Welcome to the Q4 2014 Service Corporation International Earnings Conference Call. My name is Richard and I will be your operator for today’s call. 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. I will now turn the call over to SCI management. You may now begin.

Good morning. This is Aaron Foley with SCI Investor Relations and I hope everyone is doing well today. We appreciate you taking the time to join us as we discuss our results for the fourth quarter 2014. As usual, we will begin 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 website. In today's comments, we may also refer to certain non-GAAP measures, 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. With that behind us, let's begin with comments from Tom Ryan, SCI's President and CEO.

Thanks, Aaron, and good morning everyone. And thank you for joining us on the call today. I'm going to begin my comments by giving you an overall perspective of what we’ve accomplished in the year 2014. Then I’ll get into the details of the quarter and end with some color on our outlook for the year 2014. So as it relates to the year 2014, I’ll start by speaking directly to my SCI teammates in transition to my fellow shareholders. When we started off this year, things were a little chaotic. We had closed the Stewart transaction a brief eight days earlier. Since then, we’ve on-boarded over 3,400 new teammates, we’ve introduced Dignity products and services to the Stewart businesses, we transitioned them into a new set of systems and processes, we moved the entire organization to a new HR platform, we implemented a new customer relationship management system and a new sales compensation system, we rolled out a new regional original management structure, we sold 90 businesses for over $400 million and we identified an additional 40 million of synergies further enhancing the value of the combination. And by the way team, we grew earnings per shares from 21% to $1.11. We generated over 500 million in adjusted cash flow at a growth rate of 16%. We did all this by focusing on the customer and delivering to them what they wanted and what they needed. We continue to grow comparable preneed sales in the mid to high single digit range both in funeral and in cemetery. We expanded the footprint not just through the Stewart transaction but through several other accretive acquisitions in addition to building new funeral homes as we continue to grow the network. Finally, we continue to leverage our scale to drive efficiencies and enhance…

Good morning everybody. This morning I'm going to start in my usual way by commenting on our cash flow results for the fourth quarter and the full year of 2014, then I'm going to shift and update you on our capital deployment, then as Tom just mentioned, I'd like to talk about the trust structural change that we completed in the fourth quarter and then by -- then end by discussing our forward-looking cash flow outlook for next year. So first to summary of 2014, we finished 2014 on a high note and I'd like to echo Tom's earlier remarks. I'm extremely proud of our nearly 24,000 dedicated and talented associates that drove our outstanding 2014 performance. I want to personally thank each of our associates for their hard work, dedication and most of all, their perseverance during the integration of the Stewart businesses in 2014. So now let's talk about the financial results. Free cash flow generated in 2014, grew $40 million or 12% over 2013, this double digit percentage growth was due to higher earnings and higher cash proceeds that are primarily associated with strong preneed funeral and cemetery sales. This growth was particularly meaningful in light of having approximately $60 million higher combined cash interest and cash tax payments during 2014 compared to the prior year. Our deployment of this free cash flow in 2014 was also impressive and I’ll touch on that in just a moment. So in the fourth quarter, adjusted operating cash flow which again is normalized to exclude the Stewart transition other cost which are defined and reconciled in our press release. This grew 17.5 million or 16.5% to total $123 million. While our cash flow was slightly higher than our internal expectations, it did grow at a slower rate than our normalized…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question on line comes from Chris Rigg from Susquehanna Financial. Please go ahead.

Good morning. Just wanted to better understand sort of the capital deployment, I understand high level message, but I know you're not specifically given EBITDA for this year, but if we think the consensus is somewhere close to correct, is it right way to think about that you're actually going to take up your absolute debt outstanding to maintain a 3.7 times leverage multiple?

Yes, Chris it's definitely a possibility and I think we’ve said that try to say somewhat clearly, we do not think that we’re going to continue to delever with the increase of EBITDA expected from the growth of the base business as well as the additional synergies during 2015. So that EBITDA grows as I said you're already in the range of 3.5 to 3.7, so yes it's a good assumption that over time we will do appropriate actions to essentially keep ourselves within that leverage range.

And then on the volumes in the quarter, I know at times in the past when you’ve had good in period volumes you would say that hey maybe that was a pull forward of some volumes that you would have expected later in the year because of the nature of the volumes i.e. flu or frail elderly, is that sort of the dynamic you saw in the quarter or do you actually think these were market-share gains and you really didn’t see that much from the flu?

Chris its Tom. I think it's more of a former it generally is driven by flu, so I’d say the biggest driver of this we think is flu and again it has a bigger impact on the elderly. I think this flu stream quite honestly was I heard that the is 23% effective, the flu shot this year which is very, very low and the flu that went through was very harmful to the elderly particularly. So I think we do think the 1.8 is driven by flu, having said that we're continuing to see that into January. We saw volumes up for the month of January and so I'd expect that to continue and then again if history tells us we'd expect the summer months to probably be a little light.

Right, okay and then last one I apologize if I missed this but just on the decline in taxes in 2015 relative to earlier guidance, should we expect that to step back up in 2016 or is this sort of a permanent or at least more a multiyear improvement in the tax outlook? Thanks and I'll leave it at that.

No, Chris. I think the way to think of it is, it's more of a onetime event. The guidance that I said in October was about 150 million of cash taxes for the level of income that we're expecting in 2015 based on our models and your models as well. This was something that we dug into that goes way back in time relating to some tax planning strategies at Alderwoods and we're able to take this $25 million NOL benefit during 2015 but it's a onetime event that's how you should think about it.

Thank you. Our next question comes from A.J. Rice from UBS, please go ahead.

Hello, thanks. Sorry for maybe a little background noise but first of all the pick-up in construction revenues in the core obviously helped the cemetery business and the margins, would you say that’s an underlying market pick-up, would you say -- how would you describe what's happening there and is that undoubtedly staying at the same level but should we expect some of that to continue in the '15?

Yes, I think so A.J. this is Tom and the way to think about it, it is somewhat confusing, I'll admit and I think we're trying to make it more clear but historically we've had quarters where our GAAP revenues for instance might be way up but our production is down I mean using an example of GAAP revenues up 10% production up 3% and so we have to talk about the fact that hey we constructed a lot of stuff that was sold in prior periods that got recognized now. What you're beginning to see now because we've probably done a good job of building readily available inventory, you'll notice this time that our sales growth was around 9% or 10% and our GAAP revenues were about 9% or 10%. So, what's really happening is because we're good at getting things constructed on time we're able to sell it and recognize it pretty efficiently. So, this quarter I think the thing to really focus on is that the sales growth was commensurate with the GAAP revenue growth and we'd expect that to continue because we have completed a lot of construction projects that have readily available deliverable property and as long as we're getting 10% down we're going to record that in the income statement. So to your point, we feel good about our ability to sell into next year and I think the recognition will be strong because again we've got a wide array of products to deliver upon those sales.

Okay, last quarter there was quite a bit of discussion about the restructuring of the preneed selling effort in the funeral business not pay commissions anymore in this [terminally ill] M&A contracts, if you just give us a flavor as how that's played out in the quarter, it looks like before preneed funeral sale volumes is pretty good, so it maybe something we'll responded to maintain their commission levels has stepped up but give us your flavor on what you saw?

Sure A.J. I think you hit the nail on the head, it is a process change and again you'll recall from last time to give credit where credit is due, this is something that Stewart did a best practice that we adopted and the concept being that when we have these situations which are tough ones, we're going to instead of writing a contract that's going to go in the backlog and turnaround and come out, we're going to effectively make those arrangements and treat it more as a near at need transaction. You will notice that we still have some contracts that go into the backlog, it isn't 100% implemented because again every situation is going to be slightly different but I think that's going very well and your observation is true to the extent that is a commissionable sale, our sales people are good, they're going to get out there and radiate and drive new sales and that are true preneed that are going to go in the backlog and stay there for some period of time. So we think that's going really well, it's lowering a cost a little bit as it relates to our funeral margins but I think more importantly allowing our sales force to really go out and radiate and drive future market share for the company. So, so far so good and I think that will really lap itself next year and be less of an item we need to talk about.

Okay, then my question would be around the Stewart synergies, it sounds like you guys have run ahead of your original expectations both obviously you raised the synergies guidance couple of times but you're also maybe in timing have realized some sooner so if you could, what do you think the run rate of synergies you're exiting 2014 as? And what is left to capture as you move into 2015?

I think from a run rate perspective if you go back to our guidance, we got about 80 million in cost I think and 20 million in revenue synergy there, is that correct? So I think for the most part the 80s and the run rate. Now, how much got recognized in '14 I don't have in front of me, probably about $50 million there.

50-55, yes.

But as we start off the year with the 80 running for us and the 20s really still something we’ve got to implement and execute on and again that’s remember that’s going to be around getting the average revenue per case on the funeral side up a bit from the packages and the presentations that we do around that, the additional products and services like catering that again we’ve initiated but really haven’t gone full board yet on the Stewart locations. And then on the cemetery side the little bit of a longer opportunity and because remember really our benefit there is going to be around the fact that we’re going to offer a wider array of products and services in those cemeteries so it’s going to take building the inventory that we need and then applying our pricing model to that. And so with more choices raising the satisfaction scores of our customers along with the profitability and how we run those cemeteries. So that’s probably a way 2015 into 2016 type of impact rolling in.

Thank you. Our next question in line comes from Robert Willoughby from Bank of America. Please go ahead.

Tom or Eric, can you, and you may have touched on it briefly Eric in your comment just the need and timing of the trust restructuring something you started a couple of years ago. What drove that? Was there any kind of regulatory or tax pressures to do so or was it just an efficiency situation if it’s just efficiency what kind of savings can we bring from that going forward?

It’s something Robert that was not regulatory it’s something that the trust structure that we had was somewhat convulated as we grew through acquisitions for 40 years and it’s something we were working with our trustees to make it very simple so we have one trustee now over prearranged funeral, one trustee over preneed cemetery and one trustee over the internal care funds. It does have some tax advantages but that’s not primarily why we did it we really did it for this made our back office a lot more efficient as well. We ultimately most of those synergies are included in the Stewart synergies related to this back office because while this project started a couple of years ago we kind of wrapped it in and did it with the Stewart integration as well.

Okay, and are there any other kind of similar kind of good guys out there remaining that we just can’t see that clearly from the outside looking in?

From a cash tax perspective or cemetery…

You guys have always surprised us with the low cash tax rate or an initiative such as this that we do not know is ongoing. Are there other projects underway where we could see something of same comparable size or do you pretty much exhausted that pipeline of internal opportunities?

I think on that Robert we always are looking and I think the way to think about it is this until we tell you differently we’re probably a full cash tax payer around the edge I think we’ll my guess is we’re going to find limited opportunities so lower that a bit but I think of the size and significant as you seen us in the past the big rocks and [indiscernible] and now it’s Little Rock that we’re continuing to wobble down. So we hope to surprise you a little bit but I wouldn’t get -- I don’t believe it’ll be a material amount.

And Tom can you give just a general update on Neptune I know you kind of consolidated the numbers but how should we think about the performance there?

Neptune continues to perform really well Robert we’re excited about as you think about the quarter from a GAAP perspective we’ve grown that the revenues I think in the quarter about almost 7% and so we’d expect to be able to continue to grow that in the mid to high single digit range on the revenue side. And from a margin perspective for the quarter again I think we’re up to 16% for the quarter the fourth quarter is typically lighter I think because of the selling opportunities around the holidays are more difficult. So for the year now our margins are approaching 18% and as you’ll recall we’ve bought in that tune I think from our perspective it was high single digit 8%-9% margin. So continued up the margin and this component albeit it’s not a big piece it’s about 6% of our funeral revenue but it’s growing at a mid to high single digit range so very pleased. I want to thank Marco and his team for continuing to drive success there.

Thank you [Operator Instructions]. Our next question in line comes from Mr. John Ransom from Raymond James. Please go ahead.

One kind of picky question what was the year end [Technical Difficulty] versus the average share count for 4Q?

You said share count you broke up John…

Yearend share count versus quarter share count.

We ended the year…

What was the weighted average for the quarter weighted average for the year?

No what I meant was what was the ending share count as of 12/31 versus what we get as the [Multiple Speakers]

300 million shares John.

I’m sorry?

5 was the end of the year and 2-3 is where we did today consulting to the year as I said on the call we probably have just under another 2 million shares that we repurchased after year end.

Okay, thank you. Secondly you guys are doing your first Analyst Day next week, just a little bit of a teaser of what you might be talking about number one and number two and what was the motivation to do it?

Well, let me answer the first one, John, we’re not going to -- you got to show up to see what’s going to happen buddy, it is going to be the big show.

I mean I will be there.

So, I don’t want to give you too much of a teaser but I think one of the things we wanted to do, we’re going to give a more comprehensive deep dive into some of the operations as the company talk specifically to our strategy and how that’s occurring but it's really going to be a bigger deep dive and also allow you guys they have access to more of our management team. We’re going to have I believe five presenters, but even better we’re going to have a larger group of executive management there to mingle with you guys, talk about what we’re doing and give you a real comfort about the people that are doing the work in this company and not just Eric and I which -- I know Eric doesn’t do very much work at all. So, it's important for you guys to see that. But anyways -- and the reason for it is we did a survey of you guys and when I say you guys I mean all our investors some of our bigger ones on both sales side and on the buy side and the feedback was can we see a deeper bench, can we interact with more management, can you take us through some things about cremation and how you guys think about it. So all that we’re going to try to answer all your questions and we’re pretty excited again about the opportunity to talk about it. So that’s a great queue in for its February 17th, it is by invitation only, but it will be webcast and again you’ll find all the relevant information on the website while we’re going through it. So please do show up if you're invited and go on the webcast even if you are not.

And then the last question, I think we’ve talked in the past in a very small way you guys were doing some de novos in addition to your 50 million to 100 million of M&A, is that something that could ever be more sizeable than where it is now?

I think it can be a little more sizeable, again we may go from historically building two or three year to four or five and I can see doing that number gets into the high single-digits a year. But probably it's better to think along those lines John and again things can change. As an example, there are still states out there they don’t allow you to be in the funeral business and the cemetery business, if that would ever change as an example it may open up some opportunities for us to build locations on cemetery where we’re restricted from doing so today. So, I think that type of thing would probably launch a little more aggressive opportunity to invest in capital. But even without that I think it's not a huge part of what we will do, but we’ll begin to look at how we can grow and I think is important we’re going to talk about this on Investor Day the changing consumer environment. There is a lot of people that want some of the same traditions, but there is lot of people who want some different, so as you think about the funeral home of the future we may begin dive into that and try some things in different market. So, yes I think if it is a growth but not a tremendous growth opportunity.

Thank you. [Operator Instructions]. We have a question online from Duncan Brown from Wells Fargo. Please go ahead.

Hey, good morning. Maybe just going back to volumes, I think you said that Stewart legacy funeral volumes were down slightly versus obviously SCI being up a little bit. Anything you can maybe highlight to explain the difference maybe some concerns around Stewart market-share loss or just local market issues?

Yes, I think a lot of is just the geographic footprint, they are not in all the markets that we were in, so if you go into regions or certain states, you’ll see that we had tremendous volume growth in one state and might have been off in another and again allow that’s probably tied to what’s going on with the flu. So, no we didn’t -- there is no discernible issue as it relates to market-share, I think we -- because again they were just slightly down and as you saw we were up 1.8%. So, I think it's just a function of geography.

And my last question is more of a high level question maybe something we’ll learn more about on the 17 to it, seems like the game plan for you all is pretty straightforward, run the business keep leveraging the 3.6, 3.7 range and do some M&A, I guess just where does that leave you with some of your thoughts regarding potential strategic initiatives, obviously the REIT options have been thrown out there before, are those still under consideration or are those potential options tabled for now?

I think the one that we said, we’d always continue to look at the opportunity would potentially be the REIT. There are reasons why the REIT doesn’t work as well, some of which are tax cash cost as it relates to tax, as it relates to capital structure and moving out of there, but there is some obviously tax yield in converting to REIT. The other thing that I think we feel is that as long as we believe our stock is not fully valued it makes sense for us to continue to shrink that equity base. And once you made a conclusion that your stock is fairly value and your opportunities are limited. And now we got to go to a very high yielding dividend payout a REIT might make a lot more sense. So, I'll tell you right now it doesn't make sense but it's something that we'll continually monitor as we get through the strategy of the company but that isn't something that's on front of mine for us today.

And at this we have no further questions, I would like to turn the call back over to SCI management for closing remarks.

Thank you guys again for being on the call and as John already mentioned we've got the Investor Day on the 17th next week. So, we look forward to seeing a lot of you there and getting to join us and take a deeper dive into our business and as well as our strategy that we are going to be executing over the coming years. So, thanks again and have a great weekend and we'll see some of you next week.

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