Service Corporation International (SCI) 2008 Q4 法說會逐字稿

Good morning ladies and gentleman, and welcome to the fourth quarter 2008 Service Corporation International earnings conference call. My name is Gena and I will be your coordinator for today. (Operator Instructions)

I would now like to turn the presentation over to SCI management. Please proceed.

Good morning, this is Debbie Young, Director of Investor Relations. Thanks for joining us today as we discuss our fourth quarter and year end results. With me today are Tom Ryan, President and CEO and Eric Tanzberger, Chief Financial Officer. After some prepared remarks by management, we will be happy to address any questions you may have. 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 risks and uncertainties that could cause our actual results in the future to differ materially from these forward-looking statements. For further information related to these risks, uncertainties and other matters refer to our periodic filings with the SEC that are available on our website at sci-corps.com. In addition during the call today we may use the terms normalized EPS or normalized operating cash flow. These are non-GAAP financial terms. For a details reconciliation of each of these measures to the appropriate GAAP term, please see our press release and 8K issued yesterday. With that, we will begin with remarks from President and CEO, Tom Ryan.

Thank you, Debbie and thanks everybody for being on the call today. I'm going to start off as usual with an overview of the quarter which will include both the funeral operations overview and a cemetary operating highlights and then follow up that by providing some commentary on our outlook for 2009.

To begin with on the overview of the quarter, our normalized earnings per share we reported was $0.09 verses prior year number of $0.14. While this is disappointing results by our standards, it wasn't unexpected considering the dismal consumer sentiment coupled with the dramatic fall of the financial markets. Positive items to take away from the quarter, first of all was our continued strong revenue for funeral service. Absent some Canadian currency conversions and some trust fund income impacts that I will get into more detail when we overview the funeral operations.

Secondarily, we were able to maintain our pricing and our as need cemetery business which again reflected strong quarter over quarter results. And lastly on the positive side, we were able to reasonably manage our expenses in this very tough environment that we were operating in. As far as challenges goes and there are plenty, the first one that I would address, is that we had significantly lower pre-need property production and reduced levels of completed construction revenues for the quarter. Production even absent some one time large sales from the fourth quarter of 2007 was down some 18%. We also saw the challenge significantly reduce levels of cemetery trust fund income. And lastly, we experienced lower than anticipated funeral services. So now I will turn our attention to funeral operations and provide that overview.

Our comparable revenues for the quarter were down just over 3%. When you break it down, our comparable volumes were down 3.8% or just over 2600 calls. Based upon looking at cemetery internment rates in our cemeteries and feedback from competitors and feedback from vendors, we would have expected our comparable volumes to be down in the neighborhood of 2.5% to 3.5%. So, it's our belief that we are generally in line with a number of deaths that are happening within our marketplace. Additionally, our reported comparable revenue for funeral service was essentially flat compared to the prior year. Buried within this variance though, there is some positive notes that I would like to share with you.

First of all, we experienced an unfavorable currency variance from the dramatic devaluation of the Canadian dollar during the fourth quarter of 2008. And it impacted our funeral average by some 250 basis points. This has a very limited impact on our income and our cash as the Canadian's expenses are similarly reduced. Without the currency impact, the funeral average increase 2.6% even with a negative $4.8 million impact from reduced trust fund income.

Excluding the trust fund impact and the currency impact, the average associated with true at-need funerals and the insurance funding pre-need going at-need funeral base drew a very respectable 4% for the quarter. So we continue to see the consumer spending to levels no significant deterioration and spending patterns in areas that aren't impacted by the pre-need consumer and the marketplace.

Therefore, when you take all of this revenue impact and drop it to the bottom line, our funeral profits increased $3.1 million or 160 basis points despite the decline in revenues as we are able to reduce employee and related costs along with other variable costs to capture the profits that we did.

Now I'll turn quickly to pre-need funeral. Remember, pre-need funeral really has no impact on current EPS and builds a backlog. So, in the face of a difficult retail environment, we are actually very pleased to report that pre-need funeral sales of $93.8 million for the quarter. This was $4.7 million below the prior year quarter or down around almost 5%.

While the number of contracts written were down by 11%, the average contract was still over $5700 and up almost 7% compared to the fourth quarter of 2007. Again, this builds our backlog and bodes well for future revenue streams. In January, we've experienced very similar trends for our pre-need funeral production. We are seeing slightly down dollar volume sales which continue to see a strong average and down a little bit more as it relates to numbers of contracts written.

Now I would like to turn to an overview of our cemetery operation. Our comparable cemetery revenue decreased some $36.3 million or 18.6% in the fourth quarter of 2008 as compared to the fourth quarter of 2007. There were two major driving factors which led to these reduction.

First one is pre-need property sales were lower by some $24 million. Which did include $10 million in two large sales from the fourth quarter 2007. Excluding these one time large sales, the pre-need property production was still down some 20% as consumers pulled back from the discretionary spending. January pre-need property production is down a similar amount as compared to the trends in the fourth quarter.

The second item which impacted cemetery revenues is the other revenue line item. This was lower by some $11 million and is all due to reduce trust fund income predominately from the merchandise and service trust which has the higher equity exposure than the ECF trust and slightly different accounting as well. Cemetery profits were then down $28.4 million reducing our gross margin percentage to 12.4%. If you apply a 70% gross margin to the reduced pre-need property production and 100% gross margin to the trust fund income shortfall, these variances account for substantially all of the profit shortfalls.

Now I'd like to turn your attention to our outlook we provided in the press release related to 2009. For 2009, we anticipate earnings per share to range between $0.26 per share and $0.36 per share. Our operating cash flow should fall to between $220 million and $300 million and our maintenance Cap Ex and cemetery development Cap Ex should range between $80 million and $90 million. Resulting in a free cash flow of somewhere between $130 million to $220 million for the year 2009.

This range of performance assumes a very difficult economic environment for 2009 and makes the following broad assumption. First of all, that comparable funeral volumes are down from low single digits to the mid-single digits. Secondly, that the average revenue per funeral achieved inflationary increases negated somewhat by declining trust, pre-need going at-need averages in negative Canadian currency effect. The third item that I would mention, is that cemetery property sales will range from high single digit negative comps to the low teens in negative comps.

Additionally in 2009, we've anticipated stock market returns of ranging from the negative mid-single digits into the mid-teen negative returns. I would also expect that we will be very focused on expense controls and very focused on reducing Cap Ex spending in anyway that we can. Also it's our belief that funeral gross margin percentages should dip slightly but begin to approach 2008 levels. While cemetery margins most likely should be in the high single digits as reduced production, lower trust fund income and lower construction revenues, all items that had very high gross margins put a squeeze on the cemetery gross margin. As you would expect, the funeral business will continue to work through this and be the predictable cash business that we know it is, while cemetery is much more volatile. And we would expect it to be again dramatically down as we think about 2009. But lastly in our range of assumption, we have assume no share repurchase activity for 2009, as we focused on maintaining liquidity and target EBITDA leverage ratios in the face of declining EBITDA into 2009 and again having to have expectations that this thing could go longer and deeper as we enter 2010.

Let me say first that we surely do not enjoy the thought of going backwards in 2009. However, our guidance must reflect the fact that we continue to see very difficult economic environment for the consumer and uncertain financial markets coupled with the fact that we have seen significantly lower number of funeral services in January and early February. Just to give you color there, in January we're seeing high single digit comp declines in the number of funerals and seeing similar or more dramatic trends into February. Fortunately, we believe we can continue to maintain a strong balance sheet by diligently managing the level and maturity schedule of our debt maintaining very ample liquidity and generating a healthy stream of excess cash over the coming quarters even in the face of these unparalleled challenges. Just by example today, our free cash flow yield of some 20% using the mid-point of our guidance. In addition to that, we currently yield near 5% in our dividend payout. So, we feel it's a very compelling evaluation as it relates to the cash being generated even in this difficult environment. If by chance later in the year we see some sustainable improvements and I mean sustainable improvements in our EBITDA and cash flow streams and we can consider taking that excess cash and investing it to enhance shareholder value during the very opportunistic times. It's our belief that our business model is sound and with 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. This concludes my prepared comments and I will turn the call over to Eric.

Thanks, Tom. I will briefly discuss our fourth quarter results and the I will separately discuss our 2009 outlook just like Tom did. But I will concentrate on just four areas for both the fourth quarter of '08 and 2009 outlook. And those areas are the cash flows, trust funds, our capital allocation considerations and our liquidity profile.

So starting with the fourth quarter of 2008, and starting first with cash flows, our adjusted cash flow from operations was just under $30 million for the fourth quarter. First, compared to the fourth quarter of '07 last year this was down about $37 million. This decrease primarily relates to operating income declines around $29 million quarter over quarter. Secondly, the fourth quarter adjusted cash flow [inaudible] is at the high end of our $20 million to $30 million updated guidance range that we released earlier this month. But it was well below our original fourth quarter expectations that we discussed on this call back in November. Just a couple of reminders here about this range. First, this range excludes the positive effect of receiving about $91 million in a federal cash tax refund that we received in December of last year. And I also want to tell you that when you think of the level of cash flow from operations in the fourth quarter, it is affected significantly by the timing of cash interest payments. So we spent about just over $130 million of cash interest in 2008 of which $60 million of that $130 million was paid in the fourth quarter of '08. When we compare our $28 million of cash flow from operations to the $60 million low end of our previous cash flow operations guidance, we have to look at what the factors were that caused the decline. First of all, operated income was below our expectations and operating income also included some non-cash income items such as bonus accrual adjustment. We also had pre-need production that was below our expectations for items that are deferred into our backlog and does not go through P and L and we also had a slower collection amount in creating installment sales but not to a material degree at all for slower collections.

The shift into trust funds for the quarter as disclosed in the press release, the U.S. trust funds decreased by 12.6% in the fourth quarter and had a total decrease of just over 22% for 2008. The diversification of the underlying assets certainly helped us because as you can tell the S and P 500 was down about 37% for 2008. As a reminder, this trust fund performance does not flow to our income statement in the immediate manner. The unrealized and realized net losses within these trust funds are allocated to the individual items within these pre-need contracts, And in these allocated net losses flow through our income statement as each of these contracts mature through the delivery of merchandise and services. The trust fund income that was recognized in our income statement was just over $10 million for the fourth quarter and about $83 million for the full year of 2008. On a year-to-date basis, the trust fund income declined by a little bit more than $30 million versus 2007, of which $18 million of the decline occurred in the fourth quarter alone. So far in January of 2009, we're somewhat pleased with our trust fund performance versus the overall market. For January '09, our combined trust funds are down about 1.1% versus the S and P 500 down about 8.5% for the month of January.

Let's shift into capital allocations. In the fourth quarter, we repurchased a little over 10.5 shares for a cash outlay of $62 million. For the whole year of 2008, we purchased about 17.7 million shares for little over $142 million for cash outlay. Our maintenance capital expenditures and our cemetery development capital expenditures were about $37 million in the fourth quarter while total Cap Ex for the fourth quarter was just under $46 million. We also paid $45 million during the fourth quarter to retire the outstanding balance on our bank credit facility. We also retired, in January of 2009 about $10 million worth of bonds which was done at 20% discount by purchasing bonds with cash in the open market. The end of the year and looking at liquidity, our cash balance is $128 million at December 31st and today as we speak our cash balance is approximately $150 million. Along with this cash balance, we have $250 million of availability under the bank credit facility and to remind you, we have no near term significant debt maturities. We do have about $25 million of bonds maturing in April of this year.

Now I will shift my remarks to 2009 and again stick with the same four subjects so let's start with - cash flows. As stated in the press release, we expected our cash flow from operations to be in the range of $220 million to $300 million for 2009 as Tom also stated. Some of the assumptions that we used to develop this cash flow from operations include the following. First, the EBITDA performance of the underline businesses is consistent with our $0.26 to $0.36 EPS range and Tom in his remarks earlier just gave you color on the drivers associated with that EPS range.

From a working capital perspective, our working capital is modeled to be somewhat neutral as a result of continued active working capital management that we have underway and prove than we can do in the past. Customer cash collections are consistently modeled with our expected revenues. So we will have some loss of cash flow from operations which is expected due to less premium sales production and Tom again gave you those numbers earlier. We have also modeled some deterioration in our permeated installment cash collection, but we have not seen and not modeled significant declines related to that either.

Related to trust funds, our balance sheet is three line items amounting to about $3 billion relating to our pre-need trust investments and our customer receivables. About $2.6 billion of this amount is the actual trust fund amount. However, this balance also includes cash and insurance products. So only about $2 billion of the financial statement line items are really subject to market risks. And as a reminder our trust funds are affected by the market's performance. You saw that in 2008. Due to our diversification of our underline investments, the market effect is muted on our trust fund performance relative to the stock market.

Now shift into the trust fund income that we expect in 2009, let's start with the internal care funds or the cemetery perpetual care funds. Generally we modeled this income to be slightly below 2008 levels. Now remember, this is somewhat of a stable cash flow stream. This is really for lack of a better words, clipping the interest coupons for most of the portfolio. So to somewhat consistent cash flow stream compared to the merchandise and service trust. Even though there is a slight dividend component from equity securities in internal care [inaudible]. For the pre-need funeral and pre-need cemetary merchandise and service trust, our model do assume we will lose an additional $25 million to $35 million of trust fund income from the 2008 levels.

So let's talk about that. Most of this decline is the full year effect in 2009 of the unrelied losses and trust funds that occurred in late 2008 which will flow through the 2009 income statement as contracts mature. Now related to the effect on the 2009 trust fund income resulting from the trust fund performance during 2009, we generally believe that for every 1% decline in trust fund performance, it equates to about $1.5 million of reduction in trust fund income. So now overall you have some insight into how we modeled the trust fund income and it's a difficult process to model this. But the trust fund income will move with the market in 2009, and could also move with the levels and mix of contracts that turn [inaudible] come out of the backlog.

Now shift to capital allocations for 2009. We plan to aggressively manage our capital expenditures during the year. We expect our maintenance Cap Ex and our cemetery development Cap Ex of $80 million to $90 million with total Cap Ex including some minimal additional Cap Ex for possible growth. We have demonstrated in the past that we are big believers in share repurchases and we continue to maintain this belief, especially at the current trading levels. But as Tom said I also want to remind you that we believe we prudently managed our capital structure to about a three and a half times net debt to EBITDA leverage ratio. Therefore as we said it's going to be difficult for us to repurchase shares at least in the near term.

So our models assume that the fully diluted weighted average shares stay at about $255 million throughout 2009.

As mentioned earlier on the call, we repurchased bonds in the open market in January. Our bonds have rallied since the trades in terms of their prices. But we are still very open minded to attract the bond repurchases as we think about our capital allocations in 2009.

Last thing I want to leave you with liquidity profile as we see it going forward in 2009. I already mentioned that our current cash balance is about $150 million. We have a bank credit facility with a capacity, open capacity of $250 million. But most importantly, we have very healthy levels of free cash flow in 2009. $130 million to $220 million with a mid-point of $175 million. That produces a very attractive yield and at least in the high teens right now as we speak. There is also no meaningful debt maturities until November 2011. All of these factors contribute to our belief that we have adequate and substantial liquidity weather this storm in 2009. So with that, Gena, I think we going to open it up to our investor questions.

[Operator Instructions] Your first question comes from the line of A.J. Rice with Soleil Securities.

Good morning, it's actually Chris Rigg filling in for A.J. Just a quick question on the January and February volumes that you talked about earlier in the call. Do you view the declines as -- Are the aggregate number of deaths down or do you think actually that people are looking for cheaper product from competitors?

Hey, Chris, this is Tom. I will answer that one for you. I think generally, obviously we have seen levels of decline that we have not seen in at least a decade. And it's very concerning. Let me point out a couple of things. One is it if you go back to first quarter of 2008 for the first time in a long time you had some semblance of a flu. And if you look at those levels that were strong levels for the industry and for us, you're comparing it to a tough number. Number two, we haven't seen any semblance of a flu this year. We diligently checked with suppliers, competitors and we look at obit notices and markets. Acting very, very paranoid I promise you. And at the end of the day what we concluded is that everyone is experiencing similar levels of decline. You ask a great question. Are there people that are just going away? And my gut feel on that one is on the fringe, we surely can see some of that and it's a difficult time. But nothing to the levels that we are experiencing our suppliers are experiencing our competitors are experiencing. We really believe that it's predominantly the number of deaths in the history. We will tell you that will somewhat self-correct as you go throughout 2009 and even into 2010.

Next question relates to the capital spending. The $80 million to $90 million, is that sort of a number that you squeezed down for this year and is not really sustainable number going forward? You are just reigning in some things on a one-year basis and you'll have to bring that back up in the future. And when we look ahead if you spend $80 million to $90 million this year, does that mean next year's capital spending is going to have to be higher to make up for what you didn't spend this year, sort of the deferred maintenance phenomenon?

Let me on that, I think if you look at the last couple of years we spend -- and the best way to look at this is to look at capital spend on a location level, which I know you guys don't see. But when you think about 2007 and 2008, we took on the Aldewood's businesses. One of the things we noticed right away was Alderwood had some deferred maintenance and I would call that standard maintenance as well as cemetery development. So what you saw us doing in '07 and 08' is step the level of cemetery Cap Ex spend and maintenance Cap Ex spend. So we were already anticipating that the $130 million to $140 million levels that you seen were going to go back to more reasonable levels. I would say a steady state in a normal market is probably somewhere closer to $100 million to $110 million. Now let me explain $80 million to $90 million and what I think the future holds. Number one, a lot of our cemetery development was focused on the high end consumer. Based upon the economy right now, that's not moving nearly as fast as historically would. So, I don't anticipate this year and next year having to build a lot high end cemetery inventory. That ought to put reduction right away as you think about 2009 and 2010. I don't think --the second thing I would tell you is Cap Ex has a bit of a lag to it. You think about in the fourth quarter 2008 we said, hey, let's really manage Cap Ex. Well unfortunately for three -- you projects that are in mid-hammer swing and you aren't going to stop those types of projects. You will continue to spend and finish the project. So, I would expect 2009 levels to manage within the $80 million to $90 million and my expectation for 2010 is that the simple replication or maybe even lower. I think you will see less projects approved throughout 2009 with the spend will get into 2010. Keep in mind the lag effect. And I would say watch the economy as the economy gets better and the consumer begins to spend again at the high end, we may up our cemetery construction accordingly.

Okay, great. And then one maintenance question here. Can you remind us how large the Canadian business is?

The Canadian business is about 12%, I believe, of our overall revenues.

Okay. Great. Thanks a lot.

Your next question comes from the line of Clint Fendley of Davenport and Company. Please proceed.

Good morning, Tom, Eric and Debbie. First off here, Eric, I wondered on the free cash flow guidance, fairly broad range here, are there any tax assumptions that could be affecting the broadness of the range?

I do think we will end up paying cash taxes, Clint. I think it's a little bit of a move in process right now and let me explain to you why. I think generally we paid $20 million in '08 and I think we will be about $20 million to $50 million today and that's another wide range for you, I guess. We are doing some things to really affect this. First of all, we have some expected state tax planning as well that's underway. And we have lower pre-tax earnings of course that's going to affect it. And it's also, we made assumptions on which jurisdictions will earn the income this year. The differences is between U.S. and Canada income and different states also affects it as well. And then lastly which is really under review is understanding the effect of the bonus depreciation which is in the new economic stimulus package that just came out. So pretty wide range for that as well. I hope that's helpful to you.

It is. Thank you. And also just in reading the fine print on your 2009 guidance. are you guys planning any kind of significant asset dispositions for the year?

No, we are not.

Then at least on a sequential basis, the improvement we saw in the funeral gross margins, is there anyway to quantify how much of that might have been due to lower pre-need commissions for the quarter?

It's a little bit of it, but Clint, keep in mind that a lot of our sales force is fixed costs. We lost a lot of the variable component. A lot of it is really to comply with Department of Labor requirements of getting people it to do things other than selling. For training purposes and the like. We are a lot more fixed than we are variable. The minimus amounts that would impact that.

Okay. And then the final question and I will get out of the queue, on the cemetery side and back to the previous question around some of the larger product -- projects for your customers there, I mean, how are some of them and how have some of the conversations gone? Are they deferring their plans here? Or are they moving ahead with smaller plans in light of the current environment? Any color that you could provide on that segment?

I think on the cemetery side you break it into different skews here. At the very high end you are seeing a lot less activity. There just aren't people out there buying the high end stuff. I would say in the more standard customer is continuing to buy and some of them are sitting on the side lines. I think what you are seeing right now and again this is my own feeling, is that if people are just shocked, everything is happened in the economy over the last four or five months they are stalled and trying to decide what to do. As time goes on, I think they're going to re-enter the market and the question is will they re-enter at the same levels or slightly lower levels. Again, that's what's good about our strategy by having the matured product approach. We've got different types of properties that can meet any consumers need. When the consumer comes back from sitting on the side lines, we will continue to ramp up production where they want to buy.

Great. Thanks, guys.

Your next question comes from the line of Robert Willoughby with Banc of America Merrill Lynch. Please proceed.

Thank you. Tom or Eric, any change to your philosophy on acquisitions? There was a Stewart deal once contemplated here, but do you see given the corrections of evaluations here and the industry softness, are the individual rollups the onesies and twosies kind of vastly more attractive now or are evaluations holding on those transactions?

I think this is --This is Tom and thanks for your questions. Obviously the Stewart transaction was one that made a lot of sense for us at the time. Just in the sense of looking at the combined companies and the synergies you could put together. As we view the world today, we are not really in an acquisition mode like you say with things happening around us. There are other alternatives that are more attractive. Having said that, there is probably a handful and maybe less than a handful of what I call marque properties that are sitting out there that will some day make sense to be part of somebody's portfolio including ours. So, we're obviously actively out there listening as deals come by. But I hope we've proven to you in the past and I commit to you now, that if we look at those types of deals we are always considering the appropriate debt levels for the company liquidity concerns in alternative use of the cash. But what I would commit to you is we only do a deal if it was a marquee property and it was at a price that was a great return for our share holders. I wouldn't say we were actively out there at all. Having said that, there is a few that we would definitely entertain discussions if the deal made sense for our shareholders.

And I guess given the economics of your business, the cash flow that you do generate, why aren't people knocking on your door. How do you guys remain independent? How do you guys remain public?

Well, again, I here what your question really is. I think we share your view. Our equity is what we feel is under valued. Probably a lot of equities are right now, But the uncertainty in the market place is causing that to happen. So I think, as the uncertainty lifts, and people look at the true dynamics of this business, it's my belief that it will go back to a more reasonable valuation level. I think what's keeping people right now is the fact that I would -- I am assuming in your question a private equity fire, if I'm a private equity guy this is a great business but how low does it go and where is my financing? It's just a tough market to get financing in and I'm sure that plays into some of the evaluation concern. But to your point, if the equity traded at this level for sometime to come in the markets came back and I think that's real possibility that the people are going to look at this and good cash business and say, hey, how can you have cash flow yields such as this and maintain pricing where the equity sits today.

And what defenses do you have in place? I mean staggered boards and all that kind of stuff?

We do continue -- we have a staggered board today. We have no poison pill or anything like that in place. So I think very limited I would say as it relates to that defense. And again, our goal always is to enhance shareholder value. We listen to any and every opportunities as it relates to SCI. All we can do is focus on the dynamics of the business. We believe that when the economy gets better and the consumer wakes up again and the trust funds begin going north instead of south, this is a very valuable business, particularly as you think about the baby boomers coming and you think about the channel that we are enhancing and creating as it it relates to reaching out to that consumer. We were focused on that. Generating cash flow and giving cash when we can back to our stake holders.

That's great. Thank you.

(Operator Instructions) And your next question is from the line of Dana Walker from Kalmar. Please proceed.

Good morning. Could you talk about, Eric if one looks at the low end of your prior view towards '09 which was before the world collapsed, there appears to be a $60 million EBIT delta looking at the midpoint of your present range versus the prior low end of your range. Can you play the attribution game?

Is this $60 million the low end of the cash flow range on the guidance for November? Is that what you are saying?

I looked at it more from an EPS standpoint but I presume that they are all but interchangeable, yes.

Dana , this is Tom. Again, I don't think we have a perfect reconciliation for you. I think what you are trying to say is what changed about our opinion from November to now to the tune of $60 million. And I will give you the three categories and then I don't think I will try to quantify for you but I will give you guidance on it.

Number one, we have a lower opinion of funeral volumes today than we would have had in November. Based upon what we saw in January and February. That is probably somewhere in the $10 billion to $15 billion type of degradation maybe even a little more. Then you think about cemetery property sales, again you go back and look at history through September we actually were up year-over-year in cemetery production. You saw cemetery production fall off some -- pre-need cemetery production fall off some 18%, 20% for the fourth quarter. So we've obviously soured our opinion about what pre-need production looks like in 2009. That may be the biggest difference. Then lastly again and this is perfect hindsight , we saw the markets crater in September and October. We saw them again in November. And they kind of flattened out better in December. I will tell you we have a lower opinion about where stock markets ended up in 2008, and now that we have seen it versus what we thought in November. Those three things really kind of add up through the entire $60 million delta. Again, as I would prioritize them in value I would say cemetery production one, probably trust fund income two, and then lastly a lesser impact or should say and more pronounced impact from comparable funeral

Tom, that's very helpful. The question number two, given than you were active in buying your stock back in Q4, I presume that the reevaluation of what your income and your cash flow streams would look like in '09 means that you perhaps wish that you'd held your fire and thus want to wait to replenish before you re-engage.

I think you always wish based on where it was in the fourth quarter versus now that we held our fire, so to speak. We still think that at that point in time, it a prudent investment to invest in our shares. I think as Tom had mentioned clearly with the trust fund income and the premium sales doing what they are doing and trying to take our base case or best guess on where it's going to land, and then you couple that with managing the capital structure to about a 3.5 times net debt to EBITDA leverage ratio, it just is pretty clear that in the short term at least until we really see it stabilize it's not going to give us the ability to go forward with share repurchases at this point. We certainly hope that things are covering in '09 and we obviously as I said in my prepared remarks from big believers in share repurchases. We have to manage our capital structure as well and that's a balance.

There seems to be feedback here but absent any change in stock market performance or stability in your underlying operations, I presume you have a discipline where you will sit on your hands for six months, if you wouldn't mind filling in that blank?

We will have to wait and see. I can't predict the future. We gave you our best guess. I want to tell you again in our prepared remarks, we did a very limited amount of bond repurchases as well. And we were certainly open minded to that at an appropriate discount. And then there is other uses of cash as well that Tom just talked about.

And I think the real issue like you are hitting on the head, this isn't a cash issue. This is a net debt to EBITDA issue. So the real question is how low can you go? What's going to happen to EBITDA? That's a function of how bad the consumer gets and how bad the stock market gets. So to your point and I think I said it in my comments, if we saw a sustainable improvement in the EBITDA and the cash flow, then I think that affords us the opportunity to begin to look at those types of options to take advantage of them. What we are doing now is saying, hey, it's more important to maintain the appropriate debt levels, net debt levels than buying back the stock. That's our first priority. Once we see that happen then we can go to priority two and make money for our shareholders. First and foremost, let's see how low this thing goes. Let's see it bottom out and see it coming out the other side.

I'm not passing judgment. I want to prompt a dialogue up. Third question, given that the trust appear to be more resilient in January, vis-a-vis market performance, was there a realignment of asset allocation within the trust?

There was not, although we have been studying this very, very diligent in terms of the asset allocation. The internal care fund as I mentioned to you, Dana before is clipping and fixed income coupons. Not much we change there had and somewhat stable and inconsistent. The funeral pre-need merchandise service trust really has a pretty long life to it. And asset allocation is geared toward that ten to twelve year life. The cemetery as we continue to study it more and more has a shorter life related to the markers being delivered and the services and such. So we are looking at doing adjustment as we speak related to that asset allocation to take that into effect and betting that with some advisers as well as our board as we speak.

Just add to that, I think what is important to note is what Eric is talking about is, we didn't change our philosophy as it relates to asset allocation. Having said that, money managers that run the money have different styles and the like. What I would tell you is this generically is that the whole world fell in the fourth quarter. In other words, everybody got treated equally bad which begin to see probably occur in January is that more quality stocks are nonfinancial, nonretailers, people like that,, those stocks performed much better relatively to the general market. I think what you saw in our portfolios is that our investment managers were positioned there and that really was the big difference I think as it relates to our equity returns versus the market equity returns. Not a predictor of the future, I do think it bodes well to say that our investment manager were in the right spot and the panic of the fourth quarter is probably a little more selective than in January and February.

One should therefore further into it, that you folks didn't change your manager mix, even if your managers may have changed some of their underlying thinking and actions?

That's correct, Dana

Couple last quickies here. Given that the cemetery business for the meanwhile is under duress, have you changed your expense planning meaningfully in that part of the business?

We are definitely looking at the leverage that we can pull as it relates to managing fixed cost in cemeteries. There are a lot of different ways to do that. Unfortunately there are all kind of around the edges. There's no fantasy. There's no magic button to pull. I will say we are managing diligently the administrative costs and maintenance costs as well as some of [inaudible] but more variable costs as it relates to the selling efforts. I think you will see some of those things play out in 2009.

Finally, Tom, you commented about funeral volumes in January and February and how you thought that it was environmental. Do you have a transparent way to look at what cremation volumes might have been and whether they were even if somewhat better or still under duress?

I think what's hard to see, when you look at our business, we don't see a lot of dramatic change in our cremation mix. Having said, if you think about our strategy, we are not chasing the very low end cremation consumer. If someone jumps out cremation service to direct disposition or variable to direct disposition, we're not going to see it in our mix. It's somewhere else. And it's also probably not in the supplier loop. If you are a casket manufacturer or marker manufacturer, that customer isn't coming to you either. It's a little tricky on a realtime basis to know it. Clearly we can see the data and unfortunately it's about two years old by the time it's accurate. It's our belief based upon feedback of our people in the field that clearly you are seeing some people go into that direct position but it's not some dramatic move into that category.

So if funerals are down you don't believe that cremation volumes are up, at least in the early part of this year?

I do think they are up. I guess what I'm saying is they are down so much that I don't think the mother load of it is related to cremation. I think most of it is lower number of deaths, coupled with a little bit of what you are saying which is cremation mixed change into that category. Clearly the economy is tough. You get somebody on the fringe, they will spin down. I think what we are trying to say is to use an analogy, when people talk about mortgages, 8% of the people are defaulting on their mortgages. 92% are paying them currently. It's not a perfect analogy. But I would tell you there are a lot of people that still value traditional funeral service, traditional immortalization and we believe that will continue to happen. On the fringe, will people convert? Absolutely. Tough economic times, I think it's crazy to think they won't.

Thank you for your responses.

Thank you.

Your next question comes from the line of Nicholas Jenson with Raymond James and Associates. Please proceed.

Hey, guys a quick question on your perpetual care trust, one of your peers had a prefunding issue and what have your lawyers seen with your trust portfolio and do you have any intention to use some cash to increase that trust level. Thanks.

Certainly we have looked at it in very much detail. And I will tell you that there is different state laws and it's not black and white either. But for right now I would leave you with saying there is a possibility that we may need to fund some of these trust funds because of these lawsuits in the future. Right now our position is that we do not believe that this amount will be material.

Okay. Thank you very much.

(Operator Instructions) Your next question comes from the line of David Common from JP Morgan. Please proceed.

Thanks. I have two general lines of questions. One is on Cap Ex. I think I heard you right in saying the 2010 could even be a little lower still versus 2009. Could you comment on that sort of in the context of $100 million to $110 million study state observation as well.

Sure, Dave. I think $100 million to $110 million is what I would have told you before 2008 economic crisis hit. With that run rate would have been is a healthy build of cemetery inventory at the high end, coupled with normal maintenance Cap Ex spending will put you in that type of range. What I'm telling you today is it's $80 million to $90 million because we don't see any need to build a bunch of high end property right now. We've got enough to last us and not moving as quickly as we like. As it relates to 2010, I just what I'm telling you is, it'd be easier to hit the bottom end of that $80 million to $90 million in 2010 than in 2009. The reason for that is just the whole approval process.

I got it. This is a mid-hammer swing stuff. Okay.

Obviously on the maintenance Cap Ex it's a little quicker. But think about cemetery development. You to get zoning and all sorts of things. Those projects don't stop. We aren't going to initiate a lot of them in 2009 because we don't see need to do so.

So you've got enough high end cemetery inventory to last five, ten, fifteen years type of thing?

Well, depends on the economy. We hope it won't last very long that means the economy comes back. But to your example, if they aren't buying any, we have plenty of it. So we will just wait and see.

All right. Then also can you just remind me the way you do look at free cash flow yield as that sort of net plus non-cash items minus a maintenance level of Cap Ex? Or just net plus non-cash items? And do you hurdle rate? Is that sort of a 12 month look forward hurdle rate? For stock repurchase.

We look at 12 month look forward and by quarter. Then we look at free cash flow as cash flow from OPs minus maintenance Cap Ex minus cemetery development Cap Ex. And that number to us is free cash flow that we can either build on, buy something, buy back our debt, buy back our stock. That's how we view internally free cash flow and you take that number divide it by the number of shares, there is your free cash flow per share yield. And what we are saying is using the midpoint that will tell you we were around 18%, 19%, 20% depending on how you compute your midpoint.

Is there a hurdle rate -- I would have thought anything north of 15% to 18% would be interesting.

It absolutely is. I think on an after tax basis. Those are the types of returns that we see as very attractive.

Okay. I appreciate it. Thank you.

Due to time allowed, that concludes the Q and A session. I will turn it back to management for a closing statement.

I want to thank everybody again for participating on the call. We look forward to talking to you guys again which I guess will be early May. Thanks again. Have a great week.

Thank you ladies and gentlemen for your participation in today's conference. This concludes today's presentation. You may now disconnect. Have a great day.