Executives
Leslie Loyet - IR, Financial Relations Board
Thomas Crawford - President, CEO
Thomas Kitchen - SVP, CFO
Analysts
Thomas Bacon - Lehman Brothers
Jamie Clement - Sidoti
Herb Buchbinder - Wachovia Securities
Michael Scarangella - Merrill Lynch
Colin Stewart - JC Clark
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Stewart Enterprises, Inc. (STEI) F2Q07 Earnings Call June 12, 2007 11:00 AM ET
Operator
Good day everyone and welcome to today's Stewart Enterprises, Inc. second quarter 2007 earnings conference call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions to participate will be given at that time.
And now, I'd like to turn the call over to Ms. Leslie Loyet of the Financial Relations Board. Please go ahead.
Leslie Loyet
Thank you. Good morning and thank you all for joining us. On behalf of Stewart Enterprises, I'd like to welcome everyone.
By now, you should have all received a copy of the press release that was distributed this morning. If not, please contact Liz Dolezol at 312-640-6771 and she will send you one immediately, or visit Stewart's website at www.stewartenterprises.com for a copy.
Management will provide an overview of the second quarter and then we will open up 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, 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 industry trends, competitive trends, and their effect on future performance, and assumptions underlining 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-Q for the quarter ended April 30, 2007.
The Company uses EBITDA and free cash flow as financial measures. These financial measures are not in accordance with accounting principles generally accepted in the United States of America, GAAP, and are intended to supplement rather than replace or supersede 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 www.stewartenterprises.com, under Investor Information, reconciliation of non-GAAP financial measures, and can also be found in the company's press release dated June 12, 2007.
With all that said, I would like to introduce management. Today, we have Tom Crawford, President and Chief Executive Officer; and Tom Kitchen, Senior Vice President and Chief Financial Officer. At this time, I'd like to turn the call over to Tom Crawford. Please go ahead.
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Thomas Crawford
Thank you. Good morning to everyone who are joining us on the call. We appreciate your presence and trust that your time with us today will be worthwhile. It's my pleasure to take part in my first quarterly report as the CEO of Stewart Enterprises.
Before we begin the review of the details of the performance of the company for the first quarter, let me explain how we are going to cover that information. Some months before I was appointed CEO of Stewart Enterprises, I listened to a quarterly report given by Tom Kitchen, then the acting CEO as well as CFO. I was impressed with Tom's report that it was informative, thorough, and to the point, and thought at that time that if I did come on board that there was no need to change any part of the quarterly report and keep it as it was going forward. With that thought in mind, I am going to turn the time over to Tom in a few minutes to review detailed results for the quarter. But, before I do, I would like to give you some of the highlights of our strong operational performance for the period.
First of all, net earnings from continuing operations increased 21% for the current quarter to $13.8 million or $0.13 per diluted share and 32% for the first six months to $25.8 million or $0.24 per share. Additionally, the company generated solid cash flow with $14.6 million from operations during the quarter and $32.5 million for the six-month period.
We achieved strong preneed sales, with a 12% increase in preneed funeral sales and a 5% increase in property sales. With the implementation of improved funeral and cremation offerings to client families, we continue to realize increase in average revenue per event in both funeral and cemetery categories. Compared with the same period last year, we experienced a 4% increase in the average revenue per traditional funeral and an 8% increase in the average revenue per cremation. Despite a decline in funeral and cemetery events of approximately 2% for the quarter, compared with the same period last year, we still generated an increase in total revenues of 5% during the quarter. We believe the results demonstrate the commitment of the employees of Stewart to work to the stated goal of Caring for People and Making a Difference. We believe that as we continue to focus on putting families first that we can build on the solid results of the first six months and produce consistent and positive performance into the future.
With that said, I am very pleased to turn the time and the call over to Tom Kitchen to review the detailed results.
Thomas Kitchen
Thank you, Tom. I will begin my comments by discussing our cash flow. The company reported cash flow from operations in the second quarter of $14.6 million, compared to $23.8 million for the prior quarter of '06. After eliminating the impact of non-recurring items, recurring free cash flow was $11.5 million for the second quarter of '07, compared to $18.9 million for the second quarter of last year. The decrease in recurring free cash flow for the quarter resulted from $7 million in tax payments during the period, compared with just $500,000 in tax payments during the second quarter of '06. This was due to the net operating loss carry-forwards utilized in '06. In fiscal '06, we paid $4.3 million in taxes, however, we expect to pay more than $14 million in taxes for fiscal year of '07.
For the first six months, operating cash flow was $32.5 million in the current year and $51.1 million for the comparable period of last year. And recurring free cash flow was $23.7 million for the first six months of '07, compared to $33 million for the same period of last year. Similarly, the decrease in recurring free cash flow for the year-to-date period occurred due in part to $5.6 million in tax payments made in the current year, net of $1.4 million of tax refunds received during the first quarter of '07. The first six months of '06 included tax payments of just $700,000, due to the net operating loss carry-forwards previously mentioned.
Recurring free cash flow in the first half of '06 was also enhanced as a result of an increase in customer collections following the delay in collection processing after Hurricane Katrina. As to our debt balance, we reported outstanding debt of $363.3 million and cash on hand of some $46.5 million, or a net debt balance of $316.8 million. This is the lowest net debt we have experienced in over ten years.
Moving to the income statement and our quarterly results. For the three months, we increased revenue from continuing operations $6.9 million or 5.3% to $137.7 million, driven by increases in both the funeral and cemetery segments. In our funeral operations, revenue for the quarter increased $2 million or 2.8% to $73.8 million, due primarily to solid increases in our average revenue per funeral service and an increase in insurance commission revenue, as a result of a nearly 20% increase in preneed funeral insurance sales for the quarter.
The company sells preneed products and services through trust and insurance and earns a commission on these preneed insurance sales. We increased the average revenue per traditional funeral service and the average revenue per cremation service for the quarter, 3.9% and 8.2% respectively. The positive effects on funeral revenue were partially offset by a decrease in the same store funeral events of 1.7% during the quarter or some 262 events to a total of 15,475. The decrease for the quarter showed a significant improvement when compared to the 5.5% decrease in the first quarter of this year. Our same store businesses experienced a 50 basis point increase in cremations from 38.5% for the second quarter of '06 to 39% for the second quarter of this year. As a final note to our funeral business discussion, pre-need funeral sales increased 12.3% during the second quarter of '07.
Switching over to our cemetery operations. Cemetery revenues increased $4.9 million or 8.3% to $63.8 million for the second quarter of '07. This increase was due primarily to significant progress in construction with an increase of $4.3 million during the quarter on various cemetery projects and $1.2 million or 5% increase in gross cemetery property sales, partially offset by $0.5 million decrease in merchandised delivery revenue. The increase in gross cemetery property sales resulted in part from serving customers interested in large cemetery property purchases.
With regard to gross profit, we experienced an increase in our overall gross profit for the second quarter of $800,000 to $32.7 million. This equates to a 70 basis point decrease in total gross profit margin to 23.7% compared to 24.4% for the same period in '06. Our funeral gross profit for the quarter increased $0.5 million to $18.9 million or 25.6% of revenue compared to the same margin in the second quarter of last year. For the quarter, cemetery gross profit increased $300,000 to $13.8 million. Cemetery gross profit margin decreased from 22.9% in the second quarter of '06 to 21.6% for the same period of the current year. This decline is due to several factors such as increased merchandise insurance and advertising cost and a decrease in merchandise delivery revenue.
On other matters, corporate G&A increased $0.5 million to $7.7 million for the quarter due primarily to the costs related to the issuance of stock grants and the accelerated depreciation of the company's current computer software systems associated with the implementation of two new business systems. These increases were partially offset by lower professional fees, which were higher than normal during the second quarter of last year because of restated SEC filings. During our second quarter, we recorded hurricane related charges of $300,000 net of insurance proceeds compared to a recovery of $0.5 million for the same period of '06. These charges were for repairs at locations damaged by Hurricane Katrina and the timing of receiving insurance proceeds is not in line with the timing of cash spending related to Hurricane Katrina. We continue to work with our insurance carriers on our remaining claims. Other operating income net increased $800,000 to some $900,000 due primarily to the sale of excess cemetery property and proceeds related to the sale of an investment during the quarter. Interest expense decreased $1.4 million to $6.3 million for the second quarter as we reduced our average debt by $29.3 million compared to the same period of last year.
In addition, the company experienced a 61 basis point decrease in the average rate due to additional interest incurred in the second quarter of fiscal '06 on the company's 6.25% senior notes as a result of the company's inability to timely complete an exchange offer.
The company reported net earnings from continuing ops of $13.8 million or some $0.13 per diluted share for the second quarter of fiscal '07 compared to $11.4 million or $0.11 per diluted share for the second quarter of fiscal '06. This represents a 21% increase in earnings per share from continuing operations for the quarter. Earnings for the three months were impacted by the recognition of a tax benefit of $1.5 million, which resulted from the utilization of a capital loss carry-forward. The impact of the tax benefit resulted in an effective tax rate of 30.4% for the second quarter. The effective tax rate, exclusive of this benefit, would have been approximately 38% for the quarter, which is more reflective of our expectations of this normalized rate for the remainder of the current fiscal year.
I will give a brief recap on our year-to-date results. Our net earnings from continuing operations for the first half of fiscal '07 were $25.8 million or some $0.24 per diluted share, compared to net earnings of $19.5 million or $0.18 per diluted share for the same period of '06. This represents a 32% increase in earnings per share from continuing operations for the year.
Revenue from continuing operations increased $13.5 million or some 5.3% to $270.3 million with funeral revenue increasing $3.1 million or 2.2% to $146.5 million and cemetery revenue increasing $10.4 million or 9.2% to $123.8 million.
Gross profit for the first six months increased $2.6 million to $63.7 million. Corporate G&A increased $300,000 to $14.8 million. And hurricane-related charges, net of insurance proceeds, were $2.1 million for the first six months of fiscal '07 and fiscal '06.
Interest expense for the six months decreased $2.1 million to $13.1 million. Earnings for the six months were impacted by the recognition of a tax benefit of $3.4 million for the year, which resulted from the utilization of capital loss carry-forwards. The impact of the tax benefit resulted in an effective tax rate of 28.6% for the first six months of '07. The effective tax rate, exclusive of this benefit, would have been 38% for the year.
Preneed funeral sales increased 7.1% during the first half of this year adding to our preneed funeral backlog. You may have noticed that our earnings release includes a reconciliation from net earnings to earnings before interest, taxes, depreciation and amortization, or EBITDA from continuing operations. EBITDA from continuing ops was $32.9 million or 23.9% of revenues for the second quarter of '07, compared to $32.2 million or 24.6% of revenue for the second quarter of '06. And finally, EBITDA from continuing operations was $62.5 million or 23.1% of revenue for the first six months of fiscal '07, compared to $58.8 million or some 22.9% of revenue for the comparable period of '06.
Thomas Crawford
Thank you, Tom. The solid results for our second quarter and the first six months of 2007 are encouraging and we intend to continue to build on the positive performance going forward. We believe that as we focus management attention on high-yielding opportunities within the existing company, we clearly have the ability to continue to grow earnings and generate additional cash. I am pleased with the team we have in place at Stewart and we will further strengthen our management group as we add bench strength to accomplish key initiatives to help drive the company forward.
Clearly, I'm not a licensed funeral director nor a former owner of a cemetery, but from past experience, I have spent a significant amount of time listening to consumers of the products, services, and feeling the practices of the profession and the industry. I am committed to asking questions from a different angle and helping our management team to look at the business in new ways to generate more value.
As a management group, it is not our goal to make the company the largest in the industry, but it is our goal to make the company more valuable every day. We will spend every dollar from an investment standpoint as if it is our own and to invest with a strong business case, generating worthy returns. We will work to get the most out of the resources under our stewardship by implementing the best practices of the company that the company has to offer and do that across the board. We will strive to make our internal business processes leaner and re-deploy the savings to higher return initiatives. We will constantly work to take better care of the customers -- our customers and those who visit our facilities in support of their client families.
As a management group, we will strive to be totally honest with each other without ego or bias and to pursue the right course of action for the company and not having to be individually right. We will have that same attitude with the investors in Stewart Enterprises. When we do well, we will give you the facts and move on; when we don't, then we will tell you what we did wrong and without spin or without varnish, what we are going to do to correct the mistakes. So, we'll improve our flawed assumptions.
As I stated earlier, it's not our goal to make the company the biggest in the industry, but the best in class and to help our company become more valuable to our investors, for our customers, and to our employees.
Now with that said, we are now going to turn the time over to you to ask Tom Kitchen the really hard and difficult questions and to leave the easier ones for me and we will both stick to that religiously. So, I will turn the time over to you.
Question-and-Answer Session
Operator
Thank you sir. Today's question and answer session will be conducted electronically. At this time if you do have a question, you may signal by pressing star one on your touchtone phone. If you are using a speakerphone today, please make sure your mute function is turned off to allow your signal to reach our equipment. And once again, that's star one for questions and we will go first to Tom Bacon with Lehman Brothers.
Thomas Bacon - Lehman Brothers
Good morning.
Thomas Crawford
Good morning.
Thomas Bacon - Lehman Brothers
Obviously in your comments, you said you plan on focusing on high yielding opportunities within the company and I was just wondering maybe if you could give us an idea of what you think some of those might be? And then I also noticed you didn't really talk about the acquisition opportunity and I was just wondering if maybe you could give us an idea of how you are thinking about that going forward?
Thomas Crawford
Okay. And I will try and wrap those things together if possible. First of all, when you look at this industry and I don't think this should be a surprise to anybody who's invested, who knows about this industry, the statistics are that the death rate right now it's at best a 1% growth, with a little bit of tailwind it's 1%. We got a cremation rate that continues to grow and the net effect is you have a substitution curve that impacts traditional funerals.
So, with that, the issue is, one is to go out and acquire. And the challenge with that is when you do acquire, for us right now, it is you are acquiring into the same kind of industry statistics that I just talked about, which you can deal with, but right now we are looking at it a little bit differently. Now I'm going to come back to that in one minute.
But first of all in our base business, Stewart Enterprises grew as we all know through acquisitions and we've got a lot of divestitures over the last year. And as Tom said, the debt has never been lower than I think for last ten years, which is a heroic thing given where the company was.
The other interesting point is that during that rapid acquisition growth, I think it's easy not to look at how you improve the day-to-day operations and I've had people in the organization tell me that two years ago they didn't even know what cash flow was. And I don't use that that as an indictment, I just use that as a way of saying, in the last two years a lot of progress had been made on the internal disciplines and we have a lot further that we can do within the company.
The challenge with having an organization our size and again there are those that are a lot bigger, but our size we have got a lot of locations. But the good part of having a lot of locations is we have best practices at each one. And I have got two books on my desk, big thick books, the Stewart way with best practices, but we've got to take those books and really apply that at the local level with those manageable few things that help us serve our families better to get the most out of every experience that we have, every event that comes our way. And just by doing some simple math on that as we focus our management skill on really managing our businesses, we have a tremendous opportunity to improve our revenue and our profitability. So, that's the first thing we need to do.
We just keep going after and strengthening our base businesses and for those businesses that are not yielding the adequate return, that don't match the Stewart way, we need to dispose off those and we will for somebody else can do a better job with them that we can now because I don't want to dilute management's time and effort and attention on low yielding businesses.
So, we will probably get a little bit smaller from that standpoint as far as the number of facilities we have, but by doing so, by putting best practices, by focusing on the businesses that we can grow, we believe our return on net assets will go up.
Now, the second thing I think we need to do in the organization, and I believe this firmly, is that we have assets in this company that we have not unlocked all the benefit of. And that simply comes from asking questions a little bit differently and asking not only why, but why not. So, that's the second part of where we need to pursue. And I'm not going to go into a lot of details on that just yet because I think the first priority we have is clearly strengthening the base business. That's the first and foremost thing we have. As we do that, then it makes the second part easier, because we will re-deploy savings from the gains that we made into reinvesting back in what I hope to be growth opportunities going forward without a great departure from what it is that we do today, and that's just unlocking the value that is in the assets today. And by doing so, we hope to get, again, as I said, a high return on net asset.
Now, the third part of that then becomes what you do about acquisitions. And if we can -- right now, for us, if we don't have -- and this is what we said internally, we will invest in resources where we have a good business case, and where we can do something with them once we acquire them. And if we don't, we won't. It is as simple as that. But, our acquisition thrust going forward would be stronger when we strengthen our base business, where we have the Stewart way that we can bring into an acquisition, and improve the return and the performance of that business after it is acquired. The other part from our acquisition focus will be, as we unlock the value in the assets that we currently have, we will invest in resources that help support the growth of those new product lines or new ventures for us. So, that's in a nutshell where we would like to go downstream and into the future.
Thomas Bacon - Lehman Brothers
I mean, do you think, as far as the cost savings or strengthening the base business, are you going to provide us with any targets in terms of your margin goals or anything like that so that we can benchmark your progress?
Thomas Crawford
I think in the future we can do that. I think right now it is a little bit -- for me, it is premature to do that. I am still learning this business and still gathering the knowledge that I need to go forward to put more definition around what we just talked about.
Thomas Bacon - Lehman Brothers
I'd just be interested to hear your opinion, I mean, obviously, your competitors, kind of, realigned their pricing because they felt that consumers were more and more viewing merchandise as a commodity. And I'd just be kind of interested to hear your perspective of having come from the merchandise side of what really is going on in the mind of the consumer?
Thomas Crawford
Well, that's a good question. And I think from the mind -- when you think about the mind of the consumer, I think you can plot all truth on a two-by-two matrix. And if you put frequency of experience in one axis high to low and knowledge on the other, low to high, you will find that coming in -- having a funeral event is probably about as low a frequency, low a experience as you can ever have. And on an average, it is done once every 17 years. And I don't know about anybody else listening, but for me, I've yet even have to make an arrangement. So, that tells you what we are dealing with here. Families come in not knowing what they -- they don't know what they don't know, and that's a concern, but it is also an opportunity. And I think what happens at the end is, they do remember the experience, they do remember the feelings. From past experience and I've shared this with many people in our organization in past is that after you -- if you bring a group of people and then ask them to describe what it is they purchased, even if they had the experience anywhere from one to three years, they can't really describe. And they might miss the description in total, but they do remember what happened at the ceremony, they do remember the feelings they had and those are the things we have to capitalize. Merchandise is very important, but it is not the center of the universe, from my standpoint.
Thomas Bacon - Lehman Brothers
Okay. And then, Tom, maybe just a couple of quick questions. Are you guys a full cash taxpayer now?
Thomas Kitchen
Going forward, we anticipate that we would be.
Thomas Bacon - Lehman Brothers
Okay. And then also just on the increase in the insurance funded preneed, are you doing anything differently there in terms of incentives or is it just better packages driving higher averages?
Thomas Kitchen
With regard to the incentives, no, the compensation for the sales force has not changed. But, what we are doing is, certainly focusing on certain geographic areas on preneed insurance where it fits. If you recall, in the past, we have always talked about, we will sell preneed insurance or preneed trust depending on certain facts and circumstances of the locations. And what we have done here is really actually put together some teams of people that are focused on the preneed funeral and their vehicle for selling, it's in finance and it's mostly through the preneed insurance.
Thomas Bacon - Lehman Brothers
Okay. I'll get back in the queue, but welcome to Mr. Crawford.
Thomas Crawford
Thank you.
Operator
We will take our next question from Jamie Clement with Sidoti.
Jamie Clement - Sidoti
Good morning gentlemen. Thanks a lot for taking my call.
Thomas Crawford
Good morning.
Thomas Kitchen
You are welcome.
Jamie Clement - Sidoti
Question about, not so much the cremation trend, but your ability to drive average revenue per cremation. I think last year for the full year, my numbers could be wrong, but I think you were up about 1.5%, the prior year I think it was maybe about 4%. The last three quarters though, I think the fourth quarter of last year was about 6% and then through the first six months of this year I think you were up about 9%. So, it seems that there was almost like this point of inflection that was reached in the fourth quarter of last year. I know this has been a point of emphasis for you guys, but can you talk to us a little bit about why over the last sort of six to nine months you really seemed to gain traction in being able to drive those increases?
Thomas Kitchen
Jamie, a couple of things. We think the packages have helped increase the averages with regard to cremation. It's also a factor of presenting to the cremation, families that we serve, what are the options. And we are doing what we believe is a much better job of presenting the options for the cremation families, letting them know that their memorialization, visitations are certainly something that they can take advantage of and should take advantage of because we believe every person would like to have some memorialization of their life. So, what we have is really two-fold. One is I think the packages have made it easier to communicate that to the families and the families realizing that cremation has some other options associated with it. And I think that the emphasis that we placed on those two points has really produced solid increases in the cremation. Really the mix of the cremation has moved up from a lower to what we call a direct cremation to something that is more of a full-service cremation. So, that is a very pleasant experience for us from the standpoint of trying to certainly present the options to a cremation family and letting them know what they can do and it's been showing some very positive results for us.
Jamie Clement - Sidoti
Okay. I guess the point that I sort of ultimately hope to get to was, if you have got a situation where you are increasing your average revenue per cremation at a faster rate than the cremation rate is growing, that takes a lot of headwind out of the story, right?
Thomas Kitchen
Right.
Jamie Clement - Sidoti
Have the packages been adopted equally well across the organization or are there certain areas where you think you can continue to see some improvement?
Thomas Kitchen
I think there are certain areas where we can see some more improvement when we go through and look at pre-package and post-package prices. It adds some significant positive benefit for most of our operations, but there are certain locations, which we see, are certainly candidates for some improvement because they haven't achieved quite the increase that we believe that they are capable of. They just haven't realized their full potential that this is really about taking the cremation and the mix and trying to get the people from the direct cremation up to something that has a memorial service or full-service cremation as opposed to just a direct cremation.
Jamie Clement - Sidoti
Okay.
Thomas Crawford
Jamie, if I can make one other comment. Another thing that we intend to do going forward is that when you look at cremation, it's not going to go away, it's going to continue to rise. The question is, how fast and you have seen some of those increases. But if this is something that's not going to go away, I believe that the best way to attack something is you have to focus time, effort, and attention on that. So, we intend to add a strong capable person to my staff whose sole responsibility is cremation or is a constant thought process with the intent of taking the fear out of cremation, use of the headwind, and reducing that to where we can. The objective would be to revenue in difference and that's a low probability at least in the near term of that happening, but that's the intent. Try and get it to the point where cremation for us is not looked at as a negative, but with positive attitude. My feeling is that that will happen with more speed when we focus time and attention on that.
Jamie Clement - Sidoti
Okay. And back to Tom Kitchen, if I could just ask a couple of cash flow related questions. The run rate through the first six months of D&A, should that continue or will the accelerated portion of that software system, is that going to be dropping out any time soon?
Thomas Kitchen
It should probably drop in maybe the third quarter somewhat. The principal reason for that was the accelerated depreciation associated with the old information systems that we are now replacing and that would probably be a third quarter of '07 event. So, I think the D&A or the depreciation and amortization should drop off, maybe not so much in the third quarter, but certainly in the fourth quarter of this year.
Jamie Clement - Sidoti
Okay. And if we just sort of -- if we take the Capex run rate from the first half, is that probably where you will end up at the end of the year?
Thomas Kitchen
That will influence a little bit again by the business software, probably, we have got about $3 million year-to-date that we incurred on those two systems. So, I think if you take that out of the capitalization or the fixed asset acquisition and then you annualize that balance, I think you would get a good feel for -- we probably still have by the way in the third quarter some additional amounts that we'll incur on the business software as well. But, in terms of other ordinary Capex, those would be more in line with the run rate after you adjust for these two software packages, and also do note they are overly complicated. We do have some capitalization going on with the rebuild in New Orleans. The Lakeland Funeral Home, which is our big funeral home here in New Orleans, will be going through the reconstruction. Most of that money will be capitalized. We estimate the cost of that would probably be about $3.5 million in total, at the end of the project. And we started that project in earnest probably at the beginning of the second quarter of this fiscal year. So, again, that $3.5 million would probably be spent over the balance of this fiscal year. Our goal is to, by the end of our current fiscal year, have that Lakeland Funeral Home up and running and open for business.
Jamie Clement - Sidoti
Okay. Thanks very much, and Tom, welcome.
Thomas Crawford
Thank you.
Operator
We will take our next question from Herb Buchbinder with Wachovia Securities.
Herb Buchbinder - Wachovia Securities
Hi, guys. Couple of quick questions here. With the stock over $8, does the buyback become less attractive and how are you going to put some of this excess cash to work in the short run? Second, the increase that you have in your cremation rate, the average revenue per cremation of 9%, does this give you some opportunities to try to increase that average revenue in your conventional funeral business? Are there some things you are doing in one that you could apply to the other, or are the things you are doing in cremation strictly applicable to cremations? And my last question would be, your funeral trust earnings growth about 12% for the last 12 months is quite good, but can you give us roughly what your equity bond mix is? Certainly, there has been some drop in the bond market here, what impact that might have on your trust earnings and earnings going forward?
Thomas Kitchen
All right. Let me try and take them one at a time. With regard to buyback, I think that's really a question that needs to be answered based on specific facts and circumstances at a given time. And with regard to future expectations and the outlook, that's something that the Board, when we completed our repurchase last year, I think it was in the third quarter or fourth quarter of last year, we certainly have considered it, have elected not to go forward with it, but that should not be interrupted as a negative, that's just really -- our interpretation was probably not at that point in time. I can tell you that the Board goes through that evaluation on a regular quarterly basis and will make a decision based on consideration of what the facts and circumstances are going forward and what the expectation is with regard to the company's performance.
Cremation, yes, the increases with regard to our cremation averages have been very strong. We believe it is attributable to data presentation. It is the packages to simplify for the cremation families. The lessons learned there with regard to packages, our package pricing is the same for our traditional families that we serve, the difference there certainly from a standpoint of pricing, the traditional families pricing is going to be substantially higher than cremation. So, the percentage increase while it's lower in aggregate terms is probably very comparable to the dollars that we realize from the cremation. So, it's largely somewhat of the base because cremation being a lower base is going to produce a higher percentage, but we believe that in terms of aggregate dollar opportunities, both the opportunities are similar for traditional as well as cremation. And unless we've learned in cremation with regard to better presentation packages with the same lessons that we are presenting to our traditional families as well.
With regard to the trust earnings, the returns have been very good over the last one and three-year periods of time, we are very satisfied with that. It's been an effort from the standpoint of the company's investment committee to oversee the performance and to take a very proactive role with regard to charting the course in terms of what's the asset mix that we are going to follow. We have been transitioning over the last couple of years from let's say a higher asset allocation invested in equities to something lower and taking every opportunity to transition into something that would give us more current income and less dependence on capital gains and reduce the overall volatility of the portfolio.
With regard to the recent trends in the bond market, that's really sort of a phenomenon that's probably happened within the last 30 days. And while it certainly may have an impact on, let's say the existing fixed income portfolio that we have, we still have some cash that we've been keeping our powder dry and we'd like to deploy as the ten-year treasury marches north of 5%. We fully intend to take advantage of deploying some of that money over a longer term, getting it out of cash and into a longer-term fixed income security. So, while it may have, let's say somewhat of a downdraft on the valuations in our fixed income portion of our portfolio, we view it somewhat as an opportunity for us to deploy some of our cash and to do it over a longer term to take advantage of the spike up in the rates that's occurred over the last month.
Herb Buchbinder - Wachovia Securities
Roughly what percent of your assets would be in bonds right now?
Thomas Kitchen
Right now in bonds, in what we call fixed income type securities, it's approximately 45% maybe a little bit under 45%, might be 43% or so. That's overall and that's the consolidated mix that exists between our funeral and merchandise trust portfolios as well as our Perpetual Care Trust portfolios.
Herb Buchbinder - Wachovia Securities
How much do you think in cash?
Thomas Kitchen
Cash is probably about 5%.
Herb Buchbinder - Wachovia Securities
Okay. And the rest would be in equities?
Thomas Kitchen
Equities would be the rest, that's correct.
Herb Buchbinder - Wachovia Securities
Okay. One other thing. You mentioned about having some assets that are not utilized. Can you give us an idea in terms of the funerals that are being performed today, what percent of them are using the space for receptions after the funeral? And I know you charge for that, is that something that you are doing more and more, trying to create again a whole experience here?
Thomas Kitchen
In certain locations and I wouldn't want to suggest that that occurs across the board because that's one area that we believe represents an opportunity for us. But in certain locations, especially in Southern California, we see a demand for these types of reception facilities. Truth of the matter is a lot of our facilities were built at a time prior to let's say that recent trend and so what we are doing, every time we have an opportunity to expand or change or modify a facility, we are looking to incorporate a reception area for us to do that. For example, here in the New Orleans area, in St. Bernard we've rebuilt that funeral home and did exactly that. We took some space that we didn't deem necessary for the old purpose and we converted it into a reception facility that we think would be a positive for the community, especially that community that's going through a rebuilding and there's really limited facilities for them to meet or to have a reception. So, there are opportunities for us. I think that's something that going down the road will incorporate as best we can, to capitalize or certainly take advantage of the opportunities that we see with regard to presenting a more complete experience for the different traditional and -- any information to the families.
Herb Buchbinder - Wachovia Securities
Okay. Thank you very much.
Thomas Kitchen
Okay.
Operator
Just a reminder, if you do have a question, please press star one on your touchtone phone. We'll go next to Mike Scarangella with Merrill Lynch.
Michael Scarangella - Merrill Lynch
Hi, good morning, guys.
Thomas Crawford
Hey, good morning.
Thomas Kitchen
Good morning.
Michael Scarangella - Merrill Lynch
I wanted to just touch on volumes a minute, it seems your funeral volume is down 1.7%, but that was a lot better than the down, 5.5, we saw in Q1. So, I wonder if you could tell me if that's -- things that you guys are doing to try to take share or you think overall death rate in your markets was just better this quarter?
Thomas Crawford
I think that our experience is that -- it's probably a combination of both, Mike, in the sense that, again, we believe that we're presenting to the families that are making inquiries better. We monitor the calls that come into our funeral homes and we certainly have done a much better job over the last year training the people that field these calls, so that -- we believe that once we get the families into the funeral homes, we have a significant, let's say, competitive advantage with regard to closing the transaction. So, it's really paying attention to the details in a lot of ways for us to seek our ways to capture the market share, as well as, once we get them in this, the simplicity of the pricing packages, the ability for people to make decisions easily, especially at a time when they really just not emotionally up to making some really, a myriad of decisions. So, I think it really represents an opportunity for us to take some market share, but it's also -- it's not just the packages, it's really from the beginning to the end of the experience, from the time you take that first call, making sure that the people are answering the questions accurately and intelligently, and really hitting all of the points that we want them to hit during the course of fielding that call.
Michael Scarangella - Merrill Lynch
Do you have a sense as to what volumes look like so far in the third quarter or is it too early?
Thomas Crawford
We tend not to comment on that, but I will tell you that, it's probably the experience so far is trending consistent with the second quarter.
Michael Scarangella - Merrill Lynch
Okay. That's good to know. On the cemetery side, some of your competitors have talked a bit about market segmentation, whether it be high-end grave sites or catering to specific religions or cultural groups at a higher price point. Have you guys done much of that and what's kind of your view on that strategy?
Thomas Crawford
Yes, as a matter of fact, I think that that is a strategy that I have emphasized certainly very significantly over the last year. We have a number of very impressive cemetery properties across the country going from the East Coast to the West Coast that lend themselves to private estates, the development of private estates, and we have been very successful in selling high-end cemetery properties, which include tombs or private mausoleums that would be constructed on the cemetery property. We probably -- when I look back over the last nine months, I would say that we have had about seven or eight individual transactions that have been north of maybe $0.5 million each. And to me, certainly the revenue opportunities and the profit opportunities or something like that really dwarf the revenue and profit opportunities from some of the lower in-cemetery properties. So, I think that, it's not something that we're going to build a base of business and do 100% of, but we think that as a part of our strategy, it's important for us to capitalize on the high-end or, what I call, the high-net-worth individual. Just as an example, we did have a high-end property sale that occurred in late last year that required a significant amount of construction. We completed a construction and that was in excess of $1 million transaction for us that we reflected in the second quarter of '07. So, that $4 million of construction revenue that we recognized is in part due to the higher cemetery sales that we're realizing the benefit of by catering to or appealing to some high-net-worth families.
Michael Scarangella - Merrill Lynch
How does that work? Is that something where you try to build an inventory of high-end properties and then sell them or you build those mostly on demand?
Thomas Kitchen
Well, we still build them on demand in the construction, but what you have to do is you may have certain sectors of your cemetery that you may want to develop and you may want to build what I call the infrastructure there so that when people go there, they can see what it looks like. They can see the roads, they can see the landscaping, they can see the walkways, and the paths and they can kind of get a picture and in today's world electronically, we can develop pictures that let them know what the end result is going to look like. So, it's a combination of having the properties, it's a combination of having the right marketing materials, and it's also the combination of having the sales people with the right tools in terms of what's the communication and how you cater to a high-end person, where do you advertise. It's not somebody who is going to walk in and buy immediately, you're going to have to build a relationship, you are going to have to do more work, then (inaudible) if somebody were coming in to buy an individual crypt space. So, it's a combination of steps that we have to take to make sure that we have everything in sync in order for us to take advantage of that marketplace.
Michael Scarangella - Merrill Lynch
Okay and thank you. And a question for Tom Crawford. You alluded to the fact that your background is not necessarily in funeral and cemetery management. So, I guess I'm wondering, getting into the company now do you feel like you have the team you need in place to manage the day-to-day operations because I'm noticing you don't have a COO, I don't think at Stewart. Should we expect an additional management member to help you out there or do you have what you need?
Thomas Crawford
Right now for the time being I have got what I want from that side of the business meaning that I don't want a COO just yet, we may do that in the future or we may not. And part of that is that I want to get closer to the operations as well and that's why I want the division Presidents to report to me and not to a COO for the interim. And that's what I need to better understand the business and also to impart what I would like to do in the business as well. The places where we have needs will be in the sales and marketing side to help us as Tom said to further segment, to further present material, to better understand the customers. We have needs there. As I mentioned, a very important need will be on the cremation side where we have focused resources on not just putting things out there, but really understanding what the mindset of that consumer is so we can tailor the best offering that we can to the cremation of the consumer. Because I think typically as everyone knows, the average cremation family tends to be better educated, higher income levels, and the fact that we have not tapped into that very well with the price in the whole product system means that we haven't got it right. And that's what we hope to do, is to get it right by focusing attention on that segment.
Michael Scarangella - Merrill Lynch
Okay, thank you. In the Q guys, you updated your disclosure on the funeral consumers' alliance suit. There is a pretty big eye-catching number in there that the plaintiffs are looking for $950 million or $1.5 billion for troubling. Anything you can tell us there in terms of maybe timing, how long does this take to play out and anything you could say about that number that would make us feel a little bit better about it?
Thomas Kitchen
Sure. Well, that was the most significant piece of information on new development during the quarter that we experienced on the anti-trust litigation. We still are waiting for the court decision with regards to the class certification. And that's something, on the last call or one of the previous calls, I indicated that I thought that late spring, early summer that that would be forthcoming. It's not as of today, but it could happen at any time. There really is just no schedule that we can point to with any certainty to tell you when to expect that. Right now, our belief is that absent that decision, we would look forward to some trial date in early part of '08, but our attorneys tell us that regardless of how the class certification decision goes, whether it goes in our favor or against us, that decision we expect would be appealed in at the court, the trial date would probably be stayed pending the hearing on that appeal. Mike, we still believe very strongly in our case. We believe that there is no evidence to support any of the plaintiff's charges and so we have not changed our opinion that we believe that there's really no substitute of issues at this point in time that would really concern us. So, we don't believe that the plaintiffs have much of a case.
Michael Scarangella - Merrill Lynch
All right. So, this is going to play out in kind of '09 timeframe?
Thomas Kitchen
It's just from this vantage point, the schedule is really outside of our control. It could be, I don't want to say it's not. It could be '08, it could be '09. I certainly hope it's not past '09 and in fact I would like to see this thing get resolved favorably tomorrow or the next day. I realize that from my standpoint, it's certainly not anything that I lay awake thinking about at night time because I know what our case is and I know that we have a strong argument. But I know from your standpoint, it is somewhat of a question mark that is lingering out there. So, we believe it certainly is something that we would like to get resolved sooner rather than later, but the pace or the schedule is just outside of our control.
Michael Scarangella - Merrill Lynch
Okay. And Tom, just real quick one. Great job in terms of debt reduction, should we expect any more this year or are you just going to put that cash on the balance sheet for growth opportunities?
Thomas Kitchen
At this point in time, we have said before that our intent is to not, let's say build up cash balances unnecessarily. We would look to either reduce debt, pay dividend, repurchase stock, or to make acquisitions and our goal is to continue looking at those four opportunities for us going forward. I will tell you that at the beginning of the year, we said that we had a goal of a debt reduction of some $25 million or $30 million going forward, but that is something that we would certainly take a look at on a regular basis in terms of what's the right asset or the right deployment of our cash. And I think those four alternatives that I quoted probably and certainly will be looked at every period and every month.
Michael Scarangella - Merrill Lynch
Okay. Thanks, gentlemen.
Thomas Crawford
Okay.
Thomas Kitchen
Thank you.
Operator
We will go next to Colin Stewart with JC Clark.
Colin Stewart - JC Clark
Good morning, guys.
Thomas Crawford
Good morning.
Thomas Kitchen
Good morning, Colin.
Colin Stewart - JC Clark
Just a couple of quick questions. I noticed in your Q, there was a disclosure about a subsequent event making an acquisition in North Carolina. Just wondered if you could provide any additional details on that and maybe talk a little bit about where you are seeing pricing in the market and if multiples have started to come down? And I guess the second question was related to, I know there is a line in your income statement under other operating income that talked about a gain on sale of excess cemetery property. It was a relatively small number, but do you think generally speaking that there are more opportunities there to sell excess cemetery property and are there other pieces of land that you're working on selling as we speak?
Thomas Kitchen
Okay. With regard to North Carolina, Colin, yes we did buy subsequent to the quarter a business there from a standpoint of -- it had some, let's say, troubles that the owners ran into. It popped up on the marketplace that -- it gave us an opportunity to make an acquisition that we considered to be a very fair price, something that we could justify. And it was close to another facility that we had that was going to require fairly major investment for us with regard to some updating in investment. So, when you combine the facility, which I'd believe this facility we purchased was probably about six or seven years old, maybe a little bit older than that, but it was in good condition. It had a business going that the owners ran into some personal problems. We thought that combined with the strategic decision on our part that we could just simply transfer most, if not all, of our business from the nearby funeral home to that new location and at the same time, avoid this major maintenance cost or this overall cost that we were going to incur. We thought it was a smart decision for us. It is similar to the acquisition that we made in the first quarter from the standpoint of the justification in what we saw as the opportunities for us to move forward. Tom, you want to handle the multiples?
Thomas Crawford
Yes, let me talk about the multiples from someone relatively new to the industry. I think Tom may have talked about that in the last call that he made, that they were relatively high back then. When I look at the acquisitions that we have looked at recently, the multiples continue to be high. And I would tell you, little bit surprisingly high. I exited this industry for the first time right when the -- just before the decline came and I was a little bit surprised of the multiples being paid then, but the decline followed. And coming back into it, the multiples remain high. I just came through a process where we sold the company that I was running with a private equity company and there is a part of me that wants to call my former colleagues and say, if you ever want to sell the company, let me know and I would give you the name of some of the investors that I am seeing right now because of the prices that are being paid. And so, they remain high and that is why for us -- it is critical for us on our business case to make sure that we are -- in our business case that we have a good method that once we -- if we are successful in acquiring something, we know exactly what we're going to do with it.
Now I will state, we're still in the market, we're still looking at things as they come through, evaluating what's before us, but it has to have a good strategic fit. We will not pursue anything that is small in nature that would take a disproportional amount of management time, but we're still looking, we have not removed ourselves from that. But, I will tell you, I am a little bit surprised at the multiples that are being paid currently as we speak. And so from that standpoint, we don't have the business case, we are letting those go to someone who obviously has a different viewpoint than we do on the situation. Also in relation to properties that we still have on our books, yes, there are some that will be sold. And we have got some passes on the criteria, we will continue to make passes on refining our criteria. So, we have a good situation, a good case for those business that will be sold and the value that we expect from them.
Colin Stewart - JC Clark
I was really, on the cemetery property side, referring to where you have an excess portion of land on a current property that you can perhaps a portion up and re-zone and sell off to a developer or something like that.
Thomas Crawford
We look at that on a regular basis and we have -- just as in this quarter, we had sold some, a small piece of property that was in a cemetery in Texas. But, what happens and what we have experienced as frequently as anything else is that when we look to carve off a piece of a cemetery property to a real estate developer, whether it is commercial or residential use, the civic gadflies come out of the woodwork and they start objecting to it. So, they slow the process down. While it is something that -- in some locations we can do easily than others, there are some locations where that's a bit of a challenge and we need to assess them on a case-by-case basis. So, we are not in the business of holding on to, let's say, cemetery property that we do not think has a role to play for us with regards to our primary business. So, we certainly are sensitive to the opportunities that present themselves to sell them, but we are also realistic in assessing these opportunities. I know these things are sometimes met by objections and challenges that make it a difficult task for us to accomplish.
Colin Stewart - JC Clark
Okay. Great. Thanks a lot guys.
Operator
And again, if you do have a question, press star one. And we have a follow-up from Tom Bacon with Lehman Brothers.
Thomas Bacon - Lehman Brothers
Thank you. This is another question for Tom Crawford. I was just wondering when you were talking about focusing on the business and sharing best practices. But you didn't say anything about purchasing and I am just wondering, having come from the merchandise side, if you think there is a lot of opportunity for cost savings from purchasing.
Thomas Crawford
I think the company has just engaged in some good contracts with all of our major suppliers and we feel very good about the work that was done. They have done a superb job. We have also hired a person specifically with that title that we never had before to consolidate all of the purchasing power that we have in the company. So, the answer to your question is, yes. Can we do more? Absolutely. Have we taken good steps thus far? Absolutely as well. But, we believe, as we look at the number, and that's part of also the software improvements that we're making in the company, we look at the number of different vendors that we have had in the past, because of the size of our organization, it is a little bit mind numbing. So, we are trying to widdle that down a well and we will get benefits on our purchasing side as well.
Thomas Bacon - Lehman Brothers
Okay. And then maybe just, in terms of, obviously there is a lot of different pricing initiatives going on in the industry and I just was wondering if you've seen maybe over the last 9 to 12 months whether there has been an opportunity for you to increase prices sort of underneath the pricing umbrella of some of your competitors?
Thomas Crawford
I will let Tom talk about the last six to nine months.
Thomas Bacon - Lehman Brothers
Okay.
Thomas Kitchen
Well, Tom, you said that we would increase pricing, I'm not sure --
Thomas Bacon - Lehman Brothers
Some of your competitors have been doing some things with pricing which have resulted in higher averages per service and I'm just wondering whether that creates a pricing umbrella maybe not across the whole company, but in certain markets where you can raise prices because of some of the actions of your competitors?
Thomas Kitchen
The answer is yes. These businesses that we run are really local in nature and so you really have to look at your pricing relative to what the market has. And we will adjust our pricing to reflect the market and in some cases we are going to be higher, but in other cases we may be lower. So, it's kind of hard to generalize and come up with a general statement as to what's our pricing philosophy. We will tell you that, for example, in cremations, there were some locations where I'd really felt that a year ago we were lower than where we needed to be in terms of the pricing in particular for direct cremation. And I'm not interested in doing a direct cremation for $800 or $900. So, I just felt that the service and what we were providing the families demanded a higher price and in some of those locations we did some market surveys and discovered that our pricing was less than what the direct cremation was for some of our competitors and what happened was, we increased our pricing to come up closer to our competition. So, we will do that on a location-by-location basis and come up with a pricing strategy that we feel makes sense for that region or that geographic location.
Thomas Bacon - Lehman Brothers
Okay. And maybe just one more question on the acquisition front. I mean obviously, Tom, you referred to the availability of funds from private equity and some of the high multiples that are being paid and I mean, is that an environment that makes sense for Stewart to become a seller?
Thomas Crawford
A seller of what, individual properties or in total?
Thomas Bacon - Lehman Brothers
Either one.
Thomas Crawford
Well, my reference to private equity was more in jest given the prices that are out there today. And I do know where the multiples are being paid. Again, I don't have the background and knowledge to know who the funding is underneath that. I'm just saying they are very high today. Right now, I think our EBITDA multiple is probably close to 10, if I'm not mistaken. But in the acquisition arena, we will continue to sell properties that don't fit the return criteria we have, but we will do a better job of drifting that down and we hope to get higher prices with properties that somebody else can do better with. On the other side -- so for us acquisitions, small properties that we will dislodge those and that's what I said earlier we will probably become a little bit smaller as far as rooftops before we become bigger. On the other side of the ledger, I got to tell you that doesn't even cross my mind in all honesty. That's not the thought that I have, that's not an intent that I have in any way shape or form. The intent that we have is going after our business right now to make it more valuable every single day and as we make it more valuable, obviously that makes it little bit not as valuable to somebody else who might think of doing this. So, for us we are pressing ahead forward, haven't had one discussion, one thought on the other side that you just raised.
Thomas Bacon - Lehman Brothers
Okay. So, it's more of an opportunity for you to sell your underperformers, I guess?
Thomas Crawford
Yes, absolutely. So, we can clean out the underbrush and again we want to increase the return we have on the assets that we have and our stewardship. I think that's what makes the business more valuable is when we get more out of what we have and then we figure out how to take that some place sell. That's where the real magic comes into play.
Thomas Bacon - Lehman Brothers
Okay, great. Thanks again.
Thomas Crawford
Thank you.
Operator
And there appear to be no further questions at this time. I would like turn the call back to Mr. Crawford for any additional or closing comments.
Thomas Crawford
Well, okay. We'd like to thank everyone. On behalf of all the employees of Stewart Enterprises, we appreciate your time this morning. We appreciate your continued interest and support in our company and our people. So, thank you very much, and we look forward to talking with you in three months. Thank you.
Operator
That does conclude today's conference call. Thank you for your participation. You may disconnect at this time.
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