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Stewart Enterprises (NASDAQ:STEI)

Q4 2012 Earnings Call

December 18, 2012 11:00 am ET

Executives

Martin R. de Laurèal - Senior Vice President of Corporate Development & Investor Relations

Thomas M. Kitchen - Chief Executive Officer, President, Director and Member of Investment Committee

Lewis J. Derbes - Chief Financial Officer, Senior Vice President and Treasurer

Analysts

Albert J. Rice - UBS Investment Bank, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Clint D. Fendley - Davenport & Company, LLC, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Dick Innes - JC Clark Ltd.

Duncan Brown - Wells Fargo Securities, LLC, Research Division

Gregory M. Macosko - Lord, Abbett & Co. LLC

Operator

Good day, everyone, and welcome to the Stewart Enterprises' Fourth Quarter and Fiscal Year 2012 Conference Call. As a reminder, today's call is being recorded. [Operator Instructions] I would now like to turn the conference call over to Martin de Laurèal, Senior Vice President of Corporate Development and Investor Relations. Please go ahead.

Martin R. de Laurèal

Thank you, operator, and good morning. On behalf of Stewart Enterprises, I would like to welcome everyone. By now, you should have already received a copy of the press release. If not, please visit our website at www.stei.com.

On today's call, management will provide an overview of the fourth quarter and fiscal year 2012, and then we'll open the call up for your questions.

The information contained in the call is current only at the time of this call. Statements made by the company that are not historical facts are forward-looking statements. The company assumes no obligation to update any statements, including forward-looking statements made during this call. Examples of forward-looking statements include: projections of revenue or earnings, growth rates, free cash flow, debt levels, tax benefits and other financial items, statements regarding plans and objectives of the company and its management, statements regarding industry trends, competitive trends and their effect on future performance, and assumptions underlying the forward-looking statements regarding the company and its business.

The company's actual results could differ materially from any forward-looking statements due to several important factors, which are described in the company's Form 10-K for the year ended October 31, 2012. The company uses adjusted earnings, adjusted EPS, adjusted EBITDA, net debt, free cash flow and cash flow per share as financial measures. These financial measures are not in accordance with accounting principles generally accepted in the United States of America, or GAAP, and are intended to supplement rather than replace or supersede any information presented in accordance with GAAP.

A reconciliation to the most directly comparable GAAP financial measure can be found on the company's website at www.stei.com under Investor Information. The reconciliation of non-GAAP financial measures can also be found in the company's press release dated December 17, 2012.

With that said, I'd like to introduce management of Stewart Enterprises. On the call today, we have Tom Kitchen, our President and Chief Executive Officer, and Lew Derbes, our Chief Financial Officer.

At this time, I'd like to turn the call over to Tom. Please go ahead.

Thomas M. Kitchen

Thank you, Martin. Good morning, and thank you for joining us on the call today. As usual, I'll offer a few opening comments, and then I'll turn the call over to Lew. He'll cover the financial performance in more detail before we open up for some Q&A.

Overall, we're very proud of our performance in fiscal year 2012, including an exceptional fourth quarter, which continues the positive momentum we've generated throughout the year.

Some of our accomplishments in 2012 include: achieving the highest annual revenue and gross profit in 4 years; expanding Cemetery and Funeral gross profit margin by 250 and 100 basis points, respectively; increasing adjusted EPS by 18% to $0.46; producing total annual returns of 11% in our preneed trust and 13% in our perpetual care trust; and generating operating cash flow of more than $76 million and free cash flow in excess of $61 million.

Illustrating the quality of our earnings, our operating cash flow per share of $0.89 is nearly double our earnings per share, and our free cash flow per share is also very strong at $0.71.

Our most significant event and accomplishment in 2012 was the restructuring of our organization, which was announced in April.

This reorganization better aligns our geographic regions and integrates operations and sales, while focusing on providing a more efficient and effective sales strategy.

These changes have enabled us to assemble an outstanding team, which will increase productivity and further enhance our customer experience.

Throughout the fiscal year, our sales team produced strong results by expanding sales and profitability and delivering a better customer experience. Their hard work and dedication can be seen in our improvement in preneed funeral and cemetery property sales for the fiscal year. These results are the highest annual sales in 5 years and, we believe, demonstrate that customers continue to value the services we provide and the facilities we offer.

In addition, we're very pleased with our strong trust performance, with double-digit average annual total returns over the last 3 years. Since the end of the last fiscal year, our trust portfolio has improved by over $50 million. The significance of this improvement is that it will enhance revenue and profitability in future periods.

We also think it's important to note that we have $1.8 billion in future revenue in our backlog or 3.5x our annual revenues. So not only is our current performance strong, we're building a backlog of revenues for the future.

I'm also pleased with the progress of our cremation initiative, which progressed nicely during the year. We've embraced the increasing trend in cremation as an opportunity and have recognized that many of our cremation families desire a more attractive permanent place for their loved ones' remains. During the latter part of 2010, we began implementing the plan to intensify our efforts to offer specific cremation services, merchandise and memorialization opportunities in our cemeteries.

For the last 2 years, we've invested over $12 million in new cremation inventory. As of October 31, we've completed 31 projects that have provided us with the traction we need to be successful in this initiative. In fact, cremation cemetery sales, overall, increased by approximately 15% from the prior year.

We're encouraged by these results and are planning to invest some $10 million to $15 million in fiscal year 2013.

Since we have a significant presence in combination operations, we believe we're uniquely positioned to capture market share and serve the growing number of cremation customers. Might be self-serving to say this, but we've created some very attractive and unique cremation memorialization projects. Not long ago, we walked through one of the cremation gardens with a colleague, and he commented it was beautiful and that the pictures did not do it justice.

We made a remarkable progress in this initiative and intend to be the premier provider of choice for cremation memorialization in all the markets we serve. We're optimistic for continued success in this initiative.

Additionally, the hallmark of our company and management team has been the relentless pursuit of realizing efficiencies and improving productivity through our continuous improvement initiatives. Our Funeral and Cemetery margin expansion, as well as our 18% improvement in adjusted EPS, are just a few tangible indicators of our success. We're building a stronger and better company and have laid the foundation to ensure our long-term growth. We believe the financial results of the fourth quarter and fiscal year 2012 are solid evidence that we're on the right path.

With that summary, I'm going to turn the call over to Lew.

Lewis J. Derbes

Thanks, Tom. I'd like to provide some further insight on a few key areas. First, I'll discuss the company's operating performance in a little more detail. Second, I'll provide an update on our tax planning strategies. Third, give you some additional information on the performance of our trust portfolio. And finally, discuss cash flow.

Before I discuss the performance for the full fiscal year, I thought it might be appropriate to provide some additional highlights from the fourth quarter.

During the quarter, same-store funeral services increased 2.2%, which is the best improvement in calls over the last 18 quarters. We believe this is an indication of increased market share, as we believe this compares favorably to industry-wide data.

Gross profit increased by 14%, resulting in a 340-basis-point and a 180-basis-point expansion in Funeral and Cemetery gross profit margin, respectively. This is impressive in face of a difficult comparison for the fourth quarter of last year.

Adjusted earnings from continuing operations increased 20%. And finally, operating and free cash flow, excluding the $11.3 million received last year as part of the Hurricane Katrina settlement, increased 18% and 36%, respectively.

Now turning to our performance for the year. We generated $516 million in total revenue and $110 million in total gross profit. In addition, we improved adjusted net earnings by 13% and adjusted earnings per share by 18% compared to last year. The

2012 performance is consistent with what we have been stating for some time about our business. Low single-digit growth in the top line can be translated into double-digit growth in the bottom line.

Now turning to our segments. Cemetery revenue increased by $4 million to $233 million for the year. This improvement is primarily a result of an increase in cemetery property sales and improvement from trust-related activities, and an increase in merchandise deliveries as well as services performed.

This improved revenue, coupled with a reduction in our operating expenses, including the previously mentioned successful integration of our operations and sales organizational structures, has translated into a $6.6 million or a 20% increase in Cemetery gross profit to $40.4 million. This reflects a 250-basis-point expansion in Cemetery gross profit margin for the year.

We also generated $283 million in Funeral revenue. Same-store funeral services declined less than 1% for the year. We believe this is consistent with the overall market and compares favorably to our peers.

We are particularly encouraged by the performance over the last 6 months of the year, which reflected a call increase of some 1.3%.

Our strategy of remaining focused on a balance between calls and average revenue has proven successful. It has enabled us to leverage the high fixed cost nature of our business, resulting in increased profitability and cash flow from incremental calls.

As a result of our continuous improvement initiative and our focus on effectively controlling our costs, we realized a 4% increase in Funeral gross profit to $69.3 million, as well as a 100-basis-point expansion in gross profit margin to 24.5%.

We're also pleased with the 10% improvement in preneed funeral sales compared to last year, which is a further indication that customers continue to value the services we provide and the facilities we offer. Preneed sales are important to the company's long-term potential and provide a strong indication of our market share.

We reported a $4.6 million increase in adjusted earnings from continuing operations to $40.2 million or $0.46 per diluted share.

Finally, our adjusted EBITDA increased 7% to $110 million for fiscal year 2012, our highest EBITDA since 2008.

I want to briefly update you on our ongoing tax initiatives. In 2007, we embarked on a project of carefully examining our tax planning strategies, and we are proud of the accomplishments of this endeavor.

As a result of these actions, including the most recent change that was announced last quarter, we have been able to realize federal tax refunds and reductions of federal tax payments of nearly $83 million over the last 5 years, and expect to further reduce our future tax payments by additional $21 million. Overall, we will save more than $100 million as a result of this initiative.

Moving on to our trust portfolio. Over the past 12 months, the fair market value of our portfolio increased more than $50 million to $856 million. We generated a total annual return of 11% and 13% in our preneed and perpetual care trusts, respectively. This bodes well for future revenue recognition associated with the undelivered preneed contracts in our backlog.

Several years ago, we began the process of diversifying our portfolio. Currently, 25% of our portfolio is invested in asset classes, which were not represented in our trust just 3 years ago, and approximately 40% of the portfolio is now comprised of either exchange-traded or index funds. We continuously evaluate our investment strategies to maintain an asset allocation that provides consistent returns with sufficient diversification.

And finally, as it relates to cash flow, during fiscal year 2012, we generated $76.5 million in operating cash flow and $61.4 million in free cash flow, which results in $0.89 of operating cash flow per share and $0.71 of free cash flow per share. As Tom previously mentioned, this illustrates the quality of our earnings.

We have deployed this cash by repurchasing some $27.4 million of our common stock, paying $13.3 million in dividends and investing $6.4 million in acquisitions during the fiscal year.

For many years, we have consistently generated strong, positive cash flow. In 2013, we will continue to use our cash wisely where we can get the highest and best long-term results for our shareholders.

And finally, our leverage coverage ratio, as measured on a net of cash basis, remains solid as of October 31, 2012, at 2.3x. This further attests to the strong financial condition of the company.

Before I turn the call back over to Tom, I wanted to take a moment to offer my thanks to our employees for their hard work and dedication, which made these impressive results possible.

I would also like to wish our employees and everyone on the call today a happy holiday season. Tom?

Thomas M. Kitchen

Thanks, Lew. In summary, after reviewing all of the events of the past fiscal year, we're pleased with the overall performance and are optimistic about the future of our company.

Our financial condition is strong. Over the last 5 years, we've averaged nearly $80 million in annual operating cash flow, for a total of nearly $400 million.

Over that same 5-year period, we've deployed this cash by repurchasing over $108 million or 17% of our common stock, reducing the face value of our outstanding debt by $119 million or 26% and paying more than $55 million in dividends and investing approximately $18 million in acquisitions.

For fiscal year 2013, we plan to use our strong cash balance to: grow our base business through internal initiatives, as well as targeted strategic acquisitions; invest in and maintain our facilities; and emphasize the use of technology to enhance the customer experience and enable our employees to be more productive; further expand our cremation initiative by developing gardens and other cremation-related projects; pay dividends to our shareholders, which we believe is an important use of our capital; and continue to purchase common stock in the open market.

And finally, adding to Lew's comment, it's also important to me to add my thanks and gratitude to the company's most important resource, our employees. Their contributions and efforts are the principal reason for our success.

Now, we're ready for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from A.J. Rice from UBS.

Albert J. Rice - UBS Investment Bank, Research Division

A couple of questions on my mind. First of all, on your comments around your case volume growth, and obviously the 2.2% case volume growth in the Funeral business in the fourth quarter was particularly encouraging. If you drill down on that, is there anything more? Is this just the natural ebb and flow? Or can you walk away and make any commentary on whether we're starting to be at a point where we see a turn on volumes definitively?

Thomas M. Kitchen

Well, A.J., I can't say in terms of the macro view what the market is going to do for the overall market. But I can say that we have been focused for some time in terms of turning the corner and doing everything we can to achieve a quarter-over-quarter positive result with regard to same-store calls. And it begins with the people in the field, the team of employees, having them focused on providing the right customer service for the families that we serve. We've got great properties and great businesses, and it's really important for us to continue the quality of the services that they have. Encouraging active community involvement has been very important for us to achieve some calls. And also, too, I think finally, we have been balanced in our focus with regard to average price in same-store calls. So we think, first and foremost, it's important for us to catch the call, that gives us the opportunity to serve the family in a more expanded fashion. If we focus too much on price, we may price ourselves out of that and not give us an opportunity to serve that family in a bit broader fashion than maybe it was originally intended. So I could say that...

Albert J. Rice - UBS Investment Bank, Research Division

From the percent of your cases coming out of the preneed backlog, is that a higher percentage?

Thomas M. Kitchen

No, A.J., I checked that going through my preparation for the call, and the increase is actually balanced between the preneed and the -- preneed going at-need and the true at-need walk-in. And so I draw some encouragement from that, 2 reasons. One is that we believe that selling preneed funerals is important for us to build the backlog and to capture market share going forward. But it's also important that the families that don't have a contract with us are coming in, let's say, on a more consistent, higher numbers than we're serving on the pure at-need walk-in. So there is a balance between the 2 of them for the period, and in fact, for the last 6 months.

Albert J. Rice - UBS Investment Bank, Research Division

Okay. On the Cemetery side, obviously, you showed good margin expansion. But you also commented that the high-end market was actually down year-to-year. Those things -- those 2 things don't usually go together. Could you flesh out what allowed you to still show the margin improvement in spite of a little softer high-end market this quarter?

Thomas M. Kitchen

Well, I think the changes that we've made in the organization to improve the efficiencies and the productivity of our organization, consolidating our sales and operations, has given us the efficiencies that we believe are important to enable us to serve the families better and to do it in a much more efficient fashion. And that's been a big help for us. But at the same time, we're focused on growing the top line, both for Cemetery as well as Funeral.

Albert J. Rice - UBS Investment Bank, Research Division

Okay. And then in the G&A area, I'll ask you about that. You referenced higher professional fees and healthcare expenses. Should we look at the Q4 as a run rate? Or were there some unusual items in there that were normalized going into the next fiscal year?

Thomas M. Kitchen

I think that it's a little higher than what I would expect the quarterly run rate to be. It was up about $1 million in this quarter. And when I look at the components of that G&A, my expectation is that it should not result in as high of a number going forward, especially in the first quarter of 2013. But I'd also go back to your comment regarding Cemetery revenue earlier. I think our deliveries were up in terms of delivering merchandise. And we also had an improvement in terms of the trust income that we realized during the course of the year as revenue. So those 2 other factors were certainly helpful for us to achieve some increase in terms of the overall revenue for the year from cemeteries, as well as the efficiencies that were gained. That goes to what Lew said before. Some small increases to the top line combined with effective management of our expenses can produce a double-digit increase on the bottom line for us.

Albert J. Rice - UBS Investment Bank, Research Division

Okay. And just one last sort of specific question. On the preneed funeral sales, are you seeing any shift between insurance in trust and preneed sales? Has that dynamic changed in light of the interest rate environment or any other factor?

Thomas M. Kitchen

We have historically sold about anywhere from 2/3 to about 70% of our preneed funerals through insurance. We've seen it creep up somewhat during 2012 a little bit higher, but not I wouldn't call it materially higher. So the balance between the trust and the preneed insurance sales for us have been holding relatively constant within a fairly tight range. But the majority of it, roughly 2/3 to 70%, is going to come from our insurance sales.

Operator

And our next question is from Chris Rigg from Susquehanna.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

I just wanted to come back to the savings from the reorganization earlier this year. Of the $10 million that you expect on a fully baked basis, how much was realized this year versus what you expect in 2013?

Lewis J. Derbes

Chris, this is Lew. I'll answer it in this respect. When we announced that there were 2 components to the $10 million, the first was a difficult decision that we had to make associated with trends at the beginning of the year, which resulted in a reduction in force, okay? We made the announcement back in April. So that portion, I would suggest, it would be logical to conclude that you got about 0.5 year benefit from that because it's a reduction for us, it's a separation. You're going to have that benefit immediately as soon as those people are no longer with the company. In the press release, for the second component, which was the integration of operations and sales, we had suggested in there that it was going to take 60 to 120 days before that process would be fully implemented. So if you kind of back up from that April time period, you'll see that there was some benefit during fiscal 2012, but a significant portion of the benefit will not result until our fiscal 2013 year.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

So about -- it's right to say about roughly 60% to 70% of the other half this year?

Lewis J. Derbes

I don't want to suggest the exact dollar amount only because, as you know, we don't give guidance, but I think you can make an approximation based upon that 60 to 120-day timeframe and how we've gone through, in terms of our announcements with the sales changes.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then...

Thomas M. Kitchen

And Chris, I just have one point to emphasize, too, on that, and that change was made for a number of reasons. It was not just to reduce our costs. It was really to improve the customer experience and to ultimately result in increased sales opportunities for us down the road. That will come. We expect to see some traction in 2013. And one particular help to that is to emphasize or reemphasize our training, to roll out training that is going to be much more consistent and much more effective, in order for us to be successful in selling the preneed, in particular, preneed cemetery property.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay, okay. And then I know you don't give guidance, but with regard to the cemetery property side, can you give us a sense -- I'm sure you have pretty good visibility on when projects will be completed and how that will impact revenue. When you think about construction projects in 2013 coming -- or being finished, is that greater or less than 2012? Or any color around how that could impact revenue next year would be helpful.

Lewis J. Derbes

Chris, I suggest on that, when we look at the projects, obviously, some of them could have delays associated with permitting requirements, et cetera. But overall, if you look over the course of the last 3 or 4 years, okay, the amount of production or sales that didn't get recognized as revenue over the course of the last 3 years has really been very close to the same dollar amount, okay? Now, there's some lumpiness in between quarters. As we look at it on an overall basis, we'd expect by the end of year that the drag, if you will, from either projects not being constructed or those sales that are less than 10%, to be approximately equal to what it was in '12.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then on the -- again, on the preneed side, the number of contracts that are being sold on an installment basis, is the drag there just because of overall higher activity? Or is the actual proportion of people buying on an installment basis rising?

Lewis J. Derbes

No, it's the former. As our sales have gone up, as we mentioned, property sales for the year were up about 2.3%. We don't take any contracts where we don't have a minimum down payment of at least 5%. So when you record a sale, if it's at the lower end, and I'll say a significant portion of our property sales have a much higher down payment percentage, but if you get one around 5%, it could take 3 or 4 quarters based upon a normal amortization -- 3 or 4 months over a normal amortization schedule before that would trip above the 10%. So I think that what you're seeing in terms of the drag from the 10% side is just an increase in production.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then final one. Do you ever sell anything at-need on an installment basis or is there only preneed?

Lewis J. Derbes

Only preneed.

Operator

And the next question is from Clint Fendley from Davenport.

Clint D. Fendley - Davenport & Company, LLC, Research Division

A question on the investment that I know you guys have been making this year in your back-office capabilities that is expected to benefit earnings next year. Just any updates on where we are with those technology investments.

Lewis J. Derbes

We've made several investments over the last couple of years, Clint. As you'll read in our K, I know it's a large document and we didn't file it until last night, but the continuous improvement initiative is something that we've been working on for the last several years. We've implemented a completely new financial suite with Oracle. We put a completely new contract management system in that was got [ph] care specific, called HMIS. We've invested in scanning technologies to route accounts payable invoices. We've invested in point-of-sale contract information and automation of QC-type projects for reviewing contracts before they're recorded in our system. We're seeing benefits from all of those. The results of the most recent change that we talked about with the RIF and the best-in-class sales, there were only made possible by those investments that were made back in 2008, 2009, 2010. We'll continue to invest in technology. We always are striving, as part of this initiative, to become more efficient and determine ways to reduce waste and inefficiencies. I think that's highlighted by the expansion that we're seeing in the gross margins in both the Funeral and the Cemetery segment of our business, as well as while corporate G&A was slightly up, and A.J. just had a couple of questions about that, that Tom answered a second ago, but if you look at the total value of corporate G&A for this year, a good portion of that G&A is associated with salaries and wages. The amount of corporate G&A in total for this year is less than it was back in 2009.

Thomas M. Kitchen

And Clint, I guess, one other point I think that would be emphasized is that, while we're making investments in technology, it's in the, let's say, low single digit on an annual basis in millions of dollars. And so you're talking probably $2 million, $3 million -- anywhere from $1 million to $3 million a year, once we've implemented the larger systems. Those were more expensive in the past. But going forward, the expectation is that we're going to be building certainly much more of a seamless, much more of an integrated system, and we'll do that with the products that we've already implemented. And our expectation is, going forward, we're probably talking about anywhere from $1 million to $3 million annually to do that.

Lewis J. Derbes

The only thing I'll also add on, Clint, is that when we started this initiative, our focus was predominately on back-office functions. And as we've gained the efficiencies in terms of the back-office, our focus over the last year or 2 has now kind of transitioned into what I'll call the front-office functions or customer-facing type of technologies. And the objective here is to make the process more seamless for our customers, for our funeral arrangers and for our sales counselors, so that they can spend more time focusing in on the personalization and customization that our customers are preferring, as opposed to the paperwork. And that's really where the investment has transitioned over the last year or so.

Clint D. Fendley - Davenport & Company, LLC, Research Division

Okay. That's very helpful, guys. And then one last question. I'm wondering on the cremation sales increase of 15% that you discussed in the press release, does that represent solely cemetery property sales?

Lewis J. Derbes

No, it's sales of property, merchandise or services to cremation families but in our Cemetery. It does not include anything associated with the Funeral segment of our business. So what we're measuring here is what -- we're trying to put new memorialization opportunities that our cremation customers see value in, okay? So what we're measuring is what are those cremation families that have selected cremation on the Funeral side choosing in our cemeteries? And that's what we're measuring year-over-year for the 15%.

Clint D. Fendley - Davenport & Company, LLC, Research Division

And how is that...

Thomas M. Kitchen

The bulk of the sales would come from cemetery property for our cremation customers, and the majority of that is coming from those new cremation gardens that we have built over the last couple of years.

Clint D. Fendley - Davenport & Company, LLC, Research Division

Right. And how is that scaled? If you look -- obviously, you began there in Orlando and sort of have rolled this out across the country. I mean, are you seeing sales accelerate in some of the earlier properties where you've made this investment? And is a lot of that 15% attributable to the properties where you've gone in and upgraded the offering there?

Thomas M. Kitchen

We believe that, from the experience we've had over the last couple of years, going back to the ones that have been opened for the longest period of time, we do see an improving trend. One of the benefits that comes from having these cremation offerings, which are very, very attractive and very impressive when the families come there and see it firsthand, one of the benefits that you get is that it gets them into the cemetery and they can see, not only the cremation gardens that you have to serve or offer them, but they can see other interment opportunities or memorialization opportunities for them. And we had an example recently, where a family came in looking to buy cremation niches at one of our cemeteries and ended up buying, not a large dollar-value sale, but a significant sale, for a family tomb Because they changed their mind in midstream. That didn't count as a cremation cemetery property sale. But it nevertheless was, let's say, influenced to a large extent, because when the family came in to the facility to look at the cremation offerings, they saw the other inventory and the other offerings and changed their mind and decided to do something a bit more traditional. So it's -- not only has it experienced good traction with regard to the families in realizing sales, but it's also really given us the inventory that we can then use as a means to get the families in and then give them -- have us have an opportunity to sell either the cremation cemetery property and merchandise or sell them some other type of cemetery property.

Operator

The next question is from Robert Willoughby from Bank of America Merrill Lynch.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Somewhat related to that. Is there any kind of same-store metric that you might be able to throw out in pricing trend at some of those cremation gardens that have been around a while? And then opposite of that, you do have the alternate service facilities as well. Can you possibly comment on the contribution that business makes to the whole?

Thomas M. Kitchen

With regard to the first, it's -- each of these gardens is unique, and the pricing is going to be based on the offerings and the investment. For example, a cremation garden, that's an outdoor garden, may not have some of the higher-priced offerings as we would on an indoor mausoleum that has -- that's air-conditioned and it's got heating and so forth. So it's -- and it also depends on where you are in San Francisco. It could be a higher dollar value, significantly a higher dollar value than it might be in, say, New Orleans. So it's really hard to characterize the pricing trends with regard to the cremation because each one is unique and different. And it could range from a cremation cemetery property of a couple of thousand dollars, $2,500, on up to $7,500 to $10,000. It's a fairly wide disparity. But our goal, and where we believe we are uniquely positioned is, with the number of combination operations that we can develop the cremation gardens in the cemeteries that are part of a combo operation, it gives us a unique opportunity to drive some cremation families from the funeral home into the cemeteries in order for them to really answer the question, where do they want that urn to be in 5 years or 4 years? They don't want to take -- they shouldn't want to take it home because it really just creates an issue for them somewhere down the road. So it's important for them to think about the memorialization opportunities and having the large combo operations. It gives us that unique capability to do that.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

But there is no situation where a return hurdle isn't being met, that the concept hasn't resulted in some incremental growth level, I guess, is a safe conclusion?

Lewis J. Derbes

Bob, that's a safe conclusion. We -- before any project, we would develop a pro forma and measure it and go for what IRR will this project return. The fact that we've continued to invest in these gardens should highlight to you the success. We're up to $31 million. We expect to have another -- spend another $10 million to $15 million on this initiative going forward. We're seeing success, both from when we first start and put something new and different, you get a little bit of excitement in the community of people coming. But it's not like that is tailing off. We're seeing that this offering is something that's resonating with the cremation consumer.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

And the alternate facilities that you mentioned in the K, I guess, you have 23 of them. Does that show up on a line item somewhere?

Lewis J. Derbes

We don't split that out as a separate business segment. We do have some more direct cremation-type businesses, most are under the Neptune moniker in California. It's been part of our business portfolio for quite some time. Their business is more commercial storefront type facilities out of predominantly leased space. But their margins are consistent with the margins we're producing overall in Funeral segment. It's one that is driven a lot by the preneed side in volume. And we continue to manage the business in that fashion and attempt to have some type of service or customization where possible.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Okay. And 2 other ones. Just on the capital deployment front, you referenced $10 million to $15 million on the incremental cremation opportunities. But I didn't see a kind of a base capital expenditure there in the Ks. It just kind of similar to the prior year would be the best bet?

Lewis J. Derbes

Yes, I mean, the reason we spelled out the $10 million to $15 million on the cremation inventory, we only spent about $8 million on that this fiscal year, so we wanted to disclose, maybe a change in trend in terms of that investment going forward. I would say the remaining capital expenditures, the trends would stay the same from prior years.

Thomas M. Kitchen

And I think one difference that should be emphasized is that the cremation cemetery offerings are more inventory development as opposed to capital expenditures. Last year, we had about $20 million in CapEx, about $15 million worth in maintenance CapEx, and the remainder would be expansion or growth type of CapEx for the company. So the inventory development that Lew was talking about is in addition to the capital expenditures that we incur, which generally range between $15 million and $20 million annually.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Okay. And is there -- in the absence of formal guidance from you, kind of the share repurchase assumptions, is that a logical run rate for you going forward, what we saw in the fourth quarter?

Thomas M. Kitchen

We were comfortable with that. We did about 4 million shares repurchased for the year, and we think that's a good balance. So our efforts are to grow the business, and if we see a good acquisition opportunity, then we may move in that direction a bit more or in a larger way. And dividends represents another important use in the company and the Board of Directors has indicated their willingness to evaluate the dividend policy going forward to see an opportunity for growing it. So we're going to do the best we can to generate positive cash flow. We think that's the best indication of, long term, what the business is going to be valued at, and it's up to us to allocate that capital in the appropriate fashion that is friendly for our shareholders.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

And lastly, can you help us with the tax rate assumption, Lew, for next year. What can we be using for the models?

Lewis J. Derbes

Yes, I would say 38% is a good effective rate, Bob. We did have a little bit of noise in that rate as it relates to turnaround of the valuation allowance during the year. We do have a small valuation allowance remaining on some capital loss carryforwards, so that could change slightly. But I think 38% is an appropriate rate to use for modeling purposes.

Operator

And the next question is from Richard Innes from JC Clark Ltd.

Dick Innes - JC Clark Ltd.

I have 2 questions for you this morning. The first one is on calls and revenue per call. The same-home service is clearly best in industry and much better than the CDC panel is reporting. On the flip side, you've got revenue per services down a little bit in Q4, up a little bit for the year. Based on your earlier comments, I take this is something that is strategic, you're making a trade-off, you're focusing on your calls. Is this something we should expect to continue going forward

Thomas M. Kitchen

Dick, I would say, yes, we're going to continue to emphasize the calls. And we look at this in really 2 ways. We'd love to see the top line grow organically, and we'd like to see it come from both the number of calls as well as the average revenue. But we felt it's important for us to, first and foremost, get that call. And if we have to sacrifice a little bit on the average revenue, then that's a trade-off we're willing to make. But I think it's also, when you look back on the year, it largely was in the mix. The pricing that you see was pretty much a result of the increase in the cremation. In the fourth quarter, for example, I think the cremation rate increased about 100 basis points, and so the average revenue was down slightly. But if you look at it for the year, cremation rate was up, I think, 60 basis points. And so on the average revenue for both our traditional and cremation, we were up slightly. So our goal would be to, first and foremost, grow the top line through calls. And at the same time, we would look to increase the average revenue on a same-store basis. But if we've got to take one over the other, we'll take the calls.

Dick Innes - JC Clark Ltd.

Right. And if we looked at the breakout between cremation calls and traditional calls, it would look better than what we're seeing overall because of the mix change.

Lewis J. Derbes

Yes, both are going to show up, but the mix change, because the cremation nominal price, is lower revenue per event [indiscernible] ...

Thomas M. Kitchen

It -- there was a unique -- one of these things in the mix for the fourth quarter, the average revenue was up for traditional and was up for cremation. But overall, because the increase in cremations increased 100 basis points, it produced an average revenue that was down for the quarter.

Dick Innes - JC Clark Ltd.

Okay. Second question is on acquisitions. As I recall on the last conference call, you mentioned that you had a letter of intent on a business that you expected to close shortly. Is that still active? And maybe you can provide some color as to what the current environment is for acquisitions.

Thomas M. Kitchen

I believe that one closed during the fourth quarter. So that was 1 of the 2 that we closed on during the year.

Dick Innes - JC Clark Ltd.

So there was an acquisition in the fourth quarter and one earlier in the year?

Thomas M. Kitchen

Correct.

Dick Innes - JC Clark Ltd.

And what's the general environment out there now for acquisitions?

Thomas M. Kitchen

We have been -- yes, we've been very active and had a high level of activity in the year, and actually the second half the year was probably higher than the first half of the year. We have been sharpening our pencil and been very, what we believe is, aggressive or competitive in submitting proposals for those businesses that we have a high degree of interest in. We are not -- we would prefer to see businesses that are -- that look a lot like ours, larger businesses, combos first, and then in regions where we have a presence, where we can leverage the infrastructure and the management or oversight that's currently there. The situation has been that we believe that the pricing and the price expectations in the marketplace are higher and are elevated. And we have -- while we've been competitive and been aggressive, we have not done more acquisitions, largely because they've gone to some other bidder that's willing to pay a higher price.

Operator

And the next question is from Duncan Brown from Wells Fargo.

Duncan Brown - Wells Fargo Securities, LLC, Research Division

Just one from me. I mean, for the K, you have 31 cremation gardens, 4 under review and -- excuse me, 4 under construction and I guess, 20 under feasibility review. I guess, just given the success that you're seeing in the existing rollouts, I mean, how many gardens can you roll out in a year? And when do you think the whole portfolio could be more mature on that front?

Thomas M. Kitchen

Well, at least for the next year, we think that the rate of completing these gardens will average probably 1 a month, but it could be -- you'll do 2 in 1 month and 0 in another month. So our expectations is that, going forward, we'll have 9 to 12 opened in 2013. And that will complement the 31 that are currently open. I think in past conference calls, we indicated that our goal would be to open approximately 10 to 12 on an annual basis. And so going forward, having 4 under construction and 20 under consideration, it gives us some confidence that we'll be able to meet those targets.

Operator

[Operator Instructions] And the next question is from Gregory Macosko from Lord, Abbett.

Gregory M. Macosko - Lord, Abbett & Co. LLC

Just a follow-up on cremation, just so I understand. How are the margins on cremation versus the rest? I assume all those revenues are in Cemetery?

Thomas M. Kitchen

Well really, in that cremation business, you going to have the Funeral side and then you have the cremation in the Cemetery side.

Gregory M. Macosko - Lord, Abbett & Co. LLC

So it's split between the 2?

Thomas M. Kitchen

Correct, yes. And now, it's very difficult to characterize or generalize on cremation margins versus the other traditional, say, funeral. We believe that cremation is an excellent complement to the business. We're already in the funeral and the -- in the cremation business and are taking in additional cremation, even though perhaps maybe it might be a direct cremation at the low end of the price. We think as long as it's at a price level where we can make money, it makes sense for us to do that. We've got a heavy fixed cost investment in our business. And every call we get, provided it covers the variable cost and makes a contribution towards the fixed cost, it's worthwhile for us to perform.

Gregory M. Macosko - Lord, Abbett & Co. LLC

So just generally speaking, given the new investment in cremation, would it -- clearly is a choice you want to make and follow up on it. It's not hurting the margins generally? Or is it maybe a little bit?

Lewis J. Derbes

The investments that we're making, Greg, have been more focused on the memorialization side in the Cemetery side of our business. We've served cremation families through our funeral homes for a long time, and some have chosen to go into the cemetery. But the industry as a whole and the company have not provided them, let's say, memorialization options that they felt were attractive. And so the investments that we've been making are to attract the cremation families that we're already serving through our funeral homes and get them into the cemeteries or a permanent place of memorialization. What we're seeing on the Cemetery side of the business, the margins between a traditional lot sale or a cremation niche, et cetera, it's really no difference. We can get the same margins from those investments. On the Funeral side of the business, as what Tom refers to, it's a little more difficult for us to measure because, whether it's our traditional service or our cremation service, it's being delivered through the same delivery channel. So it's the same funeral home, it's the same funeral director, it's the same fleet of cars. And we're not allocating our costs among those components. But I think the best way to look at it, and Bob asked a little bit ago about some of the alternative businesses. We said before, they can operate at margins that are consistent with those of our traditional funeral homes. So overall, we think that on a margin basis, on a percentage basis, the margin can be -- we can seek to be indifferent in terms of traditional versus cremation.

Gregory M. Macosko - Lord, Abbett & Co. LLC

Okay. Very good. And then -- you mentioned on the discussion over the high-end cemetery, which that side was down yet the margins were up. And you mentioned that trust income was a benefit there. Isn't trust income just generally flowing in based on the number of plots that have that trust around it to pay for the upkeep on those? Or how does that -- how did that help the sales there and the margins?

Lewis J. Derbes

As it relates to the Cemetery side of the business, which I believe was where your question is focused, the trust helps us in a couple of ways. One, we have a wholly-owned subsidiary that manages our trust. They charge a fee based upon the fair market value of the trust for those portfolio management services. So with the increase in the fair market value of the portfolio, we are seeing increases in those management fees, which are improving our margin because the cost to manage the portfolio is the same. So that's the first segment. But then in the second, as it relates to the earnings, there is one piece, which you referred to as the perpetual care earnings, which for every lot sale you get a certain percentage, and in effect, it goes into an endowment fund, and those earnings are distributed through the cemetery in order to maintain those cemeteries in perpetuity. But the second portion of it relates to preneed cemetery merchandise or services that are sold preneed, and we don't realize the earnings from that until they're actually delivered on an at-need basis. And what we've seen with deliveries being up, with the number of services being up, and then with the fair market value of the trust being up, that the overall benefit of that preneed portfolio for the Cemetery segment has helped to improve our margins because the overall benefit has increased in fiscal '12.

Gregory M. Macosko - Lord, Abbett & Co. LLC

Good. And then with regard to that, we're just talking about the trust, et cetera, you mentioned that 40% of the trusts, in general, are in ETFs and index funds. Is that a fair representation of the equity portion of the portfolio or not?

Lewis J. Derbes

The ETFs and index funds are not limited to equity only. We do have some fixed income ETFs, as well as high-yield, some in REITs and other are the alternative classes. What we're trying to do is to reduce the individual issuer risk, gain sufficient diversification of the portfolio. Our objective is not to hit home runs through the portfolio, it's just to earn a rate of return that kind of exceeds the inflation plus a reasonable return on top of that. So what we've done as opposed -- we have a portfolio management team on staff that's focused on managing the portfolio. So as we've added some of these asset classes, and I mentioned in my comments that over 25% of the portfolio is in asset classes that didn't exist just 3 years ago. When we've expanded into those classes, we've tended to use the index or exchange-traded funds, but we have used some for equity, and then some specifically for fixed income.

Gregory M. Macosko - Lord, Abbett & Co. LLC

But any -- just any rough mix that you can give on the portfolios?

Lewis J. Derbes

If you would -- I don't have the exact numbers in front of me, but if you look on the footnotes in our 10-K, we tend -- most of the mutual funds that we have in those classes, we'll split out the mutual funds among fixed income, equity, et cetera. That would give you an idea on the classes. Just to follow-up with a couple of items that I have handy, it may give you an idea. I said 40% in total, kind of the alternative investments, if you will, that we've added in terms of asset classes, that represents about 7% of our total portfolio. Those asset classes are 100% index and exchange-traded funds. We have some that is in the high-yield sector or a portion of fixed income, and then we have a portion in equity. Those are the portions you can pull out on the mutual funds. So in total for the asset allocation, and just to summarize, we have about 5% in cash, about 35% in fixed income, which would include high-yield, a little over 40% in common equities, about 10% in preferred stocks and then about 7% in total -- other alternatives.

Gregory M. Macosko - Lord, Abbett & Co. LLC

Okay. And that's a balance that you've come down to and you figured that will be maintained within reason over the next period of time?

Lewis J. Derbes

We constantly monitor market conditions, and we will tweak the asset allocation as market conditions change. Our strive is to have a balanced asset allocation that will produce a reasonable rate of return with as little risk as possible.

Operator

There are no further questions at this time. I would now like to turn the call over to Tom Kitchen.

Thomas M. Kitchen

Thank you, and we'd like to thank everybody for joining us today. We appreciate your interest and continued support in Stewart. And we hope you have a very happy holiday season. Thank you again.

Operator

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

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