Service Corporation International (SCI) 2012 Q3 法說會逐字稿

Welcome to the Q3 2012 Service Corporation International earnings conference call. My name is Christine and I will be your operator for today's call. (Operator Instructions). I will now turn the call over to SCI Management.

Hi, good morning. This is Debbie Young, Director of Investor Relations for SCI. We welcome you to today to our call as we discuss our third quarter results and our outlook for next year.

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 to differ materially from these Forward-looking statements. For more information related to these statements and other risk factors, please see our filing with the FCC that are available on our website.

Also notice the terms, (inaudible) EPS, debt- to-operating cash flow and precash flow all which are Non- GAAP financial terms. For a reconciliation of these terms to be appropriate measures calculated in accordance with GAAP please see our press release and 8-K that was filed yesterday. We have also posted a presentation on our website containing each of these reconciliations that you can find under the subheading webcast and presentations. With that, we will now begin with comments from Tom Ryan, SCI's president and CEO.

Thanks, Debbie, and thanks everybody for being on the call today. I am going to start with an overview of key items in the quarter and then move to a more detailed review of both our funeral and cemetery operations,and finally add some additional color on our outlook for 2013.

So, to begin an overview of the quarter. We had an outstanding quarter with significant increases in both general and cemetery profits in an impressive 36% growth in normalized earnings per share. It exceeded not only external expectations, but our own internal expectations. I want to thank our hardworking team of over 20,000 professionals that make these results possible while continuing to provide everyday extraordinary service to our client families.

These results highlight the leverage we have in our businesswhere modest revenue growth can translate into substantial earnings per share growth. Our normalized earnings per share increased $0.05 to $0.19 verses $0.14 in the prior year quarter. Most of this increase came from operating earnings growth.

Growth and cemetery gross profit contributed to approximately $0.02 of the total $0.05 as revenues recognized from the completion of new cemetery property construction projects generated comparatively higher margin approaching some 80%. Because the associated selling costs recognized in prior periods when the sale occurred.

Comparable funeral profit growth contributed another $0.01 as lower merchandise expense, selling and advertising costs, and favorable staffing efficiency more then overcame a slight revenue decline. noncomparable funeral operations delivered another $0.01 as incremental performance from resent acquisitions began to take hold.

Finally, an additional $0.01 improvement and from the favorable impact from share repurchases and foreign currency impact from liability settlement somewhat offset by increases in general and administrative expense predominantly incentive related and a slightly higher tax rate. Precash flow produced during the quarter was $97 million which was up 8% from last year. We continue to deploy our free cash flow to enhance shareholder value.

During our third quarter, we again were active buyers of our stock and also completed an acquisition in North Carolina of three funeral homes. I want to welcome the Stewart Terry and the entire team in Hickory to the SCI family. We expect to complete multiple acquisitions in the fourth quarter of this year.

As we look ahead, we believe we will finish the year strong. As we disclosed in our press release, we have updated our fiscal year 2012 earnings per share guidance above previous ranges, and are projecting continued growth in earnings per share as well as solid cash flows in 2013 which

I will talk more about in a minute. Now shifting to an overview of our comparable funeral operations.. Comparable or same store funeral operations performed relatively well during the quarter despite a decline in revenue.

Our revenues were down $1.2 million driven primarily by a 1. 8% decline in volume of funeral services. The reported comparable sales average grew 0.7% but when you exclude the negative effects of Canadian currency translation and trust earnings, the true average grew at some 1% despite a 60 basis point increase in the cremation rate.

This is a bit lower than we had anticipated as the impact of refresh dignity packaging, receptions and events and E-commerce floral sales flattened out a bit. Refreshed dignity packaging surrounded around consumer choice of flexibility has now been rolled out to the entire network. The results were generally favorable, but not as impactful as we would have liked across certain of the major and metro markets.

We are taking what we learned and going back for follow up training in markets were implementation impact was not what we wanted. Receptions and event catering continue to benefit our average adding about $3 million to revenue during the quarter, but we now lack the full network implementation and from here it is fine tuning. Having said all that, we still believe we should be continued year-over-year improvements throughout the fourth quarter and into 2013 from the dignity packages as we adapt and retrain.

The slight decline in overall revenues was more the offset by prudent cost management, lower merchandise costs, selling costs, field overhead. We were able to grow comparable funeral profits by $3.7 million and improve the gross margin some 100 basis points to 19.9%. From a preneed perspective, comparable preneed funeral sales production was flat during the quarter.

This was solid performance against a strong comparable prior year quarter that was up some 8%. So, year-to-date, through nine months, we are up just over 4% year-over-year. We still expect to finish the year as we guided increases in the low to mid single digit percentage range.

Now shifting to an overview of cemetery operations. Comparable cemetery revenues increased $4.4 million or 2.3% quarter-over-quarter.

We called in the first six months of 2012, we grew our recognized Jacks Cemetery revenues by $20 million for some 6.4% but our true production revenues grew by some $32 million or 9.1%. This spills in the deferral at a negative effect on margins as we recognize selling costs in the period even though the revenues were deferred until constructed.

This quarter, part of that benefit of the backlog increase flowed through and generated a $5.1 millionincrease in GAAP operating revenue. Also higher trust funding come in the quarter of about $3.5 million, was equal to revenue that was recognized in the prior year quarter related to a large property rights transaction.

Comparable preneed sales production declined 1.4% in the quarter. Although this was slightly down, we feel it was a very respectful performance against an unusually strong prior year comparable growth of some 23%.

Again, on a year- to-date basis, we are up 9.1% performing ahead of pace with our guidance of up mid to high single digit percentages in 2012. Cemetery profits grew $6.9 million or just under 18% for the quarter and margins increased 320 basis points to 23.6%.

This was mainly attributable to the cemetery construction revenues which carry higher margins as we have already incurred the selling costs in prior periods. So these incremental operating revenues of $5.1 million that are mentioned earlier, they generated 80% margins and dropped some $4 million to the third quarter margins.

Lower merchandise costs and maintenance and administrative expenses generated from supply chain initiatives made up the balance of the $6.9 million margin freeze. Now shifting to our outlook. As disclosed in the press release we have raised our earnings guidance for 2012 have provided our initial outlook for 2013.

We are expecting $0.1 to $0.21 in normalized earnings per share for the fourth quarter of 2012 compared to a prior number of $0.19 per share. In the fourth quarter of 2011, we grew GAAP cemetery revenue some $9 million with relatively flat sales production and completed a sizable amount of construction projects. This year much of that construction was triggered in the third quarter that we just reported.

We believe operating efficiencies and lower share count should more than counteract the touch comparable cemetery quarter that is coming in the fourth quarter. Therefore, our increased expectations for the full year 2012 are now a range of $0.76 per share to $0.79 per share and again that compares to 2011 of $0.65 earnings per share. This 2012 expectation for the full year represents an 18% to 22% growth over 2011.

All-in-all, a very impressive year in a difficult revenue environment. When I look back at what made this year such a success, the usual suspects were there. First, effective management of our cost structure both from a staffing perspective and supply chain.

Second, strategic deployment of our free cash flow through our share purchase program and through acquisitions. Maybe what I am most proud of, though, is continuing to grow our preneed cemetery sales production. Over 9% on a year-to-date basis following a 12% increase that we incurred in 2011.

We are achieving this growth by expanding the sales radius around our location and selling to new market segments predominantly through community service sales. These sales tend to exhibit lower down payments and have a higher proportion of financing terms that extend out to 60 months. The profits come now and the cash over the subsequent payment term period.

These heritage sales not only generate potential future cemetery sales opportunities to friends and family but in our 215 combination facilities, where 70 % of our total sales production occurs it increases the likelihood that we can provide the funeral service to the families at the time of need. Looking ahead to the next year in 2013, we believe are all well position to delivering solid results that our shareholders have come to expect. Our earnings per share guidance range of $0.79 to $0.87 at the midpoint represents about a 6.5% increase from the mid point of our expected 2012 earnings per share.

If you back out the Canadian note currency of some $0.015that we incurred in the first nine months of 2012 this makes our year-over-year true normalized growth at 2013 again at the midpoint closer to 8.5% growth andat the higher end of our guidance about 14%.

Now, to give you a little color on assumption. Comparable funeral revenues will continue to be challenging to growth in our opinion. We anticipate comparable funeral volumes will still be soft., down low single digits as we have experienced over the last few years.

We know one day the volume will come but until then, preneed is our best avenue to expand market share. Comparable funeral average will continue to grow in the low single digit range absent currency and trust fund impact. It is a little more challenging this year as we refreshed dignity packages, catering events, and E-commerce floral sales have been active over 12 months now.

Still, we will work very hard at achieving growth in 2013. On the cemetery side, revenues will continue to grow led by preneed production growth in the mid to high single digit percentage range. Remember preneed sales generate about 65% of our operating revenue.

Preneed sales growth will be driven by community service built expansion, continued training and development, around the sales manager position in particular, leading to increased counselor effectiveness and increased headcount. Keep in mind, for modeling purposes, that 35% of our revenue stream is at need cemetery. We expect that to be relatively flat year-over-year.

Segway margins will be impacted by the traditional inflationary costs in our business, but as we do every year, we will find ways to minimize that impact particularly through our spend smart and finance and accounting business procession transformation initialise. So finally, we believe we are well positioned to achieve long-term growth in our business both organically and through acquisitions. In the near term, we remain challenged in growing our topline. However, we believe the demographic dictate thatour company will experience in the future a natural growth trajectory.

This will be further enhanced by our acquisition strategy and our current focus in investment in growing our preneed business which today represents a backlog of over $7 billion. Until then the cash flow characteristics of the business remains strong. We plan to continue to capitalize on value enhancing opportunities which include returning capital of the year through measured share repurchases and a growing dividend. This concludes my prepared remarks, and I will turn the call over to Eric.

Thank, Tom. I am going to continue our comments today. Our prepared remarks, and I am going to give you our thoughts about our cash flow results and free cash flow deployment in the third quarter. Then I will have some comments about our cash flow outlook for the remainder of 2012, then I will also discuss 2013 as well.

So let us talk with cash flow during the third quarter. The results in the quarter grew about $7 million or 6% on an adjusted basis over the prior year quarter, and this was in line with our expectations. You can see the reconciliation on our press release and on our web-site as Debbie mentioned, but this excludes some modest amounts related to system and process transition costs. the increased in adjusted operating cash flow was due to higher EBITDA of about $12million that was partially offset by time differences in working capital.

These differences primarily relate to our increase in preneed cemetery property sales that were sold on installment basis that Tom just discussed in his remarks as well. Maintenance CapEX and cemetery development CapEX, and again these are the two components that we consider our recurring CapEX. In the quarter, these amounts were flat at about $26 million and this, again was in line with our expectations. Deducting these recurring capital spending items from adjusted cash flow, from we calculate our free cash flow for the third quarter to be about $97 million and this grew roughly 8% over the prior year quarter.

On a free cash flow per share basis, this represents $0.44 of free cash flow per share represented an impressive growth of 16% over the prior year quarter on a per share basis. So let us talk about how we deployed that free cash flow during the quarter. As Tom mentioned, we continue to buyback our shares during the quarter. We repurchased 3 million shares in the third quarter for a total investment of just under $40 million.

Subsequent to the end of this quarter, we bought another 1.4 million shares for just over $19 million. All this activity resulted in us purchasing a total of 13.6 million shares for all of 2012 to date for a total amount of about $162 million.

As of today, we currently have just under $60 million of repurchased authorization remaining. In our current shares outstanding have been reduced to just about 212 million shares outstanding. This was a small acquisition in the quarter, but more importantly this brings our total acquisition investment year-to-date through the third quarter to about $19 million in 2012.

Now, let us talk about our cash flow outlook, and I will start with 2012. We expect to produce growth in our operating cash flow in the fourth quarter which is expected to be in a range of $100 million to $120 million compared to about $97 million in the fourth quarter 2011. We also expect our maintenance and cemetery development CapEX to be the same as last year's quarter at around $30 million.

Therefore, these amounts equate to expected free cash flow for the fourth quarter of 2012 of $70 million to $90 million representing solid growth over the $67 million of free cash flow we generated in the fourth quarter last year. The fourth quarter solid cash flow performance will result in our operating cash flow being $390 million to $410 million for the full year of 2012. This is consistent with our previous guidance.

Due to our cemetery development projects recognized in the third quarter, our maintenance and cemetery development cost will be higher then our previous guidance and will end a year of $110 million which will result in the full year of 2012 free cash flow of $280 million to $300 million. Importantly, on a per share basis, the midpoint of this 2012 full year free cash flow guidance is nearly 11% over a full year 2011, and as Tom mentioned, I also want to thank our entire SCI team of over 20,000 professionals for executing so well during 2012 and generating this impressive free cash flow growth.

Now let me shift to our cash flow outlook for 2013, and as we look ahead, we expect our operating cash flow from our base businesses to grow commensurate with our expected EBITDA growth and our earnings guidance that Tom discussed earlier. While our funeral and cemetery operation cash flow will grow next year, we also disclosed in our press release that we expect to pay $35 million to $45 million of cash taxes during 2013. This compares to $17 million in cash taxes expected to be paid in 2012.

These levels of cash taxes do not make us a full cash taxpayer due to remaining and net operating losses in 2013, but we do expect to become a full cash taxpayer in 2014 with currently expected cash tax rate of around 30% in 2014. Our operating cash flow guidance of $375 million to $425 million includes the effect of these anticipated higher tax taxes of 2013. Capital spending in 2013 will be similar to 2012 levels at $105 million to $115 million for maintenance and cemetery CapEX and probably an additional $10 million for other growth capital expenditures. By deducting just maintenance and cemetery development CapEx from the operating cash flow, we anticipate our free cash flow in 2013 to range from $260 million to $320 million.

So, the strong and consistent cash flow continues to be our story here. We expect our free cash flow per share to grow in the low single digit range in 2013, but when we normalize our increase in cash taxes the midpoint of the free cash flow ranges result in about a 9% growth rate in our free cash flow per share and about a 9% growth rate in our precash flow per share demonstrating the underlined solid cash flows that our funeral and cemetery businesses continue to produce that has resulted in a free cash flow per share compounded annual growth rate of about 10% since 2004.

So in conclusion, we will enter 2013 the same way we plan on finishing 2012 with a solid balance sheet and a good capital structure, tremendous liquidity, and excited about. the opportunities in front of us that allow to deploy our free cash flow to enhance shareholder value. So, with that Operator, this concludes our prepared remarks, and we are ready to open the call up to questions.

Thank you. (Operator Instructions). And our first question comes from A.J. Rice of UBS. Please go ahead.

Thanks. Hello, everybody. A couple quick questions if I could ask. On the acquisitions in the quarter and then the comment headed into the fourth quarter. I know on the cash flow statement you says you spent $9 million for accusation-related activities. Was that all the North Carolina property? or was there anything else in there?

I think there were some other things that were also in there AJ. in that $9 million number.

All right.

With regard to fourth quarter, we are excited about it. There is a lot of activity. John Faulk is sitting here with me and his team is working very hard, been on the road quite a bit. There are a number of deals. I could not count them all on one hand, but probably two to give you an idea.

Do you think that is driven by people who want to do tax planning ahead of whatever comes next year out of deaths or reduction talks, or do you think you are just seeing a natural pick up in the underlining tone of the market?

I think more of the former. There is a lot of people that are being driven by fear of what is to come with regards to taxes but again, that is probably what pushes him over the hump. I do not think anybody is selling just for that reason. You get to the point where it makes sense, but we are definitely seeing I would day some acceleration of that behavior.

Okay. Maybe just one other area, Clearly, in the quarter, there was some discussion about all the things that are happening in the read world and non-traditional companies are looking at taking on read structures and so fourth. For whatever reason your name surfaced on that. Can you give us maybe a little discussion about what you are thinking along those lines would be, and what the opportunity and the challenges to considering something like that might be?

AJ, this is Eric. You have seen our track record. We are always looking at different project and different ways to enhance shareholder value. A read structure that came up recently mostly because of the non- traditional reach out there is just one piece of an equation that we are always looking at ways to increase our shareholder value. The update is that structurally there is complexity for a company to get in to that in a non-traditional read area, and we are currently forming our opinion at that. I will tell you that it is going to take a while for us to complete that analysis.

Again, AJ, I think the full benefit read would be when you are a full taxpayer. As Eric pointed out, we are still not. Always worthy of exploration for the benefit of shareholder values.. If we get to the point where we have something to talk about, we will surely let you know.

Maybe just a final thing here. In your guidance for next year, you did not mention buybacks or acquisitions. I am assuming there is no further buyback baked in there? It sounds like you will probably pursue it, but you just did not bake it in there? Is than true for acquisitions a well?

Yes, I think what we have one there is minimal amounts of both. Again, we do not know which way we are gonna drive it and what is going to happen. That has been consistent with the way we have done it over the last few years quite honestly.. There is some upside to capital deployment in 2013.

All right. Thanks a lot.

Thank you. Our next question is from Chris Rigg of SusquehannaPlease go ahead.

Good morning. Thanks for taking my question. I just want to -- maybe I missed it, if I did I apologize. Did you guys give directionally whether you think operating income next year is gonna be up or down relative to 2012?

Operating income is going to be up Chris for sure. I am not looking at a sheet, but my memory of operating income should be, I do not have it in front of me, Chris. I do not know. I think on a pre-tax basis it is surely somewhere in the $8 million to $15 million range. Something like that.

Okay. Then the tax rate for the guidance next year is what percent?

It will be around where it is now which is 37% to 38% absent any type of dispute items that popped up that are obviously not forecasted.

Then on the cemetery develop and project completion for next year, is that going to be comparable to this year or up or down, or any color there would be helpful.

Generally it is going to be about the same, Chris. Is the way to think about it. Our philosophy on cemetery sales which shifted back in to the mid 2000s. It has been pretty consistent year over year. We are building fantastic cemetery inventory for people to see it and to buy. That has been really the strategy which we deployed which is a little heavy on the front, but really generate sales in the back. So we are going to continue that program in 2013 and beyond.

Just qualitatively, on the Refresh Dignity, and you guys said you- - given what you saw in the quarter going to go back out to the field and do some retraining. Can you give us some sense for what you guys are seeing that you do not like with regard to the refreshed product?

It is not so much that we do not like. What we find Chris is we want to get this out there People are anxious for it to get into market. Think about going into a funeral home-side almost1500 locations. It is a chore.

We only have so many resources to train , and we want to get it up and running. I say we have it up and running at every place that we possibly can. What we find is in one market it is very successful because it was trained well and received well and we are seeing the traction, and then a market next door maybe a total different reaction.

For a variety of reason it may be turnover. It may be that we did not stay long enough to do the training. What we find is when we role these things outsometimes it doesn't track the first time.

What we will be doing the rest of this year and early part of next year is going back to the markets and saying why isn't this working. The concept of this Refresh was enhanced flexibility. One of the pusbacks we had before was it wasn't flexible enough, too rigid of a program. We think once people really understand the benefits of the flexibility and understand the substitution capabilities with regards to product that once that really registers, it's going to take hold in all these markets. That is our missions 2013, and I feel pretty good about it. I was just pointing out that we have rolled it out to everybody and it's improvement from here.

Thanks a lot.

Thank you. Our next question is from Clint Findley of a Davenport. Please go ahead.

Good morning guys. Nice quarter and nice outlook here. First question on the cemetery side. If I understood you correctly it sounds like some benefit flowed through in the quarter about $5. 1 million due to the cemetery construction.

I wondered how much we would expect to potentially hit then in the fourth quarter. If you could frame that against what I believe you characterized as a tougher quarter that is coming up for the cemetery segment.

Yes, let me speak to the $5.1 million. It is a little confusing, Clint. So I will try to clarify it for you. What we call construction revenues is once it is completely constructed, whatever has been sold in that backlog gets triggered. It's a little bit of a deceiving number. The number for the quarter was probably more like of $7.5 million of more constructed revenue.

Let me explain what constructed revenue really is these days. If you think about a project that's being built, we are selling it aggressively in the first part of the year and particularly in this quarter. Just think about this quarter beginning in the first day of July.

We are selling the heck out of a project that's going to be completely in the end. A lot of those sales occurred during the third quarter. It just so happens that they get deferred in to a bucket until that final weld is put in and now that is considered constructed. I think the better way to look at it is to look at the production that's occurring over periods of time.

We are up 9% on a premium basis yea- to-date. So, when you think about the fourth quarter, we had a lot of that constructed activity occur in the prior year. We won't have as much "constructed" inventory.

What I do believe, though, is we are going to sell more and be able to recognize more because that constructed inventory already exists. So rather than confuse you with when things get called construction or not, I would point you towards we feel comfortable that from a production basis and what we are able to recognize, we are gonna have a solid fourth quarter. Just know that the accounting treatment in last year's quarter gave it a heavier dose of profit. Again, not something we cannot overcome just relevant information to you.

So we still expect a strong quarter, but probably just not quite as good as the 22.5% margin that we saw a year ago.

Probably so. I am not saying you can't do it, but again that was helped by the fact that you recognize that revenue in the selling costs wasn't there. You already took it many prior quarters in 2011.

So, agreed with your statement, but again we feel if you look at the guidance, $18 million to $21 million for the fourth quarter. That shows you that we are in the ballpark of last year and maybe beating it. The things that are gonna really help us are we are going to have a reduced share count and we have done a good job at managing our expenses throughout the year. We believe that is going to overcome any differential in the cemetery business if there is one.

Fair enough. Did you guys notice any change in the selling environment for the preneed during the quarter and any changes on the part of the consumer?

Not anything to speak of. Again, I think the two things I want people to, Clint is year to date, 9.1% and we are comparing against a third quarter last year that grew 23%.

It was a lot per quarter that we were trying to overcome. I don't see anything. Clearly the consumers are a bit distracted by the things that are happening out there. We have seen that consistently in the last few years.

Again, we view what we sell as, while it is discretionary it's probably one of the ;east discretionary when you categorize those items because it is a planning event. It is taking care of something It's giving people peace of mind. Even in difficult times, people are coming back and wanting to take care of something like this. So, nothing noticeable to point out for you.

okay.

A couple of questions, quickly here on the guidance. I wondered what share count was implicit within the fourth quarter guidance? Are we expecting slightly north of the $212 million that you referenced in the commentary? From a weighted average perspective it will be slightly higher than that. I think for the whole year the weighted average comes down to just under $220 million for the whole year.

And, I wondered what volume expectation was baked into the 2013 guidance?Are we thinking it's flat to slightly down?

Yes, I think our midpoint of our guidance is slightly down similar to the stands we have experienced the last few years.

Okay and then a final question. I mean just any idea when you might be able to complete the read analysis that you are doing, and I wondered if you had any discussions with the IRS on the potential conversion yet?

We have not had any discussions with the IRS, Clint on a potential conversion. If we go down this research path that we are doing forming an opinion and it continues to look like something that will give us tax efficient fees, we will continue to go as far as we can to form the full opinion as the way I describe it. If you do involve the IRS, it's not going to be timely. My guess would be maybe 6 to 12 months we could have an opinion formed one way or the other.

Excellent.. Thank you guys and again, nice quarter..

Thanks, Clint.

Thank you. Our next question comes from Robert Willoughby of Bank Of America. Please go Ahead.

Tom and Eric, can you speak to the revenue trends, the pricing trends you are seeing on the base cremations, and then some representation on what you are seeing on the memorialization type of event, cremation events that you have. How has the numbers of those growing and how's the pricing comparing?

I think on the cremation side, Bob I don't have anything in front of me but looking at some of the trends. Cremation growth has actually been better than the burial growth from a percentage perspective. We are seeing some traction. people probably in our materials in our ability to deliver service to consumers so the trend on cremation pricing actually are a little better than historical memorial.

People again probably in our enhanced presentation materials in our ability to deliver private services that are more relevant to cremation consumers. So the trend on cremation pricing actually are a little better then historical memorial. Again I am speaking over quite longer periods of time and not so much to the quarter. Even in the quarter, I am looking at something now that is up. I think some 3% on a year-to-date basis for cremation on a burial side closer to 2-2.5 %Trends are good there.

I don't think the tough part. Someone referenced before, it's still a tough economy out there, and I don't think you have a highly confident consumer. Particularly our target audience with interest rates as low as they are. That is eating into their consumable spend.

So, we are again very cognizant of that fact in trying to find ways to make these things affordable through payment terms on a preneed basis. We have been able to continue to enhance the pricing mainly through increased mix, getting people to buy additional products and services that are relevant. We feel pretty good relative to other retailers, but realize it is a challenge.

Just to be clear, Tom, there's a base cremation which would be the lowest-end business you see and do. I guess you are saying you do see a little of a price bump there and then the percentage of cremations that are actually taking one or more, two or more of the things that you offer some type of memorialization issue? What representation of that is of the total cremation procedures. Is that a fair question?

Yes, it is. I think on both count we are seeing increases. Obviously on the increases on direct cremation, that's a direct function of our pricing. We view direct cremation as something we want to participate in, but again we have got to have a price that allows us to make some money in this business.

So, we have inflationary costed that one. It's up some 2% or so year-over-year.. The reason we get to 3.5%for the year is that the cremation with service is doing even better.

Again, backing many to that expand and take up rate and Dignity packages and the like. We feel good about both trends. I say the direct cremation is going to correlate well with the base inflation and the other one it has the ability for upside with regard to products and services.

Just to dumb it up for the healthcare guy, The guidance for next year, I am not pushing the volume- - I am not pushing any type of trust fund return assumption, there's a lot happening on the margin. Can you possibly give us the buckets in terms of what the bigger drivers are, what the smaller drivers, and the things like the newer services like events planning and E-floral, and what are those adding year over year in terms of your guidance increase?

I think the way to think about it, Bob, is this. On the funeral side, we launched a lot of new things in 2012 which had impact.

Refresh Dignity packagesAs you mentioned, E-commerce, floral sales. additionally, the catering an event packages. All those things are in the 2012 number. So as I think about 2013,we should see some bumps, but probably harder to overcome because you are comparing back against those initiatives.

So the funeral -side of the business, I wish I had something exciting to tell you. I think it is our expectation that we can maintain margins. We have a slight increases which eek out slight increases in cash flow. The real upside to 2013, like we said over the last few year, our ability to grow cemetery profits. That is predominantly going to be a function of our ability to maintain sales on a preneed basis.

So development on that cemetery inventory, training in getting good leads and utilizing those leads effectively through lead management systems. I think it's really going to hinge upon how successful are we on selling preneed cemetery. We also know that we have some initiatives launched that are gonna save us some money. I referenced them a little bit.

Spinsmart which is a new system than is going to allow us to have information to manage our supply chain much more effectively. It's a fantastic system that we think is going allow us to leverage some of our size again. Secondarily, Eric mentioned earlier that we have a finance and accounting business process improvement where we moved some offshoring capabilities that were wit one vendor to another. It is going to allow us to really transform the way we do the finance and accounting function and save us a lot of money in the meantime. It's a long term project and it pays out over five years, but these are two things in particular that are going leverage again our size and be able to reduce some of our costs.

Look for that, and look for the preneed cemetery, and that is going to tell the tale on how good 2013 is. I hope we are going to land some good acquisitions. We have some good ones that we have had so far this year, hopefully close to more in the fourth quarter. Those will be impacted. Not a whole lot more.

Neptune is another one. I think Neptune will continue to improve. We are very pleased with the progress. A great management team in drive and performance. All these little things, but I would preneed cemetery is the one that is going to row the boat.

Well that is the one you are making a bet on the economy as well I guess. Would you characterize stretch goal for that preneed cemetery business as indeed A stretch or is it really more complicated than that?

I feel very confident. We saw what happened in 2008. I am not going to print--Do you had another 2008/2009 event. We saw preneed cemetery sales freeze up. The good news is they came back out of their shell six months later.

That's something that we can't control , but when you think about our model, Bob and you understand this as good as anybody. On the funeral side, we recognize revenue when we have a volume event and when we collect the price there is not a lot you can do to move the GAAP profit. On the cemetery side, the ability to do that cemetery sale to leverage both cash flow and earnings per share.

So unfortunately, because of our accounting, that's the thing, it is more economically sensitive than the former. So, you're right, it is a little more economically sensitive, According to the last cycle is it will come back after a terrible event. I don't expect that. I think it's different circumstance. I'm confident that 2013, our politicians will work this out, right? We'll get there.

Politicians, oh. Looks great. Thank you.

Thank you. Our next question is from Duncan Brown from Wells Fargo. Please go ahead.

Good morning. You referenced the implementation of a new purchase ordering system plus some changes in outsourcing providers, and if I read the press release right there was roughly a $2.5 million hit to G&A because of that. Is that one time in nature, or how should we think about that?

It's one time occur during 2012, and we should have those systems and process transformation costs behind us for the most part, but yes, those specific costs that you're referring to relate to those two projects, and we are finishing those products, but obviously there's always tweaking on the backend. So maybe some of that will leap into the first quarter of next year, but generally that's correct, Duncan..

So, another roughly 2.5 for Q4 is that fair?

Yes.

Thank you. Maybe going in to the reception events front. It sounds like that's flatlined atleast sequentially. Tom, I think last quarter you gave some stats about certain locations haven't even, the catering is available everywhere but certain locations have not even sold one. I wonder if you would update us on that and then the progress on how you drive that further?

Sure I would tell you that the update isn't dramatically different. We moved it slightly. We still probably have some 40% of our locations that have either sold one or none.

Now to give you some hope, right. It is kind of flatlined. When you think about how we trained all this, there's actually one team that has implemented the Dignity packages and pricing. They are the same people that are doing, that are helping the events and catering, and so what's happened is we've been inundated with rollouts as you can imagine. We have now completed that. Think of this team- -we have a really, good team by the way.

They will now be able to rifle and go back and fix places that have not implemented it to places at this point. Instead of having to run to a market and do the initial roll out, they are gonna go focus on floral in this area or catering in this area or a Dignity package uptake in this area. I view this as our- - we've been shooting a shotgun last season and this season it's using your rifle and going in and fixing this thing. I think we're going to have traction in both catering as well as when we take a break in a market that we really needs the assistance and the training. That's the upside to this.

That's fair. Thanks. One numbers question, how much is out on the revolver currently, please?

About $77 million out on the revolver, Duncan.

Great. Thanks a lot.

Thank you. Our last question is from John Ransom of Raymond James. Please go ahead.

Just in under the wire. A couple things. Your acquisition of Neptune, what have you learned on the cemetery business? I'm sorry on the cremation business? And what have you been able to do, if anything, to cross-pollinate your cremation efforts across your mainstream franchise?

I think at this point, again what we have learned from Neptune is that in this price conscious cremation consumer, getting in front of them ahead of time is a tremendous benefit. These consumers typically probably lack information in order to make the decision. When it's made on an at need basis, there's not enough time or thought that goes in to it. We're finding that their approach to getting in front of these folks and explaining the options to them to get them to take a $600 to $700 spin in their mind to somewhere close to $1800.

That is probably the real light switch for us as it relates to dealing with this cross conscious direct cremation consumer. As far as cross-pollenization, there's plans in place to begin to do a lot more of that. But you can begin to think about some of the things. One simple thing for us is leveraging scale. They sell a lot of urns. We buy a lot of urns. We buy more then they did. We can leverage our cost benefit into their model. We are learning things about how they do direct mail in dealing with cremation consumers and being able to transfer some of that and actually put some of that management under them as well

We had an NCS brand that tried to do similar things although under a different model. And as you think about the cemetery, we have got cremation gardens in parts of the country, but again our unique opportunities for the consumer to consider and whether that is gonna work or not in different locations, again we will get back to how we train it and how we present it to the consumer. So all that is kind of a work in progress. Right now, John what we are focused on with Neptune in particularly is growing the model. We actually opened new offices this year alone in Chicago, Detroit, and Indianapolis, Milwaukee, Indianapolis, New Orleans, Nashville Atlanta, Albuquerque. This is the real opportunities to put this model in front of the consumer that we weren't going to see because our approach was not going attack the cost conscious direct consumer. So that's probably what we are focused on more verses the cross-pollenization at this point. Having said it is on our radar screen and we will continue working it.

Just a couple other ones. What was the contribution approximately of EBITDA this year from the good returns you have gotten out of your trust funds?

Well in total the trust fund income is modeled to be about $95 million to $100 million for the full year. Now there is a lot of cost associated with that as well, but that is pretty much chalking the bottom line depending on how you want to think about it. What it is really doing is offsetting in place you for us. Buy generally when you think about EBITDA and you do the math on the guidance it is close to $600 million EBITDA company.

Right. But I am saying when you do your guidance you weren't assuming these level of returns? Is there some upside in your EBITDA verses good returns?

You asked about the quarter, but if you're moving to 2013, no. We assume- -

I am sorry I am not being very clear here. I meant the year-to-date numbers. The good numbers out of your trust. How much have they helped your year-to-date numbers relative to what you were modeling initially?

It is about $75 million year-to-date. As I expected. I would say last year somewhere between $70 million to $75 million. It is not very material. As you know, the first quarter was good. The second quarter wasn't good and it has come back in the third quarter. So it's not moving the needle too much, John. John, the reason for that is this is a confusing topic for some of those that don't know as well as you do. take a billion dollar trust portfolio. A hundred basis points is $10 million in a year. That sounds gravy. A hundred basis points is $10 million, well guess what? $9 million of that $10 million gets deferred into the backlog. .

So even with a robust return to the market this year, think of it this way. We get about 10% of the benefit of what is happening within that trust fund, because it is all tied to the event of death, and we will roll over some 10% of our backlog each year. So that is why in highly accretive markets it is not nearly as beneficial as people would expect. Like we learned in 2008 and 2009, when the markets craters it doesn't reflect through our income statement as quickly. So great questions, and it's not a big number as Eric pointed out because again of the deferral effect related to the backlog.

Yes,. I think the number Eric uses is like every 1% was like $1.5 million of EBITDA, I don't know if that still holds but that is the number I remember from kind of - -

It is pretty close, John. It is really about a 1%. It is probably more closer to $1 million than $1.5 million. But generally that's true, and it is all bawl of their ten year contracts, ten year asset lives.

Right, okay. And then lastly, this -- I was looking at your longer term model the other day and clearly there's been this structural improvement in the cemetery business, of about 400 or 500 basis points. Could you just take a step back and look at that? That business used to be very -- the margins used to be incredibly volatile. And it looks like now the cemetery margins are both higher and a little -- a lot less volatile then they used to be. Is that -- structural, is there something you can help us understand that a little better?

Sure. I really think it is two things. And they kind of go hand in hand. One is we have a very definitive strategy as it relates to cemetery property. That we embarked upon some call it seven years ago. And that was build it and they will come. Remember the Kevin Costner movie. We are building fantastic inventory that we believe we can sell and people with money will buy it if they can see it. So a lot of our strategy was putting fantastic things out is there and being able to sell it that gives us a robust portfolio to go out and sell at any point in time, which adds stability to the business.

Second thing we did because we have really invested in our sales force and our sales management in lead, the lead management systems. And putting the weighted effort behind that, we have seen total preneed cemetery production growth -- this is on a comparable basis. 7% in 2009, 6% in 2010, over 12% in 2011, 9% in 2012. So that, John that consistency as it relates to creating cemetery growth, (Inaudible) inventory and putting the emphasis on training has allowed us to really grow the profitability of that segment.

Okay. Perfect. Thanks.

Thank you. We have no further questions. I will now turn the call back over to SCI Management.

Thank you very much for being on the call today. We look forward to seeing you for our year end call. Sometime in February. Thank you very much.

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.