Service Corporation International (SCI) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter 2, 2009, Service Corporation International earnings conference call. I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will conducting a question-and-answer session towards the end ever this conference. (Operator Instructions). I would now turn the presentation over to your host SCI management. Please proceed.

Good morning, and welcome. This is Debbie Young, Director of Investor Relations for SCI. As usual, before we begin, I get the pleasure of taking you through the Safe Harbor language. In our comments 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 risk factors please review our periodic filings with the SEC that are available on our website at sci-corp.com.

In addition, during the call today Tom and Eric may use terms normalized or adjusted EPS or adjusted operating cash flows. These are non-GAAP financial terms. Please see our press release and 8-K that were issued yesterday where we have provided detailed reconciliation for each of these measure to the appropriate GAAP term. And now I'll turn the call over to President and CEO, Tom Ryan.

Thank you, Debbie, and thanks, everybody, for being on the call today. I am going to do my normal thing and give an overview of business, then get a little bit into the segment of funeral and cemetery and have concluding remarks before I turn it over to Eric.

As many of you know and have read in the press release we reported normalized earnings per share in the second quarter 2009 of $0.12. This compares to $0.14 in the 2008 second quarter. While it's slightly down the prior year quarter as many of you know a lot has happened between now and then, and therefore the $0.12 that is we are able to print definitely surpassed our expectations based upon the difficult business environment that we've been operating in and I'd like to thank my 20,000 teammates here at SCI for executing and performing at levels that were well beyond my expectation.

The primary drivers of our performing beyond expectations were really three. The first one was outstanding execution on cost reduction. One piece I would define as strategic initiative and we talked about this many times but they're metric driven. We've been able to reduce cost through what we call our FTE or full time equivalent matrix to allow us to optimize staffing particularly on the funeral side of the business. Secondarily we've launched the cemetery administration initiative that is allowing us to utilize technology and again be more efficient to the back office performance of our cemeteries and lastly the cemetery maintenance initiative, which is focusing on again taking best practices and disseminating them to all of our cemeteries again, across our entire business profile. So those things have began to take effect. I would define them as very much in the middle of the game if you will.

So there's much more to come. It just takes time to have these initiatives take hold because it's a lot of planning, it's a lot of useful metrics and the like.

The second way that we are able to reduce cost it's really driven at the field and home office level. These have a more immediate impact. These were driven by great execution in the field of people just taking hold and understanding what a difficult environment we are operating in. Making those tough decisions not to spend the money. I would say there's (inaudible) as well with some incentive comp changes that we have put in place for our field management. We actually shorten the bonus period from 12 months to 6 months. We also lowered the gate as to when people can begin to earn a bonus. Both these things kept people's heads in the game as we were operating in the first six months with all the uncertainty around them.. All that together allowed us, in my opinion, to reduce cost pretty dramatically.

Secondly we saw favorable trust performance particularly here in the second quarter. We earned 11.9% versus an expectation that was really at low single digit as it relates to trust performance and remember we set those back in February when the market was near its lows. Most of this gets deferred but the income statement impact in the second quarter alone which probably about 3 million to $3.5 million beyond our expectation. So again better than we could have anticipated.

The last piece of performance that drove beyond our expectations is having to do with (inaudible) cemetery sales reduction. We are beginning to see large sales come back, not to the levels we saw in 2006 and 2007 but we really saw them shut down for about eight months and we are seeing them back in April, May and June. Production for the quarter was down approximately 5% versus an original expectation for this quarter that was probably around the mid teens being down. So again a lot better than what we expected, still not back to levels we were enjoying in 2007 or early 2008.

Other favorable items of note that I'll just briefly mention. We had very favorable working capital management that produced solid cash flow. Eric will get into that a little bit later. We continue to see our average funeral revenue growth performance. Again pretty much in line with expectations. We thought we could hold the line here and we have. We have also seen solid pre need funeral sales production. Again this only impacts the backlog predominantly but we are able to maintain essentially the levels we saw in 2008. And lastly we have favorable tax rate versus our expectation.

The primary challenge we continue to face is that we are seeing lower numbers of comparable cases within our funeral business in the markets. While we saw improved comparable performance compared to Q1, we still saw our funeral cases off just over 7% which isn't what I would define as normal and that is something we expect to continue.

Now, I will take that moment to shift us into funeral operations. Within our funeral segment we saw our comparable revenues for the quarter down almost $22 million or about 6%. Our comparable funeral volumes as I mentioned before were down 7.1% or about 4700 (inaudible). As I've said many times there is no perfect market data for us. It just isn't available so we look at a lot of things. We look at cemetery interments because again I think the cemetery business is less competitive relative to the funeral side. We look at pre need to at need conversion, so people that bought those contracts years ago they aren't going to switch. So again, that trend ought to hold to what's happening in the market. Lastly, or I should say, we also look at competitors and vendors and we look at the CDC 122 cities. Again, not completely accurate data but directionally correct. If you boil all that down it would tell me that what was in our markets, I believe that it should have been down somewhere in the 4, 5, 6, 7% range.

So again I'd say we are in the outer end of that range. Could we be losing a little market share in certain markets, of course. I don't think it's something that is dramatic. I think all these numbers should begin to shift back to more normalized comparison as the year goes on.

When, -- also I want to talk briefly about what we are seeing in the reflected deaths in the marketplace. The first quarter we were down almost 11%. In April and May we saw comparable numbers down about 9%. And in June and continuing into July we are looking at comparable funeral cases that are round down 4%. So still not something to write home about but the trend is a little healthier than we started off the year at.

On the good note, our comparable revenue per funeral service was up about 1 percentage reported to prior year. That's a little deceiving because there are two things putting downward pressure on there. First is the trust income comparison. As we all know our trust income is down year-over-year. That put about 120 basis points downward impact on our average. In addition the Canadian currency changes year-over-year impact the average by about 170 basis points. Keep in mind even though it impacts revenues the same impact is occurring in cost. When you boil all the way to the bottom line the Canadian currency does not have the material impact.

If you take those two trends away you say what is happening to the SCI business, consumers walking in year-over-year, ex currency, ex trust, we are about 3.6%. So again this is in line or slightly ahead of what I would say we expected, and I would say surprising compared to other industries we are seeing downward pressure on pricing.

It also encompasses the fact that we have slight growth in our cremation rate which grew by about 20 basis points. What I would attribute this 3.6% achievement to is a few things. One is our continued focus on strategic pricing that we are doing all the time moving market to market. We are also managing discounts better and particularly we are seeing an increase in the Dignity package take up rates. Now we've rolled out those new Dignity rooms and our Dignity package take up rates are up 250 basis points this quarter over last quarter. So those things are really driving the average as we expected and we are pretty excited about it.

When you take all that revenue talk I just gave you, the funeral profits decreased only about $2.6 million year-over-year. Remember that is in the pace of this 7% lower volume and this resulted in actually a 50 basis point improvement in our comparable gross margin percentage, which is now 20.9%. While we are not happy about making $2.6 million less. I think our cost savings initiatives were dramatically impacting and negating the negative impact of volume.

I am very proud of our team managing those variable personnel costs, and negating the majority of the revenue challenges. For pre needs funeral which again is a backlog issue but very important to us. In the face of very difficult retail environment, we are pleased that our pre need funeral sales of about $120 million for the quarter, and while this was $3 million below prior year, it was pretty much in line with our expectation. We are seeing improvements there and again you've got a much more apprehensive consumer but I think we are doing things to negate some of that impact. The other important thing about pre need that I will point out is that the average contract written continues to grow. If you look the average contract we are writing and remember this is 52% cremation business, it's $5,700. When you compare that to what is running through our P&L today, the average funeral we are performing is $5,100. As you think about that $5,700 and having growth on that in the future, it will go well for revenues and enhanced margins as we head out into the outer years.

Now I'll move to cemetery operations and remember this was naturally more volatile due to the discretionary (inaudible) and because of the higher trust fund exposures relating to the size of the business. Our comparable cemetery revenues decreased about $16 million or 8.6%. It was due primarily to a couple of things. Number one, comparable cemetery revenues declined $5.9 million or about 9%. We believe this is primarily a function of the decline in deaths in our markets. No different than what we see on the funeral side of our business.

Our comparable pre need sales production, and remember production is what we are selling and not necessarily what we are recognizing, was only slightly down for about $6 million this quarter compared to last quarter. That's about 5% reduction compared to last quarter. I should say second quarter of 2008. Now the recognized pre need recognize $7.2 million so the incremental decline from production really relates to our ability to recognize what we sell. Why wouldn't we recognize something we sell? It's either a property we haven't gotten 10% down on or property that is not constructed or quite possibly could be merchandise like a marker that we haven't set yet. So even though if somebody has bought a market we have to go put it down in a cemetery. So there's the reasons why you see a difference between production and what we recognize so there is a slight production from this quarter to second quarter of 2008.

I think the thing to focus on here is our cemetery pre need sales production was much stronger than we anticipate, down 5% versus an expectation that we set in February for being down mid-teens. So we are very pleased with the direction of sales. Last thing that impacted cemetery revenues is the category you'll see of other cemetery revenues down about $2.8 million and this is primarily reduced trust fund income particularly on our merchandise service trust. Still improved beyond our expectations as the markets rebounded from the March 2009 lows.

Our cemetery profit after talking about all those revenues, the easy way to think about it is this. They are down about $5.4 million year-over-year which reduced the gross margin percentage to 17.4%. While this is slightly down from the prior year, on a sequential basis this is up from a 10.7% margin we reported in the first quarter. Simple way to think about what is happening in the cemetery is I apply a 65% margin to the reduction in sales. So if you look at recognized revenues on pre need and at need they are down about $13 million, and if you apply 65% margin you would expect our gross profits to be down $8.5 million. The other cemetery revenues really pure profit. That $2.8 million dropped straight to the bottom line. So you would expect our cemetery profits to be down somewhere around doing the math quick 11.3 million left. But they are only down 5.4. The reason for that is that again our team delivered incremental cost savings of roughly $6 million and this is primarily related to lower merchandise cost and lower personnel cost from leveraging our scale and use of matrix.

So in conclusion the economy and the markets are still very uncertain. We are not here to tell you that the economy is out of the woods and the financial marks will continue to March north. We surely don't anticipate that will ever going to run our business. So we believe an improved cost structure, enhanced trust return and a more productive cemetery sales force will result in higher earnings per share for 2009. The rest of 2009. Therefore, as you saw in the press release, we moved our guidance from $0.26 to $0.36 to $0.36 to $0.42 earnings projection for 2009. While liquidity and leverage are still on our radar screen and we are focusing on those every day, most companies will for years to come, we are cautiously seeking value added opportunities for our shareholders. We are generating lots of cash. It's time to put the cash to work in the best place we possibly can. This concludes my prepared comments and I will turn the call over to Eric Tanzberger our Chief Financial Officer.

Good morning everybody. Thanks again for joining the call as Tom said. I am going to really address three issues, really talking more detail about cash flows, about our trust fund performance returns for the quarter, and about our liquidity and financial position and throughout those three topics I'll make some comments and give you some more color on our '09 updated guidance that we released yesterday during the press release.

Starting with cash flows, as you saw our cash flow from operations is very healthy $70 million for the second quarter. This is relatively flat to last year from cash flow (inaudible) but it was strong compared to our internal expectations and that primarily relates to good cost containment initiatives, higher than anticipated trust fund income and I'll hit on that a couple of times, strong working capital management and lower cash taxes and all of those positive events helped to offset the soft volumes that we saw in the number of funeral services performed versus our expectations. So very pleased with the working capital initiatives especially mostly in the area of managing our accounts receivable, pre need trust deposits and withdrawals and of course our payables as well.

Additionally these working capital initiatives in the quarter included the liquidation of some cash surrender value of certain key man life insurance policies. And this contributed about $15 million of positive cash flow to working capital in the quarter and it's safe to say that is something that will probably not recur next year as you look forward. Unlike the first quarter though which had relatively minimum cash interest payment, the cash flow this quarter included about $57 million of cash interest payments. The cash flows in this quarter also included about $4 million that we paid in cash taxes, which would amount to about $14 million of total cash taxes that we paid in the first half of '09. And while this operating free cash flow that I'm referring to was flat quarter-over-quarter, our free cash flow grew substantially as we continue to manage the capital dollars very effectively.

The total CapEx for the quarter is about $19 million and about $15 million of that was related to maintenance and cemetery development CapEx, which is somewhat consistent sequentially with the first quarter spend in those areas. When you deduct the recurring capital spending item of $15 million from the cash flow from ops we calculate our free cash flow for the quarter to be around $55 million, which is about $20 million more than the $35 million generated in free cash flow in the prior year quarter.

Now shifting from a year-to-date cash flow from ops is about $211 million, which was consistent with the $210 million in the first half of last year. For the full year of 2009, the original expectations that we had from cash flow from ops was in the range of 220 million to $300 million. We now expect the cash flow from operations for the second half of this year to be about $110 million to $160 million. This revises our full year 2009 cash flow from ops from 320 million to $370 million as you saw in the press release yesterday.

We also expect though to continue to manage our capital spending very effectively for the remainder of this year so we think our maintenance and cemetery development CapEx will end '09 in the range of about 70 million to $80 million. This compares to give you a reference point, to about $33 million of maintenance and cemetery development CapEx that we spent in the first half of this year.

So the revised guidance that I just gave you with the cash flow from operations and the CapEx will result in revised free cash flow guidance of about 240 million to $300 million and that is for the full year 2009. This range compares to just under $180 million of free cash flow that we had for the first half this year. More free cash flow represents a free cash flow yield of about 14 to 18% yield on an annual basis which is based on yesterday's closing price of the stock. So I hope you will agree that this kind of cash flow performance especially in an environment where we've had significant challenges demonstrates the strength and durability of our business model and our Company.

Within this free cash flow guidance to give you a little bit more color, one eye that I would like to point out to you is that cash tax payments are also turning lower than what we originally anticipated in a year earlier in the year. The revised cash flow outlook includes about 20 million to $30 million of anticipated cash tax payments that are expected in the entire year of 2009 and for a reference point in the first half of 2009, we paid about $14 million in these cash taxes.

Speaking about taxes, the shift through the income statement our effective tax rate related to our earnings from continuing ops was about 34% for the full year is what our original expectations are and we continue to have these expectations. However what I want to mention is that in the first half the effective tax rate was about 32% so we do expect the second half to have a higher effective tax rate which will primarily be in the range of 36 to 38%.

The second item worth pointing out is despite the increase that we saw in corporate G&A expenses that we incurred in the second quarter, the remaining two quarters of 2009 should trend back to more normal levels. So I'll refer to those about 20 million to $23 million per quarter for corporate G&A and as we mentioned the second quarter of '09 included about $5 million related to a prior period adjustment related to employee benefits and $2 million in litigation and investigation fees as well.

So to summarize all this cash flow comments, the increases we expect in 2009 are really a result of better than anticipated performance as it relates to cost reductions, pre need cemetery sales, trust fund income, and prudent working capital management. Looking ahead, into 2010, we would very preliminarily anticipate higher cash taxes than '09 levels as well as the return to more normal working capital levels as well.

Let's shift to trust fund performance that we had for the quarter. Certainly as you saw in the press release, our trust funds have benefited from the rebound in the financial markets. The trust fund experienced significant performance improvement sequentially in the second quarter relative to what we experienced in the (inaudible) both last quarter and in the fourth quarter of 2008. The investment returns of our combined trust fund asset increased by just under 12% in the second quarter of '09. That translated into our income statement for trust income recognized was about $17.6 million for the quarter. And while this is below about $25 million that we recognized in trust income in the prior year quarter, as Tom mentioned, it was higher than we originally anticipated by about 3 million to $4 million.

From a year-to-date perspective, the trust fund income that we recognized in the first half was about $30 million. This was also ahead of our original expectation. So looking forward from here, due to its improvement that we are mentioning in the financial market. We've updated our expectations for trust fund income the remainder of the year and now anticipate the second half of the year to have trust fund income of about 30 million to $35 million. And as a measurement that is roughly equivalent to how much we recognize in the second half of '08, and it also revises our full year 2009 guidance of trust fund income to be in the range of 60 million to $65 million.

Lastly let's talk about our liquidity and financial decision. We continue to enjoy very strong liquidity and good financial position at SCI in my opinion. Our cash balance at the end of the quarter as you saw was $170 million, which is up over $40 million from the year end of 2008. Today as we speak, we have just under $200 million in cash on hand and we also have about $250 million of available capacity on our credit facility. Our total debt is about $1.75 billion at June 30, which represents a reduction of just about a $100 million since year end 2008. We've been very successful in deleveraging in the first half and Tom mentioned this and we did it by repurchasing our debt in the open market at a discount to par values as well as retiring scheduled maturities with cash during the second quarter. So we had about $74 million of repurchases in the open market in the first half of 2009 and this is in addition to the $29 million of scheduled maturities that we paid off in cash in April of this year.

Now we not have any significant debt maturities for over two years until November 20, '11 and even with that, that maturity is about $150 million. The same that, in our opinion, our current cash position attractive cash flow, and lack of substantial near term maturities really bodes well for the future financial condition of our Company. And in conclusion in the near term, we'll continue to focus on cost control initiatives and prudently managing our capital expenditures. Again as we look again to the opportunistic with our capital and seeking investments that will increase shareholder value as we go forward. So that's my prepared remarks. So at this time, I think we'll turn it back over to you and we'll take questions from the investor group.

(Operator Instructions). Your first question comes from the line of AJ Rice from Soleil Securities. Please proceed.

Hi.

Hi AJ. you sound like you are in outer space.

We actually had to remove his line. The next question comes from the line of Robert Willoughby from Banc of America.

I don't think I can sound as cool as that. Eric, on the receivables that has been trending down for several quarters now, what specifically are you up to now on that line item, and it sounds like moving into next year you are expecting it to bounce back a bit?

Well, we obviously are managing our receivables as well and in our days sale outstanding is probably when you weight the middle markets, are really the high teens to low 20 days. I think we'll go ahead and hold that Robert in terms of working capital management. We also have a little bit more room on payables as well, continue to hold. But again I mentioned that we had some receipts this quarter from cash (inaudible), about $15 million. That's the type of thing that I just want to highlight won't reoccur next year, bring it down to more normal working capital levels but again we'll continue to prudently manage working capital well into 2010 as well.

Are you guys charging any more for outstanding balances? Is that part of the program or--?

Robert, this is Tom. A couple of things. On the funeral at need side, what Eric addressed before, there aren't any changes for outstanding balances. They are collected pretty quickly. When you talk about the cemetery pre need side, which is something that everybody is a little more concerned with, we've done some things to try to enhance our collectability. To give you an example, in certain markets, we've actually lowered the finance charges in our offerings as long as people would sign up for bank draft, become a bank draft customer. That more readily assure us that it is collectable. So we are seeing today continue to see on the cemetery side, single paying customers about 50%, and we are seeing people that are financing, 60%, up 60% now that are financing on a bank draft. So we are trying to do some things that make collectability a little more assured as it relates to interacting with our.

And very difficult to call, but are you making any assumptions for flu season that is coming up, everything we are seeing suggests maybe a bit more severe. You guys aren't making any predictions, are any of the guidance boost here dependent on seeing an uptick in the death rate?

We are definitely not putting it in our guidance, Bob, but I've heard the same things you are and the feedback I've gotten from people that are a lot smarter than me on this topic is that you definitely are seeing the swine flu has traveled around the world and it has ran more rapidly than people anticipated but it has not mutated into a very dangerous form yet and I don't think people believe it will. The bad news is that it attacks younger people, and so it's probably less -- it will be a bad flu season. It probably isn't one that is going to impact our business as dramatically. I am more concerned about our employees and them getting sick and not being able to come in to work during peak periods. Those are the type of thing that we are trying to prepare for better. I'm with you. The first quarter of this year is so bad on comparable volume basis that it's hard for me not to believe from a comparable perspective 2010 is going to look pretty good.

That's great. Thank you.

Your next question comes from the line of AJ Rice from Soleil Securities. Your next question comes from the line of John Ransom from Raymond James.

I never liked AJ. So that's good.

You remember that black -- Iron Man.

You're showing your age. Eric, just a quick numeral question. Kind of free cash flow, the cash flow from ops will get you 250 to 290. What is the difference in your kind of GAAP taxes and your cash taxes? I want to double-check what that number would be in your guidance.

It would be a pretty big amount. The difference, because obviously you're accruing at about 34% on a year to date basis as I said, the original guidance, John, that we talked about really worked out to about 40 million to $70 million, and now what I'm really saying today is it will be a lot less, probably in the 20 million to $30 million and probably more towards the lower end of that range. So from a midpoint perspective it's about $30 million lower from the original guidance.

20 million to $30 million in cash, but in your guidance what is your GAAP tax accrual number?

It's 34%. You get to the pre-tax amount of the $0.36 to $0.42 and that will generally be your--.

Okay. So that's a -- and you think that's a -- what is driving the lower rate this year?

I didn't hear it.

What is driving what John?

What is driving the rate to be so much lower this year than what you expected?

Really two things. The statutory rate is probably about 300 to 400 basis points higher than that when you add in state and all that type of thing. We had some really good tax planning that we have been starting to initiate and we have a structure, that's a hybrid energy structure, not to get technical between some interCompany loans between the US business and the Canadian business which helps us as well. Those two things pretty much have been driving us down to more the 34% areas as opposed to 38% area at the end of the year.

Okay. My third question is just kind of stepping back for a minute and looking at your strategy, you are clearly trying to drive more of the premium end of the market. Are you just, given that structure of selling higher cost funerals in the backlog and you had a pretty aggressive pricing strategy a couple years ago, have you just resigned yourselves to probably being 200 to 300 points under the market going forward, typically at the lower end it is going to be more distressed and maybe more toward lower cremations?

John, I wouldn't define it as that. If you look at our pre need consumers, one of the things that I think everybody's got to keep in mind, for an at need consumer and you walk in and want to spend $6,000, you got to write a check for $6,000 or you got to put it on your credit card. One of the beauties of pre need is that it makes it much more affordable for a larger array of consumer. So that's what we like the best about pre need is it is allowing us to finance these over 3, 4, 5 year terms making it much more affordable for somebody than just coming up with $6,000 because my uncle had a heart attack. I wasn't expecting it. I didn't know it was going to happen. That's a very difficult come out of pocket versus a planning mechanism that allows us to think about what we want, allows us to pay for it over time. Maybe if it's an insurance product, it allows me again to underwrite that product if something does happen. So I think that's really the strategy is focusing on pre need, allowing people to make it as affordable as we possibly can but give them great funeral service, great memorialization products because that is what we believe the consumer wants.

Another question. Eric, what has the trust fund performance been since quarter end?

We are just preliminary getting it John. I don't have a good consolidated number for US and Canada. I would tell you just based on the preliminary feedback we are getting collecting it from the trustees, it probably looks like it's going to be somewhere in the mid single digits probably percent for the month of July. That's probably what I'd guess at this point. We'd have that in a couple days.

Okay. And speaking of your CapEx for a minute, would that include share repurchase or are you looking more at opportunistic acquisitions? And the other question I had Eric is with your new guidance where will you be on your debt to EBITDA covenant which sets down in March of '10?

Well, if it's the leverage ratio covenant you are referring to we're probably about 3.6 right now as of June 30. That ratchets down but I think it's comfortable, I think I am comfortable with it ratcheting it down when it does in 2010, and 2011 as well. Right now the limit is 4.25 and ratchets down to 3.75 and 3.5, but I would probably leave you with the impression that I am comfortable with that, John.

Okay. How much flexibility does that really give you to spend money on things outside of just deleveraging?

I think it's all a function, you're right, we are paying close attention to that John, and the way I categorize it is this. Obviously buying back discounted debt is the most beneficial to that ratio. Second most beneficial to that ratio could be an acquisition that carries with it a trailing EBITDA because again if you pay a decent price, you don't harm that ratio very much, and a least beneficial to the ratio would be share repurchase because under the calculation you are getting the credit. What I would tell you is we have got to manage the ratio all three of those options are on the table for us, and we are going to look at all three. We do have to be careful on share repurchase because again we want to maintain, the ratio is 3.75 for the covenant but we want to manage the Company to about 3.5. So again as a results get better or we have enhanced cash flow, look for share purchase to be a possibility but probably more likely are going to be more deleveraging possibly, and also I think again these are times to begin to look at opportunities as it relates to grow as long as they are within the parameters of value that you'd be proud of us for.

I hear you on the call. That's the expectation. That's good. And there is one other thing I was going to ask you but I forgot. I'll get back in queue. Thanks.

Your next question comes from the line of Clint Fendley from Davenport.

Good morning, Tom and Eric. You mentioned the improvement in the sentiment later in the quarter. I wondered if you have the data by month for the pre need cemetery production.

We've got it Clint. I don't have it in my fingertips but we'd be glad to share with you. One thing I would caution you is it hard to look at sequential. Let me tell you why. May is always a huge month for a lot of reasons. Mother's Day primarily. A lot of other I think again religious type of holidays that drive bigger, Memorial Day obviously is another one that drive these types of sales. So you can't look at May and look at June because June will fall off May every year. So the best way to look at it is, because of the seasonal nature is to look April to April, May to May, June to June, and what I would tell you is that May was a really, really good month. June was a really, really good month. We definitely saw it get better as the quarter went on as it relates to seeing those sales pick up . And I'd tell you the same trends as it relates to high end cemetery inventory. I'm not sure we had one from October to March, and we definitely began to see that pick up and really in different pockets of the country, wasn't isolated to any one area. We are beginning to see that consumer come back, and again if they are finding value in those products they are beginning to pay for clients and that's a good sign

Have those same trends held true then through the month of July?

July we are just closing the books on sale. I would tell you preliminarily I think we are doing fine on sales. I haven't seen any particular large sales come to my attention, but again I don't expect those to go away anytime soon. Most of the people that are buying those have the money, and I think -- and they didn't lose all their money. The question is how comfortable are you that things are going to get a lot worse. Until you see something like that, I expect the high end to continue to truck alone. I don't think we are going to see 2007 level maybe ever again, not in the next four, five years, but I think again these are quality products that people find value in and we are going to present them to families and hopefully they'll buy them.

Okay. And final question. With some of the changes in your sales force, have you moved toward as more commission based structure or have you left your basic approach there intact?

Well, there's really two types of sales that I would point you towards. We have one we call family service counselors. Family service counselors are I would say driven much more towards salary and a bonus type of structure. We are beginning in some of our growth markets and again we are isolating this we are in 20 markets I think, and with this strategy what we are trying to do is establish what we call a community service salesforce and we've had this in pockets in the past. We have a different approach to try to generate leads, utilize technology to manage those leads the best we can, and in doing so, you are looking at a more commission style type of employee as we are driving those types of sales. So it's a kind of a mixed bag, but again I'd say the preponderance of our sales around the family service model which is salary plus bonus.

Great. Thanks guys. Nice quarter.

Thanks.

Your next question comes from the line of (inaudible).Please proceed.

Hi guys. Good morning.

Hi.

A couple questions we have for you today. As far as your number of shares, it seems like the reduction year-over-year would be a bit more than just in a dilutive effect and if you've gone through the repurchase I apologize for asking you that again, and then something else you could add a little color to for us would be the employee reduction. Is this permanent reduction? Is this something that's oriented to the economy or do you feel that you are at a good level there now?

I'll take the first one I'm thinking and Tom will take the second one. We haven't done any share repurchases in 2009. The last one we did was very late in 2008, which is about 17 million shares So when you figure it out, and weighted average it that's when you get 251 million shares. I will tell you there were restricted shares and stock options issues as we normally do in our Board cycle in the month of February. So that also had an effect to it as well. But other than that, that's the really only movement in the weighted average shares. Tom, do you want to talk --

Yes, I think on the (inaudible). While we've had again some selective type of headcount reduction, there's been nothing massive whatsoever. I say that in certain markets we may have a little more as we roll out some of new ways of doing things, I don't want to belittle the impact of the market but when you look globally at our headcount, it's not dramatically reduced. A lot of it gets back to normalizing the job and then utilizing staffing better. You can imagine a lot of the functions that we perform are very volatile in nature in the sense as you think about a funeral home maybe three funerals in a day and then go four days without a funeral. So there are ways to utilize metric, share staffing within the market that don't necessarily relate to headcount reduction but more efficient use of staffing in the market.

Okay. Thanks a lot, guys.

Okay.

From Barclays Capital your next question comes from the line of Emily Shanks..

Good morning. This is Jason Trujillo for Emily. On the debt pay down for the first half of the year for the $74 million of open market repurchases can you guys walk us through which bonds you bought back and how much for each of those?

The amount that we did on the schedule maturity is just under $30 million. The amount that was repurchased in the market was about $74 million and again I think as we talked about before, what we look for is really the shorter maturities and then obviously from the best active buck to get the yield, the highest yield as well and the biggest discount to par. But primarily that $74 million was concentrated into two areas. It was the 2013 so we were able to get a very near term maturity and I think that was reduced to about 56 million to 32 million and then we were able to purchase a good size block in the 2015s, which went down from 200 million into the 160s. We have not been able to do anything with the 2014s at this time. But that should give you feel for where we were doing it.

I'd just add to that. We are very comfortable with our debt level where it is. So we are really only looking for opportunistic uses of our capital at this point and we'll look at opportunities as it relates if they present themselves at the appropriate yield.

That is very helpful guys and good job in the quarter. Thanks.

(Inaudible) your next question comes from the line of [Ben Macifack].

Hi guys. Thanks for taking my call and very nice quarter. Looking at the trust fund performance was very nice in Q2, but that type of performance cuts both ways. So is there any thought to derisking the portfolios using this rally in the market?

Well, a couple of things I mention to you is we believe very strongly in the diversified approach. We've disclosed what our equity and debt mix is. For the most part, the funeral trusts are around 35% equity and the rest debt just to give you an example of that. So we look at it very soundly. But the real truth to driving it is that these are very long-term investments. They are backing out premium funeral contracts and that example to stick with funeral that have a long life that is over a couple market cycles so I call it somewhere around 10 years maybe 12 years, so we really look to match the underlying investment profile and the structure of those assets with the life of the liability itself. So we look at it. We look for trends like all of a sudden if something is getting shorter in its life or longer in its life states are able to adjust accordingly, but from the state that we are able to not do government security and take a prudent person approach, I think we are pretty comfortable with the diversification and the asset allocation that we have at this point based on the life of those underlying liabilities and assets.

I would just add to that, first of all, just so you know, Eric was primarily overseeing the trust investment through March 9, this year and then I kind of took over on finance. But anyway, all kidding aside, understand that these are trustees and it's pretty tough to move money one way or the other. And I don't think we'd want to. What we look at because primarily we have a strategy and we are going to stick with it. On the fringe, we do hold opinions about what we think is going to happen. As an example, I think as a committee, we believe inflation will rear its head sometime in the next year, two years, three years and those are the things that are on our mind so we may slightly position ourselves to better live through that type of scenario. But it won't be dramatic movements in how we invest. It would be things, taking position that better allow us to live through a higher inflationary environment.

Okay. Again great quarter. Thanks, guys.

You have a follow-up question from the line of John Ransom from Raymond James.

Is there any--?

You went AJ on us.

Can you hear me? Can you hear me?

Now we can.

Is there any opportunity for any more asset sale particularly on the cemetery side?

You mean selling businesses?

No. Are there any more asset sale opportunity particularly on the cemetery side as you've done in the past?

Yes. I think there's a little bit of that, but I wouldn't define as a lot. We pretty much pruned the portfolio but from time to time things change as you know, John, a freeway gets built, and therefore the value of that underlying land changes. So I think that is going to happen from time to time when you own almost 400 cemeteries but it isn't a big number that we count or think it will dramatically impact what we do.

Okay. Thank you.

All right.

At this time we've exhausted the time allotted for questions. I will now turn the call back over to SCI management for closing remarks.

I want to thank everybody for being on the call today and we look forward to talking to you again in the early November. Thank you