Stewart Enterprises, Inc. F2Q10 (Qtr End 04/30/10) Earnings Call Transcript

Jun. 9.10 | About: Stewart Enterprises, (STEI)

Stewart Enterprises, Inc. (NASDAQ:STEI)

F2Q10 (Qtr End 04/30/10) Earnings Call

June 9, 2010 11:00 am ET

Executives

Leslie Loyet – IR, Financial Relations Board

Tom Crawford – President and CEO

Tom Kitchen – Senior EVP and CFO

Analysts

Clint Fendley – Davenport

A.J. Rice – SIG

Richard Innes – J.C. Clark Limited

Colin Stewart – J.C. Clark Limited

Jamie Clement – Sidoti & Company

Rajas Raji [ph] – HNC Capital [ph]

David Schmookler – Kingsland Capital

Operator

Good day, everyone and welcome to today’s Stewart Enterprises Incorporated second 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 like to turn the conference over to Ms. Leslie Loyet of the Financial Relations Board. Please go ahead, ma'am.

Leslie Loyet

Thank you. Good morning. 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 Dolezal 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 second quarter and then we'll open the call up 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 affect 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 and the company’s Form 10-Q for the quarter ended April 30, 2010 and their other filings with the SEC.

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 USA or GAAP and are intended to supplement rather than replace or supercede 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 and can also be found in the company’s press release dated June 8, 2010.

With that said I'd like to introduce management of Stewart Enterprises. On the line we have Tom Crawford, President and Chief Executive Officer and Tom Kitchen, Senior Executive President and Chief Financial Officer. At this time, I'd like to turn the call over to Tom Crawford. Please go ahead.

Tom Crawford

Leslie, thank you. Good morning and thank you all for joining us on the call today. I trust you've had a time to read the press release and our earnings report for the second quarter of 2010. As is our custom from past calls, I will give you my assessment of the quarter and Tom Kitchen will provide more financial details later in the call.

First, as you read in the press release, for the quarter, revenue increased but our earnings were down slightly as our earnings per share was less than the second quarter of 2009 by $0.01. I believe we provide enough detail in the press release to explain the events of the quarter and I'll try not to duplicate them. However I want to provide additional insight that is not obvious from the data. I will review both positive and mixed results for the quarter.

First and to the point, we are not happy that the earnings are down by $0.01 compared to the same period of 2009. After having stated that, there are reasons for a slight decline from that period.

On the funeral side, we reported essentially flat revenue for the quarter but costs increased by $1.9 million or 3.6%. For the last three quarters, I have highlighted that our direct funeral margins, the basic blocking and tackling of the business which includes our fuel labor costs have been expanding in a down market because we have been managing our costs well.

While we reported a cost increase of 3.6% for the quarter which reduced our total margin and margin percent, the reality is that at the rooftop level, again as I said our basic blocking and tackling, our field organization continues to manage costs well and at expectations.

Of the $1.9 million increase in costs, $1.4 million is attributable to two factors. The first is that last year, we received a windfall benefit in the form of a positive adjustment to insurance reserves due to an improved experience rate. The second relates to investments we've made in market research, cremation and R&D in our new invention initiative, with the intent to provide greater growth into the future.

In the cemetery segments, we reported revenue growth of 2.9%; however, similar to the funeral segment, costs increased by $1.1 million due to the same windfall effect from the insurance reserve adjustment and the investment expenditures to grow the business in the future that I've just described.

One additional point worth noting is that during the quarter the company took a $700,000 charge to resolve employment related litigation in our California market. The insurance reserve adjustment benefit in one year obviously makes a difficult comparison in the following year and the additional investments that we made to grow the business further compound that difficult comparison. However, we believe that those decisions and expenditures are prudent and will benefit the company well beyond a single quarter.

Now, let me shift gears and tell you about the areas in which I continue to see progress. First on the funeral side, as mentioned earlier, while our volume was down and revenues were essentially flat, we maintained our direct margins which include all field labor costs and that's once again, that’s not all in. That's our basic blocking and tackling at the field level.

Additionally, after experiencing declines in average revenue per event during the fourth quarter of 2009 and the first quarter of 2010, during the second quarter we experienced an increase of eight tenths of a percent. What is significant about that increase is that we installed our next generation of funeral packages during the quarter and in April which was the first full month of operation within new packages. We actually experienced a higher growth in our average revenue per event which was also accomplished without raising prices.

In the cemetery segment, I'm pleased that revenue from merchandise delivered increased by 10.1% for the quarter compared to 2009. This growth is a function of best-in-class practices and dashboard measures that gave greater focus and visibility on managing work flow and reducing order to delivery cycle time. Additionally, we're managing our costs well as margins have improved in this category.

We continue to see positive progress in our cemetery property sales, which grew by 3.9% for the quarter compared to 2009. While a growth of 3.9% is not spectacular, it is solid. So what is most impressive is that we're attaining more revenue when compared to the previous year.

For the quarter, bad debt expense declined by approximately 63% and declined 41% for the first six months compared to the same period of 2009. That reduction of bad debt and retention of revenue is the equivalent of growing property sales by 8% for the quarter and 11% for the year in order to achieve the same results. That's not too bad. We're retaining more in our company. We have higher quality sales.

I'm also pleased that our corporate G&A expense decreased by 16% for the quarter and 14% year-to-date. We are committed to continuous improvement and our department with the same name is working to streamline processes to eliminate unnecessary steps, effort and cost. And we're currently in a test mode in two markets with a system that will allow us to handle contracts once and eliminate excessive checks, handoffs and handling.

We expect to see -- excuse me -- we expect the system to be operational throughout the company by the end of the year. Finally, I'm pleased with our free cash flow generation for the quarter which increased by 11% over the previous year. We're committed to manage our costs and all of our investment decisions and much more astute in freeing cash from stagnant asset classes.

As I stated earlier, we don't like our penny decline for the quarter, however I believe we are continuing to make progress in strengthening the underlying ability and long-term capability of the company. Now, with that overview, I'm going to turn the time over to Tom Kitchen for more detailed financial review.

Tom Kitchen

Thanks, Tom. Today, I'd like to discuss our financial performance for the quarter and we'll address several topics of interest. First, regarding our earnings, we experienced a decrease of some $500,000 in earnings and a penny per share compared to the second quarter of ‘09. This is attributable mostly to the expenditures of approximately $1.2 million we made that Tom explained earlier.

Additionally, we're in the final stages of successfully resolving employment-related litigation in California that resulted in a $700,000 charge during the quarter. And for the second quarter, cemetery segment increased revenue by $1.6 million or 3% to $57 million. This increase in cemetery revenue was due largely to the continuous quarter-over-quarter growth of our merchandise deliveries in cemetery property sales, which we increased $1 million and $900,000 respectively.

It's also worth noting, we sequentially increased revenue from cemetery property sales some $3.6 million and merchandise delivery $600,000 compared to the first quarter of 2010. This performance reflects a continuation of the positive trends we generated over the latter part of ‘09 and the first quarter of 2010.

The increases in cemetery merchandise delivered in property sales were partially offset by a decrease of $2.2 million in revenue related to construction projects primarily due to a high rate of completion on several private mausoleums last year. The decrease in construction on private mausoleums in the current year is not surprising given the lag in timing of developing and building private mausoleums. In other words, the private mausoleums completed in the prior year were purchased and the construction had begun prior to the downturn in the economy.

Given the effects of the economy and the drop in consumer confidence a year ago that resulted in a decrease in cemetery property sales in 2009, we understand the decrease in construction and related revenue in the current year. While we experienced a decline in the second quarter, we did complete $1 million in construction of private mausoleums in the second quarter of 2010 and are continuously developing and building mausoleums from our backlog.

Also want to bring to your attention to a few items in the addition to the decrease in private mausoleum sales that occurred in the second quarter of ‘09 that impacted last years’ gross profit but were not present in the second quarter of 2010. First, last year, after extensive analysis, we noted our historical claim experience had improved allowing us to reduce our self insurance reserves during the second quarter of ‘09 by approximately $1.3 million. It's important to note that since the reduction in the liability of self-insurance reserves have been consistent with the new levels.

In addition, last year, we also recorded a $3.1 million charge to record the probable funding obligation to our perpetual care trust. Tom noted during his comments some increases were experienced in our operating expenses as a result of decisions we made. While this had a negative impact in our second quarter, there were some positive trends we were pleased to see develop.

The two largest of which is the reduction in our corporate G&A by more than $1 million and $2 million in our three months and six months ended April 30 of 2010 respectively. While part of this decline is due to the reduction in expenses incurred in fiscal year 2009 related to a new system implementation, there are other contributors to this decline because of actions taken by managers at the beginning of the current year to tighten our belts and to reduce our levels of spending especially in response to the overall impact the weak economy has had on our business.

The second is the reduction in the company’s interest payments due to our repurchase of approximately $84 million of convertible debt since March of ‘09. Annual cash interest payments for 2010 and later will be lowered by more than $2.6 million.

Now, turning to our trust portfolio, we've experienced positive trust returns for the last four quarters resulting in returns for the trailing 12 months of approximately 31% for our merchandise and services trust or what we call pre-need trust and then 34% for our perpetual care trust.

I'm pleased to report that our investments continue to improve during the second quarter of 2010 with a 7% return on our pre-need trust and 6% return in our perpetual care trust. For the last 12 months ended April 30 of 2010, the fair market value of our portfolio has improved $156 million to approximately $784 million.

We all know, however that the financial markets have declined significantly since May 1st with the S&P index dropping in excess of 8% in May. However, our overall trust portfolio declined less than 5% due to our actions to rebalance our asset mix with more weight given to fixed income securities.

Our strategy since the late ‘08 financial turmoil has been to reposition the portfolio away from more volatile investments such as equities and transition to a heavier reliance on less volatile, high quality, fixed income securities. As an illustration of this and since October of ‘08, we've sold in excess of $100 million of equity securities and reinvested the proceeds in fixed income investments.

Cash and fixed income securities comprise approximately 40% of the total portfolio as of May 31st or some 10% higher than October of ‘08. Notwithstanding the recent uncertainty in the financial markets and the declines experienced in May, the fair market value of our portfolio as of May 31st has increased more than $90 million since October of ‘08.

And finally with regard to the trust portfolio, asset composition and as part of our strategy to move to less volatile and more fixed income securities, we typically utilized a passive investment strategy where we're able to mitigate the individual security risk by making investments in the larger pools of securities with comparable investment characteristics. As of May 31st, total passive investments including cash in our portfolio accounted for more than 30% or more than $220 million.

I noted earlier in my comments, the benefits we're realizing from reduced interest payments resulting from the repurchase of our outstanding debt. In addition to the positive impact on interest expense and cash flow, the reduction in outstanding debt coupled with the April 30th cash and short-term investment balance of $75 million has produced net debt of $291 million, the lowest level for the company in more than 10 years.

Notwithstanding a soft economy for the last 18 months, our leverage coverage ratio has improved to 3.4 times as a result of these actions. Our emphasis on generating positive operating and free cash flow has produced significant benefits enabling the company to report available balance sheet liquidity of $75 million as of April 30th.

In addition to strong operating cash generation, our strategy over the last two years of examining our income tax policies has produced significant positive results and has been a large reason for the company’s success in generating high levels of cash flow. By better aligning our revenue recognition for both GAAP and tax, we've realized tax refunds and reductions of current year tax payments of approximately $38 million since the beginning of fiscal year 2008 and combined with recent IRS approvals in the first half of 2010, generating a net operating loss carry forward of $90 million as of April 30th. We estimate that this NOL will be sufficient to offset any potential cash tax payments for the fiscal year as well as for fiscal 2011.

Cash flow for the second quarter is nearly $2 million better than the same period in the prior year and is in part due to the benefits realized from the company’s tax initiatives. And finally, we will continue to look for opportunities to deploy our cash which could include funding acquisitions, new products and services and debt repurchases. Now, I'd like to turn the call back to Tom Crawford.

Tom Crawford

Tom, thank you. The start of this year I made the comment that I looked at 2010 in a very positive way and was quite positive for the year. And I will tell you we remain optimistic about the year and when you look at our numbers year-to-date, our revenues and gross profit were up 3%, our operating earnings were up by 12%, earnings before interest and taxes have grown by 14% and EPS is up 13%.

We are investing positive ways for the future. As I mentioned earlier, we are making those investments that we think will yield dividends that benefit this company for a long time. We are encouraged with our progress in inculcating our best in class mindset in the new organization. At the same time, we realize that's a never ending process and we will continually make improvements. We remain positive about our cremation initiative.

As we completed the rollout of the new cremation merchandise and display systems during the quarter and additionally, during the quarter we began the investment process to add significantly improve cremation inventory into our cemetery. We're seeing the benefits of high cremation memorialization purchases as we speak.

We're pleased with the relative strength of the balance sheet and liquidity, as Tom described in the opportunity it prevents. We believe we're in a good position to grow and we have been more active in working that acquisition process. We will acquire appropriate tuck in acquisitions to augmenting specific markets but we're also focusing attention on larger more significant potential candidates.

We have had a good beginning to our fiscal year. We're looking forward to that continued success in 2010. We believe our actions and priorities are worthy and our direction will produce greater value to shareholders.

Finally on a simpler and lighter note, let me say that Stewart Enterprises celebrated its 100-year anniversary on April 26th and I will tell you our employees are looking forward to another 100 years of faithful service to the industry and profession.

So with that, we'll now open it up to your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We'll take our first question from Clint Fendley with Davenport [ph].

Clint Fendley – Davenport

Good morning, gentlemen.

Tom Crawford

Clint, good morning.

Clint Fendley – Davenport

Very nice progress on the SG&A. How sustainable should that be going forward given some of the test on the system that you mentioned, Tom and it's expected to be operational by the end of the year.

Tom Crawford

You know, Tom and I can both talk to that, but let me have Tom answer that question first because he's -- he and the financial organization have been knee deep in that.

Tom Kitchen

With regard to the corporate general and administrative expenses, I think that there is significant opportunity for us in the last half of the year. First half of the year probably at a little bit of a tailwind, because we did have some additional costs we incurred in the prior period with regard to a large system implementation. But nevertheless, we think some of the steps and actions we're taking will still provide us with some benefits during the second half of the period with regard to lower G&A expenses, maybe not at the same level, but nevertheless, a level that we would consider to be significant.

Clint Fendley – Davenport

Okay.

Tom Crawford

Let me just add to that, Clint, as far as, sustainability on the percent change, probably that's going to be tougher but the absolute reduction of overhead is SG&A is what we're focused on. We have a continuous improvement function within our company as I mentioned. And we have invested heavily in systems, so, okay, this is the best information systems, best it's ever been and this may not be all that articulating, but when we can go right down to at the click of a mouse, right down to the individual contract by day, compared to what it used to be, it's really quite remarkable.

But also as we said, with the new system that's being tested today and will be rolled out. Our intent is that, we want to shrink our footprint and by the number of people we have handling contracts and in our processing, so we're much more efficient so this is a good start. We expect to continue on that and as a matter of fact just continue to lower that dollar amount in our company.

Clint Fendley – Davenport

Okay. Good to hear. And I guess, switching gears a bit, on the perpetual care trusts earnings, they were down obviously a bit year-over-year against a total return of I guess about 5.5%. Any color on what happened there?

Tom Kitchen

No. I think it's just a reflection of the asset mix and the portfolio that's going to be more of a fixed income balance to the perpetual care trust fund. It's as time has gone over the last 18 months even the fixed income yielding lower amounts than what they previously did. So it's just a reflection of the overall trends in the market and the fact that the perpetual care funds are predominantly are much higher percentage of fixed income versus an equity.

Clint Fendley – Davenport

Okay. And Tom, could you update us on the cash impact from the funding obligation related to the perpetual care trust?

Tom Kitchen

Yeah. We have, I think about, it's approximately $13.5 million liability booked at the end of April. At the beginning of the year it’s approximately $14 million, so the difference really reflects some amounts that we have left in the trust in order for us to refund or repay the balance that's due, so it's about a $500,000 amount that we've repaid.

At this point in time, we're still managing this thing, this situation with regard to the $13.5 million. We've got it booked. We acknowledge that it's obligation that we have to make at some point in the future. We're just trying to work with the regulators in terms of managing that cash impact over maybe a longer period of time as opposed to a shorter period of time.

Clint Fendley – Davenport

So were the chances that we're beyond one year for the…

Tom Kitchen

Clint, it could extend past our current fiscal year but the longer time goes on I think the higher the probability that we would have to satisfy that obligation.

Clint Fendley – Davenport

Okay. And then on the litigation charges, are we expecting that that will be resolved by the third quarter here?

Tom Kitchen

Yeah. That employment litigation that we were successful in reaching an agreement on, we believe that should take care of the amounts that we estimate and that any future amounts as we cleared up would probably be immaterial.

Clint Fendley – Davenport

Okay. And you haven't obviously included it in your adjusted earnings calculation, but it's not something that should be continuing for…

Tom Kitchen

No. We -- in looking at it, it's something that we acknowledge that we had an obligation for and it really, the $700,000 is part of an overall reserve, the amount that we recognized in the current quarter, but it does relate to an approximate five-year period. So, the amount is bit large because the number of years involved was more than just a single period.

Clint Fendley – Davenport

Okay. And then last question here. The investments in the market research, any notable findings to report yet from that?

Tom Crawford

Not yet. We're just in the process of we'll be concluding that in this next month and we took most of the funding in the quarter, the firm that we're using is finishing up their work and so we're waiting to see. I've just got little snip it’s here and there but I've been asked to hold off until we see the whole package so that's still in process.

Clint Fendley – Davenport

Okay. Look forward to it. Thank you, guys.

Tom Crawford

Thank you, Clint.

Operator

Next we'll hear from A.J. Rice with SIG.

A.J. Rice – SIG

Yeah. Thanks. Hello, everybody. Just a couple questions if I could ask. First of all, you commented, Tom about the revenue increase in April beyond better than the price increases you've realized so far and we're attributing that some of the outgrowth of the initiatives you've done. Can you give us a little more flavor as to what specific things you think are contributing to pick up in revenues in April and pricing in April, I guess and the sustainability of that?

Tom Crawford

Well first of all, we didn't take the benefit of any price increase. The average revenue increase was a function of we put new packages in place and that's going to be an ongoing process as well. When you get one in it will -- that's going to be updated and modified. We've also spent more time on looking at our assortments as well from the hard asset, the casket and where we've focused on that aspect and simplified that.

Also we have spent an immense amount of time and energy on putting more training. We're constantly training but we went out with a new program called Face-to-Face that we've put our entire field operation through that. So we've invested heavily to get that done, which is again a combination of understanding responsibilities, dealing more effectively with consumers and then working on a more simplified and consistent package that we think makes it easier and better for consumers. So those are the things that again make it easier for consumers, easier for us and reinforce with the training in the field those are the positive outtakes from our past program and seeing advance in the average.

A.J. Rice – SIG

And I know that in one of the things you've talked about is trying to get people on the cremation side to focus on broadening the service mix they are selling. Is that part of what you're seeing here or is that still in the future?

Tom Crawford

No. That's included in it but we haven’t -- we're still getting the benefit of that going forward. We have rolled out our cremation offerings. We revamped our field inventory and our presentation systems that was done during the quarter, and once again, going back and having to train our employees. And that's probably going to be one of the more interesting challenges that we have or anybody within this industry, is getting the mindset of the employees where we want it to be. Because so much even though creation has been increasing every year, there's still that mindset that it's traditional is good and cremation isn't quite as good.

So that's what we're spending an immense amount of time once again training. I mentioned the Face-to-Face training that we rolled out in the field. We put a special segment on that just for cremation and we've got people deployed in the field. So as I said, this is the quarter that we rolled out the products from a funeral home standpoint and we're making those investments to get back to that enrollment [ph] rate from a cemetery standpoint. So we got a -- our folks are thrilled very positive and…

A.J. Rice – SIG

Okay.

Tom Crawford

… just one little side line to that, is last week or the week before we had a meeting with all of our sales executives and our regional Vice Presidents here in New Orleans, and as we reviewed what was our actions in cremation, one of our regional Vice Presidents, who is in a high cremation market just made a comment -- simple comment, but he said, before you were telling us to go do better in cremation and I equate that with saying we're kind of found that just go to better, go to better, go to better, but he said, now you're giving us tools, they can go make a difference, so we look at that as a positive.

A.J. Rice – SIG

Okay. Good. I understand the comment about the construction project and what’s -- how the economy is impacting that year-to-year in the second quarter. I don't know, if Tom Kitchen has this information available. But as you look at the rest of the year, is the likely drag from that dynamic, the same as we play out the rest of the fiscal year and sort of when would you say you'd anniversary those tough comps, if you could -- if you have that?

Tom Kitchen

Yeah. We took a look and that's the point in the comparables in the third and fourth quarter, are not as challenging as they were in the second quarter of 2010.

A.J. Rice – SIG

Okay. That's good news.

Tom Crawford

Let's make one more comment. That stuff comes in, it can come in, I will call it seasonally. It gets a little bit lumpy and I think a month, excuse me, three months ago in one of the calls, I was asked a question about the second quarter and I said well, I knew where we were on the topline, but I had forgotten about the fact that we had this heroic construction in the second quarter of 2009. That just left my memory for a minute.

So, as Tom said, and this is where it's kind of one period to the next, you have to look at it in a continuum and again, where we had a big, big hurdle against last year's results for this quarter it -- we don't have that going forward, so smooth right back out again. So it really becomes in my mind a timing -- a function of timing.

A.J. Rice – SIG

Okay. And one last question for me. On the capital allocation discussion you've given so far. Could you just give us a little more flavor, has the credit markets created some opportunity where you think you will be buying debt near-term in the public market or is that still something where it's not that attractive right now, but it's something you're willing to do if the opportunities present themselves.

And then, I guess, also on the acquisition front, is that -- maybe any update on what the tone of the market and availability of properties is and prospects for doing something sooner rather than later?

Tom Kitchen

Yeah. A.J., this is Tom Kitchen. With regard to the debt purchase, we did disclose in the Q that subsequent to the end of the quarter we repurchased a face amount of $5 million. So the answer to that is to the extent that we believe that we've got the liquidity to address all of our needs, we consider repurchase of debt to be an attractive use of our capital.

Tom Crawford

On the acquisition front, as I said, we are, we stepped up our process and our work. There are some, I will tell you there are a couple of tuck-ins that we're working on right now, so that's in process and again closing those is a whole function of coming to agreement on terms and conditions.

So we are working on some things right now that are tuck-ins. The longer ones, we've got some interesting things that we're looking at but those will take more time and those are more relationship based but we are active and that's a use of our capital that we want to employ.

A.J. Rice – SIG

Okay. I guess, I'm going to add one more here. The 3.2 times debt to EBITDA, if that's what I heard you say, is that what you are at this morning. How does that compare to where you'd like to be long-term? Are you almost getting to the point where you are maybe underlying a little bit?

Tom Crawford

Well, I think, at this point in time it's 3.4, A.J., but we believe that we're comfortable at the 3.4, if there's an opportunity for us to expand the business through an acquisition and maybe increase that we’d certainly be open to that. But if we have the ability to generate cash and the right amount of liquidity and do accomplish our goals and objectives, and still have the opportunity to reduce the capital structure and reduce the leverage coverage, we would think that that would be a good use of our cash to continue to do that. We think that that will have returns for our shareholders long-term for the company to establish a strong financial position, especially in uncertain financial markets like we've had over the last 18 months.

A.J. Rice – SIG

Okay. All right. Thanks a lot.

Tom Kitchen

Thanks, A.J.

Operator

(Operator Instructions) Next we'll go with Richard Innes with J.C. Clark Limited.

Richard Innes – J.C. Clark Limited

Good morning.

Tom Crawford

Dick, good morning. How are you?

Richard Innes – J.C. Clark Limited

Good. A couple of questions. First off on same home calls down 2.8% this quarter, same quarter a year ago you were down 9.6%, so over a two year period, down 12.4% and I think your conclusion is that you're not losing market share. So is that believable that we're down in total number of deaths by over 12% in a two-year period?

Tom Crawford

Well I think, Dick, the best thing to do is look at others in the industry as well and if you do that you'll get a sense that, yeah, the market is down. And the data that we have and again you know how it works. It usually lags by a couple of years until you get the absolute, but all of the measures that we look at, which is CDC and all of its variety, and realizing the shortcomings with CDC and talking to trying to get a sense from suppliers and listening in on other calls as well. The market is down and then when you look at some of the work that's come out just trying to size market from independent people, you can conclude, yeah, it is down and so…

Richard Innes – J.C. Clark Limited

Well, I think, there's no question it's down. It's just the magnitude of the drop over that two-year period that is a bit of a shock to the system?

Tom Crawford

Yeah. And again, going back, can't change things a year ago…

Richard Innes – J.C. Clark Limited

Okay.

Tom Crawford

… right now, today, with where we are, we look at it and say, yeah, we're holding our own in the marketplace.

Richard Innes – J.C. Clark Limited

Okay. Now, are you seeing same trend in the internments in your cemeteries, they are also down by the same order of magnitude?

Tom Crawford

You have got, in the cemetery you have, that’s a function of burial and that also a function of cremation as well.

Richard Innes – J.C. Clark Limited

Right.

Tom Crawford

And which is what we're trying to slowdown and we feel is an opportunity. So internments in the cemeteries are down and again, you go do a sample of any cemetery operator you'll find the same -- in general the same issue. Now, what we're trying to do is to slow that down by getting more people into our cemetery and this is where we've changed our processes, which is really kind of intriguing and worthy is that when a family comes in, we take them on a tour of the cemetery first and which typically we haven't done. And we've had great success in that in our market, so the whole idea is that for those cremation families they go into the cemetery and look at the available options they have for memorialization.

Richard Innes – J.C. Clark Limited

As you've researched this issue of total market, any reason to anticipate a turnaround in the near future?

Tom Crawford

Well, that's an interesting question. You go back to a year ago and I talked about the market returning to some sense of normalcy. And if I look at historical data, I would believe that. And then you go back of 1940 on and you see the normal progression that may even flow year-by-year, but as we've done more thinking on this and there are books out there on demographics and live birth rates and all the different generations and how that may play in.

Dick, there may be some sense of the fact that with the live birth rates being a little bit lower after the G.I. Generation that that may be a function that is impacting the whole industry right now. And that's the short-term kick and we need to look at those kinds of age curves. There's a big pig in the python that's working its way through the system with those baby boomers and so that's been some new insight to me, where I talked about returning to some sense of normalcy. It may take maybe a little bit more of an opportunity but also at the same time, the fact that we've got different cohorts working through the system, that's a great brilliant opportunity for us and others in the marketplace.

Richard Innes – J.C. Clark Limited

Second question is on revenue per call which was up 0.1% in the first half. 0.8% in the second quarter against a current increase of 3.6% which is a negative impact on your margins. Is this happening in both traditional and cremation calls or do you see different patterns of behavior there?

Tom Crawford

No, we're seeing our cremation calls actually picking up more pace. Our average revenue per event is higher on cremation which we've been pleased with. We think it's just more focusing time and effort and attention on that cremation consumer. And also on our own attitude, so we're seeing that positive impact on the cremation consumer.

Richard Innes – J.C. Clark Limited

So the traditional calls are the ones that are the biggest concern here?

Tom Crawford

But we're also seeing – We are also seeing increase on the traditional side as well. That's what I said this last month and April, with the new packages were such an important thing for us. We saw a real benefit.

Tom Kitchen

On other point, Dick, on the cost increase period-over-period. Dick, we've got in there that litigation charge of $700,000 and then that favorable insurance or the reserve adjustment in the prior year period that I think those two factors really accounted for some of the unfavorable percentage comparison to the prior period.

Richard Innes – J.C. Clark Limited

So I think you had indicated that you had not taken any price increases and if you haven't, is there an opportunity to do so?

Tom Crawford

I think right now, Dick, we made some adjustments in the last quarter going forward the rest of the year. We've let our packages work and we feel very comfortable with that. We've also taken a hard look at the type of products that we're selling in the marketplace, both from a casket standpoint and cremation product as well. And we feel like, with the mix that we're putting in the readjustment that we've done. That has taken place in the marketplace, we'll be able to expand our margins and let me go back to the point that Tom made and the point I was making earlier in the call, is that when you look at the straight data as Tom said, we've had other things that come in, the margins have dropped but then when you sort that back out to what is happening with our people at the rooftops and what are they doing. And our folks have done a very, very good job of managing the business, when we have small changes that or negative changes from a market standpoint, but still maintain their margins that's where I said we take, we're positive with our results.

Colin Stewart – J.C. Clark Limited

Hi, guys. It's Colin Stewart, I'm just here with Dick and I just had a couple of questions as well. Just wanted to go back to Tom, your comments at the end of the prepared remarks related to the -- I guess the six months year-to-date results on the gross profit and then the operating income I believe you stated both of those were up -- forget the percentages that you quoted. But if they commented that both of those metrics were up and correct me if I'm wrong, we try to look at things on apples-to-apples basis and when I go back to look at the six-month results for the first half of 2009, I think to be fair you really got to back out that $3.1 million charge you took against your trust fund, which is really in our view a one-time event.

And if you do that according to our math and we then make the comparison that actually looks like the operating profit and the gross profit in the business year-to-date are actually down. To be perfectly, frank, we're a little bit frustrated as large shareholders, I mean we look at the situation and say the economy is a lot stronger than it was a year ago. The SG&A is down significantly. The interest expense is down. The trust returns are much better and you're still unable to grow the profitability of the business year-over-year.

Tom Crawford

Excuse me, Collin, that's a good point on the issue with the trust last year and the hit that we took. When you start backing out all of the things that we talked about earlier and you start twiddling those down and you talk to me about in all fairness. Go back in all fairness and look at the things we just talked about earlier, is the fact that we had some mountains to climb here and you start twiddling out those things by the decisions that we've made. In all honesty to invest for the future, it would be an easy thing not to do that and not to make the investments we have, but there comes a point to say what are you really accomplishing, so we made new ways to develop our business which we're doing so adjust those costs out that $700,000 for the litigation settlement in California that Tom talked about. Let's be fair and back that out.

Also, what happened for the quarter and here is where you have to go beyond a quarter, beyond a period, where in our cemetery sales we were up but we also saw a little bit of a mix change as well that happened within the quarter, didn't happen in the second. But we're selling more in the mausoleums which is good, less as a percentage, the percentage of lots went down and lots have our highest margin so that had an impact as well which tends to bounce back from one period to the next.

Colin Stewart – J.C. Clark Limited

I can accept that the litigation charge, it should be looked at as a one-time item but the $1.2 million incremental expenses investing in your business, you guys have been talking about best-in-class and reinvesting in the business and all these programs that you had in place for the last several years and obviously there's some expectation as a shareholder that we're going to see a pay-off from those and see revenue growth which to be perfectly, frank, we really haven't seen.

Tom Crawford

Okay. That's a function of – Dick asked questions earlier about the market size and the reality is that you can accept what you want, that's fair, do what you want but the market is in fact smaller in the last couple years than it has been in the past. So we've been managing around that and this is a fixed cost business where little bit of volume gives you great benefit. And you take away volume then you have to overcome those hurdles and that's what we've been working on and that's why we look at the basic blocking and tackling down the field, what we are trying to accomplish. We do feel like we've had a positive impact.

Colin Stewart – J.C. Clark Limited

Okay. Thanks for your answer.

Tom Crawford

Thank you for your questions.

Operator

Next, we'll take Jamie Clement with Sidoti & Company.

Jamie Clement – Sidoti & Company

Good morning, gentlemen.

Tom Crawford

Jamie, how are you?

Jamie Clement – Sidoti & Company

Good, thanks. Tom, one of the things you referenced in your prepared remarks, you were talking about improvements in the process from order to delivery of cemetery merchandise, I believe?

Tom Crawford

Right.

Jamie Clement – Sidoti & Company

What exactly you are talking about? I sort of thought that process was straightforward previously, so.

Tom Kitchen

Jamie, this is Tom Kitchen. The practices are certainly better definition of what the roles and responsibilities of the people in the cemetery are, especially in the case of merchandise. Many of the markers are going to be installed after the service has been performed and it's really incumbent upon us to establish the right process and the understanding of the expectations that people in the field to first design the marker, secondly, to order the marker and then stay on top of the delivery and then ultimately to install the markers. What we've done as a best practice is to develop dashboards that give key metrics to the field that enable them to monitor each step of that process for them to use that and ultimately getting those markers in a merchandise ordered and delivered and installed. It's the installation of that that completes the cycle and enables us to recognize it as revenue.

Jamie Clement – Sidoti & Company

Okay. Okay. And it just, most of my questions have been answered but just – so I don't have the ask the questions in the future, if you are positioning your trust more in fixed income, now, in a low interest rate environment, for the purposes of earnings at some point down the road when I assume interest rates would be higher. You're basically locking in the coupon for earnings perspective going forward, but you don't really care what the ongoing or the prevailing market price of that bond might be because you intend to hold it to maturity. Is that kind of the right logic here?

Tom Kitchen

That's part of it, but the other part in a lower interest rate environment is to stay short and not to go out on a long-term basis, so our policy would be to have maturities that would be somewhere in the five to seven year range.

Jamie Clement – Sidoti & Company

Okay.

Tom Kitchen

And durations that might be four to five, to the extent that you're on individual securities or you can hold them to maturity and realize 100% of the face value, so primarily we understand that transitioning more to fixed income at this point in time, it's not the right point in time to go on a long-term with regard to the investment. They are short to intermediate and at this point in time also to the portfolio has a laddering effect, so that each year we've got $15 to $20 million worth of fixed income securities, maturities that are matured at any given time. And so the natural and normal steps you take to protect you from, let's say significant increases in the overall interest rate environment remain relatively short, hold a security to maturity and to really just manage that duration.

Jamie Clement – Sidoti & Company

Okay. And just for final clarification. If you end up, if you own an individual bond and let's say you're buying that at a buck 15 and a couple years down the road it's trading at $0.85 on the dollar because of a rise in rates, what it's trading at, at any given time has no impact on your earnings right if you're holding it to maturity?

Tom Kitchen

That's correct.

Jamie Clement – Sidoti & Company

Okay. All right. Great. Thank you very much.

Tom Crawford

Jamie, thank you.

Operator

(Operator Instructions) Next, we'll hear from Rajas Raji [ph] with HNC Capital [ph].

Rajas Raji – HNC Capital

My questions have been answered. Thank you.

Tom Kitchen

You're welcome.

Operator

Next, we'll take David Schmookler with Kingsland.

David Schmookler – Kingsland Capital

Hi, David Schmookler from Kingsland Capital Most of my questions were answered as well. The only outstanding one is on the CapEx. Can you just update your goals for spending for the year? It seems like they might be kind of tracking the first half. It's a bit lower than I had expected.

Tom Kitchen

With regard to the maintenance CapEx, we probably will be cracking the second half of the year consistent with the first half of the year. The expansion, we've got a couple of funeral homes under construction so that would be dependent upon the progress we make with regard to the construction in those two funeral homes, but maintenance CapEx will, we believe will be consistent with the experience for the first half of the year.

David Schmookler – Kingsland Capital

Okay. I guess, is the growth CapEx going to ramp in the second half of the year? I guess I'm just trying to quantify…

Tom Kitchen

We have some provisions and expectation that as we expand out some of the cremation offerings in our cemetery that there could be some either capital development or inventory development to offer to the families that we have in terms of the cremation initiatives, in trying to bring more cremation families back into the cemeteries and have them use the cemeteries.

David Schmookler – Kingsland Capital

Okay. And going back to the $1.2 million of spending on new initiatives and market research, I guess the market research is kind of a one-time thing and that might come of that going forward, but should we expect a similar number going forward the rest of the year and then similarly how are you measuring the return on that? Are you guys going to talk about the returns you get on that spending going forward?

Tom Crawford

The market research, that is one-time and it is important to note that, typically, we will do market research projects but we do those within our own confines with our own people that are smaller in scale and they are more market related. This is one where we have – It's more of a massive undertaking. I don't know when the last time the company tried to do something like this. I just don't know but it's not within the three year period that I've been here, so that's a major switch but that's a one-time pop.

On the new initiatives that we have on the cremation piece, we have invested in our infrastructure that will continue on for a bit because we have two people at a top level and we've made a conscience decision and that's all part of getting our products, our inventory, our people's mindset correctly so we've made those kinds of investments. So it will continue to run and we've also got some set up costs in there as well, as we're putting new inventory in. And the new invention piece that's in our platform that we've talked about from the beginning, as folks on investing class, new invention trying to find growth opportunities that are new, different but they are related. So we've been spending money on that and that's one we don't have anything to report on.

We've got some decisions to make coming up where we've got some very positive things from my standpoint but again, this is trying to invent something from nothing and those are more start up. So we're not at that point yet, so we're just maintaining the R&D and again that will probably be at a lower rate than what we have right now but we'll still have that investment for the next little bit.

David Schmookler – Kingsland Capital

Okay. And just to clarify, you guys have been mentioning this kind of stuff for some time now. You just called it out and quantified it this time around just to help with the year-over-year comparison. Is that right or is this new spending?

Tom Crawford

No, basically we've increased it. Again, the R&D, excuse me. The market research that's all within the quarter and that won't go away. The new investment we've been spending but we've been doing that in a very small way just trying to scrape things together. We put more emphasis on it in the quarter, but again that's one that's not a permanent platform we're building in until we finally have something we say, we can go with. So either we go forward or we don't. We've got those decisions to make going forward.

David Schmookler – Kingsland Capital

All right. Thanks guys.

Tom Crawford

Thank you.

Operator

And at this time we have no further questions in the queue. I'll turn the call back over to Mr. Crawford for any additional or closing remarks.

Tom Crawford

Well, thank you very much and again we appreciate all of you being on the call today. We do appreciate your questions and we hope we've answered them in a way that's meaningful, to help you better understand our business but more importantly at the end of the day to understand what we're trying to do in the challenges we have but also the opportunities we see ahead of us. As I mentioned before, we remain positive about 2010 and building on the platform going forward. So with that we thank you. We wish you well and we'll see you in three more months. Thank you.

Operator

Thank you. This does conclude our conference. We thank you all for your participation.

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