Good morning and welcome to the Third Quarter 2014 Service Corporation International Earnings Conference Call. My name is Brandon and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. And I will now turn it over to SCI management. You may now begin.

Good morning. Thank you for taking time to join us today as we discuss our results for the third quarter. This is Debbie Young from Investor Relations at SCI. As usual, I'll begin the call with our customary Safe Harbor language. The comments made by our management team 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 Web-site. 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 Web-site and in our press release and 8-K that were filed yesterday. Alright, so let's get started now with comments from 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 overview of the quarter followed by a preliminary outlook for 2015. So beginning with an overview of the quarter, we're very pleased to report normalized earnings per share of $0.23 for the quarter, which is an impressive 28% growth over the prior year and in line with our internal expectations. Adjusted operating cash flow exceeded our expectations by growing a solid 21% to $123.2 million. Our comparable funeral business performed extremely well during the quarter, delivering a 16.8% increase in profit which exceeded our expectations. Our comparable cemetery business also performed well during the quarter, delivering an 8.3% increase in profit, but fell slightly below our expectations. Additionally, we benefited from the contribution of the Stewart business which performed slightly below our expectations. However, we did accelerate the impact of feed deal synergies beyond what we had anticipated for the quarter. Also during the quarter, we continued with our share repurchase program, investing approximately $70 million to repurchase 3.2 million shares. And finally, we are pleased to report that our Federal Trade Commission divestiture process associated with the Stewart acquisition is substantially complete and the proceeds were in line with our expectations. Eric will talk more about this shortly. Now to an overview of funeral operations for the quarter. Overall our comparable funeral segment, which excludes Stewart, performed very well and ended the quarter ahead of our expectations. When compared to the prior year, third quarter funeral revenues grew by $9.3 million or 2.4%. $6.1 million of the $9.3 million was core revenue growth which is driven by the slight increase in same-store funeral services performed and a 1.5% increase in the sales average. We…

Thank you. Good morning, everybody. I'm going to start by commenting on our stronger than expected cash flow results for the quarter as well as our expectations for the remainder of the year, then I'm going to discuss our focused capital deployment to enhance shareholder value during the quarter, and then finally I'll end with some color on our cash flow outlook as we move forward into 2015. So starting with cash flow, our adjusted operating cash flow, and I'll remind you that excludes Stewart transition and other costs as defined in our press release, this cash flow grew $21 million or more than 20% in the third quarter to a total amount of $123 million. These results were ahead of our internal expectations, primarily due to our strong preneed cash proceeds. Growth in adjusted operating cash flow was achieved despite higher anticipated payments for cash interest and cash taxes, which collectively grew more than $17 million over the prior year quarter. Specifically, cash interest payments increased $13.9 million related to incremental debt associated with the Stewart acquisition, and our recurring cash tax payments increased $3.4 million which was in line with our guidance as well as our expectations. Our maintenance and cemetery development CapEx for the quarter came in at approximately $37 million. This was slightly lower than our expectations but higher than prior year by approximately $9 million, which reflects our incremental investment in our Stewart properties. Deducting these recurring CapEx items, we calculate our free cash flow for the third quarter to be almost $89 million, or about $13 million or 17% higher than the prior year. This again exceeded our internal expectations. In the first nine months of the year, adjusted cash flow from operations has increased $51 million or 15% to a total amount of…

(Operator Instructions) From UBS we have A.J. Rice on the line. Please go ahead.

Maybe first just a point of clarification to Eric's comments on divestiture. So $0.08 of EPS headwind, can you give us a sense of how much revenues are represented from those divestitures?

The contribution in the first – in 2014, A.J., is probably close to call it $28 million of EBITDA, maybe approaching $30 million. So if I back into revenues, I'm probably getting close to $100 million of revenue. That's the way to think about that.

Okay. And then obviously I understand the terminally imminent change, it makes a lot of sense, can you give us a sense of how much benefit that might actually be for you and then if you incorporated that in your guidance, and then is there any backlash or – I mean I assume the sales force was not happy about the commission impact, how are you managing that?

I think, A.J., we choose to look at it from a positive because I think it was really about taking care of these families, number one, and what we wanted to do is we wanted to provide our sales force ways where they can go out and [radiate] (ph) true preneed business. So we view this as kind of a win-win-win, first being we've got a very caring professional that we're handing these people over, they've been taken care of before, but these are folks that are really good at dealing with death upon us or as [indiscernible]. So the customers are being handled very well. Secondly we are freeing up our sales force to get work released which generate higher commissions and compensations for them, and so that's obviously a very powerful thing. And then like you said, we have been burying, and again you'd have to estimate the cost, but about half of the compensation level, so call it a 7% to 8% burden of the face amount, in making those arrangements and paying the counsellors to sit down and take the time to do that. And so that may be now down to call it 2% or 3% based upon the new flow. So you're right, I think as it relates specifically to this business, and we even saw it in the quarter, you should reduce cost to some extent if you annualize this probably $4 million or $5 million year-over-year. Now having said that, I think there's another important thing to say though. Because we're freeing up time for the sales counsellors, our hope is that we are going to generate more business which is going to be at full compensation levels, and so you really got to kind of break it down but we'd like to see the compensation go way up. So that's our anticipation but in your specific instance I think you're right there's probably call it annualized $3 million or $4 million or $5 million type of savings.

Okay. And then, Eric, I know that you laid out the guidance, I just was curious I think you've done a little better or you've raised synergy guidance several times this year, maybe some of that synergy is accelerated into this year from last year, is there any way to call out somehow embedded in your guidance what's the step-up from this year to next year in synergy? At one point I think though we were looking at about $50 million to $55 million being picked up next year in incremental synergies. Is that somehow shifted a little bit or any thoughts about that?

It has shifted A.J. I think that's a fair point that you're making. As we up the guidance from the original level up to the $100 million including revenue synergies, we also made a lot of traction on the integration this year, probably a little bit quicker than what we originally talked about. So originally it was half and half, it was supposed to be about $30 million that were going to hit 2014. I think it's higher than that by about $10 million to $15 million. So that therefore reduced your $55 million by about $10 million to $15 million. So the incremental step-up is probably in the let's call it $40 million to $45 million range as you look at it that way as you just described, and it's not that the synergies aren't there, it's exactly what you described, some of the acceleration is in 2014 and we'll get the full amount in 2015 but less will be the step-up because of the acceleration in '14.

Okay, alright, I'll pass on to others to ask more questions. Thanks a lot.

From Susquehanna International we have Chris Rigg on the line. Please go ahead.

Just on the Stewart business, sounds like you're seeing some volatility there. I was just hoping you could give a sense whether you think you've got your arms around that and maybe just sort of describe some of those issues if you could?

Sure, Chris. I think there really isn't I'd say a lot of volatility. I'm trying to address, break it into funeral and cemetery. I think funeral is looking good. We are seeing some increases in average revenue per case due to our expanded kind of product offerings and widening out what we can put in front of client families. We have seen a little bit of loss of volume to compensate for that, but generally we're in line with expectation when you think of funeral. So now let's shift over to cemetery side. One of the things we said is we thought over a longer period of time we would be able to ramp up production on the Stewart operation. So remember there's three components to that. There is the taking the existing inventory within the cemeteries and broadening the base if you will of tiering the product; secondarily, pricing that new tiered product; and third, selling that product. So the real impact of that as it relates to property, we wouldn't have anticipated until 2015, some even moving to 2016, depending on how quickly we can get construction underway. The good news is, on the cemetery side our production is up in Stewart, and a lot of what it is, is selling items that are not recognizable today. So our production is actually up about 10% to 11%, but basically none of that drops to the bottom line because it's in the deferred bucket. The second item that I talked about, again kind of briefly mentioned, relates to recognition of when we can recognize property merchandise, and I didn't want to get into it because it's a little bit complicated, but cemetery is more difficult than funeral. So we have to physically deliver what we are doing and then…

Okay, great. And then just on the buybacks, I don't think you have them in your guidance, and then more importantly – and this is guidance for '15 – when I look at the last time you guys did sort of an accelerated repurchase program, it was in the immediate afterwards of Alderwoods and you've got 260 somewhat million of cash already in the balance sheet plus what you're going to generate over the next 12 to 18 months. Can you give us sort of your latest thinking on sort of the pace of buybacks over the next year or so?

I think the way to think about it this way, Chris, is I think the midpoint of the 2015 free cash flow guidance is about $315 million. We've got an $80 million worth of dividend we are going to do. We'll do somewhere we believe between $50 million and $100 million in acquisitions, and again we just don't know, right, we hope there's more of them because they're great internal rates of return when they become available, and the balance of those two – and again kind of using my math at the high end of the acquisition, I would say we've got somewhere in the neighborhood of $140 million of free cash flow if we get those acquisitions, plus your $260 million. We like to maintain about $100 million in cash, Eric mentioned that we've got $45 million tax payment. So as I think about, the probability is, we're going to spend somewhere around $250 million give or take on share repurchases over the next year. And I think to use your terminology, we've never done accelerated share repurchase, we just had a lot of cash after the Alderwoods deal. And so we believe we can do this without an accelerated share repurchase, be opportunistic when the stock drops and buy more because again we have such a high level of confidence about where this Company is going in the future. So we'll take advantage of dips and we'll buy more and we'll dial it back as things come closer to fair value which is we believe a ways away at this point.

Okay, and just on what's assumed for next year in the EPS?

I think it would be helpful for everybody, if you take this year's $1.10, okay, and now back out $0.08 that we've identified for you that was contributions from businesses that aren't there anymore. Now we're sitting at, again I'm doing this from my head, $1.02. The midpoint of our guidance is showing you $0.20 of improvement, so call it 20%. $0.12 of that synergies, if you again say computing what Eric just said $40 million to $45 million, that implies an additional $0.08 of improvement beyond the synergies. So knock yourself out and let's pretend that the core grows at 6%. We're going to get an additional $0.02 because we paid down $200 million in debt required, [so even if it is] (ph) 2% debt, so give us $0.01 for that, and then give us a couple of pennies on share buyback because we're going to have incremental share buyback '15 over '14. Now we're sitting at $1.20, $1.30. Now knock it down $0.01 for an increased tax rate that's identified. There's your midpoint. So the real question is will we grow the quarter at 6% or grow the quarter at 8%, grow the quarter at 10%, that's what we've got to figure out, and again we try to give a wide range of guidance because we can't control what volume is going to be, we're going to compete as effectively as we can. We believe there's some upside to cemetery sales that we can achieve if things go our way. So that's the way to think about this. I don't think there's anything too secret in our guidance, it's just that's the business where it is and we're going to deploy cash very wisely and grow this thing, as we've [indiscernible] impact and we'll continue to be impacted over the next 20, 30 years.

(Operator Instructions) From Bank of America Merrill Lynch we have Robert Willoughby on the line. Please go ahead.

Just on the back of that question, just clarify, Eric, you're not assuming any more debt reduction then going forward, we're flat-lined to debt levels at this level?

Yes. As I said, we're right in the middle of 3.6x to 3.7x, Bob, and we anticipate staying at those levels.

Okay. And I didn't see it in the disclosure, maybe you commented on it, but the SCI direct and cremation rate disclosure in the press release, I did not see, is there a reason that's been eliminated or did I just miss it?

The cremation rate is pretty consistent, Bob, as it's always been. We ended the quarter at 51.9% which is 100 basis point increase over the prior year, so very consistent. No reason why we [indiscernible] it – omitted I should say. We will put that back in. SCI direct continues to grow, continues to do well, we just had a lot of Stewart data in the press release but we'll take your comment to heart and under advisement. The preneed production grew 12.4% to just under $30 million and that's really a function kind of split evenly between a 5 or so percent growth in the prearranged funeral volume in terms of the number of contracts and the average as well, kind of 5% to 6% growth. So it continues to be healthy, it continues to be an exciting part of our business.

From UBS we have a follow-up from A.J. Rice. Please go ahead.

I figured I'll just come back and ask a couple of more questions if I could here. Eric, when you talked about being below 3.75x debt to EBITDA and that that gives you more flexibility, can you just expand a little bit on what additional flexibility you have?

A.J., we had what would be characterized as a basket in the banking credit facility world of capital that we could spend which was around $150 million-ish that we could spend related to share repurchases when the Company has a net debt-to-EBITDA calculation north of 3.75. Now that we are below that, there is no specific stipulation as to how we can spend our capital. And so therefore we can continue deploying capital towards share repurchases with nothing specific limiting us below 3.75.

Okay. Tom, you talked about expectations for share repurchase over the next year, what we might think about. I know there's been this discussion about the strategic review, et cetera, and I think you've been orienting yourself towards just redeploying free cash flow towards an ongoing buyback program as opposed to any kind of accelerated program or any of the other things that were mentioned from time to time over the last 18 months. Is there any formal update on any of that, is it pretty definitive now this is the path to go forward with?

A.J., I don't know that formal is the right word but we did evaluate each of those. And I think as we put those through first of all the lens of our client families and our communities, there are certain of these – because of the emotional business that we're in and how reputation is very important, there are certain of these that just don't meet the right criteria for us. There are some that actually work and create some value, but the real I guess test is, when you apply that opportunity against our opportunity to grow like we think we can through continuing to acquire great businesses and redeploying that cash either to integrate businesses or to shrinking the equity base, the higher return is doing what we're doing. I guess you can make a case that leveraging up more could create a little more value, accelerate your shrinking of the equity base, and I think when we weigh that versus running the [indiscernible] and what that could do in a downside scenario, we think the pace we're on is very healthy and very good. So our conclusion is what Eric said, run the Company at 3.6x to 3.7x, be very diligent about how we deploy capital. I think hopefully you guys have seen our diligence to that over the last four or five years. We're big believers in growing in this business and we will invest to do it, and absent opportunities we're also believers that our share price is not truly reflective of the value of the Company. So we'll continue to deploy capital as such.

Okay. Eric, when you were talking about the step-up in cash taxes this year to next year, I guess you mentioned that you'll continue to look for opportunities. I know there were some things that [slowed] (ph) the service down, like they required some long-term due diligence to figure out what you could deploy into that to reduce cash taxes, are you thinking pretty much to run through those and this is a firm number, or you think there's some opportunity to wiggle this away as the year progresses next year?

I answered it was a firm number in 2012 and luckily I was wrong, so there is always hope. But I would tell you it's a little different time, A.J., than what we've had in the past. We did have and utilized that benefit that you just described, we had a hunch that there was some opportunity there within the Stewart business and their deferred tax assets but we essentially were able to get to that and utilize that in 2014. And if you recall, our original guidance was $70 million of cash taxes in '14, it ended up being $40 million, and a lot of that was us doing the work related to the Stewart businesses. That being said, we are focusing, continuing our focus to try to drive some ideas to fruition in terms of continuing to create benefits for our shareholders. We do have a couple of ideas that are going to come to fruition but those are, some of those are already baked into this guidance. There is a little bit of other ideas that we have, that we will continue to look at, but ultimately I do think that it's not going to dramatically move from what I gave to you this morning.

Okay. And then just my last one was on the mom-and-pop acquisitions, I know you talked about $50 million to $100 million going forward. I guess I had the impression that there were some things maybe that might close even between now and year-end and I think you may see about 11 million year to date. Is there some fourth quarter bolus of things that may get closed or is that now really more next year type of opportunities?

There may be something that closes, A.J., but not to the level of that $50 million or $100 million, because again I think a lot of our focus was integrating Stewart in the first half of the year. But I think we do feel good about 2015 and the potential for getting some transactions to close that will allow us to deploy some of that capital into growth opportunities, which again we'd be excited to do.

Okay, great. Alright, thanks a lot.

We have no further questions at this time. We will now turn it back to SCI management for final remarks.

Thank you everyone for joining us on the call today. We look forward to talking to you again in 2015. Take care.

Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.