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1®
Service Corporation International
Merrill Lynch Health Services Investor ConferenceNew York, NYNovember 28, 2006
Service Corporation International
®
Tom RyanPresident and CEO
3®
SCI strengths and investment considerations
Market leader in the death care industry further strengthened by pending acquisition of Alderwoods. Combined company will have
Pro forma revenues of $2.3 billion
Pro forma adjusted EBITDA of $465 million, including estimated synergies of $65M
More than 2,000 funeral homes & cemeteries
Competitive advantage due to size, unparalleled network and national brand strategy
Diverse geographic exposure
Reputation and service excellence
Strong industry fundamentals
Attractive financial profile
4®
Today SCI is well-positioned for profitable growth
LEVERAGEscale and drive operating discipline
APPROACHbusiness by customer segment
MANAGEfootprint of businesses
Profitable growth
Profitable growth
5®
Approach the business by customer segment
Consumer landscape is changing
From products to experience/value
Segment our consumers based upon their needs
Tailor our business operating strategies to consumer segments
Drop our one-size-fits-all approach
Focus resources on most profitable segments
Respond better to changing demographic trends
Funeral Cemetery
Quality/Prestige Premium/Prestige
Customs Conscious Standard
Convenience/Location
Price
Manage footprint
Leverage scale
Customer segmentation
6®
Leverage scale & drive operating discipline
Align pricing strategies with customer segments; centralize and simplify pricing process
Focus pricing on service and cemetery property, our competitive advantages
Implement operating standards
Develop clear yet flexible benchmarks and shared best practices for increased productivity
Focus preneed efforts on right product for right customer
Align incentives with product value to SCI; reward incrementality
Pursue affinity opportunities and more fully utilize our purchasing power
Manage footprint
Leverage scale
Customer segmentation
7®
Manage the footprint
Categorize our current footprint based on customer segmentation model
Target expansion growth differentially focusing on highest return segments
FUNERAL: Target segments that value high quality service/memorialization, our core competency
CEMETERY: Target combos and attractive stand-alones
Prioritize capital spending according to consumer model
Proactive funeral home facility capex to ensure facilities meet consumer expectations
Cemetery maintenance standards based on revenue, life-cycle stage and endowment care trust fund levels
Manage footprint
Leverage scale
Customer segmentation
8®
Alderwoods AcquisitionCompelling transaction
Two largest companies in the North American deathcare industry – 14% market share
Fully consistent with SCI’s long-term strategy
Significant synergies of $60 - $70 million within 18 months
Investment returns meaningfully exceed SCI’s weighted average cost of capital
Accretive to operating cash flow and earnings per share excluding one-time costs
Strong cash flow generation and planned divestitures reduce financial risk
Increased preneed backlog to almost $7 billion enhances long-term revenue stability
Expect to be within desired leveraged ratios by 2008
9®
Alderwoods AcquisitionStrong North American presence
3
32
124
99
44
2
38 306
12
26
20
6
7
20
92
53
27
227
2
44
141
1
26
2649
62
11
18
4
19
9
9
19
13
2
21 10
3
2
4
12
13
3
6
7
19
1
2
3
4
26
1
Funeral Homes
36
Cemeteries
32
10
38
8
11 3
1
2
4
5
4
4
5
9
6
12
33
2
32 5 10
11
3 1 2
3 1
9 1 14
2
5
1
3 5 2
Combination
7
11 3
12 1 3
30
3
4
12 7 1
14 17 2
308
45
4 2
29
10
12
33 3 3
5
7 2
22 1 10
1 Pro forma Revenues and Adj. EBITDA reflects pro forma results for LTM June 30, 2006; includes impact of expected acquisition and divestitures
2 PF LTM Adjusted EBITDA of $399.6mm plus $65mm of synergies
Combined company: 46 States, 8 Canadian provinces, District of Columbia and Puerto Rico
10®
Alderwoods AcquisitionSignificant synergy opportunities
We expect to realize $60 to $70 million within 18 months
Duplicate systems and infrastructure
Management structure duplication
Senior executive and public company costs
Increased purchasing scale
One-time costs to achieve synergies of approximately $60 million
$30-35 million in 2006 and the remainder in 2007
Other one-time costs (financing and other deal costs, legal and accounting costs) of approx $75 million
Includes $25 million of tender fees for SCI and Alderwoods debt
Detailed integration plan in place and integration teams have been very active
11®
SCI Q3 06 highlights
Q3 06 Q3 05 Change
Comparable North America
Funeral
Revenues $258.8 $248.8 4.0%
Gross margin percentage 20.6% 14.5%
Total funeral services performed 51,556 54,791 -5.9%
Average revenue per funeral service $4,848 $4,317 12.3%
Cemetery
Revenues $135.3 $138.9 -2.6%
Gross margin percentage 14.3% 17.1%
Cash Flow and Capital Expenditures
Cash flow from operations (1) $113.7 $68.1 67.0%
Total capital expenditures $22.7 $28.4 -20.1%
(In millions, except funeral services performed, average revenue per funeral service and gross margin percentage)
(1) Includes the receipt and recognition of $10.9M of interest income in Q3 06 from the redemption of convertible preferred equity certificates received in connection with the original disposition of our operations in France. Also there was one additional payroll period (~$18M) in Q3 05 compared to Q3 06.
12®
Near term expectations
Significant focus on integration of Alderwoods
Volume and revenue loss due to planned asset sales, but not expected to impact EBITDA materially
Continued volume loss associated with low priced immediate cremation activities in certain markets
Continued strong increases in funeral averages due to strategic pricing initiatives
Favorable impact from operating staffing metrics
Improvements in cemetery sales production and efficiencies in selling cost metrics
Service Corporation International
®
Eric TanzbergerSenior VP and CFO
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Strong financial position
Expect to be at high end or exceed our guidance ranges for EPS and cash flow from operations
Guidance for EPS of $.30 - $.34 ($.32 - $.36 revised for France distribution)
Guidance for cash flow from operations of $295 - $315 million
Cash on hand at 11/8/06 of approximately $635 million
Debt at 9/30/06 stable at $1.3 billion, with only $30M of current maturities
Build up of net cash balances in near term due to asset sales and cash flows
FTC mandated and other SCI divestitures are anticipated to generate $200 million of proceeds in the near future
Comprehensive review of combined properties after close expected to result in additional divestitures
Quarterly cash dividend increased 20% to $.03 from $.025
15®
Financing in place for Alderwoods transaction
$56
$300
$250
$342
$195
$140
100
200
300
400
$500
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Senior Notes Debentures
Existing Maturity schedule ($ in mm)Existing Maturity schedule ($ in mm)
Pro Forma Maturity schedule ($ in mm)Pro Forma Maturity schedule ($ in mm)
$150
$250 $250$195
$14
$197$250
$300
$200
$560
100
200
300
400
$500
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Existing Senior Notes New Term Loan¹ New Private Placement Debentures New Senior Notes
1 Term loan anticipated to be retired with asset sales proceeds and free cash flowNote: Schedules exclude approx. $21mm in convertible debentures maturing through 2013 and approx. $121mm of other debt consisting primarily of capital leases, mortgage notes and unamortized discounts
16®
Combined company pro forma overview
LTM as of J une 30, 2006
($ mm) SCI Alderwoods Adj. for the Acquisition
Adj. for the Divestitures Pro forma
Revenue $1,709.6 $742.5 ($1.8) ($94.3) $2,356.0 Gross profit 298.0 108.9 (8.4) (13.2) 385.3 Adj. EBITDA1 323.2 92.3 (2.7) (13.2) 399.6 Midpoint of synergies 65.0
Adj. EBITDA with synergies 464.6
1 See definition and calculation of adjusted EBITDA at the end of this presentation.
Initial Leverage RatioInitial Leverage Ratio
Debt at 9/30/06 $1,296
New debt from Alderwoods 850
Tender offer for 2009 notes (145)
Pro forma debt $2,001
Pro forma Debt/Adjusted EBITDA 4.3x
17®
Target 2008E
Target Ratios
Operating cash flow less certain capex1/Interest Expense
>1.5x 2.2x
Net Debt2/Operating cash flow less certain capex
5x to 7x 3.6x
Net Debt/Total Net Capital3 40% to 45% 38%
Note: 2008E assumes no share repurchases or debt re-financings
Target Ratios
1 Cash flows from operations (excluding unusual items) less capital expenditures (excluding expenditures to construct new funeral home facilities and other growth capital)
2 Total debt less cash on hand
3 Net debt (as defined above) plus stockholders’ equity
18®
A bright future ahead
Predominant leader in a stable industry
Significant cash flows, liquidity and financial flexibility
Short-term growth opportunity
Successfully integrating the Alderwoods acquisition
Utilizing more centralization and standardization to take advantage of our scale
Aligning preneed and pricing strategies with customer segments and our competitive advantages
Long-term differential growth opportunity
Tailoring our business approach by customer segment
Footprint expansion in customer segments that we excel
19®
Service Corporation International
Merrill Lynch Health Services Investor ConferenceNew York, NYNovember 28, 2006
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Non-GAAP financial terms: EBITDA, Adjusted EBITDA
“EBITDA” presented in this table represents income from continuing operations plus (i) provision for income taxes, (ii) interest expense, and (iii) depreciation and amortization less (iv) interest income.
“Adjusted EBITDA” presented in this table represents EBITDA further adjusted to reflect the impact of (i) gains and losses on dispositions and impairment charges, (ii) an adjustment for capital leases (described in note (a) below), and (iii) legal expenses related to the acquisition.
We believe EBITDA and Adjusted EBITDA facilitate company to company performance comparisons by removing potential differences caused by variations in capital structure (affecting interest expense), taxation and the age and book depreciation of facilities and equipment (affecting relative depreciation expense), which may vary for different companies for reasons unrelated to general performance or liquidity. Our calculations of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled measures of other companies.
EBITDA and Adjusted EBITDA are not measures of performance or liquidity under GAAP and should not be used in isolation or as a substitute for net income (loss), cash flows from operating activities or other income or cash flow statement data prepared in accordance with GAAP or as a measure of profitability or liquidity.
We have included information concerning EBITDA and Adjusted EBITDA as performance-based analytical tools and you should not consider these measures in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
EBITDA and Adjusted EBITDA do not reflect our current cash expenditure requirements, or future requirements, for capital
expenditures or contractual commitments;
EBITDA and Adjusted EBITDA do not reflect the changes in, or cash requirements for, our working capital needs;
EBITDA and Adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacement; and
Our measure of EBITDA is not necessarily comparable to other similarly titled captions of other companies due to potential
inconsistencies in the methods of calculation.
Because of these limitations, EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as a measure of cash that will be available to us to meet our obligations. You should compensate for these limitations by relying primarily on our GAAP results and using EBITDA only supplementally.
21®
SCI EBITDA reconciliation
For the year ended December 31, Six months ended J une 30,
(Dollars in thousands) 2003 2004 2005 2005 2006
Income (loss from continuing operations before cumulative effect of accounting changes $69,265 $119,670 $55,474 $42,192 $52,614
Provision (benefit) for income taxes 26,402 (7,650) 33,233 27,073 31,282
Interest expense 139,964 119,293 103,733 51,229 53,337
Interest income (6,215) (13,453) (16,706) (7,950) (12,763)
Depreciation and Amortization 152,206 135,142 77,097 37,521 49,526
EBITDA $381,622 $353,002 $252,831 $150,065 $173,996
(Gain) loss on dispositions and impairment charges - net (50,677) (25,797) 26,093 1,213 7,391
Other operating expense 9,004 - - - -
(Gain) loss on early extinguishment of debt (1,315) 16,770 14,258 14,258 -
Adjustment for capital leases1 24,652 27,151 28,430 14,303 -
Adjustment for pre need selling costs2 (68,053) (73,558) - - -
Adjusted EBITDA $295,233 $297,568 $321,612 $179,839 $181,387
The following table provides a reconciliation from income from continuing operations before cumulative effect of accounting changes to EBITDA and Adjusted EBITDA for the periods indicated:
1 Adjustment for capital leases represents the operating lease expense for certain leased transportation equipment. The terms of these leases were amended in 2006 and, based on these amendments, the leases are now classified as capital leases.
2 Effective January 1, 2005, SCI changed its method of accounting for direct selling costs related to the acquisition of preneed funeral and preneed cemetery contracts. The adjustment for preneed selling costs in the respective periods represents the selling costs previously deferred but which are now expensed under SCI’s current accounting policy.
22®
Alderwoods EBITDA reconciliation
53 weeks
ended 52 weeks
ended 52 weeks
ended 24 weeks ended
(Dollars in thousands) J anuary 3,
2004 J anuary 1,
2005 December
31, 2005 J une 18,
2005 J une 17,
2006
Net income (loss) from continuing operations $8,359 $(3,564) $42,861 $26,895 $5,898
Income taxes (6,485) (1,453) 4,815 18,193 7,318
Interest on long-term debt and refinancing costs 76,453 78,079 30,069 14,528 12,949
Depreciation and Amortization 40,222 42,093 44,598 21,095 20,862
EBITDA $118,549 $115,155 $122,343 $80,711 $47,027
Provision (benefit) for asset impairment 5,229 1,787 (1,379) (1,627) -
(Gain) loss on dispositions1 1,056 (3,529) (4,964) (5,447) 80
One time gains in general and administrative expenses2 - - (11,800) (11,800) -
Legal expenses related to the acquisition - - - - 2,800
Adjusted EBITDA $124,834 $113,413 $104,200 $61,837 $49,907
The following table provides a reconciliation from net income (loss) from continuing operations to EBITDA and Adjusted EBITDA for the periods indicated:
1Gain or loss on dispositions is included in other (expense) income — net.
2One-time gains in general and administrative expenses primarily relate to the recovery of a corporate receivable that was previously fully reserved.
23®
Pro forma EBITDA reconciliation
1Adjustment for leases represents the operating lease expense for certain leased transportation equipment. The terms of these leases were amended in 2006 and, based on these amendments, the leases are now classified as capital leases.
The following table provides a reconciliation from income from continuing operations to EBITDA and Adjusted EBITDA:
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