Stewart Enterprises, Inc. (NASDAQ:STEI)
Q2 2009 Earnings Call
June 10, 2009 11:00 am ET
Leslie Loyet – Financial Relations Board
Thomas J. Crawford – President, Chief Executive Officer & Director
Thomas M. Kitchen – Chief Financial Officer, Senior Executive Vice President & Director
Jamie Clement – Sidoti & Company
Welcome to today’s Stewart Enterprises Incorporated second quarter 2009 earnings conference call. As a reminder, today’s call is being recorded. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session, instructions to participate will be given at that time.
I would now like to turn the call over to Ms. Leslie Loyet of the Financial Relations Board.
On behalf of Stewart Enterprises I wanted to welcome everyone. By now you should have all received a copy of the press release that was issued yesterday afternoon. If not, please contact Liz [Dolezol] at 312-640-6771 and she will send you a copy immediately or, feel free to visit Stewart’s website at www.StewartEnterprises.com for a copy. Management will provide an overview of the second quarter and then we’ll open up the call to your questions.
Before I turn the call over to management, please be advised that the information contained in this call is current only as of the time of the call and the company assumes no obligation to update any statements including forward-looking statements made during this call. Statements made by the company that are not historical facts are forward-looking statements. Examples of forward-looking statements include projections of revenues, earnings, growth rates, free cash flow, debt levels, tax benefits and other financial items, statements regarding plans and objectives of the company or its management, statement 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 10K for the year ended October 31, 2008. The company uses EBITDA and free cash flow 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.
Reconciliation to the most directly comparable GAAP financial measures can be found on the company’s website again at www.StewartEnterprises.com under investor information reconciliation of non-GAAP financial measures and can also be found in the company’s press release dated June 9, 2009. With that said, I’d like to introduce management of Stewart Enterprises, we have Tom Crawford, President and Chief Executive Officer and Tom Kitchen, Senior Executive Vice President and Chief Financial Officer.
At this point I’d like to turn the call over to Tom Crawford.
Thomas J. Crawford
You do have the financial information and I hope you all appreciate that it was sent out probably earlier than we have in the past and after we take your questions, we’ll determine whether we do that again. We’re delighted you have the information and are glad you are on the call with us today. Given the economic and market conditions in which we’re operating the second quarter in general was productive for the company and shareholders for the following reasons.
First, earnings were a little bit better than expected; second, the company continued to generate strong cash flow for the quarter and we’ve generated greater cash year-to-date than what was generated in 2008; third, the balance sheet was strengthened by the company’s action to repurchase over $40 million or 9% of face value debt at attractive prices; fourth, our cash position remains strong and even after repurchase of the debt we had $72 million on hand at the end of the second quarter; and fifth, the company completed the early replacement of the revolver due in November, 2009 with a new agreement running through 2012 in which the subscriptions exceeded our expectations. We were very pleased with that.
During the course of the call Tom and I will both cover these points in more detail as well as a few others. In relation to our performance for the quarter, as you have read, you’ve got that information, we generated net earnings of $13.2 million compared to $13.9 million for the second quarter of last year. This translated in to earnings of $0.14 per share compared to $0.15. After adjusting for several unusual items and Tom will discuss those later, we earned $10.6 million compared to $14.1 million for the second quarter of last year.
That in turn generated earnings per share of $0.11 compared to $0.15. Additionally, we generated $21.8 million in operating cash flow for the quarter and on a year-to-date basis have generated $29.1 million compared to $28.4 million for the same period of 2008. And, as I mentioned just a moment ago, our liquidity position remains strong at the end of the quarter with approximately $72 million of cash on hand.
Now, there were four main factors contributing to the decline in earnings for the quarter compared to the previous quarter. First, was the decline in funeral volumes as the number of deaths was significantly lower than the previous period. The second factor was a reduction in cemetery premium property sales which in a difficult economic environment can be postponed to a later date. The third factor was a decline in trust related earnings of $2.1 million compared to the prior year which is in line with our expectations and probably just a little bit better than our previous expectations. The final factor was a $3.1 million perpetual care funding obligation charge related to the write off of investments in General Motors which as you are all aware, recently filed bankruptcy. This charge was included in the cemetery costs and raises that cost category for the quarter.
Let’s take a closer look at the performance of both cemetery and funeral operations. In the funeral segment our revenue declined by 7.3% compared to the second quarter of 2008 which resulted from decreased earnings from the trust activities which I mentioned and simply we had fewer services entering our facilities due in part to market conditions. However, we were able to increase revenue per event by 2.4% and we saw positive increases in both traditional and cremation services.
Our premium funeral sales were $24.7 million for the second quarter of 2009 compared to $25 million for the second quarter of 2008. That is a 1.3% decrease on a comparable quarter-to-quarter basis. While the premium sales are down 1.3% for the second quarter, we believe that there are some positives that go along with that. We also believe that our premium sales while they are longer term and don’t impact the current period results we do monitor that statistic as an indicator of consumer attitudes. As I said, while they’re down 1.3% for the second quarter, this is an improvement over the first quarter of 2009 as premium funeral sales were off by approximately 16%.
Additionally, we few it as a positive that our premium sales increased by 32% when compared to the first quarter of 2009. Taking in to account the seasonal considerations of the business, that increase of 32% in sequential quarters of 2009 was much higher than the 2008 sequential quarter growth. For the quarter our calls were down by 9.6% and we fully expected calls to be down as we track death data we took the pulse of our suppliers and also listened to the results of fellow industry participants. After factoring in the [leaker] effect in 2008 and the decline in two of our west coast regions due in part to a decrease in low end cremation events, we believe that we are in line with industry performance if not slightly better.
We’re also pleased for the quarter with our organizations ability to better manage cost and scale our locations to meet market conditions, as we experienced a $1.6 million decrease in expenses for the quarter primarily due to the effect of labor management and improvement in our general liability claims. Part of our best in class initiative is to better manage and control the labor component of the business to better size our labor with the demand of the facilities and to manage the effectiveness of labor within those facilities.
Now, in relation to cemetery performance, our cemetery segment continues to feel the largest impact from a weak economy. Our sales organization is still generating leads, making calls and presentations but we find there is a greater tendency to delay the purchase decision. With that said, we experienced a decline in cemetery property sales of approximately 9% for the quarter. Now, while we’re not happy with that, it is a great improvement over the prior year quarter’s results where our property sales were behind by 28%. Additionally, our cemetery performance was negatively affected by a reduction in trust income of $1.3 million which was expected as we entered the year due to lower overall equity values.
Now, compared to the first quarter of 2009, we experienced increases in our funeral and cemetery gross profit dollars and the margins as we grew revenue in the second quarter compared to the first quarter of 2009 and continued to control our expenses. This resulted in net earnings per share in the second quarter of fiscal 2009 in excess of 50% greater than the first quarter of this fiscal year. While we don’t like reporting negative results relative to any previous period comparisons, and given the economic environment, the industry conditions as it relates to reduce market size and especially the strength of the second quarter of 2008, we were pleased with our operating performance for the second quarter and the actions taken to strengthen our balance sheet and further ensure overall company liquidity.
Now, with that I’m going to turn the time over to Tom Kitchen who will provide more detail.
Thomas M. Kitchen
There are several topics that I would like to discuss with you this morning and some of them may repeat what Tom has said but I believe they are important enough for me to add some additional comments. First, we’re very pleased with the new $95 million credit facility we negotiated and announced last week. It offers the company the right downs between available liquidity, costs and the flexibility in terms of the conditions. We believe it gives the company the right financial support for our business strategy going forward.
Earlier this year we evaluated our need for liquidity and concluded that a $75 million of facility would be sufficient for our requirements. We were pleased with the response and over commitment of our bank group and ultimately settled on $95 million as the amount for the new agreement. We believe that this demonstrates our bank group’s high degree of confidence in Stewart Enterprises during this period of uncertainty in the credit market.
Finally, with regard to the credit facility it is noteworthy that the company is not currently drawn on the facility nor has it ever drawn down from the current facility since its inception in November of ’04. Next, during the quarter ended April 30th, we purchased $22.6 million of our convertible note in the open market for approximately $14 million. As a result, we reported an $8.7 million net gain from the early extinguishment of debt during the period.
Subsequent to quarter end and through June 3rd we have purchased an additional $17.5 million principal amount of our convertible note for a cost of approximately $12.9 million. This approximately $4.6 million gain will be reflected in the company’s third fiscal quarter ending July 31st. Overall, this has reduced the outstanding debt for the company by $40 million or approximately 9%. This deleveraging of the company’s capital structure is a prudent use of our liquidity. It serves to improve our financial condition and has produced significant tangible value for the company’s shareholders.
In spite of the economic headwinds experienced during the second quarter we produced net earnings of $0.14 per share compared with $0.15 per share for the same period of last year. After adjusting for several unusual items such as the net gain on early extinguishment of debt of $8.7 million and a loss of approximately $3.1 million in our perpetual care trust related to the General Motors bankruptcy, the EPS for the quarter was $0.11. While this represents a decline from the ’08 second quarter, it’s a marked improvement from the company’s first quarter this year.
This in part is due to more effective expense management in response to difficult market conditions. Our cash flow for the first six months of ’09 remains strong. Generated operating cash flow of $29.1 million compared with $28.4 million for the first six months of the prior year. While we believe this is partially a result of better management of our working capital, it is also due to lower estimated tax payments experienced in ’09 versus ’08.
During fiscal year ’08 we initiated an effort to review our accounting policies to determine opportunities to improve our current tax position. Any changes will generally align our book and tax accounting for announced placement trust. These efforts could result in refunds or reduced future tax payments of as much as $30 million to be realized over the next 12 months. The company’s cash position remained very strong with $72 million of cash on hand as of April 30th.
Now, shifting from the company’s operations, I would like to provide you with some additional insight on the company’s trust performance for the second quarter. It’s useful to think of the premium funeral and cemetery merchandise and services trust as simply pre-need trusts while the other trusts will be referred to as perpetual care trusts. Since reporting our first quarter results in early March, the financial markets have experienced positive trends and I’m pleased to note that our pre-need and perpetual care trusts experienced a positive total return of 5% during the second quarter just ended.
Further, the financial markets and the company’s portfolios similarly realized a continuation of these trends through May of ’09 producing a positive total return of approximately 5% during this month. Our pre-need trust are primarily related to pre-need customer contracts. These contracts are sold in advance to when the merchandise and services will need to be delivered. IN many cases it could be 10 or more years in advance. For pre-need trusts realized and unrealized losses have no immediate impact on our income statement. We allocate all realized earnings to the customer contracts and recognize those earnings in the period the contract is delivered.
The fair market value of our pre-need trusts as of April 30, 2009 was $262 million lower than our cost basis. This represents an improvement from the $278 million at the end of our first quarter. The pre-need contracts we manage are long term in nature and we believe that the trust investments will appreciate in value over the long term. We are encouraged that the portfolio’s performance in May is expected to result in further improvement in this unrealized loss position.
In addition, as of April 30th of ’09 it’s important to note that we had $225 million in earnings that have been realized and allocated to our pre-need contracts that will also be recognized in earnings in the period the pre-need contracts are delivered. So, while we have net unrealized losses in the portfolio of $262 million in the pre-need trusts, the $225 million of accumulated earnings and realized gains that have not yet been recognized as revenue will offset against these losses when they are ultimately realized. In a sense, much of the unrealized loss relates to the appreciation that was realized over the last several years.
In assessing the impact of these pre-need contracts on the company’s overall business, it is significant to note that approximately two thirds of our funeral services performed in any period are at need services. So, while there may be some reduction in future revenues to be recognized when the pre-need contracts deliver, it relates to only one third of the funeral services that are performed. This is important because for the at need funerals there is no trusting related to the sale and therefore there is no financial impact from our trust portfolio.
Similarly, the cemetery revenue depending on the pre-need trust is approximately 20% of the company’s cemetery revenue. This results in approximately 80% of the cemetery revenue not affected by the financial markets. Combined, more than 70% of the company’s revenue is not impacted by the trust portfolios investment performance.
Our other trusts relates to our perpetual care funds. The purpose of these funds is to set aside a portion of the revenue from cemetery property sales to generate income which is used to defray the cost of maintaining our cemeteries. For our perpetual care funds, the original principal of the investment is to be maintained at all times. In effect, these funds act as an endowment fund. Since the principal is not to be touched and because we can only withdraw the income, we have no funding obligation for the unrealized loss unless we sell the securities or if the securities are rendered worthless because of some action such as a bankruptcy.
In the second quarter and in anticipation of the bankruptcy action for General Motors rendering the securities we own in our perpetual care trust fund nearly worthless, we recorded a $3.1million estimated probably funding obligation to restore the net realized losses in certain of our cemetery perpetual care trusts related to investments in General Motors. This funding obligation was recorded in cemetery costs and will be funded over an extended period of time.
Since the beginning of our fiscal year, we have funded approximately $1.8 million of the initial $13.3 million funding obligation in the perpetual care trust funds that was recorded in fiscal year ’08. With regard to our current funding obligation, it is interesting to note that the company has adequate liquidity to satisfy the payment and we are generating positive cash flow from these funds that can be used to satisfy the obligation. It’s also interesting to note that if we used existing liquidity one could view this as a reallocation from a current asset cash to a long term investment in our perpetual care funds.
Even if this occurred we would still report the asset on the balance sheet, invest the funds and realize the economic benefit in the future from the investment income in our financial statements. We would of course be restricted from using the principal for other corporate purposes. As reported in our fiscal year 2008 call, we estimated the expected overall decline in revenue from trust related activities in ’09 to be approximately $10 million. As of April 30th ’09 and based on current market conditions, we believe the approximately $10 million annual decline is still a reasonable assumption.
For the second quarter of fiscal year ’09 we experienced a $2.1 million or $0.01 per share decline in our trust related revenue which negatively impacted our second quarter results. This decrease includes $800,000 in our funeral segment and $1.3 million in our cemetery segment. In total, for the first six months of fiscal year ’09 we experienced a $4.3 million or $0.03 per share decline in our trust related revenue including a $1.7 million decline in our funeral segment and a $2.6 million decline in our cemetery segment.
To conclude my remarks, the company’s financial condition is strong. I say this based on our new credit facility that has nothing drawn against it, significant reduction in the outstanding debt, no near term debt maturities, substantial cash on hand and a track record of sustainable operating profitability and positive cash flow. I’ll turn the call back over to Tom.
Thomas J. Crawford
I believe it’s a moot point to say that none of us like the business environment that we find ourselves in. However, given that we had a very strong second quarter. We’ve taken prudent actions in a recessionary environment by better managing our costs and continuing to make investments in facilities and equipment that will further benefit the company’s operating performance and financial strength as the economy improves.
We have secured our replacement credit facility with more than adequate amounts that exceeded our expectations. That facility encompasses terms and conditions we believe support our capital needs for the future. We will continue to use our cash wisely where we can get the best and highest long term return for our shareholders such as continuing to pay dividends, evaluating the benefits of repurchasing debt and stock and pursuing acquisitions in the base business.
Additionally, while all the actions we have discussed are strengthening the company’s ability to compete in our base business, we are also taking actions in the development of new revenue and profit sources for future benefit. It is our intent to manage and lead this company with the best long term interest of the shareholders in mind. In summary, we believe that we performed well in the second quarter in spite of the perpetual care funding obligation and the decrease in earnings from trust activities, we achieved earnings per diluted share of $0.14 for the quarter compared to $0.15 for the second quarter of last year.
We believe this demonstrates the underlying company fundamentals are sound and that we’ll get stronger with full implementation and maximization of the best in class. Now, with that that concludes our remarks and we’ll now open it up for questions from you.
(Operator Instructions) Your first question comes from Jamie Clement – Sidoti & Company.
Jamie Clement – Sidoti & Company
A couple of questions Tom, as you look at the second quarter results versus the first quarter and you touched on this in your prepared remarks, the cemetery property sales obviously a meaningful improvement in my opinion sequentially. Can you give us a little bit more color on what your sales force has been telling you over the last six months? I mean, was this just an issue of the world stopped in the first quarter for you guys or what are some other things to consider here?
Thomas J. Crawford
I think you have any time you’re seeing what we’ve just gone through you have a shock to the system. When wealth has been diminished people pull back even those that have wealth pull back to a degree. So, there was that shock to the system. What we’re seeing right now and we hope it continues again, the trends are positive but we’re not totally out of the woods yet from an economic standpoint but I think there’s a sign and the impressions we get and our sales force is conveying to me is you have the shock factor then as it goes on you realize the world is not going to come to an end and then signs start to take place a little bit.
Where people were very resistant, holding on in making that decision, the decision really doesn’t go away when you think about it. Those needs are still there and so it really is a delay. But, as that shock works its way through the system we are finding the people responding better. We’ve got our sales force, I will tell you also, we feel like the quality of our sales organization is much better than it has been because we’re attracting a higher quality person because of the economic conditions. Our sales people continue to be strong and motivated.
We were with a group last night, very enthused about their performance for this last month and what they’re doing from a motivational standpoint. So, I think it’s a function of the shock working its way through the system. Also, when you look at consumer confidence and the measures that we see out there it is starting to increase and trend in the right direction. So again, we’re not out of the woods but we keep pushing.
We also reorganized our reporting structures that we had talked about last quarter and we think that’s given us one more level of focus as we really function. It’s divided the division of labor so to speak and we’re getting much more intent focus on the sales function right now.
Jamie Clement – Sidoti & Company
If I could just ask one more, I think it was on the last conference call where you talked a little bit about the lower end direct cremation market. Obviously, that’s a market where people probably are doing some price shopping right now. I think you mentioned that you all would be sort of potentially refining your strategy or sort of thinking about things in that area. Any update on that front? Is that business a business you still want to be in? Is that a business you want to grow to be able to kind of openly at least sell more services and products in to? Can you just give us a sense of what’s going on there?
Thomas J. Crawford
Growth in cremation is not going to go away that’s with us. So, that’s one that is a given. Now, what we find in the low end, again with the economic shock and where we’re seeing this and really not across the board but really in pockets of the country especially where we have cremation only businesses, our cremation only businesses are much higher. They range in prices from $1,600 to almost $2,000 by location. In this kind of environment we’ve seen people come that are just absolutely low price and that’s where we think we’ve had some siphoning off.
Now, for those operators who provide those kind of cremations at those prices, we’re not sure how they can make a lot of money out of it. I don’t know if that’s a long term viable business. So, we can’t compete with that $299, $399 kind of business, we’re just not geared for that. But, we want that cremation business. We want every call that we can to come in to our properties because not only do we have people here but we have the opportunities of using our cemeteries and to make sure that the remains are put in a place that are appropriate for the families. We think there is opportunity, we don’t want to lose that.
So, for us that cremation business is important. We are refining in some of the places some tests in one of our large market areas where we were trying to attract that customer without doing damage in a sense to the base business and we’ve also had some studies underway that are still preliminary that help give us a fresh look at this business. Not so much from the decision of cremation versus traditional but looking at consumer and consumer preferences and attitudes. So, this is a business at the low end at $399 we’re not going to chase that, we can’t. But, we want that cremation consumer and we are putting more effort and emphasis on it.
It appears that there are no further questions at this time. Mr. Crawford I’d like to turn the conference back over to you for any additional remarks.
Thomas J. Crawford
Thank you very much. We are delighted to have you on the call today. As I said, we don’t like reporting numbers that are any less than the previous quarter or previous year but given the conditions and what took place as I said at the very beginning we thought we had a very productive quarter not just only financially but all the things that we are doing to strengthen this company for the long term and hopefully do the right things that will last. So, we’ve got challenges but we are encouraged with what we’re doing and excited with some of the future things that we have on track. We thank you and we look forward to talking with you in another three months. Thank you.
This concludes today’s conference. Thank you for your participation.
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