Service Corporation International (SCI) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2009 Service Corporation International conference call. My name is Latasha, and I will be your coordinator for today. (Operator Instructions). I would now like to turn the call over to SCI management. Please proceed.

Thank you and good morning. This is Debbie Young, Director of Investor Relations for SCI.

Before we begin today, let me just get you through the Safe Harbor language. We're likely to make some statements today 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.

So for more information related to these statements and other risk factors, please review our periodic filings with the SEC, including our 10-Q that was filed earlier this morning or on our website at sci-corp.com.

In addition, during the call today, Tom and Eric may use terms such as 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 reconciliations for each of these measures to the appropriate GAAP term.

With that, I will turn the call over to President and CEO Tom Ryan.

Thank you, Debbie, and thanks, everybody, for being on the call this morning. My comments today will be focused on the third-quarter performance and the factors driving our results, and then lastly on the outlook for our future.

So to start with an overview of the quarter, I would like to say we're very pleased to be able to report the strong results today. Our normalized earnings per share we reported were $0.13 versus a $0.09 prior-year quarter. Once again this quarter, we surpassed our internal expectations.

We were able to accomplish this even though we continued to experience some weak funeral volume trends, although they are better than what we have seen in the first parts of the year -- they continue to improve -- but the comparable still is a negative, unfortunately.

The primary drivers of our ability to achieve these results were, number one, an outstanding execution on cost reduction. And I will get into a little more detail on that in a moment. The second item is improved cemetery sales production. And again, we will talk a little bit more in detail about that. And lastly, we've seen very favorable trust performance over the last quarter and really for the entire year.

So first, let me turn to those cost reduction efforts that I mentioned as a primary driver of our performance. As I mentioned, really, in the second quarter, our cost reduction efforts continued to play a key role in our performance this quarter again. And I want to put them in two different categories.

The first category I like to refer to as the light switch. And what I mean here is these are kind of our ability to react reactionary and immediate impact decisions. First and foremost, probably the primary driver is really our field force. They made tough decisions immediately as we saw this economic crisis coming, and they are able to reduce a lot of variable costs and a lot of fixed costs in anticipation of some really tough times.

We tried to buttress this effort with a field incentive comp plan change this year that lowered the gates to the field bonuses and afforded us the opportunity to pay midyear bonuses. So we think that focused everybody very carefully on making sure that we're achieving the reductions that we needed.

In addition, on these reactionary kind of immediate impact items, we had some field and home office driven, making some tough decisions. We froze salaries, we froze positions and things of that like, which again allowed us to reduce those costs and achieve the results, particularly here in the second and third quarter.

So I define these as we did some tremendous learning through this very difficult process, and some of these savings will be sustainable, but not all of them. Some of them are going to come back into our results as we go back and lift the gate on giving people raises once again and have to kind of refresh the troops and refresh the facilities that we have. So we understand that those are going to come back. Some of those are permanently built in.

The second type of cost reduction effort I like to -- I refer to it as the runway. And here it's about strategic initiatives that take time to develop and implement. These are best practices that may require training and rollout, may require implementation of technology. There's a lot of reasons why these take some time. But these are very, very sustainable and can be improved.

The first one we introduced you guys to a number of years ago was what we call our funeral metrics. And here, we're utilizing metrics to manage our staffing costs better by utilizing part-time employees, by sharing employees and the like. And we have continuously seen improvement over the years, and we continue to see it today. It's part of our D&A, and we do this very well, but we continue to improve.

The second item that we've mentioned to you before is the cemetery maintenance and administration. These are really two different projects, but they are centered around how we manage our cemeteries. And it has to do with standardizing the maintenance function, partly through outsourcing and partly through driving [in term and] efficiencies and best practices.

The second part, the administration piece, is the streamlining of the arrangement and record-keeping process with technological improvements. So this one requires a little bit of an investment in technology to accomplish, but both should, once implemented, result in annual savings opportunities of some $15 million to $20 million, give or take. We've realized some of this today, but the majority of it is going to show up in 2010 and some in 2011. So we're very pleased with the progress there. There's more to come.

The last strategic initiative I just want to touch upon because it impacted our results was approximately four years ago, we challenged our risk management group and our legal department to begin to focus on claims and lawsuits, when you think about the issues around autos, workman's' comp and the like, and they've applied intensive and comprehensive training.

When you think about this one, it's a geography and what type of claims are showing up. So if we had an abundance of workman's comp claim in California, we could apply that training to ensure that those get reduced, people understand how to deal with those a little more timely. And the hard work takes time, because as you guys know, on these kind of incurred but not reported reserves, those get billed over time. A lot of times, these pay out over three and four years.

So our hard work has paid off, and we've seen some of the beginnings of this already in fewer claims. We're much better at expediting those claims that we do get. We've seen reduced cash payouts. And in the quarter, we were able to take down these long-terms reserves. Our liability went from $66 million to approximately $59 million, so about a $7 million, $7.5 million improvement when you think about what we accomplished here in the quarter just with the reserve.

So this contributed about $0.02 to our quarter. And the nice thing about this, because it seems like a one-off, it really isn't. We add to that reserve usually $26 million a year, and now our go-forward accrual is going to be $20 million a year. So we really have realized about a $6 million annualized savings that will continue into the future.

Now I would like to move to an overview of our funeral operations. Our comparable funeral revenues for the quarter were down $13.7 million or approximately 4%. The downward pressure was primarily because of same-store volumes, which were down 4.6% for the quarter. While this is not great, we are encouraged that the numbers are trending more favorably compared to the first half of the year. The first half of 2009, we were down over 9%. So not pleased about being down, but pleased about the direction.

Once again, we believe that we are generally reflective of the deaths in the marketplace. We compare back to our cemetery interments, which are about this. Our competitors and our vendors are down 5% to 6%. And the CDC data, which isn't always completely aligned with us, was down 3% to 4%. So we're seeing the trends that continue to tell us that this is a marketplace phenomenon.

We're down about 7.8% on a year-to-date basis. And just to give you some insight into October, it is down we believe in the high 3s to 4% at this point in time. And although volumes have been challenging, the funeral average continues to grow in the challenging economic climate that we live in. It is up 1.9% for the quarter and 3.2% on a year-to-date basis once you exclude currency changes in Canada and the trust fund impacts, the lower trust fund.

So continuing to grow the 1.9% also includes a 50-basis-point increase in our cremation rate. How are we able to accomplish this? Strategic pricing, managing our discounts and the increase in the Dignity package take-up rates, really the primary drivers of the improvement in the average. And these more than offset selective market pricing pressures that I think everybody is seeing these days in any retail business.

Despite the 4% decline in revenues, our funeral profits actually grew $10 million or 16.6%, and our gross margin improved 390 basis points to 21.6% from 17.7%. This is really due to the cost reductions I described earlier, lower variable costs, workforce initiatives, and about $5 million from the reduction of that insurance reserve I referred to earlier.

On the preneed side of the ledger, which really doesn't impact our P&L but grows our pipeline, preneed funeral sales continue to be steady. We reported approximately $123 million in sales for the quarter, which is down about $4 million from prior-year quarter and was in line with our internal expectation. This is very solid performance, again considering the economic environment that we are living in today.

Now I would like to turn to cemetery operations. We're very excited to report that comparable cemetery revenue increased $4.5 million or 2.7%. We believe we've started to see some recovery in the willingness of the discretionary consumer. The first increase -- we've experienced the first increase in the last four quarters, really since the second quarter of 2008. In the last four quarters, we reported declines ranging from 8% to approximately 19%. So this trend is very, very encouraging for us.

We think the increase in sales is primarily attributable to the outstanding execution on the preneed production side, much stronger than we even anticipated. We were able to grow our comparable preneed sales production, and this is the preneed sales production, by over $15 million in the quarter, or grow it by 18%. This was due to improved consumer sentiment, which, again, we think was enhanced by selective incentives we put in place related to finance charges and special pricing on inventory that was slow-moving.

In addition, we are seeing better counselor productivity. We believe it is attributable to training, and so more and more counselors are writing minimum levels of business that we track on a metrics basis. And we've also seen the resumption of large sale activity. We've seen people come back at the high end buying very, very valuable property that we have for sale in many of our cemeteries across the country. This strength on the preneed production side more than offset the small declines in the at-need cemetery revenues, which we believe is primarily a function of the decline in deaths in our markets and in declines in other cemetery revenue.

Our cemetery profits increased nearly $10 million. And if you logic through that improvement, our revenues grew by $5 million. I like to assume that our variable costs are about 40%, so of the $5 million revenue growth, $3 million ought to drop to the bottom line. We saw approximately $3 million from that insurance reserve improvement that gets allocated to cemetery. So the remaining piece, the $4 million improvement in profits, is really because of our expense management on the cemetery side of the ledger.

We grew our gross margin by 560 basis points to 19.4% from a 13.8% prior-year quarter. And again, our team executed on these cost savings, primarily related to lower merchandise and personnel costs and from leveraging our scale through the use of metrics from some of the long-term initiatives that are beginning to take root.

Now I would like to shift to the outlook that we have provided to you in our press release. As you saw there, we've provided guidance for both the fourth quarter of 2009 as well as guidance for next year in 2010. As you can see, we intend to finish the current fiscal year very strong. We expect the continuation of what we're seeing in the third quarter. And our updated earnings per share expectations for 2009 are in the range of $0.46 to $0.48 and will be slightly down from 2008 levels of $0.52, but significantly ahead of our original expectations and even our revised expectations from the second quarter.

Looking ahead to 2010, we anticipate growth in earnings and continued strength in our cash flows. Our earnings per share guidance range is $0.45 per share to $0.53 per share and is based on the following kind of broad assumptions.

First of all, it includes Keystone closing in late first quarter of 2010. Another thing that I think is important to keep in mind, it is our opinion that in 2009, we were able to accomplish the great results we did -- you'll remember when I talked about light switch expenses. We turned off a lot of things. We deferred a lot of projects. We didn't give raises. We didn't fill certain positions.

And so it's our belief in a normalized year the 2009 result might be down another $0.03 or $0.04. So when you think about comparing 2009 to 2010, it's important to keep that in mind, because it's our opinion that you can't run a company like that forever. You've got to begin to invest back in the people, back in the facilities and turn on some of those projects that are going to allow us to grow.

The other thing I would tell you about 2010 is that the midpoint for sure, we're assuming that 2010 continues to be a tough economic recovery. It can be a recovery, but it'll be a slow one and not one that is going to be robust.

So the broad specific assumptions that you can follow along with me, our funeral volumes we believe will continue to be challenging, particularly as we think about the silent generation and that impact in the number of deaths, at least through 2013. We expect down low to mid-single digits on volumes within our range. We would expect that our funeral average will continue to grow, but in the low-single-digit range, absent currency and trust fund impact. So as you think about it, it may be more challenging to get to 3% and 4% type of increases we've seen in the past. We do believe you can get in the 2% to 3% ranges.

Cemetery preneed production we anticipate will grow in the low-single-digit range. We expect that our segment margins will be impacted by increased personnel costs as we again turn back to giving raises. We'll have more incentive comp and we'll probably experience increases in health insurance costs. So all those things are factored in.

Keep in mind again that we've been under a wage and hiring freeze and had no bonuses in 2008 for the last 10 to 12 months. And like I mentioned before, that's just not sustainable. These increased personnel costs will be somewhat mitigated by continued expense management, particularly benefiting from the strategic initiatives regarding cemetery maintenance, cemetery administration that I touched upon earlier.

From a general and administrative cost perspective, we expect those to increase slightly, primarily due to systems initiatives and increased personnel costs. The effective tax rate we're utilizing in this range is a consistent 36%. And we would anticipate that our fully diluted share count would approximate 250 million shares.

And lastly, a note on strategic acquisitions. We recently announced a strategic acquisition, Keystone North America. Keystone is the fifth-largest provider of deathcare products and services, focusing on the small to midsize markets within the US. They have over 200 businesses in a market segment that we like and that we play in today. We have 300 businesses that look a lot like their 200, and all of these have great customers and high-margin businesses.

We're excited about the opportunity that Keystone brings to us, and we really look forward to welcoming them into our SCI family. We anticipate the transaction to close in the first quarter, pending regulatory approvals.

So now to conclude things before I turn it over to Eric, while we're still facing a challenging economic environment, we believe we have the right strategy, the right operating capabilities and the right people in place to continue to deliver great results. Whether you look at our performance in the current environment or our near-term outlook, we believe it demonstrates the strength and durability of our business and particularly our business model. And as always, we will continue to examine the best uses of our financial strength to invest in the long-term growth of our business and return value to our shareholders.

This concludes my prepared comments, and now I would like to turn it over to Eric Tanzberger.

Thanks, Tom. Thanks, everybody, for joining us again this morning. Today my comments will be centered on the cash flow and capital spending. Then I'll talk a little bit about trust performance for the third quarter and give you a near-term outlook on both of those topics. And then I would like to talk about our current financial position and our current liquidity as well.

Starting with cash flow, as you saw in our release, the cash flow from operations was a very healthy $94 million in the third quarter of '09. This is pretty strong compared to our expectations. It was probably about $10 million to $13 million higher than what we originally anticipated. And as Tom described earlier in his remarks, we had solid expense management initiatives. Higher than anticipated trust fund income and really better cemetery sales production really helped to have a good quarter in cash flow, which offset continued soft funeral volumes.

When we compare this cash flow to the prior year, the operating cash flow was down a little over $20 million. So let me address that for you. There are a couple of reasons why we had a decline in cash flows versus the growth in earnings per share quarter over quarter.

First, we had some noncash items that were in the earnings. And as Tom mentioned, we reduced our insurance reserves roughly about $8 million, $7 million to $8 million, in that area, which did not benefit cash flow during the quarter. We also had a slowdown of receipts on preneed sales, particularly on the cemetery side. Although these sales improved during the quarter, with the economy and certain sales incentive programs that we've put in place, we're seeing lower down payments. But we expected this, and this really is just a timing difference, because as you know, we will still get the money over time.

Secondly, we also partially funded a payroll at the end of the quarter. So on September 30, which was a Wednesday, we funded part of our Friday, October 2, payroll, which resulted in an $8 million more of a cash outflow quarter over quarter. And some of this was mitigated, that item, about our overall payroll costs are lower quarter over quarter. But it was an $8 million item as it relates to cash flow when you compare to the prior year.

Thirdly, we had a $5 million payout during the quarter. This related to the midyear field incentive comp payments, which Tom had mentioned earlier. And again, we did not have a midyear payout in '08, but have found it very effective to help keep management focused and engaged. And we will probably continue to do that in 2010.

So although when you look at it compared to prior-year cash flows decline, we were able to again manage our capital dollars very effectively. So our total CapEx was about $20 million for the quarter, which is roughly about half what we spent in the prior-year quarter. And the maintenance and cemetery development component of that was about $18 million for the quarter.

So if you deduct these recurring capital spending items, meaning the maintenance and cemetery development CapEx, from cash flow from operations, we calculate our free cash flow for the quarter to be just over $75 million. While this is just slightly lower than prior-year quarter, this is much higher than our internal expectations by about $15 million to $17 million. And again, what drove that is good expense management, better trust fund income and a better than expected cemetery sales production.

So then shifting from the quarter and let's look more forward looking from a cash flow perspective, so as our press release indicated, we are expecting to generate $45 million to $60 million of operating cash flow in the fourth quarter of '09. This would bring our full-year 2009 expectations in the range of $350 million to $365 million. This is pretty consistent with 2008 levels, which was about $355 million, excluding special items, for 2008, which primarily related to the $90 million tax payment that we made in 2008.

Maintenance and cemetery development CapEx in the fourth quarter should be around $20 million. So this will result in revised free cash flow guidance of about $280 million to $295 million for the full year of 2009. So you should think of that as the high end of the guidance that we updated on the August call after the second quarter.

This free cash flow range of $280 million to $295 million represents a 20% to 30% increase over 2008 levels of about $220 million. It's pretty impressive, considering the environment we have operated in this year. And I really want to just take a second and emphasize what Tom did and thank our associates in our funeral and cemetery operations and our field operations, which really drove this, for their efforts in executing the cost reduction initiatives during the quarter and really during 2009.

So looking ahead to 2010, we again believe we will continue to generate very attractive cash flow for our Company. Our operating cash flow guidance range of $300 million to $350 million basically reflects slightly higher anticipated earnings that will be offset by higher cash interest and lower working capital compared to 2009 levels.

So let's talk about the assumptions for 2010 as it relates to cash flow. First of all, the EBITDA reflects an increase consistent with the earnings per share ranges that Tom mentioned earlier in the call. Cash interest will be higher in 2010, probably around $5 million or so, which again is due to the financing for the Keystone acquisition. Although we don't expect it to close later in the first quarter, we're obviously going through the process of financing the Keystone acquisition today.

Working capital is projected to be flat to probably slightly down, meaning a use of cash in 2010 compared to a slight source of cash expected in 2009. While we have anticipated increases in sales production, which will increase sources of working capital because of down payments and such, this will be offset by the $15 million benefit we received in the second quarter for liquidating certain life insurance assets. That will not recur in 2010.

We have higher incentive compensation payments, probably to the tune of about $20 million to $25 million expected in 2010 versus 2009 levels. We'll have less working capital from enhancements in our trust area. So in other words, we worked hard at enhancing our trust working capital during 2009 by improving our processes. And we won't have as many of those enhancements. We got it more down to a normalized level now in 2010. And then of course, from a working capital perspective, as I mentioned, we also build in this expectation of some degree of lower down payments and slower connections in the preneed sales area.

Our cash taxes will be consistent with 2009 levels. So in 2009, our expectations is about $20 million to $25 million of cash taxes, probably more of the lower end of that in 2009, and will probably be $20 million to $25 million in 2010.

As it relates to capital spending expectations, $85 million to $95 million for maintenance and cemetery development and probably an additional $10 million to $15 million for other growth CapEx is expected in 2010. This is somewhat higher than the low $70 million range we expect in 2009, which is due to the resumption of more normal capital spend levels, reinvesting a little bit into our businesses, and also our announced acquisition of Keystone.

So when I deduct the maintenance and cemetery development expenditures from operating cash flows, we anticipate our free cash flow in 2010 to be in the range of about $205 million to $265 million. This again is pretty impressive, as it represents a low- to mid-teen free cash flow yield when you use a price of about $7 per share.

Now let's shift to our trust fund analysis. As disclosed in our press release, the combined trust fund assets increased by just under 12% in the third quarter of '09. So for the year through September, the trusts are up a total of right around 20%. And then subsequent to September, our preliminary October performance is generally flat in our trust funds, which as we know is pretty consistent with the financial markets during the month of October.

So our total trust fund income recognized in our income statement for the third quarter was about $18 million, which compares to about $21 million in the third quarter of '08. And again, it is better than we expected, as I mentioned before, by about $2 million to $3 million.

On a year-to-date basis, the trust fund income that was recognized in our income statement through September 30 was about $49 million to $50 million. This again is lower than in the prior year, as we've mentioned several times during 2009, lower by about $23 million, but again, much better than our original projections.

So, looking forward, discussing trust funds, in terms of our outlook, keep in mind, though, that projecting the amount of trust fund income that we will recognize through our income statement in a given period is an extremely difficult task. There are several variables and several moving parts, such as determining which specific contracts in the backlog are going to mature and predicting what the financial markets are going to do as well.

With that being said, our outlook for earnings per share and cash flow in the fourth quarter assumes that our trust funds will perform -- will be flat, excuse me -- for the fourth quarter. In other words, it will stay at about this 20% year-to-date number for the rest of the year. But shifting to 2010, our outlook assumes that our trust funds will realize an annual return in the low-single-digit percentage rates.

Now I'm going to shift to just talk about our current liquidity and our current financial position. So at the end of the quarter, our cash balance was about $233 million. Today, as we speak, it's about $210 million, and that is subsequent to a significant amount of interest payments, about $45 million to $50 million, that were paid in the first week of October.

Our total debt was about $1.74 billion at the end of the quarter. That represents a reduction of about $105 million since the beginning of 2009. In the quarter, we continued to repurchase debt in the open market at a discount to par value. So it was about $17 million we repurchased in early third quarter. And I think I actually mentioned that on the August call, because it was really done in the month of July. That brings our total repurchases and retirements to about $118 million year to date in 2009.

Subsequent to the end of the quarter, as we've all seen, we announced the Keystone acquisition, which relates to approximately $256 million of a cash outflow. Let me briefly update you on the status or our financing plans.

First of all, you may have seen our press release earlier this morning announcing a bond offering. Unfortunately, consistent with the SEC rules and guidelines, I won't be able to make any comments about this on our call today during the marketing period. Furthermore, as you'll see in our 10-Q filed earlier this morning, we will be amending our credit facility to increase the availability from $300 million to $400 million. And we will also extend the maturity from November 2011 to November 2013. So we're very excited about that.

We also intend to use this increased availability on our credit facility, along with, of course, the cash on hand, to fund the Keystone acquisition and to prepay our private placement notes that were due in November 2011 in the amount of $150 million at par. We continue to have a favorable debt maturity profile. And therefore, this will allow us to have no significant maturities until November 2013.

From a leverage perspective, we remain committed to targeting leverage on a net debt basis at 3.5 times EBITDA or less than that. We will probably run the Company about 3.25 to 3.5 times on a net debt basis, is really where we target.

So, in conclusion, we continue to believe that our strong free cash flow distinguishes us in this industry, particularly in the challenging environment that we have seen. I want to reiterate our attractive low- to mid-teen free cash flow yield that not only we enjoy today, but continue to expect in 2010.

We again will continue to focus on cost control initiatives during 2010 and prudently managing our capital expenditures. And of course, when we have achieved our appropriate leverage targets, as I describe to you, we will continue to be opportunistic with our capital and seek investments that will continue to increase our shareholder value.

So with that, Latasha, I think that concludes Tom and I's prepared remarks, and I think we would like to open it up for investor questions at this point.

(Operator Instructions). John Ransom, Raymond James Associates.

Nice work in a tough climate. I know you guys are working on a, I guess, Harvard-engineered demographic study. And I guess the last I heard is that was due to be completed by the end of the year. How should we think about that? Is there any fallout from that in your 2010 numbers, or how should we think about that?

Not at all, John. That's something that we're working on and I think again comes in at phases. We'll probably see something a little more conclusive the early part or the late part of the first quarter next year. But again, our anticipation here is just this will be a model that will help us make better decisions.

I think we know what we believe is going to happen over the next few years and we want to understand the whys and we want to understand the geographic significance of it and some of the drivers. So it's something that we look forward to having, and we think it will make us better managers of -- stewards of our capital. But we feel pretty strongly about what's driving the markets. And I think our expectations for next year haven't changed at all, based upon the preliminary findings of that study.

Just to explore this a little bit, how do you expect to -- let's just assume they say, okay, Tom, your volumes are going to be down 4% a year for the next eight years, just as an example. How would you react to that that is different than what you're already doing? Is there any upside in terms of field consolidation or some other things you might do that we should think about? Or is it just more of a refinement of a planning tool that you already have?

I think more of a refinement of a planning tool that already exists. But I think if we know, for instance, we know it's going to turn. We don't know when. We don't know if there is a geographical significance to that. And one of the things you don't want to do is be understaffed in an area that is going to potentially grow.

So I think it's going to help us understand better what's going to happen, what are some of the trends as to why, what are some of the behavioral drivers of people's decisions. But again, just help us be better managers of our staffing, be more thoughtful about the products and services that we offer, and again, from a geographic perspective, allow us to differentiate a bit.

Okay, thanks. A couple other things. Eric, on your 2010, what kind of revenue contribution do you expect from Keystone?

Keystone has LTM of about $125 million of revenue. And of course, it will be in that area.

Multiply by the timing, by the --

That's correct. The most difficult part, John, as you point out, is when it's going to close. But our anticipation, as Tom mentioned, is probably in the mid- late-ish first quarter, is what we're expecting.

And then some level of divestiture.

And is there any -- I mean, they have, what? They have higher EBITDA margins, higher revenue per funeral. And I know some of their -- I know Steve is going to stay on. Is there anything that they can export to you, do you think, that would help some of your other operations?

Absolutely. We look forward to learning from them, and I think there's things that they will learn from us. But some of the things you talk about, margins and average, it is hard to compare because they are in a certain footprint, and our footprint is very different.

And so when we look at their businesses and we look at their style of managing them, we see a pretty similar trend. I think a lot of things they do, they package products and services. They've got what I'd call a more contemporary approach to those markets as well. So when we overlay our geographically similar businesses to theirs, it is fairly similar. And again, they bring a lot of great ideas, a lot of great management. So we look forward to bringing them -- part of the SCI family.

And what is the synergy number you think can be achieved?

I think again, John, if you remember back to Alderwoods, our original cut was probably in the $60 million range, and we were able to do much more beyond that. So since we've not really gotten into the detailed operations, particularly on the revenue side, it's hard to say. I'd say from a cost perspective, we think it is somewhere in the $7 million to $10 million range when you factor in buying power and some of the things that we can do.

Okay. And just lastly, is there -- I'm sorry, I think you answered that earlier. I'm good, thank you.

Clint Fendley, Davenport.

Tom, could you remind us roughly the percentage of your cemetery properties that you've outsourced the maintenance on?

Well, I don't have the number in front of me from a historical perspective, but we're shifting towards, as you know, predominately outsourcing all of it. It was very kind of locally driven, Clint, so I don't have any accurate numbers in front of me.

I would tell you that if you go back 10 years, it was practically zero. And over the last few years, you've seen a shift towards it. But a lot of the decisions were locally driven. And what we're able to do with this project is to take all of this business, bid it out to big regional consolidators. There's some places that we can't do that, but effectively leverage our size and our scale not only on the cost side, but on the performance side, because clearly when you do something like this with 365 cemeteries, we care very much. People come to cemeteries all the time, and they want it looking right. And so this was both a qualitative and a quantitative decision on our part.

How much of the insurance accrual adjustment was related to the outsourcing move?

None of it. This is really all driven by claims. And, Clint, it is difficult to understand unless -- I think a lot of us that have been in the accounting world before, but you begin to see evidence of these changes, like we saw claims began to come down. The problem is the way that these accruals work is you've got to see the cash flow related to those claims come down. And because these claims pay out over two, three, four, sometimes five years or longer, we're now beginning to see the evidence of the cash flow.

So this is something we anticipated. We didn't know -- we kept saying, hey, claims are down. We're not going to be able to reduce the expenses associated with some of these things. And now we're beginning to see the fruits of our labor.

So it's really nothing to do with that. It's much more to do, again, with reducing our fleet, better training around drivers and autos, better training in workman's comp and general liability claims.

Okay. Got it. And backing up, Tom, on the light switch changes that you were talking about that were made in 2009, how many of those or what types of those changes could be permanent as we move forward?

Let me give you an example. And I don't have an exact number for you because, again, a lot of these are field driven. So these were not led from Houston. These were led from people that make the money for us every day and take care of our client families.

But it's our anticipation -- let me give you an example of two differences. I've had people come up to me and say, and particularly on the management side, that said, you know, I used to have all these meetings where I'd bring people into one place or I'd travel all the time. And because we had to cut back, I found more creative ways, utilizing teleconferencing, whatever I may need to do, but I found more effective ways to communicate. And from that learned behavior I think I'm just as effective, if not more. So that is a permanent change that you ought to see travel costs not come back to the level that we once had them.

The temporary changes that have to come back, and these are kind of simplistic, but you get it, is we were at a point where we said, look, if a project isn't absolutely necessary, let's wait. Let's wait and see what happens. And people have put it off. And you can think of simple things, like reordering supplies and the like, where people just said, let's just wait until we run out and then we will get some more as opposed to what I normally do.

So our expectation is, that's going to come back. Raises are coming back. We're going to -- I use the terminology of -- this is Mike Webb's words, not mine -- but sleep with one eye open and a knife between your teeth. And that's what we will do. So it's going to be difficult environment to operate in, but we're going to do it. And we've got to begin to invest back in our people and invest back in our facilities.

Okay. And final question here, Eric. On the LTM of $125 million for Keystone, any idea yet on the level of divestiture, at least on an EBITDA basis?

No, not really that we can comment on at this point, Clint.

Thanks, guys. Nice job in a tough environment.

AJ Rice, Soleil Securities.

A couple of questions. Just to follow up on the Keystone commentary, what is the approval path from here? What needs to be done to get the deal done?

The primary approval path now, AJ, is the Federal Trade Commission. We're obviously working hand in hand with them to go through these markets and review that process. In addition, there are certain regulatory approvals at state levels and the like that we will go through. It's our anticipation the primary driver here really is Federal Trade Commission, because we will be working them at the same times and work through that process. And it's just -- it's not a simple process. We're going to do everything we can to try to go as fast as we can and cooperate as best we can with the Federal Trade Commission. And it's our anticipation we can get this done and closed in the first quarter of 2010.

Do you file the Hart-Scott-Rodino first before the discussions begin in earnest? Or do you have discussions and then file it based on inputs you get from them?

Well, that's all part of the strategy. We haven't filed it yet. But I will tell you, we are not too far from making a filing. That is really how the process works. There's a little complication in this. There's a tender offer, a Canadian tender offer, which has slightly different rules than some of the things we've done in the past. But we're working through that, again, hand in hand with the Federal Trade Commission and trying to provide them on a timely basis all the information they need to make those decisions and move through the process as quickly as they possibly can.

Okay. Obviously focus in the filing today on the debt side is on getting the funding straight for Keystone. But as you think out into next year, obviously you've got the dividend. You've got the debt repurchase activity that you've done. I don't know whether you plan on continuing to try and do some of that on open market purchase of debt. And then off and on, there's been stock repurchase activity. Any update on your thinking about uses of cash going forward once you get this or as you get this Keystone deal done?

Yes. I think what we've hopefully demonstrated, AJ, is over the last -- if you think about the last two years, the last share repurchases we did were probably in the, thank goodness, $5, $6, $7 range, back when things were tough. We felt like that was the appropriate thing to do at the time.

As the mood switched and the economy changed, you saw us shift to a debt repurchase opportunity, because again, we felt like it was appropriate to delever. It wasn't appropriate to lever up in an environment that was contracting like it was. We felt that was the best move, so again, based on circumstances, based on returns.

And as we began to see it moving more positively directionally, we were able to opportunistically do a few deals. We've done a private deal that we haven't publicly announced that we hope will close here in the next week or two that is very beneficial to our Company. And when you combine that with Keystone, it's evidence that we're in the business that we chose and we're going to grow this business.

So we really will look opportunistically. It's hard to tell in 2010. If opportunistic deals come our way and the returns are right, we will do those. If the economy gets scary again, you may see us delever. And again, we're very confident in the future of this Company. And so there's probably a likelihood at some time in the future we will begin to reduce the equity base. So, not a perfect answer, but know that we're doing the highest and best use of our incremental cash flow.

Okay. And then just the last question, maybe thinking about the outlook and what is captured in the guidance and not. I know, Eric, you mentioned you've got -- you were very tough on the salary increases this year, as a lot of companies were with the economy what it was, and then second, making some provisions for incentive comp payments next year.

If you were to think about your aggregate labor base, what kind of year-to-year increase, when you take all those items in place, plus I guess reduced turnover and some other things that are probably advantageous, what kind of year-to-year increase in overall labor expense do you think you are looking at?

It's hard for us to quantify over the entire network, because as you said, there's moving parts. There's a lot of reductions in labor, as we've had. The bonuses itself were probably, from '09 to 2010, probably about a $20 million to $25 million add going forward. But we haven't rolled out the complete strategy throughout the network as it relates to the compensation going forward in terms of raises and such.

It's not an overly huge number. It's probably, at the end of the day, less than the bonuses, but it is a significant number, AJ. I mean, it's going to be north of $10 million with 20,000 employees that we have at SCI.

And AJ, just to clarify, the bonus situation is a cash flow event, not an earnings event. We've accrued bonuses in 2009 that get paid in February 2010. And that's what Eric was talking about earlier. We didn't pay any home office bonuses or senior management bonuses at all in 2009 related to 2008 results. We anticipate, with a good fourth quarter, that we will be able to do that to the tune of, when you add the incremental field, home office, senior executive, it adds up to some $20 million. But from a P&L perspective, it shouldn't be dramatically different.

Eric is right. We will see some inflationary raises going into 2010. And what he's telling you is, there's other things that will drive costs as it relates to efficiencies and things as we roll out these different programs. But generally, think of it in the 2% to 3% type of enhancement in overall salaries.

Right. Okay, that's great. Thanks a lot.

[Raymond Meier], Wisco.

I have a question for you regarding your 2010 EPS guidance. You said that includes your Keystone acquisition. Could you just give me an idea minus Keystone how much are you looking at if the acquisition gets delayed or for some reason doesn't go through?

Well, a lot of it, Raymond, depends on when it actually closes, obviously. We've been open by saying that it is an accretive acquisition. It is probably accretive in a full-year basis somewhere around $0.04 to $0.05. Of course, you've got to downplay that a little bit in 2010, based on the fact that we don't expect it to close probably till mid- to the late first quarter of 2010.

Okay, thanks. My next question is regards to acquisition, you have to go through the FTC. And since Keystone is the fifth-largest there, do you expect any problems there regarding consolidation because of the general political environment, climate, now regarding businesses getting bigger?

Yes, I think the way to look at it is this. First of all, the Federal Trade Commission views it on a local market basis. But if you step back and even look at the US, we're about 13% of the market. Keystone is less than 1%. So this really is kind of a nonevent as you think about from a national landscape perspective from the Federal Trade.

What they're going to do is they're going to look at local markets and the competitive nature of those markets. We would anticipate there will be a few markets where the Federal Trade Commission is going to say, this does not work. We need more competitors. And those will be required divestitures that will occur. We don't expect that to be a material number, but we fully expect that within some local markets, that will occur.

Thanks, Eric. And just one last question regarding the acquisition. Going through Keystone financial statements, and they seem to have Forex swaps of about $88 million over the next five years. Is that something you guys would be unwinding out of, or you'll retain these contracts for the next five years?

No, it is really in place to move money from their US operations up to their Canadian area in Toronto to essentially pay a dividend to their shareholders. So we will probably end up unwinding it. It's not overly material. It's probably to the tune of maybe $1 million or $2 million benefit to unwind those, all of those, when you sum them all together.

That's all I had. Thank you, Eric, and congratulations on a great quarter.

(Operator Instructions). I show no further questions in the queue.

All right. Thank you guys so much for joining us on the call today. We look forward to talking to you again, I guess, in 2010. Thanks for being on the call.

This concludes the presentation, and you may all now disconnect. Good day.