Service Corporation International (SCI) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2010 Service Corporation International's earnings conference call. My name is Carol and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I am now going to turn your presentation over to senior management. You may begin.

Good morning, everyone. This is Debbie Young, Director of Investor Relations. We want to welcome you to our call today. As usual, I get the honor of doing the Safe Harbor language, so if you want to get your coffee right now, go ahead.

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.

Also on the call today we may use terms such as normalized EPS, or normalized 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 a detailed reconciliation for each of these measures to the appropriate GAAP term.

Now I will turn the call over to President and CEO Tom Ryan.

Thanks, Debby, and thanks, everybody for being on the call today. What I am going to do is what I traditionally do, talk a little bit about an overview of the quarter and then get into some of the segment discussion, and then give you a little bit of background and insight into our guidance that we are providing for 2011.

Before I do that I want to thank everybody within SCI, the people that make it happen every day. Without them we wouldn't be able to deliver these earnings. They importantly enough take care of the client families that are going through very difficult times, so appreciate all your contributions, those of you that are listening in.

So first with an overview for the quarter. Third quarter again we delivered consistent positive performance. We are pleased with what we were able to do. The normalized earnings per share were $0.13 versus a prior year $0.13 a quarter.

Now recall in the third quarter of last year that we had a benefit of a little over $7 million, or converted to earnings per share $0.02, as a result of being able to reduce our long-term insurance reserves following a multiyear period of focus and comprehensive training to decrease our liabilities as it relates to auto, workman's comp, and other general liability claims. So because of that hard work we were able to reduce that liability on a one-time basis and it resulted in that $0.02.

So when you isolate that issue, we really grew our earnings this quarter by $0.02 when you compare it to last quarter. The reason that we were able to do that year-over-year was primarily driven by three things.

First of which was the contribution from Keystone and Palm Mortuaries, the acquisitions that occurred in late 2009 early 2010. Those contributions obviously are somewhat offset by higher interest costs. They predominantly have benefited the funeral business, because again if you recall Keystone was primarily a funeral company.

The second item that drove performance in the quarter was higher cemetery merchandise deliveries and more completed cemetery construction projects. You'll recall we have to have -- the cemetery property has to be in condition to hand it over to the consumer with 10% down. So constructing these triggers that revenue recognition, and a lot of what we constructed were things we sold earlier in the year.

Lastly we had a lower effective tax rate in the quarter, which helped us about $0.01, which was offset some, by the same amount, because of higher general and administrative costs.

So overall a good quarter, in line with external expectations and a little bit ahead of our own internal expectations for the quarter, as good expense management helped to offset lower performance on the cemetery sales production side, which again we're working hard to get back on track that we are pleased with.

Now I am going to look at an overview of the funeral operations. Funeral operations performed well during the quarter relative to our expectations. As we have expected and communicated all along, funeral revenue growth continues to be challenging, but we successfully continue to manage our costs.

Comparable funeral revenues in the quarter increased 1.2% to $329 million. Same-store volume was down about 1.6% for the quarter. So again, not exciting; we would rather see growth. But the decline continues to get smaller, so again, a little better than we expected and that helped us achieve the results that we did.

For the nine-month period same-store volumes were down 2.4%. So tracking just about what we thought would happen for the year and a little bit better than what happened for the quarter.

Our funeral average grew 1.8%, which takes into account higher trust fund income and the positive Canadian currency effect. If you exclude those two things, our average grew 0.9%, just under 1%, which in this day and age isn't so bad and was within our expectations.

We think we can do better, and I will talk a little bit about that in our 2011 guidance. But remember this takes into account a 60 basis point growth in the cremation mix average. And in addition -- which is probably even a little more punitive than the cremation average mix change, because that is not too bad -- we are seeing a shift within cremation towards more direct cremation.

You will recall there was a time two and three years ago when three-quarters of what we sold was cremation with service, and we are seeing more people that are within the cremation segment buying down to direct cremation. Again in recessionary times not to be unexpected; but we are seeing a little more of that I think in our average.

The last piece of revenue is the $3.2 million increase in G&A revenues, which was driven by our insurance funded preneed production. So not only are we selling more, but we are selling more of an insurance mix in driving those G&A revenues.

It doesn't drop to the bottom line, because of selling costs. But again it's growing that backlog which is very, very important to our long-term strategy.

So from a profitability standpoint in the funeral segment, we reported comparable funeral profits that declined about $6 million, and the reported margin decline was about 200 basis points. But if you take out the $4.5 million of savings that again ran through our P&L in the third quarter of 2009 relative to the insurance reserve reduction, the reduction was really $1.5 million or about 70 basis points. So essentially flat year-over-year; slightly down on a normalized basis.

This remaining decline in margins is partially related to the increased selling costs I mentioned before. So we are selling more to the backlog and incurring more expense, which again is going to generate higher profits in the future.

We grew our preneed funeral sales by 3.1% or about $4 million for the quarter. Remember again those costs get recognized now and the revenue is deferred until a later period.

We also saw, as we would have anticipated, higher field overhead costs assisted with our new field operating structure. Remember, we now have Major division, we have a Metro division, a Main Street division. And in setting those up we have got a little more expensive management structure that we believe is going to be able to generate higher revenues in the future.

So with all this in place in a tough revenue environment, we think it is a good quarter. We believe we are poised with our new operating platform to focus on growing the preneed business as well as being able to enhance our atneed revenues, particularly on the cemetery side, with this new structure.

Recall, in Major we have got embedded salespeople now in cities that are helping drive sales, both funeral and cemetery. We expect those investments (technical difficulty) pay off.

Now I will shift to the cemetery operations for the quarter. Comparable cemetery revenues increased 3.6% quarter over quarter. This is mainly attributable to the increased merchandise deliveries and completion of the cemetery property construction projects that I mentioned before in the current period that helps overcome lower than anticipated preneed sales production.

Comparable preneed sales production -- so I am focusing just on preneed here -- declined $5.7 million or about 5.7% for the quarter. We expected to see a little bit of a slowdown. You recall we talked about this last quarter, coming off four very strong quarters in a row.

But we also feel like we could have done better this quarter. It wasn't our best performance, and we intend to focus on that and fix it moving forward.

Half of the decline in the quarter was related to a decrease in Canadian sales production. If you'll recall we had a significant acceleration of sales that took place in Canada in the second quarter when a tax law change drove that production. So now we are seeing the downside of that -- great production in second quarter, a little fall-off in the third, and again predominantly expected.

We are going to ensure that we have a good finish to the year and start off 2011 on the best foot we possibly can.

If you take a step back, year-to-date our total cemetery preneed sales production is up $12.4 million or 4.4%. So this really is about where we modeled it, low to mid single digits with the preneed production. And we were able to achieve that and feel pretty good about where we are, but also excited about being able to do it better.

So a tough comparable for the fourth quarter; we had a lot of large sales last year. But we've got a lot of activity going on right now and feel pretty good about what we can deliver.

Our cemetery trust fund income increased slightly for the quarter and was in line essentially with our expectations. A lot of the run-up in the markets occurred in September and October. It's hard to remember now, by August it was tough.

Reported cemetery profits were up slightly on an increased revenue with flat margins at 19.5%. But again if you carve out the insurance reserve reductions in last year's quarter, that is $2.7 million. If you remove that one-time benefit our margins would have increased $3.9 million or 160 basis points on the cemetery side.

So on a $5.9 million revenue increase, $3.9 million is about what you would expect to drop to the bottom line. That is really what happens when you put it in apples to apples.

So savings on the maintenance side, which we have been talking about, cemetery maintenance, we are seeing that flow through. Those were somewhat offset again by the field overhead costs that increased year over year as we went to the new structure. So again, solid performance on the cemetery side.

Now I am going to shift to the outlook. As you probably saw in the press release we provided guidance for the fourth quarter and an initial outlook for 2011. We intend to finish this year strong and again have a great base to launch into 2011.

Our updated earnings-per-share expectations for the year now are $0.53 to $0.55, which compares favorably to last year as you will recall, $0.51 (technical difficulty). If you'll recall, when we set expectations for this year we believed last year had some $0.06 of items that wouldn't recur.

What I mean by that is we knew we had the $0.02 of insurance reserves that couldn't repeat, and we probably had another $0.03 to $0.04 of estimated costs. Because you will recall in 2009 -- late 2008, early 2009 -- we turned off the light switch. We put the kibosh on a lot of expenses within our organization.

And we flipped that switch back on. I think we knew that was going to add some $0.03 to $0.04. And when you put it in that perspective, we believe we have grown normalized earnings somewhere in the $0.08 to $0.10 for 2010 over the adjusted 2009.

We think about that, about half of it came from acquisitions -- Keystone and Palm. And the other half really was good business performance, particularly on the sales side. So all in all, we feel like we are having a good year.

As we look ahead to 2011, and we anticipate growth and earnings and in cash flows. Earnings per share guidance is $0.53 to $0.61 and is based on the following broad assumptions.

Funeral volumes will still be challenging. They will be down low to mid single digits within the range.

Our funeral average will continue to grow in the low single digit range, absent currency and trust fund impacts, which are a little more difficult to predict. So look for that to be in the 1% to 2% range. We believe that we can pick it up from 2010 levels.

Year to date, on an ex-currency basis, we are looking at 0.9% growth. We don't think that is enough. We think we can do better.

But you do have the cremation mix issue that we are going to work against. So look for improvement but not significant improvement in that arena.

On cemetery preneed production, we expect to grow that in the low to mid single digit range. The key variable between low and mid is going to be large sales. To the extent we can find those and close those, you'd push yourself up into that mid single digit range of growth on the preneed side.

Our segment margins will be impacted by increased personnel costs, salaries, and increases in health insurance costs. We really have anticipated and modeled a higher cost basis, particularly as it relates to insurance.

A lot of it is due to some of the changes in healthcare, covering people up to 26 years of age, children, taking off the caps. We also rolled on Keystone employees into our full benefits.

So those things are going to show a little bit of growth. We're going to do something to help knock back some of those costs.

These increased personnel costs again will be mitigated, particularly as it relates to our strategic initiatives regarding cemetery administration expense and the implementation of [next-gen].

Corporate G&A costs we expect to increase somewhere in the, call it 3% range. Primarily the increases are going to be associated with some legal costs and again with some increases in health insurance costs.

So as a concluding statement we are very pleased with the performance of the quarter and the first nine months of the year. Then as we look ahead we still face some challenges in our industry, namely sluggish funeral volumes and a challenging pricing environment. But today we believe we are better prepared than ever to deal with these challenges and grow the business.

The cash flow characteristics of the business remains strong. We plan to continue to capitalize on value-enhancing opportunities in 2011.

I said it last quarter and I just want to repeat it. When you think about this business, the funeral business over the next couple of years is going to be really challenging to grow on a comparable basis. The revenue opportunities are somewhat limited, and we are tied to the number of deaths. So it is really hard to move the needle.

We are going to do some things. We are going to try to sell some new products and services. We are going to try to expand what we can do for the customer base. But it is going to gin a lot of cash.

Cemetery side of the business is really where we have the opportunity to invest and growth the revenue base through increased property sales. So look for us to focus on that, be able to move profitability on that side probably a little more, all the more generating a lot of cash. And we have just got to be smart with it.

So what are we going to do with our cash? We are looking for strategic acquisitions at the appropriate returns. The pipeline looks pretty good, and we see an opportunity to continue to do that in 2011.

In the absence of that we believe in returning cash to our shareholders both through share repurchases and through dividends. And I would expect us to do more of that in 2011.

Lastly, we will be reducing liquidity risk and managing our debt maturity profile again, as we do every year as the opportunity presents itself. This concludes my prepared remarks and now I am going to turn it over to Eric.

Thanks, Tom. I am going to pick it up by talking about our cash flow and our trust fund performance for the quarter; and then I will include our near-term and 2011 outlook in these comments. Then I am also going to briefly discuss our current financial position and liquidity. Then we will end the call before questions with some comments about capital deployment as well.

So from a cash flow perspective our cash flow from ops for the quarter was about $82 million, and that excludes about $2.5 million of one-time transition and acquisition costs that are related to our acquisition and integration of Keystone that are disclosed and reconciled for you in our press release.

This represents a decrease of about $12 million from last year. Keep in mind that this quarter is comparing to a very strong third quarter of 2009, which remember was about $12 million to $13 million better than our internal expectations last year.

But the decrease was primarily related this year to higher cash taxes, which is about $9 million of the variance, and higher cash interest payments, which is about $2 million more this year than last year, which was again mentioned in our press release. By the way, the $7 million reduction in the prior year related to certain self-insurance reserve reductions, that Tom has mentioned in his comments, had no impact on cash flow. It was just an earnings (technical difficulty).

Because of these taxes and interest, cash taxes and cash interest being higher this year, but from a pure funeral and cemetery operating standpoint therefore our cash flow was generally flat quarter over quarter. It was slightly below our expectations, primarily because of the effect of cemetery production being softer than we anticipated and as Tom has mentioned in detail in his comments.

Total CapEx for the quarter was about $26 million, with maintenance and cemetery development being virtually all of this amount, at $25 million. This is an increase of about $7 million more than the prior year, mainly reflecting new system integration costs that are currently underway at SCI in addition to Keystone properties as well.

Deducting these recurring capital spending items, which are the maintenance and cemetery development, from cash flow from ops we calculate our free cash flow for the third quarter to be about $56 million.

From an outlook perspective, as our press release indicated we are expecting to generate about $60 million to $75 million of cash flow from ops in the fourth quarter. That would bring our full-year 2010 expectation for cash flow from ops to a range of $330 million to $345 million. This new range essentially narrows the range that we provided to you last quarter.

From a maintenance and cemetery development CapEx perspective in the fourth quarter, we think it will be approximately $20 million. We said that in the press release, and that is really flat compared to the fourth quarter of '09. So that math will result in a revised free cash flow guidance of $245 million to $260 million for the full-year 2010 and again just kind of narrows the range of the guidance that we have already given to you last quarter.

So that takes care of 2010. Looking ahead to 2011 in terms of cash flow, we again continue to believe that we will continue to generate attractive operating cash flow. The guidance range that we have disclosed for operating cash flow is $320 million to $370 million for the full year of 2011, and that generally reflects the higher anticipated earnings that will be somewhat offset by lower working capital sources when we compare it to 2010.

So the key assumptions for this range is the EBITDA reflects an increase which is consistent with the EPS range provided by Tom earlier. Cash interest payments in 2011 will be consistent with about the $128 million level in 2010.

Cash taxes are also expected to be consistent with 2010 levels. Remember our range for 2010 is $30 million to $40 million. That should be our range for 2011, although I would also say that in 2010 I expect to be somewhat on the lower end of that $30 million to $40 million range. Again it's where I expect to end the year this year.

Speaking of taxes, from an effective tax rate standpoint, in the third quarter our effective tax rate was about 32.5% on a normalized basis because it benefited from certain discrete items in the quarter which primarily related to ongoing tax planning strategies.

For the fourth quarter of 2010 we are expecting the rate to be approximately 38%, which is more in line with the previous guidance we have generated before. For the full year of 2011 we'd also expect the effective tax rate to be in the range of about 36% to 38%.

From a working capital perspective in 2011, we expect the working capital on the cash flow statement to be more of a use of cash, similar to the 2010 levels that you have seen, which is primarily due to the continuation of less working capital sources from ongoing trust fund initiatives. It probably has an effect of $10 million to $15 million in 2011 versus 2010.

As it relates to capital spending expectations, we have said $85 million to $95 million for maintenance and cemetery development. Probably an additional $10 million to $15 million for other growth initiatives as well in terms of CapEx. Again, both of those ranges and numbers is consistent with 2010.

When you deduct the maintenance and cemetery development expenditures from the operating cash flow range I just discussed, we anticipate our free cash flow in 2011 to be a range of about $225 million to $285 million.

On a per-share basis this free cash flow range equates to about $0.90 to $1.14 per share, using a fully diluted share count of 245 million to 250 million shares that we anticipate in 2011. Now we currently have 246 million shares outstanding today. So our model assumes none to a very modest amount in share buyback just as a modeling assumption in terms of the guidance.

But this $0.90 to $1.14 free cash flow per share represents a very attractive proposition as well as an attractive low-teen free cash flow yield. So in the 13% free cash flow yield, which we are very proud of on a mid-$8 type share price.

We believe the free cash flow yield, again, coupled with historically consistency with this free cash flow stream, really sets us apart and is the real value of owning SCI shares.

Now turning to the trust funds, the combined trust fund assets of $3.2 billion increased 8% in the quarter. That increase primarily resulted in the month of September. It compares to an S&P 500 return above 11% and the Barclays Aggregate Index of up 2.5%.

Year-to-date through September, the trust funds are now up just over 7%. As Tom mentioned, the total trust fund income recognized was about $19.8 million in the third quarter, which is up $2 million compared to the third quarter of '09, which was in line to maybe slightly ahead of our expectations.

From an outlook perspective, keep in mind that projecting the amount of trust fund income that we will recognize through the income statement in any given period is an extremely difficult task as there are so many variables and moving parts. Such as determining which specific contracts are going to mature out of the backlog, and making an assumption of the forward performance of the financial markets. So it's difficult.

But that being said, our fourth-quarter 2010 outlook for EPS and cash flow assumes that our trust funds will remain flat for the rest of the year at their current performance level, which again is up 7%. Our outlook for 2011 assumes that our trust funds will realize an annual return in the low single-digit percentage range, which is very consistent with the 2010 guidance that we gave you at the very beginning of the year.

Now shifting to our financial condition and liquidity, our total cash at the end of the quarter was just over $135 million. Today we have less than that, around $100 million. That is primarily related to $45 million of cash interest payments that we had to make in early October right after the quarter.

We currently have about $140 million of borrowing capacity on our $400 million bank credit facility. Again, that matures in November of 2013. It is currently used to support just under $45 million of letters of credit; and we have drawn down about $215 million on the credit facility.

Total debt at the end of the quarter was $1.82 billion which is down slightly from June 30 levels. But most importantly again, there are no meaningful debt maturities until November 2013, which is primarily the bank credit facility that I mentioned earlier.

From a capital deployment perspective during the quarter, we continued our share repurchase program. We repurchased just over 4 million shares for a total investment of over $31 million. We currently have just over $35 million remaining on the existing share repurchase authorization that we have today.

In the quarter, we also continued to use capital towards opportunistic debt repurchases, with repurchases of about $88 million of face amounts of shorter-dated bonds that we did in the open market that we believe are favorable market prices.

Our current leverage on a net basis at the end of the quarter is 3.3 times, which again is a bank credit facility definition. We like where this is. We believe the leverage ratio as defined -- we are going to keep between 3 and 3.5 times -- is appropriate. However, probably in the current macroeconomic environment we intend to continue to run the Company more towards the lower end of this range.

So overall just in conclusion we are pleased with the success that we had in the first nine months of 2010. We are excited about our outlook of 2011. Most importantly, we continue to believe our strong free cash flow really sets us apart with our strong free cash flow yield in the 11% to 13% range.

Our current financial position is very strong with $100 million of cash. We have very significant liquidity and a very favorable debt maturity profile which bodes well for our ability to deploy capital opportunistically to raise shareholder value that Tom detailed and mentioned in his comments -- the most exciting part as we look forward in 2011.

So with that, Carol, that concludes our prepared remarks and I think we will go ahead and open the call right now up for questions, please.

(Operator Instructions) Clint Fendley, Davenport.

Thanks. Good morning, guys. Thanks for taking my question. Tom, I guess I'm a little surprised to hear that you're saying that you are seeing a shift towards the direct cremation. Why now? I guess I would have expected to hear this maybe a year or so ago when consumers were under even greater pressure.

I would say, Clint, it has been a slight shift. What we saw in the third quarter -- and again one quarter doesn't make a complete trend. But we saw about a 200 basis point move out of cremation with service and into direct cremation. That hasn't been the case, albeit there has been a slower to trend towards it.

Again, it is always something we have always anticipated or expected. A lot of time we get questions, do people choose cremation because there is a recession? Our general thoughts on that are no; people choose cremation or burial for very personal reasons most of the time.

What they spend, again, could be impacted by recession. So I guess what I am trying to convey to you is the cremation rate change isn't changing faster; but within cremation we are seeing a buy-down trend.

That could come back as people gain confidence, as the employment opportunities look better. A lot of different things will -- can impact that number. We just thought we would highlight it because it is probably causing a little more consternation as it relates to our average revenue per case.

You have still dropped some of the alliances that you have had in the past, or you don't have any new alliances I guess with like the direct cremation societies and things like that, correct?

Well, you know, all of these are kind of local-market-driven, but I would say generally we have moved away from most all of those agreements. There may be a few locally in certain markets.

But we are looking to again have some commerce with groups where we can make money and we can deliver superior service to those client families. So seeing less and less of those, but again we want to take care of folks at this difficult time in their lives, and so we serve a lot of direct cremation consumers in different markets.

Okay. Then I guess next on the new field operating structure, did you add any salespeople under the new structure?

Well, when I talk about the new structure we do from time to time in markets add salespeople. But what this is really trying to get at is the management structure.

What we did with the new op structure is begin to develop strategies that are more centric to the consumers within those marketplaces and the footprints within we operate. So as an example we've said in major markets where we have got a lot of locations, a lot of cemetery and funeral opportunities together, we can afford a bigger sales force. And if we're going to have a bigger sales force we need to have a management structure that is able to manage the leads that we are going to generate more of because we are spending more marketing dollars. We now have a system to manage those leads.

So what I am really getting at here is less about the salespeople cost and more about the management structure to run it. With that may come some costs, and that is going to show up in selling costs, not in overhead.

Have you rethought the compensation methodology here, then?

I think we are constantly tweaking that, looking at different ways to drive some of the behaviors that we want. But generally it has been fairly consistent over the last three to four years.

Okay. Then last question here, for Eric. I wondered, any color on the $10 million to $15 million in capital spending for other growth initiatives? Is that one particular project? Or additional color there, please.

No, it is not one particular project, Clint. It is consistent with what we have trended before in that particular area, above and beyond maintenance and cemetery development CapEx.

It is really related to greenfield situations and building funeral homes, constructing homes on cemeteries, and making combination facilities sometimes. It is those types of projects that we're constantly looking at to add value.

There has already been some that have been selected. But generally there is some portion of that, that we know that will come, that is unallocated right now.

Okay, great. Thank you, guys.

Robert Willoughby, Bank of America Merrill Lynch.

Yes, hey, Tom. You did reference again the higher costs associated with the field force here, and I think you have touched on parts of it. But I guess over the past few years you've spent a lot of time wiping out a layer of mid-level management, some other kind of corporate restructurings that have helped your margins here.

Can you just -- and maybe you have hit on it in a few areas. Anecdotally what have you taken down over the past years versus what has come back in place? And why this is now a better structure for you, I guess would be my question.

Yes, Bob, that is a long journey, but I will try to do it fast. A lot of what we did before is we did have duplicative management structure. We had sales organizations, a pyramid all the way through, and operating organization that didn't work together as effectively as we liked it.

So we did eliminate some of those layers, challenge some of our management structure. We have also introduced a lot of technology to allow people to better -- be more capable of managing those areas.

So what we are doing now is I think a reflection upon becoming more efficient, having new systems, having strong management team. We said to ourselves -- now the real challenge is revenue growth.

So, everything that we are doing as it relates to adding in a little bit of management infrastructure here is about being able to generate more revenue. We see that as our biggest challenge, like a lot of other companies.

So what this is really about is having the people in place to really step on the gas as it relates to cemetery sales, step on the gas as it relates to funeral preneed sales, and even lastly to begin to raise our atneed average.

If we have got more management time and the appropriate products and service mix within these segment -- think about Main Street. You may be selling a certain type of product now that we don't offer necessarily in Major or Middle, that we didn't do before because we wanted to standardize.

So this is a real opportunity, we believe, to begin to address the similar needs of a Main Street market separately from a Major market. So we view it as an opportunity to really enhance the profits.

All we are really saying is we just started this in February of 2010. So it takes a little bit of time to get this stuff in place.

And like you say, if it doesn't work, there is always the ability to slim again. We think it is going to work. So keep an eye on it, and our hope is that you will see us raise our game as it relates to revenues and preneed sales production over the coming years.

On that revenue side, Tom, it looks like the CDC data has been surprisingly strong. I have always had problems with the integrity of the data. But have you noticed any -- is that data surprising to you at all? Or is it just more or less a blip over the last few weeks?

Yes, I think it did look a little -- I've seen the CDC data and I think it is up positive for the first time in a long time. But again like you said, it isn't a perfect barometer. It is probably a good directional barometer for us.

As you have seen we have gotten the comps a little bit better. We have had some decent mines here of late. So I hope you are right; but I see the CDC data as well. But we are what, 28 days into the quarter and we have a lot of quarter left.

Okay, great. Thank you.

A.J. Rice, Susquehanna.

Thanks. Hello, everybody. Yes, Tom, you mentioned that you are seeing a nice pipeline on the acquisitions. Can you just give us maybe some more color on what is out there?

Does that mean you think there's prospects for seeing a deal, I don't know, in the next six months or anything?

Yes, A.J., I think what we are seeing here, what I would call good size, local operator type of deal out there. There's quite a few of them that are in different stages.

So very exciting opportunities and I'd say unlike we have seen in a number of years. So how many of them get to the finish line? We don't know. But again I would say there's four to eight type deals that are out there that have some range of possibility of getting done this year.

We will just see where it takes us. So we are excited. We think the opportunities exist.

If the pricing isn't right, our other option is to buy back shares. As Eric pointed out to you, on an after-tax basis those are yielding 12% and 13%.

So no matter where we go we think it is a good use of cash as we look at 2011. Our hope is to get some of these businesses on board, because again we are excited about the potential of what is going to happen in this industry over time. So the more that we can have that fit our strategy makes sense, if they are reasonable prices.

What -- is there anything behind why there might be a pickup in activity? Is it seeing Palm Mortuaries and Keystone change hands? Is it some other issue out there that you think?

You know, I think Palm helps it somewhat because it was such a big name in the industry. I think that has gone rather well from both sides of the aisle.

But I think more it's about -- there hasn't been a lot of movement in I would say independents coming into corporate for a long time, for a variety of reasons that you are well aware of. So I think a lot of it is pent-up demand.

A lot of times when the worm turns -- you know, after 1999 everybody still has '99 pricing in their head for a number of years. It takes a while to kind of figure out -- here is the real clearing price of some of these businesses.

As independent owners, people get to different stages of their lives. I think there's tax considerations and fears that are probably getting people to look at this a little quicker. Regulatory concerns and fears.

So all that pulls together. I don't think there is any one reason. But we are actively out there pursuing leads that again fit our strategy in markets that we want to operate. So we are excited about it and we will see where it takes us.

Okay. On your revenues per service in the funeral business you were up 1.8%. Do you have that broken out further by the year-to-year trend maybe in cremation versus traditional service?

I don't have that in front of me, but we will get back to you on that. Debbie or Eric or I will go over those with you.

(multiple speakers) whether one -- they are pretty close, or whether one tended to be materially different than the overall average?

I think cremation (multiple speakers) a little bit of a -- yes, I think my recollection is cremation is hurt a little bit more because of what we talked about. We saw a shift out of cremation with service, which historically may have averaged $3,500, into direct cremation averages probably south of $2,000.

So that shift is a pretty big one and I think took a little bit of a toll on the cremation average as it relates to the quarter.

Would that -- also one thing that jumped out at me is your revenue per new prearranged funeral contract was up 5.3% year-to-year. So much, much higher. Would that be just basically probably culling out the cremations? Or is there anything else happening on the preneed side that is accounting for that big jump in average contract size?

I am glad you noticed that. Yes, I think there's a couple of things. The cremation mix in that business is probably -- I don't have it specifically for the quarter, but it's been trending 52%, 53%.

So it is what we have always said. If you give a complete presentation of the products and services that we offer -- and salespeople are trained to do that -- we are able to sell $5,300, $5,400 funerals with a more than 50% mix of cremation.

So we think that is why we don't fear cremation; we embrace it. We are excited about the opportunities that can present themselves if we put the right products and services in front of consumers.

They will spend, and they will be very profitable books of business. So that is an exciting trend for us. It becomes more exciting when it comes out of the trust funds and out of the insurance product and into our profit stream.

So good observation, and we think our backlog just continues to be something that is hard for people to understand and grasp but really bodes well for future profitability.

Sure. One last question. On the guidance for next year, I guess you are saying that you are assuming funeral case volume is down low to mid single digits. Obviously that incorporates all the different variations we have seen this year.

But there seems to be sort of a steady trend to more moderate decline really going back the last 18 months. How do you reconcile that?

It seems like it could actually do better than that next year. I know you guys have been doing a lot of studying around this, demographic trends and otherwise. Is there anything interesting to say there?

Yes, I agree with you; you don't -- no, from year to year it can move, as you know, you have seen it, a lot of basis points. Over longer periods of time it is more predictable.

I think what we say is we would rather err on the side of conservatism as it relates to giving you guys any guidance. Like we said, we are modeling somewhere, call it down 2% to 4% or 5%.

What is going to happen next year? I don't know. If funeral volume is flat or funeral volume is up 1%, our guidance is going to be [light]. No doubt about it.

So that is why we want to give you some color behind what we are putting out there. But we would rather put out there -- again the trend we have seen over the last few years has been 2% to 3% to 4% down. Until we see evidence to the contrary for longer periods of time we are going to continue to model that way.

But again you guys look at statistics as well as we can. And what is going to happen next year? We don't know. But that could be an upside surprise if we were to see volume move the right direction for us.

Okay. All right. Thanks a lot.

(Operator Instructions) John Ransom, Raymond James.

Hey, Tom. Good morning. If we were to look at next year could we net out the accretion from Keystone and Palm, net of the new infrastructure costs? Is there a number? If we take those two things together and look at the year-over-year number, what does that look like?

I think they would offset. The new infrastructure costs are probably only -- these aren't big numbers, but they slightly impact a quarter that is relatively flat. We are talking about spending an additional $4 million on infrastructure.

I would say that the incremental accretion in 2011 is really only three months of Keystone. So it is probably $0.01 or so. So the two probably offset to zero.

Okay. Then secondly just drilling down a little more specifically into M&A pricing, your stock is currently as you know trading at about 8 times free cash flow, something in that range. Are you able to find properties at prices that are cheaper than that on a pro forma basis?

Yes, I think we are finding a lot of them in or around that area. Some better. We probably don't want to do a lot of them that are worse, because of like you said the opportunity we have in our own business.

So yes those are generally the area that we are seeing things get priced. Again we like the idea of getting the acquisition while you can, because we have lived through some eras where you can't.

So we are attentive. We'd like to see some deals fall our way and enhance the revenues and the EBITDA of the business.

Is there anything driving these sales other than just the normal flow of not a lot of M&A done, and now you've just got natural pent-up demand with businesses aging out?

We think that is pretty much it. You know, generally again we are talking about the businesses that are in independent ownership hands. Multigenerational a lot of times, so you just get these generational points in time.

If you think about it, a lot of these businesses, the people that own them are 10 years older than they were back the last time they were looking to sell them. Taxes, regulation, concerns that drive that behavior -- and again I hope a more favorable opinion about SCI and joining the SCI family.

We have seen I think from an integration standpoint huge success in onboarding these businesses and making them feel welcome and I think have a lot of exciting opportunities for independent funeral homes. When you think about, it if you are an independent owner, what better opportunity for people to work for you? Putting them in SCI, it opens up a variety of opportunities career-wise for them.

So again if we can present those appropriately, be in front of folks at the right time, know the network, they are just starting to fall our way a little more. The thing I would caution you on though as well is we are big enough to where acquisitions aren't going to dramatically move the needle anymore. (multiple speakers)

Right, right.

The core business is so big, the most important thing we can do is enhance the core business. So we are spending the preponderance of our time on that.

What products and services can we begin to offer the consumer to get them excited about buying these things and enhance the profitability of our current stream? What are our opportunities to provide more of these services and find better ways to package them and interface with consumers?

So those are probably the biggest opportunities in front of us. If some of that gets clicking, as you know the incremental profitability of that revenue dollar is huge. So we are working hard to do that, and I think that is the upside surprise for us.

If we can get volumes in, if we can get cemetery property sales going, which we are going to focus on, and get some of this product and pricing stuff right, that is how we surprise you to the upside in 2011.

Just lastly, let's just assume for a minute that the economy is not great, not horrible, kind of grinds along and that volume weakness because of demographics persists. So let's say from now until 2015 we are just going to make that assumption.

In that environment and given the cremation growth, what is a reasonable goal that you would give your people to say -- okay, we can grow our same-store operating income by X%; and then we will try to be clever with our free cash flow and enhance that below the line so maybe we can get to Y% growth.

What is a reasonable -- how do you think about it looking out over a multiyear cycle given those headwinds?

I think the reasonable rate would be -- on a pre-interest pretax basis just at the operating income level -- you ought to be able to do that somewhere between 3% and 6%. I think the movement between 3% and 6% is going to be determined by most likely cemetery property sales. If you can get a good trend going there, you can push it at that level.

Now, when you drop down to post-tax and post-interest, you may be growing that number at a 7% to 8% rate; and now it (multiple speakers) cash. You have acquisitions and you buy back shares. But you can see a scenario where you could grow earnings per share the low double digits in the 10% to 12% range.

I think that is a very reasonable format for us. Again, there is a lot of hard work behind being able to do it, but that is a reasonable expectation. Quarter to quarter to year to year, there are going to be factors that impact your ability to achieve it. But over long periods of time I think that is very doable.

Okay, thank you.

Thank you, sir. Ladies and gentlemen, this concludes the question-and-answer portion of today's conference. I will now turn the presentation back to senior management for their closing remarks.

I want to thank everybody for participating on the call, and we look forward to talking to you again in 2011. Have a great week.

Thank you, sir. Ladies and gentlemen, this concludes your conference. You may now disconnect. Have yourself a great day.