Service Corporation International (SCI) 2006 Q2 法說會逐字稿

This is the conferencing center--please stand by, we are about to begin.

Good day, everyone, and welcome to the Service Corporation International second 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 call over to the management team of SCI. Please go ahead.

Morning. This is Eric Tanzberger, Chief Financial Officer of SCI. I want to welcome everybody to our second quarter earnings call this morning. As usual, we'll start with a few prepared remarks and then we'll open the call up to a question and answer session.

Before we proceed, I'd like to remind everyone that the conference call today will contain some statements that are not historical facts, and are in fact, forward-looking statements, made in reliance with the Safe Harbor Protections provided under the Private Securities Litigation Reform Act of 1995. These statements may be accompanied by words such as believe, estimate, project, and those types of words that convey the uncertainty of future events, or even outcomes.

We believe these statements that we will make today are based on assumptions that we believe are reasonable. However, there are many important factors that could cause our actual results in the future to differ materially from the forward-looking statements that we will make today, or in any other documents in our file.

You can get more information and important factors related to these forward-looking statements in our filing with the SEC that are available on our website, at www.sci-corp.com. I also want to remind you that a replay of this conference call is available on that same website for approximately 90 days, under the Investor page, and under the sub-heading Conference Calls, again, on www.sci-corp.com.

With that, we're going to start with the prepared remarks, and I'm going to turn the call over to our President and Chief Executive Officer, Tom Ryan.

Thank you, Eric, and welcome, everybody, to the call.

First of all, I'd like to start off by going over some things from the second quarter that generally we're very pleased with. And then I'll get to the things that we're not so pleased with.

First of all, we're very pleased to see the progress to date as it relates to the Alderwoods transaction. We've been in continued discussions with the FTC, which I would define as very thorough yet very constructive. We've complied completely with the second request, and we think everything's really on schedule.

In addition, we've continued the due diligence, we've continued to plan integration. In doing that, we feel very, very comfortable with the synergies we've identified previously to you, and we will probably be in a position shortly to re-quantify and more specifically look at some of the opportunities at a later date.

But again, we feel very good and very comfortable to date with the things that we've found as we've begun the transition. The transition team has been very active. We've had tremendous cooperation from the Alderwoods management team--we have a lot of respect for their people, and are learning a lot of things as we go through the process. I would say that, as we talked about in the timing agreement that we entered into with the SEC, we would expect this transaction to close sometime in the early fourth quarter, probably during the month of October.

With the second item that we're very pleased with, the second quarter, as you can read from the press release, is the average revenue per funeral service. You see that it's up 9.3% for the quarter. The average is now $4,737.00, which is up approximately 8.2% if you exclude the full revenue. You will recall that the classification issue--that isn't necessarily consistent with the prior year.

So the real improvement, about 8.2% for the quarter, and this is predominantly due to a strategic pricing initiative that we've been talking about. We now have implemented that pricing initiative in all markets except for five, and those will be completed here in the month of August.

The third item that, again, we were pleased with during the quarter, is the progress we've made as it relates to one of the planks of our strategy, which is operating discipline and beginning to leverage our scale more. We've talked a little bit about the full-time equivalent metric that we're utilizing in staff management.

In Phase I, we've been utilizing best practices and disseminating those best practices consistently throughout other markets. To date, we believe we are on schedule to identify $20 million of efficiency as we approach the year-end 2006. That will be a $20 million run rate going into 2007.

In addition, we've worked very diligently on our centralized purchasing website. We now have the ability, with the agreement of the distributor, to procure products on a much more efficient basis over the web. It's live now, and it helps us get more consistency, particularly as we think about rolling Alderwoods into our organization, and utilize purchasing strategies, which will be, again, helpful to both our margins and our capital expenditures.

The last item I wanted to mention that we're very pleased with is our operating cash flow. We generated approximately $71.4 million from the second quarter. While this is flat with the prior year, and Eric will talk in more detail about it, in June of 2006, and for the second quarter of 2006, we had an additional payroll.

This will correct itself in the month of July on a year-to-date basis, but what that means, because our average payroll's about $20 million, is our cash flow improved approximately $20 million for the quarter. Eric will get into more reasons for that in his discussion.

Now to the things we're not so pleased with.

Number one, our comparable volume levels, again, are trending down. And I'll talk a little more about that when we get to the funeral analysis.

In addition, we continue to see, we think, excess costs as it relates to the anticipated controls related to our business. We think we have very adequate controls, and because a lot of the confusion of interpretation in stocks, and PCAOB, and the accounting firms' reaction--I don't think we've been as efficient as we can be in dealing with the control environment and the related testing.

So we see that as a future opportunity, but an area that today we're bearing a cost we probably don't need.

The third item that we're not so pleased with is energy and health care costs. And again, those are things somewhat out of our control, but we're doing some things to try to mitigate those.

And lastly, I'd say, our preneed funeral and cemetery production for the quarter wasn't where we wanted it to be. As many people have seen, our funeral production is down about $9 million for the quarter, and particularly relates to the number of contracts.

I will say that strategically, there's a reason for some of this happening. What we've been doing is focusing on higher quality business, in addition to writing better products with the appropriate commercial terms. Such as reducing interest rebates, reducing zero interest policies, and really including that higher quality, more economically beneficial product out there.

And in doing so, we've seen some lack in production. We're seeing fewer contracts, but we're utilizing this to really focus our sales team on the fundamentals of selling. And we believe a lot of this will be corrected--you will begin to see correction in the back half of the year.

Now to the funeral segment. The funeral side of the business, the profits are up $3.3 million for the quarter, or approximately 90 basis points, so our margins were 19.1%. The number one item we should talk about is comparable funeral volumes, which were down 5.5% both for the quarter and for the six-month period.

Let me first say, I think it's important to remind everybody, last year was a--2005 was a very good volume year. We saw consistent increases in comparable volumes, we believe due to increases of deaths within the marketplace.

So we're comparing against a year, that's difficult based upon historical trends. We believe we are directionally consistent with others in the industry. Some of the things that we have available, suppliers looking at other competitors--so the primary reason we think these volumes are down is because we think the number of deaths that are occurring in those markets have fallen.

Having said that, we do believe we may be experiencing slightly higher declines, particularly in the first quarter--we mentioned this before, as it relates to our geographic concentration in the Northeast. You will recall in the first quarter, for instance, in New York, it was down 12%. Washington and Baltimore, down 14%, Quebec 13%, just to use some examples.

So our over-concentration may be relative to others, that was a contributing impact in the first quarter. As we analyze the second quarter data, we really didn't see that as a factor. Because we're seeing the volume decline is more dispersed throughout North America.

Having said that, we have identified two specific areas that are accountable for 120 basis points of the 550 basis point decline. And they are specifically in the Pacific Northwest, and in certain sections of Florida. We've identified approximately 700 [calls]. These were--these are really calls that were local decisions to exit unprofitable immediate disposition activities within those markets.

So we chose, in a way, to not compete for those business. And again, these were not profitable contracts or decisions for us, and I think a lot of our communication of our future strategy on segmentation is driving a lot of this local decision.

So we wanted to make sure, as a check, as I'm sure you want us to do, of---then there 's strategic pricing, the strategic pricing shifts, so we believe that has an impact on volume. And it's our belief, that after much analysis, that that is not negatively impacting our volume.

Why do you say that? We've done a very thorough review, both through our J.D. Power surveys, which continue to tell us that we're improving, and particularly as it relates to clarity of pricing and things of such.

In addition, as we're rolling into these markets, we're constantly communicating with our people, who are interacting with the customer. And the feedback we're getting is very positive, again, that people view reductions on the product side favorably, and people understand the value we're providing for the service that we're executing.

Having said all that, I will say, most of the discounting problem historically has related to discounting on products. So the strategic pricing fixes a lot of the discounting issues that we've had in the past. Having said that, we did lack a certain discipline as it relates to discounts other than product discounts. And we made the effort, through our management structure, to focus our field of attention on unnecessary discount.

Having said that, when you communicate like we do, and we don't have segments, we can never--you can imagine that there's going to be instances where people may decide to not communicate our policy most appropriately, and we potentially could lose some business. In our view, that's not very much. If we lost some call, it's very, very small, and again, we believe it's the right thing to do, to focus the culture on unnecessary discounting and we think it's resulting in higher margin.

Once we get to segmentation strategies, we believe a lot of this will correct itself, as we understand our customers better and apply appropriate discounts to the customer segment.

On comparable funeral averages, we continue to see those increase. As we mentioned before, we're at 9.3% in the second quarter--really, 8.2% when you exclude the floral effect. You will recall, on a call we had, I believe after the second quarter, that we were seeing trends in heavy discounting, and we've reacted to that. The strategic pricing realignment, with more focus on service and less on the product, and the related reduction in discount, is really primarily driven the improvement.

In addition, our preneed going atneed average is up 6.3%. Why is that? It's particularly because we're writing higher quality preneed business, writing higher Dignity packages into the backlog. And in addition, we've seen positive market returns over the last few years in our trust fund, which contribute to that average.

On the cremation side, we actually saw our average cremation at $2,636.00. That's up 16.8%, quarter over quarter. This is reflective of our strategic pricing initiative, and our penetration of Dignity packages within the cremation consumer. We're finding that people are paying for good service. We're finding that people are broadening the products and services that they purchase in the cremation arena. We actually saw our Dignity take-up rate go from 16.3% in a prior second quarter to 18.9% as it relates to, again, cremation Dignity products.

We also saw the cremation mix flat, or to last year's quarter, at 41.1%. We do not believe this is a reverse of any trend. You will recall that quarter to quarter, these cremation rates can be volatile, and it's better to look at them in longer terms, particularly for the year.

If you add back the 700 immediate disposition calls that we talked about in those selective markets, our cremation rate would have been 41.8%. It would have increased by 70 basis points. So this probably is a more normalized expectation for us, as we move forward.

For the most part, funeral expenses were in line with expectation. We saw staffing efficiencies offset increases in utilities and general and administrative costs, surrounding a lot of the controls and the related testing in our field environment.

On the cemetery side of the business, we saw cemetery profits improve by $8.4 million, or 470 basis points, to the level of 20.3%. On the revenue side, we saw sales production for the quarter, on the cemetery side of the business, at about $137 million. This is down $5.3 million, or approximately 3.7%, for the quarter versus the prior year's quarter.

As we've done our analysis here, we've identified three specific markets which account for all, and actually a little more, of the decline. Those markets are the Bay Area, San Diego, and Atlanta. And most of the year-over-year declines are focused on large sales that occurred in the prior year that haven't occurred.

And as many of you know that are--know much about this business, large sales do kind of come, sometimes they don't come. We do expect those areas will get their share, but they didn't come in this quarter. So that is the preponderance of--one of the reasons why it's down.

The good news is, GAAP recognition, as a percentage of production, is 91.2% in this year's quarter, versus 87.6% in the 2005 quarter. This is primarily due to better atneed selling efforts. Our atneed sales were up $65 million. Having said that, I do think we're seeing an impact--a slight impact, but again, we think that a favorable trend, in that, because we've instituted some policies that results in, I would say, better business for us.

For instance, we've eliminated interest rebate programs in certain of our cemetery product. This is very smart--it's going to save us money, it's going to drive cash flow, it's going to drive margins. Having said that, when you take a lot of these programs away, you tend to see, sometimes, sales forces getting used to that check.

I think we're seeing a little bit of that, but we would expect, again, as we move forward in this, to come back after the year, and we'll be able to improve our cemetery sales production.

The third item of revenue that's very--that is also material, is our Other Revenue category. We had $26.2 million versus $17.2 million, and that is primarily a $7.9 million recognition in our eternal care fund. Eric's going to give you more detail on it on his comments.

General expenses were managed very well. We had metric-driven efficiencies that were gained in our selling costs. We're managing our sales people much more efficiently, which are driving down the costs. These are offset by higher maintenance and higher administration costs within our cemetery operations.

In closing, as we look to the back half of 2006, what might we expect? On the funeral side, I would expect continued strong funeral averages due to strategic pricing realignment. That, I believe, you will continue to see.

Secondarily, market trend, on the volume. They're unknown, of course, and no one can predict them. I'd hope to see that they're better than comparable 5.5% down, which is what we'd experienced in the first half of the year. Having said that, nobody knows. We've got to continue to execute.

I would expect to see a slight continued loss. The very low price, immediate disposition, particularly in the markets that I mentioned before.

Another item, I would expect a favorable impact from the full-time equivalent metrics that we're utilizing now within our funeral and cemetery operation. And we should begin to see the financial impact of those in the back half of the year.

While there's not a lot of good news on the relief on the energy front, we would expect those to continue to trend that way. Our comparables should get better. You will recall that in the back half of last year, is when we really saw energy prices increase. And so therefore, we would expect better comparables--unfortunately, not better real costs and improvements.

On the cemetery side, we would expect improvement in the cemetery sales production. We're focusing on that, and again, we're focusing on fundamentals, selling better business, and we believe we can increase production in the back half of the year.

Continued efficiencies in the selling cost metric. Again, we've put metrics in the sales force's hand--they've been managing it very well, and you should continue to see that comparable improvement throughout the back half of the year. And as I mentioned before, the beginnings of utilizing the full-time equivalent metrics in our cemetery business--well, it should help us contain costs as we conclude 2006.

With that, before I turn it over to Eric, we didn't get a chance to--because of timing and the like, I want to especially recognize Jeff Curtis and all his contributions he's made to the company. Jeff retired effective June 30th. He's still available to us in a consultant's role, and did a lot for this company, and we really appreciate him and wish him the best of luck.

With that, we've got a great replacement in Eric Tanzberger. I think a lot of people know Eric in his role as Corporate Controller. He's been very active in the investment community. So we look forward to Eric's contribution.

And, you know, because it's Eric's first conference call, I'm sure he's spent three days on his prepared remarks, so please--everybody take it a little easy on him.

So with that, I will turn it over to Eric Tanzberger, our Chief Financial Officer.

Thanks, Tom. I think I'll start with just kind of reviewing some of the historical results, and then I'd like to shift gears a little bit and talk more from a forward-looking perspective. And then to--as Tom kind of did at the end of his remarks, in terms of how we're expecting, from a financial perspective, the back half of 2006.

First of all, I want to re-emphasize how pleased we are with our operating results for the second quarter of '06. We started out with a first quarter where we were $0.02 behind our first quarter of '05, and we certainly have made that up in the second quarter, whereas we issued $0.10 per share versus the $0.06. So four pennies above prior year, which makes us, from a year-to-date basis, $0.20 versus $0.18, so we're tracking about $0.02 heavier than last year, which we're very proud of.

Tom basically explained most of the drivers on the funeral segment. The shift into the financial results for the quarter, primarily on a funeral segment as we could tell, it was driven by down volume versus a very healthy increase in our average revenue per funeral.

I would like to give you, shift to the cemetery segment, though, and give you a little bit more detail in terms of the ECF trust fund income that we received during the quarter. The amount was about $7.9 million, as we disclosed and as Tom mentioned. It particularly relates to our eternal care funds, on our cemetery side, which are set up statutorily in the stage to have funds and earnings help us maintain cemeteries through perpetuity.

Within those particular trust funds, we have investments that are made in equities and fixed income, and we have about 5% or so of those investments that are in alternative investments. And in this case, the investments were in real estate partnerships. And we--in late 2004, entered into some litigation with a general partner related to those real estate partnerships.

And essentially, any income distributions, which you normally would see out of these alternative investments, to help us defray our cemetery maintenance costs, were essentially held up in late 2004, through this quarter. And so to be conservative, in our accounting, we went ahead and stopped accruing that income, even though the cash was building up. We did not recognize that revenue, because of that particular litigation matter.

The settlement occurred this quarter, and in fact, then, the $7.9 million was released to us, and we recognized the revenues as well as, as you know, recorded it through our cash flow statement. You really should think about this $7.9 million as normalized cemetery earnings that would have came through from late 2004 through 2005. And it just happened to come in in one lump sum, in this particular instance.

It did have a very positive effect on our cemetery gross profits, as we've discussed, as well as on our margins. Our normalized margins in cemetery were about 16% on a comparable North American cemetery basis. That's slightly ahead of prior year, and in line with our expectations, to be slightly ahead of prior year.

But with the $7.9 million, it increased our North American comparable cemetery margins from that 15% normalized basis up to about 20%.

Also, speaking about the income statement, in terms of interest expense--just to give you an update on that. We've continued to pay some penalty interest expense to the tune of about $3 million per year, which is a hundred-basis point penalty related to our 2017 bonds that we issued in June of last year.

We have not had a chance to register those bonds, and that is the reason why we are paying that penalty interest. The reason why we have not registered them, is because when we announced the Alderwoods acquisition, potential acquisition, we immediately kicked into a situation under the series rules that we needed to provide pro forma financial statements. Or at least, that's the [inaudible] of such, of the Alderwoods-SCI combination going forward.

We are diligently working on those pro formas, and we hope to file the registration statement to register these bonds by the end of this month. And at that point in time, very shortly thereafter, it will eliminate the 300 basis--excuse me, the 100 basis point penalty, or the $3 million per year, in interest expense.

Shifting to the balance sheet, we continue to have very strong cash balances. You can see on our June 30th Q that was filed yesterday, we had $529 million of cash on hand at the end of the quarter. Today, as we speak, we continue to have very strong cash flows, and our cash balance today is about $580 million. So we continue to have very strong cash balances here at SCI.

From a debt perspective, our debt is about $1.3 billion today. That's up about $90 million from the 12/31/05 year-end, which--the two components associated with that increase is about $100 million of capital leases, or debt associated with capital leases, that as you know, we've already disclosed, we took on transportation leases in the form of capital leases at the beginning of this year. And that $100 million of additional capital lease debt is offset by a $10 million bond payment that--we've paid off some old June '06 notes that were due.

Today, as we speak, we have about $30 million in current maturities, so we really don't have any large maturities in the immediate future. The $30 million is primarily related to some mortgage notes and miscellaneous debt, as well as the capital leases that I just described. And our next real large maturity related to the bonds--it's not until March 2008, which is about $195 million. So really, not a lot of short-term debt that's due for our company in the near future.

I'd also comment, talking about the balance sheet, on the equity within the balance sheet. And I think the biggest story there is that we continued our share repurchase program during the quarter. We purchased 3.4 million shares for just under $28 million, at an average price of about $8.15 per share.

Our cumulative program, which is a cumulative authorization of about $400 million, we have about $36 million left on that current authorization. But cumulative, throughout that program, we've purchased 51.1 million shares for about $363 million, or about $7.11 on average per share. So we're very proud of that share repurchase program.

Shifting to the cash flow statement, looking back at the quarter, cash flow from operations was about $71 million for the quarter versus $63 million for the quarter of 2005.

I'd probably normalize that by adding back $12 million of a debt pre-pay, a premium that we paid to take out debt last year. So if you add that $12 million back to the $63 million, a normalized basis. I would say, we're at $71 million for the quarter versus $75 million normalized in the prior year.

Tom already mentioned that one of the challenges we had during the quarter from cash flows is that we had seven payroll periods during the second quarter of '06, versus six payroll periods in the second quarter of '05. That will flip back in the second half of '06. And that $20 million challenge was essentially offset by the $7.9 million in eternal care fund distribution.

But also, we've had some very good success keeping up our pace on receivable collections from our operating folks at the funeral home and cemetery level. Our DSOs continue to improve in our normal operations in North America.

From a year-to-date basis, we have $151 million of cash flow from operations, versus $190 million in the prior year--again, to normalize that, I would add back the $12 million of debt premiums that we paid, as well as to understand that we had a $29 million unusual tax refund in the first half of '05 as well.

So to normalize that $190 million to about $173 million, we're about $151 million versus $173 million, then, and again, that primarily relates to the payroll.

But there were some working capital changes as well that I'll go through in a little bit of detail in a second. Before I do that, I just want to make a statement that CapEx continues to be generally in line with the prior year, for both quarter-to-date and year-to-date. And it's generally in line with our expectations as well.

Just giving you a little bit more detail into the working capital, of course, we filed our Q yesterday, and from year-to-date basis, the first half of '06, working capital versus first half of '05--I'll give you a little bit more detail.

From the receivables side, we had $7 million more of a source in the first half of '06, and that continues to be better trends in our days sales outstanding than we had the prior year. From an other assets perspective, we had $31 million more of a use in the first half of '06 versus '05. That primarily was the $29 million tax refund that we received in the prior year.

Payables were $27 million more of a use in the first half of '06 versus '05. As we described in the first quarter analysis, we had a 2003 performance--long-term compensation plan that paid out about $16 million, and based on '05 performance, we paid out about $13 million more in bonuses across the company as well, in '06 versus '05.

From a preneed funeral perspective, we had $7 million more of a source. There's a lot of moving parts in that. First of all, as Tom has already mentioned, production is down, which tends to be more of a use when your production's down.

Maturities are also down, though, because the down volume--case volume, and that tends to be a source. But there's one thing I want to mention, both on the funeral and the cemetery side. The current with the initiatives that Tom described, in the sales structure as well as on the front line, funeral homes and cemeteries--we had certain cash flow initiatives such as the interest rebate, and charging interest on our preneed contracts.

We've also concentrated on shifting our sales from multi-phase sales to single-phase sales, and we also concentrate on higher down payments. So our total upfront cash related to our preneed funeral program, has moved from about 37% to 49%, and that has certainly helped trend our working capital. And we believe this 49% is an attainable number, as well.

Shifting to the cemetery preneed, we had an $18 million less of a source during the first half of '06 versus '05. We again had some challenges in production--our production was down about 3.4%, as Tom mentioned, on a preneed basis for cemetery. And we also had some pretty strong trust fund receipts last year, as a result of the preneed backlog projects that we completed in the early part of 2005.

Also going through this line item is the $7.9 million of eternal care funds, as well as, as I've said before, in the preneed cash flow initiatives. Our overall upfront cash rose from about 38% to about 51%, on the cemetery side.

Just to give you some further numbers, our cash interest is about $37 million for the quarter-to-date, $48 million for year-to-date. And our cash taxes were about $6 million for the quarter-to-date, $8 million year-to-date.

From an EBITDA perspective, the way we've tackled the EBITDA is about $85 million for the quarter, and about $175 million for the year-to-date. If you look at most models that are out there, we didn't give specific guidance, but most models out there are about 330 to about 350.

This is, of course, excludes any effects from Alderwoods, and so--and why is that, I think, we're trending in the right direction from an EBITDA. Just to be compliant with the new regulations, the way I calculated that, was to take operating income, for--off the income statement of 59 for the quarter and 120 for the year--I added back losses on sale, at $2.8 million for the quarter, $7.4 million for the year, and then adding back D&A off our cash flow statement, which was 23 for the quarter and 45 for the year.

Shifting to the trust performance, we had a pretty tough quarter, as the market did. The preneeds funeral for the quarter was down 1%. The preneeds cemetery for the quarter was also down 1%. The eternal care funds were up 0.5%. So overall, we had softness in the trust performance, of down 0.6% for the quarter.

We kind of look at that, versus a balanced metric, which is really comprised of about 55% of the S&P 500, to represent the equity side, and 45% of the Lehman Aggregate Bond Index, to represent the fixed income side. And that aggregate index was down about 1.25%. So we did have good performance versus some indexes, but again, overall, somewhat of a soft quarter in terms of trust performance.

Going forward, and shifting now to kind of forward-looking guidance. One thing I want to update you on is our performance in our French--our equity investment that we have. Just to remind everyone, we have a 25% equity investment in our former operations in France.

Those operations just went through the recent capitalization of the French business. And we will--we are expecting a distribution from that business of about $11 million dollars, of U.S. dollars, our return on that investment, probably in the third quarter of this year.

Since we have no basis, since we've already had a return of most of our investment, we have no basis really on our balance sheet left--that $11 million will probably go through P&L, and it will also go through cash flows from operations, primarily in the third quarter.

We believe the structure that they have now, the capital structure is somewhat stable, and it's not as leveraged as before. So for that, beginning in the third quarter, we also think that we're going to see a $4 million to $5 million equity income pick up, per year, going forward, beginning in the third quarter.

Our original EPS guidance was $0.30 to $0.34. With France, I think that France, that I just mentioned, the $11 million--I think we'll probably see we'll be on the, probably, high end of that range. And cash flow from operations, our original guidance was 290 to 315, and since we're now at about 152, I think again, with the France distribution, we'll probably be on the high end of the range. And I'll comment again on that at the end of the third quarter as well.

Quick update on the Alderwoods financing. We originally told you that we thought that we would use somewhere between $400 million and $450 million of cash in the Alderwoods deal. Right now, I think we'll use well over $500 million, and my best guess is we'll use about $550 million cash right now in the Alderwoods deal. And just to remind you, we have $580 million of cash.

The permanent amount of financing that we'll add is probably about $500 million. We will do the deal with--we'll come out with debt in the low $2 billion range, but we feel that we'll use assets, sale proceeds from FTC and from underperforming properties, as well as cash flow, to reduce that debt to about $1.8 billion. From that perspective, once we get to $1.8 billion in terms of our debt, we will then start looking at our capital ratios, which we've already shown you, to kind of drive decisions going forward.

But again, we feel very strongly about the value that's in our stock, and I do anticipate returning at that point in time in share repurchases. And again, just to remind you, currently under this authorization, we have about $36 million currently available on our share repurchases.

That's kind of looking at the quarter, and some forward-looking guidance as well, as we look at the back half of the year. Tim, at this point in time, we'd like to go ahead and open it to the Q & A session.

Thank you. If you would like to ask a question, please do so by pressing the * key, followed by the digit 1 on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, press *1 to ask a question.

Our first question today comes from Tom Bacon from Lehman Brothers.

Tom Bacon. Good morning. Congratulations on a good quarter.

Thank you, Tom.

I just--as far as not performing sort of low margin services? And I know you've said that the simple dispositions that you didn't perform in the quarter sort of hurt your volumes a bit. Is that--if you look at that National Cremation Service business, is that a candidate for disposal?

Well, I think, that actually--that part of the strategy, Tom--the two markets that this impacted, one in the Northwest and one in Florida, they're actually two very separate types of incidences, but generally along the same philosophy.

One was, we had a contract with a party to provide immediate dispositions at, what I'd say, very, very, very low prices. And as that contract came back for renewals, discussions ensued about what's an appropriate level. And I think locally, we made the decision based upon the proposal that it wasn't profitable for us to maintain. So we didn't renew that agreement.

The second situation that occurred was, as we get into this NCS business, we believe there is a customer out there that does choose National Cremation Society, and if they do, we'll utilize appropriate levels of service that we can make money at.

We did have a strategy in Florida whereby we operated locations, and I call these more like storefronts--so we were in real estate in order to service that National Cremation Service business. We made some strategic decisions to exit the real estate, and continue to service the business line through a phone number, and through appropriate personnel.

So what happens is, people begin to enter National Cremation Service, which is part of a funeral home, and in doing so, we hope we can show them products and services that they may want to choose to buy. But certain may not. Certain may choose not to come in that funeral home, and arrange their services.

So in those two situations--those are the two I'm describing, where we saw some volume impact. We also saw, in some of those markets, increases in cremation with service. So we believe, while we may be losing some business, it's immediate disposition business that has absolutely no interest in services that we provide.

So, we want to provide great service to cremation consumers, immediate disposition consumers, but we've got to make a reasonable living at it as well.

And moving on, we'll hear from Robert Willoughby, from Raymond--excuse me, from Bank of America Securities.

Good morning. This is Eric Fague, sitting in for Robert Willoughby. Quick question. On the funeral services, the decline--was it primarily--what was the breakdown between the dispositions and the actual decline just from regular operations?

When you say dispositions, you are talking about businesses that we disposed of--

Yes.

--or are you talking about immediate dispositions? Well, the numbers that we shared with you are comparable volumes, so we've excluded business in the table that we sold, or businesses that we bought this year, so we'd only take into account business that were active throughout the entire quarter in both periods.

Okay. Thank you.

Moving on, we'll hear from John Ransom from Raymond James & Associates.

Hi. Good morning. As you guys looked at your markets, either this quarter or year-to-date, what do you estimate the comparable volume number for--that you're comparing against?

You're saying, within our marketplace, John?

Yes, I mean, it's--so let's say, if your volumes were down five and a half, what do you think the volumes were trending in your--in the markets that you have, where you compete?

Well, again, I think I'd answer that this way. Number one, because of--every market is different, it's very difficult to cumulatively answer it. If I would tell you directionally, it's our collective opinion that we don't think we are losing market share within our marketplaces. We believe preponderance is the number of deaths.

Having said that, what we've done is identify, of the 5.5, for instance, in the 3 months, identified 120 basis points, that 550, which we can point to specific geographies and specific local decisions, which resulted in lower.

So, using that math, you might say, well, within our markets, excluding that, we think the markets are down 4.3%, if I did my math right. That is a simplified, a very simplified--and having said it, I know it's wrong.

I think generally, we feel very comfortable, through J.D. Power, again, through feedback with all our markets that we're doing, is we take it through this pricing--that what we're experiencing is, the market trends. In certain markets, we're gaining--in certain markets, I'm sure we're losing.

Right. And I know, something else you've talked about historically is that you've had a six-year period of time where there hasn't been a lot of external growth activity, and rightfully so. But do you think that, given how demographics and growth are driving, let's say, in Atlanta in the north end of town, or some of your markets--do you think that--are you where you want to be, or are you behind the curve, ahead of the curve, in terms of maybe putting some of those dots on the maps in places? As opposed to the old parts of town that aren't growing, and the new parts of town that maybe have more of a demographic forum? And where do you think you are in that process?

Well, I think we're blessed with a great network of businesses, and we're blessed with inheriting, I think, some great businesses in Alderwoods. Having said that, John, you hit the nail on the head. When we unveiled our strategy, it really had three parts. It was identifying customer segments, utilizing operating discipline and utilizing our scale, and the last one was managing our footprint.

And our footprint is, the way we looked at it, is by understanding the customer segments and understanding the demographics of which you speak. We're selectively building market plans locally.

So, you used Atlanta as a great example. We have great plans to expand in Atlanta, because we think it's a great market. It turns out, Alderwoods has great businesses that fit those customer segments in that market. So we believe Alderwoods allows us to accelerate our footprint of--but overall, like I said, between the two of us, we have a great footprint.

I think there's going to be selective opportunities to improve, and again, like you said, it may be moving out of one part of town that's changed and sweeping that business to another. There will be a lot of opportunities like that locally, but Alderwoods really, really accelerates our ability to implement our strategy.

Okay. And, speaking of Alderwoods, I mean--Eric, I'll let you take a crack at this one. The pro forma net interest expense, kind of on a, both an accrual and a cash basis--do you have any updated thoughts there, once you closed the deal, what we ought to be modeling in '07 for that?

Well, it's my--I have to come back to you on that, just to see. I think my recollection is, I think we end up adding on a total basis, probably about $50 million to $55 million of interest expense. But again, I want to re-emphasize that we're going to start off with--end about $900 million or so of debt, that we're going to set it up only about $500 million of that is hopefully in the form of long-term financing.

Okay.

But there will be a portion of that, John, that will be pre-paid--would be paid down very quickly.

Right.

When you think of the long-term, think of $500 million times 7% or 8%.

Okay. And how much of your--how big a bank credit facility are you looking to put in place? Because I know you've shied away from having a big one in the past. Is that going to--is that going to go up?

Well, independent of the bank debt that we'll raise associated with that, will be in the form of some type of term loans or some type of asset sale bridge, or what have you. We'll also enter into a revolver, and we do think we'll be a good size. We think we'll be around, probably around $300 million, John.

Okay. All right. And I guess--you've hinted at this, Tom, before, but the $60 million to $70 million in Alderwoods synergies, should we think about that number moving north a little bit? And when might you--would you be in a position to quantify that when you closed the deal in October? Or--maybe on the third quarter call? Or, when should we look for that additional quantification?

Well, I think, you know, if everything goes as scheduled and this thing closes sometime, like we've said, in the early fourth quarter, we'll probably be in a position in the November call to give you a lot more detail. Again, I think I described it in my comments, John, we're very comfortable with the synergies. We believe, again, this is a great fit--Alderwoods and us. And the closer we get to it, the more excited we are about bringing them into our family.

All right, very good. Thank you.

Our next question is from Mike Scarangella from Merrill Lynch.

Hi. Good morning. Tom, I just wanted to check back on your explanation of kind of your volumes versus the peer group. I just want to make sure I understand it. I think you think that some of that is due to the direct disposition businesses that you've exited, that probably closes the gap 120 bps. But I'm not sure I caught what some of the other drivers are, if you have thoughts there.

Yeah, I think generally, what we think--and I tried, Mike, to put it in the comments. Number one, I would tell you that generally it is number of deaths in our markets. We have no reason to believe--we see no evidence that we're losing market share other than the thing I identified for you.

The two things that make you worry, because--again, they keep you up at night, and you want to double-check and triple-check--are, we've got a couple things going on that you could have some concerns about. One is strategic pricing rollout, and I would tell you, with a lot of diligence on this one, we feel comfortable that's not impacting us to the negative.

And the only other bit I could tell you, this would be a very, very tiny impact to local markets. We have put an emphasis on discounting, and most discounting is secured by strategic pricing because it's product discounting.

But there are other instances where we have discounting, and I believe that these things are being applied locally with a strategy that we say, hey guys, let's not unnecessarily discount. Well, when you're rolling that out to the number of locations that we have, it's going to get applied in a variety of ways. And I can't tell you that in certain local situations, somebody's not applying it in the best light, and that that doesn't impact us.

But again, I always think these are--you know, tens of calls, as opposed to hundreds of calls, and if you look at our decline for the quarter, it's down about 3,200 calls year over year.

If you look at 4.3%, which is what I backed into, this would more closely align with what you saw from, for instance, Alderwoods, from some of the other data that's out there. There's CDC data, that again, we think is inaccurate, so I wouldn't point you towards it. So directionally, it's trended down more than we are.

So a lot of the things that we can do, if--the other thing that we utilize, our understanding what some of our suppliers may be seeing. And lastly, we have the benefit of cemetery interment. Because we're in both lines of businesses, if you think about it, we may be very competitive on the funeral front, and when you look at cemeteries, they tend to have--because the barriers to entry are so high, and because people tend to go to cemeteries that are close to their homes, you tend to see a more market trend.

And what we're seeing is very consistent numbers in our cemeteries as it relates to interment. And that, again, gives us some comfort that we're experiencing what's happening in the market, and we're not concerned--obviously, we're going to continue to work hard to compete, but we feel like, again, this comes in trends, and it will come back at some point.

Have you rolled out your market segmentation strategy to any large degree yet?

Really, not. With the Alderwoods deal in place, we've spent a lot of time on that, what we have done is, again, we've identified these segments. We're also in the midst of hiring a Chief Marketing Officer that we'd like to bring on board. And then, as we get Alderwoods in these markets, we'll better define the segments and the marketing plans around it and the like.

What we have done is roll out the basic strategy to our entire management structure. So they've had the ability to understand how we do customers, and that's what I mean, Mike, by, a lot of people are taking and understanding where we're going with this, and making local decisions based upon that.

So, they see us saying that there are certain segments that we align better with. We're about providing great service. We want to do that for all our customers. And sometimes, in these situations where you have immediate dispositions that are very, very price-competitive, and the only thing somebody wants is the cheapest possible immediate disposition, we're not great--that isn't our core competency.

We can do it, and we will do it if it's--if we can make money at it, but it's not our full competency.

On the portion that's distributed to the direct disposition business as you exit it--if that's recent, should that take a couple more quarters before it annualizes, and we see that start to drop out of your numbers? In other words, should we see this kind of--expect this kind of softness for the next couple of quarters?

Yes. I would expect that.

Okay. All right. That's helpful.

Eric, I just wanted to ask, on the timing of the acquisition financing and so forth--just want to make sure I understand. So if you think you'll close the acquisition by October, does that mean maybe--

[inaudible--microphone inaccessible]

--three or four weeks?

Three or four weeks.

Three or four weeks prior, we might start to hear about the new financing, and the amount of the asset sales, and you'll hear from the agencies on new ratings for you?

No. I think, whenever it close--whenever we get more insight into closes, our strategy would be to raise the money two or three weeks before we went and did it. I mean, we ought to have a better update on when that will be, I'll say, October 1 to October 31st, is what his comments said.

But I do think, a couple weeks before that, you'll see us come into the market.

Okay. And you think your ratings will come out then, or will that be earlier?

I would hope our ratings would come out before marketing, that's the way--we've obviously been in good discussions with both rating agencies. I think Moody's went ahead and released something a couple weeks ago with our call.

But I think more formal, when we show them the final mix of what we would finance, then, I think, they would come out with their ratings input.

Okay. And the plan is still to tender the Alderwoods bonds, I assume?

Yes.

Okay. And, any comments on the restatement that we read about in the quarter? I'm sure you're tired of talking about restatements, but is there anything significant there?

Well, I really don't think so. I think it was--I think it is not material to the prior years, but I think it was qualitatively not material either to this quarter. But it would have been somewhat borderline quantitatively material in the second quarter. So really, I made the decision to do it--push it back and correct it, because I didn't want anything overhanging in any of our financial statements as we move forward, raising this $900 million.

It primarily related to a third-party actuary administrator that we have, where we--upon us asking a lot of questions, it was discovered that there was a $5 million error in the original cumulative effect that we did in January 1 of 2004. Which we--when we changed our accounting, did not smooth the actuary losses, but didn't take concurrently into the quarter. And so it raised our--the overall effect, Mike, is at the end of the day, is to raise that cumulative effect in '04, from 50 to 55. And I just don't think that's qualitatively material at all. I just wanted to go ahead and clean it up as we moved forward, to do the financing.

Okay, that's great. Thank you, guys.

And we'll go next to Jennifer Childe from Bear Stearns.

Thank you. Tom, when--I'm a little confused. When do you expect to tell us about the properties that you might need to divest?

Well, I think what--from a public announcement perspective, it's probably going to coincide, Jennifer, with the closing of the deal. So, we're going to learn a lot from the FTC, I would say, in the coming weeks here.

So if everything's on schedule, I think we'd be in a position sometime late in October, but probably closer to the November call, to share with you all that information. Including our update on the synergies as we approach the end of the third quarter.

Okay. Do you think that the softness in your preneed production is related at all to the economy?

Well, Jennifer, you know--I think it definitely can have some impact. It kind of goes back to segments, and you look at demographics and the like, like everybody. There's certain segments that are getting hurt worse than us. I'd say in certain geographies, we do see that.

I also believe, again, we've had a lot of changes in some of the programs that are available for people to sell, so we made it probably a little more difficult, but better commercial business for us.

And I think the combination of those two things definitely have an impact. I don't think it's material to our business, but it does have an impact.

Okay. I notice that the average revenue for your preneeds that went atneed was about 93% of your atneed average, which is quite a bit lower than it's been trending. Is that anything--does that point to a new trend?

I don't think so, Jennifer, because if you break the two apart, what's happening is, because their atneed averages are so strong with pricing realignment, that the preneed--the preneed going atneed is actually up 6.3%, year over year, which is pretty healthy. And we think that's attributable to writing more Dignity plans, we think attributable to good trust earnings.

So it's the fact that the strategic pricing's having such an impact that the preneeds are not catching up. But the preneeds trend is as strong, in my opinion, as it's ever been. I think if you look at year over year preneed--improvement.

Okay. Could you give us the funeral trust earnings, and insurance accretion recognized in the quarter?

Let me see if I can get to that for you.

And, maybe the trust portfolio makeup?

Okay, the trust portfolio makeup, on the--you're talking about equity versus fixed income?

Yep.

Okay. The funeral trusts have equities about 39%, and fixed income at 29%. And then it has alternative investments in cash. The cemetery has about 50% equity, 30% debt, and then some cash and some alternative investments. And then the eternal care fund, as you know, is heavier fixed income, and that's about 25% equity and about 55% debt, and then it has some alternative investments, and cash as well.

I'll have to see--we don't have those other numbers at our fingertips. I guess the funeral--let me see if I can figure out this. The funeral TFI for the quarter, trust fund income, Jennifer, was about $8.3 million, and that's versus about $7.6 million in the prior quarter. The second quarter of '05 is what I mean by that.

From the cemetery perspective, the eternal care fund income, we've disclosed--about 14.9, up about--and last year is was about 6, and most of that was about the 7.9 million that we described.

Then from the cemetery NST, it was about 3.3 million for the quarter, which is basically flat with the prior year. I think I got--I think I answered your question.

Yes. That's fine. And just to clarify, are there other markets where you're exiting the direct cremation business, or is it just those particular markets that were unprofitable?

Yes, I think from a corporate perspective, strategically--remember, these two decisions were locally driven. So I would tell you that we have no corporate strategy that says we want to do that. But what I can't tell you is that somebody in another city isn't going to base a decision--and again, it gets looked at and approved by our operating management team. So I would tell you, we have no intentions, but if something like that does occur, worth talking about, we'll gladly share that with you on the calls as we go along.

Okay. Thank you.

Our next question comes from Bill Burns from Johnson Rice.

I wonder, could you all remind me about, on the asset sales, the FTC, it's--gosh, been years since we've gone through this again. Do you actually have to sell the properties before you can close, or do you just have to agree to sell the properties?

You can just agree, and hold them separate. So--but again, we're of the mindset that when something has to be sold, the quicker, the better. But I think the FTC does allow you to hold those separate until after close.

And what--what's the market look like out there? In terms of timing, how quickly you could sell, and price you could get?

I think, Bill, that we are seeing a lot, I would say, let's define it as a lot of interest in the business. I think you're seeing a lot of folks back into the marketplace in smaller bases, looking to put some of these together and create some synergy. So we feel very confident there's a good marketplace to sell these businesses [empty].

Any hint about the magnitude, or just wait for that?

We've got to wait. We don't know either, so--

Okay. No, that's fair.

All right.

Thanks. Thanks, Tom.

Okay.

And that's all the time we have for questions today. Gentlemen, I'll turn the conference back over to you.

Okay. Thank you, everyone, for participating in the call. We'll see you again in early November for our third quarter conference call. Thanks.

That does conclude our conference call today. Thank you all for your participation.