Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Service Corporation International (NYSE:SCI)

Q1 2009 Earnings Call

May 7, 2009 9:30 am ET

Executives

Debbie Young - Director of IR

Tom Ryan - President and CEO

Eric Tanzberger - SVP and CFO

Analysts

Robert Willoughby - Bank of America/Merrill Lynch

Clint Fendley - Davenport

AJ Rice - Soleil Securities

John Ransom - Raymond James

Henry Reukauf - Deutsche Bank

Dana Walker - Kalmar Investments

Operator

Welcome to the Quarter One 2009 Service Corporation International Earnings Call. (Operator Instructions).

At this time, I'd like to turn the presentation over to your host for today's call, the Management Team of Service Corporation International. Please proceed.

Debbie Young

This is Debbie Young, Director of Investor Relations for SCI. Thanks for joining us today as we discuss our first quarter results.

During our call today, we will make statements that are not historical facts and are forward-looking. These statements are based on assumptions that we believe are reasonable. However, there are many important factors that could cause our actual results in the future to differ materially from these forward-looking statements. For more information related to these statements and other 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, we'll probably use the terms normalized EPS, normalized operating cash flow or free cash flow. These are all non-GAAP financial terms. Please see our press release and 8-K that we issued yesterday where we have provided a detailed reconciliation of each of these measures to the appropriate GAAP term.

With that, we will begin with remarks from President and CEO, Tom Ryan.

Tom Ryan

Thanks, Debbie, and I'd like to welcome everybody to the call today. As typical, I'm going to have some comments to give you an overview of the quarter, briefly take you through funeral operations, then cemetery operations, and then have some concluding comments before I turn it over to Eric.

For the first quarter of 2009, we reported normalized earnings per share of $0.12 versus a $0.20 quarter in the prior 2008 first quarter. While these aren't great numbers as compared to our strong first quarter 2008, they were in line with our own internal expectations. I would like to first personally thank each and every one of the talented and dedicated teammates of mine, all 20,000, for their diligent efforts in a very difficult business environment that we operate in today.

First, I'm going to talk to a few negative trends that are impacting our business before I close on the positive momentum. The first two I'm going to touch upon, the negative trends that we experienced from the quarter that we fully anticipated. The first one is lower funeral and cemetery trust fund income due to dramatic declines in the equity and fixed income markets, particularly in the fourth quarter and experienced again in the first quarter of 2009.

In addition, another negative trend that we expected was lower preneed cemetery property sales production due to a reluctant discretionary consumer. There was one last negative trend that we surely didn't anticipate, at least, by its magnitude, and that was the lower atneed funeral and cemetery case volumes that we experienced in a way that many of us have never seen in our business careers.

Now, for the positives. The positive momentum created by our team's execution of our operational initiatives allowed us to overcome the negative trends and achieve target earnings per share at the higher end of our target free cash flow. These items include; number one, continued strong increases in funeral average revenue per case adjusted for currency and trust fund income. This was accomplished through our strategic price and Dignity showroom efforts.

Number two, by prudently managing our cost structure and our capital spending. He third item, we had a better than expected effective tax rate. We also had very solid performance on our preneed funeral sales production. Lastly, we de-leveraged our balance sheet while optimizing our debt maturity profile.

Now I would like to talk a minute about our funeral operations in particular. Our comparable revenues for the quarter were down over $41 million and over 10%. This was primarily from a comparable volume decline of 11.2% or almost 8,600 calls. Now, again, we've never experienced anything like it, and obviously we look at a lot of different metrics to try to determine what we think the causes are.

I will tell you this that our cemetery interment, which, again, I think are very reflective in the marketplace, of what's happening in the market, we're down approximately 10%. Our preneed contracts that converted to atneed in the quarter, and again, remember, these are people that pre-bought, so they're going to show up assuming that someone deceased, those were down 9%.

Again, we talked to a variety of competitors and vendors and the like, and I will tell you each and every one of them were seeing declines in the 9% to 12% range. So, again, while there certainly are always issues to deal with, we believe we're generally reflective of the deaths that are occurring in the marketplace today.

On the good news front, our comparable revenue for funeral service was up almost 1% compared to the prior year. That's a little deceiving because, first of all, trust income, the negative impact of that, had a downward pressure of 110 basis points on our funeral average. In addition, the dramatic swing in Canadian currency is down about 20% year-over-year at a 230 basis point impact on our funeral average.

Just for those two items, our average revenue per case was up 4.1%. Keep in mind that 4.1% increase includes our absorption of the 190 basis point swing or increase in the cremation rates. This was accomplished primarily, again, through our strategic pricing efforts by managing discounts and an increase in our Dignity package take-up rates were the primary drivers.

As far as funeral profits go, the profits were down $22.7 million and down about 320 basis points year-over-year.

While we managed variable and personnel costs very well, it's obviously not enough to offset over 10% decline in our funeral revenues. On the preneed funeral front, we had some very positive news. In the face of a very difficult retail environment, we're very pleased to report there are sales of $108.4 million for the quarter; this was $1.2 million above the prior year levels or up about 1.2%.

The average contract written continues to approximate $5,600. And again, looking at where we're writing business today, this was very well for our future revenue base as those preneeds convert to atneeds.

On the cemetery front, you'll recall this naturally is a more volatile business due to the discretionary consumer impact, as well as a higher exposure to trust funds income. Our comparable cemetery revenues decreased $23.4 million or 14%, and this was primarily due to two things.

First of all, cemetery property sales production, and again, a very discretionary purchase was lowered by some $13.2 million or approximately 16%. While we improved on a sequential quarter basis, and reduced the comparable quarter percentage decline, we continue to encounter a more hesitant consumer.

Second item that impacted cemetery revenues was in the other revenue category, and it was off some $6.2 million, and it's all due to reduced trust fund income, predominantly from the MSP Trust, the Merchandise Services Trust, which has a higher equity exposure.

When you boil it all down, cemetery profits were down about $13.8 million, reducing the gross margin percentage to 10.7%. If you apply a 70% gross margin to reduced preneed property production, and a 100% margin to trust fund income shortfall, and an additional $2 million of lost profits from merchandise and services that became atneed, these variances account for about $17.5 million reduction in profit.

So through very diligent efforts of our operating folks, we reduced fixed cost by about $3.5 million, which allowed us to perform slightly above our own internal expectations.

In conclusion, we continue to see a very difficult economic environment for the consumer. We continue to believe we're going to experience uncertain financial markets, and coupled with the fact we've continued to experience slower funeral activity in the month of April, we think it is going to be a difficult environment to navigate.

Fortunately, we believe we can continue to maintain a strong balance sheet by diligently reducing the level and managing the maturity schedule of our debt. We're going to maintain very ample liquidity and generate a healthy stream of excess cash flow over the coming quarters, even in the face of these challenges.

It is our belief that our business model is very sound, and when the economy does begin to go forward again, your company will be in a position of strength, with a stronger, more dynamic sales pipeline, facing an aging baby boomer clientele.

This concludes my prepared statement, and now I'd like to turn the call over to Eric.

Eric Tanzberger

Good morning. I'm going to really touch on four topics. I'm going to talk about our cash flows, our trust funds, our liquidity profile, and I'll end with our capital allocations as we go forward. So let's start with cash flow analysis.

As Tom mentioned, the earnings were strong this quarter compared to our internal expectations. As strong sales average, when you take into account the currency and the trust fund income, and the lower effective tax rate, and lower expenses offset weaker funeral volumes. These earnings helped to generate the solid cash flows.

Our cash flow from operations was about $141 million during the quarter, which is consistent with about $140 million in the prior year after we adjust for the $90 million federal tax payment, if you remember that we made in the first quarter of 2008. This level of cash flow from operations is in line with our internal expectations.

So let me talk about four items that I believe helped generate the strong cash flow from operations for the quarter.

First, positive working capital is usually expected in the first quarter because very little cash interest is paid. In fact, we only paid about $6 million in cash interest in the first quarter of '09. Our current quarter, the second quarter of '09 is quite different, with about $50 million of cash interest expected to be paid, including over $40 million already paid on April 1st of this year.

Second reason is outside of the limited incentive payment in our field operations. We did not take any incentive compensation during the first quarter of 2009. This resulted in about $25 million positive effect to working capital in the first quarter of '09 versus the first quarter of '08.

Third, prudent managing of expenses as Tom mentioned in detail, and very limited wage increases also contributed to positive working capital in the first quarter. And fourth, while lower than the prior year levels, we also had customer cash collections that were in line with our expectations during the quarter, both on the preneed and atneed side of our businesses.

All four of those items helped to generate cash flows that you've seen which are pretty solid in the first quarter of '09 versus our expectations, as well as versus prior year levels.

In addition to managing working capital, we are also diligently managing our CapEx in this difficult environment. Total CapEx was about $23.5 million for the quarter, with the maintenance and cemetery development portion of that was about $18 million of this amount. And I want to emphasize that the $18 million of maintenance and cemetery development CapEx in the first quarter of '09 is down by just over 25% from the first quarter '08 levels. Therefore, we calculate our free cash flow for the quarter to be about $123 million, which is slightly better than the prior year and our expectations.

And the second topic I want to talk to you about are our trust funds. You've seen this in our press release that our combined trust fund assets decreased by about 4% in the first quarter of '09. The diversification of our asset helped us perform as we mentioned in the past. As the S&P 500 was down about 12% during this period, our trust funds are just down about 4%. Let me update this performance.

In the month of April, our combined trust funds have generated strong performance, increasing by about 6.5%. The April performance results in our combined trust fund performance now being up a little over 2% for the four months ended through April 2009. Our trust fund income that is recognized in our income statement for the first quarter of '09 was just over $13 million. While this is well below the $25 million in trust fund income that we recognized in the first quarter of '08. The trust fund income amount in the first quarter of '09 was in line with our expectations.

Third, I want to talk about our liquid profile. As noted in our press release, our cash balance at the end of the quarter was very strong in the amount of $215 million, which is up about $85 million from the end of 2008. This $85 million increase was really due to the $123 million of free cash flow that I mentioned already in the first quarter, less about $40 million in financing activities related to normal capital lease payments, debt payments and a dividend payment that we made in January of this year.

To update you, today we have about $140 million of cash. So the cash was reduced in April by really four major items. First of all, the cash interest that we paid of about $42 million, on April 15, we paid bonds that were due in the amount of about $29 million. We also made open market debt repurchases in the amount of $24 million and we also paid another dividend at the end of April in the amount of $10 million. Those sum about $105 million of cash outflows.

So we had good cash receipts and we continue to have positive working capital management in the month of April, which helped to build our cash balance back up to about $140 million today after the $105 million of cash outflows that I just detailed for you.

From a liquidity perspective, we also continue to have a significant amount of availability under our long-term bank credit facility through November 2011. The availability under this credit facility is currently just under $250 million.

Now, lastly, I want to talk about capital allocations. As noted in our press release, our total debt was about $1.85 billion at the end of the quarter. As I mentioned, we reduced debt by about $53 million in the month of April subsequent to the quarter through the cash repayment of $29 million of bonds and $24 million of open market repurchases of bonds in the month of April. We now do not have any significant debt maturities for the next 2.5 years, until November 2011.

From a capital allocation standpoint, we will continue for the rest of 2009 doing what we have begun in the first quarter, which is prudently manage capital expenditures and deleverage in the company through additional debt repurchases and other actions. Despite the difficult environment right now, we believe our cash balance and our strong free cash flow will allow us to continue our deleveraging activities for the remainder of 2009.

That concludes our prepared remarks. I think we'll go ahead and take question from the investor group.

Question-and-Answer Session

Operator

(Operator Instructions). The first question will come from the line of Robert Willoughby, Bank of America/Merrill Lynch.

Robert Willoughby - Bank of America/Merrill Lynch

Tom and Eric, if I look at the profit profile in the quarter, I could conclude this would have been a vastly better experience, even a blowout, if the atneed demand had been there in the quarter. Did you defer any spending on anything material in the quarter or is this just through fixed costs coming down and should stay down on any pickup going forward in revenues?

Tom Ryan

No big deferrals, just people managing the cash well, prioritizing projects, and clearly, we've got most aspects of the company where, again, we're in a salary freeze mode. So that's allowed us to manage expenses pretty diligently through this period.

Robert Willoughby - Bank of America/Merrill Lynch

You did mention some open market purchases of the debt. Have you removed any of the debt that had the restrictive covenants? I think you had $150 million in notes sitting out there. Is that what you've attacked?

Eric Tanzberger

No, it really hasn't at this point. The November 2011 debt related to the private placements that you're referring to is still $150 million. Those private placement notes have the same covenants at the bank credit facility. The open market purchases were based on the yield perspective, the best value for us. It was primarily the 2013, the reduction of $55 million balances that was out there for the 2013, that we're able to repurchase in the month of April.

Robert Willoughby - Bank of America/Merrill Lynch

So no plans here to jumpstart a share repurchase program anytime soon? Is that the safe assumption?

Eric Tanzberger

Not anytime soon.

Robert Willoughby - Bank of America/Merrill Lynch

Lastly, I [de-netted] trend lower than I had thought. Is this a good run rate for you going forward?

Tom Ryan

Yes, it is.

Operator

The next question will come from the line of Clint Fendley from Davenport.

Clint Fendley - Davenport

I wondered if you guys could comment on how you're thinking about your guidance at this juncture, given the strong start that we've had here with Q1.

Tom Ryan

As you know, we've given annual guidance and we've not given, at least for a long time, any quarterly guidance. So as I look at this, this quarter was about where we expected to land. I know a lot of the external guidance was probably a little bit lower, and therefore, this is viewed as more favorably I think in some of you guys eyes.

For us, this is probably about where we thought it would be. So I would tell you that we feel very good about being able to report this number with comparable volumes down 11% and all of the other things going on around us. We're in no position yet to believe anything that our annual guidance is still something that we're very comfortable with.

Clint Fendley - Davenport

With the trust funds now up a little over 2% through April, how has that changed from the original assumptions that you had back earlier in the year?

Eric Tanzberger

We ran a bunch of different models. I don't have the specifics in front of me, but we've generally assumed that our trust funds would perform negatively this year. We had a range of negative performance that we assume. So, to your point, if the markets were to stay where they are, and I'd love to believe that's true, and if you can guarantee me that I'd like to buy it, then I think we do a little bit better.

We've still got our helmet on in believing that the rollercoaster isn't over yet. So, at this point in time, we wouldn't project anything other than continued volatility and we're going to work hard to manage our costs and use our cash wisely.

Clint Fendley - Davenport

On your cash flow guidance that you had given, any thoughts there, maybe on tightening the range or high end of the range, given the strong start that we had here.

Tom Ryan

I think that this is a strong start. So when you compare cash flow to earnings, I feel a lot better about our cash flow in the first quarter based on where we are. Again, we still think we're within our range of guidance. Because it's only three months, we hesitate to project anything for the nine.

That will tell you we're very very pleased, working capital management was very good, and I think we feel very confident about our ability to manage the capital side as well.

Operator

Next question will come from the line of AJ Rice, Soleil Securities. Please proceed.

AJ Rice - Soleil Securities

Eric, you mentioned the $23.5 million on CapEx, is that a good quarterly run rate for you going forward do you think?

Eric Tanzberger

It obviously contains a little bit of growth CapEx in there. $18 million was the main cemetery development, and that I described kind of a good run rate related to that $18 million. The growth CapEx as you know would be a little bit choppy based a construction project.

AJ Rice - Soleil Securities

I appreciate the bounce back in the trust funds in April, but just to think about it for the year, the 110 basis points impact on the averages from the hit you took last year, if we were to flat line out the market from here, is that sort of a normal run rate or is there a reason to think it would get worse as you get through the rest of the year or even better if the market stayed steady?

Eric Tanzberger

I think it would get a little better, obviously. The other thing to keep in mind AJ is that the allocation of income has a lag to it, probably, around 45 days on average depending on the trust. So when you think about a good April, that's probably not going to impact your average until some of your contracts mature in June. So keep that in mind that it isn't immediately allocated to contracts.

AJ Rice - Soleil Securities

On the open market purchases or the debt, are you buying those at a discount or you're buying on the face value?

Eric Tanzberger

At a discount.

AJ Rice - Soleil Securities

Is there a general level of threshold that you're look to get in terms of a return on the debt when you purchase it? Would you care to share with us?

Tom Ryan

Are you selling some debt AJ? It's obviously market conditions. I mean, we would love to buy it, we're obviously looking for the highest yielding debt to go ahead and take out. This was probably in the mid-90s where we pay for it.

AJ Rice - Soleil Securities

The last big picture question is, when volumes are fluctuating 1%, 2%, 3%, I think that's just a normal flow of the business. I mean this one, I can't remember ever seeing a double-digit decline like this before. What's your thought, are you getting any better analysis that can give any explanation for why we saw something like that? And you're saying, April maybe not down 11%, but you don't have the leap year, you don't have the [flu] variation year-to-year, but in April it sounds like you're still down high single-digits or something. Any thoughts about that?

Tom Ryan

First of all AJ, just to make you feel better, I'm sitting next to Bob and he's been around a little bit longer, and he said he has never seen anything like it since he's been doing this, so it is highly unusual. We're doing a lot of analysis and as you know, it's very difficult to get great real-time analysis. But we know that the milder flu season has had an impact, we think it's probably about 100 to 150 basis points, not something dramatic. There also was an extra day here, so that's probably another 1%.

So the mother load has nothing to do with those two things. And the three things that again come to mind, and it's just very, very hard to pinpoint at any one point in time is medical advancements and access to healthcare; heart disease, cancer and stroke are the top three killers, all three trending down. And in you look at statistics, even from 2000 it's trending down pretty dramatically.

And the other item is the decline in the number of births. In the late 20s and early 30s, there is a pretty dramatic dip in the number of births that have occurred. I realize there is immigration that's occurred during this time but we believe that has a decent impact.

And then lastly I think we would be crazy not to believe that in these difficult economic environment, as you're going to have a fringe consumer that is going to make changes in how they choose to remember, and so, you probably are going see a pick up in direct cremation. We don't think that's dramatic but it contributes to the decline.

We don't have any great answers but we have some ideas about some of the things that are driving this. We'd expect that the back half of the year would get better. It really shouldn't be like this for an entire year.

Operator

And the next question will come from the line of John Ransom, Raymond James. Please proceed.

John Ransom - Raymond James

Could you remind me the key governing covenant that you have, is it the debt-to-EBITDA covenant?

Tom Ryan

Debt-to-EBITDA is a net debt calculation John. (Inaudible) 12 months EBITDA obviously, it's 4.25 right now, and next time that it ratchets down would be March 2010, and that would ratchet down to 3.75 times.

John Ransom - Raymond James

So you've got to operate under the 4.25 for the next year. At the end of the quarter, where did you sit with that calculation?

Tom Ryan

At the end of the quarter, going back 12 months, it's around 3.65 in that area.

John Ransom - Raymond James

Based on your guidance Eric, where do you think you end up? Assuming your guidance hasn't changed, but factoring in go-forward EBITDA numbers, does that calculation change under your definition materially for the balance of the year?

Eric Tanzberger

We've certainly run a lot of models from low-to-high. It just depends on where the volume really takes us, and where we'd land for the rest of the year. If you take the guidance that we've given you and you go to the low-to-high, it could put you anywhere from around where you are today to just north of about four times. So maybe in situation that we may have to work with the relationship we have with our banks. But right now it's a little bit premature because it's so hard to predict the rest of this three quarters in this unusual down volume environment.

John Ransom - Raymond James

In the current environment is there any net deleveraging transaction that you could execute in short order, should you need to?

Eric Tanzberger

I think we're open to anything, really, but I think you have to do chipping away at the debt, especially at a discount because it's a net debt calculation. And of course, you've got to work on EBITDA, the easiest way to correct the ratio is to increase EBITDA through the operating initiatives that we're doing driving revenues, as well as prudently managing our cost structure.

John Ransom - Raymond James

I'm sorry to keep drilling down on this, but does the facility that governs this mature in '11 or is there another debt instrument that stays out longer that would have the same covenant?

Eric Tanzberger

It's November 2011 that governs these covenants.

John Ransom - Raymond James

So in theory, you would have to a chance to re-cut this covenant upon maturity, if nothing else?

Eric Tanzberger

That's correct.

John Ransom - Raymond James

And I'm sure they would be interested in a higher rate than what you're paying? You have nothing outstanding, right?

Eric Tanzberger

We have nothing outstanding on the bank credit facility, but again, as I told Robert earlier, the $150 million of private placement notes are linked to that and have the same covenants as the bank credit facility.

John Ransom - Raymond James

That's what I hear. When do those mature?

Eric Tanzberger

They mature in November 2011.

John Ransom - Raymond James

So it's the same.

Eric Tanzberger

It is the same. They are both wrapped up in the Alderwoods transaction.

John Ransom - Raymond James

So you would have a chance to re-cut that, again, kind of deleveraging mode for the time being, until you get a little more cushion under the covenants?

Eric Tanzberger

That's correct.

John Ransom - Raymond James

Just jumping to a couple of other things, have you seen any change in the cancellation rate, people that have previously decided to pre-fund their funeral, and then they have an economic emergency and they need to get the cash back out. Have you seen much of that?

Eric Tanzberger

No, we have not. We have not seen any kind of material adverse trends that are popping out. We're obviously monitoring it very closely, but everything including the cash receipts really held up according to our expectations.

John Ransom - Raymond James

I assume that might have been a little bit of a surprise to you.

Eric Tanzberger

I would say so.

John Ransom - Raymond James

The funerals that you're selling into the backlog, you mentioned that was about $5,600. I just wanted to clarify that number.

Tom Ryan

That's right, $5600. Again, we're not seeing deterioration, and we see an increasing number probably that we saw on the cremation sides. They are still on a lower average. When you look at cremation contract versus cremation contract, people are still spending good money on preneed funerals.

So, we believe, again, if we can get through some of this volume issue, we've got the right infrastructure to begin to really run if we can get a little bit of help from the economy, the markets and the volume starts to pick up.

John Ransom - Raymond James

If we blend all of this together, the better trust fund, the backlog sale, the cremation mix, where should we think about revenue for funerals for the balance of the year? Is it going to be much different than the first quarter other than the trust fund increase?

Tom Ryan

The biggest swings are going to be trust fund income and what happens to Canadian currency because, again, it doesn't sound like a lot, but if you assume about 10% of our revenues are Canadian currency and then you assume that the currency is devalued by 20% year-over-year, that has a pretty pronounced effect on our average.

The good news is the expenses have the conversion feature, so it doesn't drop to the bottom. I think if the currency stays where it is and the trust fund where it is, I would expect us to be at or slightly above the levels we're seeing today.

John Ransom - Raymond James

On the cost side, to use the baseball analogy, what inning are you in do you say from a structural cost perspective. I know you did a really good job after all there was on the G&A side and you've started to look at some field opportunities. Is there another wave of opportunities or are we getting pretty close to the end of some of the structural cost reductions?

Tom Ryan

That's a trick question because I'm a T-Ball coach and we only get about two innings in. I think we definitely have more fields to get through. We talked about before on the cemetery side of the business we've got some projects that are introducing technology, and again, better processes that we're just in the midst of and beginning to get there.

I like to believe that we've done a lot, but there's still more to do. So back to your nine-inning game, we're probably in five or six, like that.

Operator

(Operator Instructions). The next question will come from the line of Henry Reukauf, Deutsche Bank.

Henry Reukauf - Deutsche Bank

On the trust fund income, is there a metric? I don't know if you've ever given it, that 1% change in your trust fund income year-over-year is going to change the income that you guys report? I know you said there was a lag with that.

Eric Tanzberger

We did give that on the guidance call last quarter. It was about for every 1% decline in a combined trust fund, it was worth about $1.5 million of EBITDA to the company. Again, we've put some caveats around that saying that that's a pretty rough calculation because your mix on who is coming out of the backlog in terms of the deaths that are coming out of the backlog is the ages change or how old the contracts change, that mix changes. That can move that criteria materially, but as a general statement, that's the statement that we've made.

Henry Reukauf - Deutsche Bank

Just a question on the debt, I guess it's rallied a little bit since the mid '90s. Are you still interested at the better levels in repurchasing debt as being the one way to bring down your debt balance?

Eric Tanzberger

I think we're going to prudently look at it, but I do think that there is still some available at a discount. Again, you take a value approach where you approach it from a perspective of what's the highest yielding debt that you can take out, that would include paying a discount. You're right, it's obviously rallied, but I still think there are some prudent purchases out there.

Operator

The next question will come from the line of Dana Walker, Kalmar Investments.

Dana Walker - Kalmar Investments

Your cemetery property sales seem to be firmer, that is not down as much as we saw late last year. Would you remind us where that number was in Q4 and your general sense of whether Q1 was a belier or an indication of firmer results?

Tom Ryan

There's seasonality to cemetery sales. If you go back to the fourth quarter, we were down just over 31%. Now, included in that comparison, we had some highly unusual large sales that occurred in the fourth quarter of '07. So if you took those out, we still were down 22%, 23% fourth quarter to fourth quarter. This time we went from 23% to about 16%. If you look at it from a sequential perspective, first quarter had more sales than the fourth quarter.

I will also tell you looking at it by month, and talking to the one who really knows, Dan Garrison, consumer sentiment has gotten a lot better as the quarter went on. We saw a more willing consumer in March versus February, and I would tell you a more willing consumer in April.

So, we feel good. We're still going to have a real tough time comparing to the prior year. To your point, I think if things continue like they are and confidence builds a little more, we feel good about the back half of the year.

Dana Walker - Kalmar Investments

One other reminder, your assumption made in your guidance for cemetery property sales was what?

Tom Ryan

For cemetery property sales, my recollection is that preneed property sales were going to be down high single digit to basically low teens, in that type of range. I think the way we're thinking about it was the first half of the year is going to be a lot worse because things were good in the first half of '08 for us, and when you get to fourth quarter, you've got a much easier comparison. So I would tell you that the first quarter result was within our expectation of where we thought we would be. So now it's just back to what happens with the consumer sentiment throughout the rest of 2009.

Dana Walker - Kalmar Investments

From the steps you have to take in this type of environment standpoint, would you say that you're stressing your field organization by the cost stringencies that you're having to apply?

Tom Ryan

I think generally, no. I think some of the things that we've really tried to do are we are making efficiencies by better process. A lot of the things that we're doing in the field get back to enhanced processes that allows to not only save money, but free up time to do things better. I'll give you an example. As we're looking at the model we want to do for cemetery maintenance, that's going to outsource. Basically, moving the grass and doing those types of things within the cemetery, which I believe is going to allow our folks to free up time to do things such as better customer service, ensuring that we're doing things right, everything around it.

So not only are we going to save money, we're going to do the important thing a lot better for the company. So those process changes I think are going to be beneficial in the long run. I will tell you that we've deferred some things, like everybody in the company has gone back and looked at priorities and said, what do I need to do this year, and maybe there is some want too that we're not going to get, I think that's the general sentiment. Between 20,000 people, I'm sure there is a couple that are stressed, Eric looks stress across the table.

Dana Walker - Kalmar Investments

You mentioned in your cash flow analysis that there was an incentive comp amount that was not paid this year to the field. Is that also an earnings absence or that is an expense not taken?

Tom Ryan

What I said Dana is that we did make limited payments to the field operations, but other than the field operations, there was no incentive compensation which included all the corporate office employees.

Eric Tanzberger

From a P&L perspective, it's pretty consistent. What this did is, in the first quarter of 2008, we paid annual bonuses to everybody from officers to field personnel, we also had an accrual related to a long-term incentive plan for certain senior officers that relates to the stock price. It's a three-year accrual to get paid out in cash. And as you will recall, I like to dream back in 2007, I think the stock hit 14 at the end of the year and everything looked great. So we had big payouts on bonuses, we had big payouts on that particular incentive plan. And so that got paid in 2008, it had nothing to do with earnings.

In 2009, there was a great absence of both. As the stock price went down, we didn't have any payments as it relates to that incentive plan, and we had very, very limited bonus payments again, sparingly in the field. There weren't any corporate bonus payments at all. That created a big working capital change, but not a big P&L differential.

Operator

The next question will come from the line of Emily Shank with Barclays Capital.

Unidentified Analyst

This is [Jason Trohio] in for Emily. Regarding that debt pay down, what is your current capacity for further bond row purchases?

Eric Tanzberger

I think it really depends on the free cash flow, and does it continue to perform the way it's performing. But I do think that we have excess capacity right now in the $20 million to $30 million, $40 million range probably, but again, there is a lot of assumptions on what happens to the rest of the year in terms of the free cash flow. I think I need to stress to everybody that we're going to be opportunistic with this, we're looking for discounts, and we're looking for open market purchases in that light. So it's not just focused primarily on doing a transaction that doesn't ultimately make sense, we're going to be opportunistic about it. There have been so many questions today about that, I just wanted to stress for that.

Unidentified Analyst

Can you give us any color on what the actual magnitude do you think might be going forward here till year end on debt repurchases or can you not comment on that?

Eric Tanzberger

I can't comment right now. We're going to be opportunistic, we're going to manage our leverage ratios which is a net debt ratio. So if you build cash, you're doing just as well, but if you can't do something opportunistically at a discount, you're going to help your ratio. But again as I said growing EBITDA through the revenue initiatives and the cost reduction initiatives are the primary thing that has the most leverage in that ratio.

Unidentified Analyst

And then just lastly, with the $24 million of repurchases in April, you mentioned that was primarily a 2013s. Were any of those notes bought back in April?

Eric Tanzberger

There was one small one for a couple of million dollars. I don't even think it was a publicly traded bond. In terms of the publicly traded debt out there, it was just the 2013.

Operator

And there are no more questions at this time. I'd like to turn the call back over to management team of Service Corporation International for closing statement.

Tom Ryan

We want to thank everybody for being on the call today. And we'll be talking to you on our second quarter earnings call in about three months. Everybody, have a great day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Service Corporation International Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts