Feb 26, 2009
Executives
Debbie Young - Director of Investor Relations Thomas L. Ryan - President and Chief Executive Officer Eric D.
Tanzberger - Senior Vice President, Chief Financial Officer and Treasurer
Analysts
Chris Rigg - Soleil Securities Clinton Fendley - Davenport & Company Robert Willoughby - Banc of America Securities-Merrill Lynch
Operator
Good day, ladies and gentlemen and welcome to the Fourth Quarter 2008 Service Corporation International Earnings Conference Call. My name is Gina, and I will be your coordinator for today.
At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference.
(Operator Instructions). As a reminder this conference is being recorded for a replay purposes.
I would now like to turn the presentation over to SCI management. Please proceed.
Debbie Young
Good morning, this is Debbie Young, Director of Investor Relations. Thanks for joining us today as we discuss our fourth quarter and year-end results.
With me today Tom Ryan President and CEO and Eric Tanzberger, Chief Financial Officer. After some prepared remarks by management we will be happy to address any questions you may have.
During the call 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 risks and uncertainty that could cause our actual results in the future to differ materially from these forward-looking statements. For further information related to these risks, uncertainties and other matters, please review our periodic filings with the SEC that are available on our website at sci-corp.com In addition, during the call today we may use the terms normalized EPS or normalized operating cash flows.
These are non-GAAP financial terms. For a detailed reconciliation of each of these measures to the appropriate GAAP term please see our press release and 8-K issued yesterday.
With that we will begin with remarks from President and CEO, Tom Ryan.
Thomas L. Ryan
Thank you, Debbie, and thanks everybody for being on the call today. I'm going to start off as usual with an overview of the quarter, which will include both the funeral operations overview and the cemetery operating highlights, and then follow up that by providing some commentary on our outlook for 2009.
To begin with on the overview of the quarter our normalized earning per share we reported $0.09 versus the prior year number of $0.14. While this is disappointing results by our standards, it wasn't unexpected; considering the dismal consumer sentiment, coupled with the dramatic fall of the financial market.
Some positive items to take away from the quarter first of all was our continued strong revenue per funeral service. Absent some Canadian currency conversions and some trust fund income impacts that I'll get into more detail, when we overview the funeral operation.
Secondarily, we were able to maintain our pricing in our atneed cemetery business, which again reflected strong quarter-over-quarter results. And lastly on the positive side we were able to reasonably manage our expenses in this very tough environment that we're operating.
As far as challenges go and there are plenty, the first one that I would address is that we had significantly lower preneed property projection and reduced levels of completed construction revenues for the quarter. Reduction even ascends some one time large sales from third to the fourth quarter of 2007 was down some 18%.
We also saw the challenge significantly reduce levels of cemetery trust fund income. And lastly we experienced lower than anticipated funeral services.
So now I'll turn our attention to funeral operations and provide that overview. Our comparable revenues for the quarter were down just over 3%.
When we break it down our comparable volumes were down 3.8% or just over 2600 calls. Based upon looking at cemetery and tarmac (ph) rates in our cemeteries and feedback from competitors and feedback from vendors, we would have expected our comparable volumes to be down somewhere in the neighborhood of 2.5 to 3.5%.
It's our belief that we're generally in line with the number of deaths that are happening within our marketplace. Additionally our reported comp revenue for funeral service was essentially flat compared to the prior year.
Buried within this variance though there's some very positive news that I'd like to share with. First of all we experienced an unfavorable currency from the dramatic devaluation of the Canadian dollar during the fourth quarter of 2008.
And it impacted our funeral average by some 250 basis points. This has a very limited impact on our income and our cash as the Canadian expenses are similarly reduced.
Without the currency effect, the funeral average increased 2.6%, even with a negative $4.8 million impact from reduced trust fund income. Excluding the trust fund income impact and the currency impact, the average associated with true atneed funerals and the insurance funded preneed going atneed funeral base grew a very respectable 4% for the quarter.
So we continue to see the consumer spending to levels, note significant deterioration in spending patterns in areas that are impacted by the preneed consumer and the market place. Therefore we just take all of this revenue impact, and you drop it to the bottom line our funeral process increased $3.1 million or a 160 basis points despite the decline in revenues and we are able to reduce employee and related costs along with other variable costs to capture the profits that we did.
Now I'll turn quickly to preneed funeral. Remember preneed funeral really has no impact on current EPS and builds a backlog.
So in the face of a very difficult retail environment we are actually very please to report that preneed funeral sales of $93.8 million for the quarter. This was $4.7 million below the prior year quarter or down around almost 5%.
While the number of contracts written were down by some 11% the average contract was still over $5700 and up almost 7%, compared to the fourth quarter of 2007. Again this builds our backlog and bodes well for future revenue stream.
In January we've experienced very similar trends for our preneed funeral production. We're seeing slightly down dollar volume sales which continue to see a strong average and down a little bit more as it relates to numbers of contracts written.
Now I'd like to turn to an overview of our cemetery operations. Our comparable cemetery revenue decreased some $36.3 million or 18.6% in the fourth quarter of 2008 as compared to the fourth quarter of 2007.
There were two major driving factors which led to this reduction. First one is, preneed property sales were lower by some $24 million.
Which did include $10 million in two large sales from the fourth quarter 2007. Excluding these one time large sales the preneed property production was still down some 20%, as consumers pulled back from the discretionary spending.
January preneed property production is down a similar amount as compared to the trends in the fourth quarter. The second item which impacted cemetery revenues is the other revenue of line item.
This was lower by some $11 million and is all due to reduced trust fund income, predominantly from the merchandise and service trust, which has a higher equity exposure than the ECS trust and slightly different accounting as well. Cemetery profits were then down $28.4 million, reducing our gross margin percentage to 12.4%.
If you apply a 70% gross margin to the reduced preneed property production and a 100% gross margin to the trust fund income short fall, these variances account for substantially all of the profit short fall. Now I'd like to turn your attention to outlook we provided in the press release related to 2009.
For 2009 we anticipate earning per share to range between $0.26 per share and $0.36 per share. Our operating cash flow should fall between 220 million and $300 million and our maintenance CapEx and cemetery development CapEx should range between 80 million and $90 million; resulting in a free cash flow of somewhere between $130 million to $220 million for the year 2009.
This range of performance assumes a very difficult economic environment in 2009 and makes the following broad assumption. First of all, that comparable funeral volumes are down from the low single digits to the mid single digits.
Secondly, that the average revenue per funeral achieves inflationary increases negated somewhat by declining trust preneed going atneed averages and negative Canadian currency depression (ph). The third item that I would mention is the cemetery property sale will range from higher single digit negative comps to the low teens in negative comps.
Additionally in 2009 we have anticipated stock market returns of ranging from a negative mid single digits into the mid teen negative return. I will also expect that we'll be very focused on expense control and very focused on refusing CapEx spending in anyway if we can.
Also its start our belief that funeral gross margin percentages should dip slightly but begin to approach 2008 levels. While cemetery margins most likely to be in a higher single digits as reduced production, lower trust fund income and lower construction revenues, all items that had very high gross margins would've squeezed on the cemetery gross margin.
That you would expect the funereal business will continue to work through this and be the predictable cash business that we know it is, while cemetery is much more volatile and we would expect it to be again dramatically down as we think about 2009. But lastly in our range of assumptions we've assumed no share repurchase activity for 2009.
As we focus on maintaining liquidity and target EBITDA leverage ratios in the face of declining EBITDA into 2009, and again having to have expectations that this thing could go longer and deeper as we enter 2010. Let me say first that we surely do not enjoy thought of going backwards in 2009.
However, our guidance must reflect the fact we continue to see very difficult economic environment for the consumer and in certain financial markets, coupled with the fact that we are seeing significantly lower number of funeral services in January and early February. Just to give you some color there, in January we're seeing highest single digit comp declines in the number of funerals and seeing similar or more dramatic trends into February.
Fortunately, we believe we can continue to maintain a strong balance sheet by diligently managing the levels and maturity schedule of our debt, maintaining very ample liquidity and generating a healthy stream of excess cash over the coming quarters, even in the face of these unparallel challenges. Just by example today, our free cash flow yield is some 20%, using the mid-point of our guidance.
In addition to that, we're currently yield near 5% in our dividend pay off. So we feel it's a very compelling valuation as it relates to the cash being generated even in this difficult environment.
If by chance, later in the year we see some sustainable improvements and I mean sustainable improvements in our EBITDA and cash flow streams and we can consider taking that excess cash and in investing it in enhanced shareholder value during these very opportunistic times. It's our belief that our business model is sound and when the economy does begin to go forward again; your company will be in a position of strength with a stronger more dynamic sales pipeline facing in aging baby boomer clientele.
This concludes my prepared comments. And I'll now turn the call over to Eric.
Eric D. Tanzberger
Thanks Tom. I am going to briefly discuss our fourth quarter results and then I'm going to separately discuss our 2009 outlook just like Tom did.
But I'm going to concentrate on just four areas for both fourth quarter of '08 and the 2009 outlook. And those areas are the cash flows, the trust funds, our capital allocation considerations and our liquidity profile.
So starting with the fourth quarter of 2008 and starting the first with cash flows, our adjusted cash flows from operation were just under 30 million for the fourth quarter. First compared to the fourth quarter of '07 last year, this was down about $37 million.
This decrease primarily relates to operating income declines around $29 million quarter-over-quarter. Secondly the fourth quarter adjusted cash flow from ops is at the high end of our 20 to $30 million updated guidance range that we released here earlier this month.
But it was well below our original fourth quarter expectations that we discussed on this call back in November. There's a couple of reminders here about this range; first, this range excludes the positive effect of receiving about $91 million in a federal cash tax refund that we received in December of last year.
I also want to tell you that when you think of the level of cash flow from operations in the fourth quarter it is the affected strictly (ph) by the timing of cash interest spent. So we spent about a -- just over a 130 millions of cash interest in 2008 of which 60 million of that 130 million was paid in the fourth quarter of '08.
When we compare our $28 million of cash flow from operation to the $60 million low end of our previous cash flow operations guidance, we have to look at what the factors were that caused the decline. First of all operating income was below our expectations and operated income also included some noncash income items such as bonus accrual adjustments.
The offset preneed production that was below our expectations for items that are deferred into our backlog and does not go through P&L and we also had a slower collection amount in bringing (ph) installment sales, but not to a material degree at all for slower collections. The shift in the trust funds for the quarter as disclosed in the press release, the US trust funds decreased by 12.6% in the fourth quarter and had a total decrease of just over 22% for 2008.
The diversification of the underlying assets certainly helps us, such that you can tell the S&P 500 was down about 37% for 2008. And as a reminder this trust fund performance does not flow through our income statement in an immediate manner.
The unrealized and realized net losses within these trust funds are located to the individual items within these preneed contracts. And then these allocated net losses flow through our income statement as each of these contracts mature through the delivery of merchandise and services.
The trust fund income that was recognized in our income statement was just over 10 million for the fourth quarter and our $83 million for the full year of 2008. On a year-to-date basis the trust fund income declined by a little bit more than $30 million versus 2007 of which 18 million of this decline occurred in the fourth quarter '01.
So, far in January 2009, we are somewhat pleased with our trust fund performance versus the overall market. For January '09, our combined trust funds are down about 1.1%, versus an S&P 500 down about 8.5% for the month of January.
Now shifting to capital allocations; in the fourth quarter, we repurchased well over 10.5 million shares for cash out lays of about $62 million. For the whole year of 2008 we purchased about 17.7 million shares for a little over a 142 million for cash outlays.
Our maintenance capital expenditures and our cemetery development capital expenditures were about 37 million in the fourth quarter while total CapEx for the fourth quarter was just under 46 million. We also paid 45 million during the fourth quarter to retire the outstanding balance on our bank credit facility.
We also retired in January 2009 about $10 million worth of bonds which was done at about 20% discount by purchasing bonds with cash in the open market. Then ending the year and looking at liquidity, our cash balance was about a 128 million at December 31st and today as we speak our cash balance is approximately $150 million.
Along with this cash balance we have $750 million of availability under the bank credit facility and remind you we have no near terms significant debt maturities. We do have about $25 million of bonds maturing in April of this year.
Now I'm going to shift my remarks to 2009 and against stick with the same four subjects; so let's start with cash flows. As stated in the press release we expected our cash flow from operations to be in the range 220 to 300 million for 2009 as Tom also just stated.
Some of the assumptions that we used to develop this cash flow operation include the following; first, the EBITDA performance of the underlying businesses is consistent with our $0.26 to $0.36 EPS range and Tom in his remarks certainly just gave you some color on the drivers associated with that EPS range. From a working capital perspective, our working capital is modeled to be somewhat neutral as a result of continued active working capital management that we have underway and have proven that we can do it in the past.
Customer cash collections are consistently modeled with our expected revenues. So we will have some loss of cash flow from operations which is expected due to less preneed sales production and Tom again gave you those numbers earlier.
We have also modeled some deterioration in our preneed installment cash collection though we have not seen significant declines and we haven't really modeled significant declines related to that either. Related to trust funds; our balance sheet as three line items, amounts about $3 billion related to our preneed trust investments and our customer receivables.
About 2.6 billion of this amount is the actual trust fund amount. However this balance also include cash and insurance products, so only about $2 billion of the financial statement line items are really subject to market risk.
As a reminder our trust funds are affected by the markets performances, you saw that in 2008. But due to our diversification of our underlying investments the market effect is muted on our trust fund performance relative to the stock market.
Now shifting to the trust fund income that we expect in 2009; first of all lets start with the eternal care funds or the cemetery professional care funds. Generally we've have modeled this income to be slightly below 2008 levels and remember this is somewhat of a stable cash flow stream, this is really -- for lack of better words clipping the interest coupons for most of the portfolio.
So there's some way a consisting cash flow stream compared to the merchandise and service drugs. Even though there is a slight dividend component from equity securities in the eternal care funds.
For the preneed funeral and preneed cemetery merchandise and service trust, ours models do assume we will lose an additional 25 to 35% million of trust fund income from the 2008 levels. So let's talk about that.
Most of this decline is the full year effect in 2009 of the un-relied losses in the trust fund that occurred in late 2008 which will flow through the 2009 income statement as contracts mature. Now related to the effect on the 2009 trust fund income resultant from the trust from performance during 2009, we generally believe that for every 1% decline in trust fund performance, it acclaims to about $1.5 million of reduction in trust fund income.
So, now overall you have some inside into how we modeled the trust fund income and it's a difficult process to model this. But the trust fund income will move with the market in 2009 and could also move with the levels and mix of contracts that turn atneed and come out of the backlog.
Now shifting to capital allocations for 2009. We plan to aggressively manage our capital expenditures during the year.
We expect our maintenance CapEx and our cemetery well development CapEx of 80 to $90 million, with total CapEx including some minimal additional CapEx for possible growth. We've demonstrated in the past that we are big believers in share repurchases and we continue to maintain this belief especially at the current trading levels.
But as Tom said, I also want to remind you that there we believe we prudently manage our capital structure to about a 3.5 times net debt to EBITDA leverage ratio. Therefore as we've said its going to be difficult for us to repurchase shares at least in the near term.
So models assume that the fully diluted weighted average shares stay at about 255 million throughout 2009. As mention earlier in the call we've repurchased bonds in the open market, in January.
Our bonds have rallied since these trade in terms of their prices, though we are still very open minded to attract the bond repurchases as we think about our capital allocations in 2009. Last thing I wanted to just leave you with liquidity profile as we see it going forward in 2009.
I have already mentioned that our current cash balance is about $150 million. We have the bank credit facility with the capacity -- open capacity of $250 million.
But most importantly we have very healthy levels of free cash flow in 2009, of 130 to 220 million with the mid point of about 175 million. That produces a very attractive yield in at least the high teens right now as we speak.
There's also a no meaningful debt maturities until November 2011. All of these factors contribute to our belief that we have adequate and substantial liquidity to weather this storm in 2009.
So with that Gina, I think we're going to open it up our investor questions.
Operator
Thank you. (Operator Instructions).
And your first question comes from the line of A.J. Rice with Soleil Securities.
Please proceed.
Chris Rigg - Soleil Securities
Morning it's actually Chris Rigg filling in AJ. Just a quick question on the January and February volumes that you talked about earlier in the call.
I guess --do you view the declines as -- are the aggregate number of debts down, do you think people -- or do you think people are actually looking for cheaper product from competitors?
Thomas Ryan
Hi Chris this is Tom.
Chris Rigg - Soleil Securities
Hi Tom.
Thomas Ryan
Good morning to you. I'll answer that for you.
I think generally obviously we've seen levels of decline that we have not seen in at least a decade. And it's very concerning.
Let me point out a couple of things. One is, if you go back to first quarter of 2008, for the first time in a long time you some semblance of flu.
And if you look at those levels that actually were pretty strong levels for the industry and for us comparing against the number. Number two, we hadn't seen any semblance of a flu this year.
We've diligently checked with suppliers, competitors, we look at all bit notices and markets, acting very-very paranoid I promise you. And at the end of the day what we've concluded is that everyone is experiencing similar levels of decline.
You asked a great question. Are there people that are just going away and my gut feeling on that when is, on the fringe you surely can see some of that its a very difficult time.
But nothing to the levels that we are experiencing our suppliers are experiencing, our competitors are experiencing. So, we really believe that it's predominantly the number of deaths in the history will tell you that that would somewhat self correct as you go throughout 2009 and even into 2010.
Chris Rigg - Soleil Securities
Okay. Okay.
Next question relates to the capital spending. The 80 to 90 million is that sort of a number that you squeeze down for this year and its not really sustainable number going forward.
You're just ramming in some things on a one year basis and you'll have to bring that back up in the future and when we look ahead if you spend 80 to 90 million this year does that mean next year's capital spending is going to have to be higher to makeup for what you didn't spend this year. Sort of the differed maintenance phenomenon?
Eric Tanzberger
Generally on that -- I think if you look at the last couple of years we spent -- and the best way to really look at this is looking at capital spent on a location level, which I know you guys don't see. But when you think about 2007 and 2008 we took on the Alderwoods business.
One of the things we noticed right away was Alderwoods had some differed maintenance. And I would call that standard maintenance as well as cemetery development.
So, what you start doing in '07 and '08, is step up the levels of cemetery CapEx spend as well as maintenance CapEx spend. We were already anticipating that the 100 call it a 130 to $140 million level that you've seen were going to go back to more reasonable level.
I would say a steady state in a normal market is probably somewhat closer to 100 to $110 million. Now let me explain 80 to 90 of what I think the future holds.
Number one, a lot of our symmetry development was focused on the high-end consumer. Based upon the economy right now that's not moving nearly as fast as it historically would.
So, I don't anticipate this year and next year having to build a lot of high-end cemetery inventories. That ought to put some reduction right away as you think about 2009 and 2010.
I don't think -- the second thing I would tell you is, CapEx has a bit of a lag to it. So you think about, in the fourth quarter 2008 we said hey, let's really manage CapEx.
But unfortunately for three, you got projects that are in mid-hammer swing, and you're not going to stop those types of projects, you're going to continue to expand, and you're going to finish the project. So I would expect 2009 levels to manage within the 80 to 90.
And my expectation for 2010 is that the simple replication or maybe even lower. So I think you'll see less projects approved throughout 2009 with the spent we get into 2010.
So keep in mind the lag effect, and I would say watch the economy. As the economy gets better and the consumer begins to spent again at the high end, we may up our cemetery construction accordingly.
Chris Rigg - Soleil Securities
Okay. Great.
And then one maintenance question here. Can you remind just how large the Canadian business is?
Eric Tanzberger
The Canadian business is about 12%, I believe of our overall revenues.
Chris Rigg - Soleil Securities
Okay. Alright.
Great. Thanks a lot.
Operator
Your next question comes from the line of Clint Fendley with Davenport. please proceed.
Clinton Fendley - Davenport & Company
Hi, good morning Tom, Eric and Debbie. First off here Eric, I wondered on the free cash flow guidance, fairly broad range here, are there any tax assumptions that could be affecting the broadness of the range?
Eric Tanzberger
I do think that we'll end up paying some cash taxes, Clint. I think it's a little bit of a move in process right now.
And let me explain to you why; I think generally, we paid $20 million in '08. And I think probably be about 20 to 50 million today that's another wide range for you, I guess.
But we are doing some things to really effect this. First of all, we have expected state tax planning as well that's under way, and we have lower pretax earnings of course that's going to effect it.
And its also, we've made some assumptions on which jurisdiction we'll earn the income this year. So, differences between U.S.
and Canada income and different states also affects that as well. And then lastly, which really under our review, is understanding the effect of the bonus depreciation which is in the new economic stimulus package, that just came out.
So pretty wide range for that as well, but I hope that's help.
Clinton Fendley - Davenport & Company
No. It is, thank you.
And also, just in reading the fine print on your 2009 guidance. Are you guys planning any kind of significant asset dispositions for the year?
Eric Tanzberger
No, we are not, Clint.
Clinton Fendley - Davenport & Company
Okay. And then, at least on a sequential basis, the improvement that we saw in the funeral gross margins, is there anyway to quantify how of that might have been due to just lower preneed commissions for the quarter?
Thomas Ryan
It's a little bit of it. But Clint, keep in mind that, a lot of our sales force now is pretty fixed cost.
We've lots of other variable components. And lot of it's really just to comply with the Department of Labor requirements of getting people to do things doesn't sell in, because for training purposes and alike.
So, we are a lot more fixed than we are variable. So, the minim's amount that would impact that.
Clinton Fendley - Davenport & Company
Okay. Thank you.
And then the final question now, and I'll get out of the queue. On the cemetery side and back to the previous question around some of the larger projects for your customers there.
I mean, how are some of them and how have some of the conversations gone. Are they deferring their plans here or are they moving ahead with smaller plans in light of the current environment.
I mean, any color that you could provide on that segment?
Eric Tanzberger
I think on the cemetery side, you break it into different skews there. At the very high-end you're seeing a lot less activity.
There's just not enough people out there buying the very high-end stuff. I would say, in the more standard customer is continuing to buy, and some of them are sitting on the sidelines.
I think what you're seeing right now -- and again, this is my own feeling, is that people are just shocked. There, everything is happening in the economy over the last four, five months, they're are little bit stalled, and they're trying to decide what to do.
As time goes on, I think they're going to reenter the market and the question is, will they reenter at the same levels or slightly lower levels. And again, I think that's what's good about our strategy by having the tiered-product approach, we've got different types of properties that can meet any consumers need.
And, when the consumer comes back from sitting on the sidelines, we'll continue to ramp our production, where they are going to buy.
Clinton Fendley - Davenport & Company
Great. Thanks guys.
Operator
Your next question comes from the line of Robert Willoughby with Banc of America-Merrill Lynch. Please proceed.
Robert Willoughby - Banc of America Securities-Merrill Lynch
Thank you. Tom or Eric, any change to your philosophy on acquisitions?
I mean, there was a Stewart deal once contemplated here. But do you see given the corrections of evaluations here in the industry softness.
I mean, are the individual rollups the 1Zs and 2Zs kind of vastly more attractive now or are evaluations holding on those transactions?
Thomas Ryan
Bob, I think -- this is Tom, and thanks for your question. Obviously, the Stewart transaction was one that made a lot of sense for us at the time, just in the sense of looking at the combined companies and some of the synergy you could put together.
And we view the world today, we're not really in a acquisition mode like you say, with things happening around us. There are other alternatives that are probably more attractive.
Having said that, there's probably a handful, maybe less than a handful of what I call mark key properties that are sitting out there that someday would make sense to be part of somebody's portfolio including ours. So, we are obviously actively out there listening as deals come by.
But, I hope we've proven to you in the past and I commit to you now that if we look at those types of deals we're always considering the appropriate debt levels for the company liquidity concerns and alternative uses of the cash. But what I would commit to you is, we'd only do a deal, if there was a marketing property and it was at a price that was a great return for our shareholders.
So, I wouldn't say we're actively out there at all. Having said there is a feel that we would definitely entertain discussions if the deal made sense for our shareholders.
Robert Willoughby - Banc of America Securities-Merrill Lynch
And I guess given the economics of your business, the cash flow that you do generate, I mean, why aren't people knocking on your door? I mean how do you guys remain independent, how do you guys remain public?
Thomas Ryan
Well again, I've hear what your question really is, I think we share your view (ph). Our equity we feel like is undervalued, probably a lot of equities are right now, but the uncertainty in the marketplace is causing that to happen.
So I think as the uncertainty lifts and people look at the true dynamics of this business its my belief that they'll go back to more reasonable valuation levels. I think what's keeping people right now is the fact that I would and I am assuming in your question a private equity type buyer, if I am a private equity guy this is a great business, but how low does it go and where's my financing.
It's just a tough market to get the financing in and I'm sure that plays into some of the valuation. But you're point, if the equity, trade at this level for sometime to come when the markets came back, I think it's a real possibility that people are going to look at this good cash business and say how can you have cash flow yields such as this and maintain pricing where the equity sits in that.
Robert Willoughby - Banc of America Securities-Merrill Lynch
And what defenses do you have in place, I mean staggered board all that kinds of stuff?
Eric Tanzberger
We do continue -- we have a staggered board today. We have no force (ph) and fill or anything like that in place.
So I think very limited I would say is the likes to that defense. And again, our goal always is to enhance shareholder value.
So, we'd listen to any, any and every opportunity as it relates to SCI. But all we can do now is focus on the dynamics of the business.
We believe that when the economy gets better, and the consumer wakes up again, and the trust funds begin going north instead of south, this is a very valuable business, particularly as you think about the baby boomers coming, and you think about the channels that we are enhancing and creating, as it relates to reaching out to that consumer. So we are focused on that, generating cash flow and giving cash when we can, back to our stakeholders.
Robert Willoughby - Banc of America Securities-Merrill Lynch
That's great. Thank you.
Eric Tanzberger
Okay.
Operator
(Operator Instructions) And your next question is from the line of Danny Walker from Paramount (ph). Please proceed.
Unidentified Analyst
Good morning. Could you talk about -- Eric, if one looks at the low-end of your prior review towards '09 which was before the world collapsed.
There appears to be about a $60 million EBIT delta, looking at the midpoint of your present range versus the prior low-end of your range. Can you play the attribution game?
Eric Tanzberger
It's the $60 million, the low-end of the cash-flow range on the guidance we gave in November, is that what you are saying?
Unidentified Analyst
I looked at it more from a EPS standpoint, but I presume that they are albeit interchangeable, yes.
Eric Tanzberger
Alright.
Thomas Ryan
Danny, this is Tom. Again I don't think we have a perfect reconciliation for you.
But I think what you are trying to say is, what's changed about our opinion from November to now, to the tune of 60 million. And I'll give you the three categories, and then I don't think I'll try to quantify for you, but I'll give you some guidance on it.
Number one; we have a lower opinion on funeral volumes, today than we would have had in November. Based upon what we saw in January and February.
And that's probably somewhere in the 10 to 15 billion type of degradation, maybe even a little more. Then you should think about cemetery properties sales.
Again, you go back and look at history, through September; we actually were up year-over-year in cemetery productions. You saw our cemetery production fall off, bringing cemetery productions on 18, 20% for the fourth quarter.
We have obviously downed (ph) our opinion about what cemetery production looks like at 2009, that maybe the biggest difference. And then lastly -- again, and this is perfect hindsight, we saw the markets greater in September, October.
And we saw again in November, they kind of flatten out a little better in December. I would tell you, we have a lower opinion about where stock markets ended up into 2008, and now that we've seen it, versus what we thought in November.
So those three things really kind of add up to the entire $50 million delta. And again, as I would prioritize them in value; I would say, cemetery production one, probably trust fund income two; and then lastly a lesser impact or should say, a more pronounced impact from comparable funeral volume loss.
Unidentified Analyst
Tom that's very helpful. The question number two, given that you are active in buying your stock back in Q4 I presume that the revaluation of what your income and your cash flow streams would look like in '09 means that you perhaps wish that you'd held your fire and thus want to wait and see you replenish before you reengage?
Thomas Ryan
Well, I think you'd always wish based on where it was in the fourth quarter versus now that we held our fire so to speak. But, we still think even at that point in time, it was a very prudent investment to invest in our shares.
I think as Tom had mentioned clearly, with the trust fund income and the preneed sale is still what we are doing and trying to take our base case, or best guess on where it's going to land. And then you couple that with managing, the capital structure till about at 3.5 times our net debt to EBITDA leverage ratio, it's just its pretty clear that in the short-term at least, and until we really see it stabilized, it's not going to give us stability to go forward with share repurchases at this point.
We certainly hope that things are covering in '09, and obviously as I've said, even in my prepared remarks, we did believe in share repurchases. But, we have to manage our capital structures well and that's about it.
Unidentified Analyst
You are going to sit half absent -- there seems to be some feedback here. But, absent any change in stock market performance or stability in your underlying operations I presume, you have a discipline where you're going to sit on your hands for six months, if you wouldn't mind filling in that blank?
Eric Tanzberger
Well, we'll have to wait and sit.
Unidentified Analyst
Okay.
Eric Tanzberger
I can't predict the future. We gave you our best guess.
But I'd also want to tell you again in our prepared remarks is, we did a very limited amount of bond repurchases as well. And we're certainly open minded to that at an appropriate discount.
And then there is other uses of cash as well as that Tom just talked about.
Thomas Ryan
And then, I think the real issue like you're getting on the head, this isn't a cash issue. This is the net debt to EBITDA issue.
So, the real question is, how low can you go, right. What's going to happen to EBITDA, and as the function of how bad the consumer gets and how bad the stock market gets; so, to your point and I think I said it in my comments, if we saw a sustainable improvement in the EBITDA and in the cash flow, then I think that affords us the opportunity to begin to look at those types of options to take advantage of them.
What we're doing now is saying hey, it's more important to maintain the appropriate debt levels, net debt levels then buyback the stock, that's our first priority. And once we see that out and then we go to priority two and make money for our shareholders but first and foremost, lets see how low this thing goes.
Let's see it bottom out and lets see this coming out on the other side.
Unidentified Analyst
I'm not passing judgment, I just want to prompt a dialogue. Third question; given that the trusts appeared to be more resilient in January vis-à-vis market performance, was there a realignment of asset allocation within the trust?
Eric Tanzberger
No, there was not. Although we've been studying this very, very diligent in terms of the asset allocation.
The eternal care fund, as I mentioned to you before Dan (ph) has really kind of clipped the fixed income to March. And so, there's not much we would change there, its somewhat stable and somewhat fit (ph).
The funeral preneed merchandise service trust really has a pretty long life to it, and asset allocation as we report that 10 to 12 year line. The cemetery as we continue to study it more and more, has a shorter life related to the markers (ph) being delivered in the services and such.
And so we're looking at doing some adjustments as we speak related to that asset allocation to take that into effect, and we are betting that with some advisors as well as with our Board as we see.
Thomas Ryan
Danny, just adding to that, I think what's important to note is, what Eric's talking about is we didn't change our philosophy as it relates to asset allocation. Having said that the money managers, they run the money, have different styles and like.
What I would tell you is this, generically, is that the whole world fell in the fourth quarter. In other words, everybody got treated equally bad, which began to see probably here in January, is that more quality stocks and not financials, not retailers, people like that, those stocks performed much better relatively to the general market.
And I think what you saw on our portfolios, is that our investment managers were positioned there and that really was the big difference, I think as it relates to our equity returns versus the market equity returns. So, now I predict towards the future, I do think it bodes well to say that our investment managers were in the right spots and the panic of the fourth quarter is probably a little more selective in January and February.
Unidentified Analyst
One should therefore, further intuit that you folks didn't change your manager mix, even if your managers may have changed some of their underlying thinking and actions.
Eric Tanzberger
That's correct, Dan.
Unidentified Analyst
A couple of last quickies here. Given that the cemetery business for the meanwhile is under duress, have you changed your expense planning meaningfully in that part of the business?
Thomas Ryan
We're definitely looking at the levers that we can pull, as it relates to managing fixed cost in cemeteries. And there's a lot of different ways to do that.
Unfortunately they're all kind of around the edges. There's no penance here (ph) there's no magic multiple (ph), So I will tell you, we are managing diligently, the administrative cost, the pension cost, as well as some of trying to a more variable cost as it relates to the selling efforts, and I think you'll see some of that things play out through 2009.
Unidentified Analyst
Finally, Tom, you commented about funeral volumes in January and February, and how you thought that it was environmental. Do you have a transparent way to look at what cremation volumes might have been and whether there were, even if somewhat better or still under duress?
Thomas Ryan
Well, I think what's hard to see is, if you look at our business, we don't see a lot of dramatic change in our cremation mix. Having said that, if you think about our strategy, we are not chasing the very low-end cremation (ph) consumer.
So if someone lets say, jumps out of cremation service into direct disposition, or burial to direct disposition. We are not going to see it in our mix.
Its somewhere else. And its also probably none of the supplier move.
If you are a casket manufacturer or a marker manufacturer, that customer isn't coming to you either. So it's a little tricky on a real time basis to know it.
Further we get to any seed data, unfortunately its about two years old by the time its accurate. So, its our belief based on de facts of our people in the field, and that clearly you are seeing some people go into that direct position, but its not some dramatic move into that category.
Unidentified Analyst
So, I assume if funerals are down, you don't believe that cremation volumes are up, at least in the early part of this year?
Thomas Ryan
No, I do think they're up. I guess, what I am saying is, they are down so much that I don't think, the mother (ph) of all of it is related to cremation.
I think most of it is lower number of debt, coupled with a little bit of what you are saying which is cremation mix change into that category. Its clearly, economy is tough; you get somebody on the fringe they will spin down.
I think what we are trying to say is, there's still -- to use an analogy when people talk about mortgages, 8% of the people are defaulting under mortgages; 92% are negative currently. It's not a perfect analogy, but I would tell you that there's a lot of people that still value traditional funeral service.
Traditional moralization, and we believe that's going to continue to happen. On the fringe will people convert, absolutely.
Tough economic times, I think it's crazy to think they won't.
Unidentified Analyst
Thank you for your responses.
Thomas Ryan
Okay.
Operator
Your next question comes from the line up Nicholas Jameson (ph) with Raymond James and Associates. Please proceed.
Unidentified Analyst
Hi guys, just quick question on your professional characters, one of your peers had a pre-funding issue and just wanted your thoughts on what have your lawyers seen with your trust portfolio, and do you have any intention to use some cash to increase that, the trust level? Thanks.
Eric Tanzberger
Hi Nick. I mean, certainly, we've looked at it in very much detail.
And I'll tell you that there is different state laws, and it's not black and white either. But, right now, I would leave you with saying that there is possibility that we may need to fund some of these trust funds.
Because of these losses in the future. But, right now, very clearly our position is that we do not believe that this amount would be material.
Unidentified Analyst
Okay. Thank you very much.
Operator
(Operator Instructions). Our next question comes from the line of David Cummin (ph) from JP Morgan.
Please proceed.
Unidentified Analyst
Yes, thanks. I had two sort of general lined questions; one is on CapEx.
I think I heard you right in saying that 2010 could even be a little lower still versus 2009? And, could you just comment on that short of in the context of the 100 to 110 million steady state observation as well?
Thomas Ryan
Sure Dave, its Tom. Again, I think the 100 to 110 was where we had told you before 2008 economic crisis did.
With that, run rate would have been is a healthy build of cemetery inventory at the high-end coupled with normal maintenance CapEx spending will put you in that type of range. So, what I'm telling you today is its 80 to 90, because we don't see any need to build a bunch of high-end property right now.
We're going to -- we've got enough to last us since its not moving as quickly as we'd like. As it relates to 2010, I guess what I'm telling you is, it'd be easier to get the bottom-end to that 80 to 90 in 2010 than 2009.
And the reason for that is just the whole approval process.
Unidentified Analyst
I got it, this is the mid hammer swing stuff, alright, okay.
Thomas Ryan
Yeah. I mean obviously on the maintenance CapEx, it's a little quicker.
If you think about cemetery development, you have to get zoning, you have to get all sorts of things, so those projects don't stop. And we're not going to initiate a lot of them in 2009, so we don't see a need to do so.
Unidentified Analyst
So you've got enough high-end cemetery inventory to last five, 10, 15 years type of thing?.
Eric Tanzberger
Well, it depends on the economy. We hope it won't last very long because I mean if the economy comes back.
But, to your example, if we're not buying any, yeah we've got plenty of it. And so we'll just wait and see.
Unidentified Analyst
Alright. And then also could you just remind me the way you do look at free cash flow yield, is that sort of net plus noncash items minus a maintenance level of CapEx or just net plus noncash items and do you have a hurdle rate, is that sort of a 12 month look forward hurdle rate versus stock repurchase?
Thomas Ryan
Yeah, when we look at yeah, 12 month look forward and by quarter, and then we look at free cash flow as cash flow from ops, minus maintenance CapEx, minus cemetery development CapEx. And that number to us is free cash flow that we can either build a new care (ph) home, buy something, buyback our debt, buyback our stock.
So, that's how we view internally free cash flow. And if you take that number divided by the number of shares, there is a free cash flow per share yield and what we're saying is, using the midpoint that would tell you we're around 18%, 19%, 20% depending on how you change your midpoint.
Unidentified Analyst
And is there sort of a hurdle rate that -- I mean I would have thought anything north of 15% to 18% would be pretty interesting?
Eric Tanzberger
It absolutely is. I think on an after-tax basis, those are the types of returns that we see is very attractive.
Unidentified Analyst
Okay, I appreciate it thank you.
Operator
Due to time allowed that concludes the Q&A session. I'll now turn it back to management for closing statements.
Thomas Ryan
Well, thanks everybody again for participating on the call. We look forward to talking you guys again which I guess would be early May.
Thanks again and have a great week.
Operator
Thank you ladies and gentlemen for your participation in today's conference. This concludes the presentation.
You may now disconnect. Have a great day.