Stewart Enterprises CEO Discusses Q4 2010 Results - Earnings Call Transcript

Dec.16.10 | About: Stewart Enterprises, (STEI)

Stewart Enterprises Inc. (NASDAQ:STEI)

Q4 2010 Earnings Call

December 16, 2010 11:00 AM ET

Executives

Leslie Loyet – Financial Relations Board

Tom Crawford – President and CEO

Tom Kitchen – Senior Executive Vice President and CFO

Analysts

Clint Fendley – Davenport

A.J. Rice – Susquehanna Financial

Jamie Clement – Sidoti & Company

Richard Innes – JC Clark Limited

Katherine Spurlock – Rice Voelker

Nicholas Jansen – Raymond James & Associates

Operator

Please standby. Good day, everyone. And welcome to today’s Stewart Enterprises Incorporated Fourth Quarter and Year End 2010 Earnings Conference Call. As a reminder, today’s call is being recorded. At this time, participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions to participate will be given at that time.

I would now like to turn the call over to Leslie Loyet of the Financial Relations Board. Please go ahead, ma’am.

Leslie Loyet

Thank you. Good morning, everyone. On behalf of Stewart Enterprises, I’d like to welcome everyone. By now you should have received a copy of the press release. If not, please visit Stewart’s website at www.stewartenterprises.com for a copy. Management will provide an overview of the fourth quarter and fiscal 2010 year, and then we’ll open the call to your questions.

Before I turn the call over to management, please be advised the information contained in this call is current only as of the time of this call and the company assumes no obligation to update any statements, included forward-looking statements made during this call. Statements made by the company that are not historical facts are forward-looking statements.

Examples of forward-looking statements include projections of revenue, earnings, growth rates, free cash flow, debt levels, tax benefits and other financial items, statements regarding plans and objectives of the company or its management, statements regarding industry trends, competitive trends and their 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, 2010.

The company uses adjusted earnings, EPS, EBITDA, net debt 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 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 December 15, 2010.

With that said, I’d like to introduce management of Stewart Enterprises. On the line today, we have Tom Crawford, President and Chief Executive Officer; and Tom Kitchen, Senior Executive Vice 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 welcome to all who are joining us on the call today, we do thank you for spending time with us. Now, I’m going to lateral this over to Tom Kitchen pretty quickly for more detailed analysis of the quarter, but before I do that, just in general observations or comments that I’d like to make in relation to the progress on the quarter and the year.

As you read in the press release, we generated a strong and positive result for the quarter, despite continued sluggish debt in the markets and the uncertain economy that we are in. Regardless of those two caveats, it continues to be our intent to produce increasingly greater gains in the bottom line from small improvements in the topline. This intent was first -- further evidenced by the results of the fourth quarter.

Revenues for the quarter increased by 1.3% over the previous year, by stronger management of our field cost, through better systems and controls, overall segment cost declined by almost 3%, which in turn allowed the company to generate a 22% growth in gross margin.

And as we’ve done throughout the year, corporate overhead was reduced by 6%, compared to the same period of the previous year, which then contributed to a growth an operating income of 38%. Through the key one of the impact of the repurchase of our debt, interest expense was less by 9%, which further contribute to our growth in pre-tax income, which grew by 65%.

Of course, the magnitude of the expansion of our margin is also driven by the fact that 2009 was a difficult year. With that said, it’s also important to remember that while 2009 was a difficult year, we were seeing positive improvement in the fourth quarter which gave us encouragement going into 2010.

Looking forward, while the future progression and margins will not be as large as they are in the fourth quarter of 2010, we expect to see from the directional standpoint the same kind of results and trends, that is small changes in the topline performance will yield progressively greater growth towards the bottom line.

As you read in the release, revenues for our funeral segment were flat compared to 2009. Revenues were impacted by a decline in our total case volume of 3.3% compared to last year. However, from the data we have our performance to be in line with conditions in our markets. Additionally, as we look at our case volume compared to market data, we see that it tends to have been flow on the quarter-to-quarter basis.

With that said, we were able to offset the decline in volume with stronger price realization for both traditional and cremation oriented families for the quarter. Traditional average revenue per event increased by 1.7% and cremation average revenue per event increased by 4.3%, I need to emphasize that the increases were accomplished without raising prices and while lowering markups and funeral products like caskets and vaults putting more emphasis on service components of our offering where we truly differentiate and add value.

Additionally, during the year we invested heavily in time and energy to implement a new training program, geared to make sure our funeral arrangers understand the ramifications of how they serve families and to better equip them to increase their value to the family. We believe the results indicate the returns in this investment are positive.

The increase in cremation average is interesting and encouraging to us. As you are aware from past calls, we’ve invested heavily in our infrastructure to reshape our field force used cremation and more importantly how they serve cremation oriented families. During 2010, we re-assorted our funeral home selection rooms with more field cremation products and offerings.

Additionally, we created the Director of Operations cremation position in each one of our region with the intent of this position to train our people, assort our selection rooms with authorized products and to monitor and achieve the desired results. This effort began at the end of 2009 that essentially became effective and productive during the third quarter of 2010.

One of the most simple and one of the most profound results of this effort is that our people are more skilled and better prepared on cremation and as a result, they are more inclined to talk about options with families and provide better solutions to them. We believe the results of this effort is to better prepare and equip our people are showing up in our price progressions.

For the year, our average revenue per cremation event increased by 3.1% which obviously includes the results of the fourth quarter. As I mentioned earlier, for the quarter, our average revenue per cremation increased by 4.3% and that is most -- and what is most interesting and encouraging to us is that, when you consider only those customers who are pure at need, no pre-planning, the average revenue per cremation for the quarter increased by 6.6% over the fourth quarter last year. These are not necessarily huge jumps but lead us to believe we are making significant progress in seeing cremation in positive light and heading in the right direction.

One more point in the funeral segment that is even with our flat revenues during the quarter, by strong management of our cost we were able to maintain and expand our margins. In a fixed cost oriented business, we believe this is a strong and significant indicator that our internal management systems and controls and the best-in-class mindset are working.

In relation to our cemetery segment, I’m pleased with the continued progress for the quarter. Our property sales were essentially flat for the quarter we were able to generate other benefits to grow revenue by 4% or $2 million. Additionally, we control costs well and increased gross profit by $3.5 million or 60%.

Earlier I spoke of our progress in better serving cremation families and our funeral segment, but I’m equally pleased, if not more so with our progress in serving cremation families memorialization needs in our cemeteries.

During the fourth quarter, we completed our first major new cremation garden in Orlando, Florida, Tranquil Oaks at Oak Lawn. The garden is part of our cemetery home funeral accommodation, excuse me, funeral home cemetery accommodation. We turn less than a half acre of land into a stunning cremation memorialization center in which families who want to enter loved ones and visit often.

While we are still in the development and rollout stage of our new garden initiative, we are seeing positive progress throughout the company, simply because we’re talking about the significant opportunities to better serve cremation families. We are changing our mindset and see evidence in our results. After an exceptionally strong third quarter, we continue to see progress in the fourth quarter as cremation sales in our cemeteries increase 7% over the previous year.

On a year-to-date basis, the number of total cremation events in our funeral homes increased by 1.1%, while sales in our cemetery for cremation increased by 27%. We believe this growth is significant as it shows that we’re talking to families about memorialization opportunities, after the cremation and more families are memorializing their loved ones in our cemeteries.

We are pleased with our progress in reshaping the mindset of our organization towards cremation. We are encouraged with the results and we remain most excited about the short and long-term benefits of our pursuit of cremation oriented families.

It is worth noting that our excitement about cremation is really about better serving families. We’ve made it clear to our front-line employees that we are a cremation company, excuse me, that we -- in our cremation effort, it’s not just cremation, but we’re focused on serving all of our families in serving the needs of our funeral and memorial needs for all of our families regardless of their preference for handling the remains of their loved ones.

Finally, one of our strategic objectives established three years ago was to manage our cash and strengthen our balance sheet, so we could invest with more flexibility and growth.

While Tom will go into more quantification of the results, during the quarter and for the year, we again generated strong cash flow and have further strengthened our balance sheet. During the fourth quarter, we purchased approximately $15 million of outstanding debt at discounted prices an $8.8 million or about 1.6 million shares of the company stock.

With that overview, I’m now going to turn the call over to Tom Kitchen for more detailed review of our results and progress. Tom?

Tom Kitchen

Thanks Tom. Today I want to discuss our financial performance and results of our tax initiatives, the company’s financial condition and the trust portfolio. Regarding our financial performance, I’m pleased to report that during the fourth quarter on an adjusted basis we reported earnings of $8.4 million, which is an increase of some $3.9 million from the same period in fiscal year 2009, this translate into earnings per share of $0.09 or some $0.04 more than the fourth quarter of last year.

Our cemetery segment continued to improve in the fourth quarter with a $2 million or 4% increase in revenue. Revenue increased coupled with effective management of our cemetery expenses generated a $3.5 million or 60% increase in gross profit and a 560 basis point expansion of our cemetery gross margins.

In our funeral segment, we increased our average revenue for traditional, funeral and cremation service an increase, our funeral gross profit in both dollars and margins despite experiencing a decrease in the same-store funeral services.

Our adjusted EBITDA for the fourth quarter increased some $4 million to $23 million from $19 million for the comparable period of last year.

Operating and free cash flow remained solid for fiscal year 2010 at $63.4 million and $50.7 million, respectively and we return more than $11 million to our shareholders via dividends. We did experience a decrease in current year operating cash flow, compared to fiscal ‘09, which is primarily result of a $40 million decline and net tax refunds in the current year. It’s important to note, last year’s cash flow was very strong and the highest operating cash flow we’ve had in the past five years.

When viewed together we’ve generated $148 million of operating cash flow in the last two years. This has enabled management to maintain strategies such as paying dividends, repurchasing debts and common stock, all of which produce significant value for our shareholders.

With regard to our financial condition, our emphasis on generating positive cash flow has enabled us to take actions in the fourth quarter and throughout the fiscal year to strengthen our balance sheet and further improve our capital structure.

During the year we have repurchased nearly $36 million of our senior convertible notes with approximately $15 repurchased in the fourth quarter. In total over the last year and a half, we have returned an excess of $118 million or 26% of our outstanding debt, which will produce nearly $4 million in annual cash interest savings.

As an additional benefit to the overall company, we have purchased the debt at more than $26 million below face value, also as Tom has previously mentioned, in September, we reinitiated our share repurchase program. We bought 1.6 million shares or some $8.8 million since the reinstatement of the program and we currently have nearly $18 million remaining under the $75 million program.

For our fiscal year 2010, we have been proactive in reducing costs throughout the company. In 2010 alone, we have saved approximately $4 million attributable to a decrease in corporate G&A and an annual cash interest savings. The actions taken over the last two years have produced total savings from corporate G&A and interest in excess of $6 million in 2010.

We finished the year with healthy cash balance of $66 million and the lowest level of outstanding debt for the company in 15 years. In addition, we have no significant near-term debt maturity and no amounts drawn on our $95 million credit facility.

As a result of these actions, our leverage coverage ratio has improved from a high of 3.8 times in the last two years to 2.8 times as of October 31, 2010. These actions further access to the financial strength of the company.

Regarding our tax initiatives, we commence an examination of our tax policies a couple of years ago and these efforts have produced significant positive results. We have realized tax refunds and reduction of tax payments of nearly $52 million over the last four years and will further reduce our future estimated tax payments by approximately $20 million for total cash savings in excess of $75 million. We do not have to pay any federal cash taxes this year and we do not expect to pay any federal cash taxes for fiscal 2011 and most if not all of fiscal 2012.

Moving onto the company’s trust portfolio, we believe the actions we’ve taken to rebound our asset mix towards more fixed income securities and away from equities have been beneficial and of less than a volatility of returns in our portfolio.

During the fourth quarter of 2010, our preneed trust experienced a total return of 5.4% and our perpetual care trust experienced the total return of 4.6%. For fiscal year 2010, we achieved total annual returns of 14% for our preneed trust and 15% return for our perpetual care trust.

In addition, the fair market value of our portfolio has improved approximately $70 million during the year to $795 million as of October 31st. For the last two years, fair market value of our portfolio as of October 31st has increased more than $139 million and we have realized cumulative returns of 30% and 35% for preneed trust and perpetual care trust respectively for this period.

In conclusion, by growing the topline, having effective cash management and positive free cash flow, we have maintained a strong balance sheet, improve the company’s earnings and enhanced shareholder value. We have generated healthy liquidity balances and are well-positioned to take advantage of business opportunities in the future.

Tom Crawford

Tom, thanks for that review. As I mentioned earlier, we are pleased with our fourth quarter results and we’re extremely encouraged by our full year 2010 performance. For the year, revenues were up by 3%, gross profit was up 10%, operating earnings were up 22% and we experienced a 32% increase in earnings from continued operations.

Three and a half years ago we put together a strategic platform of best-in-class, new invention and manage for cash investing growth. Our best-in-class approach has led to better flow of information, better management tools local levels and better management practices that are shared across regional and local boundaries. We believe our actions have put us in a good position to continue to prosper if the number of deaths remaining decline, but more importantly when the market turns upward, as it will, we fully expect to expand our margins and profits at an accelerated rate.

I can’t say enough about our enthusiasm to better serve cremation customers. I believe that excitement and creativity in our cremation segment is having a residual benefit in our traditional segments as well. We’re looking at our business differently in finding different opportunities. We have a great wealth in our cemeteries for both traditional and cremation customers, memorialization needs and we fully intend to capitalize on that wealth.

As Tom mentioned, our balance sheet is strong and wealth will get stronger as we continue to generate positive cash flow. Regarding our cash flow, we will still look to repurchase debt as returns justify the investment. Additionally, we will continue to repurchase the common stock of the company as authorized by the board.

We also expect to invest an additional $5 million in the cremation inventory and garden development during 2011. We also expect to continue to capture more cremation and memorialization opportunities in our cemeteries, even prior to the new gardens being developed and as we experienced in 2010.

We want to add to our growth through acquisitions. During 2010, we didn’t close any deals with the exception of a tuck-in that took place after year-end. However, we looked at a substantial number of opportunities during 2010 and will be even more determined to service the right candidates in 2011. We have recently added resources and focused attention to accomplish this objective.

We are encouraged with our backlog and we’re working on opportunities for which we are truly excited. Not only regarding the businesses but with the leadership and the people that would come with the businesses. As with all acquisitions, only time will tell if we will be able to close those and be successful.

While we will continue to manage our costs well as demonstrated this year, we will also continue to invest resources, both human and financial to explore new opportunities for the company.

Finally, as you’ve read the end of our press release, Mike Read and James McFarland, two of Stewart Enterprises long-serving board members have notified the board that they will be retiring at the end of their term of service at the shareholders meeting.

We are grateful for their service and insight and for me personally, it has been a privilege to be associated with them and learn from them. We appreciate all they have done for the company, the shareholders and all the employees.

From management standpoint as well as the Board, we’re pleased also to have John Saer and John Elstrott nominated to stand for election of the Board. I will tell you I like them, they bring a fresh perspective and we think they will be a great help in carrying out our strategic objectives for the future.

With that in mind, Leslie, we’ll turn this time back over to you and we’ll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from Clint Fendley of Davenport.

Clint Fendley – Davenport

Thank you. Good morning, guys. Thanks for taking my question.

Tom Crawford

Hi, Clint.

Clint Fendley – Davenport

First off, I wondered if you had any color on the acquisition that you did in Texas, the $1.8 million in the quarter and what’s the pipeline looking like they are going forward?

Tom Crawford

Well, the acquisition we did in Texas that was -- just a little, it’s a tuck-in. It strengthens one of our market areas. It gives us -- in that market area it gives us a little bit of a stronger presence, we are able to split our resources around. Again, it’s a small one that came up and was service through the organization, which we liked and so again, it’s more of just strengthening an individual markets and as we said, a tuck-in.

Our pipeline, this year we had a pretty good pipeline of companies that we looked at and more so than at any time, by far, in my time it’s your enterprises. And so we feel like we got a good pipeline, we’re working on some currently and as I mentioned, we -- I’m very positive with the companies that we’re looking at. And let me leave it that we’re pleased and we will continue to pursue those figure.

Clint Fendley – Davenport

Okay. Good to hear. And I think lower health claims helped you guys in the quarter by the tune of may be $1.6 million or so. I mean how much more benefit could we have looking forward here on the health claim front?

Tom Crawford

I’m going to let Tom talk about that because it’s one that really there were structural changes that were good that should last. Tom.

Tom Kitchen

Yeah. Clint, we did a couple of things during the year, one was to implement a two-tiered health plan for our employees. They were saying that we believe helped to was -- we did an independent verification audit which dropped the number of participants out of -- dependence out of the plan.

As well as in 2009, we believe that we had some higher value claims that we incurred, all of which produced a favorable result for 2010. The effective date for the two-tier plan and the point in time when we dropped, the dependents because they did not meet the eligibility requirements, that was effective May 1, 2010. So our expectation is that we should realize, all things being equal. They should produce some benefit and certainly in the first half of 2011 fiscal year.

After that, it’s going to be incumbent upon us to be able to react to he new health care plan that Congress passed in 2010 and to tell us what the impact is going to be and also I think every company is looking carefully at that in trying to assess what the impact is going to be on us and we are no different.

So from this standpoint, I think near-term, we expect some positive but longer-term yet there are no significant changes in the health care plan. There is still certainly going to be some additional cost that all companies are going to incur.

Clint Fendley – Davenport

Okay. That is very helpful. Obviously, very strong margins in the quarter on your cemetery segment. Could you just help us, may be understand the timing of any big projects that you might have had that you completed during the quarter?

Tom Kitchen

I think there were several points there that helped us with regard to the cemetery, one of which was a large project that we did put into construction. We realized some revenue is associated with that.

Secondly, there were some sales and productivity that were deferred because we did not meet the criteria for revenue recognition and we crossed over that line during the fourth quarter and that also had a positive impact on the company.

Then there was continuing improvement in the merchandise deliveries, not as much as what we saw in the first three quarters of the year but in the fourth quarter, nevertheless, we saw continuation in that positive trend. So those two or those three factors really produced some of the improvement in the cemetery during the course of the fourth quarter.

I would hasten to point out, however, that -- while cemetery sales were relatively flat for this fourth -- when compared to the fourth quarter 2009, the fourth quarter 2009 cemetery sales are fairly strong and so was a tough comparison for us to be.

Overall, we are encouraged by the cemetery sales for the year, which were some 5.5% more than the prior year. So we are certainly working to continue that trend toward improving the cemetery sales.

Clint Fendley – Davenport

Okay. Very helpful. And last question, you guys obviously have done a lot of work on the IT front to help reduce savings. I mean, how should we think about quantifying that, looking forward from the fourth quarter here?

Tom Crawford

We have spent a vast amount of time on that. We can give you infinite detail on that which you can if you just want, but let me just tell you that we’ve made great progress, we’ve invested heavily. We still feel like, not feel, we know we’ve got productivity gains plugged in for next year.

We’re doing a lot to further automate or handling on the field of contracts to eliminate -- handling to eliminate the rework from a quality standpoint. So by further doing that, we believe we got significant gains going forward. So that process doesn’t stop. And we’ll give more to that in 2011.

Clint Fendley – Davenport

Great. Thank you guys. Nice quarter.

Tom Crawford

Clint, thank you. Good to talk with you.

Operator

Our next question will come from A.J. Rice at Susquehanna Financial.

A.J. Rice – Susquehanna Financial

Hello everybody. A couple of different questions but thanks, Tom, for going through some priorities on the cash flow but obviously, you are at a point like you highlighted yourself, a 15-year loan and your debt outstanding, nothing drawn down the line of credit, to speak of and maturities are out there.

Do you think, what we see the page relative to what we saw on the fourth quarter of share repurchases accelerate and if you run through the current authorizations of the appetite to continue there, do you think the pipeline as you are describing on the acquisition backlog is enough that you want to keep some powder dry?

Tom Crawford

Well, that is a good point. We will go up to -- we have been authorized to come -- and as Tom said earlier, we will -- we’re gone fulfill that and then when that happens, we will go back with the board. But again, we’ve got the acquisitions that we are looking at and again, you cannot predict, you cannot guarantee what’s going to happen because we are not going to do something that is not in the best interest of the long-term shareholders, just to do an acquisition.

However, we have got some that are small, we’ve got some that are larger so as we progress further down, our first intent is to go through the authorization that we have, go further down the curve of what we’re looking at from acquisitions and clearly, if the acquisitions don’t materialize the way we think then we will go back with the board, we’ll probably do more. I can’t promise that but at least that is our intent to continue on the path that we are on.

A.J. Rice – Susquehanna Financial

And just maybe, Tom, you can remind me how much is left on the senior convertible notes that you have been buying? How much is left outstanding on those?

Tom Kitchen

About $125 million or so, AJ, some wherever in that target, that range.

A.J. Rice – Susquehanna Financial

It is just that they are held in tight hands so that’s why we see the variability, otherwise you would -- those would remain a priority as well I assume?

Tom Kitchen

That’s correct. There is not a lot of activity. We -- at the bottom of the market with most of the liquidity over the last year and a half and we continue to be on the lookout for meaningful numbers for us to repurchase. But in the last three months, it has not been and it just hasn’t surfaced.

A.J. Rice – Susquehanna Financial

Right. Okay. Now, I know one of the priorities coming out of the credit crisis was to move the trust fund portfolio away from, somewhat not overly but I guess less than its exposure to the equity markets. Thanks for the update on the returns. Can you just sort of tell us what the portfolio mix sort of looks like at this point and whether you are happy sort of, in terms of the long-term placement of the portfolio? Are you still trying to transition in?

Tom Kitchen

Well, I just said that we are still trying to transition the portfolio and have been taking measured steps to do that over the last two years. We are satisfied with the progress we have made but we believe that there is more opportunities for us going forward to continue that transition.

One good question to ask, certainly in today’s environment of low interest rates, is this really the right time to transition into a fixed income structure are more heavily into fixed income structure and we are wary of that. We are moving very cautiously and slowly and when we do move, we stand in a shorter timeframe with regard to the portfolio as far as fixed income.

We are continuing that. We, probably in terms of equities, we have somewhere in the 45% range of the portfolio. And, of course, on a fixed income, we are moving into that. We have improved that over the last year but we’re going to continue to try work at reducing the reliance on the equity.

A.J. Rice – Susquehanna Financial

Okay. And then my last question would just be around the prearranged funeral backlog, a, do you have any data on the impact that that had on your pricing, the case is coming out of the backlog, that came at need this period and then is there any flavor for the new contracts you are signing, how those look, average increases versus what the kind of new contracts you are signing a year ago, maybe, if you have got something along those lines.

Tom Crawford

We took some real efforts this year to make sure that we are floors that they were set with our packages that what we sold on that need basis is what we are selling on a preneed basis so we stake that in.

A.J. Rice – Susquehanna Financial

Okay.

Tom Kitchen

We think today what is coming out is. So that is a great plus going forward. So we just line up really well. What is coming at us right now, is we haven’t seen any great changes from that standpoint so that has not been an issue with us.

A.J. Rice – Susquehanna Financial

It’s not, I guess, just because of the impact still, from the investment portfolio, getting hit two years ago, is that -- so that is not a detriment to your average increases, what’s coming out of the backlog at this point?

Tom Kitchen

Well, AJ, has been and impacted, we disclosed a couple of years ago that we anticipated from the portfolio all in that we would realize approximately $10 million less in revenue for the company for 2009. That number was close to about $9 million. The 2010 year showed an improvement of approximately $1.4 million from what we would consider that the investment-related revenue for the company.

We are continuing to work on that to improve the amount of revenue that we realize. We recognize that it could have some impact going forward but we are confident that we have got the right strategy to address that.

A.J. Rice – Susquehanna Financial

Right, right. I’m just trying to figure out where you thought you were a year ago versus where you are now whether you can help us (inaudible) modest?

Tom Kitchen

A year ago, today, where we are, is not where we were three years ago. And we just continue to work on that in terms of repositioning the portfolio so that we have a series of more predictable cash flows.

A.J. Rice – Susquehanna Financial

Sure. Okay. That is great. Thanks a lot.

Tom Crawford

Thanks AJ.

Operator

Your next question will come from Jamie Clement of Sidoti & Company.

Jamie Clement – Sidoti & Company

Good morning gentlemen.

Tom Crawford

Jamie, good morning.

Jamie Clement – Sidoti & Company

Tom, did you -- I was writing some notes down so much, I got this. Did you say you plan to spend about $5 million on new cremation gardens in fiscal ‘11, is that right?

Tom Crawford

That’s correct.

Jamie Clement – Sidoti & Company

Does that work out to about 10? Is that the rough economics of these?

Tom Crawford

Jamie, what that is, that total in the absence flows, that is on average. What we did this last year, the garden that we just opened, we are absolutely thrilled with. It took us some time to get us there, to get all the requirements, all the authorizations from a zoning standpoint, anything with the community but it took time.

And so what we also have done is that we have shifted not only from the gardens but we have gotten into more quick hitting projects because we really want to capitalize on what we have and the momentum that we have in the field.

So we have got some that are more costly, we have got some that are less costly. So we got right now, we have got in total -- let me rephrase that a different way. We have about 30 projects going through our system right now.

Jamie Clement – Sidoti & Company

Okay.

Tom Crawford

Through various stages of approval and if it all comes out to about $5 million, we’ll do five, if it comes out more, we are doing more.

Jamie Clement – Sidoti & Company

Okay.

Tom Crawford

Because we have good returns on these things with good response. So again, even the one that we just put in place, Tranquil Oaks, it was less than half an acre and it cost about half $1 million with that in, with inventory. And I will tell you right now, we officially I think we are open, selling.

Just recently, we sold about $100,000 already, which we’re even making cells before we officially opened. The intent is to speed up the number of projects that we have. That is why we have parsed that out to a large and also going to smaller ones in other locations.

Jamie Clement – Sidoti & Company

Tom, you mentioned the returns on its investments and you may not want to share what you are internal model is saying, it’s still understandable but can you give us a sense of a family, a customer, that walks through there on an at need or preneed basis? What are -- I mean obviously, [urn men rights] opportunity to what buy plaques and bronze memorials, that kinds of things. What are the other options that you are actually offering there?

Tom Crawford

You have got. We are selling monuments that are granted, cowboy boots and pianos and automobiles, replica. We are selling a variety of things. I go to that extreme to say it is not just one thing.

Jamie Clement – Sidoti & Company

Okay.

Tom Crawford

Right now, we are seeing our average is about $3000 or $3500. That we are selling. It is the rights but also the niche, it is also greater memorialization opportunities.

Jamie Clement – Sidoti & Company

Okay. Okay. Changing gears just a little bit, you know, I think we saw some of this in some other public companies, September quarter earnings releases. It seems like your numbers with respect to volumes, are consistent with what other people in your industry, public and private, have also said.

Why does there appear to be such a disconnect right now currently over the last couple of months between what you all and really the rest of your industry appears to be saying about mortality trends versus CDC data?

Tom Crawford

Well, the CDC, when we look at that, we have been consistent through the quarters on -- as we track CDC, but we also are not in, CDC is an estimate but we are not in all the markets that CDC is. So we look at it in total and we also scrub it out and we look at for those markets that we are in. And so once we do that, we are consistent. The CDC this last quarter was actually up a little bit. We are delighted with that.

Jamie Clement – Sidoti & Company

Right.

Tom Crawford

And again, as you remember the past call, I thought this was going to be the year of we’re returning to some sense of normalcy, but my estimating ability is not all that good. So with that uptick in the CDC, I am hoping in general, across the board and I think there have been some issues of greater P&I forecast coming out, we’re trusting that is going to be the case. We tend to lag a little bit in the markets we’re in and that is what I said for, on one hand, as we scrub it, we are consistent in our markets.

Jamie Clement – Sidoti & Company

Okay.

Tom Crawford

I am hoping that is a bellwether of things to come but we will see.

Jamie Clement – Sidoti & Company

It seems like historically, Stewart Enterprises has always cautioned us to say hey, the CDC data is just one number, we are not in all those markets, that kind of thing. I mean, it seems like you have historically a little bit more skeptical is not right word, but just, that’s just one number.

I mean, I personally am scratching my head a little bit, just based on everybody in your industry said, covering a lot of different markets in lot of different parts of the camp in the CDC. I mean, do you think I am right to be scratching my head a little bit of the last couple of months?

Tom Crawford

Well, you know, Jamie, I’m almost going to repeat the same…

Jamie Clement – Sidoti & Company

Okay. Fair enough, fair enough.

Tom Crawford

Jamie, this is an industry that ebbs and flows around. Sure and it will bounce around. We are looking at long-term over a year, it tends to balance itself out but what I do now is that, one is that we all can predict it but that, if we go back to the data on live birth, which makes a lot -- it makes a heck of a lot of sense to me.

Jamie Clement – Sidoti & Company

Sure.

Tom Crawford

Is there was a trough back in about 19, pick a number, 1930s -- 1934 and then you run that forward, we are close to being at the end of that trough. So, I look at that as really quite optimistic about the future and then, in the short-term, especially in the next 10 years, you’re going to see a big jump. So I look at the whole market as more optimistic for the future than pessimistic.

We just have to ride through that and once again, Jamie, back on that CDC data, the CDC covers 122 cities. Literally not all, but quite a few and we are in all of 26 of those, 122.

Jamie Clement – Sidoti & Company

Sure.

Tom Crawford

That is what we have to, we look at it both ways to kind of Calgary where we are.

Jamie Clement – Sidoti & Company

I hear you. I was sort of aggregating what a lot of other companies have also said. You know what I mean? Your response is very, very fair. Thank you very much.

Tom Crawford

Jamie, thank you.

Operator

(Operator Instructions) Our next question comes from Richard Innes of JC Clark Limited.

Richard Innes – JC Clark Limited

Good morning, guys.

Tom Crawford

Good morning.

Richard Innes – JC Clark Limited

Congratulations on a strong quarter. The first question is on premium fuel cells, where they are down 13% and you said that your goal is to exceed the sales that you are bringing into your current business, which means that as long as you’re ahead of whatever, you sold seven or eight years ago or whatever your average contract maturity is, seems like a modest goal. Is that a change in emphasis on premium sales that we are seeing here?

Tom Crawford

No. Not at all, what we did want to emphasize during 2010 was our premium cemetery. And we have not deemphasized premium by any stretch of the imagination. Sometimes, we have to calibrate getting that pendulum in dead center but in 2009, I will tell you is probably little bit easier to sell premium funeral that it was cemetery and we want to emphasize cemetery this year and to get that going forward, which we have.

And as Tom said earlier, we’ve had a 5.5% increase, which we are positive, even in markets that have had, that are really hit by the economies over a major markets, we have done well. We are pleased with that, but this is not a deemphasis. We just have to get that pendulum back dead center, but still we are even with that, we are still running at a 1.2 or 1.4% or 1.4 times, excuse me, over the normal rate. So premium is important to us. No deemphasis whatsoever and again, cemetery was a bit focus for us this year and our cremation initiatives.

Richard Innes – JC Clark Limited

Right. Second question is, price of copper has being skyrocketing up over four bucks. Is this going to have any impact on your margins on bronze memorials, or do you think you can pass that along to consumers?

Tom Crawford

No. We have a long-term contract with the supplier and our expectation is that -- particularly manageable for us, especially for the perceivable future.

Richard Innes – JC Clark Limited

Last question is, municipal governments, like all governments are in bit of a financial crisis today. Is there any opportunity there to buy and or get management contracts to run their cemeteries?

Tom Crawford

Rick, that’s a good question and you are absolutely right on the pressure. The last one that we just, it was in, working, well actually in [Kendall], Texas working with municipality, we put a funeral home on property and I would say we just started an initiative right now, into the third and fourth quarter on our faith-based initiative or our third-party initiative, which includes faith-based and also any third party.

So we put one of our senior executives on that and slowly focused on that initiative and it is taking a religious focus, where we think we are getting a lot of opportunity but its also working with municipalities and I will tell you even here in New Orleans, couple of days ago, there was a meeting with the mayor on that. So, we have nothing to report on out but at least we are trying to point in that direction a little bit more.

Richard Innes – JC Clark Limited

Okay. Thank you.

Tom Crawford

Thank you.

Operator

And our next question will come from Katherine Spurlock of Rice Voelker.

Katherine Spurlock – Rice Voelker

Hi. How are you?

Tom Crawford

Well.

Katherine Spurlock – Rice Voelker

As a percentage of cremations, what is your current internment rate? I believe last quarter it was 10%?

Tom Kitchen

You know what, that is a good question and I’m going to answer that by saying that we are finding that we are even -- we need to do more work on clarifying what all of our data is. And that’s one of the, so it has been low, it is moving to high. And we found in our last series of management meetings that we want to even have better refinement on the data, as we compare one year to the next, we think we got that in place. I’m not trying to evade your question, I’m just saying if you give me a little bit -- next time, we will probably give you more clarity on exactly what that is, as our data collection becomes far more accurate that we have before.

Now, having said that, that’s why I went back to give you that data on our cemetery sales because that is clean. That is right off of all of our contract data, so I can give you then that is what I said. For the year, it increased 27%. So, if I can, let me use that as a surrogate or the capture rate that we have within our cemeteries and let me fess up one more thing here. I’m the one that is going to turn, I think interment rate, somebody did I latched on towards is mine.

And now, as we look at the data, well, that’s probably a wrong measure because it is not just internment, we have many things that are going within our cemeteries, so that will only capture one component and that’s why we are going back to capture more specific exact data and we are even changing our terminology just on memorialization rate. The point is, we want to get more people in our cemeteries and grow that significantly and that’s why we looked at 27% growth, year-over-year, as real positive.

Katherine Spurlock – Rice Voelker

And that 27% represents cremation sales in your cemeteries? Is that correct?

Tom Crawford

That is correct and that comes right off of our contracts.

Katherine Spurlock – Rice Voelker

Okay. And, in keeping with that line, did, using the old terminology, the internment initiatives, how do they contribute to your gross margins lift in cemetery and your funeral part of business and about by what measure?

Tom Crawford

Say that again? How do they contribute on our gross margin?

Katherine Spurlock – Rice Voelker

On your gross margin, yeah, or do they contribute?

Tom Crawford

Yeah. They did. We had a -- we were very positive on that. That is a good margin business for us and again, from a growth standpoint, that was a very positive percentage in our cemetery. It is still low but that is the exciting thing about what we have here. We think that is just pure great potential for us and it is a significant contributor. It’s got very good margins. There’ll be no degradation of margins from what we are doing in the cemeteries.

Katherine Spurlock – Rice Voelker

Right. And, last call you mentioned that you were reaching out to families of those, who was cremated as remains, to maybe have them come back and use your cremation gardens. Have you launched that and how is that going?

Tom Crawford

No. We haven’t launched that specifically just yet. It’s in -- what we are doing is launching our first pass with Tranquil Oaks and as we look at our home marketing of cremation, we are getting our projects up and running where we have something good and then we are going to go back to the families.

And we are also, I will tell you one of the things that we are doing that I think I’m most excited about, that is that we got some projects this year where we will put cremation campuses on standalone cemeteries. We will now be able to aid and assist funeral directors where we don’t have a funeral home and bring families in as well.

Katherine Spurlock – Rice Voelker

Okay. And when do you expect to launch that? What part of the year? Both on the ad campaign and, or the standalone cremation cemeteries?

Tom Crawford

On the standalone, we will do, our first one will be of April this year. As a matter of fact, we will target on April 15th and whether that is good or bad, I’m not sure. But April, again, in Florida in the Orlando area, the work is being done right now and that is going to launch April 15th. From an ad campaign, with Tranquil Oaks, we’re looking at January 7 for a star day.

Katherine Spurlock – Rice Voelker

Okay. January 7th. Okay. All right. Thank you. And thanks so much.

Tom Crawford

Thank you.

Operator

And our next question will come from Nicholas Jansen of Raymond James & Associates.

Nicholas Jansen – Raymond James & Associates

Good morning, guys. Just one quick question on cash flow. $63 million for the full year for 2010, that’s the cash flow from ops. And they talked about working capital being a little more of a trade giving the success in the pre-need, I know you don’t provide official guidance, but is 2010 with no tax refund and that number basically, is that a good base to grow off of?

Tom Kitchen

Yeah. We believe that the $60 – $63, $60 to $65 million, run rate for operating cash flow is a good standard for us to work with. Of course, when you get to the pre-cash flow you have to take the maintenance cap which for 2010 year was approximately $13 million.

Nicholas Jansen – Raymond James & Associates

And is there any guidance for that for 2011, for maintenance?

Tom Kitchen

No. On the maintenance CapEx, I thought you were talking about free cash flow, I’m sorry. On the maintenance CapEx, we budget typically $20 million for capital spending. And we estimate that about 75% of that would be for maintenance CapEx. So that’s, those are the numbers that you would be working with.

Historically, we have not spent as much as $20 million. I think this past year our gross spending on cap was about $60 million. In terms of planning, $15 to $20 million in total CapEx is probably reasonable. In terms of maintenance CapEx, you’d normally be looking at -- it’s about 75% of the total.

Nicholas Jansen – Raymond James & Associates

Perfect. And just one housekeeping note, what’s the current share count?

Tom Kitchen

It is slightly in excess of 92 million shares.

Nicholas Jansen – Raymond James & Associates

Even after the repurchases?

Tom Kitchen

That is correct.

Nicholas Jansen – Raymond James & Associates

Okay. All right. That’s all for me. Thanks, guys. Great quarter.

Tom Crawford

Thank you.

Operator

And it does appear that there are no further questions at this time. Mr. Crawford, I’ll turn the conference back over to you for any additional or closing comments.

Tom Crawford

Okay. Thank you very much and again, we appreciate all the questions we’ve had, we appreciate the attendance by all who were on the call and we’ll listen to the webcast later. Just let me say that we feel very positive about 2010 and we are encouraged going into 2011. We think, we are working on the right things and we are encouraged by again, our balance sheet.

We are encouraged by our initiatives in cremation that are opening up opportunities, not only in cremation, but in our business to better serve families. We are excited about the companies that we are looking at. So, in general, we are very positive about the future of Stewart Enterprises and let me just say with that, we wish you all a very joyous holiday season.

Thank you and we will see you in three more months.

Operator

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

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