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Stewart Enterprises, Inc. (NASDAQ:STEI)

F1Q10 (Qtr End 01/31/10) Earnings Call

March 11, 2010 11:00 am ET

Executives

Scott Eckstein – Financial Relations Board

Tom Crawford – President and CEO

Tom Kitchen – Senior EVP and CFO

Analysts

Drew Depitus [ph] – Davenport

Robert Willoughby – Merrill Lynch

David Schmookler – Kingsland Capital

Richard Innes – J. C. Clark Limited

Jamie Clement – Sidoti

Operator

Good day, ladies and gentlemen and welcome to the Stewart Enterprises, Inc. first quarter 2010 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 conference over to Mr. Scott Eckstein of the Financial Relations Board. Please go ahead, sir.

Scott Eckstein

Thank you, operator. 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. If not, please contact Tom Hoye [ph] at 312-640-6688 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 first 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 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 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, 2009. The company uses adjusted earnings, EPS, 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 in 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 March 10, 2010.

With that said, I’d like to introduce management of Steward 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 sir.

Tom Crawford

Scott, thank you very much. Good morning to all, and we thank you for joining us on the call today. We trust that you have had time to read the press release and earnings report for our first quarter and fiscal 2010. As is our custom, I’ll give an overview of the accomplishments of the first quarter and Tom will provide more financial details later in the call.

We’ve begun fiscal 2010 with a good strong start growing first quarter revenue and profitability and continue in the positive trends we generated over the latter part of 2009. We are pleased with the shape of our progression from revenue to earnings for the quarter. Revenue grew by 4% and by better managing our fuel costs, we generated growth of 9% in growth margins. We reduced corporate G&A cost by 13% reducing operating and income growth of 22%.

And we took prudent action in 2009 to significantly reduce our debt with favorable prices which allowed us to lower our interest expense by 13%. Therefore, net income grew by 57% and earnings per share by 60%. While we clearly don’t expect the progression of revenue to earnings to continue at first quarter rate, it does demonstrate how we intend to operate the business. Small changes in the topline produced larger changes at the bottom line. For the quarter, we saw strong performance in all three revenue producing segments of our company; cemetery, funeral and trust operations.

We are especially pleased with the progress of our cemetery segment where we increased revenue by $5 million for a growth of 10%, gross profit grew by 25% and gross profit margin expanded by 130 basis points. This increase in cemetery revenue was largely due to growth in cemetery property sales of 10%. It is worth noting that we were able to grow property revenues without a significant tailwind from the sale of large accounts. We did see growth in the large accounts volume quarter over to quarter, but the bulk of the increase came from basic blocking and tackling, bread and butter inventory property sales. While we experienced a slowdown in high-end sales during 2009, the backlog of clients we are actively working with remains high, and the dollar amount of property in the backlog is significant. In other words, our high value property pipeline remains full, and we believe that these customers become more assured about economic conditions, we’ll see greater sales of high value property in the future.

An additional point worth noting, in fiscal 2009 I reported that approximately one-third of our decline in cemetery property sales occurred in one state, where the impact of the recession was more extreme in relation to unemployment, home proposers, and where consumer confidence was exceptionally low and pessimistic. For the quarter, we saw significant improvement in the performance of our sales team. In that state as property sales increased in excess of 20%, we are encouraged with the progress our sales and cemetery operations team have made after the difficult conditions of 2009.

Cemetery sales showed improvement in the fourth quarter of 2009 and have continued to improve as demonstrated by the results of the first quarter of 2010. We expect to continue to gain momentum as the year progresses. In our funeral segment, overall revenue grew by about five-tenths to 1%, gross profit by 5%, and gross margins increased by 120 basis points quarter over quarter. While revenues grew by approximately $400,000, the increase was driven by the strong performance of our trust, our funeral trust, which increased by $500,000 during the quarter. In other words, excluding trust, funeral revenue was essentially flat.

We were down in same-store calls during the quarter, and for the first time in my three years with the company, our average revenue per call actually declined, though small, year-over-year. With that said, let me tell you why I think those results are interesting, and more on the positive side. First in relation to calls, our volume was below the same period last year by 1.3%, using CDC and other reported data, it is believed that the number of deaths for the quarter has actually declined period over period from between 3% and 5%. But we don’t like our volume declining, the reality is the overall margin is smaller than a year ago. However, as we saw on the fourth quarter of 2009, overall we have outperformed the market and we’ve gained market share.

Second, regarding averages, our average revenue per call decreased by six-tenths to 1% for the quarter, driven primarily by an eight-tenths to 1% reduction in the average revenue for traditional events, and offset by a 1.3% increase in average revenue for cremation services. Additionally, we experienced continued growth in cremation, from 40.3% of total calls last year to 41.4% this year, which further impacts averages.

We have seen some effect of consumers being price sensitive in this challenging economy environment, but we have also seen where our presentation processes can be strengthened to ensure that our frontline people are making full and complete presentation. To ensure that our presentations processes are consistent, we have invested a significant amount of time in the field to re-work our packages, evaluating and improving our casket information merchandisers’ assortment and reinforcing the value added services we provide. We will be implementing our revised packages and merchandising offerings later this month, and expect to see positive growth in our averages for the remainder of the year.

The second point that while our average revenue per event has declined slightly over the period, fourth quarter 2009 to first quarter 2010 comparisons actually show an improvement in both traditional and cremation averages. The significance of this discussion on averages is that we are not dependent on large price increases to generate improved profitability.

Given our reduction in volume of 1.3%, an average revenue per event decline as $0.06 [ph] or 1% and even after factoring out the positive impact of the funeral trust performance, funeral gross margin dollars increased by 3% and margins improved by 80 basis points. Our best-in-class initiative continues to pay dividends as we inculcate the mindset of institutional best practices and continuous improvement with strong systems to enhance productivity and value.

Additionally, we are pleased that our first quarter funeral margin of 26.6% is the highest funeral margin in almost two years. Beginning in 2009 and throughout the first quarter, we have continued to prudently manage the rebalancing of our trust portfolio to generate a reasonable rate of return with lower overall volatility. We have also continued to see progress with our trust performance resulting in a 29% return on our funeral and cemetery merchandizing services trust and a 33% return on our perpetual care trust over the last 12 months.

In our year ending conference call for 2009, I stated then, that despite the difficult conditions of the year we believe our actions of 2009 would provide a solid foundation for future growth. We are seeing the evidences of our belief we manifest in the result of the first quarter as the momentum generated at the end of last year has continued through the quarter. This resulted in substantial increases in our profitability and further strengthening of our balance sheet.

With that, I’m going to now turn the conference over to Tom Kitchen who will give you a more detailed review. Tom?

Tom Kitchen

Thank you, Tom. Today, I would like to discuss our financial performance for the quarter and I will address several topics of interest that warrants specific attention. First, in regards to our earnings, we realized the cemetery improvement earnings for the quarter ended January 31, 2010 compared to the same period of the prior year.

Net earnings and earnings per share improved by approximately 60% from prior year driven by a number of factors such as improving revenues especially cemetery, effective cost management as reflected by reductions in corporate G&A and interest expense and improved trust portfolio earnings.

Cemetery revenue increased nearly $5 million or 10% due in part to improvements in property sales and cemetery merchandize delivered in the first quarter of 2010. As Tom mentioned earlier and its worth repeating the overall improvement in earnings in this quarter illustrates very well the power of leverage in the business by translating single digit growth in the top-line revenues and to very real double-digit growth in the bottom line.

With regard to our trust portfolio and as Tom has mentioned previously, we have experienced positive returns in the last four quarters, resulting in returns for the trailing 12 months to approximately 30% for both of our merchandize and services trust and our perpetual care trusts.

Pleased to report that our investments continue to improve during the first quarter of 2010 with a 4% return on our merchandizing services trust and a 5% return in our perpetual care trust. The last 12 months ended January 31, 2010, the fair market value of our portfolio has improved a $137 million to approximately $750 million.

Regarding our outstanding debt, the company has repurchased nearly $84 million of its debt in the last 12 months has enabled us to realize significant and tangible benefits such as lower interest expense in the first quarter of more than $900,000, reduced interest payments of approximately $2.6 million expected for this fiscal year and significant improvement in our leverage coverage from nearly four times to 3.4 times in the last year despite the headwinds experienced in ‘09 and into 2010.

Since most of the repurchases of the company’s outstanding debt occurred over the last three quarters of ‘09 the favorable comparison to interest expense is expected to decline over the next three quarters.

In previous conference calls, we have discussed our continuing efforts to examine our tax policies for opportunities to reduce current and future cash tax payments. I am pleased to report that during the first quarter of 2010, the IRS approved two tax accounting changes that further aligned our tax and our GAAP accounting methods and are expected to eliminate any cash, federal income taxes payable this year and into 2011.

While we always emphasize the importance of generating strong operating cash flow, it's important to note we historically have had negative to slightly positive cash flow in the first quarter while generating greater amounts of cash in the later quarters. This is due primarily to the timing of certain annual payments such as insurance and property taxes that are historically made during our first quarter.

In the first quarter of 2010, we generated $2.8 million in operating cash flow compared to $7.3 million for the same period of last year for difference of $4.5 million. The decrease in the current quarter’s operating cash flow is largely due to the increase in working capital, partly driven by $4.6 million increase in receivables. Receivables increased during the quarter due to the improved cemetery property sales, which are typically financed.

Before I turn the call back over to Tom, I want to talk a little bit about the accounting change we adopted in the first quarter. Effective November 1 of 2009 we adopted a FASB guidance that relates to our 2014 and 2016 senior convertible notes, and apply this change retrospectively for all periods presented. The guidance states we should account separately for the liability in equity components of the convertible debt.

As a result, we increased the interest expense for the quarters ended January 31 of 2010 and 2009 for approximately $1.1 million and $1.5 million respectively or one penny per diluted share for both years. If the company would not have adopted the new guidance, EPS would have been $0.09 for the first quarter of 2010, as accounting change did not and will not have any impact on our cash interest paid.

Now I’d like to turn the call back to Tom.

Tom Crawford

Thanks Tom. I mentioned in our last conference call that I was more optimistic that the number of deaths would stabilize and return to some sense of normalcy with positive growth in 2010. That hasn’t happened just yet. But regardless of market conditions, we feel positive about 2010 and beyond. We believe our priorities are focused in the right direction, and we’ll continue to generate positive returns. We will continue to refine and improve our ‘Best in Class’ initiatives. The planning of the organization last year has helped us speed up the implementation and benefits as we are seeing in our margin expansion. The ‘Best in Class’ has helped us narrow performance variation by rooftop and within rooftops as we take from the best and apply it to the rest.

We intend ‘Best in Class’ to help us not only continue to be more efficient and expand margins but they help us grow case volume as we take action from facilities that are growing volume and apply them to the rest. The investment in our infrastructure and our information systems and the immense expenditure of time and energy last year in a major systems implementation will pay dividends in 2010 and beyond in relation to internal productivity. In addition, we are currently testing in one market area for full implementation later this year, a system that will further streamline our sales presentation and contract processing efforts.

We are confident that we will realize benefits from all the projects within our continuous improvement initiative. We continue to be excited about our opportunities available to provide more meaningful solutions to cremation orientation families with greater benefit to the company. We performed well to this point in time, but we believe we can significantly improve our performance and profit capabilities going forward.

We have invested in people and changed our organizational structure to make sure we are driving the desired performance in the company. As I mentioned earlier, we have revised our funeral home offerings to provide the most comprehensive products available to cremation family. We have placed experts in each region, for their sole purpose is to help us better serve cremation-oriented families by ensuring that we have the right product assortment, and our people are fully trained and skilled in successfully helping families.

We are equipping our cemetery sales organization with appropriate inventory to provide significantly improved memorialization choices to families. We believe we have a wealth of opportunity that currently exists within our facilities today, and we are determined to capitalize on and maximize that potential. Our actions have created genuine excitement and enthusiasm in the field, which we intend to turn into positive results.

For the remainder of 2010, we’ll also become more proactive and aggressive in pursuing growth by 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.

With the relative strength of our balance sheet, cash and cash generating capability, and our unused debt capacity, we believe we are in an ideal position to grow via acquisition. The solid results from our first quarter are a good start to our fiscal year and we are looking forward to further success throughout the year.

With that, we’ll now open it up and take your questions. Scott?

Question-and-Answer Session

Operator

(Operator Instructions). We’ll go to Clint Fendley with Davenport.

Drew Depitus – Davenport

Good morning gentleman, this is actually Drew Depitus [ph] in for Clint Fendley.

Tom Crawford

Good morning, Drew.

Drew Depitus – Davenport

Good morning. First on SG&A expense, given the noise around the technology initiatives you implemented over the past couple of years, is this a good run rate we should think about in the first quarter here or should we expect further improvement as we realize benefits from those initiatives?

Tom Kitchen

We believe that this is indicative of what we would expect the year going forward for FY 2010.

Drew Depitus – Davenport

Great, all right, thanks. And with regards to cemetery property sales, obviously a strong performance here in the first quarter, but looking at the data for preneed cemetery sales and funeral sales, it looks like those continued to decline year-over-year, is that representing of a shift to focus within Stewart or is there something there that’s impacting those results?

Tom Crawford

Now, if you look at the last two quarters previous -- 2009 we had very strong performance in our pre-need sales -- preneed funeral sales and our cemetery was off a bit. Now we’ve seen that reverse a little bit. We are down slightly for the quarter, but now we continue to focus on pre-need funeral. We really like our property sales and that has the most impacted the company right now and that’s what we are most enthused about, but there is no change in shift -- should we shift in priorities or strategy from that standpoint.

Drew Depitus – Davenport

All right. Great, thanks. And finally, Tom, could you just talk a little bit more about the capital allocation strategy going forward. You mentioned the acquisitions, I assume it’s safe to assume that debt repurchases are maybe largely completed at this point, could you just give us little bit more color on that? Thank you.

Tom Crawford

For the -- on the acquisitions, as we said, we’ve got cash, we’ve got unused debt capacity. We think we now have our systems in place, so we can do something. So we are more -- very much more proactive in reaching out and building the relationships in the context. Now, that takes some time and we have some internal goals that we want to shoot forward but at the same time we are going to make the right kind of acquisitions where they add value and not just for the sake of the acquiring, but we are more aggressive in moving forward.

From the debt standpoint we think last year I think our group did a terrific job in repurchasing debt at favorable prices; those prices are as favorable today as they were in the past. So we look at it opportunistically because that’s one where we can still -- you can get a real absolutely no offence or buts returned, you can calculate exactly what the return is going to be and as long as that’s above our cost to capital that’s a good investment we should make. So we like the debt repurchases. It’s less of track at now as it was in the year past, but we will look at it more opportunistically.

Drew Depitus – Davenport

Thank you, and nice job.

Tom Crawford

Thank you.

Operator

And next from Merrill Lynch we will go to Robert Willoughby.

Robert Willoughby – Merrill Lynch

Just, again on the SG&A question I was just to ask so was the spending on technology and the training programs last year relatively stable or was there some lumpiness to it that might contribute to some very variability to the SG&A going forward?

Tom Kitchen

Well, at this point in time last year, Bob we were in the middle of the rollout of this large implementation and the training costs were significant, and so that accounted for a significant part of the decline in the SG&A. So, that training expense was incurred in 2009 and this was very intense for the first six months of 2009, and then take off thereafter, but we don’t anticipate in 2010 having to repeat that experience.

Robert Willoughby – Merrill Lynch

Okay. So, first half of this fiscal year for you then would be a little bit better, second half, maybe the year-over-year improvement was dramatic is what you are implying?

Tom Kitchen

We believe that there is opportunity for year-over-year improvement because we are taking a very hard look at any opportunities for us to reduce our SG&A expenses without certainly effecting -- and the company’s ability to deliver on the services. We also are optimistic that as we continue the -- continuous improvement efforts that we will be able to gain traction on these implementation, and we will be able to realize the benefits which would translate into some cost reductions for us going forward. So, we are factoring that in to the comment with regard to we believe that the SG&A run-rate for this year should be lower than last year and certainly the expectation is that it could be in line with the experience of the first quarter.

Robert Willoughby – Merrill Lynch

Okay, and just the timing on the $25 million cash tax benefit in the two you said kind of two to three years. Your comments here sounds like it’s predominantly at this year phenomena with some spillover in the next year, can you --?

Tom Kitchen

We think that, that is all going to be dependent upon the company’s profitability and tax position. So, although my comments were certainly conveyed with the intent to say that for 2010 we are confident that the, we have enough loss carry forward for us to shelter any taxes from cash tax payable this year. We also believe that given a normal run-rate probably will take care of most of 2011, just not sure there. And you have got this company is significantly more profitable then perhaps maybe all of 2011 might not be accounted for, but at this point in time, we think it’s all of 2011 and based on what we know is, it’s probably most of that all 2010 and ‘11, excuse me.

Robert Willoughby – Merrill Lynch

Okay. Okay. And just for reporting purposes, what is the rate we should be using going forward. Should we continue this first quarter rate for the remainder of the year?

Tom Kitchen

No, for tax provision?

Robert Willoughby – Merrill Lynch

Yes.

Tom Kitchen

The tax provision was effected by having some capital losses that we needed to provide valuation loans for and that caused approximately we got a 2% increase in the provision of -- we think that the provision probably would be in the neighborhood of about 37.5% going forward. Absent, any further valuation allowance that might have to be dealt, which we don’t expect any at this point.

Robert Willoughby – Merrill Lynch

Okay, that is helpful. Thank you.

Tom Kitchen

Okay.

Operator

We’ll go next to David Schmookler with Kingsland Capital.

David Schmookler – Kingsland Capital

Excuse me, how are you guys doing?

Tom Crawford

Good.

David Schmookler – Kingsland Capital

I was hoping to get a little more clarity on the CapEx line and how that’s going to play out. I know there is some additional spending on funeral homes this year, and some of the cremation offerings, but how should we looking at that line on a quarterly basis as the rest of the year progresses?

Tom Kitchen

We had indicated that this year that where the couple of funeral homes that were under construction, we also had two that were coming off of lease that we would expect to incur some CapEx above and beyond what we would say normally. And with regard to the funeral homes coming off of the lease, we are working with the LaSource [ph] to perhaps maybe continue or extend the lease terms and terms that we would consider favorable to us. So at this point, there may be an opportunity for us to reduce that $10 million, $11 million worth of capital spending on purchase of funeral homes by some $5 million to $6 million, if we are successful, of which we have the confident come at this point of time, we should be able to.

So on this standpoint, we still will have two funeral homes under construction, our anticipation is that we probably would incur on just those two approximately $5 million to $6 million worth of spending this year. And then we would also have some inventory development that would probably relate to our cremation offerings, now that at this point in time, we are still going through the planning session or stages, how much we spend in this current fiscal year is going to be largely depend on our ability to bring to closure the design and the plans for those cremation offerings.

But we expect that that could be a couple of million dollars into 2010 year that we would spend on that. So those two numbers that I just mentioned in terms of the construction in new funeral homes, $2 million to $2.5 million worth of cremation now we are spending this year, plus a normal run rate that we normally experience, which is probably in the neighborhood of about $20 million a year for ordinary capital expenditures would be what we’d expect for 2010.

David Schmookler – Kingsland Capital

That’s very helpful, thanks. Any clarity on the 14 million potential fund makeover, what not on the perpetual care trust?

Tom Crawford

At this point in time, we are still – we’ve got it booked, it’s certainly an obligation that we believe indicates that we’ll have some obligation to at some point in the future to satisfy. We will work with regulators to strike terms and conditions that are certainly favorable to the company and we are also in some cases not withdrawing some of the income that we are realizing from the perpetual care trust in order to satisfy that obligation.

So at this point in time, I would tell you that long-term we expect to pay that if we are asked to repay it this year, we will do that, if not we will try to work out some terms that would be – it’s unstable to stretch that over a longer period of time. I wish I could give you more definitive information but we are at this point in time still trying to mange that liability and then certainly are satisfying the R&D obligation in a way that certainly doesn’t hone the financial position of the company.

David Schmookler – Kingsland Capital

Okay. On the funeral, on the average revenue per calls, second quarter in a row, now I think on an aggregate basis, it's down, you mentioned that. It is up sequentially, but how should we thinking about that metric as the year progress on a year-over-year basis?

Tom Kitchen

Well, right now, historically, we saw the increases anywhere between 2% and 4%, sometimes as high as 5%, if it gets too high I will tell you I get concerned about that. And so right now for us if were in the 2% range I’d be quite delighted with that.

David Schmookler – Kingsland Capital

Okay. I mean the only thing I could gather about the debt is that, it might has couple of quarters here of tough comps, those comps might some more easier so maybe we’ll see some growth year-over-year, Tom?

Tom Kitchen

But also what I mentioned is, one of the good thing that we are doing now as the systems in place, we can cash things pretty quick and we found in our own operations there is improvements that we can take, and this is why we spend so much time rebalancing our offerings, and we are changing out products from a cremation standpoint, rebalancing our casket standpoint. Our packages will be even more disciplined than were in the past, so all those measures are going to go to bump up our averages.

And also the other thing you have to factor in, as the cremation rate continues to grow, you can have positives in both areas, and your averages will be a little bit be impacted because of just the mix shift. But we feel positive with all the changes that are taking place out in the locations, and again more disciplined in our packages, tighter systems there, and improving in our product offering. So, again that's where we are confident we will see our averages come up, and coming up in the right way.

David Schmookler – Kingsland Capital

Okay. And then last one if you’ll oblige me, on the cemetery merchandize line, I guess that's largely driven by the cemetery property sales. Is there any seasonality in that? You kind of looking back, I am not sure I see anything. Is there any kind of quarters that might be stronger than the others, anyway I should be thinking about that specifically as the year progresses?

Tom Crawford

Typically, from a debt standpoint this is a seasonal business, and it will start tapering off in the later part of the year. From a cemetery sales standpoint, that's probably not as seasonal as the funeral size but we still have, is stronger in the second and third quarter historically – from the property sales standpoint.

David Schmookler – Kingsland Capital

Thanks a lot.

Tom Crawford

Thank you.

Operator

And Richard Innes from J. C. Clark has our next question.

Richard Innes – J. C. Clark Limited

Good morning, guys. Congratulations on a good quarter.

Tom Crawford

Thank you, Dick.

Richard Innes – J. C. Clark Limited

First question is on same home calls, which although were down 1.3% as you point out as lot better in the market, which indicates you are gaining market share, does this reflect any shift in strategy to pursue lower revenue calls and what you are doing?

Tom Crawford

You know Dick, there is nothing necessary from that standpoint. As we said before, we don’t want to drive away business. This is fixed cost intensive business so any incremental volume goes a long way. We have not done anything to go at the low end of the market which we will get into, and we just can’t at a very low end. There are others who will do that at prices that we just don’t get into, and we won’t do anything that jeopardizes the existing revenue base for existing properties. So, there is nothing specifically that we have done, to say. We will go court -- that low end consumer. We don’t think we’ll get them anyhow, but with the consumers that come in, we think there is just so much more we can do with them.

Richard Innes – J. C. Clark Limited

Do you see the same improving trend in your interments?

Tom Crawford

Our interments have held relatively constant and, again, this is where you are going to get more the impact from a cremation standpoint. On the funeral side, we still have -- we still will take cremation consumers, but often times they will not go to a cemetery. Now this is --

Richard Innes – J. C. Clark Limited

But you are seeing declines in interments been down?

Tom Crawford

We are.

Richard Innes – J. C. Clark Limited

Yes.

Tom Crawford

But this again is -- we are talking better enthusiasm and what we’re doing from a cremation standpoint. We have been walking over opportunities and we think that enrollment opportunity with cremation is significant for us. And as you all know, up north our friends up in Canada have done a much better job, significantly better job in capturing those cremation families with memorialization opportunities in the cemeteries. And we’ve really looked at that as a pattern and compared us with what’s happening up in Canada and they just showed us that we have significant opportunity. So --

Richard Innes – J. C. Clark Limited

A bit of that was forged because the cremation rate is much higher. Do you see this improving call trend continuing in March and April?

Tom Crawford

Our improving call trend, as far as it’s been less than the…

Richard Innes – J. C. Clark Limited

Well, you are down 1.3% which I take as encouraging versus the market in Q1, do you see that kind of trend continuing in, well February, March, sorry?

Tom Crawford

Yes, we would like to see our trend continue to do better in the market. Again, we have, this was in our best-in-class. It’s not just about efficiency, just trying to learn what our other properties are doing with that more emphasis on call volume growth. So, yes, we would hope that would continue on, absolutely.

Richard Innes – J. C. Clark Limited

On revenue per call, it seems to be more of a problem on the traditional, what are the pressures there, what’s happening with the 0.8% decline?

Tom Kitchen

Now as I said, quarter-over-quarter, fourth quarter to first quarter we actually saw an increase.

Richard Innes – J. C. Clark Limited

Okay.

Tom Kitchen

So that’s the good thing, that we are actually more out of it from just as the progression grows quarter-over-quarter. So that’s the good part. As I go back to strengthening our packages out there and how we provide those, and just pretty more disciplined within our own internal systems, we found that it was – there are some – simply to our employees could take a little more liberty than we would like, and so we tighten that up a little bit and got more consistency, so that should help us as well.

Richard Innes – J. C. Clark Limited

Preneed funeral down 3.3%, contrast to your cemetery property sales, up 10, what’s the difference there between those preneed sales, like why isn’t funeral responding better?

Tom Crawford

Well, Dick, that’s one that, I wish they were both up together but at the same time I think if I was going to make a tradeoff, that’s a good tradeoff in the short-term. Again, for the last two quarters, I think the fourth quarter were up I think about 14.5%, if I remember.

Richard Innes – J. C. Clark Limited

Okay.

Tom Crawford

So we’re kind of blowing the doors off. So what I tell you, there is more coming back to normalcy, even if we were going at the rapid rates, we want to keep a balance out there, and – which is what we’re trying to do. So I think right now we are seeing more of a positive balancing between the quarters.

Richard Innes – J. C. Clark Limited

Yep. Last question, what inning are you in on your two major initiatives of cost reduction and ‘Best in Class’?

Tom Crawford

You know what, I don’t think you’ll – that’s one of the thing with continuous improvement, you never come to the end of game. It is always going on, no matter what you have done, you say you go back and you redo it and do it better. And the thing with ‘Best in Class’ we are delighted with the progress that we have made And I think with the expansion of the margins, that expansion of margins where the volume is less is huge, it is significant.

And that’s where we, again are trying to take a fragmented business and take absolutely the best practices and inculcate that with the mindset in the system where we absolutely can – we have consistency but it doesn’t preclude creativity, but I think we are well on the way, and as I said, when we flatten the organization last year, that skewed us quite a bit because then we had more consistency in the message, more consistency in our application.

So, we feel like we’ve made great progress, and I will tell we are learning things all the time. So, the inning analogy is probably not a good one because you are never going to come to a nice ending in the last of the night, we will continue to make changes all the time. And as I said in our continuous improvement standpoint, made great strides last year and with this current test that I alluded to in the field, we’re really, really excited about that. And matter of fact we’re doing real live contracts right now, and it's really quite exciting. And that is going to give us a huge leg up, and after we do that we’ll turn right around and figure out something else to go after.

Richard Innes – J. C. Clark Limited

Sounds good. Thank you.

Tom Crawford

Thanks, Dick.

Operator

(Operator Instructions) Next we will go to Jamie Clement with Sidoti.

Jamie Clement – Sidoti

Good morning.

Tom Crawford

Jamie, good morning.

Jamie Clement – Sidoti

Good morning. Tom, I know you all don’t exactly give guidance but I wanted to ask sort of, kind of a forward-looking question here a little bit. The second quarter of last year was so strange on with the same-store services decline you saw on the funeral side. I know you referenced the West Coast, I think you all referenced some of your low end, which is obviously not the same as low end for the rest of the industry, cremation business going away. Has some of that comeback, and also I think last year with the second quarter you actually thought that your funeral averages were boosted by some of that business going away. So I am trying to kind of make heads or tails of the volume in the average from a year-over-year perspective?

Tom Crawford

Jamie, that's a good question, and I got a whole bunch of questions, and I am not sure I can quite get the right one there, but last year we were impacted with seeing low in cremation because of the economy, that's where we saw the biggest hit that was at on the West Coast, largely driven by the West Coast. Again, we have not seen any greater declines, say their volume being down, we think we’ve stabilized that. And our intent is to continue to move that forward, but we haven’t seen the massive hit that we did last year in the low end. So, again I look at the whole market stabilizing to a degree, and I look at that as a positive going forward.

Jamie Clement – Sidoti

Okay. And I guess so asking a question, which for ahead of time was that, given what went on in the April quarter of last year, I mean I could see a situation where, you could actually let me think about how I want to phrase this. Your metrics directionally in the second quarter could be very similar to kind of what you saw in the first quarter because of what was going on last year. I mean is that, I don’t want to be asking too much, but am I potentially on the right track here?

Tom Crawford

Well, I think last year was a volatile year for us. It clearly was. And we made progress, each one of the quarters took a little bit of an ebb and flow. What we are seeing though, as I said in the call, we feel positive about our trends, and trends continue in on. So I think we will – I would hope to see positive metrics compared second quarter to second quarter.

Jamie Clement – Sidoti

Okay.

Tom Crawford

The good part, we just look at where we are steeping over period to period.

Jamie Clement – Sidoti

Right.

Tom Crawford

We see good positive progress on all fronts. The momentum is good.

Jamie Clement – Sidoti

And I know you all are focused on a profit dollars and not micro-managing your averages or your volume or anything like that, so I – that is understood.

Tom Crawford

And Jamie, that’s exactly right. Now I’ll tell you, last year one of the quarters as we talked in, we had average revenues, skews up quite high, and that concerned me just as much as anything else because we have to look at it from a long-term perspective. We want to balance where our averages are with where the consumers are in our operating. So, yeah, we’re very focused on looking at our rate of growth, our progression of growth, and how we are getting there and making a good balance, and that’s really we’re trying to focus on right now.

Jamie Clement – Sidoti

Tom, I think you just answered the question I was trying to ask originally. Thank you very much.

Tom Crawford

Well, if that’s the case I am utterly delighted.

Jamie Clement – Sidoti

Okay, great.

Tom Crawford

Even a blind squirrel finds an acorn if that’s...

Jamie Clement – Sidoti

Absolutely. Thank you very much for your time.

Tom Crawford

That’s right. Normally I just – the folks right here realize that I just start talking and I say, hope I am answering somebody’s question somewhere in my yammerings.

Jamie Clement – Sidoti

No, no, very good. Thank you very much.

Tom Crawford

Thanks Jamie.

Operator

(Operator Instructions) And there are no further questions at this time. I’ll turn the conference back over to you management for any closing or additional comments.

Tom Crawford

Okay, we appreciate your time. Thank you for joining us on the call today. All I can tell you, I’ve said this before, as we met in conferences in the past, and this is an easy thing to say, what it matters is what we produce, now I realize that, that I made an accolade sincerely when I talk about that we feel like we've got, our priorities are straight, and we’re moving in the right direction, and the difficult year that we have last year was actually a good year. And this is what I think often times, is the tough years that measure the debt of your character and your ability, and I’m very pleased with the actions we've taken last, that we took last year to give us a good strong base going forward.

And now I will tell you how I feel in my three years. I feel as positive as I’ve ever felt, because of the actions that we’re taking to make this company better, to strengthen for the long run, and as we talked about here, leaving it better than we founded. So that’s the case that we’re delighted. And our employees, I can’t say enough about our employees that continue to teach us as well and show us a better way. And as we talk about ‘Best in Class’ it really is listening to what the field has to say. It's not anything is coming now from here is what the field is doing, so we learned from it. So we appreciate what our employees have done. I feel good about what we’re doing to the layman [ph] again. Results are the only thing that matters but I feel as positive as I’ve ever felt.

So with that, we look forward to seeing you and talking with you in about three months. Thank you. Good bye.

Operator

Ladies and gentlemen, that does conclude today’s conference. We thank you for your participation. You may now disconnect.

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Source: Stewart Enterprises, Inc. F1Q10 (Qtr End 01/31/10) Earnings Call Transcript
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