2006. We tried to use more of a GAAP method and say, this is what our cash flow from operations will be, and you know that number's about $300 million in our guidance. And then we tried to split our capital expenditures into four categories -- maintenance CapEx in the truest sense of how you think about it, then cemetery development, and then kind of the funeral home construction that Tom talked about before, which is somewhere around 15 million, and then just other smaller growth type CapEx. And so I think what most people have moved to is really kind of taking the cash flows from operations and subtracting out the first category of the maintenance CapEx, and then the cemetery development as well, and then leaving the kind of pure, real voluntary growth stuff such as the funeral homes and the other growth capital expenditures out of their calculations.

John, I think to answer your question on how we look at these pricing, obviously with the Alderwoods deal, we look at every deal on an internal rate of return. So we're looking at discounted cash flows out into the future against our weighted average cost of capital. We do the same thing for smaller acquisitions. I don't think that's the way that the industry views it. That's the way we view it. They still look at the multiple of EBITDA to some extent. And again, you are seeing things that range in between probably six and eight times as where deals are getting done out there, on that type of basis.

Okay. And so where do you think, in terms of where you'd like to peg the price, where are you pegging -- for smaller deals, where are you pegging that multiple of cash flow, or BCF?

I think our weighted average cost of capital is -- we use 8.6%. I think a lot of people think it's lower. What we've tried to do is take a more long-term view of interest rates because we are still at historical lows. So we view 8.6 and we look for a spread of about 300 basis points. So you will see a lot of IRRs in our deals that are going to be north of 12. And I think it also can go lower or higher based upon the number of synergies. As you saw in Alderwoods, there were significant synergies that allow us to pay a different multiple than we would, let's say, for a smaller acquisition.

Are you still -- any reason to think the Alderwoods deal is a still end of the year timing, or is there a chance it could be a little quicker than that?

I think it really depends on what happens on May 25, how -- what's the size of the second request and then the ability to work with the FTC. I tell you, we've had very good interactions with them so far. But at the same time, I think, John, it's really too early to tell at this point in time.

John, that cash interest number is around $11 million for the quarter. We had about 100 million of expense throughout the entire year. But if you remember, it gets lumpier with the bond payments, predominantly in the second and fourth quarter now, in terms of cash.

Right, right. I guess, finally, looking at cost, Tom, you guys have been three or four years at making a dent into your kind of permanent cost structure. Is that process winding down, or do you think there's still opportunities now that the -- does Alderwoods free up -- I know you talked about a combined synergy number, but is there still work to be done at the core SCI level in terms of headcount, or are you kind of done with that?

I think there is still work to be done, and I think there is a variety of ways to look at increased efficiency -- utilizing technologies, utilizing standardized models as it relates to how we deliver service to client families as well as in the back office. So we still see a lot of opportunity, again, some of which bringing on Alderwoods. But I'd tell you, if we didn't have the Alderwoods transaction, we'd still see opportunity and that's part of our strategic plan. We anticipated seeing some of those efficiencies towards the end of '06 and surely throughout '07.

Is there a reason that we're not seeing that you guys have been so conservative about share repos? Obviously, the cash continues to pile up and your stock at a multiple on free cash is pretty cheap. I guess we are a little surprised that you guys have been so conservative. Is there just something we're not thinking about there?

For the longest time, as you now know, we were unable to tap the market because we were having discussions with Alderwoods. We now are on the brink of financing this deal. And as we look at this deal, we're obviously going to do an all-cash deal and fund it here with new debt. I think we've taken the approach of, we have the availability to do some share repurchase, but again, I think we want to show a commitment to get back to the appropriate capital structure that we have always conveyed over the quarters here. And so we're going to use a significant amount of cash, as you could expect, to fund this deal.

Are there any more real estate sales to be done to help deleverage the balance sheet pro forma, or are you done with that?

No, I think there is. Not in any mass way, but from time to time, we're constantly evaluating opportunities to -- and again, we look at internal rates of return and say, is this land or is this business better cash in our pocket. And so we are constantly analyzing models, looking at businesses, and you will continue to see us dispose of certain businesses, you will see us invest in others all along our strategy. We believe that scale is good, like we said in our strategy in '04. At the same time, we want healthy businesses that are in markets that align with the customers that we want to align our long-term interests with.

I will conclude. I think it was -- that's pretty good cash flow from weak volume, so I think that's good work by your management team there. Thanks.

Mike Scarangella, Merrill Lynch.

I just want to see if there are any updates in your thoughts on the capital structure related to the Alderwoods transaction. Specifically with the Alderwoods bonds, I think you said you would either tender or [defease]. Just wondering if you have a preference at this point.

Tender.

[Done].

Cheaper.

Good for you. I think that will be a popular determination. And then secondly, Jeff, I think you had said for financing the deal, you kind of have all debt options available to you. Have you done any more thinking to narrow that down at all?

We have. I think probably the most efficient thing for us to do is to do a portion of it in long-term debt and a portion of it in prepayable debt. And that's the direction we're heading at this point in time.

Would long-term include both traditional bonds and converts?

No. Right now, we are focused on straight debt (MULTIPLE SPEAKERS) within the last couple of years.

Okay, so straight debt and bank debt, it looks like.

Yes.

Okay great. I'm sorry if it's a sore spot, but the 2017 bonds, I know you've been trying real hard to register. Where does that stand, Jeff?

We need information and need to work with Alderwoods to comply with the SEC rules so that we can get them registered, and we're in the process of doing that.

So it's safe to say the announcement of the deal has held that up?

Yes.

Next couple of months, you think?

Yes.

Last question, rating agencies -- is it too soon to hear from them on where they will shake out?

We have not been back up there, Mike. We've finalized kind of the capital structure. As Jeff just alluded to, we have visited with our Board this week and we'll probably now get set to go up there in the next couple of weeks.

Will we see any capital structure changes from you ahead of the close?

We may choose to pre-fund some of the debt, but we haven't made final decisions on that.

Okay, thanks very much.

Jennifer Childe, Bear Stearns.

Thanks. I didn't see this in the Q, that the contribution from trusts and insurance accretion for the quarter?

The funeral trust had a contribution of almost $10 million, and my recollection, although I don't have it written down in front of me, is the insurance accretion of, again, the funeral side, was a little over $3 million. So it was pretty comparable to what you have seen in the prior quarters.

Okay, and the Cemetery side?

I don't have that number in front of me, but maybe I can get it. Hang on. Okay, that is $3.2 million, and the ECF income was 8.3.

Almost 11 on the Cemetery side.

John kind of danced around this, but what multiples did you pay for these acquisitions?

I don't think we're disclosing that.

Jennifer, because the next one comes, I don't think it's appropriate for us to discuss those (MULTIPLE SPEAKERS).

Sure, fair enough. I think I heard you say that you're finding additional synergies with Alderwoods. Would you care to quantify the level?

First of all, I think what we've publicly disclosed is that we have identified some synergies from what I'd say 40,000 feet for the deal. We have now had the opportunity to meet with their senior management team, which we were very impressed with some of the things they had going on. And I think between shared practices -- before, Jennifer, we didn't have access to, for instance, supplier's agreements and things like that. You couldn't make any assumptions as it relates to that. As we dig more into this, we see further opportunities for that. And probably more importantly, again, a sharing of best practices as it relates to Alderwoods and ourselves, things that we're doing that we can apply to the Alderwoods businesses and vice versa, things that they are doing that can help ours.

So might that be an additional 10%?

Jennifer, now, it's really too early to tell. I would just tell you that we feel very positive about it and we're excited about the combination. And, again, we see more, I'm not in a position at this point to quantify that.

Okay, thanks a lot.

Dana Walker, Kalmar Investments.

Could you talk about what happens in the markets where you reprice? Has your competition started that process before you initiate, or do they follow on, or do they not follow on?

I think in most of our markets, this is something that we originated. And what I would tell you is, for the most part, we're not seeing people follow suit yet. I wouldn't say that that's the case everywhere. So I think we're leading it. And at this point, we're not seeing as many folks doing it the same way. This has been a tradition in this industry I think the way pricing has occurred over a long period of time, you know, 40 and 50 years. And so I do think it takes a different perspective. What we are finding again is that even when we're interacting with folks that it does that way, when they go through the transformation and they understand that we're putting the price on where the customer sees value, and we're putting the price on the things that differentiate, that the customer's happy, the front line employee understands it and very beneficial. So I would be surprised ultimately if more people don't follow that suit, but we're not necessarily seeing that so far.

Since you folks see the numbers up close, are there any statistical nuances that arise when volumes are soft and price rises that exacerbates one or the other?

I mean, unless you have a specific one, Dana, you want to talk to. But no, I think again, it's market-to-market. We're not seeing any reaction I think to our new pricing that leads us to believe we're losing any volumes. So we feel real good about this initiative. And to the extent we get volume in a quarter and you could have had a very good quarter today. I think we're very pleased with being able to turn in $0.10 per share in a quarter where we lost 5% volume. That's not something that in the past we would have been able to achieve.

Wondering whether a soft death rate in some way affects the price average per funeral?

I'll tell you what it is, it gets back to mix. So I'll give you an example. The average funeral in Florida is lower than the average funeral in, let's say, New York or Tennessee, pick another state. If you're seeing death rates occur, if they're dropping out of high-dollar areas, which I think we saw, you're seeing funerals not being performed in the state of New York, I mentioned before and Maryland, also in Québec and other places. Those tend to be high average funerals, and therefore, you see a mix shift. So I think that's where you would see an unusual occurrence as it relates to volume and average. But otherwise, really not.

The way you just described, that sounds like that would be a dampener to your average revenue per call, rather than a help.

Exactly. I think every quarter, you have to look at it, and we definitely saw in some of our higher average markets down volumes. And I'd say on the West Coast where you predominantly would see lower averages, we didn't have the volume erosion.

A couple of last quickies. You mentioned that your Dignity penetration on pre-need was up 700 basis points, and yet your pre-need production in the funeral side seemed to be softer than you would like. Any connection?

Yes. I think what we saw was a healthy increase in the average funeral, pre-need funeral, that we wrote. And we're seeing the volume decrease somewhat. And I think there's a couple of things that play there. We have had some changes to our comp structure, we've had some changes to -- we now charge interest on pre-need funeral trust contracts. Those type of things can impact the production numbers. In addition, what we're seeing is in a lot of these markets, we have what you would call imminent death policies. And so in a circumstance where someone is terminally ill, they may agree to write a contract. And historically, we would write those contracts and they would be pre-need production and they would turn around in two months and they would go from pre-need to at-need. We've taken a different approach in the marketplace now to rather than writing a pre-need, is have an at-need counselor assist, and that may not result in a pre-need contract. So some of this is just traditionally the way pre-need has been written. But I'd also tell you, we're not pleased with the number of contracts we're writing, and we're in the midst now of applying training and others about lead generation and trying to penetrate more markets with pre-need funeral product.

Final two questions. Can you comment on the rate of -- or the comparisons Dignity at-need? And can you also talk about how you expect your G&A spending to trend through the year, from that $22-plus million number in Q1?

I will answer the first one on the Dignity raise. On the pre-need side, and I'm speaking a little to memory -- I'm sorry -- on the pre-need side, we were, as I mentioned before, 31% approximately of our contracts versus 24% in the first quarter of last year. On the at-need side, we wrote approximately 20% of our contracts compared to just over 18% I think in the prior quarter. So we are seeing -- continuing to see lift on the at-need side of Dignity, but a higher lift within our pre-need backlog.

Then on your second question, our G&A, our guidance of 79 to 83, so it's trending to be slightly higher than that, but we anticipated it trending it back down. A lot of -- remember the '05 SOX costs carry over through March 1 of '05 when we filed our 10-K and completed our SOX '05 process. So we tend to see that trend down from that level back into the guidance for the rest of the year. Hello?

Still open, please go ahead.

I'm done.

Thank you, Dana.

We have no further questions in our queue at this time. Gentlemen, I would like to turn the conference back over to you for additional or closing remarks.

I want to thank everybody for participating today and we will see you on the second quarter call. Thank you very much.

That does conclude today's conference call. Thank you everyone for your participation.