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Executives

Debbie Young – Director, Investor Relations

Thomas Ryan – President and Chief Executive Officer

Eric Tanzberger – Chief Financial Officer, Senior Vice President and Treasurer

Analysts

Robert Willoughby – Bank of America Merrill Lynch

John Ransom – Raymond James & Associates, Inc.

Clint Fendley – Davenport & Company

Chris Rigg – Susquehanna Financial Group

Duncan Brown – Wells Fargo Securities

Service Corporation International (SCI) Q1 2012 Earnings Call April 26, 2012 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2012 Service Corporation International Earnings Conference Call. My name is Allison [ph] and I’ll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instruction) As a reminder, this call is being recorded for replay purposes.

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

Debbie Young

Hi, good morning. This is Debbie Young, Director of Investor Relations for SCI. Welcome to our call today as we discuss our first quarter results. Before we begin, let me just walk you through our Safe Harbor language.

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

Also on the call today, we will use the terms normalized EPS and free cash flow. Both of these are non-GAAP financial terms. For reconciliation of normalized EPS to EPS calculated in accordance with GAAP, please see our press release and 8-K that were issued yesterday. For calculations of free cash flow and free cash flow per share, we would refer you to a presentation that is posted on our website under Webcasts & Presentations that will give you the supporting calculations and reconciliations to GAAP cash flow.

With that, we’ll start with comments from Tom Ryan, SCI’s President and CEO.

Thomas Ryan

Thank you, Debbie, and welcome everyone to the call today. What I’m going to do is start off with an overview of the quarter, and then kind of dive down into funeral operations and cemetery operations, and then hand it over to Eric. To start off, I’m very excited to report to you that earnings per share and cash flow performance had exceeded our own internal expectation.

This was accomplished despite a very challenging comparable funeral volume environment, and I would like to thank all of my fellow associates for their outstanding effort and performance. Normalized earnings per share increased $0.03 to $0.20 versus $0.17 in the prior year quarter. While operating improvements generated about a $0.01 worth of growth, the impact of fewer shares outstanding, and the foreign currency gain offset by a higher tax rate contributed on a net basis the remaining $0.02 of improvement, resulting overall in the $0.03, or an impressive 17.6% improvement in earnings per share. This all despite a 4.6% reduction in comparable funeral volume.

Free cash flow produced during the quarter was $74 million. This was down from the prior year by some $11 million, as it was impacted by higher cash tax payments and higher annual incentive payments, and long-term incentive compensation payments, which were tied to total shareholder returns.

If you exclude these $17 million of payment we had accounted for in our forecasting, we grew operating cash flow some $6 million, which was better than we had anticipated in our own forecast. With our free cash flow on hand we continue to be active with our share purchase program during the first quarter, buying back approximately 6.8 million shares for $75 million.

Consolidated funeral revenues grew 3.9%, which can predominantly be attributable to the contribution from [inaudible], but SCI comparable revenues were down slightly. Still we were able to grow funeral profit almost $1 billion, even with the challenging volume environment and increased compensation selling expense associated with our growing preneed funeral production. Our funeral gross margin percentage declined slightly as high margin comparable revenues replaced by lower margin Neptune and G&A revenue.

Consolidated cemetery revenue grew 4% over the prior year quarter. This growth was driven primarily through strong comparable preneed cemetery sales growth of 14.1% over the prior year quarter, while atneed revenues were slightly lower by some 1% quarter-over-quarter. Our preneed sales production growth was substantially muted and converted to GAAP revenues by two items. First by an $8.5 million increase in property sales that were undeveloped as compared to the prior year, and therefore deferred into our backlog.

Second, a $1.5 million deferral of cemetery merchandise sale that were unable to be installed due to certain vendor deliveries. By the way the issue is being fixed as we speak.

The good news is that these revenues are simply deferred, and predominantly a benefit for the last three quarters of 2012. The 4% revenue growth was substantially offset by unusual increases in selling compensation and maintenance cost in our cemetery segment. We believe that these cost trends should normalize in the coming quarters, resulting in higher gross margin percentages.

Now shifting to an overview of the comparable funeral operations, and keeping in mind that this now includes the Keystone property. For the quarter, comparable funeral revenues declined $2 million or 0.5%, or was better than we had expected mainly due to higher G&A revenues on the backs of better than anticipated funeral preneed production. Funeral volumes continue to be solid down 4.6%, similar to the levels we saw in the fourth quarter of last year. This was for the most part anticipated in our forecast.

Partially offsetting this softness was a strong increase in the comparable average sales of 3.2%, excluding the impact of trust fund income and currency. We’re beginning to see the benefits of the initiatives we have mentioned before, and are enhancing the effect of our annual inflationary pricing. First, the refreshed dignity packaging, which is centered around customer choice and flexibilities along with the associated training within place in over 500 locations during the first quarter of this year, and is scheduled to be rolled out entirely during the second quarter and the third quarter of 2012.

The other item that is generating this growth is our receptions and events sale, which include catering. This generated about $2.2 million in the first quarter and added 60 basis points or said another way $31 to our entire funeral average. This has the potential to continue to grow as half our locations still have not sold a single catering package, and this too will improve as the year goes on.

And finally, coming from our digital strategy, our e-commerce sales [ph]. These again in the first quarter generated some $420,000 of additional revenue, which will help grow that average as that matures. Keep in mind that all this is done, this increase was accomplished to take into account that our cremation mix grew 90 basis points to 45% in the first quarter. Although revenues declined, we were able to hold comparable funeral profits flat.

We managed our operating costs well and the soft funeral environment and an increase in G&A revenue of $3.8 million on increased preneed insurance funeral production helped to offset associated selling related costs.

Now shifting to our cemetery operation. Comparable cemetery revenue increased about $8.6 million, or 5% quarter-over-quarter. This is mainly attributable to the strong preneed production numbers I mentioned earlier, as well as slightly higher trust fund income. Although our production numbers exceeded expectation, our recognition rates were a bit lower, so some of the revenue is going to come in future periods, while we bore the selling costs in the current period.

Turning to profits, our comparable cemetery profits grew $0.5 million or 2% for the quarter, not a margin we would expect with the revenue growth of $8.6 million that we reported. So let us break it down. The $7.7 million in operating revenue growth this quarter, we would expect about a 60% gross margin, and with 900,000 of increased trust related income growth, we expect about a 100% margin on that revenue. Therefore in total an $8.6 million revenue increase should have delivered about $5.5 million dollars in cemetery profit growth.

So let us explain why $5.5 million is only $0.5 million this quarter. And first of all as I mentioned previously, we deferred revenues on an incremental $10 million in cemetery production. Remember I pointed to $8.5 million of property sales that were hung up and deferred, and $1.5 million of merchandise sales. We had to incur an approximate 20% sales cost in margin now, and that is about $2 million that impacted margins this quarter, when the revenues will come later this year.

In addition, we are bearing a higher cost percentage of sale this quarter, as a large portion of sales were property, our most valuable component, and sold by our community service teams, which is our outside sales -- which command a higher cost than our sales structure. This combined with the transition to a new, more effective sales compensation plan with related roll-out costs in the first quarter resulted in an approximate $2 million increase in selling compensation. Most of this cost we do not anticipate to recur.

Finally cemetery maintenance expense increased by $1.6 million in the quarter. This is due in part to the fact that we have experienced in most parts of the country a rather mild winter, which resulted in a seasonally early increase of cemetery maintenance activity. This too is one we would not expect to be an issue in the coming quarters. Therefore, as we assume that the $5 million in unusual variances should not reoccur, we would expect a more normalized result of cemetery margins going forward throughout 2012, and that the full-year margins would fall somewhere between 19% and 21% range.

As we look ahead, we are excited about 2012 as we expect solid growth in both earnings and cash flow per share. We remain confident in our ability to deliver results that are pushing the upper range of guidance communicated to you in February. We believe the same trend of business fundamentals will continue, generating steady improvements in cash flow and maintaining significant liquidity, continuing to grow our funeral and cemetery preneed business and building our backlog.

We will continue to utilize our free cash flow to capitalize on value enhancing opportunities, all this as we move towards the inevitable favorable demographic impact on this industry, and especially for your company.

This concludes my prepared remarks, and I will turn it over to Eric.

Eric Tanzberger

Good morning. This morning I’m going to walk you through the details of our cash flow and our trust performance for the quarter, and I’m also going to briefly discuss how we deployed this free cash flow to enhance shareholder value during the quarter.

So starting with cash, operating cash flow in the first quarter as you have seen was about $96 million. To give you some insight, it was a little over 10% higher than our expectations, and going back to Tom’s remarks, it is primarily driven by better-than-expected cemetery production. Compared to the prior year, they operating cash flow declined about $12 million, again as expected.

The first thing I would say that there was about $10 million more of higher incentive comp payment, and that is the same thing we mentioned before payouts from our short-term plans, as well as payout on our long-term total shareholder return plan as well. We also had higher cash tax variance between cash taxes quarter-over-quarter of about $7.5 million. Now we really only paid about $2 million of cash taxes this quarter and the prior year quarter, but to remind you as I disclosed last year, we had a $8 million tax refund in the prior year quarter related to tax accounting method changes, and that is really what is creating that variance, the tax refund that we received last year that we had no such thing this year.

While we’re on tax payments, on a forward-looking basis, I want to give you a quick update on the IRS audits, and I mentioned this last quarter. A portion of our 2003 to 2005 audit years was settled in the first quarter, and we are nearing completion on the remaining issues under review for the 2003 to 2005 audit years. At this point I would anticipate that we would make the payment sometime in the second quarter for approximately $5 million to $6 million, and then we will make an additional payment in the third or fourth quarter this year of approximately $20 million to $25 million related to the complete resolution of these audit years with the IRS.

Upon settlement of this audit, we also expect that it will produce a benefit or a credit for our non-recurring earnings in our tax expense line of approximately $25 million tax benefit or credit through the income statement, of which you saw about a $3 million credit this quarter recognized in the tax line in the first quarter of 2012. And keep in mind that these payments that I just mentioned are not in our cash flow guidance numbers for 2012, and we would expect to treat them as non-recurring items or one-time events, which we believe that they are.

And going back to the cash flow, maintenance Capex and cemetery development Capex, which again are two components that we consider are recurring Capex. So during the quarter it was about $1.7 million lower than the prior year quarter, and was $21.7 million for this quarter, which was in line with our expectations. When you deduct this capital spending from cash flow from ops, we calculate our free cash flow for the first quarter to be about $74 million, and again although this is down some from last year due to the anticipated cash tax variance, and the incentive compensation payment we just mentioned, it is ahead of where we thought it would be at this time by about 15% or so.

So with that we remain comfortable with the full year 2012 operating cash flow guidance we discussed in February, which again was $375 million to $425 million on an annual basis. Our recurring Capex guidance remains unchanged, and again now it was $95 million to $105 million, and doing the math that would result in anticipated free cash flow in 2012 of the range of $270 million to $330 million, which again was our guidance that remains unchanged today.

On a per-share basis, this guidance equates to $1.22 to $1.49 for 2012 using our fully diluted weighted average share account of about 221 shares that we are currently modeling now for 2012. Also the 2012 guidance for free cash flow per share represents an 11% to 14% free cash flow yield on our current share price of around $11, very exciting. Additionally on a pro forma basis, let us assume we are a full cash tax payer, which we believe really is not until the 2014 to 2015 timeframe. So with that our free cash flow per share would still yield low double-digit percentages 10% to 11% range as well.

Shifting to trust funds now, our combined trust fund assets increased by 6.6% during the quarter. The total trust fund income that we recognized in our income statement for the quarter grew about $1.6 million to $26.4 million. Although our trust fund performance exceeded our expectations in the first quarter, our guidance for trust fund returns for the full year of 2012 remains unchanged, and recall that we are assuming that our consolidated trust fund assets will realize an annualized positive return in the low single digit percentage range.

Now let us shift to the free cash flow deployment in the quarter. We had no meaningful acquisitions or debt repurchases in the first quarter, but we continue to buyback our shares. During the quarter, we repurchased about 6.8 million shares for a total investment of about $75 million. That would average right around $11 per share. Subsequent to the end of the quarter, we bought another 760,000 shares for deployment of about $8.3 million that is $10.95 per share on average.

To update you as of today we currently have about $138 million of share repurchase authorization, and our current shares outstanding today as we speak are right around 216 million shares outstanding. So to conclude, we continue we believe to be financially strong with a very strong balance sheet. We have substantial liquidity and a great debt maturity profile that positions us well to explore value enhancement opportunities. As again to remind you, we have no meaningful debt maturities until October 2014.

Excitingly, we anticipate a 15% growth approximately in free cash flow per share over 2011 at the midpoint of our 2012 guidance. So we remain committed to deploy this free cash flow prudently, and to pursue value-added investments that will grow our earnings and our cash flow, as well as returning value to our shareholders.

So that concludes our prepared remarks for the quarter and now at this time operator we will go ahead and open it up to questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Robert Willoughby, Bank of America. Please proceed.

Robert Willoughby – Bank of America Merrill Lynch

Hi, Tom, or Eric, just the exciting Neptune investment here. Can you give us anecdotally growth metrics, what it contributed to profitability, what synergies might be left to go after if any just absence of much other excitement from a growth perspective that seems to be our focus?

Thomas Ryan

Yes, Bob. This is Tom, and we here are excited about Neptune. And like we said before, this is we think a great growth opportunity, albeit a small piece of the entire organization. I would define Neptune is on track for what we anticipated. Some of the integration costs are beginning to flow through, but probably not as quickly as initially we have liked to.

It is difficult to -- I think if you look at the reported numbers Bob for the first quarter, we probably had profits in the $600,000, $700,000 range. And that is gross profits and not EBITDA, and that doesn’t really tell the whole story. If you remember Neptune, there is a couple of pieces here. One is the fact that they are generating business so to speak on their top business. But remember that we are performing a lot of the outsourcing on their behalf. So the SCI locations are doing [inaudible] and have a margin in that business that doesn’t get captured in the Neptune line-item.

And I don’t have that exact number. But that benefit has already flown through, but wouldn’t show up necessarily in the Neptune number. We think Neptune margins can expand pretty well for two reasons. One is that we will continue in utilizing the integration of purchasing power to deliver margins to the expense line-item. Secondarily we continue to grow Neptune by opening new locations in different markets. And I believe last year we opened in three markets, and we are scheduled to another 3 to 5 markets this year. So, we think it is going to grow the top line and expand the cash margins of the business as we fully integrate from an operational perspective.

Robert Willoughby – Bank of America Merrill Lynch

And what is the kind of same-store growth rate for Neptune?

Thomas Ryan

I think on a revenue top line the same-store growth rate is probably in the low single digits, mid-single digit. And as we open more officers, again we expect to grow that even more.

Robert Willoughby – Bank of America Merrill Lynch

Okay, and then just a question on the trust returns, obviously quite an impressive performance there in the latest period, but it is so strong it makes me wonder if what shifts in the portfolio happened, do we envision a bit more risk in down markets that perhaps you are in some riskier kinds of assets at this point?

Eric Tanzberger

Hi Bob, it is Eric. No not really. I mean it just performed. We have the same asset allocation that we had before. As I said before, we probably have 35 to 40 professional institutional money managers that are managing the money. We don’t manage any money at SCI. It is spread -- you know, there is a good amount of equities as well because the asset allocation is meant to match the life of the underlying contract, which is on average about 10 years. But we just had good performance from our managers.

I mean most of the cases they did exceed their active benchmarks as well. But nothing unusual in terms of the risk profile, or changing out managers or anything along those lines Bob.

Thomas Ryan

Bob, I think if you step back a minute and say, the S&P returned 12%, and you know bonds were relatively tepid, you know, and you take the average return is 6.6%. So, it is about what we would expect with a robust first quarter stock market. You know, April is a little more choppy, but we will see what the year brings.

Robert Willoughby – Bank of America Merrill Lynch

That is great. Thank you.

Operator

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

John Ransom – Raymond James & Associates, Inc.

Hi. Just a couple of things, your mix of preneed, has that changed materially between trusting and insurance?

Thomas Ryan

Yes, it has John. If you think about there is two things happening. From what is going into the pot today, call it 80% of it coming is insurance funded. This is just on the funeral side, right, and 20% is trust. If you think about what is coming out of the preneed, going atneed spots, it has historically been right around 50, 50, starting to shift more towards insurance.

But as these things mature, we would expect more and more of a portfolio to be funded by an insurance contract as they go atneed. What that will do is that is going to put a little pressure on your trust income. Remember, trust income is the cumulative effect of trust returns over the life of the contract. Because less contracts mature on trust portfolio, we expect that to happen. Not to be overly concerned because when you think about the insurance portfolio it is more recent business.

It has been written at a higher average, and so I would expect the average revenue per case to be just fine, but less funeral income to be allocated you know to the atneed revenues.

John, are you there?

Operator

My apologies. John’s line has disconnected.

Thomas Ryan

Okay. We can go to the next question then.

Operator

Thank you. Your next question comes from the line of Clint Fendley of Davenport. Please proceed.

Clint Fendley – Davenport & Company

Thank you. Good morning, Tom, Eric, Debbie. First question, I wonder the average revenue per funeral was down slightly for the quarter, I wondered how we should think about this for the remainder of the year as we consider the refreshed dignity packaging, and also the reception and event sales that you mentioned Tom?

Thomas Ryan

First of all Clint, I think the consolidated average was down as a comparable average. And the reason why I would point you to that is the Neptune activity in the lower case volumes. So if we shift back to the average as it relates to the comparable business, we actually had good growth, about 3.2% quarter-over-quarter, and I’m not looking at sequential.

But as I think about the year going on, I think that that type of clip can be sustained, and I will tell you why. We have -- there is a couple of things in place that continue to benefit the average as we go forward. The first one I mentioned was the events in catering category. And there what we are doing is actually selling an additional product to families, and it is relatively new. And today we are generating that from probably on average 30% to 40% of our locations. We got 50% that still haven’t sold it.

And again because it is [inaudible], as we roll this out and train it, it is going to get more robust and contribute more. But I think the biggest impact on the quarter is going to have to do with the refreshed dignity packages. To remind everybody, what we did here is add to cemeteries the flexibility. What we are able to do now is offer a variety of products that they can choose from to take as part of the selection process.

In addition we have got substitution as it relates to casket types of products where they can select a variety of caskets, whereas before they were somewhat limited in that choice. And in doing so in the first 500 markets we rolled it out into, I should say 500 locations, was our main street locations, we saw tremendous success. We saw a pickup in dignity take-up rate go from say 30% to 33%, which had a pretty big impact on the average revenue per case.

So now we are about to roll that into our metro markets and our major markets. And this will be an additional 1200 locations. That has already begun as of the first week of April, and we should be completed sometime in the end of the third quarter. As those roll into a larger portion of the markets, larger case volume, we would expect some momentum as it relates to the average revenue per case. Our anticipation is the take-up rate will go up as well with the added flexibility with the additional training. And so we feel pretty confident that that trend should continue Clint.

Clint Fendley – Davenport & Company

On the event side, when do you expect the remainder of your locations to have the capability to offer the event sales?

Thomas Ryan

They have the capability now, and if any of them are listening I am sure they are thinking about selling some more on the call. But it isn’t just the ones that aren’t selling it. What I’m really trying to say is it is new, and like everything, we have developed training and you have got the first people that are out there hitting the beach, and they love it. And it is good, and the client families love it. And that is why I know that this thing is going to work, and why it is going to expand throughout our network, it is the feedback we are getting from the families that we serve is over the top.

They really enjoy this type of event. We have the facilities in a lot of places to put it on for them, or we can outsource the facility somewhere else to provide the catering. But this is something that helps provide exposure. It is a good way to surround yourselves with the families and friends at the end, or at the beginning of what is one of the toughest weeks of your life. So we think this is going to be a big seller more so than what we have been seeing today. And you will see more locations, and you will see locations that are selling a few today. They are going to sell more and more on a monthly basis as they get comfortable with the caterer and their performance, and things like that, people who apprehensive at first to try.

Clint Fendley – Davenport & Company

Yes. I think this is the first time I can remember you guys singling out Neptune for its impact on margins. And I know you guys have talked about the possibility for expansion, but could you remind us, I mean, have you expanded Neptune to any additional locations at this point?

Thomas Ryan

Yes, we are actually in six more locations than we were when we bought Neptune. And what Neptune is going to do, and it is easy to do the math, Neptune is going to grow the margins. So we’re going to need more gross dollars. Well, what happens because it is lower margin business, as you look at gross margin percentage on a consolidated basis it is going to pull that down slightly.

And that is okay. That was part of our plan, right. We are after dollars not margins. And that is why we are excited about Neptune. Again I just, I warn people this is not -- this is a great business. We love it. It is going to expand. It is going to grow. It has got a great natural growth to it. But at this point in time, it is not a significant portion of our profit. And so it is very important we expect it can grow, but I think quarter-to-quarter we got to achieve what we are doing with the digging memorial network today and we are seeing some real good fruits of our labor as it relates to both refreshed packages and also with the catering.

And even with e-commerce flowers, you know, a lot of these things are beginning to take root and to grow, and I think will enhance the margins of the business on the Dig Memorial Network.

Clint Fendley – Davenport & Company

Okay, got it. And last question here Eric, if I heard you correctly on the free cash flow, the midpoint of your guidance here of $1.36 is unchanged. That would exclude about I guess $30 million in non-recurring tax payments. I wonder do the tax credits affect your EPS guidance at all or would these be reflected as a reconciling item going forward?

Eric Tanzberger

Good question Clint. The answer is no, it would be a non-recurring one-time cash tax payment that would not be included in the guidance. And on the EPS side when it is finally done and it is about a $25 million credit that would obviously not be part of the EPS guidance either. It would be considered a one-time reconciling item as well.

Remember, these go all the way back to 2003 and 2005. It really has nothing to do with the ongoing 2012 operations.

Clint Fendley – Davenport & Company

Yes, okay, got it. Thank you guys. Nice quarter.

Operator

And your next question comes from the line of John Ransom of Raymond James. Please go ahead John.

John Ransom - Raymond James

Hi, I don’t know what happened. But just to go back on the insurance versus trust, so my point was back to the 20:80 is likely to remain constant in the future in that state [ph]?

Thomas Ryan

I think so, at least in the near term for sure. That is probably the right area for us John.

John Ransom - Raymond James

And they give you a CPI return in exchange for more cash upfront that is what you like about that?

Thomas Ryan

Well, it is not a CPI. It is typically a fixed number. This is associated with the G&A revenue. Again they are interchangeable, and I would say today we’re taking the lower growth product with more cash upfront, which is easily what we want to do.

John Ransom - Raymond James

Okay. All right. Thanks.

Thomas Ryan

Thanks John.

Operator

And your next question comes from the line of Chris Rigg of Susquehanna. Please go ahead Chris.

Chris Rigg - Susquehanna Financial Group

Good morning guys. Just on the preneed cemetery side, has there been any sort of change in the mix of properties that you are selling. Has there been any sort of movement back towards the high end sort of properties at this point, is it still sort of the average is the average?

Thomas Ryan

I would say two things. We are seeing increased utilization on the cremation site. You know, the niche in cremation, the more utilization product grows at a higher clip, and part of that is just the fact that more people are choosing cremation. But as far as the components of cemetery, I would say Chris that it is really about production, it is about numbers.

We’re having some high-end activity, not at the levels of 2006 and 2007. So I think that is getting better. But with generating this, it is not large sales. With generating this year-over-year is the fact that we are writing that many more contracts, and that is exciting to me because that is showing that these aren’t one-off, these are more and more people making arrangements. And getting in front of our sales folks and that is a very positive thing for us.

Chris Rigg - Susquehanna Financial Group

Okay, great. And then one last bigger picture question, on the acquisition environment, where do you think sort of the multiples are right now for the group, and how has that changed sort of over the last 12 months?

Thomas Ryan

I think you know, what we are seeing is that they are probably inching up a bit, but nothing too dramatic. And I think again the multiples probably are different, depending on the type of market. And as you go into rural markets, you are going to get one multiple as you go into a competitive major market with a big business, particularly combos, you are going to see higher.

Let us say on average you know today, from a historical basis people are wanting to get somewhere in the 7 to 8 range on a historical. And again for us pro forma pretty quickly we can make that work really good for us as long as it is in that arena. Would you expect it to go up? Yes. I mean I think we are seeing more people active, but I also think there is more businesses out there or sales.

So we’re excited. We think the pipeline is good. We think the pricings so far are remaining reasonable, and we expect to see some activity in 2012.

Chris Rigg - Susquehanna Financial Group

Okay, great. Thanks a lot.

Operator

And your next question comes from Duncan Brown of Wells Fargo Securities. Please proceed.

Duncan Brown – Wells Fargo Securities

Hi, good morning everybody. I wondered if you could talk about volumes, on the Q4 call you kind of highlighted that December was the worst month, and kind of indicated that January would be a tough month as well. I wondered if that played out, just talk a little bit about monthly volumes, was January bad, you saw a little bit of pickup in February, March?

Thomas Ryan

Yes, I think what we saw from a -- again this is comparable, January and February were the worst two months of the quarter. March came back, was much better. It is always hard to tell though because you are comparing against last year’s quarter. So if I reverse it on you and say, what happened in the first quarter of 2011, we had growth in January, growth in February and March was bad.

So a lot of this plays of each other. But generally we saw it improving as we got to the end of the quarter of March.

Duncan Brown – Wells Fargo Securities

Okay. I appreciate that. And I was wondering if you could maybe go back and give some color around the unusual increases in selling comp on the cemetery side. I think I followed all that, but wasn’t quite sure why you expected to not be recurring going forward?

Thomas Ryan

Okay. Two things. One is $2 million related to what I would call deferred sales. So we sold $8.5 million of the property that has not been constructed. And we sold $1.5 million more of merchandise that could not be delivered or put in place. Those $10 million of revenue that is from a -- the way you look at your business you would say I sold $10 million of revenue.

Well, accounting rules say no. You can’t recognize it yet, and we know we’re going to get to recognize it in the coming months. Unfortunately the accounting rules also say, when you sell it, you expense the selling cost. So we had $2 million of selling cost in our expense line, where the revenue hasn’t come through yet. So think about the $2 million of that it is just sitting there that the revenue is not there with.

So I don’t expect that to re-occur as quarters go on. The second piece really relates to the fact that we switched our sales compensation program. We changed the way that we do it, and we believe it is going to be a more effective cost efficient way of selling. And I guess the simple way I would say this is we’re going from a salaried plan to one that is more like a draw plan.

Again it would allow people therefore to not be as productive let us say, and to maintain in those positions. By a draw plan, you are drawing its future commissions and send people to continue to sell. So in the switch over from one plan to another we incurred some costs, and that occurred in the first quarter. We know for fact those costs aren’t going to reoccur.

It is our belief actually that the cost should be again more cost efficient as you compare back in its future quarters on a going forward basis. So, there is $4 million that is identified in my opinion, we shouldn’t see again as the year goes on or in future years.

Duncan Brown – Wells Fargo Securities

Okay. That is helpful. So the part two, the increased cost was actually due to switching it, not due to an expectation of higher sales comp going forward, is that correct?

Thomas Ryan

That is correct. There is some other little bit of cost that relates to where we sold it and what type it is. I mean, understand that we compensate more for properties than we do for merchandise and services because we value the property more. There is a legacy issue, if you will, an adjacent issue. I buy property, then you know, my brother may want to buy next to me. So, property is very, very important as it relates to the scarcity of it.

So we incent more to sell property. So if you look at the mix of what we sold, we sold an inordinate amount of property as it relates to merchandise and services in the quarter. That is where the growth came from. So, you would expect a little bit more, and then I also try to identify the fact that we have two categorized types of sales organizations. One we call community service, which for people outside the industry would be outside sales. So they are generating leads away from our properties. And then you have what we call family services that is more akin to inside sales. And they are getting most of their leads from our properties.

So, we pay more on average for a community service sale that is generated away from our property. So those two things that the growth came from community service, and then it was property related will result in a slightly higher percentage cost as you grow the cemetery business.

Duncan Brown – Wells Fargo Securities

Right. I appreciate all that explanation, so I guess one of the other takeaways in this, or the other question is so that the property versus merchandize in your opinion was -- that mix was unusual in this quarter and not something to continue going forward.

Thomas Ryan

I would expect that we can sell property at a higher clip than merchandise, but probably not as action [ph] as you saw in this quarter. I mean it is pretty severe as it relates to historical performance, because we did overall grow I think 14%, and almost all of that was driven by properties.

Duncan Brown – Wells Fargo Securities

Got you. That is helpful, and one last one from me, is it still 65 million out on the revolver?

Thomas Ryan

Yes.

Duncan Brown – Wells Fargo Securities

Great. Thanks guys.

Operator

Thank you. I would now like to turn the call back over to SCI management.

Thomas Ryan

We like to thank everybody for participating on the call today. We look forward to seeing you again sometime in late July to report our second-quarter earnings. Have a great day.

Operator

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

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