Welcome to the Q2 2014 Service Corporation International earnings conference call. My name is Adrian, and I will be your operator for today's call. (Operator Instructions) I'll now turn the call over to SCI management. SCI management, you may begin.

Good morning, everyone. This is Debbie Young, Director of Investor Relations at SCI. Thanks for joining us today, as we discuss our results for the second quarter. Before I turn the call over to Tom, let me remind you that the comments made by our management team today will include statements that are not historical and are forward-looking. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in our press release and in our filings with the SEC that are available on our website. In today's comments, we may also refer to certain non-GAAP measurements, such as normalized EPS, adjusted operating cash flow and free cash flow. Reconciliation of these measurements to the appropriate measures calculated in accordance with GAAP is provided on our website and in our press release and 8-K that were filed yesterday. With that out of the way, I'd like to now turn the call over to Tom Ryan, SCI's President and CEO.

Thank you, Debbie, and good morning, everyone. Thanks for joining us on the call today. I'm going to begin my comments by giving you the highlights of the quarter. Then I'll provide some details on the Stewart integration and synergies, including for the first time, our estimate of potential revenue synergies, which we have previously not quantified. These revenue synergies will be in addition to the $80 million of cost and purchasing synergies we've already discussed. Finally, I'll close by giving you some color on our outlook for the back half of 2014. Beginning with an overview of the quarter, we are very pleased to report normalized earnings per share of $0.23, which is an impressive 21% growth over the prior year and in line with internal expectations. Adjusted operating cash flow also grew at solid 27% to approximately $98 million. Our comparable SCI businesses, particularly on the cemetery side had a strong performance during the quarter. Additionally, we benefited from the contribution of the Stewart acquisition, which you'll recall, we closed at the end of 2013. Also during the quarter, with our leverage back to below 4x, we are extremely pleased to report that we returned to our share purchase program, returning more than $59 million to repurchase approximately 3.1 million shares. As it relates to the Federal Trade Commission divestiture process, we are on track to close the majority of the divestitures over the next couple of months. We closed on deals that generated more than $150 million of gross proceeds in the second quarter. And finally, during the quarter, we closed on a large cemetery acquisition in New Castle, Delaware. And therefore, we want to welcome, Lee Hagenbach, his team, in Delaware, our 44th state we now do business in to the SCI family. Now, for an…

Good morning, everybody. I'm going to start this morning by commenting on our cash flow results for the quarter and our outlook for the remainder of 2014; then I'm going to touch on how we deployed our capital to enhance shareholder value during the quarter. So let's start with our cash flow. Our adjusted operating cash flow, and just to remind you, that excludes Stewart transition and other cost as we defined in our press release. This adjusted operating cash flow grew an impressive $21 million or 27% in the second quarter to $98 million, benefiting from incremental cash flows related to the addition of Stewart. These results were ahead of our internal expectations, primarily due to higher cemetery comparable pre-need sales production. Adjusted operating cash flow was able to continue to grow, even in the face of higher anticipated payments for both cash interest and cash taxes, which collectively grew $19 million over the prior-year quarter. Cash interest payments increased $11 million. This was related to the incremental debt associated with the Stewart acquisition. And cash tax payments increased $8 million, and again, both of these figures are in line with our internal expectations. Maintenance and cemetery development CapEx for the quarter came in at approximately $28 million. This was slightly lower than what we anticipated. When you deduct these recurring CapEx items, we calculate our free cash flow for the quarter to be $71 million or $19 million higher than the prior year and above our internal expectations. Now, I want to shift to the outlook, as it relates to cash flow for the remainder of 2014. At the midyear point, adjusted cash flow from operation has grown $30 million or $13%, totaling $262 million, resulting from the earnings growth that Tom has just highlighted as well as…

(Operator Instructions) And we have A.J. Rice from UBS on line with a question.

Maybe a few questions if I could ask. First of all, just to try to make I understand the comments about, obviously the good performance in the cemetery, particularly in the pre-need production area. Is that 11.8% is that legacy SCI or is that the entire business?

A.J., that is legacy SCI pre-need production. So keep in mind there is a component of pre-need and then there is an at-need production for cemetery. So it will grow more like funeral revenue, it's kind of slightly flat or slightly up or down. So 11.8% is pre-need comparable businesses.

And then to think about that as, on the Stewart side, I'm assuming that there is probably not much growth right now, as you're going through integration process, but you made some comments about the back half of the year. Do you think that the pre-need production side, when you -- on the legacy Stewart side, you'll start to be able to grow that in the back half of the year?

We do, A.J. And again, I don't have the numbers in front me. My memory is the first quarter was down for sales for Stewart and we actually saw some cemetery production growth in the Stewart business within the second quarter. Again, I attribute a lot of that to just change management, all the integration, learning new processes, systems, products. So I really think we already have momentum to grow the back half of the year on Stewart. The incremental piece that we are talking about gets to availability of a breadth of product in cemeteries, associated with the appropriate tier pricing, which again is our strategic pricing model. And then, our ability to sell that, that kind of incremental growth that is beyond what I think we could do is probably more of a 2015 issue, but we maybe begin to see that regionally in the back half of the year.

I don't know if there was number of one-time items that I know you're singling out, and obviously should. Are we pretty much down with the Stewart integration costs, the systems integration costs, the deal cost, or is there some residual cash outlay in the third quarter that the company will have to make around these things?

Well, on the deal costs, I think we are pretty much done. We've refinanced the converts and have the capital structure done, but in terms of the integration cost, no. There will be more looking forward. And as the synergies rise, remember they have risen up to $60 million to $100 million. It costs money from an integration standpoint, cash outflows to achieve those synergies. So no, I don't think we're done. And I think we have more to go. Not at the levels that you've seen through the first half of the year, but maybe more like 25% to 50%, a-quarter to half of the levels that you've seen so far year-to-date, A.J.

And then, it's obviously interesting that in the midst of all this, you were able to pull-off an acquisition in Delaware. Is the company actively out there looking for one of those family opportunities to smaller opportunities? And what does the pipeline look like?

I'd say, right now the pipeline looks really good. I rarely see John talk anymore, he's traveling all the time out there beating the bushes. So I would tell you from feedback from John that we're seeing a lot of activity, and again it maybe pent up activity, because of us and Stewart kind of being out in the market for the last year-and-a-half. So we're excited about that. I don't know how long it will last, but we're actually talking to quite a few folks and looking at quite a few sets of numbers.

And the pricing is consistent with some of your other recent smaller deals?

I think that's safe to say, yes.

And our next question comes from Bob Willoughby from Bank of America Merrill Lynch.

You touched on just about everything here. It seems like you're hitting on all cylinders frankly, but just how much upside stem from holding on to some of those divested assets maybe a bit longer. What exactly falls out of the model sequentially from a maybe revenue and EBITDA standpoint?

Well, I don't have revenue in front of me, but I think EBITDA, Bob, is probably close to $4 million from an EBITDA perspective. That was with all of them in there. So you compare that back up against your lost use of those funds, so it is accretive to hold them longer. That's not our intention. We'd like to -- again, I think these businesses are better in the hands of the long-term owners than they are of temporary owners. So we're moving as quickly as we can. But to your point, it's not hurting us from a financial perspective.

And just you mentioned that there is a lower CapEx number out there. What anecdotally isn't being investment, what drove that?

We had some numbers in there in terms of maintenance CapEx for the Stewart facilities and those continue, but I think our original guidance is probably little bit on the conservative side based on the quality of assets that Stewart has during the acquisition. I think that was primarily kind of the change. It's not much of a change, 135-ish down to 125-ish. So we're still going to spend the capital to get it to the Dignity Memorial standards, but the locations are in pretty good shape. As we said all along, the Stewart assets are just great assets.

And you did surprise me with the share repurchase in the second quarter, $59 million, it's a big number. I mean what's a share repo run rate going forward for you?

We'll have to evaluate that in terms of the free cash flow yield in our different metrics, but generally what you saw us do in the second quarter is kind of our opinion. And we have the liquidity. We have the favorable debt maturity profile. And so you'll probably see us stay on that same path during the back half of the year, Bob.

And our next question comes from John Ransom from Raymond James.

Well, everybody got to ask all the good questions, so I am reduced to just thinking about your overall ASP. It's a little bit complicated blending the Stewart into the Service Corp and then thinking about the backlog. But if we were to think about the two to three year trend in ASP, how would you help us think about that, particularly on the funeral side?

You're talking about the walk-in average or the pre-need backlog, John?

I'm talking about blending pre-need and at-need, your overall realized revenue for funeral, including what you bought in your backlog?

I think the way we think about it is this, on the at-need side, we believe every year, again it kind of ties back into what's going on in inflation. But we feel pretty confident that we can experience somewhere in the neighborhood of 2% to 3% increases in average sale. Now, what ends up happening is you've got a cremation mix change that's going to knock that down to probably somewhere between 1.5 to 2 on a blended basis, as the way we think about modeling forward. The nice surprise to me is that I think is changing now, and this would exclude obviously SCI Direct, but if you take the non-core backlog, the core backlog for the first time this year I believe, the pre-need coming out of the backlog is actually higher than the at-need. It's taken a while to catch up for a variety of reasons, but our expectation is that pre-need backlog growth will actually grow at a higher clips. And again, we've already got the mix baked into it right, so that will actually be a little more of a tailwind for us as we think about two to three to five years out.

And then you add on top of that a one-time $20 million reset for Stewart or is $20 million just getting started? Is there more to do down the road, other than the $20 million?

Well, remember the $20 million EBITDA, and remember the $20 million is a mix between funeral and cemetery, so as we think about the impact of the two, we actually believe that the cemetery side will be more impactful on EBITDA growth, the opportunities there than the funeral side. You said it there, John, the average Stewart location wasn't as high an average as us. Now, some of that's geographic. But again, we think some of that is product mix that we sell a higher breadth of product and services and options, which again it can be done through packaging, it can be done through sales training. So we do believe that we'll begin to close that GAAP predominantly related to additional products and services.

And then my other question is, I know you are a metric-driven guy. How real-time do you think you get market share information by market? And how would you look at your market share gains or losses, and I know you focus more on the top, call it 60%, 70% of the market, but how do you think your market share has progressed? And do you think that will -- what do you think the trends look like going out?

John, I guess, first of all, we don't give perfect market share data, it doesn't exist. We have CDC data that's really not very timely. So on a local market basis, everybody that runs a market has their version of market share, and they report to us, and I realize when you self-report, it isn't always the same, isn't always objective. I would tell you, and again, this is Tom's opinion, so there will be people who may differ on this. In 2004, '05, I think it was more in '05, I guess it was in 2005, we switch from term putting more emphasis on service and recognizing that in our pricing strategies versus product. And again, this was done based upon a strategic analysis that we did. We lost the market share, I would say in the lower price points. And so we've been more competitive as it relates to, like you said, a customer that's willing to spend for services and products that we're really good at delivering at. So we clearly lost some market share back then, but again, I'd say, it wasn't the most profitable part of our business. Then as we began to look at strategically why can't we compete more effectively, again at that lower price point. That's when we decided to eventually go to Neptune acquisition. And we competed more aggressively in that price-sensitive consumer, but through the pre-need model, not so much to the at-need model. So I would argue that we may still lose a slight bit of market share of customers that are going down in certain markets. And again, this is a geographic mix, so some times we're up, some times we're down, and we're actually more price competitive in the arena of that that I would call, the price-sensitive cremation consumer. And I think over time, we're going to gain share, because we are the best pre-need seller in that segment. The other thing I would argue is to, we're the best pre-need seller in all segments, and I think we're growing backlog by what we're putting in the pre-need bucket there, and I also believe the demographics will begin to move our way. As we look at into the Harvard study in how we evaluate markets, we know that our consumers have access to healthcare, quality healthcare, and probably have more of an extension on life than some of the other markets, some of those segments that we aren't as pronounced in. So that again is a deferral and at some point it's going to turn. So we got a lot of belief that our market share should begin to move the other way, not aggressively, but in acknowledgement that maybe in years past, we've lost a slight bit of share in certain markets.

And then lastly, any update, you were talking about in terms of your tax mitigation/efforts to look at those efforts. I'm not asking the question, where do not mean that. You've looked at read out data, you've looked at a number of things, is there any thing worth reporting on that front?

Really not in a position yet, John, to report on that. It continues to be under study. And I'll just remind everybody, the lens that we'll evaluate these options through. One, reputation in our communities and with our families is incredibly important to us, particularly in the business as emotional as ours. So I'll just remind you that anything we do, will be first and foremost in our client families minds lined up with what's right for that business. Also, our ability to execute our operational growth strategies, we're excited about what we think we can achieve over the next few years. So any strategy would have to give us some assurance that we'll continue to be able to execute and do that. And finally, it's really about value creation for our long-term shareholder, who will be with us post-transaction. And that's the way, the lens that we're going to look at everything that we do. Also we've got to evaluate things like break-up fees and taxable events, we've got very low basis assets. So there're a lot of things to look at and consider. We're still in the midst of that. We're a lot further along, than we were last time we talked to you, but really nothing new to report other than that.

And our next question comes from Duncan Brown from Wells Fargo.

Just wanted to go back to something you said earlier in connection with the EBITDA associated with assets to be divested. That $4 million number, does that represent assets that there was $4 million of EBITDA contribution in the current quarter?

Yes. It's $4 million in month in this current quarter. Now, remember, that get smaller and smaller as we sell things off. So probably what's left, Duncan, maybe the run rate of the assets are less more like $2.5 million, for a total of 40% of it. But that is, you are correct in the way you're thinking about it.

And then, on the synergy front. The original or the second conversion, $80 million of cost synergies, how much is in the current run rate?

We expect to have about half of that in 2014. And the reality of it is the first chunk of it really didn't come until during this quarter around May of the month, when we really made some significant milestones associated with the integration. So not very much, is the answer to your question.

And then, just lastly from me. Maybe going back to pre-need funeral sales production, is the right way to think about it that sort of the slowdown there is, in your view, entirely related to integration issues or is there anything else worth mentioning there?

It's probably related to integration issues. Again, I will remind you that the average pre-need funeral customers are in their early 70s, and so you really haven't seen the baby boomer impacting that business like you would in cemetery. But additionally, Duncan, I'm glad you mentioned it. Funeral probably has a few more distracting issues than the cemetery side, and it's related to the new products and the training around them. We also had some changes to our insurance sales policies, and when we recognize commissions and how we deal with eminent death type of situations with that. And also if you recall Stewart use Forethought as their insurance provider and we use Assurant. And we currently are using both of those products and it's on a geographic mix, I think that created a little bit of I'd say of a slowdown or confusion. So those things are done now, they're integrated. And so we feel like, the back half of the year we ought to be getting back to levels that we can all be excited about.

And our next question comes from Chris Rigg from Susquehanna International.

This is Frank Lee, on for Chris. Would you be able to provide any color on the piece of earnings in the last two quarters of the year? And is the revenue and cost synergies that will hit in 2014, will those be balance across the last half of the year or will those predominantly fall in the fourth quarter?

We think on the synergy front, obviously as the year goes further, the more. So you're going to get a bigger pop in the fourth quarter, but I'd also say the third quarter will be meaningful. But I think again, like you're pointing out is, it'd be weighted to that fourth quarter as far as synergies go.

And Frank, just to be clear, what Tom is just referring to correctly is on the cost synergy side, because you actually mentioned revenues as well. Revenues are stuff that we've just now are starting to identify. So not much of that probably built into the models in '14, that's really more of a 2015 situation, as we go to achieve the full, our $100 million run rate.

And I will now turn the call back over to SCI management.

Thank everybody for being on the call today. We appreciate the time and the questions. And we look forward to talking to you again in October. Take care. Thank you.