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Stewart Enterprises, Inc. (NASDAQ:STEI)

F4Q09 Earnings Call

December 18, 2009 11:00 am ET

Executives

Leslie Loyet – Financial Relations Board

Thomas J. Crawford – President, Chief Executive Officer & Director

Thomas M. Kitchen – Chief Financial Officer, Senior Executive Vice President & Director

Analysts

Jamie Clement – Sidoti & Company

Clinton Fendley – Davenport & Company, LLC

A.J. Rice – Soleil Securities

Richard Innes – J. C. Clark Limited

Colin Stewart – J. C. Clark Limited

Operator

Welcome to today’s Stewart Enterprises, Inc. fourth 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 like to now turn the call over to Ms. Leslie Loyet of Financial Relations Board.

Leslie Loyet

On behalf of Stewart Enterprises I’d like to welcome everyone. By now you should have all received a copy of the press release. If not, please contact [Liz Doleizol] at 312-640-6771 and she will send you a copy immediately or visit Stewart’s website at www.StewartEnterprises.com for a copy.

Management will provide an overview of the fourth quarter and year end 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 this 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, statements regarding industry trends, competitive trends and their effect on future performance and assumptions underlying the forward-looking statements regarding the company’s 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, 2009. 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.

Reconciliations 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 December 18, 2009.

With that said, I’d like to introduce management. With us today 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

We’re delighted to have you on the call today and we trust that you have had time to read the press release and earnings report for our fiscal year 2009. As is our custom, I’ll give an overview of the accomplishments of the year and the fourth quarter and Tom will provide more financial details later in the call.

Given the economic environment and the overall market conditions with fewer numbers of deaths, fiscal 2009 was an exceptional year of challenge. Many of our long term employees have commented that they have never seen a year quite like the one we just finished. However, with that said, we believe 2009 was also a year of opportunity for the company.

While we got off to a slow start at the beginning of the year, we are encouraged by the results as the year progressed especially those of the fourth quarter and we like the direction of our trends. While same store calls for the year declined by 5.9% compared to 2008 results, our performance over the last six months of the year showed marked improvement especially to the results of the fourth quarter where call volume was essentially equal to the prior year.

Pre-need funeral sales increased for the year by three tenths of a percent and increased 11.8% compared to the fourth quarter of last year. This quarter also follows a positive third quarter where pre-need funeral sales were up 4.3%. With pre-need cemetery sales while we did not get back to the prior year levels, we achieved the highest property sales for the fiscal year in our fourth quarter with a slight decline of 2% compared to the fourth quarter of 2008. Overall, we experienced a 13.2% decrease for the fiscal year.

We do not like the overall regression in property sales but we like the direction of the trends for each of these metrics with the fourth quarter having the strongest performance of any quarter this year. We remain encouraged and we’re optimistic going in to 2010. We are pleased with our efforts to instill a best in class mindset throughout our operations as evidenced by our expansion of both gross margin dollars and margin percent over the past six months in our funeral segment despite declines in volume.

For the quarter we increased funeral gross profit by $1.1 million and funeral gross profit margin by 180 basis points compared to the fourth quarter of 2008 by effectively managing our costs and improving our labor productivity in a systematic and sustainable manner. Our fourth quarter results are a continuation of what we experienced in the third quarter. Our recently implemented systems, our best in class tools and techniques and continuous improvement in mindset are paying dividends today.

By achieving these results in a reduced death market, we believe we can further extend margins and margin percentages as the market improves. As you recall, a year ago the economic conditions were turbulent, volatile and uncertain, back then as we looked ahead it was our intent to focus on strengthening our balance sheet, generating strong cash flow and profitability. I’m pleased to report that the company’s financial condition remains strong as we have reduced our debt by 18%, generated high levels of cash and strengthened our ability to produce greater earnings in to the future.

It remains our intent to manage for the long term benefit of shareholders and throughout the year we have continued to invest in technology and our employees. We have focused on continuous improvement and have completed system implementations that will improve efficiencies and information processes throughout the company. We will maintain our focus on continuous improvement initiatives in an effort to further reduce waste and inefficiencies and continue to increase productivity from our business.

During the year we also put a significant amount of time and energy in to analysis and a valuation of our investment allocation policies of our trust to better match risk and return with the underlying needs of the trust. Tom will discuss our actions later in the call. Speaking on the performance of the trust, on an annual basis we experienced total annual return of over 15% in our pre-need funeral and cemetery merchandise and services trust at a total annual return of nearly 20% in our perpetual care trusts.

Before I turn the time over to Tom, let me provide a brief summary of our fourth quarter and our yearend financial performance. For the fourth quarter earnings increased to $5.9 million or $0.06 per share. For the fiscal year earnings increased to $35.7 million or $0.39 per share and our operating cash flow was solid at $84.9 million for the year. Overall, given the market conditions and the difficulty of how we started the year, we’re pleased with the positive trends we experienced as we gained momentum throughout the year.

Now with that, I’m going to turn the time over to Tom Kitchen.

Thomas M. Kitchen

Today I want to talk to you about our cash flow and how we’ve used that cash flow in 2009. I’ll also give you an update on our trust performance for the year and what our expectations are for 2010. One of the many things that we have focused on this year has been generating strong operating cash flow and maintaining significantly liquidity. While we look to control all areas of spending and working capital management, we took an in depth look at some of our tax accounting policies and with IRS approval we made several changes resulting in refunds and reductions of current year tax payments. In fact, during fiscal 2009 we received approximately $32 million of cash flow primarily related to our tax planning strategies resulting in $20 million of tax free funds and $12 million in tax payments we did not have to make.

For the year we generated $85 million in operating cash flow and $72 million in free cash flow which is the highest level in the last five years representing a 7% increase from fiscal year 2008. This is in comparison to an equally strong $67 million free cash flow in ’08. When viewed together, we generated $139 million over the last two years. We’re pleased with this performance especially in light of the economic backdrop of the last 18 months. So, how did we deploy this cash?

Well, we purchased nearly $83 million or 18% of the company’s senior convertible debt for approximately $61 million or an average discount of approximately 27% in relation to the par value of the debt. As a result, we recorded an approximately $20 million pre-tax net gain from the early extinguishment of debt. In addition to improving the company’s financial condition our future results will be improved by reducing cash interest payments by more than $2.7 million annually.

In addition to using our liquidity to repurchase debt, we constructed two new funeral homes and currently have two additional funeral homes under construction. Also during fiscal year ’09 we increased our annual dividend rate by 20% and paid $9.7 million to our shareholders through dividends which we consider to be an important use of our liquidity. Even after considering significant debt repurchases, investment in our business, dividends and operating cash needs, we ended the year with $63 million of cash.

At the end of fiscal ’09 our long term debt was $367.5 million and our net debt was $305 million which is the lowest in more than $10 years. This enabled us to improve our leverage coverage ratio to 3.4 times which is significant in light of the economic challenges we face in ’09. Lastly, as previously announced, we entered in to a new $95 million credit facility during the year. We’re pleased with the current structure and we believe it supports the company’s business strategy going forward. We’re also pleased to report that we have not drawn against this facility.

While we’ve been very successful in generating strong cash flow for the past few years, our plans for 2010 are based on some assumptions that warrant a few comments. First, while we continue to pursue certain tax planning strategies in 2010 we can’t say with certainty at this time which, if any, will result in lower tax payments. We therefore have factored in to our planning cash tax payments of approximately $12 million which is an increase from fiscal year 2009.

Additionally, the company’s plans include gross capital spending of approximately $5 to $6 million to cover the construction of two new funeral homes. Also, we are committed to our cremation initiative and allocated capital to implement that philosophy to expand on these cremation opportunities. Finally, as noted previously, the company has recorded a $14 million perpetual care trust funding obligation that we may be required to fund in 2010. Although we will continue to manage the timing of satisfying the obligation, it could result in a use of cash in the next fiscal year.

In summary, our plans are based on lower free cash flow in 2010 compared with ’09 as a result of these items. Notwithstanding these special factors I just mentioned, we will endeavor to maximize our cash flow during 2010 and believe our cash flow from operations and other sources will enable the company to maintain its strong financial position and provide sufficient liquidity to address all of its needs.

Another significant highlight experienced during fiscal year 2009 is the overall performance of the company’s trust portfolio. We’re pleased to report that the investments improved sharply during fiscal year 2009 resulting in a total return of approximately 17% for our consolidated portfolio. As of October the 31st of ’09, we have reduced our realized loss position by $116 million from the low point which was January 31st of ’09. Since our fiscal year end and as of November 30th of ’09, the fair market value of our consolidated portfolio increased nearly $22 million or 3% further reducing our unrealized loss.

The company has taken advantage of the rebound in the financial markets to rebalance the trust portfolio. We have reviewed alternative asset allocation models and selected a new allocation that is more heavily weighted towards fixed income securities. As a result, we have reduced our exposure to equities and have increased our investment in fixed income securities where we intend to generate a reasonable rate of return with a lower risk profile. We will continue to reduce the volatility of our investment portfolio by adjusting our asset mix as the financial markets improve.

Finally, 2009 trust related revenue was about $8.8 million less than 2008. We anticipate 2010 trust related revenues to be similar to ’09. Before concluding my remarks I’d like to discuss an accounting change that impacts all companies with convertible debt that may be settled in cash upon conversion. This change will be effective for us in the first quarter of fiscal year 2010. In general, the accounting change requires convertible debt to be segregated between debt and equity based upon fair value using the company’s non-convertible debt borrowing rate.

As a result, beginning in the first quarter of 2010, all periods will be presented in accordance with this new pronouncement and will result in the following. First, the fiscal year 2009 reported results will reflect an approximate $5.4 million increase in interest expense and a $13 million decrease of the pre-tax gain on the repurchase of the senior convertible notes. Second, over the remaining life of the convertible debt, we estimate earnings after taxes will be reduced by approximately $1 to $4 million annually and EPS therefore will be reduced by approximately $0.01 to $0.04 per diluted share. Finally, although this change will impact reported earnings, I need to reemphasize it will have no change in cash interest paid or cash flows.

To conclude my remarks, throughout fiscal year 2009 the economic environment and overall industry conditions have certainly been a challenge. However, we are pleased with the way our company has responded with regard to controlling costs and generating positive cash flow. We also are pleased with the way that we have used that cash flow to reduce debt which resulted in an overall improvement in the company’s financial condition.

Now, I’m going to turn the call back to Tom Crawford.

Thomas J. Crawford

During 2009 we prudently managed our cost but we also continued to take long term view and make investments in facilities, infrastructure and people needed to build a stronger, sustainable growth in the future as evidenced by the topics we’ve discussed this morning. We are optimistic about 2010 and beyond. In relation to normal conditions that affect our business on a day-to-day basis, we assume that the number of deaths in 2010 will return to some sense of normalcy. We assume the consumer attitudes continue to improve as consumers better adapt to existing economic conditions and outlook and we assume the financial market gains made in 2009 will be maintained.

In how we operate our business we expect to retain and expand the games made with the best in class initiative and all the investments we’ve made in technology and infrastructure. The flattening of the organization with the elimination of the divisions has given us more focus on driving operational gains and property sales improvements and the trends are indicative of that progress.

From our third quarter in depth study of cremation, we are excited with the opportunities available by altering and improving our practices in serving cremation oriented families. Our commitment to serving families in death care relates to three primary things. Now, I’m going to quote to you from the internal documents that we have in the company however, these really came from the mouth of the Chairman of the Board, Mr. Frank Stewart and after all the numbers and after all the analysis this is the best and clearest articulation of what it is we do in our company.

Those three things are first, to help families and individuals create a personal, meaningful and memorable celebration of a life well lived. Second, to provide families and individuals with dignified and varied choices regarding the disposition of their loved one. Third, to offer families and individuals choices in lasting memorialization that will preserve the legacy of their loved one for generations to come.

In relation to serving cremation families, we believe we do a relatively good job with the first two points. But, as we’ve learned from our study that there is a significant opportunity on the last point of lasting memorialization which plays to the strengths of our cemeteries and our facilities. Cremation is over 40% of our business and will likely continue to grow. Today we feel we have a much better roadmap to the future to increase our performance and our profitability in this segment of the market.

We are aggressively implementing action plans to capitalize on that opportunity. To date, we have added two high level cremation experts in our organization. We’ve changed our field organization structure to enhance our effectiveness in growing volume, revenue and profits by serving our families better. We’ve changed our cremation inventory development philosophy in our cemeteries. And, as Tom mentioned earlier, we have allocated capital to implement this initiative.

Cremation is a significant growth opportunity for Stewart Enterprises and we are well positioned to capitalize on the opportunity. We will also become more proactive and aggressive in pursuing growth via acquisition. With our best in class initiative and our technology infrastructure in place now, we have more confidence in our ability to acquire and add value, and that’s lasting value. With the relative strength of our balance sheet, cash and cash generating ability and our unused debt capacity, we believe we are in an ideal position to grow via acquisition.

As I mentioned at the beginning of the call, we are pleased with the trends as the year has progressed, especially those of the fourth quarter. We remain encouraged with what we see in the early weeks of the new fiscal year. Given all the issues we’ve discussed thus far we believe we are taking positive long term actions. Therefore, we look to 2010 and beyond with great optimism. We will now take your questions. Operator, I’ll turn the time over to you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jamie Clement – Sidoti & Company.

Jamie Clement – Sidoti & Company

Tom, with respect to the gross cap ex dollars that you have allocated towards developing the cremation business, are you talking about things like memorial gardens, those sorts of things in your cemetery properties? What are the areas where that money is going towards?

Thomas J. Crawford

Those are exactly the types of things we are doing. That’s a good question so I could just stop it right there but I think it needs more explanation. We really learned a lot in how we have built investments in cemeteries for cremation and we realized that we were doing more on an afterthought basis and not as active and proactive as we need to. So, as I said we’ve changed how we look at our capital, how we look at what we are doing so we will be investing in gardens and doing things that we are pleased and proud to take families in to that we think will be very positive and so that’s what we have slated for this year and we’re out aggressively looking at that right now.

Jamie Clement – Sidoti & Company

Tom, just another follow up on cremation, looking back at the last four quarters I notice you had a bit of a down tick this quarter in cremation as a percentage of your business. Are your people at the local level – is it becoming clearer that when the economy was sort of at its worst earlier this year that there may in fact have been more of a recessionary based move towards cremation in your industry this year?

Thomas J. Crawford

That’s a good question. Again, a thumbnail analysis that was done some time ago, and again it’s back of the envelope, during any time you have an economic down turn what we have seen is there might be a little bit of a spike in cremation. I think that’s what happened this year and especially at the low end and that’s what we experienced where we had more of a mix down. There is a segment of the population that just drifted to as low as you possibly can. We think that’s what impacted us this year but again, we feel that we made progress on that and are very positive going forward.

Jamie Clement – Sidoti & Company

Tom, just from the looks of the numbers it looks like that trend sort of moderated more towards your favor in the fourth quarter versus where it was in the second and the third. Do you think that’s right?

Thomas J. Crawford

It did. We saw a bigger jump I think in the third quarter if I’m not mistaken, if I’m remember correctly, a bigger jump and then for the fourth quarter it came right back down again. It still showed an increase year-over-year but a much slower rate in the fourth quarter.

Operator

Your next question comes from Clinton Fendley – Davenport & Company, LLC.

Clinton Fendley – Davenport & Company, LLC

First question, Tom Kitchen I wondered on the accounting change with the covert the $0.01 to $0.04 impact for next year what variable would cause us to be at the top or the bottom of that range?

Thomas M. Kitchen

It’s the 2010 year is going to be at the top of that range. So, as the debt amortizes to its face value then the interest will become less until it reaches its maturity.

Clinton Fendley – Davenport & Company, LLC

I wondered if we could step back as well, your comment Tom Crawford that deaths will likely return to normalcy next year. Just recognizing that it’s very difficult to predict, what are your volume expectations for Q1?

Thomas J. Crawford

Well, we typically don’t give much guidance on that and again, looking at historical deaths, going back to the 40s, any time there’s a downturn usually there’s an upturn. Now, there’s a possibility you may have a year of down volume followed by a year of no growth or a slight decline but typically where it’s down it will come back up. So for us, we’re planning that in our organization that the volume will increase and that’s the message and that’s where people are planning on and pursuing. As I said, we’re early on. As we look at the data, one short period does not predict anything but we tend to be relatively encouraged by what we see.

Clinton Fendley – Davenport & Company, LLC

Obviously we’ve had somewhat of an abnormal flu season this year and that has tended to be one of the largest drivers of the activity in the early part of the year. Obviously it’s a bit difficult to know given the H1N1 but no expectation that this year might be abnormally loud as well given that we may have already gone through the flu season for this year?

Thomas J. Crawford

We haven’t gotten in to the new flu season and it’s coming up and typically that starts to hit in the later part of the first calendar quarter. But, we went through an extremely mild period in 2009. Now, what was also intriguing to me was just the last few months how much discussion there has been in the press about flu, not necessarily just H1N1 but any kind of flu that’s out there. To me that was some interesting chatter just out in the media with concern about flu. So, it’s still coming up but our expectation is if history follows the market has a better opportunity to sense an expansion than we do a contraction but again, we’ll see how that works.

Clinton Fendley – Davenport & Company, LLC

Then last question here, obviously you guys are continuing to push to delever. I wonder if you can comment on the current environment for M&A?

Thomas J. Crawford

Well right now historically prices have been inflated and that has kept us looking but not pursuing. We think there’s more sense of reasonableness from a pricing standpoint going forward and as I mentioned, we feel like we’re in a great position. Last year, just remember how things were a year ago and what all the concerns were. What a difference a year makes but with all the actions that have been taken place that Tom and I both described, we feel we’re in a terrific position because of the cash that we have on hand, the unused borrowing capacity and with what we’ve been working on really the last two years to put in place we’re seeing great evidence of that this year. So, we feel like we’re in a good position to move forward.

We’re going to be more aggressive and proactive. But, at the end of the day we will still do what’s in the best interest of the company and it’s not going to be pursuing things that are not priced well or properties that we can’t necessarily pursue.

Operator

Your next question comes from A.J. Rice – Soleil Securities.

A.J. Rice – Soleil Securities

I have a couple of different sort of clean up questions, on the flattening out of the at need volume in the funeral homes this quarter is that your sense that that is sort of the underlying trend of the market or was there any dynamic that you think would have had you do better than what maybe those trends were?

Thomas J. Crawford

You think for the quarter?

A.J. Rice – Soleil Securities

For the quarter you guys are reporting that you flattened out year-to-year in the at need case volume and I’m just trying to figure out if that’s indicative of the market or if there was anything that would have driven better than that results for you specifically?

Thomas J. Crawford

We joke that it’s outside of just brilliant and good looking management but that doesn’t account for it. But, what we would tell you is all the data we have from the CBC is there was actually a decline once again in the fourth quarter in the [inaudible] that we look at. That’s probably two quarters back-to-back so it continues to decline probably about 3.5% is the data that we had for the quarter. So our gains we felt very positive about.

Now also when you take a little bit closer look at that the thing that is interesting is that as we look at the types of volume that goes for our location, one of the things that we categorize is ship outs, infants and others which is we don’t do full service – that part of the business actually was in decline so when you net that out, just the base business we actually were over where we were in the previous year. Those were all positives.

We’ve got all the implementations behind us that took place in 2009. We think that fourth quarter our people have really been focused on operating the business, getting out in the communities more so all the things that we had to put in place in 2009 are behind so we think we’re getting back to just what we do so I would assume those are the things that we’re seeing for the quarter.

A.J. Rice – Soleil Securities

I guess I’m just wondering is there any chance maybe earlier in the year you were losing some to discounters that are maybe coming back in now that the economy is stabilized a little bit? Is there any way to test that theory?

Thomas J. Crawford

Well, we monitor at a local level what is happening to us. I mean, there are really quite detailed reports location-by-location. Where we saw the biggest slide was in the northwest and that’s where we have an intense cremation market and that’s where we feel like the bottom just kind of slide out on us a little bit. That’s where we had the biggest impact this year.

A.J. Rice – Soleil Securities

Are you getting a little bit of that back?

Thomas J. Crawford

It’s interesting also, this is a one off so you have to take it with a grain of salt but even some of our competitors at the local level, these are the moms and pops, the one offs here and there that proclaim low price, we looked at an ad the other day and the average that they were toting was actually in line, might have been even a little bit higher than what we’re offering and we haven’t changed our prices. We also have seen in the marketplace, it’s one thing to be a discounter and to see the discounters really running their business up on the rocks. [Inaudible] that comes back at the end of the year.

Anybody can gain volume but to gain it where you have a business, that’s the other part of the equation. So, how that swings back time will tell but we really like the results of the fourth quarter especially when you relate it to what we see in the market standpoint from CDC.

A.J. Rice – Soleil Securities

Tom Kitchen if I might ask, obviously you’re at a point now where your debt to EBITDA is down to about 3.4 like you said and you’ve paid down some debt at opportunistic purchases, what in your mind is the right level of leverage at this point going forward and when have you paid down too much debt and you need to think about buybacks, giving money to shareholders if acquisitions don’t materialize or if there’s not enough development?

Thomas M. Kitchen

We are comfortable with the leverage coverage at this point in time. Our plans are certainly to focus on the company’s financial condition to maintain the strength because we think that that strength is going to give us an opportunity to use our liquidity for some acquisition or growth opportunities whether it’s in developing the cremation gardens, or building new funeral homes, or perhaps making an acquisition that we feel would maybe have favorable EBITDA consequences for the company.

Going forward, at least initially in to 2010 our goal is to perhaps take maybe a little different tact with regard to our liquidity and to try to grow the company and to realize the benefits from that growth. If the debt opportunities or repurchases are deemed to be attractive, we may do that but certainly last year was what I would view as almost a once in a lifetime opportunity in a sense that we were purchasing debt at discounts of about $0.27 and today those discounts are significantly less than $0.27 on the dollar.

But, to go back to your question in terms of the share repurchases, if we think that going forward the share repurchase has the value for the shareholders, we would take a hard look at that. We still have $26 million or so remaining on the share repurchase plan that we had approved in 2008 and then in the middle of 2008 we suspended the share repurchase but certainly we’ve got that teed up and ready to go if we think that has a benefit for our shareholders. We are certainly open to that as a possibility going forward in to 2010.

A.J. Rice – Soleil Securities

My final question would be in talking about the development opportunities, I guess you’ve got the affiliation relationship in Texas that you’re developing and the combination on it you’ve got the two funeral homes on it one in South Carolina and one in Florida that you were developing. Are those basically all on track and is there any other development opportunity that’s come along in the last few months that would be worth highlighting?

Thomas M. Kitchen

The short answer is yes, they’re on track. We actually built and completed two funeral homes in the FY ’09 period. One of them was a combination opportunity for the municipality in Texas. There are two more under construction in Florida and so we like the markets that they’re in. One of the two is actually a combination operation for us so it’s something that we think is the company sweet spot in terms of its competitive strengths. We’re going to look at continuing those opportunities for us to put a funeral home on to a cemetery property whether it’s our cemetery or perhaps maybe some affiliation we can work with a municipality or maybe some religious order.

Thomas J. Crawford

The other part of our development goes back to that cremation that we talked about before. We talked about gardens, I probably spoke to early on that. It’s more than just gardens, we saw some things last year in our study that were really quite unique and challenged our thinking and that’s why we will be focusing capital on that part of the development of our business and to do it in a significant way.

Operator

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

Richard Innes – J. C. Clark Limited

Three questions for you, first one on pre-need sales, funeral very strong in the fourth quarter up about 12% but on the other hand cemetery was weak, I think down a couple of percent. Why aren’t those moving in tandem here? Why is cemetery weak when funeral is so strong?

Thomas J. Crawford

Well, I think from our business they have moved in a general direction but they have not been one-for-one historically. As I said before, I looked at those things when our pre-need came back, I looked at that as a [inaudible] and I still believe that. That’s been typically one of the more sales that would stay in in a tough economic condition and that’s why we were very encouraged by the third quarter and extremely encouraged by the fourth quarter. Our momentum is good, our people’s attitudes are right.

Richard Innes – J. C. Clark Limited

You’re talking about funeral now?

Thomas J. Crawford

I’m sorry, funeral pre-need. Now, here’s the second thing that is interesting, when you look at our cemetery property sales you have to segment that and if you ask me what really surprised me in 2009 that I wasn’t anticipating, I knew it would be a tough economy but I thought our large sales, our large estate sales would have hung in there. That’s where we’ve had the biggest struggle through the year and that’s great business when it’s up. It’s not a huge percent of the business but as far as the decline it has a significant impact. That’s the one where we’ve had a tougher time getting large sales through in 2009.

Now, when you back out the large sales and just get the net of everything else, the rest of our basic blocking and tackling bread and butter business is actually still down but not down that much. So, that’s been a pleasant surprise. The other thing is on the large ticket items, our backlog is still relatively full. We feel good about that so it’s just trying to unfreeze that backlog getting people to move forward. Those are the things that you have to segment a little bit closer but as far as both of them moving, they’re both moving in the right direction right now and we feel positive.

They’re not going to correlate one to the other so that’s the biggest impact. Also, you have to understand one other thing, our decline has been focused primarily in one area and that’s been in Florida. That’s been when you pull out any economic indicator you want, that’s the area that has been hardest hit by unemployment, by property values, any other measure you want to have. So after sorting through all of that and as I said, right now our trends are positive and good and we feel the basic blocking and tackling is right where it needs to be.

Richard Innes – J. C. Clark Limited

The second question is on same store revenue per call which was down 4%. Now, part of that is trust earnings but if you look at the traditional it’s up .7, cremation is up 1.5, I would think that’s a little below where you’d like it to be. Do you see that improving?

Thomas J. Crawford

That’s one of the things that we’re anticipating improving, yes we are. We’ve had a very positive trend throughout the year, the fourth quarter it dipped a little bit but we have just reinstituted a training module that we just put out in the field this last year that really focuses on doing a much better job. We are reevaluating our packages, our Senior Vice President of Operations just returned from an intense trip with our folks. So no, we don’t consider that we’ll continue on at a low growth but for the fourth quarter it did take a little bit of a dip but all over on average for the year we showed some pretty good progress.

Richard Innes – J. C. Clark Limited

My last question is on acquisitions, the strategic emphasis on that going forward is that because of a change in strategy or do you see better opportunities in the marketplace?

Thomas J. Crawford

Well, I think Dick as I said before it’s kind of layering in a good foundation where we can keep, and retain, and sustain and grow whatever it is that we acquire. I am a student of history and I do go back and look whether it be wherever I visit or the industry that I’m in and we all know what happened in the past with acquisitions and for this business we’ve spent the last couple of years really putting it in place all the infrastructure, all the best in class and then by flattening the organization we have a much, much more focused effort. This is one where we feel very strong.

There hasn’t been a time where we didn’t want to do acquisitions but we were very selective and very careful on that and we’ll continue to be careful and continue to be selective. But again, with a stronger balance sheet as we said earlier, we want to expand what it is we do. We feel that we are just in a much better position to do that.

Richard Innes – J. C. Clark Limited

Tom, did you look at Keystone and Palm?

Thomas J. Crawford

I read about them after they came through. We don’t typically comment on those and anything that we look at obviously we’re asked to keep very confidential and I’m just saying this in general. We hold that on anything that we’ve looked at very strictly.

Operator

Your next question comes from Colin Stewart – J. C. Clark Limited.

Colin Stewart – J. C. Clark Limited

I just had one quick question, when I sort of try to get to an EBITDA number and where you guys were for this year, it looks to me it’s somewhere around $87 million in change which is down about $10 million in EBITDA from the previous year. It appears the two primary impacts were both on the trust fund earnings which you’ve already commented on and obviously on the cemetery property sales which you’ve touched on as well. I think Tom Kitchen in your commentary you made a comment regarding your expectations for 2010 that the trust earnings would be about flat with where they were in ’09 so sort of that doesn’t look like it’s going to come back.

I guess my question sort of pertains to the cemetery property sales and do you expect with a rebound in the economy and things looking a bit better on that front that you would get some kind of a snap back in the cemetery property sales which would allow you to get your EBITDA back up to where you were previously running or sort of what has to happen in the core business? If you’re not going to get a rebound in the trust earnings, what has to happen to get that EBITDA back up to closer to where you were in ’08?

KK

That’s a good question. The answer to that question is yes, we expect a snap back and as I said when you start to pare back our property sales the decline was not systemic at all, that’s the good thing. It was focused in highly hit areas and again, when we look at just the trends we feel positive that those areas are coming back. You segment out the large estate and again a different story emerges. So we intend that we’re planning on our property sales coming back.

That’s why we said a year ago and through the year the whole impact of the economy put people in a state of holding off and we think that’s one of the – it’s clearly hit us in the large estate area but we believe that’s going to thaw. As I said, just as we monitor our weekly performance, people monitor it daily, I don’t, I monitor it weekly, we like what we’re seeing right now. So, our cemetery sales we believe are going to come back.

On the operations side we feel terrific about what has happened with our best in class and our systems. That’s why I emphasized the fact that our margins expanded not only in absolute percents but in absolute dollars as the volume was diminishing. Those are gains we’re going to retain going forward. The acquisition piece again, we’re going to be aggressive on that but again, you cannot necessarily predict when that is going to come to pass. But, the other point is that we’re taking cremation very seriously and this whole issue of memorialization.

I did [inaudible] for a minute called him just to find out past experience on what the memorialization rates are that they encountered and his are right in par with what our goals are and it shows us the opportunity that we have going forward. So, you layer all those things in, those are the things that we feel will get our EBITDA right back.

Operator

It appears we have no other questions at this time. Mr. Crawford I would like to turn it to you for any additional or closing remarks.

KK

Again, we all thank you very much for being on the call today. From all of the people at Stewart Enterprises we wish you the best blessings for the New Year and for the holiday time with your families. I will tell you, here at Stewart Enterprises we are all dressed in black today and we hope you will all be supporting us as we say Go Saints going forward. It’s good for the community and good for us. But anyways, we’re delighted to have you on the call. We feel good about the actions we’ve taken. We really feel positive about 2010 because of all the things we’ve done in the past and we look forward to a good year. We’ll see you in about three more months if not before.

Operator

That does conclude today’s conference. Thank you all for your participation.

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Source: Stewart Enterprises, Inc. F4Q09 (Qtr End 10/31/09) Earnings Call Transcript
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