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Service Corporation International (NYSE:SCI)

Q4 2010 Earnings Call

February 10, 2011 10:00 am ET

Executives

Debbie Young - Director, Investor Relations

Thomas L. Ryan - President and Chief Executive Officer

Eric D. Tanzberger - Senior Vice President, Chief Financial Officer and Treasurer

Analysts

Clinton D. Fendley - Davenport & Company

John Ransom - Raymond James

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2010 Service Corporation International Earnings Conference Call. My name is Eva and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer towards the end of the conference. (Operator Instructions)

I would now like to turn the call over to SCI management. Please proceed.

Debbie Young

Good morning and welcome. This is Debbie Young, Director of Investor Relations at SCI. We’re here today to talk about our fourth quarter and year-end results.

In our comments we’re going to make some statements that are not historical facts and are forward-looking. These are based on assumptions that we believe are reasonable. However, there are many important factors that could cause our actual results in the future to differ materially from these forward-looking statements. For more information related to these statements and other risk factors, please review our periodic filings with the SEC that are available on our website at sci-corp.com.

Also today on the call we may use terms such as normalized EPS or normalized cash flows. These of course are non-GAAP financial terms. Please see our press release and 8-K that were issued yesterday where we had provided a detailed reconciliation for each of these measures to the appropriate GAAP term.

With that, I’ll turn the call over to President and CEO, Tom Ryan.

Thomas L. Ryan

Thank you, Debbie. And thanks everybody for being on the call today. I want to apologize in advance if my voice sounds little funny. I’ve got a cold, so if I sound little strange, that's the reason why. Welcome to the call today. And we’re going to give an overview of the quarter, talk about funeral operations, cemetery and get into the guidance for 2011.

We finished the year strong as you can see for the fourth quarter with excellent performance. We exceeded both the external and our internal expectations. Both earnings and cash flows result exceeded the guidance that we gave you guys back in October. Normalized earnings per share were $0.18 versus $0.14 in the prior quarter. So growth was $0.04 or about 29%. The quarter-over-quarter improvement is primarily driven by three things.

First, the acquisition contributions from Keystone and Palm Mortuary, which we anticipated and delivered as we would have expected. In addition, I think this one was somewhat surprising, higher cemetery premium sales productions. We’re comparing against a very difficult Q4 2009, I think it had some concerns about repeat performance. Not only do we do that, but we exceeded that by a healthy margin and hats off to our sales organization for that.

And lastly, lower corporate overhead expenses. Again, we managed some of these expenses down that helped deliver the profits for the quarter. So we exceeded the high end of the guidance again by $0.04, as we experienced better than expected funeral volumes, this is really against out expectations versus prior year. We were only down 0.5% in volume, which somewhat surprised us. And a lot of that occurred in late November and into December.

Again, our cemetery sales production was high, lower corporate overhead costs and higher cemetery trust fund income in the quarter than we would have anticipated.

Now I’m going to shift to funeral operations. In the fourth quarter, comparable funeral revenues increased 1.4% or $355 million. Driving that increase, first of all, was our GA revenue, these are the General Agency gain that we get for selling preneed insurance. That grew by $1.1 million or 7.6% on increased insurance production this year's quarter over last year's quarter.

In addition, I touched on this earlier, our same-store volume was down 0.5% for the quarter. So not something that we are excited and want to stop at, we’d love to see that number be a comparable gain, but again better than we expected, better than the trends that we’ve seen, again a lot of it occurred with this cold weather snaps in late November through December. While still down, we are very encouraged best comparison we had in some time.

For the year, same-store volumes were down 1.9% and about where we expected them to be. The call for next year in the 2011 guidance, we are assuming that we are going to experience similar volume declines in the low to mid single digit range, as again, this is the trend we have experienced over the last five to seven years. We believe some day that this will reverse itself, we just, again, aren't going to be in the prediction business of trying to tell you when that’s going to occur.

In the fourth quarter also, shifting to funeral average, we grew our average of 1.7%. This takes into account flat trust fund income and a positive Canadian currency effect. When you exclude that Canadian currency effect in the trust fund income, we grew our atneed average 1.3%. This is slightly lower than our expectations, but right at around it.

Some of the drivers for why we are not achieving the average revenue per case as we would like is in the cremation mix and not in the shift itself, our overall cremation mix for the quarter moved 50 basis points to 41.7%. So again not surprising to us, but the thing that was surprising and this happened last quarter is the shift that we are seeing from cremation with service to direct cremation.

So we have seen an increase beginning in Q3 that continued in Q4. We are now little more than 50% of total cremations performed were direct. I think some of that is we are now soliciting in a better way, in a healthy way, the direct cremation consumer that we are learning how to interact with that person, again as those sentiments shift and change. I think it's a positive on one front, at the same time I think it's a sentiment of the economic environment that we are living in today.

So this shift is causing some pressure on the average when you think about the direct cremation spent versus the cremation with service spent. There is about a $2,400 difference and that’s again putting the pressure on our overall average.

For the year, our cremation mix was 41.6% and again about a 50-50 split between direct and cremation with service. This is up 70 basis points from 2009, which is less than our normal increase of 100 to 150 basis points. Keep in mind that the mix grew 160 basis points back in 2008/2009. One year does not make a trend, but we are seeing less cremation mix shift.

From a profitability standpoint, our comparable funeral profits declined $1.5 million and we reported a margin decline of about 80 basis points. There is really two reasons again what costs are growing on the funeral side of the coin and both of them, if you ask me, are fairly positive and things that we anticipated in setting our guidance.

The first one really relates to the fact that we are selling preneed funeral at a very healthy clip. Remember, when we sell preneed funeral contracts, those costs we expense currently and the revenue gets earned into the backlog. So what we are seeing today is normal selling costs, two things.

One, we are investigating in marketing initiatives to primarily drive lead generation and this has been successful, coupled with the fact that we are going to pay our sales force for increased production. Those two things are driving up costs.

Preneed funeral sales grew by 3% in the quarter, up some $3.4 million, but more importantly for the year, our preneed funeral sales grew by 10% or more than $46 million. So we are very pleased with the success, even if it’s going to call them a little bit of diminish in our funeral margins.

The second component is probably little bit of a (inaudible) something we anticipated and this has to do with our field overhead. As you’ll recall, earlier this year, we reorganized our field operations. In doing so, we strategically plan at management in markets that were geared to really drive preneed funeral and drive operating performance.

So as you recall, the new operating structure in our major markets, we put embedded sales managers in those markets. Guess what, our preneed funeral sales grew by some 10%. In the major markets they grew by 18%. We know now that those investments were appropriate and again, unfortunately, the way GAAP works we are going to bear those expenses in the current margins, but they are going to lead to higher margins in the future that we are really excited about.

Now I’m going to turn to cemetery operations. Our comparable cemetery revenue, and this was GAAP, increased 4% quarter-over-quarter. This was mainly attributable to increased cemetery sales production. Our comparable preneed sales productions, I remember this is preneed, grew by some $10.5 million or 10.8% in the quarter. Again, this is truly amazing when you think about the quarter that we are comparing back again. So very, very pleased, a lot of hard work, a lot of great performance by the sales group.

On a year-to-date basis, our cemetery preneed sales production was up $22.8 million or some 6%. So this exceeded our guidance. As you recall, we said it would be up low single digit percentage range. We beat that. We got it to 6%. Again, I’d like to thank our operating leadership and our sales leadership for delivering the results that they did.

Cemetery trust fund income increased slightly for the quarter and came in a little ahead of our expectation. The reported cemetery profits were up almost $2 million or 5.2% for the quarter and margins grew some 20 basis points comparing again against a very strong 2009 number. The increase in revenue is more than offset increased selling costs and again costs related to our new field operating structure.

A lot of the growth on the cemetery side of the equation was done on cemetery property and we pay more for cemetery property. That's one of the reasons why the costs were up a little bit. Again, something that we’d anticipate and something we are happy to do. When you stab back for the year, our comparable cemetery profits grew from $115.3 million to $129.4 million. This is a growth of $14 million or some 12.3%.

Now, let's step back and look at 2010 in a summary mode. All in all, when you look back, we are very, very pleased with our operating performance. Strategic acquisitions of Keystone in March and Palm Mortuary in December of 2009 provided as we expected significant growth to revenues and profit in 2010. We accomplished this with no material increase in leverage. In fact, we improved our near-term debt risk profile by issuing 2019 notes and buying back some $111million in near-term bonds in the open market. Synergies on both these large acquisitions are on track.

As we communicated to you throughout 2010 and really in setting our guidance, comparable funeral was going to be challenging to grow. But we managed our expenses well. What we told you to do is that preneed selling costs would put pressure on comparable margins. Again, we anticipate that. We were able to grow preneed funeral sales by 10%. And we asked you to be patient with us and see that we could deliver. While this doesn't have an immediate P&L impact, this will benefit future periods.

Growing our backlog is a part of our core strategy to grow revenues over the long-term. Perhaps most notable to the profit and loss of the quarter is we proved that we can grow comparable cemetery revenues, up some 5% for the year. This was accomplished by a 6% increase in preneed cemetery sales production.

In addition, we generated roughly $265 million of free cash flow, which enabled us to return more than $156 million to our shareholders through a combination of share repurchase, some 14 million shares were purchased and dividends of $40 million. And in addition, we directed some $15 million to acquisition excluding Keystone and of course Palm in late 2009.

Lastly, as you may have seen yesterday on the heels of our operational success of 2010 and our financial strength, we’ve raised our quarterly dividend 25% from $0.04 a share per quarter to $0.05 a share per quarter beginning with the payment in April.

Now, I will address the outlook for 2011. As you saw in our press release, we have raised our guidance range for 2011 from the outlook that we gave you back in October. The primary reason for the increase is based on the trends we saw in the fourth quarter of 2010 and we’re seeing in preliminary 2011. Broadly speaking, stronger cemetery premium sales production, better funeral volumes and slightly better trust fund income somewhat offset a lower growth and average revenue.

Our new EPS expectations for 2011, a range of $0.56 per share to $0.64 per share and again that would compare back to $0.59 of earnings per share we posted in 2009. Keep in mind that in 2Q 2010 we did have a one-time currency conversion gain of $4.3 million. And so when you think about 2010 on a comparable basis, it's probably most appropriate to think of it as $0.58.

Our key assumptions in this guidance, funeral revenues will again be tough to grow. We anticipate volume declines in the low single digit range in our guidance. And although we still believe funeral average will grow in the low single digit percentage range, accident, currency impact and trust fund income, resolving back a little bit our assumptions here from what we’ve seen in the back half of 2010 and preliminary 2011 as it relates to the consumer and their willingness to spend.

If you think about what’s happening, we’ve dialed it back to about 1% to 2% as far as growth for 2011. This is really two things that are driving. One, a tough economy and consumer sentiment in addition to low interest rates, which impacts the ability of our retirees and the impact of unemployment on consumer sentiment and consumer spend.

In addition, continuing trends towards direct cremation within our cremation mix of the business. These two things again give us a little pause.

I don't want you to think we are sitting idle and believe there aren't things we could do to enhance the average, because we are doing a lot of things. Number one, we are testing new packages, which are going to allow us some flexibility in a variety of products and services that we can be able to offer our client families. It's our belief then that package sales will grow and the average revenue per case can grow on with it.

Now, the preponderance of this may not impact 2011 as much, but surely will have an impact on 2012, and we will be testing these new products in a variety of our markets throughout the year.

On the cemetery side, while funerals (inaudible) grow the preneed backlog. On the cemetery side, we believe we can grow revenues in 2011, led by our preneed production growth in the low mid single digit range. We’ll continue to aggressively manage our expenses, expected benefit from strategic initiatives particularly regarding cemetery administration spend.

These cost reduction initiatives will mitigate some increased personnel costs predominantly related to healthcare and also recall that we refinanced some debt and therefore probably are going to have a little higher interest expense by putting longer-term debt out there versus keeping shorter term-debt. So again, we are going to mitigate these with healthy management of our expenses and feel pretty good about it.

Lastly, corporate G&A expense will be around $100 million as you think about modeling.

So in conclusion, we’re very pleased with our performance in the quarter and in the year. I have special heartfelt thanks to all our over 20,000 associates, particularly to the sales team for their leadership in 2010.

So as we look ahead, we are very, very optimistic about 2011. Expect from us the ability to generate steady growth in our cash flow, expect us to grow the preneed backlog and again this will not be a capital intensive nature for us. And therefore, with this excess cash, we’re going to deploy it in the best way possible to capitalize on value enhancing opportunities for our shareholders.

First and foremost, strategic acquisitions at the appropriate returns to the extent we can't use all our cash doing that, expect us to return cash to shareholders with share repurchases and continue to focus on potentially growing dividends and lastly in reducing liquidity risk and managing our debt maturity profile.

And remember, while we are so excited about acquisitions and the like in growth, is that we know that baby boomers are coming and when they do, our portfolio of businesses will be enhanced in value tremendously.

It's our belief that by the latter half of this decade, we should begin to see again a substantial impact as it relates to the numbers of deaths that occur in our market.

This concludes my prepared comments. I’d now like to turn it over to Eric.

Eric D. Tanzberger

Thanks, Tom. I’m going to pick up the call talking about our cash flow and trust fund performance for the quarter and I’ll give a little bit insight into our outlook for 2011 on those two topics. And I am also going to briefly discuss about our current financial position and our strong liquidity that we have and then end our comments with a discussion of capital deployment, particularly that we did over the quarter.

So, starting with cash flow, Tom has already mentioned this, we finished 2010 with very positive fourth quarter results. The cash flow performance in the quarter as well as the year finished ahead of our guidance we last discussed in the October conference call.

So for the quarter, we reported $90 million cash flow from ops and again that’s normalized for about $1.2 million of one-time transition costs related to the Keystone acquisition. But the $90 million is $23 million growth over the prior year quarter and about a $15 million increase over the high end of our guidance, again that we discussed in October.

The increases were primarily due to higher than anticipated earnings and we’ve been through that this morning already, as well as lower cash taxes paid during the quarter. So cash taxes were about $7 million lower than the prior year quarter resulting from the approval from the IRS in December of certain tax accounting method changes that we applied for and I’ll discuss that in a little bit more detail in a second.

While we’re discussing taxes from the income statement perspective, our current effective tax rate in the quarter was lower than expected and prior year. And that number was about 35.4% on a normalized basis. The lower rate was primarily due to state tax refunds that we received as well as adjustments to our state tax accruals as a result of filing our state tax returns in the fourth quarter.

So for the full year of 2010, we reported approximately $360 million in cash flow from operation. And for the full year, that’s normalized by about $5 million of transition and acquisition costs related to the Keystone acquisition. This was a decrease of about $12 million from 2009 levels, but let me give you a little bit more color on that and remind you.

Recall that in 2009, it was a record year for cash flow for us as we aggressively managed all of our cash flows through the challenged macroeconomic environment that existed at that time. So we had very little incentive compensation payment. That was about a $25 million decrease in payments versus what we characterize as normalized levels. We also received proceeds from the sale of certain life insurance assets which we disclosed to you midyear last year about $15 million. And we benefited from temporary cost reductions that we believe were around $9 million to $12 million, let's call it around $10 million to make it easy.

So, when you take into account those three items, which roughly totaled about $50 million and deduct it from the $372 million of reported cash flows in ‘09, we actually believe on a normalized basis that our cash flow from the funeral and cemetery operations showed positive growth over the prior year to the tune of 10% to 12%.

Maintenance CapEx and the cemetery development CapEx, and remember those are the two components that we consider are recurring CapEx in our free cash flow calculations, but for the quarter increased about $13 million to $30 million. For the full year, the recurrent CapEx was around $94 million and that was an increase again of about $26 million over '09 levels.

The furnished CapEx spend in the fourth quarter did come in slightly ahead of what we expected. Most of this result of timing there, as we return to more normalized levels of CapEx in 2010, again following a very difficult economy in '09 where we aggressively managed all of our cash flows and spending. For the year, the increase also reflects new systems costs as well as the addition of the Keystone properties.

Looking forward, though, in 2011, we expect our recurring CapEx to continue to be in the range of $85 million to $95 million. And that again is returning to a little bit lower level than what we incurred in 2010.

Deducting these recurring capital spending items from the cash flow from ops, we calculated our normalized free cash flow for the quarter to be about $60 million and that compares to the guidance that we talked about in the October conference call of about $40 million to $55 million. So very good performance again from free cash flow perspective.

For the full year, the free cash flow ended at $265 million. That was down over $30 million from the last year, but again before normalizing for the three items totaling $50 million that I just mentioned before.

From an outlook perspective, again looking at the entire year for 2011, we expect to continue to generate attractive operating cash flow and we have increased our guidance this morning modestly by about $10 million from the range we discussed in October.

Generally, the new guidance takes into account three factors. First, the operating improvement that Tom described that lead to our EPS guidance increase have been incorporated into these cash flow assumptions. It also includes an assumption of lower cash taxes than originally anticipated back in October. So originally, in October we talked about $30 million to $40 million of cash taxes, now it’s going to be about $20 million to $30 million of cash taxes that we expect for the full year of 2011.

And again, as I mentioned, in mid-December of 2010, the IRS approved our tax accounting method changes, which will defer a substantial amount of our U.S. Federal cash taxes for 2011 and also a couple of years thereafter. Therefore, the $20 million to $30 million included in our guidance would primarily represent various state as well as Canadian taxes that we expect to pay in 2011.

Most of these positive factors, the higher earnings and lower cash taxes, are anticipated to be somewhat offset by lower working capital assumptions within our cash flow statement compared to the last few years. But we did manage our working capital in the fourth quarter of 2010 very well and we exceeded our internal expectations.

So to summarize cash flow, the 2010 cash flow from ops is $360 million and we’re guiding to $330 million to $380 million in 2011. And again this is up from the previous guidance of $320 million to $370 million.

The assumptions regarding our recurring capital spending remain unchanged at $85 million to $95 million, so therefore we anticipate our free cash flow in 2011 to range from $235 million to $295 million. This represents a 10% to 13% free cash flow yield assuming a share price of about $9. This robust cash flow was our distinguishing strength. And again, we believe it positions us most importantly to continue to deploy our capital in a way that will enhance shareholder value.

Now, let's shift to the trust fund performance. So we continue to see good trends in the trust fund performance as you saw our press release. The combined trust funds increased by about 5.6% in the quarter. For the entire year, the trust funds were up a healthy 13%.

Total trust fund income recognized in the fourth quarter was about $22 million which compares to about $21 million in the fourth quarter of ’09, but for the full fiscal year, trust fund income recognized in the income statement in 2010 was $83 million versus $70 million last year, which is an increase of about 19%, which was in line with our expectations.

Looking forward in terms of guidance for 2011, the trust fund returns remain unchanged versus what we discussed previously. So recall what that was is that we’re assuming our consolidated trust fund assets will realize an annual positive return in the low single digit percentage range. But of course, this will be effective positively and negatively by financial market movements in 2011.

Now, let's turn to our financial position and liquidity. Our cash balance at the end of the quarter and the year was about $171 million. Today, we have got $130 million of cash on hand. So subsequent to the year, we spent about 15 million in share repurchases and I will recap all of that in a second. We have also paid a $10 million dividend at the end of January and we also had $10 million of acquisition payment subsequent to year-end as well.

We currently have about $358 million of borrowing capacity, $400 million bank credit facility and again this matures in November of 2013. There are no borrowings under that facility, but as used to support right now $42 million in letters of credit.

Our total debt was about $1.85 billion at the end of the year. But again, we continue to enjoy a favorable debt maturity profile with no meaningful debt maturities until October of 2014.

Our current leverage per our bank credit facility definition, which is a net debt calculation, was 3.2 times at the end of the year. We believe this ratio will manage the company between 3 and 3.5 times is appropriate on a net debt basis and as we said before we continue to say we generally intend to continue to run the company at the lower to midpoint of this range.

Now in terms of capital deployment for the quarter. During the quarter, we continued our share repurchase program and we repurchased about 3.6 million shares for a total investment of about $30 million. For the entire year, we directed about $116 million of capital to our share repurchase program and we bought about 14 million shares.

And as I just mentioned subsequent to the end of the year, we bought another 1.8 million shares for about $16 million. So as of today, we currently have about $163 million remaining on our existing share repurchase authorization.

Our current shares that are standard about $240 million now. That's the number that are in our forecast projections that we based it on. And this compares very favorable to the 254 million of shares we had outstanding at the end of 2009, which is about a 6% reduction in the number of shares outstanding.

As Tom said, we didn't have any meaningful debt repurchases during the quarter. However, for the year we bought back about $111 million of face amount of our shorted dated bonds in the open market and that was done at what we believe a favorable market prices.

So in conclusion, we finished 2010 with very healthy cash flows. We entered 2011 with a lot of momentum with a strong balance sheet, great liquidity, a favorable debt maturity profile and very attractive cash flow, which we believe positions us well to take advantage of opportunities that will increase shareholder value.

So with that, that concludes our prepared remarks. At this point of event, operator, I think we can go ahead and open it up to questions.

Question-and-Answer Session

Operator

Sure. (Operator Instructions) Your first question comes from the line of Clint Fendley with Davenport. Please proceed sir.

Thomas L. Ryan

Clint, are you there? That's the easiest question we’ve ever had.

Operator

His line is open.

Clinton D. Fendley - Davenport & Company

Hello, can you hear me?

Thomas L. Ryan

All right, Clint, now we can hear you.

Clinton D. Fendley - Davenport & Company

Hello, can you hear me now?

Thomas L. Ryan

Yes, we can.

Clinton D. Fendley - Davenport & Company

Okay, sorry about that. Congratulations on a nice quarter guys. First question, just on the preneed sales production, the cemetery side, I was wondering if there were a couple of sizable product sales that drove the results here or was it across the board strength?

Thomas L. Ryan

It was truly, Clint, across the board strength. If you look at the quarter we are comparing back again, there was quite a bit of large sales. That's one of the reasons we were a little nervous going into the fourth quarter, it was our concerns about being able to repeat those.

As you well know, they kind of come when they come. And what ended up happening was we surprisingly had quite a bit of that. It wasn't quite to the level of 2009, but what really made up the difference was just the overall production, not necessarily in the large sale side. So we’re very pleased both at the level of large sales and more particularly at the transaction level, the number of contracts and number of people that we’re interacting with.

Clinton D. Fendley - Davenport & Company

Okay. And as we think about Q1 for your business on the cemetery side, obviously never a seasonally strong period for that segment, but should it possibly be weaker than usual given some of the weather that we’ve had in Texas and throughout the South?

Thomas L. Ryan

I think it can. I mean, it really depends, what happens with the weather, Clint, is you’re exactly right, when it's really bad, it’s going to be hard to be able to close that deal. But, let's say you are out a week, the next week you ought to be begin to make up some of that. So I don't think it's something that we’re forecasting as a big impact, but it could have a little bit impact on the quarter. At the same time, when you have weather like this, you’d expect volumes to be up on the funeral side. So I think that's probably a fair expectation and again, we are so early in the quarter, it's difficult to tell.

Clinton D. Fendley - Davenport & Company

I wondered if you could update us on the Main Street initiative, obviously you mentioned you are pleased with Keystone, the results look very good there. I mean are you feeling better about the longer-term opportunity here in the smaller business segment side?

Thomas L. Ryan

We definitely are, we are very excited about the team, then Steve Tidwell has put his team together and it’s been working diligently. They are actually testing a lot of the new product initiatives for us. And we expect that group to do very, very well, and also expect to be able to grow that group in acquisitions as we look forward because these are markets that make a lot of sense for us. And so, yes, we’re very, very excited about the momentum and expect great things from that division.

Clinton D. Fendley - Davenport & Company

Okay. And just a couple of modeling questions here. Tom, I heard you correctly, corporate G&A around $100 million for next year?

Thomas L. Ryan

Around 100, yes.

Clinton D. Fendley - Davenport & Company

Okay. Very nice. And then as we model the effective tax rate, Eric, should we be around the 35.5% or so range or what should we be thinking there?

Eric D. Tanzberger

No, it really around 37ish, 38ish, Clint. Frankly what happens is, like when we filed our state tax returns, we have to adjust whole of that, we had a state tax refund this quarter. So it will kind of ebb and flow, but it will be one-time event as you go. From a normalized basis, you really should model somewhere around that 37% to 38% and then if it moves for a quarter-to-quarter, I will explain to you why it moved like I did today.

Clinton D. Fendley - Davenport & Company

Okay. Excellent. Thank you, guys, nice quarter.

Eric D. Tanzberger

Thanks, Clint.

Operator

Your next question comes from the line of John Ransom with Raymond James. Please proceed.

John Ransom - Raymond James

Hey, good morning. I remember the days when you used to burn cash like 10 years ago. It seems like a long time ago. Do you guys have any needle moving M&A discussions going on with, are there any sizable deals out there to look at that might move the needle?

Thomas L. Ryan

I think that, again, we are excited about some of the opportunities that are out there. We are seeing some opportunities but, again, not needle moving opportunities because of the size that we are most of our growth is going to come from organic growth, that’s why we’re focused very hard on interacting with our consumers both utilizing technology in our sales force and the acquisitions will be nice add-ons as we move in most of the markets that fit our profile, our strategic profile. So expect this to continue to kind of roll up in those markets and at least over this year and the coming year, but nothing game changing.

John Ransom - Raymond James

Okay. And, Eric, could you remind me, your current expectation for 2011, the contribution from the three deals that you did from an EPS standpoint compared to what you yielded of those acquisitions in 2010?

Eric D. Tanzberger

Well, the real material piece to the puzzle, John, is really it’s just you have one quarter Keystone that wasn't in 2010. As we’ve said, it's a mid-30ish, $30 million-ish type range EBITDA. So there is a piece of that that was not in 2010. But other than that, Palm was in there full year. It would be part of our same store operations frankly in 2011 and the other ones that we’re just doing are not really material enough to move the needle.

John Ransom - Raymond James

So if we were to kind of net the debt refinance and the acquisitions, it's about a point, because your re-file is costing you a couple of tenths this year versus last year so maybe it's kind of a push.

Eric D. Tanzberger

Maybe a little bit accretive to be honest with you, John. I think what people maybe getting all confused on interest expense is that we bought back bonds during the year, $111 million granted, some of that was on a facility at a lower rate and how that’s refinanced, but the truth is we also came out of our bank accounts $50 million to $60 million of that. And so what you’re seeing at the end of the year wasn't really the full run rate.

Secondly, I think you will continue to see us chip away as the shorter-term bonds with some of our free cash flow during 2011. So I think that the cash interest itself will be a little bit lower than what you’ve been seeing and not have that headwind, so to speak.

And I would add synergies with everything else, I think it's safe to say that that will be accretive during 2011.

John Ransom - Raymond James

Okay. And then the third thing, is there anything we should be thinking about with respect to your share count assumption for this year? You got a higher stock price, I don’t know if that affects. How you can calculate your options and ending share counts, with your share repos and what’s your plans for the year?

Eric D. Tanzberger

As I said, $240 million are outstanding right now. And that’s pretty much what we modeled. There is always, when you do the fully diluted calculation, it adds 4 million to 5 million shares. We continue to stay with that model. As you know, we have $130 million of cash and over $250 million of free cash flow we believe in 2011 and you’ve seen that we did a balanced approach last year between acquisitions and share repurchases and debt repurchases. So I think it's hard for me to predict where to go other than we’re going to deploy our capital to the highest return opportunities, but I do foresee some share repurchases in there, probably at modest levels.

John Ransom - Raymond James

Great. And just lastly, this is maybe more of a reflective question, but as you guys move through the great recession and hopefully we’re coming out of it a little bit, what surprised you positively or negatively with respect to receivables collection, preneed activity? I guess it's our view that preneed activity and receivables collection held in there a lot better than we might have guessed two years ago, were you surprised at that and do you have any observations about that you can share?

Thomas L. Ryan

I think what I would say as a surprise is we always looked at ourselves as a consumer discretionary spend type category. And so we got concerned early on when you saw the consumer really pull back that it’s going to dramatically impact our business. And I would say what surprised me, John, is that I realized we’re on the outer end of that consumer discretionary in the sense that people jumped right back in once they figured the world wasn't going to end, because this is the planning tool. It's a necessity for people to take care of it, it provides them peace of mind. So it's very different I would say from other retailers that go through what we went through. So I think that’s the surprise to the good side for us. We’re something that people feel like they need to take care of, they want to deal with, and you saw in our preneed sales and you saw in the fact that receivables really didn't slip.

John Ransom - Raymond James

Great, thanks. Nice job.

Eric D. Tanzberger

Thanks, John.

Operator

(Operator Instructions) With no further questions in the queue, I would now like to turn the call back over to SCI management for closing remarks. You may proceed.

Thomas L. Ryan

I want to thank everybody for participating on the call. We look forward to talking to you again in late April, I believe. So have a great week. Thanks.

Operator

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

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