Service Corporation International (SCI) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2007 Service Corporation International earnings conference call. My name is Lauren and I'll be your coordinator for today. At this time, all participants are in listen-only mode. (Operator Instructions)

If at any time during the call you require assistance, please press star zero and a coordinator will be happy to assist you. I'd now like to turn the call over to SCI management.

Good morning. This is Debbie Young, Director of Investor Relations for SCI. Thanks for joining us today as we talk about our third quarter results.

In our comments, we will make statements that are not historical facts and they 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 these forward-looking statements. 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. Including our third quarter (thank you) which is expected to be filed early tomorrow.

In addition, during the call today, we may use the term normalized EPS. This is a non-GAAP financial term and we have provided the appropriate reconciliation to EPS calculated in accordance with (EPS) 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 website for at least 90 days and can be accessed by clicking on webcasts and presentations in the investor section. We will now begin with comments from Tom Ryan, our President and Chief Executive Officer.

Thanks, Debbie. Welcome everybody to the call. We are very pleased to report to you today that our normalized earnings per share of $0.10 versus the prior year earnings per share of $0.08. We had very solid results and what I would define as a very difficult volume environment that we experienced in the third quarter. Our Alderwoods business has performed actually slightly better than we had anticipated. And we're very pleased to report that again, we're realizing the synergies we anticipated. We realized in a timely fashion that we had set out for shareholders. Secondarily, our normalized cash flows, and again, I've adjusted those for $5 million transition costs from operations increased by 25% to approximately $142 million for the quarter.

Again, we're very pleased with this because this actually was better than we had anticipated for the quarter. It was really driven by continued improvement in our funeral day sales outstanding, continued strong cash cemetery sales and in addition, working capital initiative that we've put in place predominantly wouldn't get more efficient ways to manage our trust ins and outs as it relates to trust funds in the insurance business.

Now, to give a little overview for funeral operations. On the funeral side, revenues were a little weak during the quarter predominantly driven by lack of volume. This negatively affected gross profit as well. Comparable volumes were down 3.5% for the quarter. It's our belief based upon examining our competitor's results, examining our suppliers result and also some of the ways that we try to track market share locally by examining local obituaries and the like. We believe that the 3.5% is a reflection of what's happening within the market. Generally, we're maintaining market share on national level.

Most of the low priced cremation follow up is consistent with both quarters. We began to experience that in 2006. And now when I think you take the quarterly comparisons, it's pretty consistent. We are still seeing a little erosion of pockets as it relates to very low end. But predominantly, we think that that comparison is now much more alike. Comparable revenue per (case) for the quarter is actually up 3.8%. Again, this is continued to be the effect of our strategic pricing which again is now consistent period to period. So we would expect on a comparable basis if future revenue growth is going to near inflationary price increases that we put through. On the Alderwoods business front, the Alderwoods revenue per case is up about 4% from our original expectations for the third quarter. We completed strategic pricing completely throughout the U.S. during the third quarter. We're able to roll it out a lot faster than our original expectation.

Our expectations would be for about a 6% to 8% impact in the locations across the nation. Again, that's going to vary from place to place, but on average, generally about a 6 to 8% impact and what we saw on the SCI side and we would expect the same thing to happen with the Alderwoods business. The other item that I think you need to take into effect is we're in the process of rolling out dignity packages now to the Alderwoods locations. We would expect that this will happen throughout 2008. Once we roll out the availability packages, again, what we saw on the SCI side is the package take up increase which should result in a further list, the revenue per take as it relates to the Alderwoods location. Lastly, as it relates to the funeral results for the quarter, we've been speaking about staffing metrics which again we've been utilizing on the SCI side since the latter half of 2006 and we've begun to roll those in the Alderwoods location in 2007. From an SCI perspective, we've really run the gaming on that. From an Alderwoods perspective, we're still utilizing that tool and finding more efficient ways to manage our consumer traffic. The positive impact therefore particularly for the Alderwoods piece should spill into 2008.

Our next phase for really all locations as it relates to SCI or Alderwoods is inserting the practice templates. We've developed essential preparations efficiency metrics and templates. Again, we probably roll that through half or two thirds of the United States today. The second phase of that will be the market staffing (thus) practice template. Again, that should come in sometime in 2008 and allow us to have more efficiencies as it rolled out throughout the United States. While not directly impacting earnings per share on the funeral side, we're seeing a lot of progress on the preneed funeral production side. Keep in mind, most of this really fill the backlog if you will as it relates to the funeral business. Our comparable production on funeral revenues increased about 9.4% in the third quarter to $85 million. Our investment that we've been speaking to in sales operation infrastructure is beginning to make a difference. Manpower is being driven with a refocus particularly on the stand alone funeral homes and we're seeing increased activities that markets where we've inserted that infrastructure in the focus as it relates to our consumer groups on the stand alone. Keep in mind, our goal here is to grow that preneed backlog. We're on the right track and moving in the right direction as it relates to funeral for anything.

On the cemetery side of business, we really had a great quarter. We saw strong revenue growth which drops straight to the bottom line because we managed our expenses very well. On a comparable business, we saw solid sales production, about a 6% increase on the preneed side for the quarter. We saw higher recognition rates of the inventory that we sold. So again it's available to sell and we saw an enhanced trust returns and all of this contributed to the growth we saw in the quarter. Look for enhanced sales production as we move forward to the fourth quarter and really into 2008. We begin the sales operation infrastructure investment. We're putting dollars there to be better organized, driven by more inventory and increased manpower throughout our sales counselors here in North America. For the Alderwoods location, the results really aren't where we wanted them to be at this point in time. Again, I think there's a lot of issues why. One is sales manpower issue. We probably lack the appropriate manpower to hit the sales levels that we want. We also was in the Alderwoods locations lack the appropriate period inventory. The good news is that, we've got cemetery strategic pricing in place at all of the Alderwoods locations. We're focused on the manpower issues. And we've begun - - we're really got some in place already and we're continuing to develop the tiered inventory approach throughout the Alderwood location. That really bodes well for 2008. It felt really good about manpower inventory and pricing. And we look to that to show up on our results next year.

In other news, just to report to you, in October, just last month, we sold our French business in the face of what I would define as an extremely difficult LBO financing environment. I think a lot of you out there have seen this in other places. Our share of the purchase price that were allocated was EUR 123.5 million. We were required to escrow EUR 10 million for potential liabilities if it still exists. Again, I don't think those funds to come back to us in about two years. Therefore, we received about US $160 million on a pretax basis. Eric will talk to you about - - this will be taxable and I think again we'll pay those taxes in the first quarter of next year. With these and other divestiture proceeds and our strong operating cash flows that we're experiencing, we've been aggressively buying back our stock. Year to date and again, I can't remember when we've started but it's kind of mid-year, we've repurchased 22.7 million shares for approximately $291 million and those results are accumulated through Tuesday, which I think is also filed in the queue as well. That gives you my overview.

Now I'm going to turn it over to Eric Tanzberger, our Senior Vice President and Chief Financial Officer.

Thanks, Tom. I'm sure most people had the chance already to read the earnings. Summarily, we're going to take your questions on the quarter very shortly. Today, I'm going to earmark my comments this morning for more forward-looking comments as opposed to rehash the press release. Overall, I do know - - want to reemphasize Tom's comments about our third quarter performance.

I was very pleased with reporting $0.10 per share on a normalized basis within a very tough environment as it relates to the number of deaths. The $0.10 was in line with our internal expectations so that you know that. But I have to tell you the same-store case volume came down 3.5% was not within our expectations or our plans. So good cost management with our field operations and strong cemetery performance really contributed to a good quarter for us here at SCI. Just talking forward-looking in terms of guidance, I'm talking specifically about our annual guidance that were reported in February of this year were obviously three quarters through 2007. And we continued to be comfortable with that annual guidance that we reported. From a revenue perspective, the funeral and cemetery revenues will be within the range as a general statement. We'll probably be towards the low end of that range because at the time we issued the guidance, we did not take in the disposition effects and we've obviously sold different amount of businesses during 2007 as Tom has already mentioned. From a funeral margin perspective, our range is 20% to 24%. We're currently at the low end of the range mostly due to the soft volume environment that we've experienced in 2007. I expect to end the year towards the low end of this range.

Cemetery's quite different, though. The cemetery margin we raised our guidance from 16% to 19% over our last conference call. We're currently around 19%. So I expect to end the year at the high end of this range or even slightly exceed this range. From an EPS perspective, we've obviously had $0.38 on a year to date basis. Again, that's the normalized earnings per share. We expect to be on the upper half of that earnings per share guidance range of $0.46 to $0.52.

There's really two points I want to make here as you think through that range. The first one is we continue to be in a soft funeral volume environment and that's continuing through the fourth quarter. So, so far in October, we've seen same-store case volume in the funeral segment down about 2.4% in October. We also will experience a higher tax rate in Q3 that you've seen but also in Q4. I'll talk about and give you a little more detail of that in a moment. From an Alderwoods perspective, we also remain very comfortable with our synergies. If you remember, just to refresh your memory, $90 to $100 million is the total amount of synergies that we're expecting. $65 to $75 million of that will fall into calendar year 2007. Again, I just want to reemphasize what a great story this is.

The full run-race synergies drop our multiple pay per Alderwoods for the original 12.9 times EBITDA to 6.5 times EBITDA. So just a great transaction for SCI. Switching now to cash flow from operations were a guidance was $305 to $345 million for the year. Currently, we're around $311 million through September 30 and that's from continuing operations. So, we're all ready with our range. We do have very heavy cash interest payments. Approximately $60 million that will be paid in the fourth quarter. We still expect to be in this guidance range. This guidance range excludes the positive effect of French sales proceeds.

Let me explain to you what I mean by that. As Tom mentioned, we completed the French disposition on October for over 160 million of net proceeds, that excludes the 10 million Euro escrow that we have outstanding as well. Some of this proceeds could flow through, other income and through cash flow from mobs in the fourth quarter. We're still making this assessment. That French proceeds if it float - - any of it is a return on equity enclose to cash flow from mobs that is not anticipated in that range of $305 to $345 million. Three other quick notable cash flow from operations items that I'll mention in the fourth quarter. First one is that we do expect to pay United States federal cash taxes of about $10 to $15 million. Again, I'll talk about taxes in a second. We also expect to pay approximately $40 million to terminate our cash balance plan in the fourth quarter. We also will probably have a charge of about 4 to $5 million on a pretax basis to purchase annuities related to the termination of the cash balance plan. In addition to the nonrecurring third quarter charge of about $5 million of pretax basis that you saw this quarter. Again, this all relates to consolidating or define benefit plans into our 401-k defined contribution plans.

Now switching to our cash balance. Our cash balance last September 30 was $287 million. You've probably already seen that up about $60 million from June 30. Our current cash balance today is about $325 million. The French proceeds I mention the north American divestitures during the quarter which is about $100 million in proceeds. Cash flow from mobs that really driven the increase in the cash balance up to about $325 million. This was offset by the sharing repurchases and an opportunistic death pay down that we did in October subsequent to the quarter. We've already mentioned the divestitures about $100 million. We've also received proceeds about $30 million subsequent to the third quarter. This actually brings our year-to-date proceeds of about $350 million. Another thing I want to mention to you on a forward-looking basis is that we also believe we should have additional proceeds in late 2007 or early 2008 an additional $100 million which relates to a few larger proceed deals. Again, we're expecting with minimal EBITDA loss. From a share repurchase perspective, there was also a large use of our cash lately. And Tom mentioned that we spent on '07 about $291 million, that includes $107 million in the third quarter and $80 million spent on share repurchases subsequent to the third quarter and that's through just a couple days ago. We'll continue our share repurchase program going forward as well as seek high return projects that meaningfully exceed a weighted average bottles and caps. One last thing on cash is the debt paydown I want to mention as well.

In October,so last month, we paid down $50 million of our 200-million of private placement notes. They're originally due in 2011. There's no pre-payment penalty associated with this. This is floating rate debt that we had and we really want to to take out a little bit of the negative carry we have due to the high cash balance that we have. I want to mention to you that we're comfortable with the leverage were exist today which is around 3.5 times EBITDA. In fact, we're just under 3.5 times now. We do not expect to pay down more death. We'll also evaluate our current maturities in 2008 forward- looking perspective due to the refinancing or paying down debt. I just want to talk a little bit about taxes. As mentioned earlier, we've now become a U.S. federal cash taxpayer after full utilization of the SCI federal net operating loss. We expect our cash tax rate to be between 28% and 30% of our future pretax book earnings. From a P&L perspective, you may have noticed the 36.5% effective tax rate for continuing operations at $0.10 for the third quarter. For the fourth quarter, I think our effective tax rate on continuing operations will be at least 36.5%. And even perhaps as high as 39%. I also think that 2008 will carry a higher tax rate within this range. We're not prepared to comment on that at this time. The primary reason for the higher effective tax rate is associated with these continuing operations relates to newly required interest expense on existing uncertain tax liabilities. And we're obviously going through tax plan as we speak to solidify where that is going to land in the fourth quarter somewhere between 36.5 and 39%.

Lastly, I just want to mention our trust performance for our trust funds this year. Obviously, it's very volatile market on the third quarter related to the equity markets but our trust funds perform very well. On a quarter day perspective our funeral trust funds had 3.1% return. Our cemetery trust fund also had a 3.1% return and our eternal care funds had a 1.7% return. All of our trust fund had a return of 2.7% in the quarter which we're very pleased with as is a very volatile market as well. From a year-to-date perspective through September 30th, we have a return of 7.6% fort he 9 months on all rhe trust funds sum together. So again, we continue to very pleased with her trust fund performance as well. That wraps up our prepared remarks at this time. So Lauren, I think we'll go ahead and turn the call over to you and ask for questions.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Robert Willoughby with Banc of America Securities.

Eric, can you just repeat some of the after-quarter things that you did mention. I thought it was - - Did you indicate 80 million in shares have been repurchased since the end of the quarter or did I get that number wrong?

Yes. That is correct. We spent about $107 million during the quarter, Robert, and we've already spent $80 million subsequent to the third quarter. That's actually through Tuesday of this week. So we continue to be very strong share repurchases right now.

And the debt reduction was 50 million?

Yes. We did the $50 million in October. It's kind of an opportunistic situation. Just to check out some negative carry, Robert. But I don't expect for that trend to continue.

Right. But in terms of pain that's down.

Then just the cash that came in, it was $30 million received from divestitures and you expect up to $70 million more. Is that the number I heard?

No. They're mutually exposed. The $30 million Robert, I was describing the proceeds received so far through October. It's actually another $100 million that we expect towards the end of '07 or in very early '08.

Okay. Still no change really to the acquisition how it look. Your evaluation still look high to you?

Generally yes. I'd say with the creative environment the way it is, Robert, beginning to see pockets of possibility but nothing of any large [ Inaudible ] yet.

Okay. Looks great. Thank you.

Your next question comes from the line of John Ransom with Raymond James.

Hey. Good morning. I'm sorry, I had a little trouble getting on the call. We calculate that you have about $100 million or so on the buyback. Is that right or are we missing something?

No it's about right around that area, John.

Okay. When would you - - given that your leverage is where you need it to be and you guys still have a ton of free cash flow, when would you anticipate addressing that at a board level to maybe bump that up?

I think, John, like we talked about before philosophically, what we do is look out over the coming months. The board is in lock step and understanding that absent higher return projects that we believe share buyback is the best strategy we should avoid at this time. So I guess we just got to look at it and it's something we'll address with the board and that board is going to happen next week. So at that point in time, we'll decide do we have enough capacity to get through the next three months? We'll decide potentially to expand it.

Okay. My other question from a GAAP basis, if we look at the third quarter revenue, and I know this is soft seasonal quarter, but what is the - - once you get through with all of your announced divestitures, is there an adjustment we need to make to kind of the GAAP revenue run rate that we saw on the third quarter? Is it maybe 2 or 3%? We're trying to figure it out. Looks like it might be another 2 to 3% coming out of revenue when you account for all of the divestitures.

I think, if you look at it, i don't have the divestiture numbers in front here. Eric, we sold how much during the third quarter?

In total, the $350 million that we mentioned of proceeds represent about $225 million of revenues, John.

Right, so we had mayflower come out in the first quarter.

That's right.

And the plans minority stake come out. Then you just had [Kenyon] 70% taking Kenyon and then looks like another. I'm just trying to figure out from a standpoint if we just look at the third quarter, how much revenue would come out from a run rate?

Probably just over about $100 million on a full run rate basis.

From the third quarter run rate?

Annualized, yes.

Okay. That's helpful. And then a couple other questions, is there anything, I mean, you guys have a good depth structure in terms of maturities. Is there anything you plan to do from a death structure standpoint?

Yeah. We obviously did something opportunistic in October. That was prepayable debt that we had that $50 million with no penalty. We were able to purchase it at [par]. I was really addressing the negative more than anything John. Right now, would I anticipate just looking at our current maturities. We have $45 million of that bond that's left in early '08. And just make it a call at the time if we want to use cash, based on cash balances and how our share repurchase continue to push debt out as you've seen us do over the last couple years.

Okay. And Eric, what would be kind of from the starting point today, what is a share count number today and what would you estimate given your debt activity? What's, and I'm sorry if I missed this, I had trouble, what's kind of annualized interest expense number? Looking as your balance sheet looks today and check up.

I said annualized interest expense number is somewhere around 140ish in that area. I would I probably say that our share count today is somewhere around 275 million shares.

That's fully diluted or basic?

That's just basic. That's the number of shares outstanding, John.

Okay. Got you. One of the things you guys mentioned a couple of quarters ago is that you saw second half of '07 that your volume trend would be more like the market. I know that you had sort of a quarter like that this time, but as we look out and as this pricing strategy gets lapped, what are your expectations kind of volume, growth and pricing compared to the market as you kind of worked through this? And we'll exclude the turnout at Alderwoods. But the kind of core SCI, what do you want to do, kind of looking out the next 12 months?

I think the core SCI, John, the way I think of it is this. We would expect inflationary price increases to stick. We believe we can do that. But beyond that, that's probably what to expect on those core SCI properties. We did think we're a function of the marketplace and so again, think whatever happens with numbers and desks, we'll be right there with it. My expectations and again these are...

Sure.

...take up two with too much credibility. At the end of the day, what we're seeing is the three big killers out there, heart disease, cancer and strokes. Those are the three things that cause death the most. We're seeing those go backwards because again better preventive, people are living longer, so, we're going forward with a management plan that says we've got to really manage expenses good because the environment could be soft.

Now, on the Alderwoods side of the equation ,we get the rolling effects of strategic pricing and I think I mentioned in my comments as well, we still haven't put packages in the Alderwoods location. If you recall, we should begin and do that in 2002 and 2003. We again experienced some increases in revenue per case. Our gut feel is that that's definitely going to occur. We do see for the Alderwoods location, a better than inflationary price growth. Now, if you flip over the cemetery side, that's where I think we see a rosy picture. We believe with having more available inventory particularly on the Alderwoods side, we anticipate having larger man power efforts. We're going to grow production on the cemetery side both at Alderwoods and SCI. So that's kind of a thumbnail look I'd say for the next 12 months and what we would expect and all the while generating a lot of cash and all the while continue share repurchasing.

Great. Thanks very much.

As a reminder, ladies and gentlemen, to ask a question, please press star one. There are no further questions in the queue. I'll now turn the call back over to management for closing remarks.

I want to thank everybody for participating today and we look forward to talking to you again in 2008 with our final 2007 results. Talk to you soon.

And thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.