Service Corporation International (

SCI

)

Q1 2011 Earnings Call

April 28, 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

John Ransom – Raymond James

Clinton Fendley – Davenport & Company

Robert Willoughby – Bank of America Merrill Lynch

A.J. Rice – Susquehanna Financial Group

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Service Corporation International Earnings Conference Call. My name is Ragina and I will be your operator today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer. (Operator Instructions)

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I would now like to turn the conference over to SCI management.

Debbie Young

Good morning. This is Debbie Young, Director of Investor Relations at SCI. Thanks for joining us this morning as we talk about our first quarter results.

Let me just briefly read 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 review our periodic filings with the SEC that are available on our website.

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

And with that, I’ll begin with our President and CEO, Tom Ryan.

Thomas L. Ryan

Thank you, Debbie, and thanks everybody for joining us on the call today. I am excited to report that we started off the year with strong results that exceeded both external expectations as well as our internal expectations for earnings per share and for cash.

We reported a normalized earnings per share of $0.17 versus $0.13 in the prior year quarter. This is the growth of $0.04 per share or some 31%. This quarter-over-quarter improvement was primarily driven by four things. First, the acquisition contribution from our Keystone businesses. Remember, we closed Keystone on March 26 of last year, there really wasn't in our result until the second quarter of 2010.

Secondly, positive comparable funeral volume. I never thought I'd say that, but I am, and very proud to say that had a very positive impact on the quarter. The third item was higher cemetery preneed sales production, which again we've seen some trends of that past quarters that continued in the first quarter of this year. And lastly, we had higher trust fund impact.

Now, I am going to shift to talk a little more detail about the funeral operations. In the first quarter, our comparable funeral revenues we reported was $379 million, which is a growth rate of 4.3% or some $15.6 million. This was driven by the same-store volume, which was up 1% for the quarter and this was a trend, which began in the last two months of 2010 and continued really through February of this year. March was a bit softer and we have to believe that this was generally caused by the severe weather we experienced in the winter and actually experiencing right now unfortunately and a dissipated impact on the volumes associated with the stronger flu season.

In Q1, our funeral average grew 1.9%, which takes into account higher trust fund income and a positive Canadian currency effect. Excluding these favorable impacts, we experienced a growth of 0.9% quarter-over-quarter, which was in line with our expectations. This growth in overall average occurred despite the 230 basis points decrease in cremation. This increase is larger than what we typically have seen in any given period, but remember it's only three months. I don't think this is something to overreact to. Keep in mind that last year the cremation rate only grew at 70 basis points.

So this can be volatile and again, we'll continue to monitor, but it did have an impact on this quarter, because while we saw a healthy increase in the burial average this quarter, it was offset as all of the increase in the cremation mix during the quarter really fell to the direct cremation category for us. That put pressure on the overall average. Also aiding the increase in funeral revenue was higher G&A revenue of $5.4 million on increased production as well as a continuing shift to an insurance fund product.

From a profitability standpoint, comparable funeral profits increased $9 million and the margins grew 140 basis points. This is what you'd expect on a revenue increase of $15.6 million or about 60% drops to the bottom line. We managed our cost well and the revenue increases are reflected in the margin, but slightly offset by increased selling costs of $4.2 million from higher preneed production in the current quarter. Remember that the cost recognized immediately in the period incurred, while the revenue is deferred and delivered.

Our reported preneed funeral sales declined 1.2% or roughly $1.5 million for the quarter. Included in these results is a one-time adjustment of $7.3 million to reflect insurance cancellations that occurred in November and December of last year that did not get reported as we transitioned the new system. As this adjustment does not have a GAAP impact, remember insurance funded contracts are even on our balance sheet, we chose to run it through the first quarter period for reporting purposes.

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