Welcome to the Q1 2015 Service Corporation International Earnings Conference Call. My name is Elsa 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.

Hi and good morning. This is Debbie Young, Director of Investor Relations at SCI. We appreciate you taking the time this morning to join us as we discuss our results for the first quarter. As usual, I 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 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 behind us, let’s begin with comments from Tom Ryan, SCI’s President and CEO.

Thank you, Debbie and good morning everyone and thanks for joining us on the call today. As you saw on our press release yesterday, we are off to a great start in 2015 with an outstanding performance in the first quarter. Normalized earnings per share grew an impressive 14.3% to $0.32 per share. We are proud to report that this is the fourth consecutive quarter of double-digit earnings per share growth. This growth is even more impressive when you consider the $0.03 per share headwind we overcame from losing the contribution of the divested properties from the Stewart combination. Excluding the impact of these divestitures, our growth would have been 28%. Overall, we had very strong performances in both funeral and cemetery segments. Additionally, lower interest expense and lower share count helped to offset increased overhead expenses as we expanded our support capacity to match the larger portfolio of businesses created from the Stewart transaction. Let me mention a few other highlights of the quarter. Our adjusted cash flow from operations grew an impressive $34 million, or 21% over the prior year. Also during the quarter, we acquired various properties, which we expect will add approximately $13 million in annual revenue. Accordingly, I would like to welcome the employees of these prestigious businesses to the SCI and Dignity family. Finally and perhaps most importantly to you, we continue to deliver on our commitment to return capital to our shareholders, with share repurchases and dividends totaling nearly $94 million during the first quarter of 2015. Now, for a deeper dive into funeral operations for the quarter. The results of our comparable funeral segment, which now includes the Stewart operations, came in slightly higher than our expectations for the quarter due to higher than anticipated funeral volume. We were well positioned to…

Good morning, everybody. As usual, this morning, I will walk you through the details of the first quarter cash flow performance as well as our 2015 outlook and then I would like to highlight some of the capital deployment that we did for the quarter. So, let’s start with our cash flow performance. As everybody has probably seen by now in yesterday’s press release, our adjusted operating cash flow in the quarter was very strong, growing $34 million, or 21% over the prior year to a total amount of $198 million. This exceeded our expectations. This was accomplished despite contributions from FTC divested properties in 2014 that did not benefit us in the first quarter of 2015 and we estimate that cash flow impact to be about $10 million to $12 million difference quarter-over-quarter. Cash flow growth during the quarter was predominantly driven by higher cash receipts from improved operating performance, lower cash taxes and interest and improved preneed funeral and cemetery collections. So, let me give you a little bit more color on that. First, our cash receipts during the quarter were higher due to cash collections increasing from the strong funeral case volume activity that we have experienced starting back in December 2014 through this quarter. Our cash interest payments also declined by about $3 million. This was in line with our expectations as we continue to pay the required amortization of our term loan from the Stewart transaction. Next, our cash tax payments during the quarter also dropped by almost $11 million over the prior year quarter and came in lower than we expected. That being said, we still anticipate our full year cash tax payments we previously communicated to remain unchanged and I am going to give you a little bit more color to that in…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And we have our first question from Chris Rigg from Susquehanna. Chris, your line is now open.

Hi, good morning guys. Just wanted to ask about M&A, I think I should be – should we be thinking about the M&A in the first quarter is about $46 million, not the $30 ish million that’s in the cash flow statement. And then with that, that’s basically the low end of your target range for the year, so how do you feel about transactions over the balance of 2015? Thanks.

Yes. First Chris, to answer your question that’s the right way to think about it, about $46 million and it would tell me that I would be looking for the higher end of our range as to what we will close, because clearly we have got other transactions in the pipeline. And so we feel really good about the opportunities that are in front of us in 2015, both from acquisition perspective as well as looking at some new build opportunities and continuing to invest in cemetery inventory that these types of returns as good as they are, even outshine share repurchases. So as soon as we can – as much of that as we can get, we will do.

Okay. And then on – with regard to the Stewart synergies, I mean are you sort of run-rating the full amount at this point or is there still some more cost to come out of the deal?

There are still some costs to go. I mean, when you think of the $100 million, we shifted in and announced last quarter that more came in, in 2014 than what we expected. So we expected about – where the run rate was about $55 million coming in, about $35 million will come in, in 2015 and about $10 million in 2016. So you are really not at the full run rate. You will be at the full run rate in 2015, but it’s going to be later in the year and some of that, a very small amount will lop over into 2016 in terms of actually hitting the income statement.

Great. Thanks a lot.

Thank you. Our next question comes from Robert Willoughby from Bank of America Merrill Lynch. Robert, you may go ahead.

Tom and Eric, can you speak to – and Eric you touched on possible refis here I guess, you do have a substantial amount of debt coming due over the next few years and it looks like higher coupon stuff, is there – or how are you thinking about refinancing maybe all of it at some point or what kind of rate arbitrage would you anticipate from that kind of activity?

Without quoting anybody that we have worked with because you have to be careful doing that obviously, publicly. But if you just take where we are trading today and look at where we could refinance, it’s probably similar to the past transaction last year where you could probably do something in the high-4s or low-5s. Now in terms of specifically talking with financial partners in terms of entering the market, we continued to look at that. We have no plans right now to announce, obviously. But in terms of looking at more of a big bang refinancing, what I would point out to you, Robert is that a lot of the near-term stuff still has make whole payments associated with it. And so we are kind of looking at it from an NPV perspective in terms of if interest rates are going to continue to stay at these levels, then every day that goes by that you are not refinancing yet, you are going to have a lower make whole payment ultimately when you do refinance. And you balance that with our liquidity and our desire to clean – have a good clean track record looking forward for 12 months or so of near-term debt maturity profiles to give us the flexibility to have the deployment plans such as dividends and share repurchases and acquisitions that we have described to you. Ultimately, as you get through those make whole payments, you get to some maturities that don’t have those, that have call provisions and that would lead you to be at that time maybe something a little bit bigger. But as of right now that’s how we are balancing it. Balancing the make-whole provisions with it – with an opinion of when do we think interest rates should move. And in that case, you got to probably go sooner rather than later.

Okay. And then on the acquisition side, some of the tax benefits I think you have seen I know my wife routinely sells my house and gets rid of all my possessions regularly, but she rolls it forward into something bigger, with the divestitures that you have done, you got the benefit in what you pay for the deals this past quarter, do you – is that a continuing benefit there, have you redeployed all that benefit as yet or how big is what’s left?

Not as big. I mean when we did strategically is you have a period of time where you can do what you are describing, which is a lifetime exchange and keep the money into some type of escrow account. But at some point, it expires over a certain number of months. And so we were able to utilize that in foreseeing this particular transaction that was very successful for us, but there is not a lot left to do probably in that perspective.

Okay. And Tom, any color, can you tell us what you did acquire funeral homes versus cemeteries locations?

Yes, I think we have got – that are reported in this quarter, I believe is three funeral homes and one cemetery. It’s correct and that’s on the West Coast.

Okay, perfect. Thank you.

Thank you.

Thank you. Our next question is coming from A.J. Rice from UBS. A.J. you may go ahead.

Thanks. Hello everybody. Just a couple of questions if I could, first of all maybe to follow-up on some of the deal-related questions, I guess I can see where you guys [Technical Difficulty] Stewart deals, step back from the mom-and-pop type acquisition market a little bit. And now, you are back in full bore and that maybe what’s going on. But I also wondered, are you also seeing an uptick in available properties, sort of what’s happening in terms of from the seller side out there?

Sure, A.J. I think we are seeing, like you said before, part of it can be timing. When you took Stewart out as the buyer and waited during that FTC waiting period, you took us out of as a buyer. You had a lot of the potential buyers that were getting their balance sheets and financing ready to buy our divestitures. There was truly a low on activity for over a year’s period. And so I think part of this is that pent-up natural transactional flow. Another thing that I just think it’s getting to a time when you think about these businesses and the generations they have been enhanced, we clearly are seeing less and less generational handover, I think as time goes on. And so I think a lot of these businesses are just – it’s the right time for these people to look at diversification and selling the businesses. So we have seen a pickup in activity. I can’t tell you how long that’s going to last, but I would tell you that we are pretty busy right now and the pipeline looks busy through 2015. I hope that continues because we are excited about those opportunities. The other thing I would just point out as we continue to look at opportunities to develop cemetery inventory and diversify our product offerings for consumers and particularly with the bringing on the Stewart businesses, there is ample opportunity to do that and those generate high internal rates of return. We are also looking pretty hard at new builds versus acquisitions and you will probably see a little more activity on that front, both combo facilities that we are building as well as some standalone opportunities. So we see ample opportunity to deploy our cash. We continue to have a great problem, which is generating a lot of cash and deploying it. But I view that as a real opportunity and really, from deploying it for growth, which is our first opportunity, we still are excited about the share price. And it’s still a good opportunity for us to buying those shares. And I think Bob even mentioned, we are thinking about the dividend and growing that over time, because again with the growth rate of the company, we can foresee an opportunity to continue to grow that dividend over the next few years.

Okay. And one other question on the potential acquisitions, are you seeing pricing be relatively constant or valuations relatively constant versus what you have been seeing?

Yes, I don’t think we have seen any dramatic change. I think there is always that bid/ask difference that you got to talk through and understand. And from our perspective, we really look at it from our ability to make a difference and I think we have mentioned this before, the two real strategic opportunities for us are who are the customers and what value do they bring and then what’s the scale opportunity for us. And as those things go up, it affords us the ability to pay a little bit more. So, we see a variety of pricing depending on which market it is, because again we like being in a lot of different markets, but it’s going to change by geography and demographic mix and the like. So, yes, I think we are in the same general ballpark of where we have been and that’s a very comfortable place for us.

Okay. And maybe if I could just ask you on the quarter, I guess, the 4% plus volume increase, I understand the comments about the flu, but I think it’s your third straight quarter now of positive volumes. If you drill down in the quarter, I know a lot of the flu was early in the quarter, late in last quarter, did you see consistency in your case growth year-to-year across the quarter? And I don’t know if there is even early read into your second quarter yet on what you have seen so far?

Yes, A.J. I think, again, for us, I just don’t ever get in the predicting business. It’s too hard to tell with the lack of good data, but to answer your question, it was fairly consistent throughout all three months. I think March was a little bit less than January and February, but they were all solid improvements, both December, January and February being in the, call it, 4% to 5% range and March dropping off slightly. What we are early seeing in April is not that strong as I reported in the first quarter, but still on a relative basis really solid performance. So, it’s really hard to understand. Could some of that be market share? Could some of that be preneed? Surely, it could. And the only reason we caution everyone is history tells us something that if you go back to 2013 we started off about the same way and we ended up slightly down for the year. So, we gave it back in the back half of the year. So, we are just modeling that way. I hope I am wrong. But at this point in time, we would rather have a little more data to support that thesis and that’s why we are keeping the models where we are. I tried to move them up, but Tanzberger wouldn’t let me so we are where we are.

One last question, on the pricing side, you are up 1.1%, but I think you also made the comment that cremation was sort of flattish. I guess, if you don’t have that headwind from the cremation in the quarter, I would thought your pricing might have been a little stronger. Have you drilled down at all to look at that or any commentary on that?

Yes. I mean, we did drill down. I don’t think it’s something that we see as the long-term trend. It is short of our expectation as I think I mentioned in our comments. We would expect it to be a little more. Having said that, I will tell you when we, for whatever reason, when we see kind of a surge in volume, this tends to be the case. And what we have historically seen is that’s generally bounced back when you saw volume lighten up that the average tends to get a little better. We don’t have any – we don’t see something that greatly concerns us. Obviously, anything concerns us if we are going to work at it. But I feel pretty good about the rest of the year. Absent that Canadian currency situation that, again, we forecasted, but I think as the year goes on, particularly next quarter, you will continue to see that kind of currency headwind. But I feel pretty good about where we are. I was kind of surprised by a flat cremation rate quite honestly, but again, that could change quarter-to-quarter as well.

Okay, alright, great. Thanks a lot.

Thank you.

Thank you. Our next question comes from John Ransom from Raymond James.

Hi, just a picky question. What was the share count at the end of the quarter? I know you did a fair amount of buyback, but how did that play out towards the end of the quarter, share count?

It’s about $202 million at the end of the quarter, John and it’s – 202 million shares, excuse me, at the end of the quarter. And we started the year just under 205 million shares.

That’s basic. What about diluted?

Diluted was 207 million and I don’t remember where it started. It was started at like 212 million.

The 207 million, I mean that was your share count during the quarter. So, you are saying the ending share count wasn’t much different than the average share count for the quarter?

Yes. What I am saying is, is that from a shares outstanding, it was about 202 million at the end of the quarter from a diluted perspective to add about 4 million to 5 million of that, let’s call it about 207 million.

Okay. So, what’s the good – is that a good number? What do you think a good share count number is for the second quarter kind of in that range or you think it will – I mean, your buybacks are obviously continuing?

Well, I think as I said before, subsequent to the quarter, we have already started repurchasing shares, about 1 million shares are already repurchased. I would hope that would continue. Now, the other issue is, is that we are starting to get a good amount of option exercises from the overhang as well that’s been a curve being at the stock price that we are and that I can’t predict. But ultimately, we hope to continue, John, as we have shown our track record to continue to whittle it down just like you saw in this quarter from a net basis, it whittled down from 204 million to 202 million.

Okay. And where do you think value – valuations, now that you are back in the mom and pop world, are valuations better or worse than you thought or about the same?

I would say about the same, John. Again, I think people are – there has been enough transactions that have occurred since the downturn that it’s kind of leveled off to an area where people understand. If cemetery business can be slightly different than the funeral business, geographies can be different based on demographics, but it’s falling within acceptable range.

And how many people are competing with you on funeral homes? I know you got your friends in Houston, but do you see anybody else showing up that you are competing against that wasn’t there a couple of years ago?

No. I would say generally, it’s the same group of people and depending on the geography, it could be a local type buyer, but we still continue to see – our goal is to develop relationships with the businesses that, that – so when they come up for sale, they aren’t people we don’t know. And so we continue to see opportunities where people approach us and we may or may not compete on a transaction with someone else, but from time-to-time we do. And I would say it’s generally the same people. There is a few that got created out of this – the merger between SCI and Stewart. The divestiture process created some new consolidators, but again not significant amounts of money. And so they are going to look at opportunities that present themselves in markets that are conducive for them.

Okay. And do you feel as badly about Bob’s wife as I do? I wanted to ask you about – your opinion about that?

Yes, I do. I just hope next time she sells everything that she calls me first.

Alright, thank you.

Okay.

Thank you. Our next question comes from Duncan Brown from Wells Fargo.

On the terminally imminent contract front, how should we think about that going forward, I mean, will that number eventually be zero?

I think the answer is it will never be absolutely zero. It’s kind of a tricky situation, because again we want to take care of the families as best we can. And so in most places, I think we have got a pretty good process to hand off that imminent situation to an at-need arranger that can again handle that contract, but sometimes we don’t have that luxury or that option or it just doesn’t fit the situation. So, we are having to continue to write it. So, I think what you see is the diminishing amount of those contracts being imminent and those are going to be written on trust contracts.

It’s right.

So, we will continue to identify those for you. You should see them trend down, but again, it’s really a customer facing issue and then for us a staffing issue as to how we handle that. At the end of the day, what’s most important is taking care of that family first and foremost. And we think this process is the best way to do it assuming that’s what’s right for the family and we have the capability internally to deal with that.

Okay, that’s helpful. And then I appreciate the disclosure in the press release regarding how much gross profit was lost due to divestitures. I wonder if you can give us that number for Q2, just given that I assume it will be a lower number than we saw in Q1 as divestitures ramped last year?

I think – Debbie is looking up. I think it’s around $6 million. Debbie, is that right?

In total, it would be $6 million.

Yes.

About $3 million, $3.5 million this quarter would be about the same Duncan…

No, you are wrong. It’s 97 [ph] total between cemetery and funeral was the profit, so it’s going to drop from call it $10 million to about $9 million in the second quarter. Eric is talking about earning per share.

I was talking about EPS.

So second quarter is still pretty big because some of the bigger divestitures didn’t occur until late in the second quarter or early third quarter, after the second quarter it drops off significantly. I think it’s down to like $1 million when you get to the third quarter. So another quarter of a little bit of a headwind like Eric said, call it $0.03 rounded off.

Okay, that’s great. Thank you.

Thank you. We have no further questions at this time. I will now turn the call over to the SCI management.

Thank you so much for being on the call with us. We look forward to talking to you, again in late July with our second quarter earnings call. Have a great week.