Service Corporation International (SCI) 2008 Q2 法說會逐字稿

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

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

Good morning, this is Debbie Young, Director of Investor Relations. Thanks for joining us today as we discuss our second quarter results. First of all, I want to bring to your attention that during the opening remarks today, Tom and Eric will refer to a couple slides that have been posted on our website. So you might take a moment now to go access them while I read to you our cautionary statements. Our website is www.sci-corp.com. During our call today, 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. In addition, during the call today we may use the terms normalized EPS and normalized operating cash flow. 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 terms. Again, for those slides and supporting materials, the website is sci-corp.com. With that, we will begin with remarks from President and CEO Tom Ryan.

Thanks Debbie and thanks everybody for being on the call today. My comments today will touch four topics. First of all, I'm going to give an overview of the quarter, on the funeral operations and cemetery operating highlights. In addition to that, I'm going to address certain recurring concerns that have been raised by shareholders regarding economic sensitivity, financial market exposures, and lastly commodity pricing pressures within our business. The third item I'll touch upon is to provide an outlook for the remainder of 2008. Lastly, I would like to touch upon our use of excess cash and the proposed Stewart transaction that everybody knows about.

So starting off, we will touch upon some highlights for the quarter. For the quarter, our normalized earnings per share were $0.14 versus $0.11 in the prior year. We obviously were very pleased with those results. It's a solid quarter if you think about it in a very difficult economic environment. The primary reasons we were able to accomplish the results we did were the continued strong revenue per funeral service that we're enjoying today and continue to enjoy throughout the year. Secondarily, we are enjoying the Alderwoods transaction synergies that were realized -- were truly realized and on time for that matter. And lastly, we're seeing very positive things in our sales production growth, despite again difficult economic times. So I want to first of all thank each and every one of our 20,000 employees for the tremendous efforts they have put forth not only in this quarter, but over the last few years.

Now turning specifically to our funeral operations. Our revenues for the quarter on the funeral side were very strong. They were up 2.5% on a comparable basis. These were generally in line with our expectations as we continued to see our strong average revenue per case somewhat offset by the continuation of soft volumes that we have been experiencing within our relevant markets. Our overall comparable average revenue per case was up $212 or 4.4% for the quarter.

Now I'd like to steer you towards the slides Debbie mentioned. We have a slide on the website that's titled Comparable Funeral Sales Averages and there's four graphs and then I guess some data at the bottom of the page. First of all I want to turn your attention to the green bar on the graph which shows the steady sequential growth in our true atneed average. So you can see quarter over quarter that thing continues to grow. The average for the second quarter of 2008 as compared to 2007 is up 5.6% and now is about just over $5,200. This green bar represents 70% of our funeral revenue stream. So this is the preponderance of it. Historically, as you can see from the chart as well, we experience more sequential growth in the back half of the year. And this is because typically our annual pricing occurs in the third and fourth quarter as it relates to inflationary pricing within the market. As we anticipated and have talked about over the last few quarters, we continue to see no material evidence of a consumer spenddown because of the economic conditions that are out there today.

Now I would point you to the red bar on the graph. You can see here that this shows the matured preneed contracts that turned atneed in the quarter and therefore were recognized into the revenue stream. The average on this bar is up 2.2% over the prior year quarter to approximately $4,800 for the second quarter of 2008. This represents the other 30% of the revenue stream that currently runs through funeral operation. Half of this or 15% is trust funded contracts and half of this -- the other 15% -- is insurance funded contracts.

Sequentially notice the nice growth trajectory entering in the fourth quarter of 2007, followed by a slight downturn in the first two quarters of 2008. The insurance funded contracts were able to maintain approximately their year-end average, as this 15% of our business running through funeral is not subject to market risks. The trust funded maturities were lower by about 4% to 5% in the first half of the year, somewhat mirroring our trust performance as you would expect. Because of the investment allocation and the diversification, and Eric will get more into this later, our negative trust returns for the quarter as you can see from the chart were down about 4% compared to a 12% loss in the S&P 500 Index. So I guess the moral of the story from this slide and as it relates to funeral averages is while negative trust returns have an impact on our average, as expected it is immaterial to the overall average as it pertains to only 15% of our revenue stream. It is invested in an approved asset allocation in a diversified manner.

Now on to comparable funeral volume. We saw comparable volumes down 2.6% or just over 1,800 calls for the quarter. Based on our analysis, we believe that are relevant markets were down around 1% for the quarter. The number of contracts under $1,000 were down almost 1,000 calls. Again, remember this is low price cremation business which we have strategically exited in certain markets. Most of these thousand contracts can be isolated to a few markets. In particular we see heavy concentrations in Seattle, San Diego and predominantly it relates to legacy Alderwoods locations where strategic pricing were put into place in 2007.

Overall, volumes were strong in March and April as we experienced a somewhat more normal flu season, but again started to tail off in May and June, and in July they also apparently are coming in a little weak. Our funeral profits for the quarter were relatively flat on an $8.8 million funeral revenue growth, which reduced the gross margin percentage by 50 basis points to 20.2%. This was, this happened as we experienced higher sales and marketing costs of about $3.4 million and this was associated with our 20% preneed funeral production growth. While this is a short-term negative to margins, we believe it's a very positive for the future market share growth over the mid-and long-term periods that we will experience through 2009 to 2012 and beyond. This trend should continue as we grow our preneed backlog in the future.

Secondarily another thing that impacted funeral profits were higher energy costs such as utility, gasoline, and natural gas. These increased $1.8 million for second quarter in the funeral segment and again we believe this should get better comparably as the year goes on. Keep in mind energy costs began to rise in the back half of 2007, and therefore on a comparable basis this should get better.

In the face of a very difficult retail environment, we're very pleased to report over an $20 million and over 20% increase in our preneed funeral production. As we discussed in the May call this is due to a number of items. Number one, increased number of sales counselors and sales managers. Secondarily, we have seen increased productivity to enhance training and development initiatives. And lastly as we talked about, we have made a lot of investment in our sales infrastructure that had a longer runway, if you will, for preneed funerals and now we're really beginning to see that pay dividends.

Now I'd like it turn you back to our comparable funeral average slide. I want you to take a look at the blue bar. The blue bar represents business that we are writing today and deferring into our preneed backlog. As you can see, over the last four quarters that has averaged in excess of $5,500, when you compare that down below to the red bar where you're seeing maturing preneed contracts flowing through the revenue stream at $4,800 today. What that tells us is with accumulated growth over time, the preneed production that will roll through our revenue stream in the future -- this chart would tell you we believe that's going to be very, very strong. You can see why that we're growing the preneed backlog at a much higher average and therefore ought to have a very positive impact on the black graph as you can see the total funeral average run through again our profit and loss statement. So we feel very positive about preneed. We're writing good business at high averages. I think it bodes well for future margins.

Now moving on to cemetery operation. Our comparable cemetery revenues increased $6.3 million or 3.5%, as we experienced increased sales production of about 1.6% overall and 2.6% specifically for property sales. We also saw increased recognition rates of 93.4% in this quarter versus 90.4% in the prior year quarter as higher levels of constructed inventory are sold. Keep in mind property doesn't get recognized until it's built, so again the capital investments we have made over time -- we now have more inventory that's available for sale and therefore available for revenue recognition. These two positives were partially offset by lower eternal care trust fund income because of a lack of capital gains that are allowed to be recognized in certain states that happened in the prior year that didn't happen in this year. We expect that higher completed construction levels in the back half of 2008 and are very pleased with the sales production momentum we have created in the first half of the year, especially considering the economic environment we're operating in. This is being driven by more of the right inventory, and the increasing number and productivity of our sales professionals.

Cemetery profits were up $2.9 million for the quarter, 9%, and the revenue increase was partially offset by number one, an anticipated increase in merchandise costs of approximately $2 million, and secondarily increased selling costs of about $2.6 million as the increase in fixed costs associated with more sales counselors resulted in only a modest increase in sales production levels at this point. And lastly, a rise in energy related costs of approximately $1 million was a negative impact on our cemetery margin.

Now I'd like to move to the specific concerns that have been raised by shareholders as it relates to our industry and maybe more specifically SCI. The first concern that's been raised is that our revenues are going to be impacted by economically sensitive consumers. Legitimate question. First of all, how I'd like to address this, if again you go back to our comparable funeral sales average chart looking at the green line, our funeral at need average continues to grow on a sequential basis and on a year over year basis. Year over year, that's up 5.6%. We told you that history has shown us that people do not spend down in a material way during difficult economic times, and I think that is proving out in the numbers so far. Secondarily as it relates to revenues being impacted by economically sensitive consumers, cemetery sales production continues to grow. It's up 1.6% for the quarter and property sales, which typically get recognized currently upon sale and are not required to be trusted, grew even more at 2.6%. Lastly, on the preneed funeral side, we saw preneed funeral production grow 20% -- given, that was against a difficult Q2 '07, but again very strong growth in that category. So in conclusion, while there surely is some impact from the economy, the impact we believe is generally immaterial and is being overcome by operational execution.

The second concern raised by shareholders is revenues impacting -- being impacted through the trust funds from negative equity market returns. The first thing I'd say if you look again at the slide, our year-to-date performance for the trust funds are down on all three categories of trusts year-to-date about 4.4%, versus the S&P 500 being down almost 12%, as a diversified asset allocation mutes equity market volatility. Secondarily, industry accounting dictates that revenue recognition is generally associated with delivery of product or services. Therefore, trust funds accumulate returns over several years. Lastly, of the current funeral revenue stream, only 15% of the revenues are exposed to financial market returns in any given period. Therefore, in conclusion, bearlike financial markets surely have some impact to the overall performance. As we have always said, the diversification and the long-term nature of our portfolios mutes this impact on our financial results during volatile periods in the marketplace.

The last concern raised by shareholders and again a good one, higher commodity prices have negative impact on our margins. While we surely have experienced higher energy costs like many other businesses, it's important to keep the financial impact in perspective. For all of 2008, the impact should not exceed $0.02 per share. Additionally, we are reflecting this increased cost in our annual inflationary retail pricing. Furthermore, we're in the process of implementing new technologies in our location to better manage energy usage across our network. The second commodity impact is higher copper and other raw materials, which have resulted in increased costs associated with some of our cemetery products. Again, to put this in perspective, this should have an impact of something less than $0.02 per share for the entire year. This too will be reflected in our retail inflationary pricing, and we will diligently work to manage this cost effectively in the future.

For the remainder of 2008 (inaudible), we continue to be very comfortable with all the guidance we provided for 2008. We would tell you to look for continued average revenue per case growth on the funeral side of the equation, which will be driven by the true atneed average and insurance funded contracts going atneed from the preneed backlog. We should experience slight headwinds from trust funded contracts that are going atneed, but remember only 15% of our case volume is impacted by this. Preneed going -- we also would tell you that to look for further labor efficiencies in both the funeral and cemetery segment, particularly in the fourth quarter of this year. Energy, cemetery merchandise, and higher selling costs due to preneed funeral and cemetery production growth should continue to have a slightly negative impact on margins and earnings per share, but not much more than $0.01 to $0.02 for the quarter. We also would expect to see continued momentum on preneed funeral sales production with strong year over year growth. Preneed cemetery production, we also would expect to see modest growth in that segment as enhanced sales efforts are somewhat negated by a difficult economy. Keep in mind that the third quarter from a seasonal perspective tends to be the weakest performing quarter for the year. As we implement initiatives throughout the back half of the year to combat higher commodity costs we are experiencing, we would expect the preponderance of the initiatives to be in place by the fourth quarter of this year.

Now I'd like to briefly touch upon our use of capital and specifically the Stewart transaction. Excess cash generated we would expect to be utilized in our proposed transaction with Stewart Enterprises. We continue to believe that the timing is right for a combination of our two businesses and that the offer we have made is very compelling. We believe it is in the best interest of both sets of shareholders and would create tremendous opportunities for both sets of our employees. An independent committee of Stewart's board is evaluating our proposal and we have not had access to any other information at this time. While we believe the Stewart transaction as proposed is the best alternative to create shareholder value, in the event such a transaction were not to take place, we believe the best alternative is to return -- is the return of cash to our shareholders through the continued use of our share repurchase program. That concludes my prepared comments. I'll now turn the call over to Eric Tanzberger, our Senior Vice President and Chief Financial Officer.

Good morning. I'm going to really talk about three general areas this morning on the call. The first one relates to our cash flows for the quarter, and I'll cover capital expenditures as well within that discussion. Tom, as you just heard, covered most of the highlights from the Q2 operating performance. But I am going to discuss one more income statement item, which is our effective tax rate for the quarter, and with that I'll also touch on cash taxes for the mid-year report as well as the rest of the year. Then of course I'll give more detail as it relates to our trust balances and specifically our performance for the quarter.

So let's start with cash flows. First, our cash balance at June 30th was about $105 million, as you see on our balance sheet. Our cash balance as we speak today is about $115 million. So the balance appears to have grown only modestly since our reported $100 million cash balance on our last earnings call in early May. You have to take into account that the growth was offset by $42 million spent on share repurchases subsequent to this May call. So we actually had increases in growth in our cash flows, but our cash balance was affected by spending about this $42 million for share repurchases. For the full year 2008 to date, we have now repurchased a total number of 7 million shares, spending just under $80 million to buy these shares. Today we currently have about $66 million left at our current share repurchase authorization from our board. However, as Tom mentioned, we plan to build our cash balance for potential Stewart transaction for now. But share repurchases would be our first alternative outside of a possible Stewart transaction.

Now, looking at our cash flows, our cash flow continues to be solid in the second quarter just like our recent quarters. From a year-to-date perspective, so looking at it mid-year, you have to back out three items to really look at normalized cash flows. First back out a $90 million federal tax payment that we made in March of 2008 that we described on our May conference call. Also adjust for $16 million less of Alderwoods transition costs and also adjust for $11 million that was paid for the premium to extinguish debt in 2007. So backing those three items out, our cash flows were about $210 million in the first half of 2008 versus $222 million in the first half of 2007. However, you have to remember that in 2007 amount of $222 million, that contained over $17 million of cash flows from discontinued operations, which specifically related to the Mayflower Insurance operations. After taking into account the Mayflower cash flows, our cash flow generated by our continuing operations was slightly higher than 2007 levels through mid-year and in line with our internal expectations.

Now a few general comments I'd like to make on our expectations for the back half of 2008 as it relates to cash flows. We do have some pressures on our cash flows from a macroeconomic perspective, primarily associated with energy costs and cemetery merchandise costs. Tom walked you through the details of that. We also continue our investments in growing our businesses organically to higher preneed and funeral cemetery sales in this investment, which it will be funded from our working capital. We also believe that our cash taxes will be less than we originally anticipated. I'll describe that shortly. From a capital expenditure standpoint, our total CapEx for the quarter was about $39 million in total. This consisted of $3.5 million in growth capital expenditures, $23 million what we refer to as maintenance capital expenditures, and $12.5 million of cemetery development CapEx for cemetery construction projects. Our year-to-date CapEx is about $68 million, which is detailed in the press release that we issued last night.

Now shifting to taxes. From an income statement perspective and our normalized earnings per share of $0.14 for the quarter, we had an effective tax rate of about 35% for the second quarter. This effective tax rate was below our annual guidance of 38% because we were required by GAAP to include certain discrete tax items in the quarterly period as a benefit rather than blending those items through the annual effective tax rate. The discrete item in the second quarter which reduced our effective tax rate specifically related to adjustment to our tax accrual after filing our 2007 Canadian tax return, which was filed during the second quarter. Looking forward our current models project an effective tax rate of 37% to 39% for the third and fourth quarter of 2008. This should result in an overall 2008 full year effective tax rate of 36% to 38%, so just slightly below the 38% original guidance that we gave you. I'll also mention to you though that this full year effective tax rate will be positively or negatively affected by the third quarter filing of our 2007 federal tax return. And we hope possibly further affected positively by tax planning initiatives that we currently have underway.

As I mentioned, just a color on cash taxes. In the first quarter of 2008, we paid $90 million of US federal cash taxes. This is primarily related to some of the dispositions we completed in 2007. As I mentioned, we are currently preparing the filing of our US federal tax return next month and will be truing up our 2007 tax accruals accordingly. We also are currently in the process of applying the bonus depreciation expense provisions which have been provided by the 2008 economic stimulus package to our 2008 estimates as well. So with these two facts I just mentioned, we expect along with other tax planning initiatives that we have underway, to continue to put downward pressure on the US federal cash taxes that we will have to pay in 2008. From a state and foreign tax perspective, we have paid $12 million in cash taxes during the first half of this year. We expect to pay another $10 million to $20 million more in state and foreign cash taxes in the second half of 2008.

Now I'd like to shift to the third topic, which is related to our trust funds. As we all know, in the second quarter the stock and bond markets experienced negative performance during another quarter of market uncertainty. However, we believe our trust funds performed relatively well versus the overall market with the combined positive return in the second quarter of up 0.4%. The year-to-date return is still down 4.4%, as Tom mentioned in his comments. Our preneed funeral and preneed cemetery MST trust funds had very strong performance in the second quarter versus the overall market and both gained approximately 1.3% in the second quarter. Our cemetery eternal care trust fund is more oriented toward fixed income and other yield oriented securities, and had a return more in line with market conditions, which was a negative return of about 1.7% in the second quarter. We believe the overall positive second quarter trust fund performance was primarily the result of the diversification in the portfolios, which I'm going to get into more in a second.

Some highlights for the second quarter in terms of the trust performance included strong performance from large cap and small cap growth managers for domestic equities within our portfolio. Both our inflation protected securities and our diversified pool of commodity exposure both added value during the quarter as well. And our convertible securities provided good downside protection during the volatile quarter. Most importantly in terms of the trust fund earnings that go through our income statement, we have not seen any material degradation in these amounts. Now remember these are earnings that accumulate over several years within our trust funds and are only recognized in our income statement once the services are performed or the underlying merchandise is delivered. This is usually several years after the original funds from the customer are initially invested. We do believe we have significant disclosures in our Form 10-Q related to the underlying investments within our trust funds.

As Tom did earlier, I also today want to point you to the slides that are on our website and specifically slide number 3 that we have placed on our website which contains more detailed information on these trust investments. This slide details our preneed funeral, preneed cemetery, and eternal care trust assets combined by asset class, so you can see the equity and fixed income and other and by investment styles within the asset classes. So you can see the growth, the value, the small cap, et cetera. We also detail on this slide a number of different institutional investment managers that manage the trust funds by asset class. We also have three major trustees that we employ at SCI which essentially hire these institutional investment managers for SCI. I hope this slide details again and reiterates to you the significant diversification we have within these trust funds. I also hope that you also take away the manner in which they are professionally managed.

In conclusion, we again believe we have delivered solid financial results for the second quarter in a difficult economic environment. As Tom mentioned earlier, we continue to be comfortable with our 2008 annual guidance that we issued in February of this year. A couple of additional comments I'll make on our guidance. First, as we continue to generate cash for investment purposes such as the possible transaction -- Stewart transaction or our share repurchase program, we are prudently managing our maintenance capital expenditures. Because of this, I believe our total capital expenditures will end the year at the low end of our annual guidance range, which was $165 million to $195 million in total CapEx. Secondly, you may recall that our annual guidance range was $380 million to $410 million operating cash flows, after taking into account the $90 million US federal cash payment we paid in March of '08. I believe we will end 2008 on the high end of this range, which is primarily because of the lower cash taxes than we originally expected to pay in 2008 as I mentioned earlier. So I believe that concludes my comments and Tom's comments. Now, Robin, I think we will turn the call over to questions.

(OPERATOR INSTRUCTIONS) Your first question comes from John Ransom from Raymond James, please proceed.

Hi, good morning. Eric, you can talk faster than I can type. Could you just -- the cash taxes -- what is the total number when you -- I know you have first year, second year, foreign, state, federal. Can you just give me a summation of what you think your total tax payments are going to be this year versus what you thought they would be?

Yes, I think for the most part we haven't made a federal cash tax payment other than the $90 million I described to you. From a state and foreign perspective, we spent right around $12 million to $15 million in the first half of the year. We don't know exactly where we're going to end up on federal for the reasons that I mentioned in my comments.

Okay.

It could be possible that we don't have any other federal cash tax payments but it's likely we will have some in the back half of the year. From a state and foreign perspective, I think we will have $10 million to $20 million of cash taxes that we paid in the back half of the year.

And you paid about $12 million, so basically you could have as much as as low as $25 million in cash taxes this year roughly -- if you had no federal taxes and you doubled what you paid in the first half, so basically $25 million or so?

Yes, that's possible, but I think it will be higher than that, I really do. I think it will be in the $30 million to $40 million range area, in all likelihood, John.

$30 million to $40 million in cash tax, that's the number I was looking for, okay, thank you. I guess my other -- just a couple other questions. Looking at the CDC information, they were suggesting a 5% growth in volumes this quarter, and you guys talked about a 1% down. Do you have any help to explain that disparity in what the CDC was showing and what your numbers were showing?

Yes, John, I think we have always said that the CDC weekly data -- it's very, very difficult to provide a lot of insight. Again, for those of you that haven't tracked us before, this is a voluntarily reporting mechanism. What tends to happen is someone goes on vacation in Los Angeles, there's no death in Los Angeles for two weeks, and then there's a load of them that come in the third week. So it's very unreliable data. Now, the CDC does put out final statistics that tends to take about two years. I think the latest data is 2006, Debbie, that we have seen? So I think that's very specific data that we use and monitor against our specific markets. If you go back to those years 2005, 2006, we were tracking right at what the CDC data would tell you. So we don't use the weekly data. We obviously look at it, but it's not reliable information. I would tell you again from our comments, we saw strong March and April numbers, we saw it begin to tail off in May. June really was a month where we saw the comparable number of deaths within our markets fall off. So there's nothing more specific than that. Again, so I don't think you can correlate necessarily to the CDC data.

Okay. And my other -- just kind of going to funeral preneed production, which is certainly been higher than we would have anticipated, a couple questions there. First of all, how much is that costing you -- if that's the right word this year -- in terms of working capital build relative to your cash flow?

I think generally we believe, John, that it's relatively neutral. If you think about it, we wrote about $20 million more for the quarter. It cost us about $3 million more for the quarter as it relates to preneed funeral. So that's about a 15% selling cost. If you look at our insurance products, the G&A revenue that we tend to get approximates 15% to 16% to 18%, and on the trust side on average, if you look at our backlog, the assets are about 85% of the deferred revenues. That tells you that you tend to average about a 15% retainage -- it's a state by state law. So I think I would tell you that generally the cash flows on the funeral side are somewhat cash flow neutral. They might be slightly negative. But again, I think as it relates to the selling costs in particular, that's how I'd look at it.

So I mean just to put that another way, some of your drag on the funeral side -- on the trust side would be offset by payments from the insurance side. Is that right?

That's right. And there's a little -- obviously there's timing delays there. Also, I think as you think about working capital, it's working capital in and out of trusts is another thing we have to manage. Obviously we collect from our consumers. We put monies into trusts and we take monies out of trusts based upon deaths and new contract sales. But that can be a working capital element you have to consider quarter to quarter that I think Eric's touched upon. And as relates to the pure selling costs, generally they will be negated by retainage and G&A revenues and on the funeral side for sure that's what we're seeing. On the cemetery side I would tell you that it may have been slightly negative for the quarter, because we have built up a fixed cost as it relates to people and we haven't seen the growth in production that we anticipated. Some of that we think is economy driven, but also it's development of our folks -- as we're hiring new counselors, it takes a while for those people to get productive. So it's an investment we want to make and we think it's a smart thing to do for the future. So that had a slightly negative cash impact I would say, but generally these selling costs are offset by retainage and G&A revenue.

Okay. Then lastly just on Stewart, then I'll drop back and get in the queue -- we calculated -- I'm not asking you to sign off on our numbers, but ballpark, if you're going to pay $11 a share for Stewart versus paying $11 a share to buy back a bunch of SCI stock, it's obviously out of the box a lot more accretive, and you're buying a heck of a lot more cash flow if you're buying your own stock versus buying Stewart's. What we did is we assumed roughly $80 million in synergies and a little over $100 million in additional interest expense, then looked at their existing free cash flow. So you will be paying a pretty hefty multiple out of the box of their free cash flow even with $80 million in synergies. So could you help us understand maybe the longer term benefits of doing a transaction like that versus buying your own stock, where obviously out of the box you're paying a much lower multiple of your free cash flow? Thanks.

First of all, if I'm going to evaluate your numbers I would like it (inaudible). But in all reality --

So would I actually.

I agree. No, I guess what I would tell you -- there's probably three things to think about. Number one, a Stewart transaction -- again a company that quality of Stewart, size of Stewart, the properties that they have is not something that comes along every day. Share repurchase -- it's a great time to be in share repurchase, but again it's a strategy we have deployed historically and will continue to deploy in the future, and we think it's a good idea, particularly at these levels. Second thing I'd say on your numbers is you have to understand the specific synergies and the timing of those synergies. Probably what you don't factor in is while we're going to take on a lot of debt as it relates to the transaction, our hope would be that very quickly we would deleverage that transaction and eliminate a lot of that interest right out of the gate with the combined free cash flows of both companies. I think the last thing I'd have to consider is that pro forma Stewart at $11 is obviously north of $1.3 billion to $1.4 billion in total transaction value. And as you think about share repurchase and deploying $1.3 billion to $1.4 billion, albeit the share price is very attractive, I don't think you can assume that you could buy back that many shares at current levels. So I think you have to consider all three of those things. We think the most meaningful impact for the shareholders for us is a Stewart transaction. But to your point, buying back our shares at these level is very accretive, very positive for our shareholders and again would be a strategy we would deploy if and when the Stewart transaction is over, if and when that transaction didn't occur.

Thank you very much.

And your next question comes from Mike Scarangella from Merrill Lynch, please proceed.

Hi, good morning guys. I just had one quick question on the very helpful charts you provided on the funeral averages. Obviously your preneed averages are quite a bit higher than your atneed. I'm wondering if that was always the case? I guess it was my assumption that industry practice was that preneed sales people tended to discount a little bit to encourage the sale. I feel like you guys are talked about having that issue in the past. I'm wondering if you have fixed that or what's driving that big premium now in preneed averages?

I think there's a couple things to consider. One is to answer your question, we're much better at selling it today than we ever were. We probably discount it less from an industry perspective than we ever did, because if you go back in time, there probably was a practice of doing that. Secondarily, you have to consider that some portion of the backlog that we have today was acquired through an acquisition and therefore those trust funds were sometimes maybe not all there. Sometimes not invested in the most prudent investment allocation, and therefore didn't have the accompanying growth. Also I think geography has a lot to do with it. You look at a lot of the heavy preneed selling that went on, a lot of it were in geographies such as Florida where the average funeral tends to be lower than other parts of the country. Now you're seeing a much more dispersed preneed effort across many jurisdictions. I think a lot of those would tend to tell you why today we're doing a little bit better. I think specifically for SCI, you also would have to consider the advent of the dignity packages. The ease of use of those packages, bundling products and services together that consumers find useful. And again that's allowed us I think over the last few years to write business at much higher levels. So you raise a great point, Mike, I think when you take those factors into consideration, and then you think about accumulated growth over a number of years. As those contracts come atneed, it does very well for the 30% of our business that today is coming from the preneed backlog.

Okay. Good, very impressive numbers there. And then I just had a couple around the proposed Stewart transaction and I understand you're in a sensitive time with that deal so you answer whatever you can. I was wondering about three things. Obviously we're trying to get our arms around what synergies might be. I think someone threw out an $80 million number, I think Alderwoods was around $65 million, and I think Alderwoods was similar size to what Stewart is now. Any comments around synergies? Also required asset sales, I don't know if you have a sense as to what the [FTC] would say to you -- but again bigger, smaller, similar to what you had to do with Alderwoods would be helpful. And then last point you mentioned, you would probably be able to delever quickly -- maybe the question would be -- how quickly do you think you would get back to current leverage after a deal with, Stewart?

Mike those are all great questions I'd love to answer for you after we announce some sort of deal, that would be a great time to talk about it. No, I think again those are things we clearly aren't in a position to talk about today. I think I mentioned we have not had any further access to data, so again we would be very premature. I think from the one piece that we can tell you, we would surely structure this I think from a financing perspective -- we like to structure it very similarly to the way we did Alderwoods, and look at putting permanent debt that allows us to maintain similar ratios we have today and the rest of it to be prepayable. Again, the cash flows we generate will be contingent upon the things you said, the synergies available in the transaction and the like. So they're now studying this offer and comparing it to other things they've got in committee. We want to give them time to evaluate that. We would expect sometime in the very near future to have them get back to us.

It's not crazy to use Alderwoods as a proxy for some of these measures?

I don't think it's crazy, but I think again synergies can be different with every company. So I just caution you -- without access to more specific information, it becomes a little more difficult. I think as you think about how we structure the deal, it probably would be very similar to that.

Good. I understand, thanks for the help and good luck.

And your next question comes from Clint of Davenport, please proceed.

Good morning, guys. Nice quarter here in a tough environment. I wondered if you could comment -- obviously very good strong results in the preneed funeral side, still positive on the cemetery side, but a bit of a discrepancy between the results there. If you could provide some color as to why?

Sure, I think first of all it goes back to the comparable nature. We're always comparing back to prior year quarter. If you go back and look I think it was 18 months ago we began to talk about investing in the sales infrastructure of the company. And I guess reinvesting within that piece. If you look historically over the last few years, our cemetery sales have actually held up very well. We have done pretty good traditionally, we probably -- I think for the most part we're performing pretty well. If you look at 2007, we saw some growth there. And on the funeral side, you really saw us take a dip. We really were impacted more I think from the Alderwoods transaction and the changeover of the sales force and a lot of things we have done historically. So I would first say that your preneed funeral production this quarter is comparing to a much weaker 2007 on the funeral side than it is again from the cemetery side. So a lot of the percentage growth should be explained that way.

And I think the other thing and again Dan Garrison can speak better to this than me, but when times are tough economically, I think people begin to look at planning in their life. And I think on the prearranged funeral side, again a lot like your will and estate and things like that, it tend to get buttoned on up on those types of things. Cemetery land is more of a purchase. I think it's a different type of sale and I think maybe that does see a little bit more of a negative impact from the eyes of the consumer. But generally I think the preponderance of the reason is you've got an easier growth mechanism on the funeral side. We're creating as an example what we call community service sales forces. And so as you think about selling within a funeral market, historically we may have sold within the funeral homes themselves, and now we're beginning to develop sales forces that sell an entire market from multiple places. So they aren't tied to any one location. They aren't getting their leads necessarily from people walking through the doors. So I think we're seeing opportunities to really grow that part of the business again against a more treacherous 2007.

Thanks, that's helpful. On the cemetery side, you had I think on the last call indicated that there was a pretty good pipeline of activity that would occur in the second half of this year. I mean is that still the plan here?

On the funeral side or cemetery side?

I'm sorry, on the cemetery side.

I think two things. On the cemetery side we would continue to believe that we're going to execute there. I think what we're talking about in the back half of the year is as you will recall, cemetery property gets recognized when we have 10% down and something's constructed. And there are quite a few projects that are due to be constructed in the back half of the year and there weren't very many in the front half. So I think the point of that was we're selling today into projects that aren't constructed and therefore those sales are being deferred. And we will construct probably to the tune of $14 million to $15 million worth of inventory that will get recognized -- in other words has already been sold -- and will be recognized once it's finished construction. So that's whether we mean by I think a solid back half of the year. Obviously, we continue to work very hard at development of our folks and hiring good folks and we hope to see some traction again on the sales production side too result in further growth.

Would you expect that to be spread fairly evenly between the third and fourth quarter then?

I think it's probably more fourth quarter.

Okay. On the energy commentary, I guess intuitively I would think there might be a little bit more pressure given some of the heating costs in winter, and that might have a bigger impact. Your comments seem to indicate that you might be able to deal with these costs better. If you could maybe provide some more color there?

I think two things. One is obviously we're doing our inflationary pricing, and preponderance of that happens in the back half of the year. Because we recognize there's higher energy costs, we have got to try to pass some of that on ultimately to the consumer like many other retailers are having to do today. As we put that in place, that will defray some of the cost increases. The other comment I made is again like a lot of other businesses, we're looking at ways to conserve usage of energy. As you think about electricity and things like that, there's technology today that allows you to utilize energy more efficiently. And we're going to begin to -- we have tested ways of doing that and we're beginning to look at ways that we can distribute that throughout our network. And again we can't do a whole lot about the pricing of it. We can do some things, but we can again try to contain some of the usage of energy as it relates to operating our business.

Okay, thanks, that's helpful. Then any color on the labor efficiencies that sounds like are planned for the fourth quarter.

I think it's no different than what we have always told you. We have begun over the last few years to utilize metrics to more efficiently manage personnel. And from those metrics we learn and we create best practices. And on the funeral side of the business, what we found is as we implemented this, we saw great success, but we saw opportunities that didn't come to fruition in certain markets. So it's refining our tools, implementing best practices in markets where we maybe didn't get it right the first time completely. On the cemetery side, it's the beginning of applying some of those metrics, applying technology to begin to look at ways that we can be more efficient. So not a lot different than what we have always said -- it's utilizing metrics, best practices, and technology to be more efficient in the way that we operate our business.

I guess then on the Stewart transaction, have you received any indication from them as to the timing of a decision here?

No. The last thing we heard from Stewart is everything everybody else has heard. They created the special committee and it's our anticipation that again they will conclude that sometime in the near future and we will have some sort of response from our letter.

How long do you guys intend to grow your cash balance for the transaction here?

I think -- we're clearly going to build the cash balance until we know something different, and I don't know when that date's going to be, and I don't know what events will trigger that. So I would look for us to continue to build cash all the way up until a Stewart transaction closes or up until a point where we determine that's not going to happen

Okay, last question, I'm sorry if I missed this, but did you all give the trust fund performance since the quarter end?

Since?

Yes, essentially for the last month of July?

No we didn't, I don't have insight into that in front of me right here.

Great, thanks guys, nice quarter.

Ladies and gentlemen, at this time I would now like to turn the call back over to SCI management.

We want to thank everybody for being on the call today. And we look forward to talking to you again. I guess it's going to be November. Thanks again, have a good week.

Ladies and gentlemen this concludes your conference. You may now disconnect. Good day.