Service Corporation International (SCI) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the third quarter 2011 Service Corporation International earnings conference call. My name is Keith and I will be your Operator for today. At this time all participants are in a listen-only mode. Later on we will have a question and answer session. (Operator Instructions) Today's conference is being recorded for replay purposes.

I would like to turn the conference over to your hosts for today, SCI management. Please proceed.

Good morning, this is Debbie Young, Director of investor relations. As usual we will start with some prepared remarks and then we'll take some questions.

Let me go through the safe harbor language really quick. In our comments today we will make statements that are not historical facts and are forward-looking. These are statements that 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 filings with the SEC that are available on the website.

Also on the call today we may use terms such 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 to the appropriate GAAP measures.

With that, we will get started with comments from Tom Ryan, our President and CEO.

Thank you, Debbie. And thanks, everybody, for being on the call today. The topics that I'm going to cover in my prepared comments are, I'm going to give an overview of key items in the quarter. Then we're going to follow it up with a more detailed review of the funeral and cemetery operations, each segment. And finally we're going provide a little additional color on our 2012 Outlook that we provided in the Associated Press release.

To begin with, we are very pleased with the results of the third quarter, especially during this very pessimistic economic and consumer sentiment environment that we are operating in. So we are pleased to be able to execute the way we did. If you look at free cash flow, that is something that is pretty exciting. We were able to increase that in the quarter by $35.7 million over the prior year, and generated approximately $116 million in free cash.

Our normalized earnings per share were $0.14 versus $0.13 in the prior year quarter. If you think about it, funeral profits were essentially flat. That is what we had communicated to you, I believe, on the last call, that we would anticipate that to occur this quarter. But we really knocked it out of the park for cemetery segment performance. And that was primarily driven, the cemetery profits, by an outstanding preneed property production quarter. And again, I am very pleased to be able to do that.

Speaking of sales production, preneed funeral production and preneed cemetery production both grew at very respectable, high single-digit and low double-digit rates on a comparable store basis. So again, great execution.

And finally, we believe we will finish the year very strong. As we disclosed in our press release, we have increased our fiscal year 2011 earnings per share and operating cash flow guidance above the previous ranges and are projecting, what we believe, are very solid earnings per share and cash flow growth for 2012.

Now turning to funeral operations. Overall, the funeral segment performed as we anticipated it would for the third quarter. We saw strong growth in comparable sales average, as well as an increase in general agency revenue on increased preneed funeral production. Which together more than offset the decline in volume that we experienced.

Comparable funeral revenues for the quarter grew 2.7%, or roughly $9 million. Of the $9 million increase, $2 million was attributable to the strengthening of the Canadian currency, which gets offset, as you know, through translated expenses. So it really doesn't generate any additional property. In addition to that, $3 million of the increase was general agency revenues that, again, is essentially offset by associated selling costs that generate that general agency revenue.

So the remaining $4 million of revenue was the increase that you would expect would drop to the bottom line. And this was driven by impressive increases in our comparable sales average of 3.9%, if you exclude the currency. So this is pretty high stepping, I believe, again, with the environment that we are operating in. 2.9% of that increase is true walk-in increase, 1% was attributable to the fact that we have trust income. And remember, we did this with a cremation mix rate that changed by 270 basis points. So I would say that this exceeded our expectations and, again, allowed us to generate cash and profits.

The increase in the sales average was offset by a 2.4% decline in same-store volume for the quarter, which we believe is a reflection of the number of deaths that are occurring in our relevant markets. Year-to-date, our same-store volumes are down about 1.3%, which is right where we have been modeling the entire year, somewhere between 1% and 2%. So, about where we thought it would be.

On the preneed front, remember these preneed revenues don't get recognized, they go in the backlog. Our comparable preneed funeral sales production continued to impress by increasing $10.3 million, or about 8% for the quarter. From a profitability standpoint, comparable funeral profits increased $350,000, so they were essentially flat. The relevant operating revenue -- remember that I talked about before -- of about $4 million increase, that was generally offset by increased advertising and lead generation expenses related to preneed production, as well as a little higher field bonus expense and other inflationary cost increases.

As I pointed out in the last quarter's call, we anticipated selling compensation -- so this is the sales force cost -- to run about 14.5% for the quarter. It did. We thought comparable lead generation costs would run about $12 million per quarter, and, again, it did this quarter. As we look forward into the fourth quarter and into 2012, we would expect selling compensation to remain at about the 14.5% level. And we would expect lead generation costs to level off at this $12 million rate, and even maybe trend down into 2012.

Now switching gears over to cemetery operations. Our comparable cemetery revenue increased $15 million or 8.8% quarter over quarter. This was mainly attributable to increased cemetery sales production, predominantly property sales, as trust fund income was generally flat, up about $0.4 million. We also recognized $3.5 million in other cemetery revenue that was associated with granting of property right easements at one of our cemetery locations.

Comparable preneed sales -- and remember preneed we can drive, versus at-need, so we can go out and generate profits and cash -- that production grew more than $21 million in the quarter, or about 23%. Keep in mind, and this is the last time I will say it, but we were dealing with that Canadian tax change last year. So Canada was quite a growth over last year's third quarter. But even in the US we were able to grow $13.6 million or 15.3%. So the growth really is impressive, even outside the Canadian operation. So I can't say enough about how proud I am of the outstanding efforts of our field management and our sales organization. Just a tremendous team effort.

Our cemetery profits grew at $4.6 million, or just under 14% for the quarter. And the margins increased 80 basis points to 20.3%. With a $15 million increase in revenues, one could expect more to drop to the profit line. However, we incurred $2 million in selling costs related to contracts written that the revenue was deferred and will be recognized in future periods.

Additionally, we had higher advertising, maintenance and bonus expenses, which put a little pressure on the quarterly cemetery profits. While traditionally one should expect lower cemetery revenues for the fourth quarter sequentially from the third quarter, I would expect the margin percentage to be higher, as we have a solid track record in managing these controllable costs when we apply the appropriate focus. And we will.

As far as the outlook that we provided in the release, we've provided fourth-quarter 2011 as well as our initial outlook for 2012. We are expecting, for the fourth quarter, $0.16 to $0.19 in normalized earnings per share compared to $0.18 in fourth quarter 2010. This brings our earnings per share expectations for the full year 2011, to $0.62 to $0.65, which compares very favorably to fiscal 2010 normalized earnings per share of $0.59. So growing somewhere in the high single digits to 10% year-over-year. So, all in all, 2011 looks to be a very good year.

Looking ahead to 2012, we anticipate impressive growth both in earnings and in cash flow. Our earnings per share guidance range of $0.66 to $0.74 at the midpoint represents a 10% growth from the midpoint of our expected 2011 earnings per share.

As far as assumptions for you guys to begin to think about as you're putting together your models, we would anticipate funeral volumes will still be a challenge, probably down in the low single-digit range as we model 2012. The funeral average will continue to grow in the low single-digit range absent currency and trust fund impact. However, we believe it's going to grow more than what we have seen, let's say, from late 2009 to early 2011 when we were kind of stuck in that 1% to 1.5% growth range. I think you've noticed the last couple of quarters we've been able to move that up a bit.

This has been driven by a refreshed Dignity packaging and pricing. And we are going back out and retraining. We've changed up the Dignity packages. And we believe it's going to allow people to buy more of them, and therefore generate more revenues and profit. We also believe that our increasing backlog average is going to continue to go up, because the quality of contracts that we have written over the last few years in the higher price that goes into the backlog, that, again, will be rolling out as time goes on.

As far as cemetery preneed production growth, we'd expect that to grow in the mid, high single-digit range. Funeral preneed production should grow in the low to mid single-digit range in 2012. Preneed sales growth will be driven by continued training and development, use of technology. We've rolled out sales tablets to our sales force by institutionalizing our lead management system, by continuing to grow community service sales and expanding our seminar program. These things we think can allow us to grow at those rates. We believe that marketing and advertising costs peaked in 2011 so they should moderate and trend down slightly as a percentage of sales production.

Segment margins will be impacted somewhat by increased personnel costs, salaries and increases to health insurance that every company is going to experience. These inflationary cost increases will be somewhat negated by strategic initiatives. Our cemetery back-office staffing and supply-chain initiatives that we think could drive down some costs to offset some of the increases.

We have forecasted trust fund performances to range from low single-digit negative returns from here, to mid single-digit positive returns. Keep in mind, our equity exposure is around 45% when you're trying to model that impact.

In conclusion, we are very pleased with our performance in the quarter and in the first 9 months of the year. As we look ahead, we still see some challenges, both macro and industry-specific, but believe we are well-positioned to execute impressive growth and value creation in this environment. The cash flow characteristics of the business remain strong, and we plan to continue to capitalize on value-enhancing opportunities in 2012.

Remember our capital priorities. Number 2, reinvesting in our core strategies on high-return, low-risk projects like cemetery development of property. Number 2, strategic acquisitions at very appropriate returns. We've been able to execute on that the last couple of years, and there's no reason we can't do it in 2012. Third, returning cash to shareholders through share repurchases and a strategy of increasing our dividend over time. And lastly, managing our debt liquidity profile by managing cash levels, credit facility availability, and near-term debt maturities to minimize the risk at SCI.

This concludes my prepared remarks and I will turn the call over to Eric.

Good morning. I'm going to talk about cash flow and the trust fund performance, as I normally do for the quarter. But I'm also going to give you some insight into what we think about those in terms of the fourth quarter, as well as the 2012 initial outlook. I will also briefly discuss the current financial position and liquidity. And then I'm going to end with some comments about the capital deployments that we had during the quarter.

So let's start with cash flow and let's first talk about this current quarter, the third quarter. The cash flow results for this quarter were outstanding and exceeded our internal expectations. The operating cash flow grew nearly $36 million over the prior year quarter. About $11 million of that increase was due to lower cash taxes and lower cash interest. But a predominant factor in that was higher cash receipts associated with at-need funeral revenues, and strong preneed cemetery production, which you saw in the income statement but bode very well for our cash flow statement, as well, during the quarter.

Total CapEx for the quarter, as you have seen, was $29 million. But the recurring expenditures from maintenance and cemetery development was $26 million of that $29 million. Which is pretty similar to the amount in the prior quarter sequentially. Deducting these recurring capital spending items from the cash flow from operations, we calculate our free cash flow for the third quarter to be about be about $90 million.

Looking forward to the fourth quarter, as well as 2012. First, let's talk about 2011. As our press release indicated, we're expecting to generate about $75 million to $95 million of operating cash flow for the fourth quarter. This brings the full-year 2011 expectations for this cash flow from ops to a range of $370 million to $390 million. This is an increase from the midpoint of the guidance range which we provided to you and talked about last quarter. We believe that maintenance and cemetery development CapEx in the fourth quarter will approximate about $25 million. And therefore, when you look at the annual basis for 2011, the recurring CapEx will land at the upper end of the guidance range of about $105 million.

So, what will this result in? It will result in a free cash flow revised guidance of about $265 million to $285 million for the full year of 2011. So in terms of per share basis, this represents approximately $1.11 to $1.20 of free cash flow per share for the full year of 2011. And that's using a fully diluted share count of about $238 million and that represents a growth of about 9% from fiscal 2010.

Secondly, let's look ahead to 2012. We believe we will continue in 2012 our proven trend of generating attractive operating cash flow. The guidance range for operating cash flow is $375 million to $425 million. It generally reflects higher anticipated earnings, that Tom has described earlier today, but will be offset somewhat by higher cash taxes. So cash taxes in 2012 are expected to increase to a range of about $20 million to $30 million. And this compares to cash taxes of about $12 million that we're expecting full year of 2011.

The other working capital changes within the cash flow statement are expected to be somewhat similar to 2011 levels. Capital spending in 2012 will also be similar to 2011 levels at $95 million to $105 million for the maintenance and cemetery development. And we'll probably have an additional $10 million or so for other growth capital expenditures. When you deduct the maintenance and cemetery development expenditures from the operating cash flow, we then anticipate the free cash flow in 2012 to range from $270 million to $230 million. So, again, on a per-share basis, this equates to about $1.18 to $1.45 for 2012. And that's used on a fully diluted share count of about [228] million shares that we are modeling for 2012. At the midpoint of this range, this represents growth of about 14% over the expected 2011 free cash flow per share.

I talked about cash taxes, but I'd like to briefly shift back to the income statement and comment on the tax rate. From an effective tax rate standpoint, in the third quarter our normalized effective tax rate was lower than what we anticipated, at about 34.7%. And this was due primarily to changes in our tax accruals, which resulted from filing tax returns during the third quarter. And also various state tax planning initiatives. For the fourth quarter of 2011 and for the full-year of 2012, we are currently modeling a normalized effective tax rate of approximately 37%.

Now shifting to our trust funds. As we all know, it was a tough financial market in August and September. Our combined trust funds declined a little over 7% in the third quarter, bringing the year-to-date trust fund performance to down 3.3%. The total trust fund income recognized in our income statement for the third quarter was just under $24 million, about $4 million higher than the third quarter of 2010. But in total was generally what we anticipated on a sequential basis.

The down market in September did not materially impact our third quarter trust fund income because we record net realized and unrealized gains and losses on an approximate 30-day lag. So expect to see some downward pressure on trust fund income recognized in the early part of the fourth quarter. However, if the current October market performance holds, we expect this to be somewhat offset during the fourth quarter, as well. For the next year in 2012, our outlook assumes that our trust funds will realize an annual return in the low single-digit percentage range.

Turning to our financial position and liquidity, the cash balance at the end of the quarter was about $127 million, and today, we have about $100 million. During the third quarter, we funded about $65 million on our $500 million credit facility. $40 million of this was to reimburse for our debt repurchases that we made year-to-date This essentially converts 7% debt to roughly 2% debt. And the other $25 million was used for acquisitions in the third quarter. This action allowed us to use our free cash flow for share repurchases when the free cash flow yield spiked in September. And I will update you on that in a minute.

But in terms of credit availability, we still have a little over $400 million of borrowing capacity on our bank credit facility. This represents the $65 million drawn I just discussed, and about $33 million of letters of credit. We intend to leave the $65 million drawn to enable us to pursue more favorable capital deployment opportunities with our free cash flow. Because, remember, this is essentially 2% debt. It doesn't mature until 2016. We continue to have substantial liquidity and a great debt maturity profile that positions us well to explore value-enhancing opportunities as we have no meaningful debt maturities until 2014.

Now let's talk about the capital deployment during the quarter. From an acquisition standpoint during the third quarter, we closed on transactions for a total spend of about $31 million that you can see reported in our cash flow from investing activities. Remember, about $25 million of this was funded through our credit facilities. During our third quarter, we also continued our share repurchase program, and repurchased about 9.3 million shares for a total investment of about $91 million. And subsequent to the end of the quarter, we bought another 1.2 million shares for approximately $11.7 million. As of today, we currently have $138 million remaining on our existing share repurchase authorization and our current shares outstanding are down to about 226 million shares.

Debt repurchases during the quarter totaled about $15 million. As, again, we modestly continue to proactively manage our near-term maturities. In summary, from a capital deployment perspective, thus far year-to-date in 2011, through today, we have directed over $155 million towards our share repurchases, close to $100 million to acquisitions, about $33 million to deploy related to our dividend, and $43 million to debt repurchases, as well.

So in conclusion, this was a great quarter for us. We expect to continue our momentum in the remainder of this year. Our outlook for 2012 is for positive growth in earnings, as well as cash flow. And, again, the cash flow continues to be the success story here, and what sets us apart in this time of financial market uncertainty.

Beginning in 2005, and that's when we really developed our current operating platform, and we also embarked on our growth strategy, our free cash flow per share has grown around 9% on a compounded annual growth rate. And we are very proud of this execution. We believe this consistent cash flow and high free cash flow yield, coupled with a strong balance sheet, great liquidity and a favorable debt maturity profile, makes us a very attractive investment going forward.

So with that, that concludes our prepared remarks. And we will go ahead, Keith, and turn it over to you to get questions from the group.

(Operator Instructions) AJ Rice with Susquehanna Financial Group.

Maybe, Eric, can you just break out, or give us a little flavor at least, for the impact that Neptune had in the quarter? I'm assuming it's consolidated now and it's fully reflected in the quarter?

Yes, we have been obviously operating with Neptune since June. What we had, it's a little bit tricky to see where they get categorized. But overall we had about, call it, $14 million of revenue reported in the quarter. And the preponderance of the revenue is going to be shown in other revenue because it's the sale of what I would call merchandise. And that merchandise gets recognized when we deliver it. And then the service side of the revenue, again, would get reported like every other funeral profit. And that's a contract that's associated with an event of death. But together, it's about $10.5 million in other revenue. And then the preponderance of the rest of it, $4 million, that flows through normal funeral operations.

And the way to think about Neptune, as I think we told you before, they generally are going to earn about a 10% to 12% margin. So, as you think about that from an OP perspective, and a little more when you think about EBITDA. So run rate of $6 million in OP, and probably closer to $8 million or $9 million in EBITDA. And the exciting thing about Neptune is the growth possibilities. We actually have just opened three new offices, I think in Minnesota, Chicago, and in Detroit. And those are where you're going to see some of the growth as we go forward and open new sites in 2012 and 2013.

And I may have missed it, but in talking about your assumptions for 2012, have you said anything about your thoughts on stock buybacks.

I think our thoughts on stock buyback, again, depending on where the price level is, would show you the velocity of our share buyback. But I think when we think about it, we've built in a moderate approach to that for 2012. And again, if the price is right you will see an aggressive approach. But we fully expect to be in the market buying back shares in 2012.

And then my last mentioned would just be the mention about buying back some bonds. Is that driven by the recent volatility in the credit markets? Or is that still part of the ongoing desire to deal with maturities through open market purchases? Just give us a flavor for what you are doing there.

It's really the latter, AJ. As you can tell, it was a very modest spend. It's when good opportunities come in the sense of pricing, but in the sense of managing our near-term maturities. But our first maturity is not until October 2014. You should notice that the large discrepancy in terms of the spend, buying our shares back at this free cash flow yield versus buying any bonds back. So absent the world completely changing, I think you should consider that, that trend is well going forward in 2012.

Clinton Fendley with Davenport.

First question, I wondered, Eric, what your cemetery margins would have been if you had excluded the benefit from the property rights easement?

The property right easement was just around $3 million or so. So we'd have to do the math. It would move it a little bit but it wouldn't be overly material at all.

And any thoughts on how Neptune impacted the cremation mix during the quarter? Because I guess this is probably the third quarter where we really had an accelerated rate of change in that mix now.

Yes, it definitely impacted the consolidated somewhat. But again, it's probably -- I don't have the contract in front of me -- it might have been 3,000 basis--.

3,000 -- yes.

But I think the number that we disclosed to you, Clint, in the press release, is the comparable number. So it wouldn't be in there. So we are experiencing a lift in cremation that is more accelerated than I think anybody anticipated, outside of Neptune.

Is there any color that you guys can offer maybe even just on geography? Is this happening in more traditional areas like the southeast? Or is it in higher acceptance markets like maybe Arizona or Florida?

Surprisingly, I'd say we are seeing it more on the East Coast. Both the Southeast and the Northeast. Places like Maine, which was already a high rate, but a significant jump there. And a significant jump in the Southeast. But I would say more in the East Coast. But really everywhere, but I'd say where we've seen probably a little bit more of the acceleration.

And from a management perspective, given the rate of change that we have seen, and the acceleration of that change, are you doing anything differently now to respond to what is now a higher rate?

I think what we've always done, Clint, is making sure that -- to us, if they're cremation or burial, it's their choice. It really doesn't matter. The appropriate thing is to put the products and services that make sense, that they find value in, in front of them. So we are doing that, in a lot of ways, through our Dignity packaging. And obviously on a preneed basis through Neptune. But I wouldn't say there's anything different on a national scale. I think every market has a certain level of cremation. And when you look at the infrastructure, there is always plans built in. As that increases, it may change the way that you staff, it may change the way you run your fleet, it may change the way you think about your footprint in that market. But that is really kind of a local-driven strategy.

And last question, as you look at your business, you guys have historically done a very nice job of gaining efficiencies, taking out unnecessary costs. Is there anything, as you look across your business today where there are opportunities going forward that maybe we could look forward to and think about for next year, or even beyond for additional efficiencies?

Yes, I think there's quite a few, surprisingly. I think every time we look back. A lot of it's going to be driven by metrics. You've heard us, Clint, talk a lot about putting metrics in different places so we can be more effective. And I'd say that continues to be the story. On the sales front, we are very metrics driven. We started it with our funeral operations. And I would say there is still more room there as we move markets to more efficient use of personnel.

But in particularly, we have a couple of things going. One is, I think, on the procurement side. We have done a great job, leadership there, of finding new ways to save on the way that we purchase items. We are looking at a system that's going to probably allow us to do even more of that as we move into 2012 and 2013. In addition, like I said before, we're utilizing technology to drive that. We now have sales tablets where all of our sales counselors someday soon, will be writing those contracts on those sales tablets to eliminate a lot of the duplicate effort of re-inputting contracts. It will reduce mistakes that are made, that we have to go back and fix later. So I look for, particularly on the cemetery side, probably is going to be the bigger focus, where you will see some costs driven down in 2012 and into 2013.

And just one last more. When we look at your free cash flow growth, amazing results. Growth of 9% since 2005. We are looking forward now to an environment where, at least, demographically, it may be easier for the next few years to sell to the higher numbers of people, but yet we may not see the death rate moving up yet. Is there anything about that type of environment? How should we think about your free cash flow growth prospects in the next couple, three years relative to what could be those demographic trends, and the increased opportunities in preneed before we actually see the volumes moving up here?

Yes. I think from a cash flow perspective, if we can grow preneed cemetery properties, a great example, to the extent we can continue to grow that, that is very cash flow positive for us. Because as you know, Clint, we don't trust any money related to that. So whatever we can sell and collect is cash flow growth. On the funeral side it's slightly negative in the sense that we generate, if we sell insurance contract about 20% D&A revenue to fund a lot of what we do. We are running right now probably in the 22% to 23% all-in with lead generation costs and selling costs. We are working on managing that down. But as you grow preneed funeral, you may see a slight degradation in cash flow. But we think it is the smart thing to do.

So I think that coupled with the savings, that coupled with the fact that we are pretty excited about some of the revenue opportunities, I really think. We are trying to find new products and services, new revenue streams to help us grow that very, very difficult comp revenue line. So when we model out cash flow, we are still very pleased with, I think, over the next few years, our ability to generate new cash. Eric will tell you we probably will pay a little more taxes as we go into the future, not a lot. And that's going to put a little bit of pressure on cash flow. But I'd say our projections for operations will more than compensate for that and allow us to continue to grow the cash flow per share over the next few years.

Robert Willoughby with Bank of America-Merrill Lynch.

Was the deal spend, the $31 million, was that all Neptune, or was there anything else that you did in the quarter?

No, it wasn't Neptune. Neptune was at the end of the second quarter. It was about five different things. One was in the Virginia area, that was the lion's share of that. But it's just various deals that we're starting to do now.

Neptune was June 3, or something?

Yes it was.

I was going to say, Bob, the deal in Alexandria, Virginia, I believe it is, was a pretty significant, about a $10 million revenue business, so we are very pleased.

And just the preneed cemetery production that continues to track these high levels. What kind of expectations do you have on that side? What kind of tempering have you done here reflecting the economy? Do we keeping running at this rate or would you model half of that going forward?

On the cemetery side?

Yes.

We think this year has been an extraordinary year. I think it would be hard to replicate double digit growth on the cemetery side. Not impossible, but not the way we model it. I do think on the cemetery side we think we can grow in the high single digits with a lot of the things that we're doing. And that, again, is the comparable store, Bob. So it's not going to be from acquisitions, it's going to be from better leads, bigger sales force and generating more profits. So that's probably where we'd guide you to model. I'm not saying it can't be done, just hard to do that consistently.

And just on the better cash receipts that I think you called out on the funeral business. Are people paying you sooner? Why would they, would be my question.

It's really just managing it as well as we can. Our field management has done a tremendous job keeping up with our metrics, such as day sales outstanding, and now looking at the aging of the receivables. And they are really doing a phenomenal job continuing to make receivable collections even better. And then, of course, when you are selling preneed cemetery property, like Tom mentioned earlier, you are not trusting that, Bob. So you are getting that cash right away, for the most part. And when we had the great spike in sales, you're getting a great spike in cash, as well. It's those two things that really drove the cash flow increases for the quarter.

Yes, Bob, Eric is right. If you think about almost the entirety of our growth on cemetery is all property. So you think about revenues and the cash associated with those revenues, the growth we are getting is the best cash flow growth you can get. So I think that is driving the cash relative to the earnings.

And you mentioned, I think, I thought I heard you say you are opening up more offices for Neptune. Are there other kinds of things that you are doing? Is there some margin degradation we should expect to see for Neptune before we see more accretion coming in? What, anecdotally, are you looking to do with that asset?

We're looking to grow it. In fairness to Neptune, we have only been involved for four months. And so I think there are things that are already in motion. One is, from a merchandise perspective, we are beginning to leverage that. We haven't seen it in the numbers yet. I think there are some other synergies that are going to take some time to get in the business. Probably aren't going to see those except in the 2012.

But the thing we're probably most excited about is the ability to grow this and put it in new markets. Like I said, we've got three new markets we're going to enter in 2011. We already entered them, actually. But we will begin to see those results. And I think we would expect to see somewhere in the five to seven to eight range of offices open in 2012, and maybe the same in '13. And those, if staffed right, and I think Marco and his team know how to do it best, can be up and running and profitable very, very fast. Particularly I was looking at Minnesota last night. Out of the gate, that thing is doing very, very well. So we are excited about that.

But again, you got to put it all in context, like I said. Neptune probably in year one, we were modeling, call it, $6 million in operating profit. And we can grow that on a percentage basis, I think, pretty good. But when you put it with the SCI, it's going to be helpful, but there are a lot of other things we're going to have to do to drive future profitability.

(Operator Instructions) Nicholas Jansen with Raymond James.

In terms of the M&A landscape, what are you seeing there? Certainly close to $100 million in acquisition spend this year is a pretty good number. So, with no maturities until 2014, just your perspectives on balancing share repos, dividends and acquisitions. Thanks.

I think on the balance question it all gets back to valuations. What are the pricing of the deals that we see relative to the price of SCI stock. And from a free cash flow yield perspective, what is that. I think our expectation would be that we continue to see deals out there. We think we can execute on that. I think at the level of $100 million, if you back out Neptune, we probably spent somewhere closer to $50 million, $60 million this year. That's probably a more realistic thought about next year in the sense that you don't find something the size of a Neptune everyday. So I think that's very achievable, I think, at those reasonable rates. But it's really hard to tell when these things are going to close and when people are going to get more excited. I'd love to tell you it could be more, maybe it will. But at this point in time, that's probably a reasonable thought as you think about cash flow use in 2012.

Is there any increased competition? Obviously some of the public guys are certainly talking more and more about acquisitions. So just any upward pressure on the multiple for the one-off transactions or for, let's say, a bigger one like the Alexandria one?

We haven't seen it in the deals that we have closed. I would tell you, looking prospectively, though, that, that would be my anticipation, that you're probably going to see a little more activity. And when there is a little more activity you will see that move into price. But we're going to be very disciplined about what we want to buy and what we are willing to pay for it because there are other options. As you look at our share price and look at the free cash flow yields that Eric is talking about, pro forma in 2012, if the deals aren't there at the right prices then we have got something else to do with the money.

And just last one in terms of cash taxes. Certainly you guys have done a great job managing that. It looks like it's been flat to down over the last four or five years. I know you're expecting it to increase to, let's say, $20 million to $30 million next year. But when should we think about that moving much higher than that? Because it seems like, if you go back and look at the model, it looks like it's been pretty steady around $20 million for the last couple years. So any thoughts on cash taxes would be helpful. Thanks.

One of the reasons why it's been helpful, is we continue to execute on good tax planning. And that has shielded some of our taxes. If you remember, Nick, I talked to you about a tax accounting change that we did last year at this time. And that has helped us. In terms of the shielding from the NOLs that we have, our estimates are, at the end of this year, we'd still have $225 million, $250 million of NOLs to shield future. You can't use all of that right away because, if you remember, as we've talked about before, the Alderwood situation doesn't allow you to use it all at once. And that's a good amount of that. But as you see, we will start going a little bit higher in 2012, absent tax planning opportunities. But you could obviously see our track record to continue to tax plan. And then as Tom said, it will start creeping up in 2013 and 2014, absent things we don't -- planning opportunities we haven't executed as of now. But we don't think that it is something that is just this huge headwind that is coming that we can't overcome with all of the free cash flow growth that we have built into the operational segments. And all the things that we are doing, that Tom's mentioned, clearly sees that.

I would say, just by the nature of our tax balance sheet, even at the higher levels we are really talking probably about spending $30 million, $40 million a year in cash taxes. And again, like Eric pointed to, operationally we can overcome that. That's not a big number for us.

And there are no other questions so I would like to turn the call back over to SCI management for closing remarks.

I want to thank everybody for joining us on the call here today, and we will be talking to you next year in 2012. Thanks again.

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