Service Corporation International (SCI) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first-quarter 2010 Service Corporation International earnings conference call. My name is Jasmine and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. At this time, I would now like to turn the conference over to your host for today, SCI management. Please proceed.

Good morning. This is Debbie Young, the Director of Investor Relations for SCI. We want to welcome you to our call this morning to discuss our first-quarter results. As normal, 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.

Additionally, on the call today, Tom and Eric may use terms like normalized EPS or normalized operating cash flows. These are non-GAAP financial terms. Please see our press release and 8-K that was filed yesterday where we have provided a detailed reconciliation to these measures to the appropriate GAAP terms. Now, I will 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 start with an overview of the quarter and then get into funeral and cemetery operations like I normally do and then have a little concluding segment for you as well.

On an overview of the quarter, normalized earnings per share were $0.13 versus $0.12 in the prior year quarter. So on a year-over-year improvement, it was primarily driven by two things. One was strong cemetery sales production and secondly, we had increased trust fund income, particularly over Q1 2009.

Shifting to kind of an expectations analysis, I would define the quarter overall as good. It was in line with external expectations, slightly below our internal expectations as, from our perspective, we had even better-than-anticipated cemetery production in the first quarter, but this was more than offset by the softer funeral volume that again I will talk about when we review funeral operations.

And so here we start, funeral operations. First of all, the comparable funeral revenues for the quarter were essentially flat. When you think about volume on a same-store basis, it is down some 3.5% for the quarter. While our annual guidance assumes down to low single digits for the year, even at the midpoint of our guidance, we were expecting a more favorable first-quarter comparable. As you will recall, last year in 2009, our comparable volumes were down some 11.2%. So we thought we would get a little better bounceback against those numbers and we didn't get quite what we expected.

There is really no reason to overreact to this. Three months is not a lot of data as the year goes and in addition to that, we anticipated this, particularly in the low end of our guidance ranges that we gave, the annual guidance back in February. So again, not as good as we thought, still down a bit but, down in the mid single digits, which is where we thought it would be for the year.

On the funeral average, it actually grew 3.2% for the quarter and this is despite an 80 basis point increase in our cremation rate. When you break down the 3.2%, it takes into account higher trust fund income, as well as the positive currency effects of the Canadian dollar appreciating against the US dollar. When you pull out those two items, which really gives you a view of kind of at-need walk-in pricing, we boil down to a growth of 0.7% when you look at it from a quarter-over-quarter basis. This was in line or slightly above our internal expectation for the quarter as Q1 was the most difficult comp as we looked at 2010 and how we compare back to 2009.

This should get easier as the year goes along. However, I want you to keep in mind that in 2010, it will be one of the toughest average growth years we have had in some time. And it is really driven by three things. One, economy's impact on consumer sentiment. There is no doubt that people are being a little more careful about how they spend their dollars across the entire retail spectrum.

Secondarily, we have seen a cremation mix change that is a little bit bigger than what we experienced over the last couple of years. And then lastly, coming on the heels of 2009, as you can say, the economy impacted the consumer last year as well, but we were able to grow a little bit beyond that because, if you recall, we rolled out the new Dignity displays in 2008 predominately, so we had a real pop I think in 2009 from an increase in the Dignity package penetration rate. And while we are still doing well there, we just don't see the same overwhelming effect that was able to kind of mask some of the economy's impact. So with that expectation for 2010, we still feel very comfortable about our guidance because we toned those down a bit to the low single digits, call it somewhere between 1.5% and 2%.

On the funeral profit side, funeral profits declined $1.7 million. We did a good job at managing our variable expenses in the declining volume environment, particularly as it relates to salaries and wages. Therefore, we had a minimal decline of the $1.7 million in funeral profits that can mostly be attributed to flat revenue combined with higher pre-need selling costs as a result of increased pre-need sales production.

And on that pre-need front as far as production goes, there was another quarter of solid growth. Pre-need funeral sales grew 10.2% to $120 million for Q1 2010. A number of contracts grew some 9% and we believe this is a function of the investments we have made in our sales organization over the last couple of years.

And as it particularly relates to pre-need funeral, I would describe it as this. Number one, enhanced sales training, both at the counselor level and at the sales manager level. Number two, sales and field management focusing on selling activity versus results, getting back to what are people doing every day on every part of the selling process following up and ensuring that we are actively out there conducting our business. And lastly, increased and more effective leads that we are generating associated with better lead management systems that we put in place to enhance again how we are following those up.

Now I would like to shift to cemetery operations. The cemetery segment performed admirably and exceeded our own expectations for the quarter. Comparable cemetery revenues increased approximately 10% quarter-over-quarter. Taken even further, if you think about our comparable pre-need sales production, we were able to grow that over $12 million in the quarter or some 15.6%.

This is especially exciting to us when you consider that we are coming off a very strong fourth-quarter performance in 2009, when you also consider that we restructured our operating structures out in the field in January of this year. Again, any time you change, that is a distraction, so we were able to overcome that. And lastly, we had some very unusual weather throughout the country, but particularly I would say on the East Coast with some of the massive snowstorms that were out there. And again, that shuts down some of your production in the quarter. So when you take all that into account, and the numbers we were able to produce, very, very pleased and want to congratulate our sales organization on what they were able to achieve.

So again, we believe this is primarily as a result of the investment we have made in our sales organization through training, managing activities and lastly, on the cemetery front, by modifying our sales compensation to incent property production in particular. That is where we saw the real raising the bar for the quarter.

We also benefited in the quarter from higher trust fund income, some $5.5 million on a quarter-over-quarter basis. So when you take the increased sales production and the better trust fund income on this success, cemetery profits improved some 67%, or $11 million and gross margins grew 580 basis points, 16.9%. Keep in mind these increased revenues are very high margin revenues. The property sales have an increase of some $10 million, come in at about a 60% margin, so that accounts for $6 million of the $11 million improvement in profit. The trust fund income dropped straight to the bottom line, 100%, and so there is the other $5 million. Pretty simple to understand how we grew the profit.

I also want to point out that we are starting to see some benefit from the cemetery and maintenance initiatives that we have been talking about, which helped offset some higher selling costs as a result of increased pre-need sales production with a higher percentage cost as the primary sales production growth came from pre-need cemetery property sales, which have a higher cost of sales.

Now we have been talking about comparable businesses and we are happy to be able to say that the rest of the year, we will be able to talk about some non-comparable piece because we have a piece that's pretty significant and that's Keystone. So a big event for us was on March 26, 2010. We closed the acquisition of Keystone. Everybody remembers this is the fifth largest provider, had about $124 million in revenues. We are very excited. We have gone through the Federal Trade Commission review and the required divestitures were within our expectations. Call it some $25 million in revenue and probably about $6 million in EBITDA that we will be divesting of.

We have gone through a robust buyer process at this point and we expect to be able to sell these operations sometime in the summer and again at prices that are very reasonable and within our expectations. We are very, very happy to have this review behind us. The transition is going very smoothly and is on schedule and we are very, very excited about the opportunity that Keystone brings us. I want to welcome the Keystone employees to the family and secondarily, I want to recognize and thank everybody that has been involved in the planning of the integration process and the initiation of it. It has gone very well and a lot of people both on the Keystone's side and on SCI's side have done a tremendous job. So thanks, everybody, for all you do.

Now in conclusion, I would summarize with this. The good news is that we continue to see favorable trends that we saw in the back half of 2009 continuing into 2010. These are strong pre-need sales, improved trust fund income and solid expense management. The one weak spot continues to be comparable volume. The best long-term way to combat this is focusing on growing our pre-need backlog and lock up these sales today through both traditional and nontraditional channels.

In the short term, we will continue to manage our variable expenses while we try to grow our relevant marketshare. We are really finding ways to interact with consumers, attracting people to have conversations with us on a pre-need basis and finding ways to interact with them on an at-need basis. If we can get people to come into our facilities, then we find that our hit rate is very high. We tend to keep them. So we are trying to find new ways to market to these folks, to communicate with them and to get them to come and visit with us. And we know when they do that they are going to choose SCI. So we are working very hard on a lot of things in that arena.

So in conclusion, based on the Q1 performance, we are very, very comfortable with the annual guidance that we have provided you guys just back in February. So we continue to stand behind that and feel good about our ability to achieve. This concludes my prepared comments and I now I'd like to turn the call over to Eric Tanzberger.

Good morning, everybody. Thanks for joining us. I am going to talk about the final funding of the Keystone acquisition. I'll also talk about our current financial position and liquidity, our cash flow for the quarter and then I will end with some comments on our trust fund performance to give you an update of what led into that.

So let's start with Keystone, as Tom said, closed on March 26. Total net cash outflow associated with purchasing the transaction was about $278 million and that is after taking into account a little bit more than $10 million of cash that was acquired from Keystone. $260 million of this $278 million was an outflow in the first quarter and that is a result of purchasing about 91% of the shares for about $180 million and also paying off about $80 million of the Keystone outstanding debt. An additional $18 million payment for the remaining 9% of the shares has already been done and was done in about mid-April.

Funding of the $260 million that occurred in the first quarter or actually occurred on 3/31, let me break that down for you a little bit. $235 million of that was really cash on hand. Now remember, that includes the $150 million of proceeds that we had in an escrow from notes that we issued in November 2009. We also used the cash balance of about $85 million as well and then we drew down on our bank credit facility to the tune of about $25 million. So those three components are how we funded the $250 million cash outflow that actually occurred on March 31.

Now after we funded this Keystone acquisition, the total cash at the end of the quarter was still a healthy $180 million, which is somewhat flat with the end of the year, end of 2009. Today, as we speak, we have less than that. We have about $135 million of cash on hand. The decrease from the end of the quarter through today primarily reflects total interest payments that we made in April of a little over $40 million. We also paid the 9% of the Keystone shares that I just described for you of $18 million and then those amounts are offset by positive cash flow from operations that we experienced in April thus far.

From a liquidity standpoint, we currently have about $205 million available on our $400 million bank credit facility, which again matures in November 2013. This is used currently to support just under $50 million in letters of credit and as I have said, we have drawn down on that and total drawdown on the credit facility is about $145 million to debt. Our total debt, as you have seen on our balance sheet, hasn't moved materially. It is about $1.9 billion and again, I want to emphasize that there is no meaningful maturities in terms of our debt until November 2013. And that November 2013 amount is primarily the bank credit facility that I've described to you.

Looking forward in terms of capital deployment, we again at SCI will continue to be opportunistic. So let me give you just a little background first from the quarter. Our current leverage ratio on a net debt basis at the end of the quarter, including a full-year pro forma EBITDA amount for Keystone, which is the bank definition, is approximately 3.25. Generally, we believe that the appropriate capital structure for us is having a net debt to EBITDA leverage ratio between 3 and 3.5 times. So we are right there in the middle of where we believe we should be.

So in terms of our capital deployment priorities going forward in 2010 we, we will continue to evaluate strategic acquisitions that are out there. Now keep in mind that an acquisition will require a return in excess of the relative return we can generate from other opportunities. In our current share price of around $9.30 with a free cash flow yield of about 9% to 11%, we believe that repurchasing our shares is relatively attractive as a good use of our capital.

Our dividend remains in tact and we are comfortable with the current amount of our dividend, which yields about 1.75% in light of other capital deployment options that are available to us. And because the current leverage ratio is within our desired range that I just described to you, we are comfortable with overall debt levels at this time.

Turning specifically to cash flow now for the quarter, our cash flow from operations was about $109 million, which was down about $33 million from the prior year. The primary reason for the decrease, as we have mentioned before on several occasions, is the return of normal incentive compensation payments in 2010. That is coming off of a year in 2009 where we had little to no bonus payments and that delta is about $23 million that I just described to you.

Also we funded on our April 2 payroll on March 31. This is just a timing difference of about $16 million compared to prior year and will provide a positive variance in April. Helping to offset some of these declines were an increase of EBITDA during the quarter and a decrease of about $8 million in cash taxes and about $2 million in cash interest payments year-over-year.

Now an important reminder about our cash flow that I have just described to you of $109 million in the first quarter. Our cash flow is impacted by the timing of interest payments, which are concentrated in April and in October during the year. So we want to caution you again about using our first-quarter cash flow and annualizing it to a full-year run rate.

Total CapEx for the quarter was about $18 million with maintenance and cemetery development about $17 million of this amount. Deducting these recurring CapEx spending items from our cash flow from ops, we calculate our free cash flow for the first quarter to be about $92 million, which was a little bit better than we expected when isolating the payroll timing issue of $16 million that I just mentioned. We still believe our free cash flow guidance for the full year of 2010 of $205 million to $265 million is very reasonable. And as mentioned before, we believe the 9% to 11% free cash flow yield that this produces is very attractive.

Now let me shift to our trust funds. The combined trust fund assets, which are about $3.2 billion, increased by about 3.8% in the first quarter, so that performance of 3.8% compares to an S&P 500 return of about 5.4%. So when you compare those, you have to remember the asset allocation where about 40% to 45% of the total portfolio from all three of the trust funds is invested in fixed income securities and another 10% to 15% is in cash and alternative investments.

So how do we measure that? We produce a custom benchmark that we monitor that replicates our asset allocation and our trust performance in our quarter was within our expectations when you compare it to this custom benchmark that again is based on the asset allocation of the trust funds. The total trust fund income from all three funds recognized in our income statement was $21 million for the quarter, which is up from $13 million in the first quarter of '09. That was the key driver of cash flow and also of earnings, as Tom mentioned in his remarks. And although this is significantly higher than last year, this first-quarter trust fund income was generally in line with our expectations.

So in conclusion, we as SCI management believe we are positioned well for the future. We have a strong balance sheet with again about $135 million of cash on hand. We have great liquidity, a favorable debt maturity profile and very attractive free cash flow, as I have mentioned. So we tend to use our capital wisely during the rest of the year and to take advantage of opportunities that we believe will increase shareholder value through this capital deployment.

So with that, Jasmine, I think that concludes our prepared remarks and I think we are ready to go ahead and open it up to questions at this time.

(Operator Instructions). John Ransom, Raymond James.

Hey, good morning. Eric, do you see -- what do you see the likelihood for the remainder of the calendar year of any material either acquisitions or divestitures?

I can't hear what he said.

Can you say the back half of your question again? It faded out, John.

Yes, I'm sorry. What kind of odds do you put for the balance of the year of any material acquisitions or divestitures?

Well, divestitures obviously we will have, primarily related to the FTC divestitures that --.

Right. I'm sorry. Other than Keystone, of course, yes.

Okay, other than Keystone. We are constantly looking at our business. I will let Tom describe that, but I don't think that will be ultimately material in terms of disposition proceeds outside of the FTC proceeds that I just mentioned. I will let Tom answer the potential for acquisitions.

Yes, John, I think on the acquisition front, from a material perspective, we don't foresee anything. Anything material is going to come when it comes, but I would tell you that we are seeing opportunities out there to grow, deals that make a lot of sense for us and I think we are in good position because of, again, our balance sheet and our cash flow that we can fund these deals. And while you are seeing business pick up in the big corporate environment, I think when you look at smaller businesses and their access to capital, it is still not there yet. And that is a good sign for us when you think about being able to do acquisitions and being able to bring cash to the table.

And do you -- the dispositions on Keystone, do you think there will be a negative arbitrage between what you paid for Keystone and what you are able to sell these assets for?

It will be slight because I think we will fetch something very, very fair. Nothing like the levels we saw at Alderwoods. So it will be a very, very slight negative arb, within well within our expectation.

Great. And I am sorry if I missed this, but could you remind me what your current bank deal would allow you to do on buybacks?

We cannot do buybacks on the net debt to EBITDA ratio that I mentioned to you, John, above 3.75 times and again, I said earlier today that we are at about 3.25 on that same metric.

Okay. So 0.5 times trailing EBITDA adjustments?

Yes, that is correct.

All right, thank you.

A.J. Rice, Susquehanna.

Hey, everybody. I had a couple of things to ask about. I mean we are seeing a number of companies say that their business was impacted in February because of the severe whether. And obviously most of your business wouldn't be impacted, but I could see a scenario where like pre-need cemetery sales might have slowed down in February. Obviously overall, the quarter was good, but did you experience any impact from that in February?

This is Tom. I think definitely we saw that. I think -- the way to think about it in our business is we had weeks in parts of the country where you clearly couldn't sell any cemetery property. So then the question is how quickly after that is done do you get back in front of these people and be more productive let's say in March to get those closed?

So I think some of that came back in the quarter, but I would also agree with you that we had to be somewhat impacted by that in particular markets. I mean if you think about DC was closed for a week, right, as an example. So absolutely, I think we've got some of it back and probably some of it carried forward into the rest of the year.

Okay. On the pickup you are getting from what you are doing with the cemetery maintenance, outsourcing some of that and so forth, do you think you got most of what you are going to see in the current quarter or is that something that is stepping up over the course of the year?

I would say you're going to see the impact a little bigger as the quarters go on than you saw this quarter. So I would expect to be able to talk a little more about it in the second quarter and then third quarter and then probably looking at a more stabilized type of rate. But I'd tell you, from learning more about this from Elizabeth who has driven this process for us, I think this is one of those kind of continuing improvement opportunities. This is a process that we are entering into and we are going to learn more and more and we are going to find new ways to drive costs out.

I don't think it is a significant level that the initial phase will generate for us, but this is a very, very good process for us. We are learning a lot and I think it enhances our ability to serve the customer. So when you can do that and save money, that is a big win-win for everybody.

Yes, that's good. On Keystone, Eric, just make sure I understand this right. You pre-funded a big chunk of the debt, which you had to carry as a negative carry. Now you have closed the deal. What are some of the natural swings from maybe Q1 to Q2 -- I don't know if that is the right way to look at it -- on the impact of that? Is that worth, I don't know, a few cents sequentially or a cent or two or how would you describe that?

You are talking about the negative carry that we had?

The negative carry and I think you also have said that you thought the deal would be accretive. So I am just trying to figure out, now we move sequentially to a whole quarter where you have it, maybe it isn't accretive day one, I don't know, maybe an update on that. What is the swing factor sequentially when you now have that in there for a full quarter?

Well, first of all, you are right. There are only four days in the quarter, so it is a very small amount. It's about $0.5 million of operating profit in the first quarter. Obviously, that will go to its normal run rate that we have described before in the kind of mid-$30 million type EBITDA range is what these businesses can produce.

We have said that we think that the acquisition, now that includes Palm, is accretive by $0.03 to $0.04. The release of the negative carry is probably maybe about $0.01 on a full run year basis, but that was about it.

Okay. That is good. And then just a final question on -- obviously Keystone is what it was, but Palm was sort of an interesting one and that seemed like a marquee family operation. We haven't had that many of those change hands in quite a while. Did the fact that that deal got announced, you did it, has that generated any other -- sometimes I know those things can beget other sales. Is there more activity than what would have been six months ago or a year ago and maybe because of that?

I think there is more activity for a variety of reasons, but I do think one of them may be that in that here was a deal that we have done. I think this is a very visible deal in the industry. I think Ken [Knotts] whose family started this whole operation are people very, very active and a lot of the people that work in that organization. And I would say the successful integration of that and people understand a little bit more about SCI and the culture that we may bring to these businesses is a positive. And I think that has resonated and we are seeing more activity.

But I think more of it is being driven by potential changes in tax law when you think about some of the ownership of these businesses and where they are just in their lives. So we are going to see some of those things be able to turn and if we are viewed as a good alternative, as a great partner in bringing these businesses into the SCI family then that is going to work in our favor.

So we are out there, we are looking. We want to do good reasonable deals that can give reasonable returns to our shareholders and grow because this is the best way we can use our capital bar none at the right prices.

Okay, that's great. Thanks a lot.

Robert Willoughby, Bank of America.

This is [Erin Wilson] subbing in for Bob Willoughby today. Just on Keystone, are you seeing any early positive or negative to prices with regards to the acquisition? And I guess I assume that you are maintaining synergy guidance. How does that factor in I guess proceeds from anticipated divestitures?

I would say it is going exactly as we anticipated, very smoothly. We are seeing the synergies that we anticipated. There can always potentially hopefully be more, but a lot of those are related to areas that we haven't had the time to delve into. If you think about the Federal Trade Commission and the rules along the process for instance, you can't get a lot into the customer interaction and pricing and some of those things. So those are the things we will learn more about and could result in further synergies. But again, we were very pleased with the ones we have identified as a very accretive, good deal for our shareholders and I would tell you so far, exactly what we expected, timing is good. So very pleased.

Okay, great. Thanks.

Clint Fendley, Davenport.

Good morning, guys. I wondered if you all could update us on the progress you have made for the nontraditional pre-need channel sales.

Sure. A lot of these -- I'll give you a couple of them. One is we have enhanced the Dignity Memorial website, something we are very pleased about. And in conjunction with that, we have updated and kind of consolidated, if you will, our approach as it relates to the location of the website.

So these are channels that I would tell you -- obviously people aren't going to wake up tomorrow and start everybody in the world planning their pre-need online, but more and more people are doing it. More and more people are looking for information and as I was talking about before, interacting with consumers, we are finding people reaching out to us through the local websites, to our Dignity Memorial website and again wanting to transact business, wanting information. So we are excited about having those in place and the success and timing and I'd say the quality of what we have been able to produce.

Secondarily, one of the things we have talked about before are these insurance partnerships. So what we are beginning to do, and again, we have to have a presence, if you will, technologically to capture this data and communicate with these potential consumers. But we have got sales folks out there interacting with consumers, trying to sell insurance products in this example where they are utilizing the cost of providing funeral and cemetery benefits as a discussion point in generating these insurance sales.

So there are people out there finding insurance products and signing up as part of the Dignity planning -- Dignity Memorial group, if you will, as being a potential customer of ours. And so they are a member. We are having conversations with them. And so those maybe funded by our product today, but more likely, what we are seeing is a real great response as it relates to people that are potential insurance customers.

So as these people follow up and sell insurance product, we have developed a relationship and they have selected, and again, this is a big variety of levels of selection, as some people have said, I want to be part of the Dignity Memorial network and I like this location. Others may have gone further and actually developed an entire plan. So we have got this big pool of consumers that we are building that we have relationships with that we are very, very excited about.

Now these are generally younger people. These are people that aren't going to show up as pre-need contracts in our backlog. And so we are learning more and more as the months go on, but we are seeing really a dramatic increase in the number of folks that are coming into that pool, if you will. So we are excited. They are going very well. I wouldn't expect big impacts in the financial results over the next couple of years. But if it works as we believe it is going to work, this should be a pretty dramatic impact when you get out five, ten years from now.

Good deal. That's very helpful. And just finally kind of a bigger picture question here. I know at one of the industry conferences this spring, there was quite a bit of discussion around just increased consumer protection legislation for the funeral industry. I wondered if you could maybe update us on where that might stand currently and how, if any, impact you might see that having on your go-to-market strategy here?

Are you talking at the national level?

Yes.

Okay. Any time people talk about potential interaction with our consumers, we need to be aware, we need to be on top of it. I guess I would describe it as this. A lot of the way we are regulated in the areas that I'd say are more of the hot pockets of concern are going to be on the state level. So there are certain states out there that we are seeing some regulations that could be somewhat burdensome.

I think the way we always view this though is that we are the most compliant of anybody in our industry as it relates to interacting with consumers or things that we do. So more regulation isn't always a bad thing. We don't view it that way. And we want consumers to be protected and we support efforts to do so. We just want to be part of the process so it gets written in a way that is fair and again, most helpful to the consumer. And so we have been involved in various state efforts to do this and we have tried to provide our insights into how best to protect the consumer and still have a robust conversation around getting planning done, which we believe is a very, very important thing.

So I would tell you that we are aware of it. I wouldn't say we are overly concerned and we are just trying to be helpful in part of the process as they develop legislation related to this. But today, it is really all driven at the state level.

Thanks, guys.

(Operator Instructions). Sabu Joseph, BOE Securities.

Good morning. Now listening to this, it looks like the cash flow or the capital allocation is going to be extremely important going forward. So can you remind or just talk about your acquisition philosophy one more time? You have done a couple of acquisitions recently. Have things changed in how you plan to do this capital allocation, especially on the acquisition side?

I think the way we view acquisitions -- we have a grid where, number one, when we are thinking about where we want to invest our capital, we evaluate markets and potential consumers as it relates to their alignment with what we are good at. What we are good at is providing, I think, high levels of service, high-quality products and the like. So we want to find consumers that agree with that and want to buy it. So we have a way of, from a demographics perspective, deciding which markets fit that bill.

Secondarily, we incrementally value an ability to scale. So we'd be even more excited if it is in an area where we can share resources and drive down the overall cost and the effectiveness of that marketplace. So that is our first view of the world is are there markets that fit that bill and there are a lot of them, quite frankly, that don't. So that would be one screen.

Once we determine that this is a place that we would like to be, it gets back to does the return on this investment meet our criteria. And I would say that generally, we are looking for deals that, on a pro forma basis, and again, we are not very aggressive in our assumptions as we evaluate these I would say, these are things that we know we can execute and deliver, we want a return of 12% after-tax, again from a discounting cash flow perspective, which is more than enough to get across our weighted average cost of capital.

So we think if we can find deals that are a sweet spot in there with potential upside, we find more things that work for us, then that is a great deal. As you get below 12%, they become a lot less attractive. As you approach 10%, we don't want to do it. So that is really the way we view the world in acquisitions, one strategically and two, what type of returns we expect to be had.

So from a strategic perspective I understand now, will you break this strategic rule on a tactical basis and what will force you to break those rules? I mean this 12% after-tax (inaudible) on investment, what will force you to break this rule?

Well, I think the only way -- what would force us to break that rule would probably be a location that we believe, longer term, has tremendous potential. We would look at a deal that says -- because when you think about discounting cash flows, there is so much weighted emphasis on the first few years. So as an example, if we knew we were getting a deal in an area that was going to grow up over the next 20 years and be a tremendous place to be, that might allow us or want us to be able to do a deal in let's say the 10% to 12% range. Otherwise, really we are looking for 12% or it doesn't really work for us. That would be an example of where we might consider doing it.

Okay, okay. I just have one quick follow-up too. Could you please give us an update on your cost management efforts? I know you have these acquisitions. Are you extending your cost management efforts to the acquired assets and how that is working now?

Sure, cost management is a continuous improvement, as you would expect. I would say, from a supply chain perspective, we are working hard every day to leverage our scale. Clearly this acquisition affords us the opportunity to take the Keystone supplies and put them within our supply chain efforts and that is going to drive down costs, we believe, in all sorts of areas.

And then strategically, we have got a few things going that, again, we have talked about if you go back and look at some of our other calls and correspondence and presentations. And they really center around, again, utilizing our scale and utilizing metrics and technology to drive down costs.

On the funeral side, we have got a very mature process, but again a robust one that continues to deliver results in that we are using funeral metrics to drive staffing. So finding best practices and ways to track staffing as it relates to providing funeral services, both cremation and burial, and rightsizing our markets from a full-time staffing and from a part-time staffing. And that has driven, I think, real efficiencies on the funeral side.

There is two newer ones on the cemetery side. We mentioned the cemetery maintenance project. And here this is a process whereby we've divided some of the responsibilities in the cemetery between maintenance of grounds and between ensuring that we have got appropriate recordkeeping and burial procedures on one side. And we are completely inhousing that piece and we are outsourcing for the most part the ground maintenance piece. By doing that, we have been able to leverage our scale and drive down that cost, so that is in place today and again, kind of a general improvement process.

And then the last one that really hasn't gotten any results yet to date because it takes some investment and take some time, but we should be in a position by the late second quarter and really kind of third quarter where we have got the technology in place to begin to see the benefits of what we refer to you guys as the cemetery administrative project. And that again is really utilizing the technology to drive down our costs in how we administer cemetery contracts and really all the administration around cemetery operation.

So these are the things that are out there today. They are strategic. There is training involved. There is investment involved, but hopefully we have proven over the years that when we see something, we can execute it and deliver and sometimes deliver beyond those expectations. So those are the general types of things. We are constantly looking for new ways to leverage our costs. It is part of our DNA, so I would summarize it as that.

Great, great. Thank you.

At this time, there are no further questions. I would now like to turn the call back over to your host for today, SCI management, for closing remarks.

I want to thank everybody for being on the call today. We look forward to talking to you again. We would anticipate kind of end of July that will be in front of you again. So thanks and have a great weekend.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.