Service Corporation International (SCI) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the SCI first quarter 2007 earnings conference call. My name is Tony and I'll be your coordinator for today. At this time all participants are in a listen-only mode and we will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I'd now like to turn the call over to your host, the management team of SCI. Please proceed.

Good morning. This is Debbie Young, Director of Investor Relations for SCI. Today we'll provide some commentary about our first-quarter results and then open the call up for questions. Please remember that the call today will likely contain some statements that are not historical facts and that are forward-looking. These statements 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. For more information related to these forward-looking statements and other important risk factors, please review our periodic filings with the SEC that are available on our website at sci-corp.com. In addition, during the call today, we may use the term normalized EPS. This is a non-GAAP financial term. We have reconciled this term to EPS calculated in accordance with GAAP in our press release that was issued yesterday and filed on the 8-K this morning. A replay of this conference call will be available on our website for at least 90 days and can be accessed by clicking on Webcast and Presentations in the Investors section. With that, we'll begin with comments from Tom Ryan, our President and Chief Executive Officer.

Thanks, Debbie, and welcome, everybody, to the call this morning. As is custom in my comments, I'm going to start off with a view of things and what I believe are the key drivers of our business. And then drop down a level and give you some more detail as it relates to each of our business segments. So, first of all, I'm very pleased to report normalized earnings per share, as you saw in the press release, of $0.17 versus the prior year reporting of $0.10, an approximate 70% increase. This was slightly beyond our own internal expectations. In addition to the earnings-per-share, we reported cash flow from operations of $127.9 million, versus a prior year quarter amount of $80.2 million and this again was an improvement of $47.7 million or approximately 60%. I want to say thank you to all of our 22,000 employees who really made this happen today. I continue to be amazed by what our people have accomplished in integrating these two great companies into one team, people from both Legacy companies accomplishing so much with regards to integration while continuing to perform their day jobs and accomplishing the results we report today. I just want to say thank you for your tremendous efforts.

The primary contributor to these healthy earnings-per-share and cash flow increases is the strong operating performance of the Alderwoods businesses which were financed, as you recall, with existing cash and additional debt and were, therefore, almost immediately accretive to both earnings-per-share and to cash flow. This contribution was further enhanced by the initial impact of the synergies we identified, primarily senior and operating management structural segment along with enhanced purchasing power in the early stages of overhead infrastructure reductions. Another contributor was our comparable businesses, both in the funeral and cemetery segment, which grew their gross margins and further enhanced our financial results. The reasons for our comparable locations financial improvement continue to be the growth in our revenue per case, which was 5.9% in the first quarter, driven by our 2006 strategic pricing initiatives. In addition, gross margins were enhanced by local market efficiencies created and utilizing our staffing metrics.

Now I'll provide a quick review of the quarter by business segment and I'm going to begin with our funeral segment. Consolidated funeral revenues were up $119.8 million or 39.7% for the quarter. The Alderwoods locations added $128.4 million to revenue. Comparable revenues were relatively flat year-over-year and divested operations reduced revenues by some $9 million. Comparable funeral volumes for the quarter were down about 5.5%. As many of you will recall from previous quarters, there is no perfect way to measure market share. Having said that, we believe that the most functional, as it relates to our business, would be to track preneed going at need volumes as well as track cemetery internments within SCI cemeteries because, again, both of these would be not very influenced by local pricing decisions or local trends in the market because these decisions were made years ago. In both cases we're seeing comparable volumes down about 3.5%. So while this is not a perfectly accurate statistical conclusion, it tells me that in the markets in which we compete, our volumes are down that 3.5%, our atneed comparable volumes were down about 6.4%. Therefore, utilizing this analysis, we believe we lost about 300 basis points of market share in our atneed business predominantly in low-priced direct cremation activity. This annualizes out to approximately 4,000 calls. On the average side we had very good news, comparable funeral averages continue to increase at about 5.9% in the first quarter. As we've talked about before, the primary driver of this increase was the effect of our strategic pricing initiative which recognizes that customers place a higher value on our services versus the product that we provide. This impact has a differential effect upon customers that choose cremation versus burial. We saw our comparable cremation average rise by 12.2% for the quarter while our comparable burial average is up approximately 3%. Consolidated funeral profits were $102.4 million for the quarter, an increase of $36.1 million or approximately 54% year-over-year. The Alderwoods locations contributed $33.9 million of that increase to gross profit. Comparable businesses increased their profits by $3.3 million while divested locations reduced our gross profit by $1.1 million. Our consolidated gross profit percentage was 24.3% versus 22% in the prior year quarter for a 230 basis-point improvement. The Alderwoods locations contributed about what we anticipated to contribute in the funeral segment for quarter one.

Now, you'll see reported in the10-Q and in the press release comparable margins within our business. It's a little confusing right now and I want to give a further explanation. In that 10-Q and press release you'll see home office and regional overhead categorized as comparable when it really relates to all our businesses. Remember, these are the back office functions that provide services to everyone. Therefore, what I tried to do in my comments is to capture a comparable look at our SCI Legacy businesses before overhead allocation. You can have a more accurate look at what is happening at our comparable locations. Comparable SCI locations generated a 31.4% margin before allocation of home office and regional overhead costs. This compares to 28.7% margin in the prior year quarter. This 270 basis-point improvement was driven by strategic pricing initiative impact and the efficiencies generated from the roll-out of our standardized operating metrics. Now recall the home office and regional overhead gets allocated to both funeral and cemetery margins. This segment increased the cost within those units by $4.8 million or approximately 26.8% versus the prior year. This was in line with our expectations. This additional infrastructure is created to support the addition of over 600 new funeral homes from our Alderwoods transaction.

Now for an overview of the cemetery segment. Consolidated cemetery revenues were up $45.8 million or 33% for the quarter. The Alderwoods locations added $51.9 million to revenue, while comparable revenues declined by $2.3 million, primarily due to weaker sales production which was down about 2% and lower merchandise deliveries as a percentage of production. Divested locations additionally reduced revenues by approximately $3.3 million. Consolidated cemetery profits increased $16.6 million for the quarter or approximately 75% this year's quarter over prior year's quarter. The Alderwoods locations contributed $14.5 million to gross profit. Consolidated gross profit percentage was 21% versus 16% in the prior year quarter or a 500 basis-point improvement. As I mentioned earlier, the Alderwoods locations contributed $14.5 million of the $16.6 million increase in gross profits year-over-year exceeding our expectations by some $8 million. This was a particular construction project that was completed in our Roseville cemetery, several of our construction projects, which triggered revenue recognition and, therefore, profit recognition. Comparable SCI locations generated a 27.7% margin before allocation of overhead costs compared to 24.8% margin in the prior year quarter. This 290 basis-point improvement was driven by reductions in local general administrative costs, maintenance costs as well as selling costs. Now, remember, our home office and regional overhead allocated to the cemetery segment increased by $2.6 million or again 26.8% versus the prior year. This again was in line with our expectations. And keep in mind in the press release this overhead is allocated to comparable for presentation purposes, but truly relates to supporting both the Legacy SCI businesses as well as the newer businesses that came with the Alderwoods transaction.

As we look out to the rest of 2007, you should expect favorable financial impacts from the following items. First of all, continuing impact from our Alderwoods integration. You should see additional overhead synergies that we create throughout the year. In addition, you should see continued purchasing power. And lastly, you should continue to see us rationalize our footprint. What we mean by this our asset sales that are nonstrategic businesses, we're rationalizing our strategic footprints within urban markets to get the appropriate number of point of sales particularly where we have opportunities to generate great returns on real estate plays. The second item that'll drive favorable impact in 2007 is the continued impact from strategic pricing initiatives, both in the funeral business and in the cemetery business. The third item, continued favorable impact from the utilization of staffing metrics in the dissemination of best practices, resulting in greater efficiencies as we operate our business. And lastly, while we expect no financial impact in 2007, we're developing the appropriate infrastructure of people, the assets, the marketing plan, making the appropriate investments in our customer segmentation strategies. This should begin to show a financial impact, we believe, in the latter half of 2008. When we execute on these key initiatives, we believe it should significantly impact our earnings growth for our shareholders in 2007. With that, I thank you, and I will turn it over to Eric Tanzberger, our Chief Financial Officer, for his comments.

Thanks Tom. I want, again, to thank everybody from our shareholder base for joining us on the call today. I'd like to start with just some general comments, just reiterating our performance for the quarter as well as talking about our guidance. As Tom has already mentioned, we issued normalized earnings-per-share for the quarter of $0.17 versus prior year number of $0.10. We're obviously very aware of the analysts consensus, and that was $0.12 for the quarter, but, again, I want to remind everyone that we didn't give quarterly earnings-per-share guidance. From an internal expectation standpoint, the $0.17 slightly exceeded our internal expectations and, for that reason, we're going to reiterate our annual normalized EPS guidance of $0.46 to $0.52 , and we'll look at it next quarter for any possible adjustments, at that particular time. Obviously the biggest project that's going on right now at SCI is the integration of Alderwoods and the performance of the Alderwoods properties. The Alderwoods properties performed in line with our expectations. It's accretive to earnings per share and cash flow, as Tom has already mentioned. The synergies continue to track in line with our expectations in total and, as a reminder, the total synergies expected for the deal are $90 million to $100 million of which we expect $65 million to $75 million of these synergies to actually occur in calendar year 2007. We again believe that these numbers from a dollar amount perspective are in line with our current expectations. We do think possibly that the timing could be quicker than what we're expecting, but right now we're not in a position that we feel we should change our 2007 guidance related to those synergies at this particular time. From an income standard perspective, I think Tom has given you a thorough explanation on our general performance and our average revenue for funeral volumes and other business drivers.

From a G&A perspective, I'll talk to that. Our G&A expense was up about $13 million to just over $35 million for the quarter. That is predominantly the Alderwoods transition costs which are in line with our expectations and they're about $11.5 million for the quarter. From an interest expense perspective, our interest expense increased just under $11 million to about $37.5 million for the quarter. This is all again related to the Alderwoods financing and I again characterize this as in line with both the fourth quarter '06 levels that you've seen for interest expense as well as our current expectations for the first quarter.

Shifting now to the trust fund performance for the quarter, to remind everyone, we have $3.7 billion in trust funds that are currently under management by SCI. The funeral trust fund balance is about $1.4 billion and that had a gross return, before fees, of 2.2% for the quarter. The cemetery trust fund is $1.3 billion and that had a gross return of 2% and the internal care funds which, again, the balance is just under $1 billion, had a return of 2% also. Our expectation for return for this quarter, based on the benchmarks that we monitor, was 1.5% so we do feel that we had a very strong quarter in terms of our trust performance as well.

Shifting now to our capital structure, our cash balance, as you've seen in the press release, was about $78 million at March 31. That's up from about $40 million at December of '06, the last time we reported. The primary sources for the quarter was cash flow from operations of just over $125 million as well as asset sale proceeds related to nonstrategic assets which produced proceeds of about $44 million. The major uses for the quarter were capital expenditures of just over $25 million, as well as the term loan that we paid off during the quarter, the remaining balance was $100 million and that was the amount that was paid off during the quarter. Subsequent to March 31st, bringing this forward to today, our cash balance in this period peaked at about $180 million. That $180 million was driven subsequent to the quarter by cash flow from operations, FTC and nonstrategic asset proceeds as well as some cash from the new debt we issued when not -- the debt that we tried to replace was not all tendered to us. Currently today though, we have about $140 million worth of cash, down from the peak of $180 million that I just mentioned and that is primarily resulting from our share repurchase program which we did commence in April. We purchased approximately $50 million of shares in open market and private transactions during April of 2007, and again I just want to remind everyone that we could not buy shares under our credit agreements until we paid off the $150 million term loan which was actually paid off on March 30th of this year. Going forward from today into the second quarter, I see that our cash balance should continue to grow through both cash flow from operations as well as further divestiture proceeds. And, in fact, our largest FTC disposition transaction, which should equate to about $70 million of proceeds, is expected to close this month, in May. We've also already received just under $50 million of proceeds from the disposition of FTC mandated properties which was received subsequent to the end of the first quarter. Also we expect $65 million from the Mayflower sale, as we've discussed before, which is the Alderwoods insurance company, and that should be coming in the coming months as well. So subject to the limitations in our credit and debt agreements, we'll build cash and we'll continue to repurchase shares or we'll look at other higher-return projects as well.

From a debt perspective, our debt is currently approximately $1.87 billion with about $100 million of that being current maturities. The current maturities is split between $45 million of bonds that are due in March '08, that is the amount of the March '08 bonds that was not tendered to us, $13 million of October '07 bonds and $40 million of kind of normal capital leases and mortgage type payments that we will make over the next year. I don't really expect to pay off that $40 million -- that $45 million that becomes due in March of '08. I do think, subject to market conditions, we will go ahead and refinance that $45 million subject to those market conditions when they become -- when they mature in March of '08. Overall though, I have to say I'm pleased with our debt maturity schedule. I've already said we paid off our term loan as of March 30. We do have private placement debt of which $50 million of the total $200 million is prepayable today and the total of $200 million would be due in 2011; but as of right now looking at our key ratios, I don't see us really needing the ability to prepay any of that $50 million for the private placement debt. And, of course, relating to the other maturity schedule in terms of long-term senior notes or bonds, our first maturity is not due until 2014, so we're very pleased with our debt maturity schedule, right now as we speak.

Shifting over to the cash flow statement, our cash flow from operations during the quarter exceeded prior year by just under $50 million. And that was in line with our expectations. Going forward in the second quarter, I do expect some strong working capital produced from the Company in terms of sources. If you recall, we are currently going through a project where we are examining the backlog, the preneed cemetery and preneed funeral backlog of Alderwoods. And as we conclude that project, we'll be able to go in and remove monies that's rightfully ours from trust funds, and I do expect about $20 million of trust receipts from these Alderwoods backlog projects during the second quarter.

From a CapEx standpoint in the first quarter our total CapEx was about $26 million versus $19 million in the prior year, so up about $7 million, but again, that is in line with our expectations and primarily relates to $7 million increase in maintenance and cemetery development CapEx. That is, again, is in line with our expectations. Growth CapEx was generally flat versus prior year which is slightly behind our expectations. So we'll go ahead and continue to watch growth CapEx as we go forward during the year to adjust any needed guidance if we need to.

In summary, as you know, it was a good quarter for us. Going forward, we'll continue to focus on the Alderwoods integration and executing on the synergies. That's the number one thing and the number one topic that is on our plates here as SCI management. I think you'll continue to see cash build during the second quarter and the rest of the year through cash flow from operations and proceeds from divestitures. As we build the cash, we'll spend that cash using high return projects that meaningfully exceed our weighted average cost of capital or we'll continue to go out into the market and open market and private transaction related to share repurchases, and again, that's subject to limitations in our credit agreements as well. Generally, from a capital structure standpoint, we'll manage to the three capital target ratios that we've explained several times to our shareholders and are available in all of our IR presentations on our website that Debbie mentioned earlier today. So with that, I think Tony, we're available to go to the Q&A session at this

(OPERATOR INSTRUCTIONS) Your first question comes from Thomas Bacon with Lehman Brothers. Please proceed.

Morning. Congratulations on a great quarter.

Thanks, Tom.

Thanks, Tom.

In terms of the margins on the funeral and cemetery side, obviously you really had great margins and the cemetery margins were much higher than I would have thought given that the Alderwoods facilities run at a lower margin. I was just wondering if that's sustainable or if there was something there because of the completion of that construction project that to that kind of boosted the margin on the cemetery side? It looked like the gross margin was like 28% or something like that there.

Tom, to speak to both segments, keep in mind on the funeral segment the first quarter is typically our higher margin quarter because you see a higher volume reported in that Q1 so as you think of the first quarter, you'd expect it to trend down particularly as you get into the summer months and then to trend back up toward the end of the year. On the cemetery side, again, it was a good first quarter but generally this was driven by completed -- the improvement -- a lot of it was completed construction projects specifically at our Roseville facility so this was a bit unusual in that sense, but again the accounting for cemetery, it relates to a completed construction plus 10% down. So we wouldn't expect to see margins like this in our cemetery. Having said that, we're very pleased with where we are and feel very good about the coming quarters. (inaudible expectations as it relates to those margins as you get into Q2 and Q3.

Okay. And as far as your preneed contracts on the funeral side, I mean, it looks like the average revenue per contract was up 12.5%, almost, which was obviously much higher than your comparable averages. And I was just wondering what's driving that. I would imagine that part of it is the pricing realignment, but is there something else going on there?

No, I think that's predominantly it, that and the fact that we're selling more Dignity packages. I think you'll see a lot of because these packages again offer a wider array of products and services and therefore, people just buying more of those. And that results in a higher revenue per case.

Okay. So it's just better penetration of the packages on the preneed?

I'm sorry, Tom, could you repeat that.

It's just better penetration of the packages on the preneed.?

It's like that and like you said, the pricing realignment as well. It's a wider array of products and services coupled with the fact that our strategic pricing that has a favorable impact as well.

Okay. And then, Eric, I was wondering, can you tell us in the wake of all the refinancings and everything else, for the purposes of the covenants with regard to your share repurchase program, can you tell us where where debt-to-EBITDA is right now and sort of what your net debt-to-cap is?

First of all, to remind everyone, when we have a net debt calculation available to us, that essentially when it's below -- in between 3 and a half and four times, Tom, we have a $100 million share repurchase basket available to us. We're in that window right now. We spent $50 million of that share repurchase basket in April. Below $3.5 million is when we're not subject as much to the share repurchase basket and we have a lot more flexibility to repurchase shares. We are just really, just north of that $3.5 million right now. So we're not below it right now, but the net debt calculation and, as I said, there's a significant amount of proceeds coming in from divestitures in the coming months so do I expect to go below $3.5 million, but right now we're slightly above it.

Okay. And maybe just one more quick thing. In terms of the -- I mean, have you identified any further properties that, -- for sale or basically to dispose of beyond what you've already guided towards?

The way we're going about that, Tom, is really on a market-by-market basis. So as we analyze markets, we're identifying either nonstrategic properties let's say in a market that we don't want to compete in, or within a market that's very strategic to us, we examine the footprint and understand excess real estate. So that is happening as we speak. But it's really a market-by-market analysis and, therefore, as we go in we're marketing those things for sale and those transactions will occur. So we don't anticipate to have a big, one big giant transaction as it relates to the national footprint. They're going to be one-offs and packaged together on a regional basis to sell.

Okay. And then I promise this is the last thing. Did you -- I know you had to make a contribution to the pension plan I think of $40 million. Any idea when that's going to happen or?

It's going to be later in the year, late third or early fourth quarter.

So later in the year, thanks, congratulations.

Thanks, Tom.

Your next comes from Robert Willoughby with Bank of America. Please proceed.

Two maybe related questions there. I think, Eric, you walked through some of the divestitures post the quarter $70 million on one and another $50 million it sounds like plus the Mayflower which is $65 million. Am I correct in assuming there's still kind of $50 million worth of properties that you have identified for sale still left?

In terms of the FTC properties we received $50 million. Let me back up. We received no FTC property proceeds from dispositions in the first quarter. So everything I've said about ftc is subsequent to March 31.

Okay.

As we speak, we received just under $50 million of proceeds from the FTC properties. The guidance is around 130. The largest transaction we hope to close in the coming weeks by the end of May and that's about $70 million specifically related to one of the FTC packages.

But there was additional properties prior to that that you had identified as being on the block. Was that not the case or?

That is the case and, in fact, the $44 million of proceeds that was received during the quarter, a lot of that were nonstrategic. About $20 million of that were some real estate dispositions that we did. And $25 million of that were nonstrategic assets that were already in the pipeline that we had talked about before, Robert.

So that might be 10 to $20 million left that's not accounted for quite yet. But it's not as quite as big a number as I thought.

That's right. Unless we go through and as we systematically, as Tom just mentioned, go through and look at other properties and select other properties for strategic reasons or what have you.

Right. And just to Tom's earlier question I think. Post Alderwoods three to five years out. Do you guys have a steady EBITDA margin in mind or is it too early to tell where you're going to wind up here?

I think it's probably too early to speak to that. Again, I think we're learning more each time we get into this. When we looked at Alderwoods last April and what we thought then and what we think now, we think it's a lot better. And so I think we're still learning about where we think these margins can go, and again, we're trying to get there as quickly as we possibly can. So we're very pleased. We do see margins trending up. When you think about sequential years, clearly there's a quarter lumpiness in the quarters but generally we feel very good and we haven't determined I think a steady state margin that far out yet.

Okay. And just lastly, you see Hillenbrand on the tape looking to split the company. Are you watching this situation with any view of potential disruption to your business one way or the other?

We saw the release as well and we don't believe it'll have any real disruption because we predominantly dealt with what's now going to be the Hillenbrand business, the base bill side and we didn't have any interaction with Hill-Rom we view this as really not a big deal. They continue to be our primary casket vendor, and so we don'view this as a negative or necessarily a positive either.

That's great. Thank you.

Okay.

With Raymond James, your next question comes from John Ransom. Please proceed.

Hi, good morning. I guess this one's for Tom. I don't want to hurt Eric having to think like this. Obviously the opportunity near near term has been really better-than-expected on Alderwoods, but getting beyond maybe this year as you think more intermediate term, what sort of potential opportunities might be there in that asset that maybe hasn't been thought about, for those of us out looking in?

I think the way we view the world is this, I'll sequentially take you through. 07's big Alderwoods synergies continue to impact the pricing and staffing metrics. As you get into '08, you should see the hangover impact of Alderwoods, in other words, the incremental impact that didn't come in '07 and you should see the impact on the Alderwoods businesses of staffing metrics and strategic pricing. As you get into 2009, I think the real issue becomes what can we do to SCI's entire portfolio. I don't think there's a differential impact from Alderwoods or SCI but we have laid out a strategy along the lines of customer segmentation, along the lines of further leveraging our scale and we believe we can impact the earnings of the company in 2009-2010 differentially with those strategies but I would tell you there's nothing material within the Alderwoods businesses that differ from our own businesses and our ability to improve them.

Great. And I'm sorry if I missed this because I was -- I had a couple other conflicts on calls. But do you -- when do you think -- I know you've talked about this project to run off low margin cremation business. When do you think -- and you've also said historically that I think maybe second half of '07 that your funeral volumes would be more like the markets that you are in. Do you still believe that? Do you still think your funeral margins are going to start to normalize or is it going to be a longer tail to run off the low margin cremation business?

Let me be clear. It wasn't a project to run off business, I promise you that.

Poor choice of words. Exit, let me get the right corporate speak. Exit low, non-optimal revenue.

That's perfect.

Thank you.

That's perfect. Like we said before, we believe that the preponderance of the difference will probably level off, probably in the seconds quarter of this year. Having said that, because this is a locally driven in its execution, we may find pockets where it continues to happen. We may also see pockets within the Alderwoods portfolios as they go forward. I think the kind of big difference that you're seeing today, we would expect to begin to close the gap because we mentioned specifically on the call, a lot of times the Pacific Northwest and some areas of Florida, we surely expect, within those market places, that they'll begin to level off and normalize. So we still feel very comfortable because we skew this data by revenue per case, and we continue to see the preponderance of our erosion in the under $1,000 or under $2,000 category and where we see growth is in the higher end of the business. So we still feel pretty good, based upon our analysis, about the direction the company is going as it relates to segmentation.

And I know you're a metric driven guy. Have you been able to assign any metrics to your market share and you've gone through the segmentation exercise, so the higher value customers, have you been able to see that you're increasing your market share in the higher margin, less value driven segment.?

It's way too early to tell because we're still developing that infrastructure. All we can run today, John, is to be able to see the number of contracts, let's say they are above $8,000 versus the number of contracts last year. It doesn't have to do with segmentation. But that is something we intend to do, but I think it's going to take some time because we're still developing the infrastructure, the marketing plan, the facilities and the like. So I don't think we'll have that kinds of data, again for another year or so probably.

And how does the above $8,000 look. I mean, are you seeing growth in that category?

It looks good, yes.

I know the prior regime used to make, put some emphasis on the higher sale Dignity going at-need. Is that something that will still be contributing in the immediate term? Are we still -- I know we've got statistics to look at but should be factoring in in our modeling, that you continue to build a bigger backlog of the higher Dignity and the higher revenue as well as the at-need.

Yes, I think you will see because, the stage at which we begin to develop Dignity, you should see a higher growth rate than normal of preneed going at-need particularly in the Legacy SCI businesses because of that average revenue per sale. So, yes, you would. And that should continue for some time and then the hope is again as we begin to package products in the Alderwoods businesses that we'll be able to accomplish some of the same enhancements to average revenue.

That's the intermediate opportunity for Alderwoods to build. I know their backlog was an area they hadn't focused on but the higher revenue backlog in particular, not just the normal backlog.

No, you're right. That's a good observation.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from [Rider] Campbell from Barclays. Please proceed.

Hi, thanks. Few questions. First, do you guys have any desire or see any need to once again be investment grade? And if so, if you achieve your three kinds of capital structure credit ratio targets and over time you still don't get investment grade rating by the rating agencies, are you guys willing to adjust those to a more conservative stance in order to achieve investment grade if that is a desire of yours?

I'll take that. We really do not have desire right now to go to an investment grade credit. That being said, as you'll hear from every management team probably, we don't necessarily think we're fairly rated right now. And the market doesn't view as a bb or low bb credit right now. What I mean by that we have investment grade covenants within our indentures and we continue to do, to do transactions that are somewhat anomalied for a high yield grade credit (inaudible), such as issuing the 20 year notes that we just did.

Sure.

We have a very stable business, predictable business with very stable cash flows, so with all those parameters, we just don't see right now a need or business case to force ourselves into an investment grade rating. And what we will continue to do, because our credit ratings are important to us, is we will continue to work with the credit agencies during 2007 and such -- continue to show them the performance that we're doing, specifically related to the Alderwoods debt position and its synergies and those types of things, to continue to what we feel is get a rating more indicative of how the market, and ourselves, view ourselves. As far as the three capital ratios, they're really not hard and fast rules that we use. Those are generally ratios that we think we have our most optimal capital structure and our lowest weighted average cost to capital, if we're in that particular area. You're not going to see us, if one ratio is slightly above a parameter, you're not going to see us do a transaction or pull a lever, if you will, to immediately force ourselves back into the center of these capital ratios. They're just kind of generally where we want to be, generally where we think we have our most optimal capital structure. Now, as we move along, over the years and look at our capital structure, we could essentially tweak those ratios a little bit as we move forward. But I don't necessarily think we'd make a more conservative so that we could aim for the investment grade company.

Okay. Second, in regards to your tenders of the '08s and '09s, clearly you guys were willing to tender for the entire issuance but you have roughly $74 million left, it looks like,e that didn't get tendered. Is there -- given that you were willing to de-lever by that amount fully to begin with, is there any particular reason why you guys aren't interested in using that excess cash to pay down the Series A, $50 million traunch of the private placement notes?

Leaving the amount of tender we did, we left $45 million on the table for the '08 for the total of $195 million and as you said, the $28 million of the '09s have a total of $200 million, so that somewhat surprised us. It's very concentrated into two to three holders of those bonds that we know very well and have very good relationships with.

Right.

In fact, those holders actually were put in some pretty large orders in the new 2015s and 2027s. I think it had to do with some internal situations that they want to continue to hold and have the new bonds as well. I think we'll look at it when it comes due. I think it's a possibility we can pay down the $45 million of the '08s, but for the most part if we're going to take it out in the first place, we'll probably look to maybe tack on to something and refinance as those they do in March '08. Specifically to the private placement transaction, I mean, question, there's $200 million outstanding, $50 million is prepayable today. And the other $150 million Series B traunch will become prepayable on November 28th of this year. We enjoy that relationship with the life insurance companies and again look into those ratios. It's not indicative to us that we need to go ahead out and take out that $50 million private placement despite the situation that occurred with the March '08 tender.

In regards to the March '08, $45 million outstanding, if you guys were to refinance that, I could be wrong but that sounds like that would be a levering-up event that you're not likely to issue a $50 million bond. Is that correct to look at it that way?

If we were going to do this and I'm not saying we are, it's subject to market conditions. It's too early to make that call. If we did, we'd look to tack on to an existing issuance, is how we'd try to do it.

Fair enough and lastly and I'm just curious in terms of the market, given the weakness in the housing and property markets and in Florida in particular, have you guys seen any opportunities, unique opportunities to acquire land, given the situation?

I wouldn't say anything of a material nature. I can't speak to a local decision that's being made. But, no, I think again as it relates to cemetery land, it's very, very difficult to acquire and obviously be utilized as cemetery land due to zoning and the like. As it relates to funeral homes, again, I think for most markets, we're doing a strategic review and understanding where the most appropriate sales are. So nothing of any concentrated nature but I can't say, that it's not occurring on a local basis in a few markets.

Okay. Great. Thanks for answering my questions.

Next we have a follow-up question from the line of John Ransom with Raymond James. Please proceed.

Hi, Eric, I did have one for you. Sorry, I forgot. Looking at second quarter cash flows, I know you mentioned you're going to harvest $20 million or so of working capital. Is there anything else we need to think of about, timing of bond payments or what have you as we model out cash flows for the rest of the year?

No. That's really the only unusual piece that would be different than, kind of the guidance that we've given already other than, of course, I think you're talking about cash flow from ops, down in investing we have the proceeds that I tried to lay out our expectations in the coming months. But from the cash flow of operations, from working capital standpoint, so far this $20 million that we'll be able to harvest is really the only unusual new item, John, that has come up.

Thanks a lot.

Thank you.

Your next question comes from Dave Pickering with [Nuny] Asset Management. Please proceed.

Couple of questions. Tom, for the funeral segment for preneed production, can you give us a little bit of color what the trends were organically, if you will, x the Alderwoods addition?

I think the trends again that we've seen over the last few years is a slow down in the number of contracts that we're able to write, but we're seeing higher quality business written. What I think we'll see in the future is we're putting some infrastructure behind again supporting our sales force to hopefully begin to generate a higher number of contracts written. So I hope that you'd see production progress throughout the year that we actually will begin to write a higher level of contracts which may or may not reduce that average revenue per case, again depending on where the penetration occurs. I'll give you an example. When you sell preneed in the state of Florida versus selling preneed in the state of Texas, there's thousands of dollars worth of difference in that average revenue per case. So if our production in Florida kicks in versus Texas, you would expect to see a lower revenue per case as it relates to what we're writing in preneed. So it's hard to project, but what I will tell you, hopefully, is you'll see the volume of contract begin to creep up which again depending on geography may or may not impact that average revenue per case.

And in a world slightly more troubled consumer, are you seeing any trends where people defer the decision to execute a preneed contract?

No, I don't think generally that we are. We're probably least impacted by economic events, but if we are, preneed is going to be the higher impact item versus at-need clearly. But we aren't experiencing anything yet that's really troublesome there. One of the things that, again, we need to always examine is we want people to go down this decision path. This is something that I think provides peace of mind to a lot of consumers. So we're always looking at a variety of ways how we fund, how we make arrangements potentially, maybe without even funding. There's a lot of things that we want to do to be in front of consumers and help again the baby-boomers make arrangements, make plans that provide that comfort or that peace of mind as we progress.

And then the last question is just on cremation. Perhaps you could just give us a little bit of color as to where the rates have trended in your business?

Sure. I think what you're seeing again, historically, we've always had higher cremation rates than the national average and that's because we're more concentrated in the coast. So higher cremation rates traditionally in California and Texas and Washington state and the like. And because we have high concentrations of businesses, we have a higher proportion. We're continuing, we believe, to see cremation increase within the marketplace. What you're seeing within SCI's business portfolio is that cremation rate stalling or slightly trending downward. And the reason for that goes back to our customer segmentation strategy. We have basically decided, in certain cases, that we don't want to compete in the very low-end direct cremation business because it's not profitable. Therefore, we've exited what I'd say some low-end cremation business. At the same time, we're experiencing a higher selection rate in our Dignity packages from cremation consumers, a differential growth. So we believe in the cremation consumer is not a homogeneous animal. There's the low-end business and then there's the business that we believe has been untapped at the higher end, where the cremation consumers haven't been offer a variety of products and services. So we're really seeing two things. Cremation consumer at the upper end of the segment that are buying more things and better things and we're seeing ourselves exit kind of the low-end direct cremation business. So we're unique I think relative to the entire population of funeral homes.

Got it. Thanks, Tom.

Okay.

Okay, there are currently no questions in queue. I'll now turn it back over to SCI management.

We want to thank everybody for being on the call today, and we'll be speaking to you on our Q2 conference call which will be scheduled sometime for early August. Thanks again, and have a great week.

Ladies and gentlemen, thank you for your attendance in today's conference. This concludes your presentation. You may now disconnect.