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Stewart Enterprises (NASDAQ:STEI)

Q4 2011 Earnings Call

December 16, 2011 11:00 am ET

Executives

Unknown Executive -

Thomas M. Kitchen - Chief Executive Officer, President, Director and Member of Investment Committee

Lewis J. Derbes - Chief Financial Officer, Senior Vice President and Treasurer

Analysts

Albert J. Rice - Susquehanna Financial Group, LLLP, Research Division

Dick Innes - JC Clark Ltd.

Colin Stewart - JC Clark Ltd.

James Clement - Sidoti & Company, LLC

Clint D. Fendley - Davenport & Company, LLC, Research Division

Seth Rosen - Eminence Capital, LLC

Operator

Good morning, and welcome to the Stewart Enterprises Inc. Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Han Wei [ph]. Please go ahead.

Unknown Executive

Thank you, Valerie. Good morning, everyone. On behalf of Stewart Enterprises, I would like to welcome everyone. By now, you should have already received a copy of the press release. If not, please visit Stewart's website at www.stei.com. On today's call, management will provide an overview of fiscal year 2011 and then we will open up the call for your questions.

The information contained in this call is current only at the time of this call. The company assumes no obligation to update any statements, including forward-looking statements made during this call. Statements made by the company that are not historical facts are forward-looking statements. Examples of forward-looking statements include projections of revenue, earnings, growth rates, free cash flow, debt levels, tax benefits and other financial items; statements regarding plans and objectives of the company or its management; statements regarding the industry trends, competitive trends and their effect on future performance; and assumptions underlying the forward-looking statements regarding the company and its business.

The company's actual results could differ materially from any forward-looking statements due to several important factors, which are described in the company's Form 10-K for the year ended October 31, 2011.

The company uses adjusted earnings, adjusted EPS, adjusted 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 supersede any information presented in accordance with GAAP. A reconciliation to the most directly comparable GAAP financial measure can be found on the company's website, at www.stei.com under the Investor Information or in the company's press release dated December 16, 2011.

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

Thomas M. Kitchen

Thank you. Good morning, and thank you for joining us on the call today. I'll offer a few summary comments and then I'll turn the call over to Lew for him to cover the financial performance in more detail before opening up for any Q&A.

Overall, we're very proud of our performance in fiscal year 2011, including a strong finish in the fourth quarter. This has been the best fiscal year in the past 3 years and includes achieving the highest net earnings and earnings per share, highest increase in same-store funeral calls, the highest annual cemetery property sales and the lowest corporate G&A expenses.

Underlying core operations performed well as demonstrated by an $8 million increase in funeral revenue, resulting primarily from increases in both average revenue per call, and the number of same-store funerals performed. Based on the data we reviewed, we believe our funeral call performance appears to be tracking ahead in the markets that we serve, which is an indication of an overall increase in market share.

We also produced almost $100 million or a 2% increase in net preneed funeral sales compared to last year. More significantly, we gained momentum during the year and finished with an increase of nearly 9% to $27.5 million for our fourth quarter. Preneed sales are important to the company's long-term potential and they help maintain and build market share.

On the Cemetery side, we produced over $100 million in cemetery property sales or an increase of 8% over last year. We also realized a strong finish to our fiscal year with a more than 14% improvement in property sales to $28 million during our last quarter. The preneed funeral and cemetery property sales are impressive, especially in light of uncertainties in the overall economy. Other significant accomplishments of the fiscal year include settling that litigation related to Hurricane Katrina for $12.4 million, repurchasing 5% of the company's common stock for nearly $30 million and announcing a 17% increase in our dividend to $0.14 per share, resulting in nearly $12 million in return to our shareholders during the year.

With this latest change, we've increased our dividend by 40% over the past 2 years. The decision to increase the cash dividend reflects both the board and management's confidence in the company's current financial condition and our ability to consistently generate strong positive cash flow. It's the board's intention to periodically reevaluate the company's dividend policy for a potential increase in the future.

We've also invested $9 million in acquisitions during the current fiscal year. While we would have liked to acquire more businesses, we have followed a disciplined process to identify those that best fit our model with regard to size, location and projected returns.

During the fiscal year, we announced some organizational changes, which we believe will better integrate operations and sales activities, and improve our ability to implement market-specific initiatives more effectively, particularly in the area of preneed sales.

And finally, we remain committed to our cremation initiative. During the fiscal year, we've improved the average revenue per cremation event, and increased the number of cemetery sales to cremation customers by emphasizing the benefit of memorializing a life well lived. As of the end of fiscal year 2011, we have completed 9 gardens and other cremation-related projects. We also have 13 projects under construction and more than 20 additional projects under review, and we're planning to invest approximately $12 million in fiscal year 2012 in new cremation inventory.

With that summary, I'm going to turn the call over to Lew Derbes.

Lewis J. Derbes

Thanks, Tom. Today, I wanted to give you some further insight on a few key areas: first, I'll discuss the company's operating performance; second, the performance of our trust portfolio; next, our tax planning strategies; and finally, our cash flow.

Before we discuss the performance for the full fiscal year, I thought it might be appropriate to provide some highlights from the fourth quarter. During the quarter, revenue improved by 3%, including a 2% increase in funeral revenue and a 4% increase in cemetery revenue. Overall gross profit improved 3%. Earnings from continuing operations excluding the loss from the early extinguishment of debt from last year increased 9%. EBITDA improved by 5%. And finally, operating and free cash flow increased 6% and 3% respectively, excluding the Hurricane Katrina settlement.

As for our operating performance for the full year, we generated $13 million or a 3% increase in consolidated revenue, which includes an $8 million or 3% increase in funeral revenue. This was accomplished by improving average revenue per traditional call by 2%, average revenue per cremation call by 3%, as well as increasing same-store call volume by more than 300.

We experienced an increase in funeral expenses during the year, resulting primarily from enhanced compensation and benefits, increased general liability insurance and energy cost combined with unfavorable funeral bad debt. Notwithstanding these increases, gross profit increased over $1 million for the year. Cemetery revenue increased by $5 million or 2% to $229 million for the year. This improvement is primarily a result of a $7 million or 8% increase in cemetery property sales, coupled with a $2 million improvement from trust-related activities. Partially offsetting this increase was a reduction in finance charge revenue as a result of the reduced interest rates on our installment sales in this low interest rate environment, as well as a decrease in merchandise deliveries compared to last year.

The improved revenue, coupled with cost management initiatives, translated into a $3 million or 9% increase in cemetery gross profit to $34 million, reflecting a nearly 100-basis-point improvement in cemetery gross profit margin. During the fiscal year, we realized cost savings from our continuous improvement initiatives. We used these savings to fund $2 million of expenses in various growth strategies in fiscal year 2011, specifically in e-commerce and third-party initiatives. We believe these investments will provide benefits in the future. Even including these significant investments, corporate G&A was less than last year.

Also, in regards to fiscal year 2011, we reported an $8 million increase in earnings from continuing operations to $38.6 million or $0.42 per diluted share. These results include the previously mentioned $12.4 million settlement of our Hurricane Katrina litigation. However, excluding the settlement and a few other unusual items, we reported a $3 million or 9% increase in adjusted earnings from continuing operations to $34.9 million or $0.38 per diluted share.

Finally, our adjusted EBITDA increased more than 5% to $101 million for fiscal year 2011 compared to $96 million last year. In regards to our trust portfolio, over the past 12 months, the fair market value of our portfolio increased some $9 million to $805 million and experienced a total annual return of 4.6%. Since dipping to a low point of $371 million of net unrealized losses in January 2009, we had steadily improved the unrealized loss position of our trust portfolio to $137 million in April of this year. However, the financial markets experienced a downturn in the late summer and fall of this year. That downturn, coupled with the volatility of the financial markets, impacted our overall trust returns, which was demonstrated by declines in both the third and fourth quarters of fiscal year 2011.

In addition, we experienced a further decline of 1.4% in November of 2011. As a result of this downturn and the overall uncertainty in the global and domestic economies, we, after a thorough analysis, elected to impair certain securities in our portfolio and reduce the cost basis for these securities to their fair market value as of October 31. The aggregate amounts of these other-than-temporary impairments were $44.7 million in our preneed trust and $11 million in our perpetual care trust. It is important to note that this impairment had no impact on either our fiscal year 2011 balance sheet or our income statement.

On our balance sheet, the securities in our trust portfolio and the corresponding liabilities are already recorded at fair market value. These impairments will be allocated to the underlying contracts in the preneed trust and will be recognized in our income statement as these preneed services and merchandise are delivered in the future.

Given that the contracts in our trust have historically had an average term of approximately 10 to 15 years, we project that this impairment could decrease our revenue and gross profit by approximately $2 million to $4 million per year for the foreseeable future. We reviewed the remaining securities in our portfolio and determined that they are not other than temporarily impaired. The overall appreciation required for the remaining securities to recover in value is only 2.5% per year over a 10-year time horizon. We will continue to monitor these securities closely. And since our actual 10-year annual return is some 3.5%, which included one of the worst downturns in the financial markets, we expect to be able to and intend to hold these securities until they recover in value. We believe we have sufficient liquidity within our trust to hold these securities for an extended period of time.

Moving on to taxes, for fiscal year 2011, our effective tax rate was a more normalized rate of 38% compared to 31% for the same period of last year. As a result of our ongoing tax planning initiatives, we have realized federal tax refunds and reductions of federal tax payments in excess of $67 million over the last 4 years and expect to further reduce our future tax payments by an additional $14 million for a total cash savings as a result of these efforts in excess of $80 million. We expect to pay nominal federal cash tax payments throughout most of next year. In addition, we continue to pursue other tax planning strategies and are cautiously optimistic they may generate further tax cash savings in the future.

And finally, as it relates to our cash flow, during fiscal year 2011, we generated nearly $87 million in operating cash flow compared to $63 million for the same period of last year. This increase is primarily a result of the Hurricane Katrina settlement that Tom mentioned earlier, as well as an improvement in our working capital. Even after excluding the Hurricane Katrina settlement, our operating cash flow and free cash flow for the fiscal year, reflect that significant improvement of some 19% and 14%, respectively, over last year.

Now I'd like to turn the call back over to Tom.

Thomas M. Kitchen

Thanks, Lew. In summary, after reviewing all the events the past fiscal year, we're pleased with the overall performance and remain optimistic about the future of our company. Financial condition is strong. Over the last 6 years, we've averaged more than $65 million in annual free cash flow for a total in excess of $390 million. Over that same time frame, we have deployed this cash by repurchasing over $175 million or 23% of our common stock, reducing the face value of our outstanding debt by $87 million or 21% and paying more than $60 million in dividends.

For fiscal year 2012, we plan to use our strong cash balance to: first, grow our base business and expand the use of technology to enhance the customer experience, enabling our employees to be as productive as possible; second, remain committed to our cremation initiative by developing garden and other cremation-related projects. We also will identify acquisition candidates that we believe will contribute to the future of our business during fiscal year 2012; we also have pay dividends to our shareholders, which we believe is an important use of our capital; and we'll continue to purchase common stock in the open market. And so far, in the current fiscal year 2012, we have purchased an additional 600,000 shares.

And finally, the favorable result of the fiscal year could not have been accomplished without the hard work and dedication of all the company's most important resource, our employees. Their contributions and efforts are the principal reason for our success. With that, we're ready to take any questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from A.J. Rice of Susquehanna Financial Group.

Albert J. Rice - Susquehanna Financial Group, LLLP, Research Division

Just a couple different things. First of all, Tom, you've referred -- several times I've heard you talk about the investment spending that you guys have made this year for some of these initiatives and so forth. Is there any way to quantify how much that's impacted operating results this year and whether you think that level of spending will persist next year, increase, diminish and even -- I don't know if there's any commentary around when you might see a return from that investment spending.

Thomas M. Kitchen

Right. The initiatives that we're talking about -- we quantified what we spent in 2011, we've spent approximately $2 million, and that was divided into a couple of various -- first and foremost, we're embarking on these initiatives in order to find new revenue channels for not only our core business but also finance some new ideas that we believe are worthwhile for us to follow up on. In our core business, certainly, the cremation initiatives, we talked a lot about that in terms of what the investments are there. But longer-term opportunities are in areas of third-party relationships, where we can expand and develop the new business relationships with any religious or community organizations, such as the one we have in the Los Angeles archdiocese. And the e-commerce opportunities for us to try to appeal to a broader market of extended family and friends that -- where we could offer products and services that have more meaning or significance and perhaps they'll be just giving them flowers. Going forward, in terms of the impact, we'll continue to invest in these. But we also are investing in other opportunities for us to make our employees more productive. And we think on balance that one should offset the other. So while we probably will have some investment in the funeral and cemetery, we expect to be able to control that with some reductions in some of the areas such as net of the general and administrative area.

Albert J. Rice - Susquehanna Financial Group, LLLP, Research Division

Okay. One thing I know that has led to some volatility in the margin trend has been the volatility in high-end, I guess, cemetery property sales. Can you sort of tell us where you're at there? I mean are we at a point now where, as we begin looking into next year, those comparisons should become easier? Just give us a flavor for that part of the business and what's happening.

Thomas M. Kitchen

Yes, the high-end sales are slowly coming back. They're bouncing back in the -- in 2011. And as the year went on, we saw the fourth quarter of 2011, a nice uptick in that. Even in markets, where -- quite frankly, I think we have talked about the Florida market being down. We saw our nice uptick there in high end property sales. So from our point of view, we assess that as economic conditions domestically at least stabilize and provide for some realistic growth expectation, we think that, that will continue to improve. It dropped dramatically. I think if you go back into the '09 and 2010 time period, we talked a lot about the significant decline in the high-end customer from the '07 and '08 time period. And what we see is while it's not back to those levels in the '07, '08 time period, we see it slowly improving, and I associate that with the growing confidence in what the outlook might be with regard to the overall domestic economy.

Albert J. Rice - Susquehanna Financial Group, LLLP, Research Division

Okay.

Operator

And the next question comes from Richard Innes and Colin Stewart of JC Clark.

Dick Innes - JC Clark Ltd.

First question is on the revenue per cremation call, which had been tracking fairly nicely through the first 3 quarters at plus 4.2%. And for some reason in the fourth quarter, it was 0.4%. What's happening there?

Lewis J. Derbes

Hey, this is Lew. We did see a pickup in some direct cremation activity during the quarter. Certainly, there was some volatility in the overall markets. We don't know if that had some price sensitivity for some of those customers. Certainly, we're embracing all our cremation calls, and our objective is if we conserve them on the funeral side with our expansion and inventory developments on the cemetery side, that present opportunities for us. But the driver there was a pickup in direct cremations. I think it's too early to tell if this 1 quarter is necessarily a trend. But we are evaluating it. We did see a little bit of an increase in terms of the direct cremation activity during the quarter and can't tell how much of it was related to kind of the sensitivity of the market implications during the quarter.

Dick Innes - JC Clark Ltd.

This may have been in the release, but I didn't notice it. What is the overall increase in your revenue per call combining traditional and cremation in the quarter?

Lewis J. Derbes

Overall increase was a little above 1%. I think it was 1.2% for the quarter.

Dick Innes - JC Clark Ltd.

Okay. When you look at the property sales, 14.4% in Q4 and 7.6% for the year. What's driving that? Is that the cremation gardens or the high-end sales? Or -- that's very encouraging, I would like to understand what's driving it.

Thomas M. Kitchen

The property sales in the fourth quarter were particularly strong, and with the growth of more than 14% over the same period for the prior year. There are a number of factors that account for that performance. For me the first -- there are some uptick as a result of the cremation sales and the different gardens that we've constructed over the last year. We consider that to be a positive trend. And we still think that it's too early to be quantifying it precisely, but we see that as a positive trend with regard to property sales of very strong positive acceptance by the cremation families that we serve. I mentioned in an earlier comment that the higher dollar sales, which we define as something in excess of $100,000, is saw a nice pickup there during the fourth quarter and that we were pleased with. It's also couple of those sales occurred in Florida, which had been underperforming with regard to cemetery sales. So that was nice to see that. We also need to give credit to the effective sales force we have. These are nearly 100 -- nearly 1,000 men and women that have a lot of experience in selling cemetery property and they did a very effective job during the fourth quarter. And we also, in response to the overall lower interest rates, we did lower our interest rates. We've disclosed that our interest rates needed to be reduced in response to the lower interest rate environment that we operate in and did have some programs that -- right near the end on the last month of the quarter to help generate those sales. So those are the factors there. We also believe that we operate some of the premier facilities in the markets that we serve, and I know you're probably familiar with a few of them. But when you look at the cemeteries that we operate, they have a very high degree of heritage and legacy with the families that we serve, and families tend to come back to the places where other family members are interred. So those are the principal factors that we think that account for the increase in the cemetery sales. Now going forward, can you generate 14% double-digit increase? We're not planning on that. We do think that a mid-single-digit increase is achievable, and that's what our goals and objectives are set for 2012 on.

Dick Innes - JC Clark Ltd.

Okay, last question is first half versus second half, if you look at the total year, earnings are up 9%, but that was basically all sourced from the first half of the year. As we look for the prospects going forward, should we be looking at what you've done for the total year or what the second half has looked like?

Thomas M. Kitchen

We believe that the total years is more indicative. We'll get some quarter-to-quarter variation in the performance. So we believe that the more indicative expectations going forward to be what we accomplished or achieved in the year.

Colin Stewart - JC Clark Ltd.

Tom and Lew, it's Colin, and I just have one question as well. The funeral side is obviously the key part of your business and generates the largest piece of your gross profit. And I mean it's a little concerning to see that over the full year, the gross profit on the Funeral business is only up about 1.5%, and for the fourth quarter, it was actually down 6.1%. So I mean just trying to understand, I mean you guys have spent a lot of money in CapEx over the last number of years and reinvested in the business. And do you feel you're getting an adequate rate of return on those capital investments given that we're not really seeing a lot of growth in a very key segment of your business? And do you have a way of measuring that? Or are the IRR hurdles being met on those capital investments?

Lewis J. Derbes

Well, Colin, over the last few years, we have invested in our properties, but we have -- we believe that since we own the premier properties in the markets we serve, we need to maintain them at a certain level. Do believe we're getting the returns on that. When we examined the performance of the Funeral in particular in the fourth quarter, there were a number of factors that affected the overall bottom line performance. One was some of the compensation and benefits, and benefits meaning primarily healthcare. We saw in the fourth quarter this year a spike up in healthcare, both in the Funeral and the Cemetery side of the business. Didn't manifest itself quite in the Cemetery side of the business like it did in the Funeral side. It -- and that, when we looked at the details of that, it's -- we have some -- a higher number of larger dollar value claims in the period. That's something that's hard to predict because when I look back over the beginning of the year and certainly in the first half of the year, our healthcare costs were running probably at or below what they were in the first half of the year and they spiked up in that -- in our fiscal fourth quarter. So those -- and then we also provided some incentives out there to drive the positive funeral call. We think it's significant for us to have accomplished a year-over-year growth in the funeral calls. That's something that the industry has not been able to do. We believe that, that's a very significant accomplishment for us, and we have taken steps in order for us to maintain or to expand out the company's market share.

Dick Innes - JC Clark Ltd.

Don't you think though, Tom, I mean if, I mean, all of your -- in a year when your, as you point out, your revenue on the Funeral side had some growth and increased the calls and the average revenue per call, which is great, but if that's all getting eaten up by cost increases either through compensation or healthcare, doesn't that sort of suggest there's a fundamental problem with the business? Or I mean I guess to ask it another way, do you think in the future that it's possible to actually grow the profitability or the gross profit of that Funeral business? Or is it just going to be that we're going to see modest revenue growth and that eaten up by cost increases?

Lewis J. Derbes

No. First, I don't believe that it's a negative reflection on the business nor do I think it's a negative impact going forward. Those are factors that we'll have to control going forward in terms of compensation and benefits. And for us, we have a business of leverage; we have a high fixed-cost investment in all of our facilities. We've demonstrated in the past, and I'm confident that we'll demonstrate in the future the ability to realize significant positive bottom line benefit by having some modest top line growth. We had said before that we can achieve double-digit growth in the bottom line by achieving fairly modest amount of single-digit growth in the top line. And it's because we've got the significant investment in the facilities that any growth or increase in the calls is going to generate a disproportionate amount of profitability in cash flow. This is one period where perhaps that model didn't work. But we're confident that, that model still has value and will generate the benefit going forward just as it has in the past.

Dick Innes - JC Clark Ltd.

Hopefully, that's the case. It certainly wasn't apparent in the fourth quarter.

Operator

And the next question comes from Jamie Clement of Sidoti.

James Clement - Sidoti & Company, LLC

I was curious, Tom, my -- the data obviously that are out there are kind of inherently flawed for a lot of reasons. My perception is nationally that the fall was less favorable from an overall kind of national mortality rate perspective year-over-year than earlier in the year. Is that -- in the markets you serve, was that your perception as well? Or would I be wrong there?

Thomas M. Kitchen

Jamie, I'm not -- less favorable in the fourth quarter or year?

James Clement - Sidoti & Company, LLC

Yes, in other words, when the fall rolled around, it seems like we, sort of, from a mortality-rate perspective probably started dipping negative again, kind of as we have for maybe the last 3 years prior to a couple of quarters earlier this year where things sort of seemed to be a little bit more level. And I know the rate bounces around a little bit, but I guess from your perspective was it -- I mean it seems to me at least that it may have, in fact, you may have had more of a headwind from a mortality-rate perspective in the fall than you did earlier in the year. Don't know if that's true though.

Thomas M. Kitchen

I think that's probably true because we had positive increases in the first 3 quarters and it was flat in the fourth quarter. Our expectation would then, had the market conditions continued into the fourth quarter that existed in the first 3, we would have seen a slight increase, but we didn't.

James Clement - Sidoti & Company, LLC

Right. And I guess that was -- fundamentally what I'm getting at is you haven't -- if anything, you've improved market share, you didn't lose it.

Thomas M. Kitchen

That's correct. And we believe that we've increased our market share, notwithstanding a flat number of funerals that we performed during the fourth quarter. From all indications that we see, and this comes from any published data, from talking with vendors, we suspect that the fourth quarter will probably have some slight decline in the mortality rate. And with that happening, we feel that it's significant for us to have achieved a flat year-over-year and with regard to funeral calls that we performed so...

James Clement - Sidoti & Company, LLC

Yes, and that's very helpful. I was wondering if I could -- just changing gears a little bit to the impairment in the trusts, just I have not had a chance to read all the footnotes in the 10-K, but some of the language here versus -- compared to where we were in 2009, it seems, and correct me if I'm wrong here, it seems like the language suggests that this may have been a little bit more discretionary than some of the impairments that had to be taken when the market collapsed a couple of years ago. I'm wondering, and I assume this is in there and I could probably do the math, was there an overall change in either allocation between classes of securities or more specifically within the equity class of securities that prompted some of this? Like in other words, was some of this, like you said, you know what, we don't want to hold this stuff anymore. We want to get rid of it.

Lewis J. Derbes

Jamie, this is Lew. I'll answer that. This isn't necessarily determination that we don't want to hold those securities any longer. What happened is -- and let me say first how it was different from what happened in '08 and '09. In '08 and '09 we had some securities of entities that went bankrupt and were deemed worthless, I mean, there was no choice on that. And the overall markets dropped precipitously at that point in time. We had some securities that were in an unrealized loss position. But we were committed to holding them. And I think hindsight being 20:20, we look back, the unrealized loss back in January of '09 kind of spiked to $370 million. And we committed we're holding them. And all the way through April of this year, it continued to improve and had declined to about $135 million to $140 million unrealized loss. But then we had some turbulence in the fourth -- in late third and then throughout the fourth quarter in the overall markets. And our portfolio had overall declines in both the third and fourth quarter as well as November was down another 1% to 1.5%. Then we had some, what I'll call, external or kind of macroeconomic factors that really made us question with the securities that we hold, all occurring in our fourth quarter, what the outlook was for recovery on these securities.

James Clement - Sidoti & Company, LLC

And is this on a security-by-security basis?

Lewis J. Derbes

Yes, it is. It's security-by-security basis. We have not made the decision to sell these securities. We just have reached the conclusion that we don't think we can hold them for as long as it would take for them to recover their original cost basis. And so we took the impairment. We wrote them down and we'll continue to evaluate these securities prospectively. They all have an outlook of favorable performance in the near term as a question of in this market -- in this part of the market cycle, can they make it all the way back to that recovery. And because of kind of the outside events and kind of expectations in the overall market for the next year or 2, we just don't think they can come back. Most of the securities as we said before were concentrated in the financial sector. The financial sector was certainly punished severely in that '08, '09 time frame, starting to make the run back, and they've kind of stabilized off, and that's kind of changed our outlook.

James Clement - Sidoti & Company, LLC

But I guess what I'm kind of getting at here is I mean this was a pretty thorough eval, I mean it sounds like this was an extremely thorough evaluation of the portfolio. And if this is like -- I mean, I know obviously, you can't predict market conditions, but let's just assume flat market conditions. I mean it sounds like you kind of cleaned the house all at once here. I just want to make sure that we're not going to be looking at this kind of going forward as an ongoing $10 million here and $5 million there and et cetera, et cetera.

Lewis J. Derbes

Certainly, that's not our expectation. We did look at every single security the portfolio. As I mentioned in my prepared comments, the overall return that's required for the securities that are remaining in unrealized loss position is a reasonable return that we expect we can achieve in the future, and we have exceeded that return in the last 10 years. So we will continue to monitor the securities, but we believe we have the ability to hold, and they recover in value and it will not predict -- present an issue in the future.

James Clement - Sidoti & Company, LLC

Yes, and I just want to be clear that I'm in fact commending you for being very upfront about this and taking care of, really taking care of business and really doing the housecleaning here. These was -- these questions were not a matter of criticism at all, okay?

Lewis J. Derbes

Thank you. We understand.

Operator

And the next question comes from Clint Fendley of Davenport & Company.

Clint D. Fendley - Davenport & Company, LLC, Research Division

Question, the release talks about the timing of construction on several cemetery projects, and I'm wondering if there's a timing issue here with regard to revenue and expenses that could impact the margins in Q1?

Lewis J. Derbes

In general, Clint, what that relates to -- Tom has mentioned a couple of times here in the Q&A session about some large property sales that occurred in the fourth quarter. A lot of those require construction. They may be customized and specifically designed for some of the high-end customers. So we had some revenue or production that occurred that did not meet the construction criteria to be recognized as revenue. So in essence, it is production, it's in our backlog and will be recognized in the future. Typically, those contracts normally have a pretty significant margin for us. And so it is just the timing because we have sell some in this period they'll get constructed in the next, but isn't anything that I would expect to have any significant trends one way or the other.

Clint D. Fendley - Davenport & Company, LLC, Research Division

Okay. I'm sorry about that. I joined the call a little bit late here. I wondered if you guys could remind us how many cremation gardens you've completed to date. And how many you expect due next year and the capital that you'll spend on these projects?

Thomas M. Kitchen

We have, as of the end of October, 9 opened. And by this time next year, we anticipate that we should have doubled that number. So we'll have somewhere by the end of next October approximately 18 to 20.

Lewis J. Derbes

And Clint, we expect to spend about $12 million on cremation inventory development in 2012. That'll all go through inventory as opposed to capital expenditures but is invested in working capital and will be sold through our cremation families going forward.

Operator

[Operator Instructions] The next question comes from Seth Rosen of Eminence Capital.

Seth Rosen - Eminence Capital, LLC

I just want to just get a little clarification on the impairment. So I guess just first off, the criteria that you used to decide which securities should be written off or written down. Was it solely that criteria of if you earn a reasonable rate of return over a reasonable time frame you'd get back to cost? Or was it also just simply if it was a certain percentage under cost or it's been under cost for a certain period of time, if you could just expand on that?

Lewis J. Derbes

Sure. The other-than-temporary impairment analysis was a combination of a formulaic-type approach, but it's inherently subjective. It was not simply an overall evaluation of it has to hit a certain percentage. We looked at the individual prospects of each of the issuers within our portfolio to make that determination.

Seth Rosen - Eminence Capital, LLC

Okay. And then just in terms of the impact go forward, so you've got $44.7 million that was in the preneed funeral and preneed cemetery trust and the $11 million that was in the perpetual care trust. Does the $11 million for perpetual care, that doesn't have this 10- to 15-year phenomenon, right?

Lewis J. Derbes

That is correct. That's correct. As I mentioned before in an answer to a question in perpetual care, a lot of these securities that we impaired have a positive outlook going forward. Most are continuing to pay dividends. There's really no impact in our perpetual care trust to the extent that we hold them, continue to get the ordinary income out of them, et cetera. So it doesn't have that impact on PC. On the funeral...

[

Seth Rosen - Eminence Capital, LLC

That's because you haven't sold the security and you're holding it, so it's nothing less.

Lewis J. Derbes

That's correct.

Seth Rosen - Eminence Capital, LLC

I got it. Okay.

Lewis J. Derbes

And as I mentioned, they -- most of them continue to pay dividends. We withdraw the ordinary income on a monthly basis and we use that to maintain the cemeteries to the level that our customers expect. In fact, we typically spend more to maintain our cemeteries than we withdraw in perpetual care. In the Funeral and Merchandise side, we also continue to hold those securities. We allocated the loss because average contract may last 10 to 15 years. It's uncertain, it was our conclusion that we'd be able to hold them before until they could recover in value. So that loss was allocated to all the undelivered contracts in our backlog. And as each one of them delivers in the future, it'll bare its pro rata share, and that's kind of where that range came from.

Seth Rosen - Eminence Capital, LLC

So I guess, just simply unless you're missing something really easy, but if we took the $44.7 million and divided it by the 10 to 15 years or 1/15 or 1/10, that's coming off almost $3 million to $4.5 million a year. So what's the $2 million to $4 million?

Lewis J. Derbes

The $2 million to $4 million was a range. It's going to -- our contracts don't deliver exactly 1/10 or 1/15 every year. It may have -- it all depends upon when they were sold, what happens with death rates, et cetera. So there'll be some volatility in that as it comes through, but that's kind of a range of what we'd expect over an extended period of time. I'd say the average life is 10 to 15. We may have some at our backlog that may be 20 to 25 and you may have some that are much shorter. So that -- that is just volatility that would come through in each period, and $2 million to $4 million is our estimate.

Seth Rosen - Eminence Capital, LLC

I got you. Okay. And then just a follow-up on an earlier question, so we still have -- and what is it, it's about $140 million or so of unrealized losses. So are you going to be doing the same process every quarter go forward, every year? Or should we -- how should we think about that?

Lewis J. Derbes

This process is conducted every quarter and it has been conducted every quarter up to this point. We just reached the position on the securities that we determined were impaired based upon specific issues with these issuers and external economic factors. We'll continue to evaluate it, but as I've mentioned before, we have the ability and intent to hold the remaining securities for an extended period of time. And we believe that we can do that until they recover in value and don't expect this to be an issue going forward.

Seth Rosen - Eminence Capital, LLC

Got you. Okay. And the $11 million in the perpetual care trust, that -- we would only be required to fund that if we sold the securities and the losses realized? Is that correct?

Lewis J. Derbes

That's correct. And only to the extent, remember we have 2 types of perpetual care trust. Some are where we're allowed to withdraw capital gains. Any portion of that $11 million that might be in a state that is -- where it doesn't allow historical capital gains withdrawals, we wouldn't have that funding obligation.

Seth Rosen - Eminence Capital, LLC

Okay. And then finally, have the premium trust -- have you seen a change in the average or expected duration of the -- between sale and the time and delivery? Because I thought you guys have spoken before about 10 years, and now you're saying 10 to 15. Maybe I misunderstood that.

Lewis J. Derbes

We really have not. I will say that it varies based upon markets. For example, it might have a much shorter life in Florida than it might have in Texas due to -- just due to the demographics in that market. But we really have not seen it, and that range will kind of take the low to the high based upon the markets that we've experienced. We have not seen any change in that rate for some time.

Operator

[Operator Instructions] At this time, I'm showing no further questions and I would like to turn the conference back over to the management for any closing remarks.

Thomas M. Kitchen

Well, thank you. We'd like to thank everybody for joining us today. We appreciate your interest and continued support in Stewart Enterprises, and we hope you have a happy holiday season. Thank you very much.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect, and have a great afternoon.

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