Service Corporation International (SCI) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter, 2009, Service Corporation International earnings conference call. (Operator Instructions). I would now like to turn the call over to SCI management. Please proceed.

Good morning, everyone, and welcome to our call today. This is Debbie Young, Director of Investor Relations for SCI. As usual, before we begin with our prepared remarks, I need to walk you through our 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, on the call today, Tom and Eric may used terms like normalized EPS or normalized operating cash flows. These are non-GAAP financial terms. Please see our press release and 8-Ks that were issued yesterday, where we have provided a detailed reconciliation for each of these measures to the appropriate GAAP terms. Now I'll turn the call over to President and CEO, Tom Ryan.

Thanks, Debbie, and thanks, everybody, for being on call today. Today I thought I would give you thoughts on our performance through the quarter, as well as some of the factors that are driving those results, and then I will give you a few comments about our updated earnings per share guidance which you may have already seen, hopefully, in our press release. So first, an overview of the quarter. In 2009, our Company got stronger, and our results improved as the year went on, culminating this quarter with an outstanding performance.

We significantly exceeded the high-end of the updated earnings per share and cash flow guidance ranges given back the first week in November -- our normalized earnings per share of $0.14 versus $0.09 in a prior year quarter. Now, keep that in mind last year's fourth quarter was a scary one -- not a great one on performance, and the financial markets were in turmoil -- so this wasn't the most appropriate comparison. Having said that, it did exceed our expectations, and really grew -- I would say on a sequential basis -- more than we would have anticipated. The drivers of our performance for this quarter were the same three that we have seen drive our performance throughout the year.

What I would tell you that is different this time, is that in the fourth quarter, I would change the order of magnitude of these drivers. The number one driver on our performance was improved cemetery sales productions. Secondarily, I would say it was expense management, which has driven a lot of performance year-to-date; and lastly, a favorable trust performance. We saw decent market returns in the fourth quarter, compounded on top of the ones that we have seen throughout the entire 2009. First I will turn to our funeral operations. Comparable funeral revenues for the quarter were up slightly. Same store volumes were down approximately 3.6% for the quarter. This continues to be a concern of ours. Having said what, we go back and look at all the comparables that we can. And we have noticed throughout the year, we started with dramatically down volumes that have progressively gotten better. Unfortunately, there is still negative comps.

We still believe that these are generally reflective of the debts in the market place. We see our cemetery (inaudible) continue to be down, which are less competitive than funeral markets. We have seen our preneed and at need comparable numbers go down as well. We have seen our competitors and vendors, similar trends downward. And again, evaluating the CDC data, we see the same types of trends -- not exactly with our numbers, but trending the same direction and approximately within the range. We finished the year down 6.7% in same store funeral services. Now not only is this a first in my career, but Bob also will tell you it is probably the first time he has seen it in his career, and that says something about 2009 and what is happening with the relative deaths in the market place. Out of the gate in 2010, we continue to see softness. We think we're down probably in the low mid-single digits through January and preliminarily looking at the first few weeks of February. This, however, is in line with the guidance we provided for 2010. We set that expectation in our numbers. Although funeral volumes were challenging in 2009, the good news is that funeral average continue to grow.

It was up 1.2% for the quarter and 2.7% for the year when you exclude currency movements, and the trust fund impact. So this tells you that we continue to be able to pass along inflationary price increases to our consumer. I won't tell you it is easy, but it is happening. This includes absorbing 140 basis point increase in our cremation rate and selective market pricing pressures that we're dealing with. Our outlook for 2010 assumes that we continue to grow the average in the low-single digit range. On the funeral profits front, we actually grew $7 million or 9.6%, and our gross margin improved 190 basis points to 23.5%, from 21.6% in the prior year's fourth quarter.

We continue to benefit from the cost reduction initiatives with lower variable costs, and the workforce initiatives. Keep in mind also that our margins were stronger, despite higher preneed selling costs as a result of increased preneed sales production. Preneed funeral sales -- and remember, these are deferred into the backlog -- grew some 20%. Now given this is comparing back to a very challenging fourth quarter in 2008, so that may not be impressive, but they grew to $114 million for the quarter. Now this exceeded our expectations by a very reasonable amount, I will tell you -- and, again, we're very, very pleased. The other part of our solid performance that I would point out, is the preponderance of this growth is due to contract volume growth. So we're seeing more consumers choosing to preneed for a variety of reasons, but that is the primary driver of this and not necessarily the average.

Now I will shift our cemetery operations. Cemetery segment finished strong in the fourth quarter. Comparable cemetery revenue increased 10% quarter over quarter. This was primarily attributable to outstanding execution on preneed sales production side -- much stronger than anticipated, and was the primary upside driver for the quarter. Our sales team really delivered, and I want to thank them and give them the appropriate recognition for the extraordinary efforts, especially during the most challenging times we have seen in 2009.

We grew our comparable preneed sales production over $26 million in the quarter, or up over 36%. It is really a continuation of what we saw in quarter 3 just exemplified. We improved consumer sentiment that we were facing. We also saw better counts of productivity from training and better sales management. We also saw selective customer incentives that were very effective in the quarter, and continue to be as they were throughout the year. We also saw the resumption of large sales activity; and all these things kind of came together to allow us to drive those sales to levels that -- much further than we would have anticipated. We also had reasonable trust returns for the fourth quarter, which led to higher trust fund income. Again, we -- for the first time in a long time, we saw our earnings outpace the prior year's's quarter. We're trying to make up for that fourth quarter of 2008 which took the markets down so dramatically.

So now we're back to par, if you will, and beginning to hopefully grow into the future. The strength on the preneed production side and higher trust fund income more than offset small declines in our at-need cemetery revenue. On this success, cemetery profits improved 81%. Our gross margin grew 820 basis points to 20.7% from 12.5% in the fourth quarter of 2008. In addition to the increased revenues, our team executed on cost savings, Primarily related to cemetery maintenance initiatives, and lower merchandise and personnel costs from the leveraging our scale of metrics. Going forward, we still expect further cost savings on the cemetery side related to our cemetery administration and maintenance initiatives.

As you will recall, we're streamlining the arrangement and record-keeping process with technology improvements, and we're standardizing the maintenance function, partly through outsourcing and partly through driving in term and efficiency. As you saw in our press release, we have provided updated earnings per share guidance for 2010. Our new earnings per share guidance range is $0.48 to $0.56. As you will recall, the old range was $0.45 to $0.53. The primary reason for this increase is based on the trends we saw in the second half of 2009 and what we're seeing in preliminary 2010, as we believe that cemetery preneed sales productions will be better than we originally anticipated. We finished 2009 at $0.51 earnings per share.

I want to build a little bridge for you so you will understand where our guidance is taking you. When you think back about 2009, we benefited from a couple of things that won't be able to repeat themselves. Number one, we had a one-time insurance reserve reduction. And again, this is something we have been building on for years but finally realized a one-time benefit. It helped us in the third quarter to the tune of about $0.02. Also, we obviously some cost reductions that occurred in 2009 that were not sustainable. This was again launched in late 2008 when everybody thought the world was going to end. We clamped down on costs. We clamped down on CapEx, and we're going to turn those things back on. So when you take those two things out, you probably get a more normalized 2009 in the, call it $0.45 to $0.46 range. So from there we believe we can build.

We're going to build number one from the contribution of our acquisitions. Both Palm and Keystone are going to be accretive to 2010. Secondarily, operating improvements are going to allow us to grow the business. Let me highlight a few of those areas for you. Number one, we anticipate better cemetery sales production in 2010 that should add to earnings. Our cost reduction initiatives, particularly around the cemetery administration area, and to a lesser extent cemetery maintenance, again should be additive to earnings per share and cash flow. Also, higher trust fund income. When you take all these positives into effect, they are expected to outpace other inflationary cost increases, as well as the difficult funeral volume environment that we anticipate for 2010.

Lastly an update on our strategic acquisitions. On December 3, 2009 we closed on Palm Mortuary in Las Vegas. This is one of the premier firms in the United States in a high growth retirement area of Las Vegas. Historically, they have had over $30 million in revenues; and again, Charles Knauss founded this company, and his son Ken continued on the tradition. They have been providing exceptional service to the Las Vegas community for more than 50 years. We want to welcome the Palm organization and its many talented associates in the Dignity Memorial family, and thank them for their successful integration into our network of businesses. And I can tell if you having been there and visited these folks, these are a talented group of people that are very excited to be part of our organization, and we're excited to have them.

And no, I didn't go to Vegas to gamble. I went there to visit them. I know a few of you are laughing out there. But it was a great visit and we're really excited to have Palm as part of our family. With regard to our pending acquisitions of Keystone North America, it is the fifth largest provider with about $125 million in revenue. We still believe we can close this transaction in March. We're excited about the opportunities that Keystone brings us to, and we look forward to working with their associates.

Finally to conclude, during 2009 we significantly exceeded our financial goal we set for ourselves at the beginning of the year. And despite the challenges in the macro environment, we still accomplished those goals. This is a testament to the resilency and strength of our business model and to the remarkable efforts of our 20,000 employees. In the face of a global economic slowdown, we put in place a clear action plan, and today's results clearly demonstrate disciplined execution of those plans. Furthermore, our strong performance of 2009, which is one of the most challenging we have ever seen, gives me great confidence for continued success in 2010 and beyond. This concludes my prepared comments, and I will turn the call over to Eric

Thanks, Tom. Today I'm going to briefly highlight our cash flow and our trust performance for the fourth quarter. I'm going to talk a little bit about our 2010 cash flow guidance and outlook, and then I'm going to discuss our current financial position and liquidity, especially as Tom just mentioned, as we prepare for the Keystone acquisition to close imminently. Our cash flow performance was very impressive this year, especially in light of the challenging environment.

This again, we want to reemphasize, we believe is a distinguishing characteristic of SCI that really sets us apart from other companies in today's market; and first of all, I want to pass on a thank you, as Tom did, to our 20,000 associates and employees for their efforts during 2009. Very tough year, they were asked to significantly contain costs, and they have done an outstanding job. That resulted in outstanding cash flow performance, especially in the fourth quarter, as it grew $38 million year-over-year, to $67 million, which exceeded our expectations. When I do that math, you have to normalize the fourth quarter of '08 for one-time items, which was the tax refund received and pension termination costs, and that's in the press release that you see in the back related to the reconciliations. But what's the key reason force this $38 million increase in cash flow?

First of all, it is the higher earnings -- the higher EBITDA that Tom certainly talked about earlier in his remarks. The other thing is we had a payroll timing issue. And recall that we prepaid part of our fourth quarter payroll in the third quarter. I mentioned that in our November call, and this resulted in about $15 million more cash flow in the fourth quarter of '09. We also continued to keep a tight rein on our capital spending in the quarter. Our total CapEx was about $21 million, which is about half of what we spent in the prior year quarter; and with maintenance and cemetery development, was about $17 million of this $21 million.

So when you do the math and deduct the current capital spending of $17 million that I just described from the cash flow of operations, we calculate our free cash flow for the fourth quarter to be a very healthy $50 million. This is certainly significantly better than the fourth quarter of '08, when we had negative normalized free cash flow of $9 million -- and we all remember fourth quarter of '08 was an extremely tough quarter for us and other companies. Free cash flow for the year for 2009 ended just above $300 million, about $82 million or 37% higher from last year.

This is, again, considerably higher than our original expectations. If you remember when we first gave our expectations in February of 2009, we expected cash flow of $130 million to $220 million. So just a great year compared to that original expectation, helped by the cost containment initiatives but especially the rebound and the consumer and the market place, the financial markets as well. Outstanding operating improvements, really drove this, significantly lower capital spending. We again had to be very disciplined in 2009, and our team really delivered. We also successfully executed, though, our cash management and working capital initiative throughout 2009. So looking ahead to 2010, we expect to continue to generate very attractive operating cash flow. Our actual 2009 cash flow for operations is about $372 million, and we're expecting $300 million to $350 million of cash flow from operations in 2010. So recall that the incentive compensation payments were minimal in 2009, and that in 2010 we anticipate returning to more normal incentive compensation experience of payments.

This will result in a decrease of cash flows in 2010 when you compare it to 2009 of about $20 million to $25 million. Also, recall in the third quarter of '09, we liquidated certain life insurance assets which produced $15 million of proceeds that will not reoccur in 2010. These two work cash flow items, coupled with higher cash taxes -- which I will discuss in a minute -- are the primary reasons why I believe our operating cash flow will be in the $300 million to $350 million range, in 2010. Although we just modestly raised the earnings per share guidance for 2010 today, the primary reason we are not increasing cash flow guidance is due to higher cash taxes than what I originally anticipated back in November. So November, I expected -- I discussed $20 million to $25 million of expected cash taxes in 2010. I now think it is going to be higher than that, probably in the range of $30 million to $40 million of cash taxes in 2010. Reasons for this is first of all, we increased our earnings expectations to have more taxable income in 2010; and the second reason is the fourth quarter '09 earnings were higher than we expected, and therefore we ended up fully utilizing our allotment of net operating losses that we previously thought some of those would be carried over to 2010.

From a working capital perspective in 2010, when you think of our cash flow statement, working capital in 2010 will be a use of cash, primarily because we will have incentive compensation payments in 2010; we will have less working capital from enhancements in our trust area that I also mentioned in the November call; and because we anticipate the continuation of the current trends of lower down payments on premium property sales. Our assumptions regarding capital spending in 2010, though, remain unchanged. So just to reiterate, when you do the math, we anticipate our free cash flow in 2010 to be in range from 205 to 265 million. And again, using an $8, share price this represents a 10% to 13% free cash flow yield on SCI shares, which we think is quite significant.

Let's shift into the trust funds. We continue to see good trends in the trust fund performance/. As we disclosed this in our release last night, the combined trust fund assets increased by just under 4% in the fourth quarter. For the year, the trusts in total were up about 25%, which is pretty comparative to the S&P 500, which I think ended up right around 26% for 2009. Total trust fund income recognized in our income statement for the fourth quarter was $21 million, which compares to about $11 million in the fourth quarter of '08. And for the full fiscal year, the trust fund income recognized in our income statement in 2009 was about $70 million versus about $83 million in 2008. So while this amount was lower than in the prior year, again, this is much better than our original projections.

Our guidance for the trust fund returns and their performance in 2010 remains unchanged, as I discussed in November, and recall that we're assuming that our consolidated trust funds will realize an annual return in the low single digit percentage range. Now again, this could be affected positively or negatively by the financial market changes in 2010, and already, preliminarily in January, the results show that the trusts in total were down slightly, probably about 1%. But again, February is not available yet. Now shifting from -- to our liquidity and financial position, as we prepare for the closing of the Keystone acquisition, our cash balance at the end of the quarter and the year was about $180 million. Today we have about $165 million of cash on hand. The slight decrease in cash from the end of the year primarily reflects the dividend payment that we had in January, which is about $10 million, and a $30 million payment that we did to reduce our outstanding revolver balance. These two things were also offset by positive free cash flow we have had so far in 2010. In addition to this $165 million of cash we have, we also have $150 million of proceeds that is held in escrow from the new senior notes that we issued in November of '09. And I just want to pause there and explain some things we have had related to that -- questions that we have had recently about this.

This restricted cash that I mentioned, the $150 million, is in deferred charges and other assets on our balance sheet. And that's the reason why the balance sheet line item increased about $154 million since September 30. Although our net debt, which we define as our total debt minus cash, appears to have increased for the quarter by about $200 million, when you add in these bond proceeds in escrow which we will receive, the net debt really only increased for the quarter by about $50 million, and that equates to the decrease in our cash balance, which again is due to the acquisitions that we funded with cash in the fourth quarter of 2009. So we currently have about $230 million of availability also to use in the acquisitions on our $400 million revolver, which again is a long term revolver which matures in 2013.

This revolver is currently used to support about $50 million of letters of credit, and we also have drawn about -- have drawn down about $120 million of our revolver today. That amount was, again, $150 million at year end, which we used to pay off our private placement notes; but as I mentioned, we paid that $150 million down by 30, so today, it is about $120 million, even though it was $150 million at year-end. Our plan is to continue to pay down this revolver. But, again, we will probably leave it at a balance of about $100 million, and keep that as kind of permanent financing from the refinancing of the $150 million of private placement notes that I mentioned that we paid down. We did direct a significant amount of capital in 2009 towards opportunistic debt repurchases.

We did about just over $190 million in open market purchases during 200,m and our total payments of debt, including schedule maturities in 2009, were about $143 million. In terms of looking forward on further debt repurchases in 2010, I think going forward you will see less of this activity, as we are currently operating at our -- kind of our net debt leverage ratio of about 3.5 times or less, but we will also be opportunistic with our capital. So if good things come along in terms of debt repurchases and there are good opportunities for us, we will consider those. So lastly just to conclude, again I want to reiterate, we finished 2009 with really robust cash flows. And again, I want to thank our front line employees throughout the organization for executing on the cost containment initiatives.

And as we look forward, into 2010, SCI enters 2010 with a strong balance sheet, great liquidity, a favorable debt maturity profile with no real maturities due until November 2013, and a very attractive cash flow yield, as I mentioned, which positions us to take advantage of opportunities that again will increase shareholder value in 2010. So again, Colby, for that, I think that concludes our prepared remarks, and I think we're ready to open up the call to our investor questions.

(Operator Instructions). Your first question comes from the line of John Ransom with Raymond James. Please proceed.

Hi, good morning. What does your kind of cash and revolver balance look like adjusted for Keystone that you anticipate, let's say by end of April?

Well, we have -- it is a $250 million, $260 million deal. We have $150 million coming from proceeds. And to tell you the truth, John, we really hope to use the 165 million, and not draw on our revolver balance by the time this closes. So I think our cash will drop into the $100 million-ish range. You will still have the $120 million out there on the revolver. As I just mentioned, we will probably pay that down to kind of a permanent level of 100. But we just don't see a significant draw on the revolver to complete the acquisition; and with the bond proceeds and cash available, I think that will be the game plan.

And the reason for the escrow is this deal was done to fund the acquisitions, is that why?

That's correct. It was done to fund the acquisitions, and on the very, very remote chance that we don't believe now, at that time, that this deal didn't go through, it gave us the ability to give the bonds back and not have that long-term debt.

Okay, and can you give any color on the acquisitions in terms of timing -- the original timeframe you expected and what you expect now? Has there been any unexpected issues with the FFTC just in terms of process?

No, John, I think -- these things always take time, and we have worked early with the Federal Trade Commission, and we have always pointed to a Q1 closing, and I think March has probably been the month we thought it would happen and we still believe that. So we're hopeful that we will have some good news here in the coming weeks.

Okay. And just remind us, share repos, is that back on the table at some point with your net debt being 3.5 times?

Yes, I think from a ratio perspective, John, we're entering that period where that is an option for us. Clearly as we think about priorities, we're investing back in our business. We're looking at acquisition opportunities because growth with the appropriate returns may have higher cash returns than even share repurchases can. And in absence of those two things, I think share repurchases makes a lot of sense. Like Eric mentioned, when we look at free cash flow yield, we're looking at a 10% to 13% after cash tax return on our shares. So to the extent we can't invest better, that's an attractive alternative for us.

And I would think the fact that you're almost a full taxpayer now would shift the balance in favor of the share repos versus the deductible interest expense and debt reductions?

That would be correct.

Okay. And I guess the last question, just more of a business question, you guys did this deep dive on death rates. For the good people at Harvard, what kind of lessons have you drawn out of that that you can share? And can you talk about your outlook? Are we looking at probably a down two or so death rate through the end of the decade, just looking at the demographics and people living longer?

I don't think that study has concluded anything like that. We're still in the process process of completing that. But I will tell you, based upon that and some other things, it is our clear opinion -- and again, year to year it's impossible, as you well know. Something can trigger an event that could give you comparable volume increase. But if you asked our expectation over the next three to four years, we would expect generally those numbers to be down for the continued reasons that we have told you before.

One is -- again, the medical advances that some day that is going to slow down as well; but number two is this lack of bursts that occurred between 1929 and 1936. We know those two events will put downward pressure on the number of deaths in our relevant markets. Those can be overcome temporarily by big flu seasons and other types of things that could drive death, but I think that is kind of the backdrop under which we're operating the business. Now the good news is, it doesn't change anything because our businesses have the capacity, if we're wrong, and the numbers of deaths go up, we will handle that and that will be a nice I would to run our business. Having said that, we're operating under the assumption that we are probably see down comparable volumes generally for the next few years.

Okay, and I guess the last question -- if you look at the dollar gross profit -- not the percentage gross profit, but dollar gross profit -- between your noncasketed and casketed funerals have you been able to narrow that difference at all to offset this 140 death annual cremation trend?

We have over the last few years, and the preponderance of that has been because of our strategic pricing, putting less pricing on product versus service. The second thing which we have done which I think is a little more positive in the long term, is focusing more on the cremation consumer. We have been able to sell a higher average cremation consumer, part of that is because we're not servicing as many as the low end, but part of it also is because we're interacting in a better way with those consumers through merchandising techniques, through new products and services; and by offering those types of products and services, we're seeing some of those consumers buying up, and we think that trend can continue. Now, we all live in this economy and understand that it is tougher times. So we realize we're selling against a more challenging consumer. At the same time, I think this is something that is very important to people. It is emotional to people, and if we could put the right types of products and services, I think it is something they will find value in and will purchase. So yes, we're seeing it close. It will never completely close because, again, I think the casket is a product that is hard to duplicate on the cremation side.

How would we think about that difference? Maybe a couple thousand dollars per funeral, around that range of gross profit difference now between funeral and -- excuse me -- between casket and noncasket?

That maybe today close to what it is. Again, I think that can narrow. But that is not just all casket. That also reflects some of the lost margin from not presenting all the options to the cremation consumer at every transaction that we do, so as that improves this will narrow. I think ultimately this gap could be as small as say, $700 to $1,000 if we do our job right over a long period of time.

Okay. Thanks a lot.

Your next question comes from the line of Robert Willoughby with Bank of America.

Hey, Tom. I don't think it is a B of A conference if there is not a funeral home facility tour, so we look forward to seeing you in Vegas next year.

That's great.

The -- assuming the government weighs in on our behalf -- but the -- can you give us any updates on Keystone performance since you announced the deal? Have they been -- sounds like they are hitting their numbers, but any color anecdotally on the kind of momentum they bring to your -- or lack of momentum they bring to your organization?

I would say generally from what I have seen in the third quarter and what I have heard about in the fourth quarter -- and, again, we're somewhat careful on the ways we communicate, obviously, between now and closing. But I would tell you I think the trends are generally the same. I think they -- the challenges that they see are some of the same challenges we see and I think some of their successes line up well with ours. Obviously, they do not have the impact from cemeteries that we have. So I would suspect that Keystone would not benefit as we did as it relates to the evidence of our sales organization and what they were able to do to drive earnings per share. But I would say on the funeral side they look a lot like us.

Okay. And then maybe a similar question on Palm. Can you give us something on the -- just the growth characteristics of Vegas, what they do well, what they do not do well? And maybe kind of growth trajectories? I assume it is a much better market than some of your others.

Yes, I would say Las Vegas is a great market. These are great folks. They have run the business very well. I think some of the things -- it is like everything that you see, Bob. We learn from each other, and I think one of the things that they like is our Dignity University. We have been able to -- they have notice very quickly -- they have embraced that training better than we have seen anybody. I know when we did the Alderwoods transaction, the same thing occurred. There's a lot of things that I think we can do to help in the development of their people, and we have begun to see some of that already. As far as growth goes, we continue to see Vegas as a growth market, particularly for our demographic segment. While you see unemployment continued to rise, unemployment impacts the youth, not the elderly.

And so the retirement population in Vegas continues to look good. People are exiting out of California and going to other markets for obvious reasons. Vegas has no income tax -- the state of Nevada has no income tax. So these are all things we factored into our decision and why we like Las Vegas. And we continue to see that, so we have seen the early results of those businesses very good. We're not -- we really don't want to share those results yet. It is kind of early. We have owned them really about two months. But we're very excited. We see positive things happening on the funeral side, positive things on the cemetery side. Maybe some opportunities as it relates to sales that we can help out on. So we're excited. Should be a good first year return for us and a great long-term addition to the SCI team.

And maybe just lastly, I still see nothing on the estate tax. That has not been fixed, correct?

No, this is the year to die. We should say, this is the year for somebody to give you money to die. But not for you to die. I have sent a note to my father, and he so far has not written back, but --

That could be a good sign.

Yes.

Okay. Well, we will wait for news on that front, I guess. Looks great to me. Thanks, guys.

Thanks, Bob.

(Operator Instructions). Your next question comes from the line of Clint Fendley with Davenport. Please proceed.

Good morning, guys.

Hey, Clint.

I wondered if you -- I'm sorry if I missed it, but how has Keystone been factored into your earnings guidance?

Keystone's accretive in the first year. I don't know if we have given exact numbers or not but it is probably $0.03 to $0.04 -- $0.04 in that area, Clint, that is factored in there. Tom walked you through the bridge that the '09 $0.51 has got nonrecurrent items such as temporary cost (inaudible). So to grow from $0.45 into the guidance -- $0.45 being kind of the normalized type level of '09, that would be part of it. The other part would be the operating improvements and further cost initiatives that we talked about.

Okay, thank you. And then could you guys remind us where we stand now as to the percentage of preneed that is funded by the third party insurance providers, and how that has changed during the last few quarters?

I think right now, probably what we write -- and this will be approximations -- 70% or so, give or take, is insurance funded. 30% is probably trust funded, and that has trended more towards the insurance, I would say, over the last few years -- not dramatically. And when you think about what is coming out of the backlog, Clint, this is a little different number, so I just want to make sure you understand both. The input is probably close to 70/30. The output is probably closer to 50/50, because a lot of the stuff that's maturing now coming out of that trust backlog is getting smaller and smaller.

Okay, so what is your expectation as to the gross margin implications of the trend here?

Well, again, I think the gross margin expectations are very positive when you look at the numbers that are being put into the backlog versus -- for the long term -- versus what is coming out of the backlog. Keep in mind, when we grow preneed funeral in the near term, it puts pressure on your current margin simply because you're incurring the selling costs, and particularly on the trust side you're not getting any income to offset that. On the insurance side, you are. That's the good news. So in the current mode, you're going to deteriorate margins slightly to benefit the future. In the long term, it's going to be very, very positive. We're seeing averages of well above our walk-in averages today, and they will also have a growth component to that average, that should reign in some very, very good margins. Also, preneed allows you more predictability with regard to staffing and everything in the long term, so we see this as a very positive event for us when you think out a few years and what margins could possibly look like.

Thank you. And last question here, obviously you mentioned in the intro there, Tom, that volumes appear to be down in the low single digit range foreign currency gains January and early February. If I'm not mistaken, in the year-ago quarter, down around 11% or so. Are you surprised that we're not up from a volume standpoint at least a bit in the early part of the year?

Yes, I would say so. I mean, and again, it may just be the optimist in me. I was hoping we would see a little better first quarter because exactly what you said. We saw the worst first quarter we have ever seen in our lives last first quarter. So I was hoping for that. But again, you just don't know. The things that are going to drive this are flu season, the weather changes. Now we did see a pretty cold February, and so you expect numbers to be a bit different. But I think yes, I would say I'm somewhat surprised, but we planned for this so we are not overreacting to it by any stretch.

Clint, the other thing I would add is that when you look at that 11% down, it really was down significantly in February and March, and what we're really quoting so far is more of January and a very preliminary look at February.

Okay, thank you, guys.

Your next question comes from the line of Vimal Nair of Wisco Research. Please proceed.

Good morning, guys, and firstly, congratulations on a great quarter. My first question is regarding the average revenue for a funeral service, and do you think we can continue to expect this increase that we saw the last few quarters going forward, or do you think it remains flat or may even come down in a deflationary environment.

I would say that our expectations are that it is becoming more challenging to grow it. We fully expect to be able to grow it. When you think about a couple of things -- one, when we talk about this, we like to take currency expectations out. The movement of the Canadian currency can have an impact on our average, so a lot of times when we talk about it we remove that, because remember, the currency at the top also translate into the expenses at the bottom, so it doesn't have as big an impact on our bottom line. So excluding currency, we would expect the walk-in business to probably grow in the lower end of the low single digits going forward, because not only do you have the pressures of pricing but you have the cremation mix change that is going to have impact on them. So when you think about that average, you may want to think in the 1.5% to 2.5% growth opportunities for us.

Then there is another component of preneed, and the preneed growth will be a factor -- will be impacted predominantly by movements in the market, because that 50% of the backlog is coming out of trust, is impacted by trust earnings going forward. So as far as the markets going north, that's going to have a positive impact on our ability to grow it. If the markets were to go backwards in a significant way, that would have a negative impact. So we expect it to grow. We expect it to grow in the 1% to 2% to 3% range, at best.

Thank you. And just a follow-up to that. So regarding the trust investment returns, what exactly do you think is the sensitivity on net income with respect to the trust investment returns? You said you were down 1% in January, and if that trend continues, what do you think would be the impact on the bottom line?

It is probably -- every 1% is probably in the $1 million, $2 million range. That's a very rough figure that we did in a calculation, because it depends on the mix of exactly where the -- which investments were down and which investments were up. But that's kind of a rough EBITDA figure that you can model, so to speak.

All right. Thank you, that's all I have. Thank you very much, and congratulations to you.

Thank you.

Thank you.

At this time, there are no further questions in queue, so I will now turn the call over to SCI management for closing remarks.

Oh. Everybody, thank you for being on the call today. We appreciate you taking the time, and we look forward to talking to you again soon, probably in late April or early May. We will let you know. Thanks again, and have a great day.

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