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Stewart Enterprises, Inc. (NASDAQ:STEI)

F3Q09 Earnings Call

September 10, 2009 11:00 am ET

Executives

Leslie Loyet – Financial Relations Board

Thomas J. Crawford – President and Chief Executive Officer

Thomas M. Kitchen – Senior Executive Vice President and Chief Financial Officer

Analysts

Robert Willoughby - BAS-ML

Clinton D. Fendley - Davenport & Company LLC

[Chris Sim – Shanklin Capital]

Jamie Clement - Sidoti & Company

Richard Innes - J.C. Clark Limited

Operator

Good day everyone, and welcome to today’s Stewart Enterprises, Incorporated third fiscal quarter of 2009 earnings conference call. As a reminder, today’s call is being recorded. (Operator Instructions)

I would now like to turn the call over to Ms. Leslie Loyet of the Financial Relations Board. Please go ahead.

Leslie Loyet

Thank you. Good morning and thank you all for joining us. On behalf of Stewart Enterprises I’d like to welcome everyone.

By now you should have all received a copy of the press release that was issued today. If not, please contact Liz [Dolezol] at 312-640-6771 and she will send you one immediately, or visit Stewart’s website at www.stewartenterprises.com for a copy. Management will provide an overview of the third quarter and then we’ll open the call up to your questions.

Before I turn the call over to management, please be advised 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 revenue, 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; statements regarding industry trends, competitive trends and their effect on the 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, 2008.

The company uses EBITDA and free cash flow as financial measures. These financial measures are not in accordance with the 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 stewartenterprises.com under Investor Information, Reconciliation of non-GAAP Financial Measures. It can also be found in the company’s press release dated September 10, 2009

With that said I’d like to introduce management of Stewart Enterprises. Today on the line 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. Please go ahead.

Thomas J. Crawford

Thank you, Leslie. Good morning to everyone. We’re delighted to have you on our call this morning and we trust that you’ve all had time to evaluate the press release and earnings report for the third quarter. I will give an overview of the quarter and Tom will provide more of the financial details later in the call.

As you read in the release, fully diluted earnings increased for the quarter to $10.8 million, or on a per share basis to $0.12 from $0.10, while adjusted earnings decreased to $4.3 million or $0.05 a share compared to $0.10 last year. Many positive actions were taken during the quarter that improved our overall financial performance and positioned us for stronger results while we continued to work through difficult market and economic conditions that negatively affected the operational earnings.

I have put those actions into three broad categories. First, actions that strengthened the balance sheet and cash flow; second, actions to improve our systems and processes; and third, continued investing for future growth. In relation to strengthening the balance sheet and cash flow, during the quarter the company repurchased debt at favorable prices which gave us a tremendous return on invested capital and produced a strong gain for the quarter. The retirement of the debt will generate an annual savings in excess of $2 million in cash interest payments in 2010 and beyond. Additionally these actions reduced our debt outstanding by 8% for the quarter and 13% for the nine months ended July 31. Also during the quarter we received a $12 million tax refund from the IRS as a result of improvements in tax planning efforts. We were able to increase free cash flow by approximately 10% or $1.8 million over the previous year and that amount does not include the $12 million tax refund.

In relations to actions taken to improve our systems and processes, during the quarter we completed the implementation of the new data management system that combined nine field data bases into one. The system will allow us to eliminate multiple handling of contracts, speed the retrieval of data, give us pinpoint accuracy in identifying bottlenecks in contract processing and improve field implementation of purchased products and services. It was a huge undertaking, took a lot of effort from our operations, sales and home office staff but the implementation is complete and the system is operational.

Regarding our continued investments for future growth, during the quarter we finalized construction on two new funeral homes. One of the locations expands our presence in existing markets to increase volume and will open in the fourth quarter. The other funeral home is a new third party relationship, where we built a funeral home on a municipally owned cemetery in a new and growing community to capitalize on the benefits of a combo operation without having to make the investment of a cemetery. To date, the performance has exceeded our expectations. In addition, we have two more funeral homes that are under contract and are going through the permit phase right now.

We also continued to invest and strengthen our web presence to make our websites more consumer friendly to generate traffic, leads and strengthen e-commerce capabilities. We will continue to invest in human and capital resources to further improve this part of our business. We are pleased with these actions that improved overall performance for the quarter and will produce continued benefits over the long run.

I’d like to now shift focus on the operational performance for the quarter. First let me say that we’re pleased with the overall improvement of financial market conditions. For the quarter we saw a 13.6% improvement in our pre-need funeral and cemetery trusts and a total return of 16.2% in our perpetual care trust. Tom will provide more detail later in the call on the improving performance of our trust operations.

In our funeral operations we saw some positives and some negatives during the quarter. Our funeral revenue declined by $2.5 million or 3.6% as a result of lower overall deaths and an increasing cremation rate. Our funeral call volume was off 6.3% for the quarter. Now approximately 35% of our volume decline in funeral volume is attributable to our West Coast operations which have been impacted by a rise in low end cremations that we believe have gone to low priced operators. After comparing peers, talking with suppliers, our own market evaluations and considering the West Coast situation, we seem to be following general industry conditions.

Our cremation rate is 41.8%, which is an increase of 190 basis points compared to last year. For the quarter we saw our average revenue per funeral event increase by 2.3% with increases in both traditional funeral and cremation services. Additionally I am very pleased that we maintained our funeral profit margin despite a drop in volume and a 3.6% decline in funeral revenue.

While we have managed the cost components well, especially the field headcount, we believe we better managed our total cost to market conditions. In fact, when you look at peer funeral operations excluding trust revenue and cost, same-store funeral gross profit actually increased by 4.7% which is a strong indicator our best-in-class focus is paying dividends in a down market. Our best-in-class dashboard system, which was developed and implemented in 2008, has given us the ability to evaluate locations and personnel performance in total and by like kinds of facility to make sure we’re managing headcount, labor costs and operational performance to appropriate standards.

We believe that our success in improving funeral operation margins in a down market will give us the ability to further capitalize on expanding margins as the number of deaths returns to some sense of normality in the future.

In relation to cremation and our growing cremation rate, we have spent the last four months deeply evaluating our entire cremation process. And that has included looking at market demographics, our merchandise assortment, our customer process and experience. We’ve evaluated our employee knowledge, ability and effectiveness. We’ve looked at our cremation inventory and we’ve even examined our construction philosophy and putting cremation offerings into the field. We’ve looked at our organizational design and even how we measure results related to cremation. While we’ve made great progress in producing steadily increasing revenue for cremation, after examining as we’re calling it our as-is process for handling cremation and families, we believe we have significant opportunity to increase performance and make market share in this segment and will be implementing action plans to further capitalize on the growth of cremation during the fourth quarter and into the coming year.

I’d like to now turn attention to our cemetery performance. Cemetery revenues declined by $10 million or 60% compared to the third quarter of 2008. Due to the lower revenue and the high fixed cost nature of the business our margins declined by $8 million. Our property sales have been impacted in part by economic conditions as pre-need sales can be postponed in times of economic uncertainty. Property sales for the quarter of which approximately 80% are on a pre-need basis were below the same period in 2008 by $3.7 million or 13.5%.

Our sales decline can be isolated into two general areas, lower sales of high value property and a disproportional decline in a few markets. In this current recessionary environment, a third of our decline in property revenue for the year is from lower sales of large dollar contracts, or contracts over $100,000. This is somewhat counter-intuitive in that this segment of the market should be the least impacted by general economic conditions. These consumers are taking a wait-and-see attitude as are many others. While we’ve seen a slowdown in these sales, the backlog of clients we are actively working with remains high and the dollar amount of property in that backlog is significant. In other words, our high value property pipeline remains relatively full and we believe these customers, as they become more sure about economic conditions, will turn to letting the sales come forward and we’ll have greater growth in high value property.

Additionally our decline in cemetery property sales is not uniform throughout the company. While cemetery property sales have increased quarter over quarter in one-third of our sales regions, approximately 75% of the decline occurred in two states where economic conditions are more extreme in relation to significant increases in the level of unemployment and in home foreclosures in those two markets. I would also add that while we’ve implemented certain incentives to promote property sales, we’re doing so in a way that makes economic sense for the company over the long run. We want our results to be sustainable and not achieved by lowering standards that would lower the quality of our sales.

While a strengthening economy will be positive for us, we’re taking actions to drive through the difficulties. We’re investing significantly in improving our sales training, making more local presentations to targeted audiences to promote pre-need opportunities, and as I mentioned earlier improving our web presence to capture more traffic and leads. We are seeing evidence of improvement in our markets as pre-need funeral sales were up 4.3% for the quarter. While that doesn’t impact us in the current period, we view that as a positive indicator of improving consumer attitudes and strengthening future market conditions. Despite the challenges, our sales organization remains positive now and in the future.

With that, I’ll turn the time over to Tom Kitchen to review the financial details.

Thomas M. Kitchen

Thanks, Tom and good morning to everyone. While Tom’s comments covered many of the points that were significant for the company during the third quarter, there are three areas that warrant additional emphasis that I would like to address.

First, the company’s free cash flow was strong for the quarter and year-to-date at $32.5 million and $55.1 million respectively. This represents significant improvement of 74% and 38% for the quarter and nine months ended July 31. It’s also important to note that this improvement in ’09 was accomplished in an economy that was less robust than ’08. In addition, the 2008 free cash flow was a very strong year for the company relative to prior years. In fact, ’08 free cash flow was more than $67 million or one of the highest free cash flow periods in the last four years for the company. So this year’s performance in generating free cash flow is impressive when you consider it compared to our highest free cash flow in the last four years.

What are the reasons for this improvement? First, although our funeral revenues are down, we have been successful in managing our funeral costs including effectively managing our labor costs to achieve a gross margin that is nearly flat when compared with the prior year. We also have managed our working capital and other elements of our balance sheet to wisely control our spending and generate positive cash flow. One significant example of this is the company’s efforts to comprehensively examine its income tax policies and practices and to look for ways to save cash taxes. This effort began nearly two years ago and I’m pleased to report that we have been successful in identifying actions and changes we have taken to produce positive, tangible results to lower our taxes paid and where possible realize tax refunds.

Last year in 2008 we implemented a change that enabled the company to realize a combination of refunds and reductions of federal income tax payments of nearly $9 million. I’m pleased to report a similar success story in ’09 that resulted in a change that is expected to produce a combination of refunds and reductions of federal income tax payments totaling approximately $32 million. During the first nine months of the current year, we have realized a combination of refunds and reductions of federal income tax payments of $20.5 million and plan to realize an additional $7.4 million in the fourth quarter of fiscal ’09. The remaining $4.1 million will be realized in fiscal year 2010. In short, the company will not pay federal cash taxes in ’09. These recent changes affect the timing of when the company pays taxes and defers the payments to a later period when the services are actually performed. We are examining all of our tax policies and will continue to look for ways to realize future tax savings.

During the third quarter, our combined tax rate was approximately 26% and year-to-date was [inaudible]. This reduction is a result of the company identifying opportunities to realize the benefit of its capital loss carry forward and adjust its tax valuation allowance accordingly.

So what are we doing with this positive cash flow? During the quarter, we purchased $35.7 million of the company’s debt for approximately $27 million. As a result, we recorded an approximately $8.5 million net gain from the early extinguishment of debt during the period. For the nine months, the net gain from purchasing some $58 million of debt in open market transactions has exceeded $17 million. We continued to purchase debt in August and bought slightly more than $12 million that produced an additional gain of approximately $1.8 million. These transactions will be reflected in the company’s fourth quarter ending October 31 of ’09. Overall during fiscal year ’09 we have purchased more than $70 million of our outstanding debt or nearly 16% of our total debt. At July 31, the company’s net debt was approximately $320 million, near the lowest point in more than ten years. And through the nine months ended July 31 of ’09 we have saved approximately $900,000 in interest payments.

In addition to improving the company’s financial condition, the future operational performance will also be improved by reducing cash interest payments by more than $2 million annually. This de-leveraging of the company’s debt [structure] is a prudent use of our liquidity, serves to improve our financial condition and has produced significant value for the company’s shareholders. We will continue to opportunistically purchase our debt where possible. However, with the financial markets settling down since the beginning of the year, the opportunities are fewer. As Tom previously mentioned, in addition to using our liquidity to purchase debt, we are also investing in new funeral homes that will either expand or maintain [inaudible] in selected markets.

Lastly, during the first nine months of fiscal year ’09 we returned $7 million to our shareholders through dividends which we consider to be an important use of our liquidity. Another very significant positive highlight experienced during the third quarter and nine months is the overall performance of the company’s investment portfolio. The company maintains pre-need funeral and cemetery merchandise in services trust, which we will refer to collectively as pre-need trust and perpetual care trust that are established to help generate income that’s used to defray the costs of maintaining our cemeteries. I’m pleased to report that the investments improved sharply during the third quarter resulting in total returns of 13.6% and 16.2% for the pre-need trust and perpetual care trust respectively. Year-to-date these trusts recorded returns of 11.2% and 15.5% for the pre-need trust and perpetual care trust respectively.

Since the liabilities to which these investments relate are long-term in nature, it’s [inaudible] that we generated positive, annual average returns for the last five years ended July 31 of ’09 despite the unprecedented declines experienced in late fiscal year 2008. While this performance may be viewed as modest, it nevertheless represents a significant turnaround from earlier this year. This positive long-term performance enabled the company to reduce its unrealized loss position by $67 million for its pre-need trust to $211 million from the low point of January 31 of ’09. This compares favorably to the $224 million of gains in investment income that have been realized but not recognized, leaving us in a net positive position of $13 million. This $224 million is included in the company’s deferred revenue and will be recognized when the pre-need funeral and cemetery contracts are delivered.

The company has taken advantage of this rebound in the financial markets to reduce its exposure to common equities and increase its investment in either cash or fixed income securities, where we intend to generate a reasonable rate of return with a lower overall volatility for the investments. We will continue to reduce the volatility of our investment portfolio by adjusting our asset allocation as the financial markets improve. While its difficult to expect third quarter performance to continue unabated, August was another strong month for the portfolio and the favorable trends continued. At the beginning of our current fiscal year, we estimated the expected overall decline in revenue from trust related activities in fiscal year ’09 to be approximately $10 million. As of today and based on current market conditions, we believe this amount continues to be a reasonable assumption.

In the third quarter, we experienced a $2.6 million or $0.02 per share decline in our trust related revenue which negatively impacted our third quarter results. This decrease includes $1.1 million in our funeral segment and $1.5 million in our cemetery segment. In total, for the first nine months of ’09 we experienced a $6.9 million or $0.05 per share decline in our trust related revenue including a $2.8 million decline in our funeral segment and a $4.1 million decline in our cemetery segment.

As previously announced, we entered into a $95 million credit facility in the quarter and we’re pleased to report that we have not drawn against the facility.

To conclude my remarks, the company’s financial condition remains strong and improved significantly based on reducing our outstanding debt, maintaining a healthy cash balance of $71 million and a continuing record of generating high levels of positive cash flow while maintaining consistent operating profitability in these uncertain economic times.

Now I’ll turn the call back over to Tom.

Thomas J. Crawford

Tom thanks for that review. Before we turn the time over to you for your call, just let me summarize that while we continue to be affected by negative market and economic conditions that have impacted the base business, we’re pleased with all the actions we’ve taken to generate positive overall growth in earnings for the quarter. We have taken prudent actions to manage our costs and continue to make investments in facilities and equipment that will further benefit our operating performance and financial strength in the future.

We are continuing to invest in the future of our company. Throughout the fiscal year we’ve invested almost $7 million in new businesses and approximately $2 million in information systems. During the third quarter as I mentioned we completed the company wide implementation of our new contract processing system, which was a major accomplishment, requiring a significant amount of time and effort and resources at all levels of our company. Over the past few years we’ve invested in upgrading our accounting, payroll and contract processing information systems, all of which will produce future efficiencies. We plan to implement cremation initiatives in the near future, designed to improve our sales, profit and market share in both the cemetery and funeral segments of our business.

We continue to work on expanding our proven expertise in synergistic third party relationships as I mentioned earlier. Also we continue to test new product segments that if successful will be of great benefit to the base business. As I mentioned, we’ve redesigned our web site to support our e-commerce initiatives that will enable us to generate new revenues in the future. Finally, we are interested in acquiring new businesses at prices we believe will enable the company to realize significant operational returns in the future.

In summary, we believe we’ve taken prudent actions in the short-term with the long-term in mine. We believe that the underlying company fundamentals are sound and that we’re continuing to prudently invest in our people, our processes so that as the economy strengthens we’ll be well positioned to grow.

Now with that, we’re going to open up the phones and we’ll take your calls.

Question-and-Answer Session

Operator

Thank you, Mr. Crawford. (Operator Instructions) Your first question comes from Robert Willoughby - BAS-ML.

Robert Willoughby - BAS-ML

Tom, just how much fat do you think that you do have left to cut here, whether it’s at the corporate level or in the field? Are there still material opportunities to bring that cost structure down?

Thomas J. Crawford

Yes, we believe there are. When you think about what we just talked about, the nine databases into one and the different interactions that take place, we have a lot of handling and a lot of rework. And the new system requires us really to do it right the first time, which is a little bit of a cultural change for us but a good change. And so with that the answer to your question is yes and we plan to take advantage of that.

Robert Willoughby - BAS-ML

Can you wrap some broad, broad numbers around it? I mean is this bigger than a casket or smaller than a casket in terms of the opportunity?

Thomas J. Crawford

Well it depends on how much you’re going to put into that casket. We believe the opportunity is part of the return we looked at in generating the investment and making that investment. So we think it’s a relatively good amount.

It won’t be a few people here and there. It will be a significant number of improvements in our efficiencies.

Robert Willoughby - BAS-ML

And just can you give us a little bit more detail on the new facilities you did mention? What markets are they in specifically?

Thomas J. Crawford

Yes. The one we just opened is in Dallas and that’s where we have the joint operation. It’s in Cabell, Texas and we’re very pleased with that. It’s a beautiful design in a growing community and again so far the early returns are very positive in the total call volume. And the other benefit with us doing this is it not only benefits us, but it benefits the community as well in bringing people into the cemetery. So it’s a very synergistic operation.

The other facility we have is a Dunbar facility in the Carolinas, South Carolina.

Robert Willoughby - BAS-ML

Just for modeling purposes, Tom, I guess you’re not the federal cash tax payer but are we still guidance on the tax rate for reporting purposes that you’ll be using?

Thomas M. Kitchen

For the tax rate I would probably follow the year-to-date tax rate in going forward for the balance of the year.

Robert Willoughby - BAS-ML

Okay.

Thomas M. Kitchen

Going into next year would be different in the sense that it would probably revert back to something that would be a more normal experience. That would be the marginal rate plus some allowance for state taxes.

Robert Willoughby - BAS-ML

And from your standpoint you’ve seen no change in the legislation there that estate taxes next year go to zero?

Thomas J. Crawford

I’m sorry. We misunderstood that.

Robert Willoughby - BAS-ML

I guess the legislation out there in 2010 that estate taxes go to zero for that year and that year only. That is still in place, correct?

Thomas M. Kitchen

The estate tax you’re talking about?

Robert Willoughby - BAS-ML

Yes.

Thomas M. Kitchen

Well currently it is in place and I guess that when you talk to people in Washington regarding what’s going to happen, I think it’s consensus that some change is going to be instituted to that. Although the legislation currently provides for it to go to zero in 2010 and then it’s going to bounce back to the 2001 level in 2011, nobody realistically in Washington expects that to occur. What is likely to occur is that they probably will have some bill that would be an extender where the 2009 rates would probably extend into 2010. You know, Bob that’s the best information that we have at this point in time in terms of what to expect for 2010 for estate taxes.

Operator

Your next question comes from Clinton D. Fendley - Davenport & Company LLC.

Clinton D. Fendley - Davenport & Company LLC

On the cemetery gross profits, they were down a bit sequentially here which seemed to be counter to some of the other companies that we’ve seen reporting in this space recently. I wonder if you could provide any color on what’s going on there.

Thomas J. Crawford

Yes. On the cemetery sales, as I mentioned earlier there are some positives and negatives. We are pleased we saw some areas where we were increasing year-over-year. That’s a positive and that’s what we’re trying to latch onto as our best-in-class to take what is positive in one area and apply it to the next. We were impacted in two areas that I mentioned. Then when you start looking at the economics of those two states, they’re struggling to a degree. And we see that same impact. And so it is isolated. As I tried to articulate earlier, we have a good backlog of large property sales, high volume, high price property sales that if that had gone away we’d be more distressed. But it’s there. We’ve analyzed it and we’ve got, even today we talked about the projects that we have coming due that we’ve got so many that are close we just need to get them really off dead center. But our backlog is in good shape.

The other thing is that the system implementation we had, it required a huge amount of effort by the company. And we knew that was going to take place and we did that in the third quarter. We felt that was the right thing and the positive thing to do and as I said that’s behind us. And we’ve got our people focused again, where we had effort and energy on making sure the system implementation went well, we’ve got them now focused back on the process. So we think all those things together give us a little indication of why we were not as robust as the others. Again as we look at areas of the country we see a lot of positives in what we have. The two economically challenged areas you know we’re watching those and that’s just going to take some time to get through.

But the other good part of that, we have really good experienced people in those areas. And we’re pleased with their actions but it just is one of those that economically as soon as we start to see some thaw there, that we see those sales will come back.

Thomas M. Kitchen

There was also one other factor I think that’s important. Third quarter you know we disclosed in the press release the $2.4 million decrease in construction on some cemetery projects and generally that’s going to be lumpy in the sense that from quarter-to-quarter can bounce around a little bit. And when you look at it compared to the third quarter of ’08 the current period had a $2.4 million decrease so that also contributed to somewhat of a decline in the margin in the third quarter of ’09.

Clinton D. Fendley - Davenport & Company LLC

And was that concentrated on the service side then of your gross profit decline?

Thomas M. Kitchen

No, it’s actually on the construction of different projects. It could be individual family tombs, it could be even the construction of what we call community mausoleums. It’s the timing of when you recognize the revenue is more tied into when you complete you know the construction on those projects. And that could vary throughout the year. And prior year, you know we compared the current quarter compared to the same quarter in the prior year experienced a decline in those construction projects.

Clinton D. Fendley - Davenport & Company LLC

And then final question here on the debt extinguishment if I heard you correctly for the fourth quarter we’ve had about $12 million so far and a $1.8 million gain. Do we expect to have more before the end of the quarter here?

Thomas M. Kitchen

We hope to. You know that’s dependent upon the availability of the debt out there for us to purchase. So if there are some opportunities for us to do that, we certainly will take advantage of it.

Operator

Your next question comes from [Chris Sim – Shanklin Capital].

[Chris Sim – Shanklin Capital]

I just wanted to clarify a little on the statements about the high price property. I know you said that the property pipeline is strong and you think there’s a good backlog there. I’m assuming you mean obviously that you have the properties available and still for sale but what kind of evidence are you seeing that the actual backlog of customers is solid?

Thomas J. Crawford

Yes, we track that and I looked at a report from our sales organization by area, by sales rep, by name and with the amount of the property that is worth on it. Now again that doesn’t mean that they’re all going to come to pass, but as far as managing that, that’s a report I look at and we take a close inspection of it.

When I say backlog, backlog may not be the right term as though that’s sold and it’s waiting to come through. That’s just simply the pipeline. I’m not even sure that’s a better term. As far as monitoring that and ebbing and flowing that’s what we do take a look at. Is it increasing, decreasing, staying or going down.

[Chris Sim – Shanklin Capital]

So you’re saying that more qualitatively speaking from talking to you sales people that they appear to be in kind of late stage talks about closing on some of these?

Thomas J. Crawford

That’s right. Yes. These are discussions that have taken place, presentations that have been made, relationships have been built along the way. This is just not by guessing. There are names associated with this. It’s just you know our ability to help them make that decision is what we’re working on right now.

[Chris Sim – Shanklin Capital]

I know you mentioned that some of the areas were stronger than others and even increased year-over-year. Can you narrow that down to some of the locations? Or I don’t know if you already said that, some of the regions?

Thomas J. Crawford

No I didn’t say that and I probably won’t say that.

[Chris Sim – Shanklin Capital]

Okay.

Thomas J. Crawford

But you can guess where we’re probably struggling.

Operator

Your next question comes from Jamie Clement - Sidoti & Company.

Jamie Clement - Sidoti & Company

Tom, just curious for your thoughts looking back at the first three quarters and property sales. You know obviously the first quarter on a year-over-year basis was you know almost unprecedented I think. I think last quarter you were down about 9% and this quarter down about 13.5%. Is it possible and I’m curious if you all look at it this way, is it possible that there was just so much pent up demand that developed in the first quarter that you kind of got that benefit in the third quarter, sorry in the second quarter and now you’re kind of more at a normalized rate of where this economy is?

Thomas J. Crawford

You know what? And that’s a good question and I can’t tell you an absolute, but I can give you my feelings on it for what that’s worth. Yes I think the trend was positive. We saw the first quarter you’re right unprecedented. It was unprecedented. The second quarter we felt very positive about that. And the third we’ve slid back a little bit and we’re looking at what’s changed in that. And I don’t think it’s due to the pent up demand has gone back to normal. I think we’ve introduced some things by our own decision and choice that were different than a marketplace standpoint.

And again we talked about systems implementation. It was a magnificent undertaking that required everybody’s effort and attention to get that done as well as it was done. And you know I use the term heroic and I say that because every time I’d stick my head in meetings, I’d turn around and walk out because it was too complex for me. It was a massive undertaking. But that took time and energy and I think again you have so much time during the day and that was one of the things that we chose to get that system up, running and implemented. We look at our results. I look at them every week, others look at them every day but I look at them every week and again we’re seeing again, doesn’t mean anything, you can’t bank on anything, but we see some improvements under our current operation.

Jamie Clement - Sidoti & Company

Tom, let me ask you something about you know the marketplace, particularly on the pre-need side. You know there is some speculation that certain markets in this country, that some operators have gotten very aggressive with respect to pricing terms and money down and those kinds of things. And your industry has seen this before in tough times. Clearly you guys have resisted doing that. Do you think that the quality of contracts being written by some other people is a little shaky in this market?

Thomas J. Crawford

Well you know I can’t comment about other people, but you know we’ve seen some of those things come through. And you know they’re aggressive. Some of them are I think knee jerk reactions. Some of them are out of desperation. And as I mentioned earlier you know we’ve really taken a longer term look at this. Once you start down that path, it’s easier to start down the path, it’s another thing to try and get back out of there.

Jamie Clement - Sidoti & Company

And last question that I kind of have is and you alluded to this and I know it was in the last call and may have even been the first quarter call, too, what you’re seeing in the direct cremation market and you had a number in the roughly 300 event type range in the press release out west, can you talk us through a little bit of the economics for Stewart Enterprises of the direct cremation market? And if people are you know price shopping in that area, what does that really mean to your profitability? Like if you lose 300 events you know is cremation, should we think about it in the same kind of high fixed cost nature as your other businesses and you let that business go because you want to preserve sort of the integrity and reputation of the home? How should we think about those?

Thomas J. Crawford

When you look at the pure economics, we have managed our costs well. We’ve gone back and looked at the few variable costs of what a cremation requires. And so you know if we wanted to roll around with the low end guys we could do that. But again you’re looking at the marginal profitability. I think the bigger issue for us is that as we’ve looked at the study that we’ve been doing and as we’ve re-examined our whole process. You know I think we’re coming to the fact that every consumer is important to us and we like people coming into our locations. We like to make sure that when they come in it gives us opportunities on whole multiple fronts. So for us, this re-examination while it’s kind of an easy statement to make over the phone here, is a big deal. And we’ve really re-vamped you know a lot of our thinking and our intent is that we can do a much better job in cremation and bringing those folks in.

And as we look at the whole, all the keyboard, and that’s why I mentioned in the last comment and it may seem simple but it’s an important point is that even how we look at track information. If we look at it one way we can get one measure but if we look at it another we can get a better viewpoint of the whole benefit of the cremation situation. So for us, economically we have a very good cost structure and we can take care of cremations very, very well but our intent is to serve the family in a way that is more meaningful and we think we’ve got more value added. And quite honestly we like those cremation customers and we’d like to get more of them in.

Operator

Your next question comes from Richard Innes - J.C. Clark Limited.

Richard Innes - J.C. Clark Limited

Two questions for you. I guess the first one is around the total market, what’s the outlook going forward? We’ve seen this unprecedented decline in the number of deaths this year. Are you seeing any improvement in the fourth quarter? And what should we view as the outlook for 2010? Do you see that bouncing back or stabilizing or continuing to go down?

Thomas J. Crawford

Well you know what, that’s just a fundamentally great question. Let me give you some thoughts on this. And again for the data that we look at, yes we are seeing some improvement and we’re pleased with that. But again it’s still early. Things could change on us. As far as where this market goes, one of the good things about this business is that deaths are going to continue to take place. The need is going to be there. That fundamentally hasn’t changed. You can’t run away from that. And that’s the good part about this business.

Now when I’ve gone back and looked at the data on back to 1947 going forward, and you look at the puts and takes, you find a couple things. That there are years when the market has absolutely dropped. Not to this level, but the market has declined. And typically you see it coming back. But here’s the interesting thing. As I’ve gone back and looked at the ups and downs and charted that on my own, is that you see in many instances that when it’s down one year, it bounces back the next. But there are probably the same number of times where it’s down one year, it might be down a second year before it starts to come back. So you have kind of a mixed bag, where it’s down one year, pops right back the next and then it’s down two years before it pops back.

So, Dick, you have really a 50-50 chance either way, whether it’s going to be another off year or whether it’s going to come back. What we’re planning on and we’re telling our folks is you know what, if it’s down one year you keep pressing ahead. Keep doing the right things. And my expectation is that the market will regain its legs and will come back next year. But again that’s my gut feel and I’ve given you the fact. You could argue it either way. It’s never been down that I’ve seen three years in a row but there are probably as many instances that it’s down two years as it has been for one year and then back up again.

Richard Innes - J.C. Clark Limited

Let’s hope it’s the latter.

Thomas J. Crawford

Well for me we’re sticking our chin out and saying we’re counting on it being up. But again, that’s why for us when you look at our funeral operations for the quarter, very pleased with that. We were down but you know in managing the costs, our folks in the field have done a terrific job and that in a down market you know the pure operating profitability actually went up. That’s what we want our folks to do so when it does spring back, we maintain that same discipline and get the benefit going upward.

Richard Innes - J.C. Clark Limited

Second question is the dichotomy here between your pre-need funeral sales and your cemetery property sales. Pre-need funeral sales seemed to have a pretty good recovery in the quarter, up 4.3% after being down. I think you’re down year-to-date 3.6% whereas property sales off 13.5%. I would have thought the same economic factors would impact a pre-need funeral as a pre-need property, other than possibly the large estate sales which I understand that get hit along with all of other luxury items. And I think you said that was about a third of the problem.

Thomas J. Crawford

That’s right. And Dick that is a good way to look at it. When we look at it, as I said it’s counter-intuitive that it would be down, except one of our executives pointed out to me about luxury car sales and was saying well you are right, there is that correlation. Now again we’re delighted that pre-need funerals is up and as we’ve talked about it and looked at it, we feel that, you know I wish they were both up together. But we looked at one kind of hopefully being a bellwether for the other and that our sales organization is still out there, they’re still selling. With the consumers we think it’s probably a little bit easier sale to make right now because it’s planning for the inevitability.

Now where I end up may be a whole different story. And that’s a decision you wait until the last minute. Oftentimes and Dick as you know from even markers and monuments, that’s a decision that people like to delay for a bit you know until they finally, you know that’s one that can be delayed. And the same thing applies with pre-need is that it’s probably a little bit more here and now for people and that cemetery I still can postpone that for a bit.

Richard Innes - J.C. Clark Limited

If you look at those two states where you had a 75% contribution to the property sale decline, are the pre-need funeral sales also weak there? Or are they off?

Thomas J. Crawford

Yes, they’re struggling there as well. That’s right.

Operator

And this does conclude today’s question-and-answer session. At this time I would like to turn the conference back to Mr. Crawford for closing comments. Please go ahead.

Thomas J. Crawford

Well you know again we thank all of you for joining us on the call today. We appreciate your questions. We appreciate your interest. And I just want to make one last comment that our effort and energy here is to do the right thing for the long-term of this business. We talk about that continually and leaving it better than we found it and doing things that will benefit this company well into the future. And we believe we are doing that and there are decisions that we made that we could have postponed. It would have been easy to postpone them and easy not to do that, but we pressed ahead because they’re the right things to do to build this company stronger. So with that we’ll wish you all well and I’ll look forward to talking with you in three more months. Thank you.

Operator

And that does conclude today’s conference. Thank you for your participation.

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Source: Stewart Enterprises, Inc. F3Q09 (Qtr End 07/31/09) Earnings Call Transcript

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