Service Corporation International (SCI) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your third-quarter 2008 Service Corporation International earnings conference call. My name is Francine, 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 today's conference. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's conference, SCI management. Please proceed.

Good morning, it's Debbie Young, Director of Investor Relations. Thank you for joining us today as we discuss our quarter results.

First of all, I want to bring to your attention that during Tom's remarks today, he will refer to a slide that just posted on our website so you might take a moment now to go access it while I read you our cautionary statements. Our website is www.SCI-corp.com.

During the 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 or 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 reconciliation for each of these measures to the appropriate GAAP term.

With that, we will begin with remarks from President and CEO, Tom Ryan.

Thank you, Debbie, and welcome everybody to the call. I apologize in advance for my voice; I am on day four of a cold here that is now in my throat. But I'll try to be as clear as I possibly can.

As usual, I intend to give an overview of the quarter, both the funeral and cemetery operations, and then follow that up with providing a little outlook for you on the end of 2008 and the preliminary summary outlook for 2009.

But, before we start, I thought we would take a step back and see, review again what we have been saying, and what we are now saying to kind of put this whole thing in perspective at 40,000 feet.

I think that, as many of you know, we have discussed over the last few quarters that we have seen deteriorating conditions in the market, the credit conditions in the market. We have begun to talk about things that might impact our business. The previous risks that we have discussed with you were the economic sensitivity of the consumer as it relates specifically to cemetery property. And what we have been saying is that our consumer base has a muted effect on the economy relative to others because we believe that cemetery property, which is 39% of our cemetery revenue and only 13% of our overall revenues, are what is truly economically sensitive.

The second risk we have pointed to people is the trust fund exposure. I've always said that is real, but again, the impact of that to our earnings is muted by the fact that only the earnings impact is shown on contracts that mature, and typically about 8% to 10% of our backlog will mature in a year.

So we have identified these risks before and in the first half of the year we actually were pretty lucky in the sense that cemetery sales grew slightly. We definitely saw some economic challenges, but we were able to grow the cemetery side. And the trust impact was really hard to find in our numbers because, again, it's only 15% of our contracts and really doesn't materially show up in the average revenue per case.

So what are we saying now? We are saying that in the back half of 2008 we're beginning to see a bit of a slowdown in cemetery sales. Specifically in the third quarter, we are down 3.8% on a production level. This is driven 100% by the economy. I believe we're actually overcoming some obstacles in order to deliver the 3.8% when I look at other discretionary retailers and some of their numbers.

The second point that we are pointing out is that financial markets have gotten a lot worse. We will see some of this impact as we move forward. But keep in mind, only 15% of the funeral contracts that we service on the funeral side are exposed to the financial markets -- 70% walk-ins, 15% come from insurance contracts. And to a lesser degree, some of the maturing cemetery merchandise and service contracts will have some downward pressure. So this will put a little downward pressure on revenue per case, but our revenue per case, we believe, will continue to grow.

We also have experienced some challenges as it relates to the funeral volume environment this year (inaudible), particularly in the third quarter, down almost 4%.

So, because of these factors, we believe we will come in on the lower end of our earnings per share guidance we provided for 2008. You will recall our guidance was $0.57 to $0.63. What we're saying now is, that range is more likely to be $0.55 to $0.58. So, while it's not exciting, it does touch the lower end of our range.

So, for 2009, we believe, and therefore we have assumed in our guidance for 2009, that it will be a very tough economic environment. While we have experienced maybe one of the worst financial market environments in history, between the stock market and credit markets, these reflect the pessimism of what will happen to the US consumer spending in 2009. With very limited access to credit and limited to no savings, the consumer will definitely be stressed.

Therefore, we believe the responsible thing for us to do for our shareholders is provide guidance that reflects our best guess of the impact of a difficult recession.

Now, step back. We are guiding you to a midpoint of $0.54 for 2009 versus a 2008 number that's going to look like $0.55 to $0.58, even facing a recession the severity of which we have not seen for decades. We will continue to generate significant levels of free cash flow as slight declines in operating cash will be replaced by lower expenses and lower CapEx spend levels. This compares to S&P earnings revisions that are out there now that approximate 30% to 40% declines in earnings. Keep in mind, our share price has suffered on the order of 50% this year.

Because it is our expectation that we will continue to grow the pre-need funeral backlog, that we face a growing baby boomer population while we continue to find new ways to leverage our scale through technology, we intend to take advantage of the uncertainty of the markets and reduce our equity base so when the economy does improve and therefore our earnings and our cash flow begin to grow at a much more exciting level, our shareholders can enjoy the benefit of that growth with a much smaller equity base.

So with those overall comments I will now shift to the normal part of the call, and I'd like to provide the overview of the quarter for cemetery and funeral operations. Overall, our normalized earnings per share were $0.09 versus a prior-year number of $0.10 per share. While this was disappointing for us, these results were, they were not unexpected in such a turbulent economic environment.

On the funeral side of the equation, our revenues for the quarter were essentially flat. This was slightly below our expectations, but we continued to see a strong average revenue per case, and unfortunately we saw a continuation of soft volumes that we have been experiencing over the previous few quarters.

Now I'd like to point you to the slide Debbie referred to that's on our website. It says comparable funeral sales averages. I want you first to look at the green bar on the graph. This shows the steady sequential growth in our true at-need average. You will note on this graph that our true at-need average is up 4.7% over the prior-year quarter and now approximates $5300.

Remember, this represents 70% of our funeral revenue stream. We continue to see a strong base, and we expect that to continue to occur. We see no material evidence of consumer spend-down because of the economy, and we really don't anticipate it because, again, monies typically are set aside for these events, either through insurance policies, deposit accounts, et cetera. Therefore, in previous recessions, we have not seen the spend-down.

Now I'll point you to the red bar on the graph. This shows the matured pre-need contracts that turned at-need in the quarter, and therefore were recognized into revenue. The average share is up 2.1% over the prior-year quarter and approximates $4900. This represents the other 30% of the revenue stream for funerals.

Now, half of this or 15% of the total stream is funded by trusts, and 15% is funded by insurance products. The insurance-funded contracts continue to grow in average as this 15% is not subject to market risk. The growth is guaranteed at 1% by Assurant and the face amount of the contracts are higher year over year. This is because we have begun to sell Dignity packages over the last few years, which has raised the average revenue per case pretty dramatically in the pre-need backlog.

The insurance-funded contracts are up 5.6% in the third quarter.

Now, the trust funded contract maturities were somewhat lower in the quarter; they were down about 1%, and most of this is because of the challenging investing environment that's facing everybody. This was somewhat offset because, again, we are writing a better book of business as time goes on and we are seeing those higher-average contracts come in.

The moral of the story here is -- while negative trust returns have an impact on our average, as expected, it is immaterial to the overall average, as it pertains only 15% of the revenue stream is going at-need. It is naturally being offset by higher-quality pre-need production.

What I mean by that is I'm going to point you back to the slide. Look at the blue graph. This is the business that we're writing today that goes into a backlog and earns a return. It's much higher than the red graph, which is the business we are running through our P&L today that was written in previous years. Hopefully, this clarifies for a lot of folks the power of pre-need and why, again, we believe that our average revenue per case will continue to grow in the future.

Now I'm going to shift to comparable volume. Our comparable volume for the quarter was down 3.9% for just over 2500 [called]. Based on our analysis, we believe our relevant markets are probably down about 1.5 to 2%, and this is based upon looking at cemetery interment rate, the feedback from our vendors and the like. It's not a perfect science. But at the end of the day, our volume was down a little more than what we think. We continue to see most of the decline occur in contracts under $2000. For instance, 60% of the declines were in contracts under $2000 for the quarter.

Therefore, because our revenues were essentially flat, when you get to funeral profits, they decreased $4.6 million, or about 130 basis points. Obviously, costs go up when revenues are flat at a fixed cost business. One of the primary drivers is higher sales and marketing costs. They were higher by $2 million this quarter over last year's quarter.

Now, why is that? It's because we are writing pre-need funerals, which we have to recognize the expense for when we write the business, and the revenue goes into backlog. We grew the backlog by 14.5%, and therefore we spent $2 million doing that. That runs through our funeral profits, unfortunately. But again, as it relates to the overall health of the business and the economic value of the business, it is driving value forward. And this trend should continue if we can continue to grow our pre-need backlog like we think we can.

Otherwise, when you look at the funeral side of the equation, our costs are growing at about 1.5% when you look at the other costs involved, just like we would anticipate.

So now, one of the positives about funerals is pre-need funerals. In the face of a very difficult retail environment, we are very pleased to report -- and I alluded to this further -- a $16 million increase in our pre-need production that we wrote for the quarter. It's up 14.5%, and as we discussed in the August call, this is really due to three main factors.

Number one, an increased number of sales counselors and managers that we have hired in an effort to get out there and sell more contracts. In addition, we have increased the productivity through enhanced training and development initiatives for our sales counselors and for our sales managers. And again, all of this we were able to do because the investment we began about 18 to now 21 months ago in investing in our sales infrastructure, and we began to build a runway, and now you are beginning to see it take off.

Now, I get a lot of questions from people about -- how can you grow funeral production by 14% in such a difficult economic environment? And as you can see on the cemetery side, it's down a little bit. I wish I had the perfect answer for you that I could quantify, and it's just very difficult to quantify. But I did want to share with you some of our beliefs as to why we are able to grow funeral in this difficult environment relative to what's happening on the cemetery side.

First of all, traditionally, the funeral consumer is slightly older. On average, they're in their low 70s versus the cemetery consumer that is in their low 60s, and therefore completing the end-of-life planning process. Normally, they have bought a cemetery product and now they are just finishing off by taking care of everything in the [class] funeral, versus a younger cemetery consumer that is thinking about it for the first time. So it's easier to get somebody to complete a process than to start a new thinking process in the midst of economic uncertainty.

Secondarily, the second reason we think, is that the funeral insurance product has a lower entry point for down payment. So it's a lot easier to start a funeral contract because you are insured on payment one, versus the requirement of having a 10% down payment on cemetery and not the ability to give them an insurance product. So not only do you have a lesser down payment, but the insurance product provides an additional benefit of protection, or mortality risk.

The third item is that funeral production is not as dependent on the large sale. It's a much more homogenous product as it relates to cemetery products. And again, you can sell cemetery products for up, again, to $2 million. On the funeral side these typically would be much more [modest].

And the last issue that we think, again, shows our ability to grow a pre-need funeral with these resources versus the cemetery market is that we really have an untapped lead source. If you think about it, of the 100 contracts that we will service, only -- we will write in a year, 35. So 35% of the funerals we perform lead to new pre-need contracts.

On the cemetery side, that's an inverse relationship. We tend to write more pre-need than the at-need or walking through the door. So it's easier for us to take advantage of the lead source, once we have the people and the training and the like.

So I think those four factors really are driving pre-need funeral in a very, very difficult economic environment.

Now I would like to switch to cemetery operations. I want everybody to keep in mind cemetery GAAP tends to be a more volatile business as it relates to reported earnings because of construction. It's just naturally that way. So the first thing about cemetery is, our revenues are down $13.7 million or 7.8%. We experienced decreased sales production of about $5.8 million or 3.8%. That's the real thing to pay attention to. Sales are down 4%, and that's tough.

Now I'm going to talk about GAAP. When you really run that through what is happening, our sales above $40,000, think about large sales, are down almost $2.6 million. But half of our decrease is the fact that at the very high end people are sitting on the fence. It's not that they'll never buy; it's the fact that they are choosing not to buy in a difficult environment.

We are seeing traction in our bread and butter sales, the steady activity of sales. So overall, our GAAP operating revenues declined by about $3 million when you think about recognition.

The second issue is that the current quarter's property recognition rate was 99%, which really just means that everything that we're selling is constructive. In the previous quarter, our recognition rate was 107%. What happened there is we completed construction of a lot of large, for instance, mausoleum projects that we recognized revenues that we previously sold books of business.

So, again, we've got $6 million of revenue in the third quarter of '07 that is in the third quarter of '08 which is simply a reflection of completing a construction contract.

Lastly, we saw lower other revenue, which is predominately driven by lower cemetery merchandise service (inaudible). Again, Eric is going to talk a little bit more about that in his comments.

The good news is we expect higher completed construction contract revenues for the fourth quarter, to the tune of about $10 million versus only about $3 million in the third quarter this year.

So now take it to cemetery profits. They're down about $16 million or 800 basis points. The revenue decrease of 13.7 can be broken down such as this. When you think about our operational revenues were lower by $9 million, keep in mind that current production enjoys about a 60% margin, whereas construction of revenues that are previously sold enjoy about an 80% margin. That results in about $6.3 million of reduced profit by not having that construction and not having the same level of sales. The trust fund income drops straight to the bottom line, so there's $5.3 million of deduction. And inflationary increases on the fixed costs, like overhead and maintenance and administration, would increase another $2.3 million.

In addition, we have added salespeople and we're seeing about a $700,000 increase in the fixed cost of adding those sales people. And that really defines for you the $16 million. And, again, think about the fourth quarter, we're going to construct a lot more revenues. We're going to keep working hard at sales. Again, I think this third quarter is not as bad as it looks on the surface.

The outlook for the fourth quarter in 2009 is attached. As you can see reported in our press release, you've probably had time to look at it. While we are not required to provide this data, we believe, considering the unusual volatility surrounding the capital markets, that it would be helpful to our shareholders in providing limited guidance to setting expectations.

So in the fourth quarter we anticipate earnings per share to fall in the range of $0.12 to $0.15 and our operating cash flow to fall between $60 million and $80 million for the quarter. The range assumes a challenging economic environment for the fourth quarter and the following assumptions. Number one, funeral volume continues to trend down; number two, that funeral averages remain solid except for some downward pressure of trust, pre-need going at-need due to financial market (inaudible). The third item I would note is comparable cemetery sales will trend lower for the comparable quarter, due to the uncertain economy and a lack of high-end profitable sales.

The fourth item I would note is that cemetery construction remains on track for a solid quarter. And then lastly, it assumes that forecasted labor efficiencies are somewhat offset by higher selling costs on the funeral side.

For 2009, we anticipate our earnings per share to range between $0.48 and $0.60, operating cash flow should fall between $320 million and $370 million, and our maintenance CapEx and cemetery development costs to range between $100 million and $110 million, resulting in free cash flow of $210 million to $270 million. This range of performance assumes a very difficult economy which we will be operating in, in 2009, and again makes the following broad assumption. Number one, that comparable funeral volumes remain a challenge. Secondly, that average revenue per funeral achieved inflationary increases, negated somewhat by the trust pre-need going at the average declining, due to the trust performance. It assumes that our cemetery property sales range from slightly negative to slightly positive. It assumes declines in the cemetery trust income line item, and it assumes focused expense controls and reductions in CapEx spending. It also assumes a moderate level of share repurchase activity, reducing the outstanding share count.

We surely do not enjoy the thought of going backwards in 2009. However, we also know that the forecast of economic conditions we are likely to face in the midst of the credit contraction can only have a very negative impact on the consumer. Therefore, as we have always said, we are not immune to swings in the economy, but our impact should be muted. While S&P earnings estimates again for '09 will contract some 30% to 40%, we believe we can deliver 2009 results that will be slightly below or at 2008 levels.

It's our belief that our business model is sound and when the economy does begin to go forward again, your company will be in a position of strength with a stronger, more dynamic sales pipeline facing an aging baby boomer clientele. Therefore, we will continue to maintain a strong balance sheet, very ample liquidity to generate significant excess cash over the coming quarters. We will take that excess cash and invest it to advance shareholder value during these very opportunistic times.

This concludes my prepared remarks, and I'll turn the call over to Eric.

Similar to Tom, I'm going to talk about the third quarter first, and then I'm going to give as much forward-looking insight as I possibly can for, really, the following topics. I'm going to talk about taxes, the cash flows and CapEx that we have guided to, trust fund performance. And then lastly, I want to talk about share repurchases as well.

Let's start with taxes. In the third quarter, end of third quarter normalized EPS of $0.09 included a tax rate which was just under 17%. This is down from a more normalized 38% effective tax rate, due to two discrete tax items that are included in the third quarter as opposed to being blended through the annual effective tax rate. The two items relate to the release of deferred tax liabilities due to the expiration of statute of limitations related to these liabilities. This primarily relates to Canadian tax planning structure where the statute of limitation ran out in terms of being audited.

The second thing is initiation of good tax planning primarily related to state taxes. Also, due to Hurricane Ike, we have not filed our 2007 federal tax return yet, and that should be filed in the coming weeks.

The good news today is that this should result in a $95 million federal tax refund that we're also anticipating to be received by the end of the year. This resulted from a refinement of the previous tax accruals due to better insight into our tax information, especially related to Alderwoods and that our resources and processes as we rebuilt our tax department during 2008 resulted from the material weakness that we had in 2007 in that area.

We also have initiated significant tax planning initiatives as well, and that's a significant component of the revised return, and that's going to generate the $95 million refund.

Now, let's look forward to 2009. From a cash tax perspective which (inaudible) in 2009, we believe the taxes will be minimized by further tax planning and also further use of the remaining Alderwoods NOLs. We are not really ready to give more specific guidance at this time in terms as a percentage of book income what our cash taxes will be. But I am going to comment in a second what we model for in our free cash flow guidance in terms of cash taxes.

From an effective tax rate in 2009 we are modeling a 37% effective tax rate. But as I just mentioned, we are initiating significant tax planning and I believe it will put downward pressure on that 37% during 2009. Of course, on both of these topics, we will give you very specific guidance at our normal conference call that we do in February when we talk about our '09 full-year guidance.

Now let's shift to cash flows and liquidity for the Company. The cash balance at September 30, as you saw in the release, was $172 million. To update you today, our cash balance is $100 million. Subsequent to the third quarter, we paid $45 million in cash interest in early October. We also just paid a $10 million cash dividend to the shareholders, and we also just purchased about $30 million in our own equity in the open market. So we have positively been out there buying our shares back already.

In the press release, talking about the third quarter now, our adjusted cash flow from operations was down about $25 million. As Tom explained in detail, the operating income of the funeral and cemetery businesses were down, primarily related to slighter funeral volume and premium cemetery sales being down. This obviously affected our Q3 cash flow, as did dispositions of properties that were made subsequent to the third quarter of 2007.

What we are really looking at from a working capital perspective is seeing if we see an effect on our cash flows related to the economic factors that are out there. We're looking at our at-need funeral cash receipts and our cemetery at-need cash receipts, and so far they really have looked okay. We looked at things such as days sales outstandings as our metrics.

From the pre-need cemetery side, and remember that's mostly done with installment contracts to a significant nature, we are just starting to see a possible delinquency effect but it hasn't been material at this time, in the third quarter. We are obviously keenly monitoring this.

The current issue related to the cash flow, then, again relates to a decrease in the pre-need sales production, for the most part. For the full year of 2008 we are expecting to meet our cash flow from operations guidance of $380 million to $410 million. That, as we have already said, translates to the $60 million to $80 million in the fourth quarter guidance, both as annual guidance in fourth quarter excludes both the tax payment we made in early March as well as the $95 million tax refund that we're going to receive, predominantly by the end of the year.

So, thinking about 2008, the cash flow was hurt by the operating performance related to the funeral volume and the pre-need cemetery sales, so we had some positives. We paid less cash taxes than what we originally expected, and we worked very hard with working capital initiatives to have a positive effect on our 2008 cash flows, and we achieved that.

Now, looking forward to 2009, in the press release we gave you the guidance of the full year cash flow from ops of $320 million to $370 million and the maintenance CapEx and cemetery development CapEx together of $100 million to $110 million. We would also -- we used maintenance and cemetery development CapEx for the free cash flow calculation. We also would have about $20 million more in CapEx related to gross CapEx, and we will give you a better specific estimate of that in February as well.

But using those figures, this translates to the free cash flow guidance in the low to mid 200 levels, specifically $220 million to $260 million with a midpoint of about $240 million of free cash flow. This would translate into about $0.87 to $1 per share, using our current share count. At the end of September we had 257 million shares; but, as I said, we have purchased shares, so our current share count is about 253 million as we speak today. This strong free cash flow using the stock price where we are currently trading is a free cash flow yield of 14% to 16.5%, so the midpoint is about a 15% free cash flow yield right now at our companies from a forward-looking basis.

And then as I'll be talking about in a minute, we have been buying these shares at these levels and we will continue to buy our shares at these levels.

Additionally, I also want to mention that within this cash flow from ops guidance for 2009 are cash taxes that are about $30 million higher than our 2008 levels. So as I mentioned earlier, with cash tax planning, I'm hoping to put downward pressure on this. And again, we will update you on that in the February call.

Shifting to the trust funds, as we have discussed in the press release, our trust funds had tough performance during the quarter along with the rest of the market. The trust funds are down 11% combined for the nine months through September 30. Now, to update you further, during October the combined trust funds decreased another 11%. So year-to-date, the trust funds are down 21% for all three of the categories of the trust fund. This, again, is somewhat of a muted effect on our trust funds versus the overall market related to our diversification. As you know, the S&P 500 was down 23% for the month of October and 33% for the year ended October. So you can see, we have a more muted effect.

As a reminder, the trust fund performance doesn't flow through our income statement in an immediate manner. But instead, it's deferred onto our balance sheet until maturity of the pre-need contract. However, in total, the funeral, cemetery and eternal care funds, the trust fund earnings in the third quarter were down about $7 million to $8 million on a consolidated basis, meaning that dispositions had a part in decreasing the current trust fund earnings. So this is primarily because of market conditions, and it primarily relates to the pre-need cemetery trust area.

The eternal care funds did have some capital gains to the tune of about $1 million in the third quarter of 2007 that obviously didn't repeat in the third quarter of 2008. But talking specifically to the pre-need cemetery trust area, in early 2008 we moved about $250 million, which is just under 25% of the total pre-need cemetery trust assets, out of government securities into a prudent investment strategy in the state of California because of a change in California law.

Now, to give you some background, the state of California is the most concentrated state for our cemetery segment. It's about 20% of our cemetery operating revenues, in California, and California is just over 20% of our MST assets. This is complicated by California's very strict trusting requirements, so we have to trust 100% of the retail price of all items and you end up trusting a lot more items in California than anything else. For example, you have to trust on sales tax fees as well as even at-need merchandise, is trusted in California, which obviously when you deliver that merchandise will go through P&L rather quickly, compared to when you perform -- write the contract in the first place.

The California assets had a poor showing related to the markets in this quarter compared to last quarter. In third quarter of '07, related to the government securities that was invested in, we had an unrealized gain of about $2 million. In the third quarter of '08, these assets had an unrealized loss of $20 million. So that really contributed to going through our income statement because of one item, and that is that we allocate unrealized losses to our contracts that turn at-need and go through the income statement or when the merchandise is delivered. This would include the at-need merchandise and the sales tax and processing fees, as well as the normal deliveries out of the pre-need backlog as well.

So what does this mean from a forward-looking perspective? In 2008 we expect the full-year cemetery trust income to be about $15 million. This is down from our original internal expectations of $20 million to $22 million. And in 2009 we are modeling the cemetery trust fund income to be about $17 million to $18 million. So it does have some effect, but it's not an overly material effect in these numbers.

Now, lastly, I want to talk about share repurchases. During the third quarter we did not do any share repurchases. But subsequent to the third quarter and after our announcement of withdrawing our offer for Stewart Enterprises, we have purchased about 4.4 million shares for just under $30 million at an average price of $6.60. So our total year-to-date share repurchases are about 11.4 million shares, or around just under $110 million. Our remaining capacity today is just under $40 million in terms of share repurchase capacity.

From a capital deployment perspective, as I said earlier, we consider repurchasing these shares very prudent, especially at the current share price level and with the current free cash flow yield that I discussed earlier. But we're also focused on a prudent leverage and liquidity policy to navigate through these turbulent times. We have already said from a leverage perspective, we want to remain at about a 3.5 times leverage ratio as it relates to EBITDA.

We also see us keep a cash balance of around $100 million as a minimum cash balance, for the most part. And, we also have a $200 million open capacity on our revolver. So we consider we have very good liquidity at this time.

In conclusion, we again feel that we have a very strong balance sheet at SCI. We don't have any meaningful current debt maturities into the future. We have very strong free cash flow, as we described. We will keep a good cash balance, and coupled with the revolver capacity we think we have adequate and good liquidity. We're going to use all of these assets to maximize our shareholder value, which right now really, really translates into a prudent share repurchase program. And that's where you'll see us spend our capital.

So with that, Francine, I think we're going to pass it back to you for questions from the group.

(OPERATOR INSTRUCTIONS) John Ransom, Raymond James.

Eric, I just wanted to review the assumptions for the '09 guidance to make sure we have all those. So you are assuming a share count in the 253 million range, so where it is today?

That is where it is today, it's 253 million. You are right.

And that's what is assumed in your guidance?

Yes.

Okay. Secondly, could you help us out a little bit with some of the gross margin ranges on the funeral and cemetery side, especially compared to the low gross margins that you had in the cemetery third quarter, what you're assuming in 2009?

I think, John, at this point, what we are trying to do is provide -- again, we did this to give an overall view of what we see. And I don't think we're in a position to talk about gross margins by business and some of the other details. We plan to provide all that in February. And I think we will be able to provide a lot better detail to a lot of people's point in the sense that we will see what October is like, we will see what November is like.

Okay.

If it's okay, I'd like to stay at this level. We ran it very high at $0.48 to $0.60, and we will be in a better position. We're really just trying to communicate with you guys as best we can.

Right. Just if you look at your cemetery margin, obviously it was very high in 1Q '07. It was low this quarter, and I know the volatility around cemetery construction. If we took a four-quarter or six-quarter rolling average, is that a good way to look at it?

A much better way to look at it, John, because you're hitting on a great point. It is very volatile as it relates to constructed revenue. So take the difference between the third quarter we just reported and the fourth quarter we are about to report. We should have $7 million more of construction revenue that will come through at 80% margin in the fourth quarter as compared with the third quarter. And again, is that because of us doing something grand? It is not. It is the completion of a construction project, and it is business that we have written previously.

So, like I always say, if you want to understand the health of our cemetery business, look at cemetery production. I think that's the best way to look at it long-term. In the short-term, you are exactly right.

And, Eric, just a reminder of the accounting rules. You can recognize cemetery revenue at what threshold of revenue collection?

You have to have a 10% down payment, and then the construction project gets completed, and then it all comes through, all the pre-need sales that are associated with that project come through at a very high margin at that point.

And, if you get the 10% down payment -- so let's say I have, for argument's sake, a $10,000 project. I pay you $1000, you complete the project. At the completion of the project, do I then owe you the other $9000? Or, is that typically a three-year installment contract or something like that at that point in time?

It's all of the above. Some people have paid us in full, and some people are three-year paper, four-year paper, five-year paper. So one has nothing to do with the other. The revenue recognition requirement is 10%. And, John, keep in mind for everybody else -- I know you know this -- this is just for cemetery property, and merchandising services get sold and trusted and deferred, just like a funeral.

Right. So again, I just want to -- I'm doing this to make a point for people that you can have 100% revenue recognition and still only collect 10% of the dollars, in some cases. So again, the rolling cash flow is probably a better way to look at it as well because of the distortion of the timing at times.

That's a great point, John, you are right.

Okay. And then, just lastly, you have a Board meeting next week; is that correct?

That is correct.

And, I assume, expanded authorization will be an agenda item to be discussed at that Board meeting?

That will be a topic of discussion next week, yes.

So, if the Board does grant an expanded authorization, do you plan to disclose that at that time, or would you wait for the February guidance?

No, I think we would actually disclose that, once it's (inaudible).

Clint Fendley, Davenport.

Eric, you mentioned a bit about you're beginning to see some of the delinquency effects. Could you provide maybe a little bit more color as to where you're seeing that? Is it more on some of your cemetery business, or is that on the funeral side?

What I was referring to is, we are certainly keeping an eye on it, but we haven't seen it become material, Clint. And we are seeing -- we do look at the delinquency rate on the installment contracts, and it crept up just a little bit in the month of September. But, again, we have not seen anything material in there. But my point was, is we are monitoring that very keenly.

Okay. And could you remind us a bit, Eric, just as we think about '09 and what's probably going to be a pretty difficult year for the consumer, just some of the variable cost levers that you have in your business as we manage through the year?

Obviously, it's a high fixed cost business. The fixed cost structure is probably in the range of anywhere from 65% to 75% in terms of the fixed cost. Obviously, you have -- we have an overhead structure here at SCI in the corporate office, there's some variable cost associated with that as well. There's part-time, there's overtime that are out there in the funeral and cemetery operations itself. Those are some of the things that are leveraging pull from a variable cost perspective. But for the most part, it's a fixed cost structure, as in the industry.

Yes, so the focus is going to be around managing staffing at the most optimal levels and continuing to negotiate the best deal we can on supplies. And those are the biggest pieces we can manage on a variable, day to day.

Got it. Thanks, guys.

A.J. Rice, Soleil Securities.

It's actually Chris Rigg for A.J. You guys provided a lot of color on the trust funds and gave us an update on October. But I was wondering, what is the go-forward assumption on the trust fund performance? And I understand it has a somewhat minimal impact on ongoing earnings, but are you assuming the market stabilizes here, or have you baked in further deterioration in the trust performance?

I think it's a slight range. But put it this way -- we haven't baked in any recovery.

All right, okay. And I know you probably can't disclose this yet or it's probably not finalized -- it sounds like it definitely isn't finalized. But on the potential share repurchase that might be authorized next week, given that you said you need about -- your comfort level is that you need about $100 million of cash on the balance sheet -- that would equate to a pretty sizable -- you could do a share repurchase probably of $200 million or more. Is that unrealistic to think you could do something of that size?

Again, I think the importance here is, I'd never paid too much attention to the authorizations because, if you go back in our history, we have probably had six or seven different revised authorizations. Our approach has never been to throw out a big number that, again, doesn't mean a whole lot. We just want to make sure we have capacity to get to the next meeting. And so, again, we will talk about it, what's best for us. But I wouldn't look at the size to be determinant of what we're going to do. What we're going to do is continue to buy them at these distressed levels.

Okay, okay. Then, with regard to volumes -- and again, the fourth quarter, for all the noise, doesn't actually appear all that bad. I guess I was wondering if you could provide any specific color as to the trends you saw from September to October. Have you seen a material decline in new business month over month? Any color there would be great.

I think, again, what we are looking at, the sales side of the equation. While we know it's a difficult environment, from what I've seen, and again, it's all preliminary stuff. But it sure seems like October wasn't as bad as everybody could have projected. I don't want to call it a ringing success, but it's not really that bad. I think on the funeral side we're seeing continuing trends of good averages, still seeing some softness in the volume. So again, there's no dramatic changes we've seen in the fourth quarter. All we're really trying to do, again, is provide guidance to our shareholders that takes into account what's happening in the overall economy today. And so we feel good about our ability to manage through this.

What I want to point everybody to is, listen, we are going to get leaner and meaner in this environment. We're going to work on the sales channel. We are going to reduce the equity values. And when this thing comes out, and I don't know when it's going to come out, you are going to have a really exciting opportunity, I think, for this Company. So we are going to keep working for that. It's just difficult to predict in '09 when we don't know the severity of the recession.

Okay. And then one last modeling question here. You had a nice sequential stepdown in SG&A expenses. Is that sort of the right -- and I know there's quarter-to-quarter volatility based upon the seasonality of the business. But is that the new base rate we should use when we are thinking about where those expenses will be next year?

No, they are going to come back a little bit, because some of that, as you can imagine, is incentive comp accruals that we had in the beginning. So bonuses that we had hoped in the first half of the year would get paid and has not. So there's a little revision there. So there might be a couple of million dollars more in there, if I were modeling it, but nothing too dramatic.

Okay. All right, great. Thanks a lot, guys.

Mike Scarangella, Merrill Lynch.

I appreciate you don't want to get drawn out into a discussion about '09 guidance. But I wonder if we could just talk conceptually about where leverage goes in '09. Do you think we get -- you're about mid 3's right now. Do you think we get to a point where you have a 4 handle on leverage, or it doesn't get that bad in your model?

No, Mike; we intend to maintain a 3.5 ratio.

Okay. Does that mean, if EBITDA goes down, you would use some of your cash to reduce debt, to keep it at 3.5?

I think, if it went down dramatically, yes, we would.

Okay, perfect. And I'm not sure if you have any comments on status of talks with Stewart. Should we just assume that they're kind of dead, or is there any different way you want to characterize them?

I don't think they are dead, no. Honestly, we've had, obviously, discussions. We broke them off, and really we have had no further discussions. I think, based upon everything that has occurred externally over the last couple of three months, it's just not the right time to be thinking about that and talking about that.

Okay, fair enough. Feel better.

Ben Mackovak, Rivanna Capital.

Can you talk a little more about what kind of assets got written down in the quarter with the impairment charge?

We look at our trust funds, and we have about 45 portfolio managers, both from a mutual fund perspective as well as a managed account. And we have not had any trust fund assets of a material nature written down.

I'm sorry. You are talking about --

I'm talking about the Oregon, West Virginia, Michigan --

Oh, I'm sorry.

Yes, let me explain that a little bit. A lot of these businesses are businesses that were bought, again, a long time ago. Some of them we probably paid a little more than we would have liked to. What happened specifically, what specifically happened on this transaction is the biggest piece relates to Michigan through the business that we had held for sale, and we had marked it to what we thought we could sell it at. We had been trying to sell this for two years, there's been regulatory red tape we have been fighting through. But what has occured is, the buyer of that business went away. And because that buyer went away, we went to the next buyer, and there was a difference in price. So all we really did is reflect the new buyers' assessment of the asset held for sale. So that's why it's marked down. It's still a smart thing for us to do as it relates to divesting these assets, and redeploy the cash and better opportunities for us.

Okay. And then can you comment on trends in values for cemeteries and funeral homes?

As it relates to the external market?

Yes, exactly.

Well, I think, again, the value is whatever somebody is willing to pay for it, unfortunately, in businesses like these. But I think the reality of it all is, with reduced leverage, pricing should come down. Pricing expectations should come down pretty dramatically because you're not seeing a lot of credit in the marketplace available to [future] (inaudible). So that's our belief, but the truth of the matter is these things don't trade daily, and not every business is alike.

Robert Willoughby, Banc of America.

I got cut off mid way through there, you may have answered this. But, just in terms of the remaining asset sales, what do you have left in 2008? And any thoughts on '09? Are there properties out there still to get rid of?

I think the divestitures that we have left, Bob, are probably somewhere in the neighborhood of $50 million to $60 million, Eric, (inaudible) [left to divest of].

That would include -- that is correct, but that would include a substantial portion of the transaction you just described.

Right. So the point is, we don't know exactly when these will close, to your point, Bob, so I think there's probably in the range of $50 million to $70 million of proceeds that will come to us sometime between now and the end of 2009.

Now, having said that, we constantly evaluate our portfolio of businesses in real estate, so there may be a stray deal here or there. But generally, that's what we expect.

I guess it follows that, there's probably another year, then, of dilution with these divestitures, that the revenue numbers, reported wise, should be down, assuming nothing else changes?

Revenue, correct, Bob, but most of these assets, like if you take the ones we're divesting of now, there's really very little EBITDA. So I think it will put some downward pressure on revenue and not so much on EBITDA.

Okay. And has there been any talk of any change in the actual form of the share repurchases? I assume you're out there on a day-to-day basis, but could you potentially choose to tender for a certain portion of your stock? Is there any thought given to the changes in the manner in which you go to market?

Bob, again, we've got a Board meeting next week to discuss this, but I'll tell you my own belief on this. We don't intend to leverage up to buy back shares. So I think the way we look at it is we want to use excess cash to buy. We don't necessarily want to move the needle on the stock as it relates to share repurchase; we want to buy them as best we can.

So, philosophically, with [pointed swords], let's buy a substantial amount daily and not look at something like a Dutch tender offering.

Okay. And just lastly, were there any meaningful costs associated with the Stewart deal that you guys incurred? Was that material?

Not material. Obviously, we did incur some legal, accounting and the like fees, but again, nothing that was big enough for us to bring to you guys' attention.

I am showing we have no further questions in the queue. I would now like to turn the call over to SCI management.

I want to thank you guys for your participation today. We look forward to talking to you again in early February.

Thanks.

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