Service Corporation International (SCI) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for your patience and welcome to the second quarter 2007 Service Corporation International earnings conference call. My name is Fab, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. 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 would now like to turn the presentation over to management of SCI. Please proceed.

Good morning. This is Debbie Young, Director of Investor Relations for SCI. Thank you for joining us today as we talk about our second quarter results. Our comments today will 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 Web site SCI-Corp.com.

In addition, during the call today, we may use the term normalized EPS or earnings from continuing operations excluding special items. These are non-GAAP financial terms and we have provided the appropriate reconciliations to EPS calculated in accordance with GAAP in our press release that was issued yesterday and filed on 8-K this morning. A replay of this conference call will be available on our Web site for at least 90 days and can be accessed by clicking on Webcast and presentations in the investor section. We will now begin with comments from Tom Ryan, our President and Chief Executive Officer.

Thanks, Debbie, and welcome, everybody, to the call. First of all, we are very pleased this morning to report normalized earnings per share of $0.11 versus the prior-year number of $0.10 per share. This was within our range of our internal expectations. So with that, I would like to thank all of our 22,000 fellow employees who really make this happen every day. I know I'm truly excited about the opportunities that are in front of our great company, and look forward to an exciting future as our industry changes and SCI leads the way. So on behalf of the Board of Directors, thank you again for your tremendous efforts.

Now what I would like to do is actually talk about, briefly, some of the things that we're very pleased with that we're seeing in our business today, and then maybe some things that we can work on that are some room for improvement. First of all, under the pleased category, we're very pleased with the progress we've made by becoming one team. The human side of integrating these two companies, culminating most recently in our announcement that talks about the Alderwoods location officially becoming a part of the Dignity network.

Second item we're very pleased with is the progress we've made in implementing the identified Alderwoods synergies. These are on time and on track. The third item we're very pleased with is the impact of our strategic pricing, both on funeral and cemetery revenues. Many of you know we've had those in place for the SCI locations for some time, and we're now getting those in place for the Alderwoods locations, and we're very pleased with our progress to date. The fourth item has to do with the progress we've made with regards to staffing metrics. As those of you will recall, we're utilizing these metrics to become more efficient and more effective in serving our client families in our local markets, and again, these are progressing quite well and the financial impacts we anticipated are showing up.

The fifth item that we are very pleased with is the pace and the realized proceeds from the divestiture programs that we've embarked upon. Again, some of these were the Federal Trade Commission as well as the Mayflower Insurance business, but also more importantly in analyzing the business portfolio and looking at nonstrategic businesses and looking at strategic footprints and markets and realizing real estate proceeds that in today's market are very favorable. Lastly, but just as important as the rest, is our enhanced capital structure. We believe we've got the right debt package in place, appropriate debt levels and are generating excess cash and utilizing that for the best benefit of the shareholder.

Now on the items that we probably need some improvement on, really there's two I'd speak to, one is we told you that one of our strategic objectives is to grow both cemetery and funeral pre-need sales production. And you'll see from our comments that both these items grew slightly in the second quarter. They're not where we want them yet, but again, I think, with the leading indicators we have, we feel comfortable we're on a pace we're going to begin to see the benefits of that in the back half of this year and particularly in 2008.

And the other item that we're not very pleased with is funeral volumes. We continue to see comparable funeral volumes down and for the most part, we believe a lot of this just has to do with the marketplace. So there's not a lot to do in the relevant number of deaths in our markets. Having said that, again, we continue to see in pockets, some of the business eroding, particularly below the 2000 case dollar level.

Now getting the overview out of the way, we'll go to specific business segments that I want to talk to. First of all, we'll talk to the funeral segment. I want to break it down first on comparable businesses, so we can talk about businesses that have been owned by SCI the entire period. On a comparable basis, our revenues were $265.9 million versus $263.2 million revenue base in the prior-year quarter. 2 This was an increase of $2.7 million, or approximately 1%. The drivers of that revenue, first of all, our comparable volumes were down 4% for the quarter. If you look at our pre-need turning at need business, it was down about 3.9%. So again, we believe we're trending more toward a normalized market approach as it relates to our comparable volumes.

What we're seeing in deterioration continues to be primarily the lower-priced direct cremation business that's under $2000 in revenues. What we expect for the latter half of the year in 2008 is to really begin to move to more of a market reflection of what's happening. We think a lot of the year over year, particularly as it relates to comparable businesses, is now there and so we believe we will ebb and flow with what's going on in the marketplace. On the comparable average revenue per case, we saw an increase of $228, or 4.8% for the quarter. So again, the continued impact we're seeing from strategic pricing initiatives, we're also seeing higher quality pre-need business coming out of our backlog, and also as we talked about before, some of the lower dollar value business is being driven away. So those three things come together to reflect a 4.8% increase.

Now, we would expect, particularly for the comparable businesses, that this growth would taper off to a more inflationary 2.5 to 3.5% as we look going forward in the back half of 2007 and into 2008. Really, you can expect that for the comparable businesses until the game has changed. We believe segmentation is going to do several things, first and foremost, drive business to these segments, so we look for comparable revenue growth when those things hit, but also our initial analysis shows some opportunity for additional products and services in some of the other segments we've identified. In particular, the customs conscious, as well as the prestige consumer we've talked to before. These things aren't going to show any impact, we anticipate, until late in 2008 and really in 2009.

Some key metrics that we've observed in looking at the funeral business, and particularly on a comparable basis, is our cremation mix is relatively flat. It actually grew by 10 basis points, and again we'd expect that with our strategy that's seen us lose business in the direct cremation area below $2,000. Our cremation with service mix as it relates to our entire cremation base has grown now to 74%. So only 26% our consumers we identify as direct cremation. We continue to see more and more of the consumers we serve choose service. Our comparable cremation average rose to $2779 and it's up 10.2% year over year. Particularly, we're seeing in the Dignity packages that average is now $4900. So again, what we've tried to tell you before is we want that cremation consumer to understand that we deliver great service and there are other things you can do other than buying a casket. So we continue to see that occur and the growth side, particularly on cremation. Once again, when you put value on the service side, that's why we're seeing that growth there as opposed to comparable burial.

The burial average is $6809, up almost 3%. When you look at the split between comparable at-need average, we're up about 4.5% on the at-need side, and our pre-need average continues to grow at 5.4%, up $244. We would expect that pre-need in the future to outpace the growth of the at-need. Again, we've written good business to the backlog, particularly a high amount of contract and we continue to see good earnings, particularly on the trust side.

So boil it all down, when you look at comparable funeral segment, our comparable funeral gross profits that we reported increased $2.1 million or 4.1%, and keep in mind, this absorbs additional resources that we've put in place in our market support centers, and also some wind-down costs associated with managing our larger portfolio of businesses. Keep in mind, this was budgeted. So if you take away the allocated overhead, it's all being absorbed by comparable, our true apples to apples comparable gross profits increased $6.5 million or 9.4% before our overhead allocation. So again, at the funeral home level, we're seeing very good growth to the tune of almost 10% in the operating income.

Comparable pre-need funeral production, this increased $3.6 million for the quarter. So again, we're seeing a turnaround, we're seeing that growth begin, but we have big expectations for seeing that ramp up even more, and we're pretty confident this is going to occur in results that we're going to report to you, particularly probably in the fourth quarter and into 2008. Next segment of our funeral business I want to talk about is the Alderwoods businesses. The Alderwoods businesses contributed $106 million to funeral revenues in the second quarter. This was about $4 million below our own internal expectations.

Additionally, G&A revenues from funeral insurance sales were $2.8 million below our internal expectations as the Mayflower Insurance Company, keep in mind this was Alderwoods' insurance company, that we had anticipated divesting of, was delayed until July versus our anticipated March closing. Therefore, the profits that we had anticipated being in the funeral ongoing business are reflected down in discontinued ops as opposed to the funeral profits from continuing operations. Now that that operation has been sold, we've got a normalized expectation back to what we'll report, so you'll see those G&A revenues and profits being reported in our normal recurring operations.

Volumes on the Alderwoods side were approximately 3% below our expectations, pretty consistent with what we saw in the SCI businesses. We would expect to see a slight market share deterioration as we roll out strategic pricing and some of the segmentation training to the Alderwoods locations. Again, we'd expect it to be that in that direct cremation business, similar to what happened in the SCI locations.

Our average revenue per case is really in-line with our expectations as we've begun the strategic pricing rollout and it's rolling out within our expectations. We would expect to see growth as it relates from the first half of the year to the second in that average as the strategic pricing really kicks in in the back half of the year. Keep in mind the Alderwoods average today is about $4459 versus SCI's $4997. So it's more than a $500 difference. We still don't believe that will ever make itself up, but it shows you some room for improvement once strategic pricing really begins to kick in.

So overall, the Alderwoods' funeral gross profits were about $4 million below our internal expectations because again, that revenue shortfall, having said that, they managed expenses very well and we're in-line with our expectations. The last piece of our funeral segment I'll talk about is divested operations. Keep in mind that both consolidated funeral revenues and profits were negatively impacted by divestitures that occurred over the prior 12 months. Gross profits were primarily impacted by the required Federal Trade Commission divestitures, otherwise we're divesting of low-margin businesses and converting the proceeds to cash and using them for alternative purposes, such as share repurchase, as we're doing today.

The next segment of business is the cemetery segment. And on the comparable side of the cemeteries, our comparable revenues were $146.1 million, versus $145.3 million, or an increase of $900,000 or 0.6% over the prior-year quarter. Excluding the $7.9 million recognition in the second quarter of 2006, you'll recall there was an endowment care gain as a result of the resolution of disputes over ownership rights to certain funds. We refer to it as Millennium. If you exclude some of those unusual gains, comparable revenues actually grew by $8.7 million, or 6.4%. This revenue growth is primarily attributable to increased sales production of $3.1 million or 2.4%. Still not where we want it to be, but trending the right direction, and again we feel very comfortable with that.

We also saw increased recognition of merchandise trust and internal care trust income, again due mainly to favorable market returns we've seen over the last 12 to 18 months. We would expect increases in comparable sales production as we look at the back half of the year, as we've reiterated before. Comparable cemetery gross profits increased $6 million, or 26.3% when you exclude the impact from the millennium income from the second quarter of 2006. This again was primarily accomplished through the profit increase, as well as the enhanced standardization in our cemetery staffing and administration. Comparable margin percentages, again, excluding that $7.9 million, grew to 19.7% versus the prior year 15.7%,, so a 400 basis point improvement. So we feel very pleased about the direction and the profitability of our cemetery business going forward. It was a very good quarter.

As you turn to the Alderwoods businesses, as it relates to cemetery, they contributed $41 million to cemetery revenues in the second quarter. Again, like the funeral side of the business, this was about $4 million lower than our expectations we had for the businesses. Some of the revenue shortfall to forecast is really due to some timing. Originally, when you have these construction revenues, particularly at our large locations at Rose Hills, it's hard to determine when exactly those are going to be completed. We had a lot of completed projects in the first quarter, which again helped us report that $0.17 for the first quarter and now you're not going to have that in the second and the third.

Part of it is that and part of cemetery sales production on the Alderwood side isn't where we wanted it to be, isn't where we anticipated it to be. A lot of this has to do, understanding cemetery sales is, having available inventory to sell. One of the things we noticed as we go into Alderwoods, is we needed to invest in developing inventory they can get out there and sell which we can recognize in our income statement, and as well collect the cash and put in our pocket. In addition, we're looking at cemetery pricing, strategic pricing there. That's being rolled out and additionally utilizing Dignity University for further sales training. We feel like we're on the road to getting this fixed and have really good expectations, particularly for Q4 and as we look at 2008.

The Alderwoods cemetery gross profits were therefore about $4 million below our expectations, because again expenses were in-line with what we thought we could manage and the revenue shortfall really fell to the bottom. So in total, Alderwoods' cemetery gross profits were 9.8%, which is well below again SCI's comparable 19.6%. So as we roll out strategic pricing, put the appropriate inventory levels in, complete the sales training, we again believe we can begin to move that margin towards a more normalized report, or I should say, reporting that we're seeing in the SCI business. On the cemetery side, again, divested operations, consolidated cemetery revenues are negatively impacted by divestitures that have occurred in the last 12 months. Gross profits were really not that impacted on the cemetery side, because these were not very profitable businesses. So generally, again, we're taking nonprofitable businesses and converting them into excess cash.

Now I would like to speak for a moment on proceeds from divestitures, because again I think this is becoming something that's very strategic that we've talked about before. For the first seven months of 2007, ending in July, we've divested of approximately 161 businesses, 55 of these were part of the Federal Trade Commission divestiture, and these businesses that we sold have now generated $251.8 million in proceeds and this approximated 10 times EBITDA as it relates to true business sales. Additionally, we have sold certain locations as real estate. So, for instance, shut down the operations and sold them for alternative use. This has generated an additional $42.3 million of proceeds and these transactions generally have no impact on our ongoing EBITDA, because typically they're in a market where we have a footprint and we believe we can move a significant portion of the business to another location.

While we're completed with our mandatory Federal Trade divestitures for the most part, we would expect to continue to see other than North American divestitures as we complete our review of the business portfolios, divesting of the nonstrategic locations and completing our strategic footprint analysis in our relevant markets, which again we believe should generate real estate sales opportunities. Additionally, we along with our partners in our French joint venture have entered into a contract to sell our shares in the French business to another private equity firm. The anticipated pretax proceeds and related gain on sale for SCI is anticipated to be approximately EUR 125 million or approximately $170 million at current exchange rates.

We anticipate this closing to occur in early September or in early October. Finally, as we look at the rest of 2007, we reported $0.28 of earnings for the first six months of 2007 from continuing operations, excluding special items. If you go back to our annual guidance, we had given guidance of $0.46 to $0.52. Therefore, backing out the $0.28, the back half of 2007 ought to produce $0.18 to $0.24 as a range in earnings per share from continuing operations. We feel very comfortable with our current guidance.

Keep in mind in the third quarter, the funeral side of the business tends to be the weakest for funeral revenue, even weaker than the second quarter. However, as business slows, we traditionally try to manage our labor more efficiently. The cemetery side is also much weaker in the second quarter as cemetery results are more sales-driven and are therefore a function of the number of deaths, as well as sales appointments set which trend down as both consumers and sales professionals take summer vacation. That's a traditional seasonality to our business.

In the fourth quarter, the funeral side of business tends to pick up again. It's our second strongest funeral quarter as winter tends to bring increased call volumes. On the cemetery side, we continue to see the impact from increased case volume as a positive. However, again, with the holiday seasons, we tend to be negatively impacted as sales appointments are again difficult to do as both sales professionals and potential consumers are doing the holiday season. So with those comments, I'm going to turn it over to Eric Tanzberger, our Chief Financial Officer. Thank you guys.

Thanks, Tom. Also want to reiterate that we're pleased with the financial performance overall in Q2, as Tom just mentioned, especially in light of the tough funeral case volume environment that we're in.

Specifically from my perspective, I would say that I'm especially pleased with our progress in the second quarter related to our Alderwoods integration. We hit many milestones and worked very hard on this as a company in the second quarter. We have milestones such as implementing our point of sale systems, fully implemented in the Alderwoods locations, as well as finishing other projects, such as our printed funeral and cemetery backlog, looking at the records of the Alderwoods locations and reconciling that and removing funds from trust funds that I talked about in the last call. This is a complex integration and we are very pleased to be on track with our original expectations. Now I'll first start talking about our annual guidance and comment on that as we see the rest of the year, then I'll come back and comment some more on the Q2 financial results.

So first talking about a midyear report card related to our annual guidance, I want to remind everybody, though, first that I'm referring to all the annual guidance that we issued in our February 19, 2007, press release. Again, we didn't give quarterly guidance, we gave annual guidance in this release, and that press release is available on our Web site as well. From an income statement standpoint, generally I want to reiterate, we believe we'll be within our ranges of the funeral and cemetery revenues that we gave in that press release, and from a margin perspective, we're currently within our ranges as well. Just to remind you, the funeral margin, the annual guidance was 20 to 24%. We're currently just under 22% on a normalized basis, so we're very comfortable that we'll be within that range for the full year 2007.

Cemetery margin is a little bit different story. Our original guidance was 14 to 17% and we are currently just under 19% normalized margins for our cemetery operations. So even though Q3 and Q4, as Tom just mentioned, are somewhat weak quarters for cemetery sales compared to the first half of the year, we do believe our margin will be more like the 16 to 19% for the cemetery full-year '07, so we're raising this '07 annual guidance to the 16 to 19% range on the cemetery side. For the most part, I would describe all other income statement guidance, such as related to G&A, interest expense, depreciation and amortization, we generally remain comfortable with that original guidance in that press release that I just discussed.

From an EPS perspective, I'll reiterate what Tom said, we're $0.28 year-to-date through June 30. Of course, our annual range is $0.46 to $0.52. So therefore the Q3 and Q4 together combined for the second half of the year should be in our projected range of $0.18 to $0.24. And I again want to reiterate that the Q3 is softer than Q4 and is even the softest quarter of all four quarters during the year traditionally on a historical basis, but we do remain comfortable with the $0.18 to $0.24 for the second half.

From the Alderwoods perspective, again we're very pleased with where we are in our integration and we're on track with our synergies. We remain comfortable with our expected synergies that's built into our expectations as well as most of the models that are out there. And just to remind you, the total synergies are projected to be 90 to $100 million and 65 to $75 million of these total synergies are expected to actually occur in calendar year 2007.

From a balance sheet and a cash flow guidance, our cash balance as of June 30 was $223 million. Currently today, it's higher than that, it's about $280 million. This current cash balance that we have today of $280 million is about $200 million higher than the last cash balance we reported at March 31 at the end of the first quarter, which was about $80 million. The $200 million increase resulted from primarily, there are $250 million in asset sale proceeds that Tom mentioned that we have had, as well as $250 million since March 31, as well as debt proceeds and strong operating cash flows. It's obviously offset by the normal things that you'd expect, such as capital lease payments, payments of dividends, but also we spent about $125 million of share repurchases through today, through July.

For the back half of '07, the way I do our cash balance is I expect it to grow. The sources for this growth will again be our continued strong cash flow from operations. Additional possible divestiture proceeds, but also the divestiture proceeds of about roughly $170 million from our French investment that Tom just mentioned as well. That $170 million is a pretax number, though, and we will pay taxes on that, in all likelihood, probably in 2008, but the $170 million should arrive shortly in the coming months. From a uses basis in terms of what we expect to deploy this cash, we will continue with the share repurchase program. We're strong believers in the share repurchase programs that we've certainly reiterated before. We will also deploy capital on any other high-return projects that we feel meaningfully exceed our weighted average cost of capital.

Further guidance as related to capital expenditures, our original guidance to remind you, is 150 to $180 million. I do think we'll be on the higher end of that guidance as we end 2007. Specifically related to those components, our maintenance CapEx is running a little bit higher than expected, primarily related to the Alderwoods locations, but our growth CapEx is offsetting that and is somewhat lower than expected.

We also continue to be very comfortable with our cash flow from operations guidance. Just to reiterate, that was 400 to $450 million of expected normalized cash flow from operations. Remember, that guidance added back the Alderwoods transition costs of $24 million, approximately $40 million termination payment related to our cash balance pension plans, and $30 to $40 million of projected U.S. federal cash taxes. So with those items, we again remain comfortable with the cash flow guidance. We specifically remain comfortable with the transition costs of $24 million and the pension termination payments in 2007.

I would like to address the cash taxes here for a second, the 30 to $40 million they mentioned. From a U.S. federal tax perspective, SCI will begin being a cash taxpayer in the third quarter after full utilization of our net operating loss carry forewards. And I think that's what we've said all along in our guidance. However, we expect to pay only about 15 to $20 million of cash payments in U.S. federal -- for U.S. federal purposes for the remainder of 2007.

However, when you do include our state cash tax payments as well as taxes that are paid in Canada, we do expect our total cash taxpayers to be around $40 million in 2007. And that number is really off of the information that we have today. Any further dispositions could affect that number. For example, as I said, we'll eventually pay cash taxes on the $170 million worth of proceeds, which is just about all of the tax gain related to the French disposition that Tom described earlier. So that really wraps up our view of the back half of the year in terms of annual guidance.

Let's go back to some of the specific results -- specific items on the second quarter as well that Tom didn't cover. First of all, from a G&A expense perspective, G&A expense is up $10 million on a quarter-to-date basis to about $30 million. $6 million of that are the Alderwoods transition costs and stock option expense is also a component of that increase, because that expense moves with the share price as well and we also have other Alderwoods wind-down costs as well, within the G&A expense line. Interest expense is also up about $10 million to $36 million and all of that increase was expected and that relates to the Alderwoods financing activity as well.

Shifting now to our trust funds, just to give you an idea on some of the performance in the second quarter, a reminder, the funeral merchandise and service trust is about $1.4 billion. The cemetery merchandise and service trust is about $1.3 billion, and our eternal care or perpetual care funds on the cemetery side is about $900 million. So a total about $3.6 billion of trust funds that we're managing. On the funeral trust funds, the quarter to date return was about 3.9% given about a 6.1% year-to-date return. The cemetery trust funds had a 3.3% quarter to date return, given a 5.4% year-to-date return, and on the eternal care fund, which has a high mix of fixed income, it had a quarterly return of 0.4%, leaving a year-to-date return of 2.4%. Again, we feel that that was affected by the volatility in the fixed income markets, and high yield, but nothing such as subprime or any of those other situations that are out there today.

From a cash flow perspective in the second quarter, our cash flow from ops is about $64 million, which is above prior year by about $15 million. After adding back $11 million of debt tender payments and $12 million of Alderwoods' transition costs. This $64 million is in-line with our expectations as we had strong working capital in the third quarter, especially from the Alderwoods trust withdrawals which I mentioned earlier and mentioned last quarter, that is somewhat offset by decreases in cash receipts, which we view primarily related to fewer funeral services performed. Going now to share repurchases, from April, when we really started in 2007, through July, we spent $125 million, specifically in the second quarter, we purchased just about 8 million shares for about $104 million, and in July, we purchased about 1.7 million shares, spending about $21 million. So a total of 9.7 million shares in '07 or a spend of about $125 million on share repurchases. Currently, as we speak, we have about $75 million still authorized from our board.

So in summary, to wrap it up, I think we still are pleased with the Alderwoods integration. That will be a big part of our focus in the second half of '07. I also view in summary our cash balance issues continue to grow, from both cash flow from ops and divestitures in 2007. We again will deploy that capital in high-return situations, such as our share repurchase program, or other high-return projects that we feel again meaningfully exceed our weighted average cost of capital. And we will generally manage those two criteria by looking at our three capital target ratios that we've explained several times that you've seen in our IR presentations that are available on our Web site.

So before we wrap up the remarks and turn it over to questions, I just want to mention one additional item that we've gotten some feedback on since we released our press release last night and got some feedback on this morning as well. And that relates to the high tax rate that we had during the quarter. We had about a 69% tax rate for the quarter. That really relates to divestitures during our quarter that we had sold, some, mostly FTC properties that had very low tax basis in those properties. When you have very low tax basis, it creates large tax gains and therefore large tax provisions.

That's really the explanation related to our higher effective tax rate for the quarter versus the book pretax number. This also affected our reconciliation in our press release when we reconcile our GAAP net income to our earnings from continuing operations. In particular, related to the addback of the gains and losses. On a pretax basis, we had a $9.7 million gain, but because of the low tax basis and again the high tax provision, we had about a $19 million tax provision related to this gain on sale. So on an after-tax basis, this number actually becomes a $9.7 million after-tax loss after it's added back in the reconciliation.

We're happy to take more questions on that, but I wanted to proactively clarify that situation since we've gotten quite a few comments about that. With that, operator, I think we'll go ahead and turn it over to Q&A at this point.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Mike Scarangella from Merrill Lynch. Please proceed.

Mike, you there?

Yes. Hi, guys. Can you hear me?

Now we can.

Looks like a nice quarter. I just had a couple questions. With regard to the Alderwoods volume, I think you said it was 3% lower than expectations, but what was the actual year-over-year volume change for Alderwoods properties?

Mike, one of the problems is Alderwoods had a slightly different way of defining case volume than we did. So there's a little bit -- it's hard to compare to prior year because their definition of a call is different. But generally, just to give you some idea of trends, we probably anticipated about a 1% down true apples to apples and it came in probably around 4. I think that's probably the general answer. High 3s or 4, yes.

That's helpful. The next thing I'm curious about, I'm trying to understand once these properties come into your same-store, what the impact will be? Have you thought about it, if you had owned Alderwoods at this time last year along with your same-store properties, what your same-store change would have been in this quarter?

Again, I think it's hard to say, Mike, but I would have expected it to be similar to ours, because we would have initiated strategic pricing, we would have rolled out some of the segmentation training. So without better knowledge, I'd expect those facilities would have had the same impact we would have. So I think what I'd expect from Alderwoods is probably the better question going forward is the Alderwoods properties ought to go along with the marketplace and what's happening there and probably lose potentially 100 to 150 basis points in the low end, because again, we're putting more price on service and so people that were coming and getting relatively cheap services, we're not getting that business anymore.

So if they were 4% down this quarter, they could further deteriorate offset by hopefully higher pricing?

Yes. I think you could probably come from that that there's -- 4 could go to 5, something like that. But in some of the Alderwoods locations, we've had pricing in place. So you may be seeing a little bit of that, probably already, particularly in May and June.

Okay. All right. I just want to make sure I understand the comments on the asset sales. I think you said through July, you sold almost 252 businesses and then you sold real estate of about 42. That's about $80 million more than the proceeds you generated in the first six months. Does that mean in July you generated $80 million in proceeds sales?

Mayflower is $68 million of that and the rest of it is miscellaneous stuff.

You're generally in the ballpark, Mike.

Okay, so about 80 in July and then we should see the French sale in the fourth quarter for about another 170.

That's right. Like I said before, and we're not quantifying this, but we continue to go through a portfolio of businesses and we will have divestiture, some of which will be nonstrategic markets that we want to exit, and then also I think we'll take a little bit longer, but you'll see again some nice proceeds from, as we're going through these market strategic reviews, we're looking at our footprint, how many points of sale do we want, how many do we need. And in this era of real estate appreciation, we're very cognizant of that, so we believe, do what's best for the business, and then find excess real estate, and sell it as another form of business, not a funeral business, we're generating those and converting that to cash and buying back shares.

Mike, one other thing -- I got a quick note from Jay that helped me on this. As it relates to the Alderwoods volumes, you guys will remember that contract in Seattle that we had last year that we exited that was a 2000 call contract that we did with a group. Well, the Alderwoods business there picked that up, and once again, because we couldn't come to an appropriate price for us, we exited that contract and didn't renew it in March. Particularly again in the Alderwoods businesses, you're seeing that same 2000 call last year run through and I'll remind you a $600 business tha again t we believe is worthy of a more appropriate price, a higher price.

Thank you. Just to follow up, you're obviously flush with cash, the asset sales are going really well, I know you're spending some money on share buybacks, you have your dividend, I don't think you're looking to pay down any debt. Do do you have appetite for more acquisitions at this point, or do you feel like your plate's full?

I think -- again, we're looking for any acquisition that fits our strategy and is at a reasonable price, we're going to do. We're in a position where we can do that. We've got a lot going on. Particularly, we're looking market by market. We did an acquisition the other day on a specific market we just closed yesterday or the day before. So we're out there looking for reasonable deals and we're also looking for opportunities with greenfield sites, finding the right place, building a location, particularly in markets where we already have an infrastructure. So I think you'll see us do that, Mike. As far as the bigger deals, it's like everything else, they come when they come. If they do and they fit our strategy, we're going to go down that path.

Okay, I got it. Thanks, guys.

Okay.

Your next question comes from the line of Bob Willoughby from Banc of America Securities.

Tom or Eric, we had anticipated maybe in the 2008 time frame that the impact of divestitures would taper off somewhat and the comps number that you report would be closer to the reported number. I guess it sounds like you do have more divestitures in mind here. Should we be looking more towards an '09 time frame when the impact of divestitures becomes less material?

I think, Bob, it's going to be this way. As you think what we call the nonstrategic locations, the ones where we decided they're marketplaces we don't want to compete in, we think most of that's going to be done in 2007. The only longer tail I see beyond into 2008 are these specific marker reviews. So in that case, we're not talking about losing the business for the most case. We're talking about a city that's got 18 locations and we've decided we can more efficiently serve it with 16.

So two parts of the real estate are available for sale and so you won't be seeing a divestiture of calls or divestiture of profits as it relates to those businesses. At least, that's our anticipated impact. It's not always 100% true, but we believe we can retain a preponderance of that business, otherwise, we probably wouldn't enter into the transaction.

So I guess a change in the model in '08 versus '07 next year, there's a revenue number of greater consequence, maybe less EBITDA margin leverage, whereas this year EBITDA leverage in both years having some pretty good cash. Is that the way to look at it?

For sure on the cash -- exactly right.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Tom Bacon from Lehman Brothers.

I just had a quick -- can you clarify on France, in terms of the $170 million in proceeds, is there going to be some sort of tax impact there?

There will be. About all of that is projected to be an income statement gain and there will be, not only a tax provision on the income statement, but we will pay cash taxes associated with that as well. I think there's a possibility that the actual, physical payment pushes into '08, but you have to think of about 35%, roughly, of that is going to be a cash tax payment, Tom.

Okay. I was wondering, I thought your comment as far as the cemetery sales on the Alderwoods facilities, that they didn't have product, and I was wondering -- I had sort of assumed that they were maybe a little bit behind as far as pre-need sales because of the financial difficulties that they had in the past. Is that something you find you have to invest a lot more in in terms of pre-need sales capabilities throughout the former Alderwoods facilities as a whole?

I think the answer is yes. There's a couple of things there. One is you're right. Alderwoods came out of bankruptcy, which is very difficult. And because of that, they had some rules and regulations around how they spent their money. But to be quite honest, Tom, it's not unlike what we see in the cemetery business all over the country. When you have a sole proprietor, they don't have access to a lot of capital. So historically what you've seen with cemetery businesses -- Let me paint you a picture or let me show you a picture and you can buy from us later. So they really didn't have inventory in the chute to show people and therefore will probably command a premium price and therefore drive the profits themselves.

What we're doing now is going in. We took a strategic turn about four years ago and said, we see moreen opportunity by building inventory and bringing people through and letting them see it and again, we'll command a higher price, we'll be able to recognize it when we want, and remember particularly that high-end inventory drives a lot of value throughout the entire cemetery. So it's really a strategic difference that is not only an Alderwoods difference, but probably a difference from the preponderance of the competitors we have out there.

But in terms of generally speaking within the Alderwoods footprint, were they underinvested the sales capability in terms of salespeople focus on pre-need?

I think we all -- a lot of the consolidators -- what happened, a lot of the consolidators, when we made a lot of the changes to save the ship did some things to the sales organization that brought it down. We're one of those too. And we've spent some time trying to reinvest back in our sales force and obviously Alderwoods was in the same position and probably hadn't invested as much as us, but again, this is a path we've been down, Tom.

We've seen the impact and we believe by investing in training and people and inventory and secondarily by putting that inventory in place, it allows you to take that strategic pricing approach. So pricing, inventory, and training on the Alderwoods side, we believe, are going to drive results. We also recognize and are cognizant that that takes some time so this is probably 2008 before we begin to see a more material impact from those investments.

Then maybe just shifting gears a little bit. In terms of Rose Hills, that was obviously the crowned jewel of the Alderwoods properties and I understand you had wanted to keep your hands off of that just because it was so strategically important. I'm just wondering, are you doing much there in terms of integrating that or introducing any of the pricing initiatives?

Two things. One is, we have significantly invested in the cemetery product side at Rose Hills. Again, Rose Hills is a such a beautiful property and they were kind of in a sell and build, sell and build, sell, and build so with a we've done is gone in and spent money on developing the inventory, which I think has been very helpful. On the strategic pricing front, we implemented our strategic pricing at Rose Hills on June 1 of this year. So a lot of the initiatives, particularly on the operating side are there and being put in place. So we feel very good, we've got a great management team at Rose Hills. We're learning from them, they're learning from us and for the most part, we're getting most of those initiatives put in place and feel like there's going to be an impact from that the back half of the year and then again in 2008.

And they were also operating all their own systems. Are they still not really integrated with your systems?

They had a stand-alone system from Alderwoods, so the approach we've taken is obviously 90%-some odd of Alderwoods business. There were a couple other locations as well that had separate systems. The first thing we did is want to get the majority of the Alderwoods locations on our system. Rose Hills has a great system, it worked really well, so our thought is that isn't something we're going to rush into. At the same time, I think over the long-term, it makes sense to leverage our scale and that's something that we will do. We've chosen to go first at the things that impact the consumer most. So strategic pricing, putting inventory in place, service standards, dignity training, dignity packages, things like that and the back office stuff is coming and we'll get there.

In terms of the market segmentation strategy, when do you see yourself in a position to really start to implement that? I know you're doing certain things now here and there, but when do you think we'll see a pretty broad implementation of that strategy?

I really think -- again, we've been delayed by a couple of things. This is something we wanted to do and as everybody remembers, the Alderwoods transaction came. And that really pushed us back a little bit of time and trying to get moving on that general direction. What we're doing now, we hired Phil Jacobs, Phil's our Chief Marketing Officer, and we've decided we want to invest in that area of the company. So we've begun to develop the infrastructure under Phil, he's getting the resources he needs in order to put this in place.

We're refreshing a lot of the information that's now two years old. So that's why we're a little bit behind, but we feel like we're going to come at it pretty hard here pretty quickly. I don't think we believe there's any impact to this. It's most likely going to be a 2009. If we're lucky, we might see some impact in 2008, but a lot of these things contain so much training around them, so I think it's going to take some time to roll it out and really see the impact. But we think it's going to be a lasting impact and a differentiating impact and a drastic change to the way the funeral business is done today.

Okay. Maybe just one last thing. In terms of the CapEx budget, when you had given your outlook, you broke it down into three different buckets, one of which was for new builds and that kind of thing and it looks like you've -- you're pretty low as far as your guidance there. Is that something you think will accelerate or do you think maybe that was a little bit optimistic to begin with in terms of the spend there?

I think there's two things happening. We're spending more on maintenance, because again I think as part of our transition thought, Alderwoods has some things in place that needed to be done. So we stepped up and said let's fix these things. We're probably spending at a rate we don't have to continue on the maintenance side. On the -- we had in our budget some growth CapEx because we thought, hey, we may spend 50 to $75 million a year growing, building things, blah, blah, blah. I think we didn't forecast that much in 2007. And what we're finding is in the marketplace that the market's pretty tough as it relates to acquisitions. Their pricing is out of whack, just like every other industry in the world, easy money has showed up in our business. We probably passed on a few deals that in a different environment we wouldn't do. I look at that as a delay and at some point, pricing will normalize it and we'll jump in.

Maybe as far as the acquisitions, in terms of the properties that you're selling, who's buying these? Are they being sold back to the operators for the most part?

There's probably four, five, six regional consolidators, which I'd include some in the public arena, some not and a lot of these rural properties you may also see isolated former employees buying them back and the like, so generally, most of these things are probably being done in packages to some of these consolidators, which again have more access to capital than at any time in history as it relates to capital markets.

Okay. Great. Thanks very much and congratulations on the quarter.

Thanks, Tom.

Ladies and gentlemen, that's all the time we have for today. I will now turn the call back over to management for closing remarks.

This is Tom Ryan. Before we sign off, I want to say one thing. Many of you may have seen the announcement in the paper that we've selected a new General Counsel. We made the announcement a few months back that Jim Shelger, our long-time trusted friend and counselor who's been with the company for more than two decades and served us very well. So Greg Sanglis, we announced is our new General Counsel, who's with us here today, as well as Jim Shelger, and I wanted to publicly say, Jim, thanks for what you've done for SCI, you've been a tremendous counsel for this company. Jim's going to stay involved with us on a part-time basis, helping us out. But we're going to miss you and we appreciate everything you've done. I want to thank him and I want to thank everybody for participating in the call and we'll talk to you next quarter.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.