Service Corporation International (SCI) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Service Corporation International fourth quarter 2007-2008 guidance call. My name is Stacy and I will be your moderator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host today, SCI management. Please proceed.

Good morning. This is Debbie Young. I'm director of investor relations for SCI. Thanks for joining us today as we talk about our year-end results and our outlook for 2008. In our comments we will make statements that are not historical facts and 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. In addition, during the call today, Tom and Eric will use the terms normalized EPS and normalized operating cash flow. These are non-GAAP financial terms. Please see our press release that was issued yesterday we filed on 8-K this morning where we have provided detailed reconciliations for each these measures to the appropriate GAAP amount.

We'll begin with comments from Tom Ryan, our President and CEO.

Thanks, Debbie, and thanks everybody for being on the call today. I'd like to start out with an overview of what we've done and then talk a little bit toward the end of my comments about the outlook for 2008. As many of you've already seen on the press release, we're very pleased to report normalized earnings per share of $0.14 for the quarter versus $0.11 that we reported in the prior-year 2006 quarter. These were very solid results, we feel, in a very difficult volume environment, as you can see, that was reported in the press release.

The primary reasons we were able to accomplish what we did were very strong revenue per funeral service that we continue to see due to strategic pricing and packaging and other things. We saw very strong cemetery sales production in the fourth quarter and, again, with a backdrop of a difficult economy in the background. And lastly and probably most importantly, the Alderwood's transaction synergies were realized and on time, so, again, that allowed us to achieve the positive results we're reported in the fourth quarter. I want to take a moment to thank our outstanding employees, all 20,000 of them, for keeping their eye on the ball in a pivotal year for the Company.

Next I'm going to give an overview for funeral operations. The revenues for the quarter were a little weak, primarily due to volume negatively affecting our profits. Our comparable volumes -- and this would be SCI locations -- were down 3.9% for the quarter. Based on our competitors, suppliers, looking at obituaries, looking at CDC data -- we try to look at a lot of things -- we think we're really in the ballpark as far as what's happening as far as numbers deaths in our market. Most of the low-price cremation falloff is consistent year over year, particularly as it relates to the comparable businesses that were SCI in 2006.

We're still seeing a little erosion pockets, but for the most part that's over. We're seeing a continued trend in January, 2008. We've closed our books and we look to be down about 4% for January, which is a consistent trend. The good news is -- and we haven't closed February -- looking at statistics there, we're seeing a reversal of that trend. We actually saw some positive movement the other way as it relates to February. Having said that, we haven't closed our books so time will tell, but we do think we're seeing a bit of a flu season resulting in the February numbers.

Our Alderwoods locations for the quarter were down about 4%, so very consistent with the SCI locations. And again, there, we may see, as you think about 2008, a little erosion on the low end because keep in mind, we put in segmentation, we put in strategic pricing in the Alderwoods' location, so we could see a little bit of erosion there. But again, this a business that we either not making money on or losing money on, so we're not as concerned about it. On the comparable revenue front, our revenue per case was up 5.2% for the quarter. We're seeing continued positive impact from strategic pricing on the true at-need average, which was up 5.6%.

So these are people walking through the door, was up 5.6% quarter over quarter compared to last fourth quarter. And if you look at a trend analysis from the third quarter of '07 to the fourth, we saw our average up an additional 3%. So we're seeing a lot of momentum on the at-need's front and, again, I think tells us that economic uncertainty does not impact, or we're not seeing an impact, on the at-need walk-in funeral, which is probably the most valuable piece of our revenues. We're not -- so therefore we're saying, we're not seeing any negative consumer discretionary behavior in pricing yet, particularly as it relates to the funeral business.

The Alderwoods revenue per case is about 2% above our original expectation, right around $4,700 for the fourth quarter. Again, keep in mind we completed our strategic pricing in the third quarter and we're in the process now of rolling out the Dignity rooms and the packages to the Alderwoods locations, that'll happen throughout 2008. And we think that will give an additional lift to those specific locations, particularly throughout 2008. Consolidated revenue per case for January, after we closed our books, is up about 5%. So again, I would tell you the trends would tell us we're not seeing negative consumer discretionary behavior in our business. Funeral profits were also slightly negatively impacted in the quarter by two things; one is in creased property tax accruals, and the second thing is we saw increased sales compensation associated with preneed sales production. We had a lights-out quarter as it relates to preneed sales above 15% year over -- or I should say quarter over quarter and because of that we have selling costs associated with it that run through current earnings.

While not directly impacting earnings per share -- I touched upon it -- it's very important and part of our key long-term strategy, we're seeing great progress on the preneed funeral production side. Our comparable production revenue increased $11.7 million over the prior-year quarter, which again is in the high teens year over year. Our investment in the sales operations infrastructure is making a difference. We believe we're doing a much better job of managing leads, following up, enhancing our manpower. Most of this is manpower driven, with a refocus on the stand-alone funeral home activity. We're providing resources and people to follow up on leads and again, remember, our goal is to grow backlog.

On the cemetery operations front, we saw strong revenue growth, which again. dropped pretty much straight to the bottom line. with good expense management in that segment of our business. Our cemetery margins after overhead allocation were 23.4%, versus the prior-year quarter of 22.5%. Our comparable revenues grew almost $6 million or 4% on a GAAP basis, and what's driving that is a couple of things. On a comparable basis we saw higher property sales production, about s $10.3 million increase. That's a 19% increase over the fourth-quarter 2006. This was driven by s successful tiered product strategy resulting in several high-end sales throughout the network, s So this drove a $12 million GAAP increase in our property revenues.

Both quarters -- these are both pretty good quarters, the 2006 and 2007, enjoyed high recognition rates as it relates to completed construction. Both of them, we recognized about 117% of what we sold because of items being constructed during the quarter. Our great results were slightly offset by the fact that we had a reduction in merchandise delivery recognition. We had a lot of merchandise deliveries in the fourth quarter of '06 and therefore, our GAAP revenues were down about $5 million. So property up 12, merchandise down 5, we're driving comp revenues around $6 million, up 4%. Look for enhanced sales production as we move forward with sales operations infrastructure investment, driven by more inventory and increased manpower.

On the Alderwoods front, we saw improvement during the quarter and primarily we think that's driven by having the available inventory -- we've been building cemetery inventory throughout the year -- and the effect of our strategic pricing that we put in place. We continue to see sales and manpower issues on the Alderwood front. It's something we're focused on and we're going to apply the necessary resources to begin to fix that in 2008. The good news is, like we reported for the fourth quarter, the inventory is available and in place and the pricing's in place, so those two things should allow us to progress in 2008.

We've had a lot of people calling us about how sensitive is SCI to the downturn in the economic cycle. Debbie's developed a slide that going to be available on the internet on Monday -- we're doing a presentation with Raymond James -- that I think will clear this up quite a bit and I'm going to try to talk you through it for a minute. If you think of economic sensitivity for SCI, the first thing you do is -- let's look at the funeral side of the equation. On the funeral side it's about 67% of our consolidated revenues, and when you think about that funeral strength, 70% of our business walks in today without a preneed. We believe -- and again have historic data to prove this -- that that consumer is not very economically sensitive. Funds have typically been set aside through insurance policies, estate planning, et cetera, there's a lot of different ways to do it, but we've never seen a dramatic impact from that consumer walking through the door.

The other 30%, as you'll recall, that runs through our in come statement are pre-need contracts. The monies have been set aside, they tend to average to be ten to 12-years old, and they've accumulated earnings over time that have been deferred. So again that is not economically sensitive whatsoever. I will say on the funeral side of the business, as we go out and try to sell new preneed that would grow our backlog, that is going to be economically sensitive. But again, we don't miss that consumer when the economy turns around and we get the opportunity to sit down in front of them two years from now. So not a big impact on current EPS. It does slow down our ability to fill up the backlog.

So now to go to the cemetery front, which is one-third of our revenue. Of that cemetary revenue stream, 36% again, is a consumer, walking through the door with a need today, and that consumer historically has not been very economically sensitive. Another 19% of the revenue stream is preneed merchandise and service deliveries, so this would be people that have died and we're now going to take those monies out of trust, just like on the funeral side. So the money's been set aside, it's been earning income and being deferred and now we're pulling it out of trust. So again, not economically sensitive. Now 39% of our revenue stream is preneed property production, so this is selling land, mosuleums and the like. This consumer is economically sensitive. They don't need it today and they have the option to defer a purchase, so we believe 39% of our cemetery revenue stream is economically sensitive.

The last piece is we have 6% endowment tier income, which is predominantly interest income in fixed income securities. So again, very steady stream, not very economically sensitive today. So if you take all of this into account, 39% of our cemetery revenue is subject, we believe, to the economy. And so that -- overall, when you look at SCI's revenue, is about 13% of our revenue stream is subject to economically-sensitive consumers. Having said that, I'll mention a couple of things. One, when the economy is down, it actually helps us on one front because of manpower opportunities. As unemployment goes up, we can access highly-qualified people from other industries and bring them in our sales organization and we find that today we're seeing evidence of that in areas that are being hit. The other thing that I would tell you is during tough times people surely aren't going to buy the big screen TV, but they do get -- they do tend to seriously plan events in their life. I think it forces you to focus on that. So again, while it is economically sensitive, I think we're slightly different because of those two characteristics.

Now I'd like to move to 2008 guidance, and again, it's in your press release. Our earnings per share guidance range is between $0.57 and $0.63. This is a 10% to 20% increase over the $0.52 we just reported. If you normalize the 2007 tax rate, which we had a 36.5%, versus a 38% we believe going forward, we're forecasting an increase in the range ever 13% to 23% over the 2007 results. On the funeral side of the business we provided guidance that says funeral margins should be between 20% and 24% for 2008. This is compared to a 20% margin, approximately, reported in 2007. The enhanced margins we believe will be driven by overhead synergies that we've put in place during 2007, the effects of Alderwoods' locations strategic pricing, and greater efficiencies from staffing metrics and sharing best practices. The real variable when you think about the funeral side -- a lot of this execution -- the real variable's going to be funeral volume. It's very hard to predict. The our forecast that we utilized in developing the 20% to 24% margin range are down between 1% and down 4% that we utilized in developing this.

On the cemetery front, we expect our cemetery margins to be in the 18% to 22% range compared to a 21% margin that we reported in 2007. Keep in mind, we recognized over $8 million in profit in the first quarter from construction activity at Rose Hills on previously-sold property. So again, those were sales that occurred from prior years where we've caught up on the construction and got to recognize those profits. Those probably aren't repeatable. If you pull those out, our margin for 2007 was about 20% and we think our range is going to be 18% to 22%. The real variable in cemetery is going to be preneed cemetery property sales that I just touched upon the sensitivity. We believe we are poised to grow this with enhanced inventory and enhanced manpower.

At the same time, this is the one current revenue stream that I touched upon which is subject to consumer discretionary trends. It could be impacted in a period of economic uncertainty. Beyond 2008, we believe that comparable funeral revenues should grow modestly, as inflationary pricing offsets minor declines in funeral volumes. This is mainly going to be caused because of depression-era dirth and birth between 1929 and 1933, not as many people were born, and healthcare advances that continue to extend life. Those two factors, we believe, ought to mute comparable funeral volume and we think inflationary pricing will allow us to modestly grow that. Further rationalization of our footprint and metrics and scale should allow us to maintain a solid low-20% gross margin percentage until volume increases.

On the cemetery front we would expect to be able to grow revenues in the mid single-digit percentage range and grow gross margin percentage by somewhere between 150 and 200 basis points per year, as enhanced sales manpower and pricing drive revenues above inflation. All the while, we will be expanding our footprint in selective -- selectively strategic market, shrinking our equity base with excess cash, expanding the preneed backlog through both the traditional and alternative marketing channels. and improving the efficiency of our network. This preparation will greatly enhance the results of our Company, particularly once the baby boom impact begins to be felt.

This concludes my prepared comments. I'll turn the call over to Eric.

Thanks, Tom. I'm going to start by talking about our cash flows for '07 and a little bit of the comments about 2008 on that, and then get into our capital priorities, and lastly I want to talk about our trust fund performance, as well as some of the sensitivity of the trust fund in bad markets and volatility as it would affect SCI. Starting with our cash flow, we're very pleased with our cash flow in 2007. It was very strong. We finished the year of cash flow from operations at just over $350 million -- $355 million, I believe, to be exact, and that's the GAAP operating cash flow number in the cash flow statement. And that exceeded our guidance given for the full-year 2007 of $305 million to $345 million. On a normalized basis -- and Debbie explained to you that definition -- that excludes things such as the Alderwoods transition costs and pension costs that we had during the year, so our normalized cash flow adjusted for these special items was about $430 million compared to $343 million in 2006. So quite a decent increase representing about a 25% increase in our cash flow from operations in '07 versus '06.

Looking forward, in 200, we're expecting the same GAAP operating cash flow to be a range of $280 million to $310 million. I do need to mention one thing, though, that's key for early 2008. That number includes -- that range of numbers includes a $100 million federal cash tax payment we're going to make in early 2008 -- it'll probably be made next month -- and it relates to one-time transaction costs for some of the dispositions that we completed primarily in 2007. So it includes the taxes that need to be paid related to the French transaction when we sold our minority interest there, as well as the large [Stomore] transaction that we sold in late fourth-quarter 2007. Excluding this payment, $100 million, the normalized cash flows for 2008 are expected to be in a range of $380 million to $410 million. That's actually, we think of as a growth in our core cash hook from operations from '08 over '07, because you have to think about what is in -- what the differences are between the two years.

First of all, in 2008, we are a full-year federal cash taxpayer, after we have fully utilized SCI's federal net operating loss carry forwards, and that has an effect of increased cash taxes of a little bit over $30 million in 2008 as you think about that versus 2007. Also in 2008, if you recall, through the Alderwoods acquisition, we inherited an insurance company called Mayflower that we ultimately sold during 2007, but prior to its sale it contributed about $17 million in cash flow operations. So between the $30 million additional taxes and the $17 million in Mayflower that will not recur, a normalized '07 is just north of $380 million, which compares to our normalized range of'08 at $380 million to $410 million, so we are expecting some growth in our cash flow from operations. We also expect our cash tax rate -- talking about pay-in in 2008 -- to be about 28% to 30% of pretax book income. Our effective tax rate on our income statement will be approximately 38%, which is slightly up from about 36.5% in 2007.

This is a normalized rate, when I talk about this 38%, because it could be impacted by divestitures like our tax rate was affected in 2007 by divestitures. The difference between the income statement effective tax rate of 38% and the cash tax rate of 28% to 30%, primarily relates to temporary differences, but it really relates to the utilization of the remaining Alderwoods net operating loss carry forwards, which I believe when utilized, just under $40 million a year of those net operating loss carry forwards. From a divesture standpoint, in 2007 we had significant divesture activity, selling more than 300 locations. Also our minority equity interest in France, that I've already mentioned, as well as the Mayflower Insurance Company. All of that generated cash proceeds of just over $550 million, so a very strong year in terms of producing cash from divestitures during 2007. In 2008, we expect asset sales to contribute a range of $60 million to $80 million on cash proceeds, and this primarily relates to nonstrategic assets resulting from the ongoing market reviews that's we're performing.

Our financial position at SCI continues to be very strong. You've probably seen the cash balance at 12-31, about $169 million. Our current cash balance is right around that range right now. Our total debt is just under $1.9 billion, it's about $1.86 billion to be exact, and I do not really look to pay down any meaningful debt during 2008. The leverage ratio will be somewhere between 3.25 and 3.5 times of normalized EBITDA and I'm pretty comfortable with that range.

We do have a $45 million debt maturity that's due in March 15th of this year -- so in just a couple weeks here -- and we're going to refinance that to our open revolver -- or open line of credit with the banks. That credit line carries a floating interest rate of LIBOR plus 200 basis points, so it's about 5% debt right now and we're going to go ahead and refinance that $45 million on to that line of credit until the markets calm down. And then once the high-yield markets calm down, you'd probably see us at that point in time to go ahead and refinance that $45 million off of the bank line of credit on to a more longer-term, high-yield bond or something along those lines. So overall, when you think about cash, after the $100 million tax payment that'll probably be paid in March, we'll start beginning cash again in 2008 throughout the rest of the year.

So what are our capital priorities during 2008 then? They somewhat remain the same, that we've been very consistent with and have discussed in 2007. First of all, at the top of the list would be any type of growth opportunities that we have. In 2007 we spent just over $20 million for construction and expansion activities, and in 2008 would expect that number to be $25 million to $40 million, and that primarily relates to strategic plans and expanding within our existing markets. Secondly, we're big believers in returning capital to shareholders. In 2007, we purchased just over 38 million of our own shares for just over $500 million. Right now, as we speak, we have about $123 million left on our current board authorization for share repurchases. We also in 2007 increased our quarterly cash dividend in November of '07. It was about $0.03 a quarter before that, and now it's $0.04 a quarter is the current run rate that we're enjoying for the cash dividend. Lastly, and as I've already mentioned, I don't think debt reduction is a real priority for us in 2007. We're comfortable with leverage around 3.5 times the normalized EBITDA. That's right around the range where we are now. We could possibly have some opportunistic debt paydowns, but I'd classify it as somewhat unlikely.

Now talking about our trust performance. As we all know, it was very volatile market conditions in the fourth quarter of '07, but I still believe our trust funds performed relatively well versus the indicators. Our funeral trust fund for the fourth quarter was up 0.4%. our cemetery trust fund was up 1%, and our eternal care funds were down about 0.9%, so the weighted average was a return of 0.3% for the quarter. On a year-to-date basis, we had a strong 2007 as it relates to trust performance. The funeral funds were up 9.9%, the cemetery funds were in the same ballpark at 9.8% up, and the eternal care funds were up 3.2%. So weighted average return for 2007 for these trust funds of just under 8% at exactly 7.9%. So we're very pleased with that type of performance that we're able to produce in our trust funds during 2007.

While we're discussing the trust performance, though. I do want to make a few comments in response to the questions that we've received about the effect of these down financial markets on our trust funds, and Tom talked about that in terms of the economy affecting our preneed sales. And by the way, while I'm thinking about it, the slide that Tom mentioned that'll be on the website on Monday with the Raymond James presentation, we'll actually put that slide on the website today so the investors can look at that and see exactly what Tom was talking about. But going back to the trust funds, our funeral and cemetery preneed trust funds can weather volatility in the capital markets and not create volatility in our income statement. First of all, to recall, to remind you, there's a very long term nature of these contracts. These investments last in our trust funds approximately ten to 12 years, and the income is generally deferred into maturity. So if you do have a bad year, it's one part of the equation over a 12-year life of that investment and that volatility really doesn't flow-through P&L because it's deferred until year 12 and you deliver the merchandise or a death occurs on the funeral side.

And we've had a very good track record of our investment returns over a long period of time. So for example since 1996, our funeral trust funds had a return of about 8.6% and our cemetary trust funds had a return of about 7.4%. We target a real return for these trust funds in the 4% to 5% range -- and again, that's a real return -- and since 1996 our real return has been 5.8% for funeral and 4.6% for cemetery, so right in that range or exceeding that range. Unlike the preneed trust I just mentioned, where the income is deferred, the cemetery endowment care trust fund had an income that is recognized in P&L on a current basis. However, you have to remember that the eternal care funds are primarily fixed-income securities, and what goes through P&L under our accounting policies is therefore interest income related to this fixed income -- these fixed income securities, so it's really not that volatile.

The unrealized gains and losses related to the securities do not get recognized in the P&L, just the distributeal earnings as the interest income comes out of the trust funds, that is what gets recognized in the P&L and it's not very volatile at all. Since 1996, these trust fund have produced a return of 7.1% or a real return of 4.4% and we target a real return of 2% to 3% in these particular trust funds. And the preneed cemetery and funeral trust fund currently have unrealized appreciation of about $35 million and the eternal care fund has market value that basically equals our cost basis as well. So hopefully that's more detail for you in terms of the questions we've been asked lately about the down financial markets affecting the trust funds.

In closing I want to reiterate what Tom was talking about. We're excited about 2008. We have expectations of double-digit growth in earnings per share and continued expectations of strong cash flow, so we're very excited about that. The basic fundamentals of this business has remained unchanged, regardless of economic characteristics or the cycles that we're in. It's a very stable industry. It is very stable and very consistent cash flows, and we intend to utilize these stable and consistent cash flows during 2008 to continue to enhance our shareholder value. Use it through continue share repurchases or higher-return projects to, in fact, growl our business for our shareholders. So with that, Stacy I'm going to turn it back to you to open the call up for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of John Ransom with Raymond James & Associates. Please proceed.

Wow, that's a lot of pressure. You have factored into your calculations all of the stock and mortgage brokers jumping out the window this year. That might help you. (LAUGHTER)

Yes, John, we're going to get that number from you, to plug into our model.

I was just thinking about that. My question is, Eric, what are the cash taxes? If you go back '06, '07, '08, what are the cash taxes in your assumption? Not from asset sales but from GAAP earnings?

Well, you're testing me on the cash taxes in '06, so I guess it's around $15 million, if I recall correctly. From an '07 perspective it's about $45 million.

Okay.

We're expecting about a $30 million increase in that in cash taxes related to, as I've said before, becoming a federal cash taxpayer for the most part this year, even though we still have some utilization of the Alderwoods net operating cash net carry forwards available to us.

Got you. So if we were to look at the true operations apples-to-apples, you're taking this capital and reducing your shares, so if we looked at it on the net share count and netted for taxes, that gives us a pretty good picture of the business?

I think it does, and we tried to really steer you to taking the pre-tax book income in your model --

Right.

-- and we think it's about 28% to 30% cash tax rate and I think that's pretty reasonable.

Okay. My second question, can you remind us what the land amortization add-back would be '06, '07?

What occurs is is that -- let me tell you what it is theoretically first, and then we'll give you the numbers. What happens is is we invest the -- we obviously spend the money to buy the cemetery, which buys the land at time of acquisition. So when we sell the property, the cost of sales associated with that property is actually a noncash cost. And the amortization -- so it's technically classified as amortization and that number was $28 million in '06 and about $35 million in '07 and it's probably in the ballpark. That's probably a good estimate for '08 as well, John.

Okay. And at this point, looking at your GAAP numbers and your cash flow per share, is that really the man add-back that we have left now that we've kind of normalized through the working capital backlog?

Yes, I think we have. We have very strong working capital during 2008. A lot of that, as we've disclosed, was some working capital initiatives we did at SCI, which probably produced $20 million. And then we also had the Alderwoods backlog project, similar to what we did at SCI several years ago, which allowed us to pull out about $25 million, as we put in the press release, of capital out of the trust fund for things that were already delivered and such.

Okay.

So yes, I would think working capital would be somewhere in the flattish range, depending on what volume is doing in funeral and those type of things.

Okay. And I guess my other question would be, are you seeing anything out there when buyers and sellers bid ask, are there any potentially unique multi-site opportunities on the purchase side where you could get a similar type of good multiple you did on Alderwoods or is it -- was that a once in a generation type of deal?

We sure hope it's not a once in a generation, but to tell you, we haven't seen any real opportunities emerge yet. You always think with there credit cycle where it is, John, that ultimately that's going to result in some opportunity, but we haven't seen anything at this point in time.

Is your bank looking to stick you with higher rate on the modest little trifle? That's something we're hearing from other customers. Is there any need for you to go back to your banks any time in the next six months to extend your line or raise your line of credit or get a covenant waiver?

We have a $300 million line. It's only utilized by letters of credit right now, which is about $50 million.

Okay.

It's all the way through 2011, November 2011, as I believe. And as I said, I'm going to out liz it for about $45 million because at LIBOR plus 200, that just makes sense to me rather than dip your toe in a volatile high-yield market.

Sure, so you're in good shape there.

We are.

And then Eric, what was your ending share count for the fourth quarter.

About two -- just under 263 million, John.

That was your ending share count?

It was.

So your guidance then doesn't include any further buybacks?

No, (inaudible). There's a little bit of add-back from a weighted average share diluted perspective and that's where the 260 to 265 comes but, yes, for the most part we certainly intend to do share repurchases and we have some modeled in there, but it's not very aggressive in the model compared to what we'd like to do.

And just remind me when your next board meeting is?

Our next Board meeting is the second week of May.

And there's no reason why they couldn't take that up at that point in time?

Well, we have $123 million right now authorized.

Right.

-- and a very good relationship with our board, they can call a conference call real quick if we felt we needed to.

Okay. Thanks a lot.

Your next question comes from the line of Robert Willoughby with Bank of America securities. Please proceed.

You said mortgage banker like it's a bad thing. (LAUGHTER) What is your guidance -- what is in the guidance for the flu season. You said kind of a down January but a much -- or a stronger February. What have you assumed for the remainder of the season here?

We did -- and again, there's a bunch of different ways to look at, this, but in order to put out guidance that we felt the most relevant, we've made the assumption in the models we shared with you guys to come up with $0.57 and $0.63, which really ranges volumes down between 1% and 4%. If the flu season is huge, if the flu sea -- you could change your opinion if that began to come in in February or March, but we still have the expectation of down, and the two things that are driving us there are continued advancement in health care and again kind of that 1929 to '33 period where we saw the number of births decline and so those two factors are why we are. To your point, if it ends up being 1%, 2% then you probably -- our guidance will be light as it relates to the funeral margins.

And are you looking at the same data point that's we're looking at, just the CDC information, or do you guys have some broader source to assess the flu?

We look -- we're looking at the same things you are and we then we obviously try to accumulate by market in looking at what is happening within our own businesses and so we feel pretty good. I did mention a little bit earlier that -- you remember last year when we went through our strategic pricing and segmentation, that we lost some contract, particularly large contracts with groups that were contracts we were losing money. And Alderwoods had a few of those and essentially, some similar patterns are going to occur. So we would expect probably a little erosion on the comparable volume front with the Alderwoods businesses. Having said that, in each case, we weren't making any money, so we're not concerned about that trend.

And you had mentioned a couple of times just the intention to build out the marketing infrastructure further. You can give us anecdotally numbers of sales reps that you either added in '07 or in the quarter, perhaps, or what you intend to add over the course of '08?

Sure, Bob. There is really two ways to look at this. One is from the sales channel infrastructure we've been able to add -- and this is approximate -- approximately, I'd say say 10% to 15% increase in our sales counselor head count. It really all occurred in the back half of 2007, so we entered 2008 with a much stronger sales force and with an idea to continue to grow that even further. So again, with this economically sensitive marketplaces and unemployment, we hope to go grab some real qualified people and put them in there. As it relates to marketing, what we've been able to do is we've bolstering our marketing team here and developed strategies and philosophies about going after consumers also in alternative channels. What we mean there is how do we begin to approach the consumer, not through leads in our funeral homes but through other avenues, and so again we're testing some things there. We're pretty excited about the future there. So on two fronts I'd say we're moving forward and trying to begin to have a dialogue with consumers at an earlier point in their life and grow that preneed backlog.

And Eric, I think you mentioned -- did I catch the number right -- divestiture-related proceeds you'd expect to see in '08, was that a $60 million to $80 million number?

That's right, Bob.

Okay. And the other question, just the $1.8 million operating charge there is some sort of tax issue, is that my understanding a trueing up of some sort?

It relates to reconciliation that we've been doing here, primarily related to the Alderwoods acquisition but also on the SCI front, as well. It's nothing that is going to really reoccur and that's why we just isolated up in operating income but isolated away from margins, but that's in the $0.14. It's a [$1.4] million debit and it's just immaterial.

Okay. All right, that's it. Thank you.

Your next question comes from the line of Edward Yruma with JPMorgan.

Hi, thanks. Most of my questions have already been asked, but you can talk a little bit about some of the staffing issues that you've highlighted at Alderwoods. How much more work is necessary there and longer term, what kind of lift do you expect that that'll give you?

I think, Ed, I think the issue there really is this -- and I think you see this in a lot of organizations -- sales organizations are a very, very important part of our Company and others. And I think any time you have some drastic change with a change of ownership, we change compensation plans and other things, that uncertainty of time, while we're waiting for the FDC, the change in the comp plans, we saw a lot of folks leave those locations. And so what we've been trying to do is recruit new folks, train them in Dignity university in our sales approaches and utilizing some of our lead techniques and the like, so it's just taking time to build it back and attract new people. So that's really the challenge we face. It's not something that we think we can't overcome, it just requires a little bit of time. So we're in the midst now of hiring sales managers, hiring sales people, getting folks through our training and so we have every confidence that we will make progress here through 2008. The question is, how far and how fast. So, we view that as really an opportunity to continue to grow our sales.

Got you. And as I think about your recurring CapEx -- I'm sorry if you already mentioned this -- how much of your CapEx guidance for '08 is one off or potentially related to Alderwoods? Thank you.

I think -- from a CapEx perspective -- I think we said this maybe on the last quarterly call -- we spent 2007 making sure that we invested the appropriate amounts in the Alderwoods business and really prioritized them, again, as of part of a welcome into our culture and making sure everybody knows how important they are to our business. So we think we've done a lot of that catch-up and so now I think -- as I think about Alderwoods versus SCI locations, you're a lot closer as far as deferred maintenance. Having said that, there is probably still pockets, but generally we've gone out there, fixed up the places we should, developed the inventory that was needed, and we ought to have that fixed by the end of '08.

Got you. Thank you very much.

Okay.

Your next question comes from the line of Bob Kaynor with Ramius Capital. Please proceed.

Hi guys, thanks for taking the question. Can you hear me?

Yes, Bob.

Hi. A couple of questions. Did you buy any stock after the quarter ended or were you in a blackout period?

We were -- we were limited in the amount that we would buy because of the blackout period, but we did buy a minimal amount of stock. I think it was about 1.6 million or somewhere around there. It was pretty minimal, Bob.

A million shares or dollars worth.

Shares.

Got it. When does the blackout period expire? When you go back --

Two days.

Okay. And then is there -- given the cash tax payment you're going to have this quarter, is that going to affect the timing of share repurchases throughout the year or is that not consequential?

No, I think $100 million is a healthy amount to pay. I think you can consider us back in the market in a couple of days, to answer your question, but I do believe that the -- when you look at whole year, when we're done, you're going to see more share repurchases towards -- not necessarily the first quarter but in the latter three quarters because of the $100 million tax payment. So we have $165 million of cash right now, as we speak, $170 million, in that ballpark, and no meaningful maturities, and so I think you'll see us back in the market.

Okay. And then on the CapEx breakdown, the portion you categorized as other growth CapEx, is there anything in there for acquisitions?

In that particular line item, there's not. That's stuff that we're doing in our markets, our strategic footprints stuff as we call it, as we've talked about before. Greenfield sites, those type of things is what that number is in CapEx.

Okay. And just -- you may have answered this before, I apologize if I missed it -- expectations from sellers from a multiple perspective, is it coming down at all?

It really depends on the marketplace but I'd say it's not -- generally not coming down and they're still relatively high as you look at what has happened in other markets. So it just takes time, I think, for people to -- for reality to set in. But again, we think with the credit markets where they are, the people are going to begin to change their mind. And particularly if what we're predicting, which is down volumes, related again to this dirth and births combined with healthcare, that people are going to look at this and saying, there's got to be something easier.

Okay. That's it for me. Congratulations on the year.

Thanks, Bob.

Your next question comes from the line of Adam Comora with EnTrust Capital. Please proceed.

Hi. Thanks. Just a quick follow up in to what you guys were talking about in terms of the current flu season. Is there any way you could give us any color on where volumes have trended so far year to date, either January, February or combined?

Yes, I think we -- Chris we gave that earlier. What we've seen within in our own businesses, January continued to show trends similar to the fourth quarter. We're down approximately 4% in comparable volume and that would include both the Alderwoods businesses and SCI now because they're both in the comparable bucket. What we're seeing in February, we don't have the books closed, but we do look at volume daily and weekly -- we probably get a little better on a weekly basis -- but generally we saw trends in early February that would point us toward a rebound in the number of cases that we're serving. So with that, take it where you want. It's very difficult to say that a few weeks in February have convinced us this is a trend.

But when you say it got better, does that mean turned positive or just low singles? Down.

Yes, turned positive.

Okay. Terrific. Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Chris Sim with Shenkman Capital. Please proceed.

Hey guys, how is it going. I just needed a clarification on the cemetery gross profit. I know it was up 8.3%. Do you have just the absolute numbers for the quarter year over year?

Yes, I think it's in the press release. The gross profit numbers on a comparable basis, back on page four, gross profit in the cemetery for the quarter was $49.4 million and the gross profit in '06 was $35.9 million and that's consolidated, right, Eric? That's on page 4. And then I think on -- I think on --

I'll give -- the comp number was $46.5 million for '07 for the quarter, and $42.2 million for the quarter (inaudible).

Okay, that was just the comp number. All right. Thanks a lot.

You're welcome.

Your next question comes from the line of Robert Willoughby. Please proceed.

Just a quick one. Are there any major bogeys left out there to really hit on the Alderwoods deal? Systems, a couple more assets to be sold, but there's nothing much left to capture here going forward, is there?

Well I think the way to think about -- again we're beginning now, Bob, to think of it all as one place, but the two things I say still have an impact are, number one, we're rolling out the Dignity rooms and the packages. We really think that;s going to have a positive impact on the Alderwoods locations and to drive the funeral side of the business. The other piece is -- and what we touched upon before -- when we can get the Alderwoods locations staffed appropriately at the sales levels of both sales managers and on sales counselors, we think that is an opportunity again to ramp up the impact on those, again, legacy Alderwoods locations. Otherwise, everything that we're looking at that's going to drive results into the future, relates to both sides of the aisle. It's really one SCI now, so you're hitting on a good point. But I do think -- keep in mind those two things. Average revenue per case ought to move more for the Alderwoods locations because of the packages, and secondarily, you should see a larger percentage growth, ultimately, out of Alderwoods because of the manpower increases we anticipate.

Great. Thank you.

Okay.

And our final question comes from the line of Dana Walker with Kalmar Investments. Please proceed.

If there was pressure in being first, I'm not sure what lie on the shoulders who's last. Good morning.

Good morning, Dana.

When you made the transition from Dignity to strategic pricing before Alderwoods came along, I recall there was a fair amount of setup necessary to get your funeral home directors to buy into the need to address pricing, which is now working beautifully. Can you talk about the steps that you're talking to culturally lay the groundwork in the Alderwoods locations so that this works?

Yes, Dana, it's interesting. It was really was a reverse way of going at it, because when we think about SCI, the evolution was the first time we did it, we put in packages first, then we put in showrooms, and then we put in strategic pricing. And now to really mess with your head, on the Alderwood side we took a different approach. We put in strategic pricing first, because we thought that was the most impactful. Culturally I think it's been accepted very well. Again, when you have success in marketplaces, if you think about it, most of these places are in markets where we've already instituted strategic prices, so I think it went a lot more smoothly seeing the effects. And Alderwoods already had they're version of showrooms, which were very effective, so now what we're in the midst of doing is taking the best ideas from the Alderwood showroom, the best ideas from Dignity, and rolling out two showrooms. The one thing Alderwoods never did was have packaging.

So we've tested the new showrooms, we've tested the packages, initially in four markets, and the results were very, very favorable, very well accepted by the technicians, and so now we're in the midst of rolling out those in the market. I would say culturally the Alderwoods locations and the Alderwoods employees have taking a liking to this, Number one, we sought their input. Number two, we're providing the resources for them to (inaudible). Number three they're really into the Dignity university. I think that's a great asset that we've got a lot of positive impact from. We can distribute strategy a lot faster than Alderwood could do with their education platform, which didn't approach SCI.

Final question relates to the cemetery. I think I know the question, but perhaps if you were to put it into words that might affirm what I think to be the case, which is it seems that the cemetery has become a much more consistent profit generator without the ups and downs. Maybe you can talk about why that's the case?

Sure, it's really very easy. Funeral has one variable that's very difficult to control, volume, if you were reliant upon the event of death in order to generate revenues. And on the cemetery side, you have a thing called cemetery property, and under the accounting rules, cemetery property is recognized when you have 10% down and you deliver it. So we have a lot more ability to generate revenue growth on the cemetery side that, again, the accounting rules do not allow you to do on the funeral side. Having said that, from an economic perspective, writing preneed funeral is just as valuable as writing preneed cemetery, it just doesn't show up on your GAAP results. So,we've got to manage to both worlds,unfortunately, but we believe in preneed, both on the funeral side of aisle and cemetary. We're going to continue to drive it culturally the way that we want it to be driven. We want to price it right, we want to pay our sales people right, and so look for those things to continue to grow.

As you look over the next year or two, how would you consider the smoothness of profit completion availability on the cemetery front?

I think it's going to be very smooth, because what you've seen over the last few years was there was a philosophy on the cemetery side of the business of sell it and then build it, and it made sense because you had to come out of pocket cash to build it. The problem is, you sell -- when you're selling without available inventory, you're selling a lesser product, the sales people have a harder time selling it, it's never priced right. and when you finally construct it, you typically underestimated what it costs. So the industry. and particularly SCI and (inaudible) & Stewart and others, got themselves in trouble with that model. We changed that model about four years ago and began to build inventory and create higher-value inventory, which again aesthetically increases the value of all of the cemetery property.

So with that philosophy, we know what it costs, we know what to pay our sales people, we know what we can charge, and when somebody comes in and wants something spectacular, we've got it. So that philosophy's allowed us to build enough inventory now, both on the Alderwood and SCI side, to where when somebody buys something, it's available, as opposed to waiting to construct it at a later date. Having said that, you're always going to have mausoleums, you're not going to build a mausoleum for 1,000 people and not have anybody to put in there. So I think there'll always be a little bit of construction hangover, but generally it's sell it and recognize it is the model we're operating on.

Tom, I know it would be difficult to generalize, but you can make a comment how you believe competition is either keeping pace or not keeping pace on cemetery property development which may or may not allow you to stand out locally?

Well I think from a public perspective and reading some of their documents, I see a lot of people move in this direction. So I think from a public perspective, you'll see it because they have the capital. From a private operator perspective, that is the issue. You have to go spend millions of dollars on a development and wait on your cash to come, and so it is a totally different dynamic and particularly with the credit markets the way they are. So this is a strategic advantage of having scale and again, being able to employ very talented people from across the country that can share best practices and ideas, very different from a local operator.

Interesting quest. Thank you. Good luck.

Thanks, Dana.

With no more further questions in the queue I'd you like to turn the call over to SCI management for closing remarks.

Want to thank everybody for participating, particularly on a Friday. Have a great weekend and we'll talk to you again at the end of the first quarter results.

Thank you for your participation in today's conference. This concludes your presentation, you may now disconnect. Good day.