Service Corporation International (SCI) Q4 2007 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Service Corporation International Fourth Quarter 2007-2008 Guidance Call. My name is Stacy and I will be your moderator 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 the conference. [Operator Instructions]. I would now like to turn the presentation over to your host for today, SCI Management. Please proceed.

Good morning, this is Debbie Young, I'm Director of Investor Relations for SCI. Thanks for joining us today as we talk about our year-end results and our outlook for 2008. In our comments 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 in these forward-looking statements. For more information related to the forward-looking statements and other important risk factors please review our periodic filings with the SEC that are available on our website at sci-corp.com. In addition during the call today Tom and Eric will use the terms normalized EPS and normalized operating cash flows. These are non-GAAP financial terms. Please see our press release that was issued yesterday and filed on 8-K this morning, where we have provided detailed reconciliations for each of these measures to the appropriate GAAP amounts. And we will now begin with comments from Tom Ryan, our President and CEO.

Thanks, Debbie and thanks everybody for being on the call today. I'd like to start with an overview of what we have done and then talk a little bit towards the end of my comments about the outlook for 2008. As many of you have already seen on the press release, we are very pleased to report normalized earnings per share of $0.14 for the quarter versus $0.11 that we reported in the prior year 2006 quarter. These are very solid results we feel in a very difficult volume environment as you can see as reported in the press release. The primary reasons we were able to accomplish what we did were very strong revenue per funeral service as we continued to stay with the strategic pricing and packaging and other things. We saw a very strong cemetery sales production in the fourth quarter and again with the backdrop of a very difficult economy in the background. And lastly and probably most importantly the Alderwoods transaction synergy were realized and on time. So, again that allowed us to achieve the solid results we reported here in the fourth quarter. I want to take a moment to thank our outstanding employees, all 20,000 of them, for keeping their eye on the ball at a very pivotal transition year for the company. Next I am going to give an overview for funeral operations. Revenues for the quarter were a little weak primarily due to volume negatively affecting our process. Our comparable volumes and this will be SCI locations were down 3.9% for the quarter. Based on our competitors, suppliers, looking at obituaries, looking at CDC data we try to look at a lot of things, we think we're really in the ballpark as to what's happening as far as numbers of deaths in our market. Most of the low price cremation fall off is consistent year-over-year particularly as it relates to the comparable businesses that were SCI 2006. We still are seeing a little emerging pockets for the most part. We are seeing a continued trend in January 2008, we have closed our books, and we look to be down about 4% for January, which is a consistent trend. The good news is that we haven't closed February, looking at statistics there we are seeing a reversal of that trend. We actually saw some positive movement the other way as it relates to February. Having said that we haven't closed our books so time will tell but we do think we are seeing a bit of a flu season resulting in the February numbers. Our Alderwoods locations for the quarter were down about 4% but very consistent with the SCI locations. And again there we may see as you think about 2008 a little erosion on the lower, because keep in mind we have put in segmentations, we have put in strategic pricing in Alderwoods location so, we could see a little bit of an erosion there. But again this business that we either are not making money on or losing money on so, we are not as concerned about it. On the comparable revenue front, our revenue per case was up 5.2% for the quarter. We are seeing continued positive impact from strategic pricing on the true atneed average which was up 5.6%. So, these are people walking through the door, was up 5.6% quarter-over-quarter compared to last quarter. And if you look at a trend analysis from the third quarter of '07 to the fourth we saw our average up an additional 3%. So, we are seeing a lot of momentum on the atneed front and again I think tells us that economy uncertainty does not impact and we are not seeing an impact on the atneed lock in, you know, which is probably the most... a valuable piece of our revenue stream. So therefore, we are saying we are not seeing any negative consumer discretionary behavior on our pricing yet, particularly as it relates to the funeral business. The Alderwoods revenue per case is about 2% above our original expectations, right around of $4,700 for the fourth quarter. Again keep in mind we completed our strategic pricing in the third quarter, we are in the process now of rolling out the Dignity rooms and the packages to the Alderwoods locations that will happen throughout 2008 and we think that will give an additional lift to those specific locations, particularly throughout 2008. Consolidated revenue per case for January after we closed our books is up about 5%. So, again I would say the trends tell us we are not seeing a negative consumer discretionary behavior in our business. Funeral profits were also slightly negatively impacted in the quarter by two things; one is increased property tax accruals and the second thing is we saw increased sales compensation associated with preneed sales production. We had a very tough quarter as it relates to preneed sales production and above 15% quarter-over-quarter, and because of that we've selling costs associated with it on current earnings. While not directly impacting earnings per share I touched upon it is very important and part of our key to long-term strategy, we are seeing great progress on the preneed funeral production side. Our comparable production revenue increased $11.7 million over the prior year quarter, which again is in the higher teens year-over-year. Our investment in the sales operations infrastructure is making a difference. We believe we are doing a much better job of managing leads, following up, enhancing our manpower. Most of this is manpower driven with a refocus on the standalone funeral home activity. We are providing resources and people to follow up on leads and again remember our goal is to grow the backlog. On the cemetery operations front, we saw strong revenue growth, which again dropped pretty much straight to the bottom line with good experienced management in that segment of our business. Our cemetery margins after overhead allocations was 23.4% versus a prior year quarter of 22.5%. Our comparable revenues grew almost $6 million or 4% on a GAAP basis. And what's driving that is a couple of things. On a comparable basis, we saw higher property sales productions, about $10.3 million increase, that's a 19% increase over the fourth quarter 2006. This was driven by successful tiered-product strategy resulting in several high end sales throughout the network. So this drove a $12 million GAAP increase in our property revenues. These are both pretty good quarters for 2006 and 2007, enjoyed high recognition rates as it relates to completing constructions. In '07 we recognized about 117% of what we sold because of items being constructed during the quarter. Our great results were slightly offset by the fact that we had a reduction in merchandized delivery recognition. We had a lot of merchandized deliveries in the fourth quarter of '06, and therefore our GAAP revenues were down about $5 million. So property up 12, merchandized down 5, we are driving comp revenues around $6 million up 4%. We look for enhanced sales productions as we move forward with sales operation, infrastructure investment driven by more inventory and increased manpower. On the Alderwoods front, we saw improvement during the quarter and primarily we think that's driven by having the available inventory, and building cemetery inventory throughout the year, and the effect of our strategic pricing that we put in place. We continue to see sales manpower issues on the Alderwoods front, it's something we are very focused on, we are going to apply the necessary resources to begin to pick that in 2008. The good news is like we reported for the fourth quarter, the inventories are available and in place and the pricing is in place. So, those two things should allow us to progress in 2008. We have had a lot of people calling us about how sensitive SCI took the downturn in the economic cycle. Debbie has developed a slide, that is going to be available on the internet on Monday, we are doing a presentation with Raymond James that I think will clear this stuff quite a bit and I am going to try to talk you through it for a minute. When we think about economic sensitivity for SCI, the first thing you do is let's look at the funeral side of the equation. On the funeral side it is about 67% of our consolidated revenues, and when you think about that funeral strength, 70% of our business walks into that without a premium. We believe and again have historic data to prove this that, that consumer is not very economic. Funds have typically been set-aside through insurance policies, state planning, etcetera. There is a lot of different ways to do it, but, we have never seen a dramatic impact from that consumer walking through the door. The other 30% as you will recall runs through our income statement, our preneed contract, the money has been set aside, they tend the average to be 10 to 12 years old and they have accumulated earnings overtime that have been deferred. So, again that is not economically sensitive whatsoever. I will say on the funeral side of business as we go out and try to sell new preneed that will grow our backlog that is going to be economically sensitive. But again we don't miss that consumer, when the economy turns around we get the opportunity to sit in front of them two years from now. So, not a big impact on earned EPS, it does slow down our ability to fill up the backlog. I will now go to the cemetery front which is one-third of our revenues. Of that cemetery revenue stream, 36% again is a consumer walking through the door with a need today. And that consumer historically has not been very economically sensitive. Another 19% of the revenue stream is preneed merchandizing service deliveries. So this would be people that have died and we are now going to take those monies out of Trust, just like on the funeral side. So, the money has been set aside its been earning income and being deferred and now we are pulling it out of the Trust so, again not economically sensitive. Now 39% of our revenue stream is preneed property productions, so, this is selling land, and like. This consumer is economically sensitive, they don't need it today and they have the options to defer a purchase. So, we believe 39% of our cemetery revenue stream is economic. The last piece is we have 6% in dormitory income which is predominantly interest income in fixed income securities. So again, very steady stream, not very economically sensitive today. So, you take all these into account. 39% of our cemetery revenue is subject, we believe to the economy and so that overall when you look at SCI's revenues is about 13% of our revenue stream is subject to economically sensitive consumer. Having said that, I'd mention a couple of things; one, when the economy is down it actually helps us on one front because of manpower opportunities. As unemployment goes up we can access highly qualified people from other industries and bring them into our sales organization and we find that today, we are seeing evidence of that in areas that are being hit. The other thing that I would tell you is, during tough times people surely are going to buy the big screen TV but, they do get... they do tend to seriously plan events in their lives. I think it forces you to focus on that. So again while it is economically sensitive, I think we are slightly different because of those two characteristics. Now, I would like to move to 2008 guidance and again it is in your press release. Our earnings per share guidance range is between $0.57 and $0.63, this is 10% to 20% increase over the 52% we just reported. If you normalize the 2007 tax rate, which we had a 36.5% versus 38% we believe going forward, we are forecasting an increase in the range of 13% to 23% over the 2007 results. On the funeral side of the business, we provide a guidance that says funeral margins should be between 20% and 24% for 2008. This is compared to a 20% margin approximately reported in 2007. The enhanced margins we believe will be driven by overhead synergies that we put in place during 2007, the effects of all the locations strategic pricing, and greater efficiencies from staffing metrics and sharing best practices. The real variable when you think about the funeral side, a lot of this is executions, the real variable is going to be funeral volume, very hard to predict. Our forecasted ranges that we utilize in developing the 20% to 24% margin range are down between 1% and down 4% that we utilized in developing those. On the cemetery front, we expect our cemetery margins to be in 18% to 22% range compared to a 21% margin that we reported in 2007. Keep in mind, we have recognized over $8 million in profit in the first quarter from construction activity of Rose Hills on previously sold property. So again those are sales that occurred from prior years but we caught up on the construction, you got to recognize those profits. Those probably are funerals. If you pull those out, our margins for 2007 was about 20% and we think our range is going to be 18% to 22%. The real variable in cemetery is going to be preneed cemetery property sale that I just touched upon. We believe we are poised to grow this with enhanced inventory and enhanced manpower, at the same time this is the one current revenue stream that I touched upon, which is subject to consumer discretionary trend. It could be impacted in a period of economic uncertainty. Beyond 2008, we believe that comparable funeral revenues should grow modestly as inflationary pricing offsets minor declines in funeral volumes. This is mainly going to be caused because of depression, [indiscernible] between 1929 and 1933, not as many people were born and Healthcare advances that continue to utilize. Those two factors we believe are a mute comparable funeral volume and we think inflationary pricing allows to modestly grow that. Further rationalization of our footprint and improved efficiencies for metrics and scale should allow us to maintain a solid low 20% gross margin percentage until volume increases. On the cemetery front, we would expect to be able to grow revenues in the mid single digit percentage earnings and grow gross margin percentage by somewhere between 150 and 200 basis points per year as enhanced sales manpower and pricing drive revenues above inflation. All the while we will be expanding our footprint selectively in strategic markets, shrinking our equity base with excess cash, we are expanding the preneed backlog through both the traditional and alternative marketing channels, and proving the efficiency of our network. This preparation will greatly enhance the results of our company, particularly once the baby boom impacts begins. This concludes my prepared comments. I will turn the call over to Eric.

Thanks Tom. I am going to start by talking about our cash flows for '07 and a little bit of the comments about 2008 on that and then get into our capital priorities, and lastly I want to talk about our Trust Fund performance as well as some of the sensitivity of the Trust Funds in down markets and the volatility as it will affect the SCI. Starting with our cash flow we are very pleased with our cash flow in 2007, it was very strong. We finished the year of cash flow from operations at just over $350 million and $355 million, I believe to be exact. And as for GAAP operating cash flow number and cash flow statement, and that exceeded our guidance given for the full year of 2007, a $305 million to $345 million. On a normalized basis as Debbie explained to you that definition that excludes things such as the Alderwoods transition costs and the pension termination costs that we had during the year. So, our normalized cash flow adjusted for these special items was about $430 million compared to $343 million in 2006. So quite a decent increase representing about a 25% increase in our cash flow from operations in '07 versus '06. Looking forward in 2008, we are expecting the same GAAP operating cash flow to be in the range of $280 million $310 million. I do need to mention one thing that it is key for early 2008, that number includes... that range of numbers includes $100 million Federal cash tax payment that we're going to make in early 2008 or probably be made next month. And it relates to one time transaction cost for some of the dispositions that we completed primarily in 2007. So it includes the taxes that need to be paid related to the French transaction, we saw the minority interest there, as well as the large StoneMor transaction that we sold in late fourth quarter of 2007. Excluding this payment of $100 million, the normalized cash flows for 2008 are expected to be in the range of $380 million to $410 million. That's actually, we think of it as growth in our forecast from operations in '08 versus '07 because we have to think about what is in, what the differences are between the two years. First of all in 2008 we are a full year federal cash tax payer, after we have fully utilized SCI's federal net operating loss carry forwards and that has an affect of the increased cash taxes of just a little bit over $30 million in 2008 as you think about that versus 2007. Also in 2008 if you recall through the Alderwoods acquisition how we inherited an insurance company called Mayflower that we ultimately sold during 2007 but prior to its sales it contributed about $17 million in cash flow from operations. So, between the 30 additional taxes and the 17 in Mayflower that will not recur, and normalize those 7 is just north of $380 million which compares to our normalized range for '08 of $380 million to $410 million as we are expecting some growth in our cash from operations. We also expect our cash tax rate talking about paying in 2008 to be about 28% to 30% of pre-tax booked income. Our effective tax rate on our income statement will be approximately 38% which is slightly up from about 36.5% in 2007. This is a normalized rate when I talk about this 38% because it could be impacted by divestitures like our tax rate was effecting in 2007 by divestitures. The difference between the income statement effective tax rate of 38% and the cash tax rate of 28% to 30% primarily relates to temporary differences but it really relates to the utilization of the remaining Alderwoods net operating loss carry forwards, which I believe when utilized is just under $40 million a year of those net operating loss carry forwards. From a divestiture standpoint, in 2007 we had significant divestiture activities selling more than 300 locations, also our minority equity interest in France as I have already mentioned as well as the Mayflower Insurance Company. All of that generated cash proceeds of just over $550 million, so very strong year in terms of producing cash from divestitures during 2007. In 2008 we expect asset sales to contribute a range of $60 million to $80 million of cash proceeds and this primarily relates to non-strategic assets resulting from the ongoing market reviews that we are performing. Our financial position of SCI continues to be very strong. You've probably seen the cash balance of 12.31 about a $169 million, our current cash balance is right around that range right now. Our total debt is just under $1.9 billion, it is about $1.86 billion to be exact. I really don't look to pay down any meaningful debt during 2008. The leverage ratio will be somewhere between 3.25 and 3.5 times of normalized EBITDA and I am pretty comfortable with that range. We do have a $45 million debt maturity that's due on March 15th of this year, so it is just in couple of weeks here. And we are going to refinance that through our open revolver... or open line of credit with the banks. That credit line carries a floating interest rate of LIBOR plus 200 basis point. So its about 5% debt right now and we are going to go ahead and refinance that $45 million on to that line of credit until the markets calm down. And once the high yield markets calm down you would probably see us at that point of time, to go ahead and refinance that $45 million off of the bank line of credit on to a more longer-term high yield bond or something along this line. So overall when you think about cash, after the $100 million tax payment, probably paid in March. We will start building cash again in 2008, throughout the rest of the year. So, what are our capital priorities during 2008 then, it somewhat remained the same, that we have been very consistent with and have discussed in 2007. First of all, the top of the list would be the type of growth opportunities that we have. In 2007 we spent just over $20 million for construction and expansion activities. And in 2008, we expect that number to be $25 million to $40 million, and that primarily relates to strategic plans and expanding within our existent markets. Secondly, we are big believers in returning capital to shareholders. In 2007 we purchased just over 38 million of our own share for just over $500 million. Right now as we speak, we have about a $123 million left on our current Board authorization for share repurchases. We also in 2007 increased our quarterly cash dividend in November of '07, it has got $0.03 of quarter before that, and now its $0.04 a quarter is the current run rate that we are enjoying for the cash dividend. Lastly, and as I have already mentioned, I don't think debt reduction is a real priority for us in 2007. We are comfortable with leverage around 3.5 times of normalized EBITDA that's right around the range where we are now. We could possibly have some opportunistic debt paid down, that are probably classified as somewhere unlike. Now talking about our Trust performance, as we all know it is a very volatile market conditions in the fourth quarter of '07, but I still believe our Trust Funds performed relatively well versus the indicators. Our Funeral Trust Fund for fourth quarter was up 0.4%. Our Cemetery Trust Fund was up 1%, and our Eternal Care Funds were down about 0.9%. So, the weighted average was a return of 0.3% for the quarter. On a year-to-date basis we had a very strong 2007 as it relates to Trust performance. The funeral funds were up 9.9%, the cemetery funds were in the same ballpark in 9.8% up. And the eternal care funds were up 3.2%. So, weighted average returns for 2007 in trust funds are just under 8% at exactly 7.9%. So, we are very pleased with that type of performance that we were able to produce in our trust funds during 2007. While we discussed in the trust performance though, I do want to make a few comments in response to the questions that we have received about the effect of these down financial markets on our trust funds. Tom has sort of talked about that in terms of the economy affects on our pre-need sales. By the way, while I am thinking about it, the slide that Tom mentioned, that will be in our website on Monday with the Raymond James presentation. We'll actually put that slide on our website today, so investors can go look at that and see exactly what Tom is talking about. So, going back to these Trust Funds, our funeral and cemetery preneed trust funds can weather volatility in a capital market and not create volatility in our income statement. First of all if you recall, to remind you this is a very long-term nature of these contracts. These investments last in our trust funds approximately 10 to 12 years, and the income is generally deferred and matured. So, if you do have a bad year its one part of the equation over a 12 year light of that investment and that volatility really doesn't flow through P&L, because its deferred until the year 12 and see you deliver the merchandize or a death occurs on the funeral side. And we have had a very good track record of our investment returns over a long period of time. So for example since 1996, our funeral trust funds turned about 8.6% in our cemetery trust funds that are turned about 7.4%. We target a real return for these trust funds in 4% to 5% range, again that's a real return, and since 1996, our real return has been 5.8% for funeral and 4.6% for cemetery. So, right in that range or exceeding that percentage. Unlike the preneed trust I just mentioned where the income is deferred, the cemetery and endowment care of trust funds has the income that is recognized in P&L on a current basis. However, you have to remember that the eternal care funds are primarily fixed income securities, and what goes through P&L under our accounting polices is therefore interest income related to this fixed income, these fixed income securities so its really not that volatile. The unrealized gains and losses related to these securities do not get recognized in the P&L. Just a distributable earnings out as the interest income, comes out of the trust funds that is what gets recognized in the P&L and it's not very volatile at all. Since 1996, these trust funds have produced a returned 7.1% or a real return of 4.4% and we target A real return of 2% to 3% in these particular trust funds. In the preneed cemetery and funeral trust fund currently have unrealized appreciation of about 35 million and the eternal care fund has market value that basically equals our cost bases as well. So hopefully that's some more detail for you in terms of the questions we have been asked lately about the down financial markets affecting the trust funds. In closing I want to reiterate what Tom was talking about. We are excited about 2008, we have expectations of double-digit growth and earnings per share and continued expectations of cash flows. So, very excited about that. The basic fundamentals of this business has remained unchanged regardless of economic characteristics of the cycles that we are in. It is a very stable industry, it is very stable and very consistent cash flows and we intend to utilize these stable and consistent cash flows during 2008 to continue to use and enhance our shareholder value. Due to our continued share repurchases or higher return projects since that grow our business for our shareholders. So with that Stacy I am going to turn it over back to you to open the call up for questions. Question And Answer

[Operator Instructions]. Your first question comes from the line of John Ransom with Raymond James & Associates. Please proceed. John Ransom - Raymond James & Associates: Well that is a lot of pressure, this is what... have you factored into your calculations all the stock and mortgage brokers jumping out of the windows this year that might help you?

Yeah, John we are going to get that number from you not from Bob. John Ransom - Raymond James & Associates: I was just thinking about that... my question is Eric, what are the cash taxes, if you go back '06, '07, '08 what are the cash taxes in your assumption from, not from the asset sales but from GAAP earnings?

For your tax I mean, on the cash taxes in '06, I'll guess it's around $15 million if I recall correctly. From an '07 perspective, it is about $45 million. John Ransom - Raymond James & Associates: Okay.

We are expecting about $30 million increase in that in cash taxes related to... as I have said before, becoming a federal cash tax payer for the most part this year, even though we still have some utilization of the Alderwoods net operating loss carry forward is available to us. John Ransom - Raymond James & Associates: Got you, so, if we were to look at the true operations kind of apples-to-apples, you are taking this capital and reducing your share so if we looked at it on the reduced share count and net of taxes that gives us a pretty good picture of the business?

I think it does and we tried to really kind of steer you to taking the pretax book income in your model. I think it is about a 28% to 30% cash tax rate, I think that's pretty reasonable. John Ransom - Raymond James & Associates: Okay. My second question, can you remind us what the land amortization add back would be '06 to '07?

Well the current state is that... let me tell you what it is theoretically first and then we will give you the numbers. What happens is as we invest the ... we obviously spend the money to buy the cemetery which buys the land at the time of acquisition. So, when we sell the property, the cost of sales associated with that property is actually a non-cash cost and the amortization... so it is technically classified as amortization and that number was about $28 million in '06 about $35 million in '07 and it's probably in the ballpark... it is probably a good estimate for '08 as well. John Ransom - Raymond James & Associates: Okay. And at this point, I mean looking at your GAAP numbers and your cash flow per share, is that really the main add back that we have left, now that we have kind of normalized through some of the working capital backlog?

Yes, I think we have a very strong working capital during 2008. A lot of that as we have disclosed with some working capital initiatives we did at SCI. We probably produced north of $20 million and then we also had the Alderwoods backlog projects similar to what we did it at SCI several years ago, which allowed us to pull out of our $25 million as we have put in the press release of capital out of the Trust funds or things that were already delivered and such. John Ransom - Raymond James & Associates: Okay.

And so yes, I would think working capital would be somewhere in the, flattish range depending on what volume is doing in funeral and those types of things. John Ransom - Raymond James & Associates: Okay. And I guess my other question would be... are you seeing anything out there and when buyers and sellers did ask... are there any potentially unique multi-side opportunities on the purchase side, where you can get a similar type of good multiple you got on Alderwoods or is it... or was that kind of once in a generation type of deal?

We sure hope it's not a once in a generation but, to tell you we haven't seen any real opportunities emerge yet. We always think with this credit cycle where it is John, and ultimately that's going to result in some opportunity but we haven't seen anything at this point in time. John Ransom - Raymond James & Associates: Is your bank looking to stick you with higher rate on the minors little trifle, I mean, that is something we are hearing from some of our other customers, are you... is there any need for you to go back to your banks anytime in the next six months, the extensional line or ratio line of credit, or get a covenant waiver?

We have a $300 million line, it is only utilized by letters of credit right now, it's about $50 million. John Ransom - Raymond James & Associates: Okay.

So, all the way through 2011, November 2011, I believe and as I said I'm going to actually utilize this it for about $45 million because a LIBOR plus 200 that just makes sense to me rather than dip your toe in a very volatile high-yield market. John Ransom - Raymond James & Associates: Sure. So, you are in good shape there?

Yeah. John Ransom - Raymond James & Associates: And then Eric, what was your ending share count for the fourth quarter?

Just under 263 million John. John Ransom - Raymond James & Associates: Is that your ending share count?

It was. John Ransom - Raymond James & Associates: So your guidance then doesn't include any further buyback?

I mean, there is a little bit of add back from a weighted average share diluted perspective, and that's where 260 to 265 counts but yeah, for the most part, we certainly intend to do share repurchases. John Ransom - Raymond James & Associates: Right.

And we have some model in there but it's not very rest of the model compared to what we like to do. John Ransom - Raymond James & Associates: And just remind me where your next Board meeting is?

Our next board meeting is second week of May. John Ransom - Raymond James & Associates: And there is a reason why they couldn't take that up at that level?

We have a 123 million right now authorized, you know very good relationship with our Board that can call a conference call very quickly. John Ransom - Raymond James & Associates: Okay, thanks a lot.

Your next question comes from the line of Robert Willoughby with Banc of America Securities. Please proceed.

You should mortgage the banker I heard some bad things? What is in your guidance, what is in the guidance for the flu season, and you said kind of a down January, but a much or a stronger February, I mean what have you assumed for the remainder of the season?

We did and again you know, there is a bunch of different ways to look at this. But in order to put our guidance that we felt the most relevant, we've made the assumption in the models we share with you guys to come up to 57 to 63, which really ranges volumes down between 1% and 4%. If the flu season is huge, if the flu... you could change your opinion if that began to come in February or March, but we still have the expectation to down and the two things that are driving us there are continued advancement in healthcare and again kind of that, 1929 to '33 period where we saw the number of worst decline and so those two factors are why we are, that is your point. If it is being up 1% to 2%, then probably our guidance is going to be a little wide as it relates to funeral margins.

Andare you looking at the same data points that we are looking at just to CDC information or do you guys have some broader source to kind of assess the flu?

We are looking at the same things that you are and then we obviously try to accumulate by market in looking at what's happening within our own businesses. And so we feel pretty good. you know, I did mentioned a little bit earlier that you remember last year when we went through our strategic pricing segmentation that we lost some contract, particularly large contracts with groups, contracts we are loosing money on. And always we have had a few of those, and essentially similar patterns were going to occur. So we would expect probably a little erosion on the comparable volume front with the Alderwoods businesses. Having said that in each case, we weren't make any money. So, we are not concerned about that trend.

And you had mentioned a couple of times just the intention to build out the marketing infrastructure project. Can you give us anecdotally kind of numbers of sales reps that you either added in '07 or in the quarter perhaps, or what you intend to add over the course of '08?

Yeah, sure Bob, there's really two ways to look at this. One is from the sales channel infrastructure, we've been able to add none of these to approximate, approximately, I would say 10% to 15% increase in our sales counselor head counts. It really all occurred in the back half of 2007. So we entered 2008 with a much stronger sales force and with an idea to continue to grow that EBIT further. So, again with this economically sensitive marketplaces and unemployment we have to grab some of our qualified people and put them in there. As it relates to marketing what we been able to do is we have bolstered our marketing team here, and developed strategies and philosophies about going after consumers also in alternative channels. What we are doing there is as we begin to approach the consumer, not through leasing our funeral homes, but through other avenues. And so again, we are testing some things there, we are pretty excited about the future there. So on two fronts I would say we are moving forward and trying to begin to have a dialogue with consumers at an earlier point in their life and roll that back log.

AndEric I think you mentioned did I catch the number right, divesture related proceeds you would expect to see in ;08 was that $60 million to $80 million number?

That's right Bob.

Okay, and the only other question just a $1.8 million operating charge, some sort of tax issue, is that my understanding, you are truing up of some sort?

It relates to reconciliation we've been doing here, primarily relates to the Alderwoods acquisition, but also on the SCI front as well. It's nothing that is going to really reoccur and that's why we just isolated up an operating income but isolated away from margins. But that's in the $0.14, 1.8 million debits are immaterial.

Okay, that's it. Thank you.

Your next question comes from the line of Edward Yruma with JP Morgan.

Hi, Thanks, most of my questions have already been asked, but, can you talk a little bit about some of the staffing issues that you have highlighted at Alderwoods, how much of work is necessary there and longer term what kind of lift you expect that will give you?

Good. I think Ed, the issue there really is this, I think you see this in a lot organizations, sales organizations are very, very important part of our company and others, and I think anytime you have some drastic change, change of ownership we changed this compensation plan and other things, that uncertainty of time waiting for the SEC, the change in the comp plans, we saw a lot of folks you know, leave those locations. So, what we've been trying to do is recruit new folks, and train them in digging the university and our sales approaches at utilizing some of our lead techniques and the like. So, it is just taking time to build it back and attract new people. So, that's really the challenge we've faced, it's not something that we think we can overcome as this requires a little bit time. So, we are in the midst now of hiring sales managers, hiring sales people, getting folks through our training, and so, we have every confidence we will make progress here through 2008. The question is you know how far and how fast. So, we view that as really an opportunity to continue to grow our sales.

Got you. And as I think about your reoccurring CapEx, I'm sorry if you have already mentioned it, how much of your CapEx guidance for '08 is kind of one off or potentially relates to Alderwoods? Thank you.

I think, from a CapEx perspective, I think we've said this maybe on the last quarterly call, we spent 2007 making sure that we have invested the appropriate amount in the Alderwoods business and really kind of prioritize them again kind of as part of walking them into our culture and making sure everybody knows how important they are to our business. So, we think we have done a lot of that catch up and so now I think as I think about the Alderwoods versus SCI locations you are a lot closer in, as far as deferred maintenance. Having said that there is probably still pockets, but generally we are going out there, fixed up the places we should, developed the inventory that was needed, and we all have that fixed by the end of '08.

Got you. Thank you very much.

Okay.

Your next question comes from the line of Bob Cannon [ph] with Remiz [ph] Capital. Please proceed.

Hi, guys thanks for taking the question. Can you hear me?

Yeah Bob.

Hi, couple of questions, did you buy any stock after the quarter ended or were you in a blackout period?

We were limited in the amount that we provide because of the blackout period. But we did buy a minimal amount of stock. I think it was about 1.6 or somewhere around there, it was pretty minimal Bob.

Okay, million shares or dollars worth?

Shares.

Shares.

Got it. When does the blackout period expire, can you go back?

Two days.

Okay. And given the cash tax payments that you are going to have this quarter, is that going to affect the timing of the share repurchases throughout the year or is that not consequential?

No, I think a $100 million is a healthy amount today. I think you can consider us back in the market in a couple of days, finish your question. But, I do believe that when you look at the whole year, when we're done you are going see more share repurchases towards not necessarily the first quarter but in the latter three quarters because of the $100 million tax benefit. So, we've a $165 million of cash right now as we speak, $170 million in that ballpark, and no meaningful maturities and so, I think you will see us back in the market.

Okay. And then on the CapEx breakdown, the portion that you categorize as other growth CapEx, is there anything in there for acquisitions?

In that particular line item there is not. That's stuff that we are doing in our markets, our strategic footprints step as we call as we talked about before. Greenfield sites, those types of things is what that number is to CapEx.

Okay, and just you may have answered this before I apologize if I missed it, expectations from sellers from a multiple perceptive is it coming down at all or --?

Yeah, it really depends on the marketplace but, I would say it is not... generally not coming down and they are still relatively high as you look at what's happened in other market. So, it just takes time I think for people... for reality to set in but again we think with the credit markets where they are, people are going to begin to change their mind and particularly if what we are predicting which is down volumes and related again to this [indiscernible] combined with healthcare that people are going to start looking at business and it has got to be something here.

Okay, that's it from me, congratulations on the year.

Thanks Bob.

Thanks.

Your next question comes from the line of Adam Comara, with EnTrust Capital. Please proceed.

Yeah, hi, thanks. Just a quick follow up to what you guys are talking about in terms of the current flu season, is there anyway you could give us any color on where volumes have trended so far year-to-date, either January, February or combined?

Yeah, I think we, of course we get a little earlier. What we've seen within our own businesses, January continued to show trends similar to fourth quarter. We are down approximately 4% in comparable volumes and that would include both the Alderwoods businesses in it, they are now because they are both in the comfortable bucket. What we are seeing in February, we don't have the books closed but we do look at volumes daily and weekly, we try to get a little better on a weekly basis but generally we saw trends in February, early February that will point us towards a rebound in the number of patients that we are serving. So, with that, take it where you want... it is difficult to say that a few weeks in February, if you miss this as a trend.

When you say, got better does that mean, turned positive or just low singles?

They turned positive.

Okay. Terrific, thanks.

[Operator Instructions]. Your next question comes from the line of Chris Sim [ph] with Shenkemen Capital [ph]. Please proceed.

Hey guys, how is it going? I just needed a clarification on the cemetery gross profit I know was up 8.3%, do you have just the absolute numbers for the quarter year-over-year?

Yes, I think it is in the press release, the gross profit numbers, on a comparable basis, that's on page 4. Gross profit in the cemetery for the quarter was $49.4 million and the gross profit in '06 was $35.9 million, and that's consolidated. That's on page 4 and I think on the...

I think the comp number was up 46.5 for '07 for the quarter and 42.2 for the quarterly prices in it.

Okay, just the comp number. Alright and thanks a lot.

You're welcome.

And next question comes from the line of Robert Willoughby, please proceed.

Just a quick one, are there any major bogies left up there to really hit on the Alderwoods deal systems you know, couple of more assets to be sold but, there is nothing much left to capture here going forward is there?

Well, I think the way you think about begin... we are beginning now Bob, to think of it all as one place. But, the two things that I say still have an impact are number one, we are rolling out Dignity Rooms and the packages. We really think that is going to have a positive impact on the Alderwoods locations and to drive those... the funeral side of the business. The other piece is and while we touched upon it before, when we can get the Alderwoods location staffed appropriately at the sales levels, both sales managers and our sales counselors, we think that is an opportunity again to kind of ramp up the impact on those again, kind of Legacy Alderwoods locations. Otherwise, everything we are looking at its going to drive results in the future related to both sides of the odd. I mean it's really one SCI now and you are hitting on the good point. But I do think, keep in mind those two things, added revenue per case ought to grow more for the Alderwoods location because of the packages and secondarily we should be a larger percentage growth ultimately at Alderwoods, because of the main power increased again at this level.

Okay, great. Thank you.

And our final question comes from the line of Dana Walker with Kalmar Investments. Please proceed.

If there was pressure in being the first I am not sure what might lie on the shoulders of who is last. Good morning.

Good morning. Dan.

When you made the transition from Dignity to Strategic Pricing before Alderwoods came along, I recall there was a fair amount of set up necessary to get your funeral home directors to buy into the need to address pricing, which is now working beautifully, can you talk about the steps that you are taking to culturally lay the groundwork in the Alderwoods locations so that this works?

Yeah, Dana it is interesting. It really was kind of reverse way of going at it, because we think about SCI, the evolution was the first time we did it. We put in packages first, then we put in showrooms, then we put in pricing. And now they are really messing with your head. On the Alderwoods side we took a different approach, put in strategic pricing first because we thought that was the most impactful. Culturally, I think it's been accepted very well and again when you have success in marketplaces you can think about most of these places are in markets where we have already instituted superior pricing. So, I am thinking we are a lot more smoothly in the effect. And Alderwoods already has their own version of showrooms with various sectors. So now we are in the mid taking the best ideas from the Alderwoods showroom, best ideas from Dignity and rolling out to showrooms. One thing Alderwoods never did was have packaging. So we have tested the new showrooms, we have tested the packages initially in four market. The results are very, very favorable, very well accepted by the patients. So, now we are in the midst of pulling out those in the market. I would say culturally the Alderwoods locations and the Alderwoods have taken a liking to this. We sought their input too but we are providing the resources for them to. Number 3, they are really into the Dignity University. I think that's a great asset, we got a lot of positive impact from we can distribute the strategy, a lot faster than what Alderwoods would do with their education platform which didn't approach SCI.

Final question relates to the cemetery, I think I know the answer but perhaps if you were to put it into words it might affirm what I think it to be the case, which is it seems that the cemetery has become a much more consistent profit generator without the ups and downs. Maybe you can talk about why that's the case?

Sure, it's really very easy. The funeral has one variable that is very difficult to control volumes. We are relying upon the event of death in order to generate revenues. And on the cemetery side, you have a thing called cemetery property and under the accounting rules cemetery property is recognized when you have 10% down and you deliver it. So, we have a lot more ability to generate revenue growth on the cemetery side, again the accounting rules don't allow you to do it on the funeral side. Having said that from an economic perspective, riding preneed funeral is just as valuable as riding preneed cemetery. It just doesn't show off in your GAAP results. So we got to manage both worlds unfortunately but, we believe in preneed from a funeral side and cemetery, we are going to continue to drive it culturally the way that we want to be driven. We want to price it right, we want to pay our sales people right, and so look for those things to continue to grow.

As you look over the next year or two, how would you consider the smoothness of property completion availability on the cemetery front?

I think it is going to be very smooth. Because what you have seen over the last few years was, there is a velocity on the cemetery side of the business of sell it and then build it. And it made sense because you had to come out of pocket cash to build it. The problem is when you are selling without available inventory you sell on a lesser product, sales people have hard time selling it. It's never priced right, and when you finally construct it you typically under estimate what it costs. So the industry in particular SCI and even others got themselves in trouble with that model. We changed that model about four years ago, and began to build the inventory and create higher value in inventory, which again aesthetically increases the value of all cemetery property. So, with that philosophy we know what it costs, we know what to pay our sales people, we know we can charge and when somebody comes in and wants something spectacular we've got it. So, that philosophy has allowed us to build enough inventory now both on the Alderwoods and SCI side. So if somebody buy something, it's available as opposed to waiting to construct at a later day. Having said that, you are always going to have mausoleums, you are not going to build the mausoleum for 1000 people and not have anybody to put in there. So I do think there would always be a little bit of construction hangover, which generally, its selling and recognize the model we are operating on.

On that note it would be difficult to generalize but can you make a comment about how you believe competition is either keeping pace or not keeping pace on cemetery property development which may or may not allow you to stand out locally?

Well I think from a public perspective and reading some of their documents, I see a lot of people move in this direction. So, I think from a public perspective you will see it, because they have the capital. From a private operator perspective that is the issue. You got to go spend millions of dollars around development and weight it on your cash. And so it's a totally different dynamic and particularly with the credit markets the way they are. So this is a strategic advantage of having scale and again being able to employ very talented people from across the country, that could share best practices and ideas very different from the local operator.

Interesting. Thank you, good luck.

Thanks Dana.

With no more further questions in the queue, I would like to turn the call over to SCI management for closing remarks.

Well, thank you everybody for participating particularly on a Friday. Have a great weekend and we will talk to you again at the end of first quarter results.

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