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Service Corporation International (NYSE:SCI)

Q1 FY08 Earnings Call

May 8, 2008, 10:00 AM ET

Executives

Debbie Young - Director of IR

Thomas L. Ryan - President and CEO

Eric D. Tanzberger - Sr. VP, CFO and Treasurer

Analysts

Michael Scarangella - Merrill Lynch

Sameer Sabharwal - Raymond James & Associates

Clinton Fendley - Davenport

Edward Yruma - JP Morgan

Dana F. Walker - Kalmar Investments

Operator

Good day ladies and gentlemen, and welcome to the First Quarter 2008 Service Corporation International Earnings Conference Call. My name is Angela and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will be conducting a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes.

And now, I would like to turn the presentation over to your host for today's conference, SCI Management. Please proceed.

Debbie Young - Director of Investor Relations

Good morning, this is Debbie Young, Director of Investor Relations. Thanks for joining us today as we talk about SCI's first quarter results. In our comments, we will make statements that are not historical facts and are forward-looking. These statements are based on assumptions that we believe are reasonable. However, there are many important factors that could cause our actual results in the future to differ materially 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 Tom and Eric may use the terms normalized EPS and normalized operating cash flow. These are non-GAAP financial terms. Please see our press release and 8-K that were issued yesterday, where we have provided detailed reconciliations for each of these measures to the appropriate GAAP terms.

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

Thomas L. Ryan - President and Chief Executive Officer

Thank you Debbie and welcome everybody to the call today. As usual I am going to start off with an overview, run through our funeral operation, cemetery operations, talk a little to the rest of the year and then turn the call over to Eric. But to start off I'd say that our normalized earnings per share were $0.20 versus a prior year number of $0.17. We think these are very solid results, particularly in this very difficult economic environment that we are currently in. The reasons we are able to accomplish this were really primarily two thing. Number one, we had very strong revenue for funeral service, again which was driven by strategic pricing, particularly related to the Alderwoods business.

Then secondarily this increase in revenue was down against a much more efficient infrastructure. The Alderwoods transaction allowed us the opportunity to enjoy synergies that we realized above expectations and were on time. And for that I really want to thank our 20,000 employees who did such an outstanding job in 2007 that transitioned here and the fruits of their efforts have shown up right here in the first quarter. So, in the overview of funeral operation, revenues for the quarter were very strong; both relative to prior year and relative to our expectations. There were up approximately 5% over comparable prior year revenues and they were really due to two things; number one, pretty solid volume as well as, as I mentioned before a very strong average revenue per take.

On the volume side, our comparable volumes were down about 0.9% where that equates to about 662 call, and based upon analyzing our competitors, analyzing suppliers of which we are attracting that we do within relevant markets, looking at cemetery internments, we generally believe that this is reflection of our market. Actually, we probably would confuse within our relevant marketplace their comparable volume were up about 1% relative to our down 0.9%. The reason for the difference and what we can tell again has to do with low price cremation follow-up. You'll remember that we rationalized our businesses over the years adopting our strategic pricing model. Well, a lot of these decisions take time to infiltrate particularly the Alderwoods business.

So, what we are seeing now is the rationalization of those business models. And let me share a couple of examples with you. In Seattle, there is a particular location that we had a low in cremation contract that we service in the SCI business. That was picked up by Alderwoods, and once again we did not renew that contract. So, within that Seattle location we are down 244 calls in the first quarter. Here's the good news, profits were up $54,000, or up 47%. In San Diego, similar situation, that locations lost 52 call. Profits were up $66,000 or up 100%. And then utilizing some stratification again, we look at contracts below $1,000, contracts below $2,000, and in major markets alone we've seen 1,200 calls below $2,000 that we lost on a year-over-year basis. And as you move up the stratification chain, we're seeing volume increase. None of this is pushing customers in the higher strata as we understand. But again we believe that our strategy makes sense and we believe that in the relevant market share on a national basis, we're holding on share in this market. Noting our point two, before I move off to funeral volumes, we continue to see positive volume trends through April. Volumes look to be slightly above the prior year levels from what we can tell.

Second component of funeral revenue that's important in driving our profits is the average revenue per case which is up over $250 on a year-over-year basis, at 5.3%. We're continuing to see a positive impact from our strategic pricing and the change in mix of business out of that low end on the true atneed average which is up 5.7% year-over-year. It's especially true for the legacy Alderwoods location where strategic pricing was not put in place for the back half of 2007. Our average revenue per case on the preneeds going atneed was up 4.5% and achieved an approximate $4,800 level for the year. Again, this is evidenced to us that when you have turbulence in the equity markets as we experienced in the first quarter, it does not have material impact on the earnings stream associated with preneed funeral. We continue to see that drive up at 4.5%.

We are not seeing any material negative consumer discretionary behavior in the pricing. Again, from time-to-time you may see cases where that's true. We are not seeing that impact for average revenue per case. The other thing that I would mention is we are in the process now of rolling out the dignity rooms to the Alderwoods locations. That event will continue to occur through 2008 and we believe we have a positive impact on average revenue per case as we expect to see more packages sold which result higher customer satisfaction and customer royalty as well as increases in average revenue per case.

On the funeral profit side of things, that looked very strong. We are up $14.8 million on a comparable basis or over 250 basis points, again, quarter-over-quarter. This is primarily driven by the increase in revenues against a more efficient infrastructure, created by the efficiencies we gained in the Alderwoods' transaction. The last piece of funeral business I'll touch upon is our preneed funeral production. Keep in minds this business that fills the backlog really doesn't have an impact on current EPS but very important to us. It's not quite where we wanted to be.

We produced $107.2 million in the first quarter which was down about 2.8%. You will recall that we have invested in some preliminary sales infrastructure in focusing a lot of issues that's related to sales. What we are seeing is that a lot of our initial focus on cemetery side and very crude and a lot of the things that are associated with the funeral side of the business really has a longer run rate to get going, but we're confident that we are on our way there. And again our goal is to grow that backlog through manpower and again through refocusing on having councilors in the right places and giving them the right leads and the ability to close that.

Now, switching over to the cemetery operation side, on the cemetery side from a GAAP perspective, our comparable cemetery revenues were down slightly about $4.4 million or 2.6% compared to the prior year. This predominantly is due to one key factor; we had significantly completed construction contracts at Rose Hills last year. We did lot of construction of previously sold inventory that got recognized, and therefore it led to a higher recognition rates as it relates to property revenues. And this more than offset an increase in production of cemetery property revenues of 7 percentage. So, when you think about the pipeline is very strong and this is a GAAP recognition issue, and if you take the construction out from the prior year you would see recognition levels that are equivalent to what we are experiencing this year. So again a healthy first quarter you just don't see necessarily profit line here.

We expect higher completed construction levels particularly in the back half of 2008. And I would again reiterate we are very pleased with our momentum on the sales production side, as we look at our preliminary April results.

Again this has been drilled by... primarily by two things, we have put the right inventory in place to sell and can be recognized once it is sold. And number two we are enhancing and bringing up the quality of our manpower in our sales organization.

Cemetery margins as it relates to that revenue shortfall are pretty predictable. The revenue shortfall fell right through the bottom-line and our cost on the cemetery side really were managed in line with the inflation.

So as you think about the remainder of 2008, we continue to be very, very comfortable with the guidance that we provided you. Keep in mind the tax rate in the first quarter was a little lower than normal and that's going to normalize to an annual rate of 38% throughout the year, Eric is going to little bit more about it but probably you should see a tax rate around 39.5% reaching the subsequent quarter in 2008. The other things to really look for our success shown through the results. Look for continued average revenue per case on the funeral side of equation, we expect that to continue to project the right way, we also would point you to look for further efficiencies, particularly in the back half for the year as it relates to managing our manpower with metrics both on the funeral side and also on cemetery side of our business.

And lastly we would also expect solid momentum, on a cemetery sales production size, in particularly I would point you towards again the, property revenue stream as a lot of the great inventory that we have built over the last few years, we believe, is going to sold in flow-through our revenue stream there.

So with that, very pleased with the quarter, and I would like to turn the call over to Eric Tanzberger, our Chief Financial Officer.

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

Thanks Tom. Tom hit most of the highlights, just heard about our operating performance for the quarter. So I'm not going to reiterate or repeat those but I am going to give you little bit more detail on one income statement item which is namely the tax rate used for the quarter. So I think it's important as you model quarter two, three, and four on the remainder of 2008 understand that.

And let's spend some time on our liquidity and cash flows where we stand today as well as at the end of the quarter, and then we are going to spend some time on the trust balances and the trust performance during the quarter, and I'll pull that data through April as well to help you. We've had a lot of investor questions on the trust performance and we'll address that as well.

So starting off with the tax rate, in our diluted EPS from continuing operations which excluded special items or as we call it our normalize EPS, was $0.20. We did have an effective tax rate of 35% for this quarter, and the 35% the first quarter was lower than our annual guidance, but remember we didn't give you any quarterly guidance. But there are annual guidance was 38% through the year, and we continued to be comfortable with that 38%. But during the quarter we are required by GAAP to include certain discrete tax item in the quarterly period as a benefit rather than in a blended annual effective tax rate.

So as discussed, as I just discussed that's why you have a lower tax rate because of some street items around the quarter that's now 35%. So that translates that in the second, third, and fourth the effective tax rates for continuing operations should be around 39.5% to ride at an overall annual rate of 38%. So you are quarterly model should be adjusted accordingly with the higher expected tax rate in remaining 2008 quarters. But again this won't effect the overall annual model with the 38% annual effective tax rate.

Now shifting gears to liquidity and cash flows. Our cash balance at March 31 was about $132 million which is down from our December 31st cash balance of about $169 million. Going forward to today, today our cash balance is right around $100 million. We've had some significant outflows in terms of cash from December 31st through today.

First of all, in March of 2008, we had $90 million of U.S. Federal cash tax payment and we've told you that it would be about $90 million to $100 million at our guidance call and it ended up being about $90 million which was paid in mid-March to the U.S. Government. We've also had $50 million of cash interest payments through today, the majority of that being about little over $40 million was actually in the first week of April and we've also had $58 million in share repurchase and dividends paid today and that breaks down to about $38 million in share repurchases and $20 million in dividends as we paid two dividend so far in 2008, one in January and one in April.

With all the significant outflows, I just described this whole year to about $200 million we've obviously had very good strong free cash flow during 2008 through today to build our cash balance back up to about $100 million mark. I see this continuing for the rest of 2008. So I see us building cash from now especially into the fall and in October when our next large interest payments are due which are about $40 million.

So with that cash and building our future cash, we will utilize our excess cash for growth project with returns that meaningfully exceed our whack [ph] which is a change from anything else that we said before and we will continue with prudent share repurchases and dividends.

During 2008 as I just said we repurchased 3.1 million shares for approximately $38 million and so you know our current remaining share repurchase authorization from our board stands today at about $180 million.

Our cash flows continue to be strong as well in the first quarter which is like our recent quarters that we've shown you. When adjusting for the $90 million U.S. federal cash tax payment I just described our cash flows are about a $136 million in the first quarter versus $128 million in the first quarter of 2007 and this increase in cash flow was right in line with our internal expectations.

Lastly in the liquidity section of these remarks I want to say that we have $45 million of bonds that were due in March of 2008. We paid off those bonds by utilizing our revolving bank credit facility and you saw that on our balance sheet that at the end of the quarter.

The current interest rate related to that revolving bank credit facility is floating with LIBOR and is currently about 4.5%. So it's a pretty good interest rate for us to have right now. But I do believe we'll refinance that $45 million off the revolving credit line as the appropriate time, but certainly we're going to wait to good favorable capital market conditions before we go ahead and do that.

Thirdly I want talk about the trust funds. We all know the capital markets were very volatile in the first quarter, but our trust funds performed well on a relative basis compared to these overall market. Let me give you some statistics on the trust fund performance in first quarter and now I am going to talk about April because I think we've seen a significant re-bond and our trust fund performance in April.

So for the first quarter, our funeral trust fund was down 5.2%, our cemetery trust fund was down 5.9% and our ECS fund was down 2.8%. Our weighted average total was down 4.8%. And remember there's a significant amount of equities in our asset allocation within these trust funds and that's net down 4.8% compares to a down 9.4% for the S&P 500 index for that equity component.

In April as I mentioned we have seen a rebound. Our funeral trust funds in April were up 3.1%. Our cemetery trust funds were 3.6% and our ECS funds were up 1.7%. So weighted average increase in trust performance of 2.9% in April versus the S&P 500 of 4.9%. So right now what you can see is you see we are pretty diversify and with the S&P 500 down we are pretty muted because of that diversification and we are not down as much, same thing in April when the S&P is up 4.9% we're not as up as much as that because of our diversification as well.

So year-to-date through April all of our trust funds in total are down about 2.1% again through April. The funeral and cemetery preneed trust funds have a significant amount of equity as I just describe. The funeral trust fund has about 40% of an equity mix, the cemetery has about just over 60% of an equity mix and ECF fund is more fixing come in nature and that is about a 23% equity mix as well. So total of about 45% of equity mix. The remaining piece of it is we have about one-third in debt, about 10% in short-term investments in cash of our total investment and then we have also a significant amount of 14% also an alternative investments but as well as in trust and insurance options which are essentially in the state of California and Florida where the trust and investment and insurance policy as well.

As stated on last conference call, specifically talking about our fixed income exposure within the trust, we believe our sub-prime exposure is less than 1%. It's probably about a half of 1% of total trust assets. And we also don't believe through our investigations that we are invested in any other high risk or any type of exotic fixed income securities within these trust loans. They are pretty conservatively invested.

Our footnotes in our quarterly report, our 10-Q, will provide a detail on the marketing cost values of our trust investment, and that should be filed later on today or tomorrow. Because of the capital market performance in the first quarter, we have net unrealized losses within these trust funds of about $118 million, and based on our total assets of $3.3 billion that's about 3.6% of net unrealized losses. We have examined these unrealized losses and again as I said, we mainly attribute them to the market performance in Q1 primarily in the equity markets as I said and do not believe these declines are permanent. And as mentioned earlier, we have also seen the investments rebound to some extent in the month of April as well.

Most importantly in terms of the trust fund earnings that go through our income statement, and again that set the time that merchandise is delivered the services are performed or the ECF earnings are distributed to us, we have not seen any material degradation in these amounts. So, to quantify that our total trust fund income recognized from our same store location in the first quarter income statement was right at about $25 million. That compares to about $26.5 million in the first quarter of 2007, so again no material degradation that affects the income statement related to these trust funds.

So, in closing I want to reiterate what Tom was saying. We are pretty pleased with our first quarter performance, especially with our increased profitability and our cash flows. The basic fundamentals of this business remain unchanged, we have to remember that. It's a very stable industry and we have very stable and consistent cash flows, and we intend to continue to use those cash flows to enhance shareholder value, either through share repurchases or higher return projects to grow our business.

And with that that concludes our prepared remarks. Angela at this time I would like to turn the call back over to you and ask for questions.

Question And Answer

Operator

Thank you, sir. [Operator Instructions]. Gentlemen, your first question will come from the line of Michael Scarangella with Merrill Lynch. Please proceed.

Michael Scarangella - Merrill Lynch

Hey guys. Good morning, nice quarter. Couple of questions. You talked about the relatively good funeral volume this quarter. We would have assumed that some of that was driven by good flu season; you didn't really talk about it. I am just wondering if that's because it's hard for you to quantify or that's just really wasn't a big driver for you in the quarter?

Thomas L. Ryan - President and Chief Executive Officer

Michael, I think you are right and you are... it's hard to quantify. I will say this, rather than describe it as a... we ought to take even hit this way, good flu season, we better not have it. I would say that we finally had a more normalized flu season, what you've really seen over the last couple of years and talking to others that track this, is that there's really kind of dearth of a flu season and I wouldn't call this one necessarily robust one, but back to normal condition.

Michael Scarangella - Merrill Lynch

Okay. So, I guess I am getting at is the down 0.9% I mean in prior quarters, we have seen the down, 3%, 4% and some of that was bad comps from some businesses that you got out of. So, is this marked the first quarter were that annualizes and this more of a normal run rate, or is this abnormally good you think because of the flu and maybe we shouldn't expect it to be this good in the next couple?

Thomas L. Ryan - President and Chief Executive Officer

Well, I think it's hard to predict what's going to actually happen in the marketplace. But let me talk relative to expectations. What I've tried to say in my call comments that in no way that I think this is an approved factor. We think within our relevant marketplace on a national scale, we think those markets are probably up around 1% on top volume. We reported down to one. What that tells you is we're still seeing some rationalization of business within our network, most of that's occurring in the Alderwoods locations because remember we did in the SCI location in 2006 and you saw a lot of it 2007, and now you are going to see a little bit of that here. It's really in pockets, it's pretty easy to identify a lot of times because these are contracts again that people have with various organizations that we found not to be profitable in our action.

So, I would tell you that, you will see a little bit of it and probably the rest of this year, not anything material and as it relates to what's going to happen in the marketplace very, very difficult for us to predict. I will say I think I feel better every quarter that I travel around and see about our ability to compete within our marketplaces. So, I think we are doing more and more things. We've had a lot more time within our marketplaces to have management teams where their strategies are beginning to take hold. So, I feel pretty good about our ability to compete and what can't predict is, what's going to happen as it relates to a number of deaths within the markets.

Michael Scarangella - Merrill Lynch

Okay. Switching to cemetery, I understand how the year-over-year comparison is tough for you because of some of the projects at Rose Hills last year. But just looking at the quarter on its own versus the guidance, it would seem like it's below what a quarterly run rate would be for the segment versus your revenue guidance. The margins also below, pretty meaningful below what your gross margin guidance is for the year, so would you say that you are tracking and I guess if the answer is yes, and that would imply pretty strong growth in revenue and good margins for the rest of the year in cemetery?

Thomas L. Ryan - President and Chief Executive Officer

Yes. I think my general observation would be we do think its tracking. The one thing it's a little bit goofy, gets to recognition on the cemetery side and there's some seasonality and just some thing that happen as an example. We have constructed revenue, so if we sell something before we build it, it falls into a backlog. And prevents the first quarter of this year we had relatively zero, I think we had a couple of hundred thousand dollars worth. Last year, we had $13 million worth of constructed revenue that comes in loans. We still think, I believe it's around somewhere between $15 million and $20 million of constructed revenues, it's going to show up probably in the back half of the year. And so, you can't get too caught up in one quarter necessarily. The better way to evaluate our progress if you ask me, really goes back to sales production because GAAP recognition is going to come and it's going to come typically within a 12- to 18-month period. We are out there selling. And if you look at our sales productions on property alone, it's up over 7% for the quarter and year-over-year. That tells me a very healthy revenue stream. When you take all cemetery sales I think it's up around 3%. So, again while we had expectations to maybe even do better, I'd say in this type of economic environment where a lot of this is preneed sales, we feel very, very good. And I would tell you that by looking at preliminary and close the books on April but preliminary numbers, we're continuing to see momentum there because we have made investments in property, we have made investments in people, we have made investments in training and all those things appear to be coming together unfortunately in a difficult economic environment. But having said that we are very, very pleased with the momentum we've got.

Michael Scarangella - Merrill Lynch

All right. Let me just understand one thing that's going on in the atneed line if I could, and may be this is a silly question, but the atneed on the funeral side is up 2.1% year-over-year; the atneed on the cemetery side is down 3.5%. I don't think the atneed should have anything to do with the construction last year. So, what is that tell me that, people are using you for funerals and doing the burials someplace else?

Thomas L. Ryan - President and Chief Executive Officer

No, I think you got to be careful. Are you looking at... you looking at 2.1% atneed walk-in funerals versus preneed backlogs and things like that. It's really not a very relevant comparison because again I would tell you, we serviced 0.9% less people on the funeral side and from a burial perspective we buried 1% more. And so it really gets back to this GAAP recognition issue and then on the funerals side, how many people came from the backlog versus walking businesses which again doesn't have a lot of relevance because you don't know when the backlog is going to come to you. So that's a real tough comparison to make, I would say, Mike, and if there's a better way to go at your question I'd welcome that.

Michael Scarangella - Merrill Lynch

Okay. You don't want to follow-up to you, maybe it's not the right stat. Let me just finish up on M&A, maybe you can tell us with the Alderwoods integration going so well, is it time for you guys to try to tee up a large acquisition or are there just not any in the marketplace right now and if not what's kind of the small to mid size acquisition environment look like to you right now?

Thomas L. Ryan - President and Chief Executive Officer

Well, I think number one, like we've always said, our strategy is based upon customers that are in line with our values and things that we do great in scale. So, we are always interested in expanding our network and we are currently looking at some deals that are out there in difficult credit environments, we think that's good for us because again we've got cash to do deals, very interested but we are selective about where we want to be, what type of facility. And, so we are active and beating it out there.

I would tell you that the more relevant thing as it relates to creation of value, really gets at getting it to consumer, and we've made a huge investments on the preneed side, on the marketing side, and these are things that are going to take some time. So, we believe that the real value is going to be created in capturing more consumers through our existing network and we like to add that network selectively, but again at the right prices. And so, we are out there looking but I would point you to things are going to move a needle have more to do with the preneed backlog, have more to do with our marketing efforts and we are very confident that we are headed in the right direction.

Michael Scarangella - Merrill Lynch

Andthe deals you are looking at would you characterize them as small, medium or large?

Thomas L. Ryan - President and Chief Executive Officer

Not relative, right. Well, again we look at everything. But at the end of the day, the reason why this industry got trouble when it did, because we tried to force peoples' hands as to when they're ready to sell. As there are approaches seeking out people where the transition period there we need a seller that's ready to sell them for the right reason that matches up with us. What I will tell you is we are out there looking, we are out there talking to people, we are seeing more opportunities than we've probably seen in the last few years. And again particularly with the credit markets to where they are, there is not a lot of folks with the cash to go close the deal. And, so we want them but we want them at the right price and we want the right strategic fit for us.

Michael Scarangella - Merrill Lynch

Okay. Thanks a lot.

Operator

And your next question will come from the line of Sameer Sabharwal with Raymond James & Associates. Please proceed.

Sameer Sabharwal - Raymond James & Associates

Hi thanks. It's Sameer in for John Ransom. Tom quick question on funeral gross margin, it was certainly a lot higher than we would have expected and certainly higher than I think your guidance was for the year as well. Was there anything on the cost side that was more or less non-recurring or alternatively would we expect gross margins to come down over the next couple of quarters?

Thomas L. Ryan - President and Chief Executive Officer

Well, I think if you recall it's a pretty seasonal business and particularly on the funeral side. So, it's a little... you always would expect the first quarter to be much higher than anywhere else, just because of the high fixed cost nature of our business where you get most of the volume there. So, you will see the margins trend more towards our guidance. If there are any unusual item in the first quarter, the only thing I would tell you is the reason why a lot of this occurred is because of the great work our folks did again in transitioning the Alderwoods business and we always said there were synergies, and the synergies were in place by yearend like we said they were. It's flowing through the funeral side, it's flowing through the G&A line item, to some extent it's flowing through the cemetery side, and I would expect that to continue. The other thing I can tell you is we are never done. We are constantly looking for ways to improve, we are constantly looking from metric, ways to run our businesses more efficiently and better for higher customer royalty. And those projects are placed today and particularly we believe there maybe further opportunities that probably won't show themselves to the back half of the year. But we continue to believe that we will see year-over-year improvements in that funeral margin line item. But, again, I would caution you back, first quarter's always the strongest quarter relative to the others.

Sameer Sabharwal - Raymond James & Associates

Okay. That's helpful. Thanks. And just secondly it looks like the consumer hasn't really affected your business that much and mind it can be little bit better than maybe you would have suggested previously. I think you talked about 13% of your business being exposed to some discretionary consumer's spend. Have you done anything differently over the past few months to brace yourself for a weaker consumer environment?

Thomas L. Ryan - President and Chief Executive Officer

I think is the slide we've put out there before and talk to you and you are right on the 13%. We said that the walk-in business both on cemetery and funeral in the trust fund business that comes in generally is not subject to economic swings to the high side or to the low side, and we continue to see that. I always caution people... of course there are people that are economically sensitive, you just don't see people relative to other persons in their life, buying down generally in this space.

The one piece that we believe is a economically sensitive... actually there are two pieces but only one is P&L that is preneed property sales on the cemetery side they report pre-arranged funeral. And the strategy we had in place, and it wasn't in an anticipation of a recession, but it really just had to do with our strategy is that we were in the midst of growing our sales organization.

Of expanding the manpower and giving our manpower better tools and training to be more efficient. And so I think the good news is this, we probably are speaking to a more economic exempted [ph] consumer on the preneed property sales side because of our readiness, because of our folks and their ability to execute we are up 7% in that category. So most economically sensitive piece of our business is up 7% and we are very, very proud of that, very pleased. We expect that momentum to continue and again if the economy turns around then that's very, very good news for us on the back end of '08 and going into '09.

Sameer Sabharwal - Raymond James & Associates

Great thanks, Tom. And Eric just one quick question. What were cash taxes for the quarter excluding the $90 million payment?

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

Excluded the $90 million payment, Sameer, they are only about $5 million that we paid in cash taxes.

Sameer Sabharwal - Raymond James & Associates

Okay, great. And your expectations for the year again excluding the $90 million?

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

Well the way we've guided into and we did it out on an annual basis and when you say when you are building your models expect about 28 to 30% cash tax rate based on whatever your pre-tax income. We think that holds... now there's some timing differences with that $5 million obviously during the quarter, but I think that's going to hold pretty true for the rest of the year.

Sameer Sabharwal - Raymond James & Associates

Great. Thanks, thanks a lot.

Operator

[Operator Instructions]. Your next question will come from a line of Clint Fendley with Davenport. Please proceed.

Clinton Fendley - Davenport

Good morning, guys nice quarter. Tom I guess if we could circle back to one of the earlier questions on the... if I understood you correctly you have about $15 million to $20 million on the cemetery side in the back half of the year. Would we... should we expect that... I mean is it common ever to see delays on that type of work or to have it pulled from the backlog for some reason.

Thomas L. Ryan - President and Chief Executive Officer

Again I think generally no. I mean specifically things can happen you can have bad weather that... if you thought something was going to be constructed in let's say September and it had a lot of rain in the specific place or you had delay in permitting, those things can happen.

What I would tell you is this is a accumulation of a lot of different project that are dispersed over different geographic areas in the US. Our expectation would be in no material relationship this slip any project slip of course it happen from time to time. But generally if it didn't happen this quarter its going to happen the quarter that follows.

Clinton Fendley - Davenport

Okay, thanks, that's helpful. And I guess going back to the funeral margins obviously very great results for the quarter. In the past I know you guys have sort of said we'll probably be at the high end of the guidance range that we said I mean given the fact that some of the success you have had here is due to the Alderwoods synergies. Is a too early to say that we might be above your guidance range for the year?

Thomas L. Ryan - President and Chief Executive Officer

It is but again if you go back to the earnings call we did in, I think it was February what we said is this. If you take our funeral margins we had an assumption that was an array between down 1% volume and down 4% volume and that really was the spread between the funeral margin guidance that we gave.

So your guess is as good as mine I have no idea what's gong to happen in the next nine months. But I will tell you that you will continue to see strong comparable volume which surely would be at the top end of that range if not exceeding. What I can't tell you is whether or not that factor is going to occur or not. We are pretty comfortable with our construction and we don't expect that to be very variable. So a lot of it is going to be driven on funeral volume which if I could predict that would be somewhere else.

Clinton Fendley - Davenport

Okay, thanks guys.

Thomas L. Ryan - President and Chief Executive Officer

Okay.

Operator

And your next question will come from the line of Edward Yruma with JP Morgan. Please proceed.

Edward Yruma - JP Morgan

Hi thanks for taking my question. Could you talk about if you've seen any impact from raw material pricing, when your competitors complained about that and whether that had any negative impact on margins?

Thomas L. Ryan - President and Chief Executive Officer

We I think generally there's is two places we'd see that and on the funeral side of the business, just the way that we've contracted that's supply agreement, we are capped at any inflationary type of pricing. And so we've put that into our expectations there. The... on the cemetery side it's a little more complicated. The best example that I can give you is the product of Braun. The product of Braun that I may be off 5 percentage is 93% copper and so a lot of the people that supply that type of material have come back with inflationary type of pricing issues as it relates to that. Having said that, it's not material. We also believe that that's a small component of how these things get manufactured. So it is something we have to deal with. I wouldn't call it a material issue.

Edward Yruma - JP Morgan

Got you. And in terms of some of these incremental investments you've talked to drive stronger performance in preneed, can you help quantify from a dollar prospective? Is it really meaningful and how do we expect that investment cadence to progress throughout the year?

Thomas L. Ryan - President and Chief Executive Officer

I am sorry could you say that again.

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

Say that again.

Edward Yruma - JP Morgan

Yes, I am just trying to understand some of the investments that you are making to drive preneed performance. Can you help me quantify from a dollar prospective how meaningful these investments are and how that cadence of investment will progress throughout the year?

Thomas L. Ryan - President and Chief Executive Officer

Yes, I mean really a lot of it... it's pretty comprehensive plans, I couldn't call it all, but the first thing we did and this has been really about 12 months ago is to create a centralized sales infrastructure that we have got now the ability to go healthy into the markets. I gave you an example. Previously what we've had is sales management within a market in a lot of any kind of support that they would have would be from that local market presence. So within that marketplace maybe the leadership has a lot of sales experience, doesn't have sales experience, and everybody is very busy. So what we said is let's create sales infrastructure that can apply training where necessary.

And really more of a rifle approach. So instead of handing things out, we can go into a market, help hire the right people, develop the bugs on the ground, create kind of centralized professional training, and by doing that in helping people be more efficient in the sales organization, we're beginning to see some traction. We've also put some incentives in place to help drive good sales behavior and good market behavior.

So, there's a comprehensive approach that we have made within our sales organization, and not say the least on the cemetery side which really helps to the development of tier product inventory. So by investing in high-end inventory that have incredible return... internal rates of return. These types of things can drive higher sales for the entire organization, and that's really why you are seeing it on the cemetery side first because we have the ability to help out very quickly by putting in that inventory which can again help that sales force.

The funeral side is a little more difficult because again we are not able to give them something else to sell, and that's really going back to training, hiring the right folks which takes a little bit more time. So I would tell you that that's generally the type of stuff. There's a lot more to it. But it's really including personnel and applying training and applying a great inventory to market.

Edward Yruma - JP Morgan

Great, thank you very much.

Operator

And you next question will come from the line of Dana Walker Kalmar Investments. Please proceed.

Dana F. Walker - Kalmar Investments

Good morning.

Thomas L. Ryan - President and Chief Executive Officer

Hi.

Dana F. Walker - Kalmar Investments

Hi there. The performance on G&A in the quarter given the ban that you provided for year-over-year which you say that, that puts... where would that put you within your band if you had to be more specific today?

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

Well I think, the first thing, you'd say is that G&A is down about $10 million but most of that $10 million relates to the Alderwoods transition cost in the prior year and we have backed that out in the guidance. But I think that is a little bit heavier in the first quarter and there's reasons for that in terms of some of the parallel issues that we've had for an in-systems and sub, but for the most part I think we are trending right in that range that we talked about in the annual guidance was just about around $19 million or so.

Dana F. Walker - Kalmar Investments

Understood. Another thought on the funeral, with your pricing up 5 plus, to what degree was that driven by improved pricing on cremation versus a normal funeral in term [ph]?

Thomas L. Ryan - President and Chief Executive Officer

I think generally both those rose in line with each other, I don't have this economy. Keep in mind the other thing that's happening by not performing a lot of this very low end, low service cremation business under a $1000, that's going to help rise that average as well. So at 5.7% some of that is going out the business with the bottom end of what we perform. But generally, Eric, you got the supplier out... the cemetery and burial were about the same.

Dana F. Walker - Kalmar Investments

Well in the 4.5%, 5% range.

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

It wasn't that much of difference, Dana, this quarter. They both kind of rose together in the same area. But James to answer your logic, well I think you are going that is, we are seeing an increasing number of the cremation cases that we performed, are choosing services as opposed to transformation, seeing that trend continue, we think again part of that is pricing, part of that is merchandising because I haven't taken any insurance. We are taking people through the options, that would give more and more people collect services with their cremation choices.

Dana F. Walker - Kalmar Investments

Let me know then on one other point, I believe in prior quarters we saw that as you try to equate your funeral volumes to the market, you were either in line to slightly below, and I believe this go-round do you think that you might be somewhat ahead, is that fair?

Thomas L. Ryan - President and Chief Executive Officer

Say that again Dana, I am sorry, couldn't here it.

Dana F. Walker - Kalmar Investments

I want to recall that in prior quarters as you have tried to equate your company's funeral volumes to which you believe has been going on national and you were behind those national indoor end market statistics modestly and I want to recall in earlier... in today's conversation, you said that you think you might be mildly ahead?

Thomas L. Ryan - President and Chief Executive Officer

No... I am sorry, let me answer that for you, I think within the relevant markets in other words markets where we choose to compete we believe we are in line or may be even slightly ahead. Now when you take the national U.S. market, and define that, you would look like that we may be loosing a little market share, but again that market share we are choosing to loose and they are specifically going to be, typically group agreement that were highly discounted within certain of our organization and particularly within our Alderwoods location today.

So I would say to you that within our relevant markets, you stay with us through, we think we are at and maybe even do a little bit better within those relevant market shares.

Dana F. Walker - Kalmar Investments

If that is so then why do you suppose that so today and to what degree do you think you are building some level of traction that would be sustainable?

Thomas L. Ryan - President and Chief Executive Officer

I think lot of it has to do with the merchandising, the training... I mean you go back to dignity university and talk about this and you open the door in terms of performance, it takes time, we got 20,000 employees, it takes... management needs time in a marketplace. We take a person to run a market; for them to see their presence felt, takes time. I think by having a consistent organization allowing people to manage in those marketplaces with the breakthrough that we have. We are beginning to see traction in the... that's why we feel pretty confident about our ability to compete with this consumer and continue to feel confident as we look into 2008 and 2009.

Dana F. Walker - Kalmar Investments

Tom to what degree though is your appraisal muddied by the divestiture program that you've just been through and possible aftereffect of that divesture program.

Thomas L. Ryan - President and Chief Executive Officer

Well again I think the good news about divesture programs is nobody likes to be midst of one because it's draining and if you look at it we really executed that pretty closely. If you look at the number of locations that we are able to divest out I think we're pretty upfront about what businesses that we were going to maintain and your businesses weren't [ph]. So we were glad to be done with that and again, I think you got to stay communicative with your employees... communicative with the network and we are through that now and we are focused on growing our marketplace.

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

Very well thank you.

Operator

And gentlemen, at this time I have no further questions within the queue. I'd now like to turn the conference back over to SCI management for any closing comments.

Thomas L. Ryan - President and Chief Executive Officer

We want to thank you participating in our call today and we look forward to talking to you guys again in about three months. Take care.

Operator

Ladies and gentlemen, we thank you for your participation in today's conference. This does conclude your presentation and you may now disconnect. Have a wonderful day.

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Source: Service Corp. International Q1 2008 Earnings Call Transcript
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