Service Corporation International (SCI) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Service Corporation International earnings conference call. My name is Angela and I will be your coordinator for today. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. And now, I'd like to turn the presentation over to your host for today's conference, SCI Management. Please proceed.

Thanks for joining us today as we talk about SCI first quarter results. 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 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 may use the terms normalize, EPS, and normalized operating cash flows. These are non-GAAP financial terms. Please see our press release and 8-K that were issued yesterday where we have provided detailed reconciliations for each of these measures to the appropriate GAAP term. With that, we'll begin with remarks from President and CEO Tom Ryan.

Thank you, Debbie, and welcome, everybody, to the call today. As usual, I'm going to start off with an overview, run through our funeral operations, cemetery operations, talk a little to the rest of the year, and turn the call over to Eric. So to start off, I would tell you that our normalized earnings per share were $0.20 versus a prior year number of $0.17. We think these are very solid results, particularly in this very difficult economic environment. We're currently in. The reasons we were able to accomplish this were really primarily two things. Number one, we had very strong revenue per funeral service, again, which was driven by strategic pricing, particularly related to the Alderwoods business. And secondarily, this increase in revenue was done against a much more efficient infrastructure. The Alderwoods’ transaction allotted us the opportunity to enjoy synergies that we realized above expectations, and were on time, and for that I really want to thank our 20,000 employees who did such an outstanding job in 2007, in that transition year, and the fruits of their efforts are showing up right here in the first quarter. So in the overview of funeral operations, revenues for the quarter were very strong, both relative to prior year and relative to our expectations.

They were up, approximately 5% over comparable prior year revenues, and they were really due to two things. Number one, pretty solid volume, as well as, as I mentioned before, very strong average revenue per case. On the volume side, our comparable volumes were down about 0.9%, where that equates to 662 [calls], and based upon analyzing our competitors, analyzing suppliers, obituary tracking that we do within relevant markets, looking at cemetery internments, we generally believe that this is a reflection of our markets. Actually, we probably would compute within our relevant marketplace that comparable volumes were up about 1% relative to our down 0.9%. The reason for the difference, from what we can tell, again has to do with low price cremation follow-up. You'll remember that we rationalized our businesses over the years, adopting our strategic pricing model. Well, a lot of those decisions take time to infiltrate, particularly the Alderwoods businesses, so what we're seeing now is the rationalization of those business models. And let me share a couple of examples with you. In Seattle, there's a particular location that we had a low [internmentation] contract that we serviced in the SCI business, that was picked up by Alderwoods, and once again, we did not renew the contract. So in that Seattle location, we are down 244 calls in the first quarter. Here's the good news. Profits are up $54,000, they’re up 47%. In San Diego, similar situation. That location has lost 52 calls. Profits are up $66,000, or up 100%. And then utilizing stratification, again, we look at contracts below $1,000, contracts below $2,000, and in major markets alone, we’ve seen 1,200 calls below $2,000 that we lost on a year-over-year basis.

And as you move up the stratification chain, we're seeing volume increases. Some of this is pushing customers in the higher stratas, we understand, but again, we believe that our strategy makes sense and we believe that in the relevant market share on a national basis, that we're holding our share in this market. Another thing I’ll point to before I move off of funeral volumes, we continue to see positive volume trends through April. Volumes look to be slightly above the prior-year levels, from what we can tell. Second component of funeral revenue that's important in driving our profits is the average revenue per case, which is up over $250 on a year-over-year basis, at 5.3%. We're continuing to see a positive impact from our strategic pricing, and the change in mix of business out of that low end on the true at need average, which is up 5.7% year-over-year. It is especially true for the legacy Alderwoods’ locations, where strategic pricing was not put in place until the back half of 2007. Our average revenue per case on the pre-needs going at need, was up 4.5% and achieved an approximately $4,800 level for the year. Again, this is evidence to us that when you have turbulence in the equity markets, as we experienced in the first quarter, it does not have a material impact on the earning stream associated with pre-need funeral. We continue to see the drive up at 4.5%. We're not seeing any material, negative consumer discretionary behavior in the pricing. Again, from time to time you may see cases where that's true, but generally we are not seeing that impact our average revenue per case.

The other thing that I would mention is we're in the process now of rolling out the dignity rooms to the Alderwoods locations. That event will continue to occur through 2008 and we believe will have a positive impact on average revenue per case, as we expect to see more packages sold, which result in hire customer satisfaction, and customer loyalty, as well as increases in average revenue per case. On the funeral profit side of things, they looked very strong. We're up $14.8 million on a comparable basis, or over 250 basis points, again, quarter-over-quarter. This is primarily driven by the increase in revenues against a more efficient infrastructure, created by the efficiencies we gained in the Alderwoods’ transaction. The last piece of funeral business I'll touch upon is our pre-need funeral production. Keep in mind, this is the business that fills the backlog and really doesn't have an impact on current EPS but it’s very important to us. It’s not quite where we want it to be. We produced $107.2 million in the first quarter, which is down about 2.8%. You'll recall that we've invested in some preliminary sales infrastructure in focusing on a lot of issues as they relate to the sale. What we're see is that a lot of our initial focus was on the cemetery side and [very crude?], and a lot of the things that are associated with the funeral side of the business really has a longer runway to get going. But we're confident that we're on the our way there, and again, our goal is to grow that backlog through manpower and again, through refocusing on having counselors in the right places and giving them the right leads and the ability to close sales.

Now switching over to the cemetery operation side. On the cemetery side from a GAAP perspective, our comparable cemetery revenues were down slightly. About $4.4 million, or 2.6% compared to the prior year. This predominantly is due to one key factor. We had significant completed construction contracts at Rose Hill last year. We had a lot of construction of previously sold inventory that got recognized, and therefore it led to our higher recognition rate as it relates to profits and revenues, and this more than offset an increase in production on cemetery property revenues, of 7% this year. So, when you think about it, the pipeline is very strong and this is a GAAP recognition issue. And if you take the construction out from the prior year, you would see recognition levels that are equivalent to what we're experiencing this year. So again, a healthy first quarter, you just don't see it necessarily from the profit line yet. We expect higher completed construction levels, particularly in the back half of 2008, and I would again reiterate we are very pleased with our momentum on the sales production side, as we look at the our preliminary April results. Again, this is being driven by--primarily by two things.

We've put the right inventory in place to sell, and can be recognized once it is sold, and number two, we're enhancing and bringing up the quality of our manpower in our sales organization. Cemetery margins, as it relates to that revenue shortfall, are pretty predictable. The revenue shortfall fell right through the bottom line, and our cost on the cemetery side really were managed in line with inflation. But you think about the remainder of 2008, we continue to be very, very comfortable with the guidance that we provided you. Keep in mind that the tax rate in the first quarter was a little lower than normal, and that's going to normalize to an annual rate of 38% throughout the year, and Eric is going to talk a little more about it. But probably you should see a tax rate of around 39.5% for each of the subsequent quarters of 2008. The other things to really look for are success showing through the results. Look for continued average revenue per case (inaudible) on the funeral side of the equation. We expect that to continue to traject the right way. We also would point you to look for further efficiencies, particularly in the back half of the year as it relates to managing our manpower with metrics, both on the funeral side and also on the cemetery side of our business. And lastly, we would also expect solid momentum on the cemetery sales production side, and particularly I'd point you toward, again, the property revenue stream as a lot of the great inventory that we've built over the last few years. We believe it’s going to be sold and flow through our revenue stream today.

So with that, very pleased with the quarter, and I'd like to turn the call over to Eric Tanzberger, our Chief Financial Officer.

Thanks, Tom. Tom hit most of the highlights, as you just heard, about our operating performance for the quarter, so I'm not going to reiterate or repeat those. But I am going to give you a little bit more detail on one income statement item, which is namely the tax rate that we used for the quarter, because I think ‘s important as you model quarter two, three, and four of the remainder of 2008 to understand that. Then I'm going to spend time on our liquidity and cash flows, where we stand today, as well as at the end of the quarter, and then we’re going to spend some time on the trust balances and the trust performance during the quarter, and I'll pull that data through April as well, to help you. We’ve had a lot of investor questions on the trust performance and we'll address that as well. So starting off with the tax rate, in our diluted EPS from continuing operations, which excludes special items, or as we called it, our normalized EPS, which was $0.20, we did have an effective tax rate of 35% for this quarter. And in--the 35% for first quarter was lower than our annual guidance.

Remember, we didn't give you any quarterly guidance. We just said our annual guidance is 38% for the year, and we continue to be comfortable with that 38%. But during the quarter, we were required by GAAP to include certain discrete tax items in the quarterly period as a benefit, rather than in the blended annual effective tax rate. So, as discussed, as I just discussed, that's why you have a lower tax rate, because of some discrete items during the quarter, and that was about 35%. So that translates that in the second, third, and fourth quarter, the effective tax rates for continuing operations should be around 39.5%, to arrive at an overall annual rate of 38%. So your quarterly models should be adjusted accordingly, to put a higher expected tax rate in remaining 2008 quarters, but again, this won't affect the overall annual model with a 38% annual effective tax rate. Now shifting gears to liquidity and cash flows, our cash balance at March 31 was about $132 million, which is down from our December 31 cash balance of about $169 million. Pulling forward to today, today our cash balance is right around $100 million. We’ve had some significant outflows in terms of cash from December 31 through today. First of all, in March of 2008, we had a $90 million U.S. federal cash tax payment, and we told you it would be about a $90 million to $100 million at our guidance call, and it ended up being about $90 million, which was paid in mid-March to the U.S. Government. We've also had $50 million of cash interest payments through today, the majority of that, being about a little over $40 million, was actually in the first week of April, and we've also had $58 million in share repurchase and dividends paid today, and that breaks down to about $38 million in share repurchases, and $20 million in dividends as we paid two dividends so far in 2008, one in January and one in April. With all of these significant outflows I just described, which totaled here to about $200 million, we've obviously had very good, strong free cash flow during 2008 through today, to build our cash balance back up to about the $100 million mark.

I see this continuing for the rest of 2008. So I see us building cash from now, especially into the fall, and in October, when our next large interest payments are due, which are about, $40 million. So with that cash and the building of future cash, we will utilize our excess cash for growth projects, with returns that meaningfully exceed our [whack], which isn't a change from anything else that we've said before, and we will continue with prudent share repurchases and dividends. During 2008, as I just said, we repurchased 3.1 million shares for approximately $38 million. And so you know, our current remaining share repurchase authorization from our board stands today at about $108 million. Our cash flows continue to be strong as well in the first quarter, which is like our recent quarters that we've shown you. When adjusting for the $90 million U.S. federal cash tax payment that I just described, our cash flows were about $136 million in the first quarter versus $128 million in the first quarter of 2007, and this increase in cash flows was right in line with our internal expectations. Lastly, in the liquidity section of these remarks, I want to say that we had $45 million of bonds that were due in March of 2008. We paid off those bonds by utilizing our revolving bank credit facility, and you saw that on our balance sheet at the end of the quarter. The current interest rate related to that revolving bank credit facility is floating with [LIBOR] and is currently about 4.5%, so it’s a pretty good interest rate for us to have right now, but I do believe we'll refinance that $45 million off of the revolving credit line at the appropriate time. But certainly we're going to wait to good, favorable, capital market conditions before we go ahead and do that. Thirdly, I want to talk about the trust funds. We all know that capital markets were very volatile in the first quarter, but our trust funds performed well on a relative basis, compared to these overall markets.

Let me give you some statistics on the trust fund performance in the first quarter and then I'm going to talk about April, because I think we've seen a significant rebound in our trust fund performance in April. So for the first quarter, our funeral trust fund was down 5.2%, our cemetery trust fund was down 5.9%, and our ECF fund was down 2.8%, for a weighted average total of down 4.8%. And remember there’s a significant amount of equities in our asset allocation within these trust funds, and that down 4.8% compares to a down 9.4% for the SMP 500 index for that equity component. In April, as I’ve mentioned, we have seen a rebound. Our funeral trust funds in April were up 3.1%, our cemetery trust funds were up 3.6%, and our ECF funds were up 1.7%. So a weighted average increase in trust performance of 2.9% in April, versus the SMP 500 of 4.9%. So right there what you can see is you can see we're pretty diversified, and with the [SMP] 500 down, we're pretty muted because of that diversification, and we're not down as much. Same thing in April. When the SMP is up 4.9%, we're not up as much as that because of our diversification as well. So year-to-date through April, all of our trust funds in total are down about 2.1%, again, through April. The funeral and cemetery [creating] trust funds have a significant amount of equity, as I just described. The funeral trust fund about 40% of an equity mix. The Cemetery has about just over 60% of an equity mix, and the ECF fund is more fixed income in nature, and that is about a 23% equity mix as well, so a total of about 45% of equity mix.

The remaining piece of it is we have about one-third in debt, about 10% in short-term investments and cash, and alternative investments, and then we have also a significant amount, about 14%, also in alternative investments but as well as in trust insurance options, which are essentially, in the state of California and Florida, where the trusts invest in an insurance policy as well. As stated on the last conference call, specifically talking about fixed income exposure within the trust, we believe our subprime exposure is less than 1%. It’s probably about 0.5% of total trust assets. And we also don't believe through our investigations that we are invested in any other high-risk or any type of exotic fixed income securities within these trust funds. They’re pretty conservatively invested. Our footnotes in our quarterly report, our 10-Q, will provide a detail on market and cost values of our trust investments, and that should be filed later on today or tomorrow. Because of the capital market performance in the first quarter, we have net unrealized losses within these trust funds of about $118 million, and based on our total assets of $3.3 billion, that’s about 3.6% of net unrealized losses.

We've examined these unrealized losses, and again, as I said, we mainly attribute them to the market performance in Q1, primarily in the equity markets as I’ve said, and do not believe these declines are permanent. And as mentioned earlier, we also seen the investments rebound to some extent in the month of April as well. Most importantly, in terms of the trust fund earnings that go through our income statement, and again, that’s at the time the merchandise is delivered, the services are performed, or the ECF earnings are distributed to us, we have not seen any material degradation in these amounts. So to quantify that, our total trust fund income recognized from our same-store locations in the first quarter income statement was right at about $25 million. That compares to about $26.5 million in the first quarter of 2007. So again, no material degradation that affects the income statement related to these trust funds. So in closing, I want to reiterate what Tom was saying. We're pretty pleased with our first quarter performance, especially with our increased profitability and our cash flows. The basic fundamentals of this business remain unchanged. We have to remember that. It’s a very stable industry, and we have very stable and consistent cash flows, and we intend to continue to use those cash flows to enhance shareholder value, either through share repurchases or higher return projects to grow our business.

So with that,, that concludes our prepared remarks. Angela, at this time, I'd like to turn the call back over to you and ask for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Gentlemen, your first question will come from the line of [Michael Scalengella] with Merrill Lynch. Please proceed.

Hey, guys. Good morning, nice quarter. Couple of questions. You talked about the relatively good funeral volume this quarter. You know, we would have assumed that some of that was driven by good flu season. You didn't really talk about it. I'm wondering if that's because it's hard for you to quantify or that just really wasn't a big driver for you in the quarter?

Michael, I think you're right, and it’s hard to quantify. I will say this. Rather than describe it as a--you always hate to even say it this way, a good flu season, because we’d rather not have it--I would say that we finally had a more normalized flu season. What you’ve really seen over the last couple of years, and talking to others that track this, is that there's really kind of been a dearth of a flu season and I wouldn't call this one necessarily a robust one, but back to normal conditions.

Okay, so, I guess what I'm getting at is the down 0.9%. I mean, in prior quarters, we've seen you down, you know, 3%, 4%. Some of that was bad comps from some businesses that you got out of. So does this mark the first quarter where that annualizes, and this is more of a normal run rate? Or is this abnormally good, do you think, because of the flu and maybe we shouldn't expect it to be this good in the next couple?

Well I think it is hard to predict what is going to actually happen in the marketplace, but let me talk relative to expectations. What I've tried to say in my call comments, and in no way do I think this is--can I prove it's accurate, we think within our relevant marketplace on a national scale, we think those markets are probably up around 1%, on comp volume. We reported down 1%. What that tells you is we're still seeing some rationalization of business within our network. Most of that is occurring in the Alderwoods’ locations, because remember, we did it in the Seattle locations in 2006, and you saw a lot of it in 2007, and now you're going to see a little bit of that here. It’s really in pockets. It’s pretty easy to identify a lot of times, because these are contracts, again, that people had with various organizations that we found not to be profitable in our [action[. So I would tell you that you'll see a little bit of it probably the rest of this year. Not anything material, and as it relates to, you know, what is going to happen in the marketplace, very, very difficult for us to predict. I will tell you that I think I feel better every quarter that I travel and see about our ability to compete within our marketplace. I think we're doing more and more things, we've had a lot more time within our marketplaces to have management teams where their strategies are beginning to take hold. So I feel pretty good about our ability to compete. And what I can't predict is, you know, what's going to happen as it relates to the number of deaths within the markets.

Okay, switching to cemetery, I understand how the year-over-year comparison is tough for you because of some of the projects at Rose Hill last year. But just looking at the quarter on its own versus the guidance, it would seem like it’s below what a quarterly run rate would be for--for the segment versus your revenue guidance. The margins, also below--or pretty meaningfully below--what your gross margin guidance is for the year. So would you say that you're tracking? And I guess if the answer is yes, then that would imply some pretty strong growth in revenue, and good margins the rest of the year in cemetery.

Yes, I think my general observation would be we do think it is tracking. The one thing that is a little bit goofy gets to recognition on the cemetery side, and there’s some seasonality and then just some things that happen. As an example, we have constructed revenue. So if we sell something before we build it, it falls into a backlog. For instance, the first quarter of this year, we had relatively zero. I think we had a couple hundred thousand dollars worth. Last year we had $13 million worth of constructed revenue. It comes in lumps. We still think--I believe it’s around somewhere between $15 million and $20 million of constructed revenues that’s going to show up, probably in the back half of the year, and so you can't get too caught up in one quarter necessarily. The better way to evaluate our progress, if you ask me, really goes back to sales production. Because GAAP recognition is going to come, and it is going to come typically within, you know, a 12 to 18 month period. We're out there selling, and if you look at our sales production, on property alone, it is up over 7% for the quarter, year-over-year. That tells me a very healthy revenue stream. When you take all cemetery sales, I think it’s up around 3%. So, again, while we had expectations to maybe even do better, I would say this type of economic environment, where a lot of this is pre-need sales. We feel very, very good, and I would tell you that by looking at preliminary--hadn’t closed the books on April, but preliminary numbers--we’re continuing to see momentum there, because we’ve made investments in property, we’ve made investments in people, we’ve made investments in training, and all of those things appear to be coming together, unfortunately, in a difficult economic environment. But having said that, we're very, very pleased with the momentum that we've got.

All right. Let me just understand one thing that's going on in the at-need line, if I could, and maybe this is a silly question, but, the at-need on the funeral side is up 2.1% year-over-year. The at-need on the cemetery side is down 3.5%. I don't think the at-need should have anything to do with the construction last year, so what does that tell me, that people are using you for funerals and doing the burial someplace else?

No, I think you’ve got to be careful. Are you looking at--you’re looking at 2.1% at-need, walk-in funerals versus pre-need backlogs and things like that. It’s really not a very relevant comparison because, again I would tell you, we serviced 0.9% less people on the funeral side, and from a burial perspective, we buried 1% more. And so, it really gets back to this GAAP recognition issue, and then on the funeral side, how many people came from the backlog versus the walk-in business, which, again, doesn't have a lot of relevance, because you don't know when the backlog is going to come to you. So that's a real tough comparison to make, I would say, Mike. If there's a better way to go at your question, I would welcome that.

Okay. You know what? I'll follow-up with you. Maybe it’s not the right stat. Let me just finish up on M&A. Maybe you can tell us you know, with the Alderwoods’ integration going so well, is it time for you guys to try to tee up a large acquisition? Are there just not any in the marketplace right now, and if not, you know, what's kind of the small to mid size acquisition environment look like for you right now?

Well I think, you know, number one, like we've always said, our strategy is based upon customers that align with our values and things that we do great, and scale. So we're always interested in expanding our network, and you know, we're currently looking at some deals that are out there in difficult credit environments. We think that's good for us, because again, we've got cash to do deals. Very interested, but we're selective about where we want to be, what type of facility, and so we're active in beating it out there. I would tell you that the more relevant thing as is relates to creation of value really gets at getting at the consumer, and we’ve made a huge investment on the pre-need side, on the marketing side, and these are things that are going to take some time. But we believe that the real value is going to be created in capturing more consumers through our existing network and we'd like to add to that network selectively, again, at the right prices. And so we're out there looking, but I would point you to the things that are going to move the needle have more to do with the pre-need backlog, have more to do with our marketing efforts, and we're very confident we’re headed in the right direction.

And the deals you’re looking at, would you characterize them as small, medium, or large?

It’s all relative, right? Well again, we look at everything. But you know, at the end of the day, you know, the reason why this industry got in trouble when it did was we tried to force people's hands as to when they're ready to sell. I would say our approach is seeking out people where, you know, the transition period’s there. We need a seller that is ready to sell and for the right reasons that matches up with us. What I will tell you is we're out there looking. We're out there talking to people. We're seeing more opportunities than we’ve probably seen in the last few years, and again, particularly with the credit markets the way they are, there's not a lot of folks with the cash, you know, to go close the deals. And so we want them, but we want them at the right price, and we want the right strategic fit for us.

Okay, thanks a lot.

And your next question will come from the line of [Samir Severwal] with Raymond James and Associates. Please proceed.

Hi, thanks. It’s Samir in for John Ransom. Tom, a quick question on the funeral gross margin. We’re certainly a lot higher than we would have expected, and certainly higher than I think your guidance was for the year as well. Was there anything on the cost side that was more or less nonrecurring, or alternatively, would we expect gross margins to come down over the next couple of quarters?

Well, I think if you recall, it’s a preseasonal business, and particularly on the funeral side. So it’s a little--you always would expect the first quarter to be much higher than anywhere else just because of the high fixed cost nature of our business. We’re going to get most of the volume there. So you will see the margins trend more towards our guidance. There aren't any unusual items in the first quarter. The only thing that I would tell you is the reason why a lot of this occurred is because of the great work our folks did again in transitioning the Alderwoods’ business in. We always said there was synergies, and the synergies were in place by year-end like we said they were. It’s flowing through the funeral side, it’s flowing through the [GNA] line item, to some extent it’s flowing through the cemetery side, and I would expect that to continue. The other thing I would tell you is we're never done. We're constantly looking for ways to improve. We're constantly looking for metrics, ways to run our businesses more efficiently and better, for higher customer loyalty, and those projects are in place today. And particularly we believe there may be further opportunities that probably won't show themselves until the back half of the year. But we continue to believe that you'll see year-over-year improvements in that funeral margin line item. But again, I would caution you back, first quarter is always the strongest quarter relative to the others.

Okay, that's helpful, thanks. And just secondly, it looks like the consumer hasn't really affected your business all that much, and might have been maybe a little bit better than maybe you would have suggested previously. I think you talked about 13% of your business being exposed to discretionary consumer spend. Have you done anything differently over the past few months to brace yourself for a weaker consumer environment?

I think as the slide we've put out there before and talked to, and you're right on the 13%, we said that the walk-in business, both on cemetery and funeral, and the trust fund business that comes in, generally is not subject to economic swings, to the high side or to the low side, and we continue to see that. And I always caution people, of course people are economically sensitive. You just don't see people relative to other purchases in their lives buying down generally in this space. The one piece that we believe is economically sensitive, actually there’s two pieces, but only one runs through PNL. That is pre-need property sales on the cemetery side, and then of course prearranged funeral. And the strategy we had in place, it wasn't, you know, in anticipation of a recession, but it really just had to do with our strategy, is that we were in the midst of growing our sales organization, of expanding the manpower and giving our manpower better tools and training to be more efficient. So I think the good news is this. We probably are speaking to a more economically sensitive consumer on the pre-need property sales side. But because of our readiness, because of our folks and their ability to execute, we're up 7% in that category. So the most economically sensitive piece of our business is up 7%, and we're very, very proud of that, very pleased. We expect that momentum to continue, and again, if the economy turns around, then that's very, very good news for us on the back end of '08 and going into '09.

Great, thanks, Tom. And Eric, just one quick question. What were cash taxes for the quarter, excluding the $90 million payment?

Excluding the $90 million payment, Samir, there are only about $5 million that we paid in cash taxes.

Okay, great. And your expectations for the year, again excluding that $90 million?

Well, the way we’ve guided you to it, we did it on an annual basis and we said when you’re building your models, expect about 28% to 30% cash tax rate based on whatever your pretax income. We think that holds. And there are some timing differences with that $5 million, obviously, during the quarter, but I think that that’s going to hold pretty true for the rest of the year.

Great, thanks. Thanks a lot.

(OPERATOR INSTRUCTIONS) Your next question will come from the line of [Clint Fendley] with [Davenport]. Please proceed.

Good morning, guys. Nice quarter. Tom, I guess if we could circle back to one of the earlier questions, on the--If I understand you correctly, you have about $15 million to $20 million on the cemetery side in the back half of the year. Should we expect that? I mean, is it common ever to see delay on that type of work, or to have it pulled from the backlog for some reason?

Again, I think generally no. I mean, specifically things can happen. You can have bad weather that, you know, if you thought something was going to be constructed in, let's say, September, and if you had a lot of rain in a specific place, or you had a delay in permitting, those things can happen. What I would tell you is this is an accumulation of a lot of different projects which are dispersed, you know, over different geographic areas of the U.S. So our expectation would be in no material way, should this slip. Can a project slip? Of course. It happens from time to time, but generally, if it didn't happen this quarter, it’s going to happen the quarter that follows.

Okay thanks, that's helpful. And I guess going back to the funeral margins, obviously very great results for the quarter. In the past, I know you guys have had sort of said we'll probably be at the high end of the guidance range that we’ve set. I mean, given the fact that some of the success you've had here is due to the Alderwoods synergies, is it too early to say that we might be above your guidance range for the year?

It is, but you know, again, if you go back to the earnings call we did in--I think it was February--what we said is this. If you take our funeral margins, we had an assumption that was an array between down 1% volume and down 4% volume, and that really was the spread between the funeral margins guidance that we have gave. So your guess is as good as mine. I have no idea what’s going to happen in the next nine months. But I will say if you continue to see strong comparable volumes, we surely would be at the top end of that range, if not exceeding it. What I can’t tell you is whether or not that factor is going to occur or not. We're pretty comfortable with our cost structure, and we don't expect that to be very variable. So a lot of this is going to be driven on funeral volume, which if I could predict, I'd be somewhere else.

Clint Fendley. Okay, thanks, guys.

Okay.

And your next question will come from the line of Edward Yruma with JPMorgan. Please proceed.

All right, thanks for taking my question. Can you talk about if you've seen any impact from raw material pricing--one of your competitors complained about that--and whether that had any negative impact on margins?

Well I think generally there's two places we'd see that, and on the funeral side of the business, just the way that we've contracted that supply agreement, we're capped at any inflationary type of pricing. So, we’ve put that into our expectations. On the cemetery side it’s a little more complicated. The best example that I can give you is the product of bronze. The product of bronze, and I may be off by a percentage, is 93% copper. And so a lot of the people that supply that type of material have come back with inflationary type of pricing issues as it relates to that. You know, having said that, it’s not material. We also believe that that’s a small component of how these things get manufactured. So it is something we have to deal with. I wouldn't call it a material issue for us.

Got you. And in terms of some of these incremental investments you’ve talked about to drive stronger performance in pre-need, can you help quantify from a dollar perspective? I mean, is it really meaningful, and how do we expect an investment cadence to progress throughout the year?

I'm sorry, could you repeat that?

Could you say that again?

Yes, I’m just trying to understand some of the investments that you’re making to drive pre-need performance. You know, can you help me quantify from a dollar perspective, you know, how meaningful these investments are, and you know, how that cadence of investment will progress throughout the year?

Yes, I mean really a lot of it--it’s a pretty comprehensive plan so I couldn't tell it all, but the first thing we did, and this has been really about 12 months ago, is create a centralized sales infrastructure, where we've got now the ability to go help people within markets. I’ll give you an example. Previously, what we've had is sales management within a market, and a lot of any kind of support that they would have would be from that local market presence. So within that marketplace, maybe the leadership has a lot of sales experience, doesn’t have sales experience, but everybody is very busy. And what we said is let's create a sales infrastructure that can apply training where necessary, in really more of a rifle approach. So instead of, you know, handing things out, we can go into a market, help hire the right people, develop the folks on the ground, create kind of centralized professional training. And by doing that, in helping people be more efficient in the sales organization, we're beginning to see some traction. We’ve also put some incentives in place to help drive good sales behavior and good market behavior.

So there's a comprehensive approach that we’ve made within our sales organization, and not to say the least on the cemetery side, which really helps, is the development of a tiered product inventory. So by investing in high-end inventory that have incredible internal rates of return, these types of things can drive higher sales for the entire organization, and that’s really why you’re seeing it on the cemetery side first. Because we have the ability to help out very quickly by putting in that inventory, which can again help that sales force. The funeral side is a little more difficult, because again, we're not able to give them something else to sell, and that's really going back to training, hiring the right folks, which takes a little bit more time. So I would tell you that that’s generally the type of stuff--there’s a lot more to it, but it’s really putting personnel and applying training and applying a great inventory to marketplace.

Great. Thank you very much.

And your next question will come from the line of Dana Walker, with Kalmar Investments. Please proceed.

Good morning.

Hey, there.

Hi, there. The performance on G&A in the quarter, given the band that you proved for your year, would you say that that puts you--where would that put you within your band if you had to be more specific today?

Well I think the first thing you would say is that G&A is down about $10 million. But most of that $10 million relates to Alderwoods’ transition policy in the prior year, and we’ve packed that out in the guidance. But I think it was a little bit heavier in the first quarter, and there's reasons for that in terms of some of the payroll issues that we've had, putting in systems and stuff. But for the most part, I think we’re trending right in that range that we talked about in the annual guidance, was just right around $90 million or so.

Understood. Another thought on the funeral, with your pricing up 5% plus, to what degree was that driven by improved pricing on cremation versus a normal funeral internment?

I think generally both those roads in line with each other. I don't have specific statistics in front of me. Keep in mind, you know, there’s the other thing that's happening, by not performing a lot of this very low-end, low-service cremation business, you know, under $1,000, that’s going to help rise that average as well. So at 5.7%, some of that is culling out the business at the bottom end of what we perform. But generally, Eric, you got this in front of you, the cemetery and burial were about--

About the same, 4.5%, 5%. There wasn’t that much of a difference, Dana. They both kind of rose together at the same area.

But to answer your logic, where I think you're going, Dana, is we’re seeing an increasing number of the cremation cases that we perform are choosing services as opposed to direct cremation. We’re seeing that trend continue. We think again part of that is their pricing, part of that is our merchandising, because by having these dignity showrooms, we're taking people through the option that we are seeing more and more people select services with their cremation choices (inaudible).

Let me narrow in on one other point. I believe in prior quarters, we saw that as you tried to equate your funeral volumes to the market, you were either in line to slightly below, and I believe this go-round, you think that you might be somewhat ahead. Is that fair?

Say that again, Dana. I’m sorry. I couldn't hear you.

I want to recall that in prior quarters as you’ve tried to equate your company's funeral volumes to what you believe has been going on nationally, you were behind those national end or in-markets statistics mildly, and I want to recall, in earlier--in today's conversation, you said that you think you might be mildly ahead.

No, I'm sorry. Yes, let me answer that for you. I think within the relevant markets, in other words markets where we choose to compete, we believe we are in line or maybe even slightly ahead. Now when you take the national U.S. market and define that, it would look like that we may be losing a little market share. But again, that's market share we're choosing to lose and there’s specifically going to be typically group agreements that were highly discounted within certain of our organizations, and particularly within our Alderwoods locations [today]. So I would say that within our relevant markets, your statement is true. We think we're at, and maybe even doing a little bit better, within those relevant markets shares.

If that is so, then why do you suppose that's so today, and to what degree do you think you're building some level of traction that would be sustainable?

I think a lot of it has to do with the merchandising, the training. I mean, you go back to Dignity University. We talked about this when we opened the door in 2004. It takes time. You got 20,000 employees. It takes--management needs time in the marketplace. You know, if we take a person to run a market, for them to see their presence felt takes time. I think by having a consistent organization, by allowing people to manage in those marketplaces with the great tools that we have, we're beginning to see traction. And that's why we feel pretty confident about our ability to compete with this consumer and continue to feel confident as we look into 2008-2009.

Tom, to what degree, though, is your appraisal muddied by the divestiture program that you've just been through, and possible aftereffects of that divestiture program?

Well again, I think the good news about divestiture programs is nobody likes to be in the midst of one, because it’s draining, and if you look at it, we really executed that pretty flawlessly. If you look at the number of locations that we were able to divest of, I think we were very upfront about what businesses that we were going to maintain and what businesses we weren't. So we were glad to be done with that. And again, I think you got to stay communicative with your employees, communicative with the network, and we're through that now and we’re focused on growing our marketplaces.

Very well. Thank you.

And gentlemen, at this time, I have no further questions within the queue. I would now like to turn the conference back over to SCI Management for any closing comments.

We want to thank you for participating in our call today, and we look forward to talking to you guys again in about three months. Take care.

Ladies and gentlemen, we thank you for your participation in today's conference. This does conclude your presentation, and you may disconnect. Have a wonderful day.