Stewart Enterprises F4Q07 (Qtr End 10/31/07) Earnings Call Transcript

Stewart Enterprises Inc. (STEI)

F4Q07 (Qtr End 10/31/07) Earnings Call

December 20, 2007 11:00 am ET

Executives

Leslie Loyet - VP, Financial Relations Board

Tom Crawford - President and CEO

Tom Kitchen - Senior EVP and CFO

Analysts

Daya - JPMorgan

Jamie Clement - Sidoti & Company

Mike Scarangella - Merrill Lynch

Robert Willoughby - Banc of America

Presentation

Operator

Welcome to today's Stewart Enterprises' Fourth Quarter 2007 Earnings Call. As a reminder, today's conference is being recorded. [Operator Instructions]. Now, I would like to turn the conference over to Leslie Loyet of Financial Relations Board. Ms. Loyet, please go ahead.

Leslie Loyet

Thank you. Good morning and thank you all for joining us. On behalf of Stewart Enterprises, I would 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 a copy immediately, or visit Stewart's website at stewartenterprises.com for a copy.

Management will provide an overview of the fourth quarter and full year and then we will open the call to your questions.

Before I turn the call over to management, please be advised that the information contained in this call is current only as of the time of this call, and the company assumes no obligation to update any statements, including forward-looking statements made during this call.

Statements made by the company that are not historical facts are forward-looking statements. Examples of forward-looking statements include projections of 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 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, 2006 and Form 10-Qs for the quarter's ended January 31, April 30 and July 31, 2007, all filed with the SEC.

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 or 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. It can also be found in the company's press release dated December 20, 2007.

With that said, I'd like to introduce management. Today we have Tom Crawford, President and Chief Executive Officer and Tom Kitchen, Senior Executive Vice President and Chief Financial Officer.

At this point, I'd like to turn the call the call over to Tom Crawford. Please go ahead.

Tom Crawford

Leslie, thank you, and good morning to all. On behalf of all the employees of Stewart Enterprises, we welcome you and thank you for joining us on our year-end conference call.

For today's call, we will follow much of the same patterns we have in the past and then I will provide a performance summary for the year and the quarter and Tom Kitchen, the company's Senior Executive Vice President and Chief Financial Officer, will provide an in-depth review of the results. After Tom's call, I will discuss a few of our strategic initiatives for 2008 and then open up the call for your questions.

I am pleased to report our results for the first -- for the fiscal year of 2007. We generated an $8.6 million improvement in revenue, a $1.7 million improvement in net earnings from continuing operations and a $0.03 increase in earnings per diluted share.

For the year, we generated operating cash flow of $81.9 million and had the strongest reoccurring free cash flow in the past five years at $59.6 million.

We improved our capital structure by repurchasing $64.2 million worth or 7.7 million shares of our Class A common stock and issued $250 million worth of senior convertible notes which reduced our borrowing costs. In September this year, the Board approved a $25 million stock repurchase program of which we have purchased 1.4 million shares of our Class A common stock for an average of $8.14 for an investment of $11.4 million.

Today, the company announced that with Board approval, an additional $25 million for stock repurchase leaving the company with $38.6 million available under both programs.

From an operational standpoint, our product and service packages have been successful and increased our average revenue per traditional service by 3.4% and average revenue per cremation by 7.4%.

We are pleased with our progress in this area, and we'll continue to refine the packages to improve our 2008 average revenue performance. My enthusiasm for the year is somewhat tampered by the results of the fourth quarter compared to the same period of last year.

The fourth quarter of 2006 was one of our strongest quarters in terms of earnings, which makes the quarterly comparison for our results of 2007 all the more of a challenge. Tom Kitchen will review the details of the year end and quarter results and the contributing causes of our unfavorable comparison to the strong fourth quarter of 2006.

Notwithstanding this tough comparison for the fourth quarter, there were positives. The company continued to increase our average revenue per event for both, traditional and -- traditional funeral and cremation services. We also continued to grow our cemetery property sales as well.

Our same-store calls did decline for the quarter but at a lesser rate than the overall market decline. Additionally, despite a down earning quarter compared to the prior year, our cash generating performance was exceptional, as we were able to significantly increase our operating cash flow from $12 million to $27 million and increased our reoccurring free cash flow from $3 million to $18 million. We are very pleased with those results.

With that, I will now turn the time over Tom Kitchen to give you an in-depth review of our financial performance for the year and fourth quarter ending October 31, 2007. Tom?

Tom Kitchen

Thanks, Tom, and a good morning to everyone. I'll begin my review with the highlights of our fiscal year and then move on to our fourth quarter.

Overall, we recorded favorable results in fiscal year '07 which are due in part to the strong balance we maintain between the funeral and cemetery segments of our business. Our cemetery activity and in particular, our preneed production, which is not completely dependent upon mortality rates has a strong stabilizing influence on our overall performance of the company, resulting in a 6.2% increase in gross cemetery property sales, and a $9.5 million increase in cemetery revenue during the year. In fiscal year 2007, the company reported net earnings from continuing operations of $39.3 million or $0.38 per diluted share compared to net earnings from continuing operations of $37.6 million or $0.35 per diluted share for fiscal year '06.

Our funeral revenue hit an overall decrease of $900,000 to $279.3 million. However, after adjusting the prior year by the increase of $1.6 million in funeral revenue related to the out-of-period accounting adjustments and $2.8 million of business interruption insurance proceeds related to Hurricane Katrina, funeral revenue would have increased $3.5 million. We achieved an increase in the same-store average revenue per funeral service for the year of 3.5%, and a 70 basis point increase in same-store cremation rate from 38.6% in fiscal year '06 to 39.3% in fiscal year '07.

In addition, we experienced a 7.4% increase in the average revenue per cremation service, and a 3.4% increase in the average revenue per traditional funeral service. The company's same-store funeral calls decreased 2.2% for the year, which we believe is consistent with reported industry data. Furthermore, we believe we have done a good job each quarter with improving call volumes throughout the year from a decrease in calls of 5.5% as of the first quarter to a decrease of 2.2% for the year. While we are not happy with the decline in volume, we are pleased with the progress made during the year.

Our cemetery revenues remain strong with an increase of $9.5 million to $243.5 million for fiscal year '07. These improved cemetery results are primarily due to an increase in construction during the period on various cemetery projects and a $6.7 million or 6.2% increase in gross cemetery property sales, primarily due to serving customers interested in large cemetery property purchases such as private estates.

These increases were partially offset by a decrease in merchandise delivery revenue due to a reduction in cemetery interments and an increase in the reserve for cancellations, which is due in large part to an improvement in the reserve for cancellations in the '06 year following Hurricane Katrina, which occurred in our fiscal year '05.

Gross profit decreased $2.2 million for the year, mainly due to certain items primarily affecting the funeral segment. Funeral gross profit decreased $2.3 million due to the -- a $900,000 decrease in revenue as previously mentioned, and a $1.4 million increase in expenses. The increase in expenses is due primarily to a $2 million increase in property, casualty and general liability insurance costs and a $700,000 impairment charge.

In addition, there was $4.1 million increase in hurricane related charges in '07 over '06. We recorded a $2.5 million charge for net hurricane-related cost in fiscal year '07 compared to $1.6 million recovery in '06. We could incur hurricane-related charges in the first quarter of fiscal year '08. However, we do not expect these costs or any hurricane-related charges after that to be material.

Our EBITDA from continuing operations was $110.6 million for fiscal year '07 compared to $113.7 million for the comparable period of '06. EBITDA for the year was impacted by $2.2 million decrease in gross profit and a $4.1 million increase in hurricane-related charges, as previously mentioned, compared to the same period of fiscal year 2006.

We are pleased to report a $4.5 million decrease in interest expense due to a reduction in the average interest rate incurred during the year due primarily to the 2007 senior convertible note transaction. In June of '07, we issued two tranches of senior convertible notes totaling $250 million carrying an average coupon rate of 3.25%.

For the year, we experienced a $4.2 million income tax benefit due to the utilization of a capital loss carryforward and the completion of an audit in the Commonwealth of Puerto Rico.

We are very pleased with our operating cash flow of $81.9 million, which was lower than fiscal year '06 cash flow by $8.2 million. When we consider the prior year included nearly $15 million of unusual trust withdrawals compared to only $2.1 million in '07, we see that the current year's operating cash flow exceeded the prior year's on an adjusted basis.

In addition, we made net tax payments of $9.3 million during '07 compared to $4.2 million in '06 due to a net operating loss carryforward that was utilized in fiscal year '06. The decreases in cash flow were partially offset by $1.3 million of cash inflows in excess of insurance proceeds recorded related to Hurricane Katrina in '07, compared to $3.8 million of cash outflows in '06.

Additionally, we received $2.1 million due to the execution of a lease of our mineral rights at one of our cemeteries to an outside third party. Our recurring free cash flow is as strong as it has been in the past five years, increasing $1.2 million for the year at $59.6 million, notwithstanding the fact that we paid an additional $5.1 million in income taxes.

Now, I would like to move on and talk about our fourth quarter. After a very strong fourth quarter last year, as Tom has previously mentioned, we have a very challenging fourth quarter comparison this year. Funeral revenue in the fourth quarter of '07 decreased $2.9 million to $66.9 million. However, the unusual items mentioned in the year-to-date results also play a part in the quarter results as well.

After adjusting funeral revenue for the $2.4 million resulting from the out-of-period accounting adjustments and the $400,000 from business interruption insurance proceeds recorded during the fourth quarter of '06, funeral revenue is relatively flat for the quarter.

We achieved an increase in the same-store average revenue per funeral service for the quarter of 1.1% and at the same time experienced a 100 basis point increase in same-store cremation rate from 38.7% in the fourth quarter of '06 to 39.7% in the fourth quarter of '07.

In addition, we achieved a 5.1% increase in the average revenue per cremation service and seven-tenths of a percent increase in the average revenue per traditional funeral service.

The company's same-store funeral costs decreased eight-tenths of a percent or 112 events to 14,055 same-store events performed. We believe the industry-wide data indicates a larger funeral call decreased in our results.

Our cemetery revenue decreased $1.1 million to $59.4 million for the fourth quarter of '07 primarily due to a decrease in merchandise delivery revenue, which is due in part to a decrease in interments in our markets. The decrease is partially offset by an increase in gross cemetery property sales of 2.8% or $800,000.

In regards to gross profit, we experienced a $5.9 million decrease quarter-over-quarter due to the $4 million decrease in revenue as previously mentioned, and the $2 million increase in expenses.

The increase in expenses is due primarily to a $1.2 million increase in health insurance costs, $1 million increase in property, casualty and general liability costs, and a $700,000 impairment charge.

In addition, we also experienced $2.8 million increase in hurricane related charges from net recoveries of $2.6 million in the fourth quarter of '06, to net charges of $200,000 in the fourth quarter of '07.

Our EBITDA from continuing operations was $22.6 million for the fourth quarter of '07 compared to $30.4 million for the fourth quarter of '06. EBITDA for the fourth quarter was impacted by $5.9 million decrease in gross profit previously mentioned, and a $2.8 million increase in hurricane related charges compared to the fourth quarter of '06.

Investment and other income decreased $1.1 million to $900,000 primarily due to a $1.3 million decrease in interest income receivable from the Internal Revenue Service. Our interest expense decreased $1.5 million to $5.8 million during the fourth quarter of '07 due to a reduction in interest resulting from the issuance of the new senior convertible notes.

For the quarter, our effective tax rate for continuing operations increased to 42.2% for the fourth quarter of '07 compared to 36.4% for the fourth quarter of '06. This resulted in additional tax of some $500,000, due primarily to increases in state and US possessions tax expense.

Our cash flow provided by operating activities and our recurring free cash flow for the fourth quarter of '07 were outstanding. Cash flow from operations increased $15.1 million from $12 million in the fourth quarter of fiscal year '06 to $27.1 million in the fourth quarter of fiscal year '07. This increase in cash flow is due to various reasons. Company paid $4.8 million less in net tax payments, partially due to tax saving strategies and a $3.4 million less in interest payments due to the timing of payments as a result of the issuance of the new senior convertible notes.

Lastly, the company executed a lease of our mineral rights at one of our cemeteries to an outside third party for $2.1 million. This improved cash flow for the quarter, and we will recognize this amount as revenue over the next year during the term of the lease.

Our recurring free cash flow increased significantly by $14.6 million from $3.2 million in the fourth quarter of '06 to $17.8 million in the fourth quarter of '07.

And finally, we are pleased to report that we have reopened all of our Louisiana businesses affected by Hurricane Katrina.

I would like to turn the call back over to Tom Crawford.

Tom Crawford

Tom, thank you for that review. As I stated at the beginning of the call, despite the fourth quarter results, 2007 was a good year for the company. However, we were not satisfied, and know we can do better.

Over the past two years, great progress has been made in consolidating and integrating operations both in the field and in the home office to better obtain the benefit of size and scale. For 2008 and beyond, our intent is to continue to build on the success and to take it up a couple of notches.

Our forward-looking strategic framework is based on three components. An operational improvement component, which we have simply entitled the best-in-class initiative, which focuses on improving earnings, cash flow, and return on invested capital from our existing business; an innovation component, which emphasizes additional growth through products or services not now in our portfolio; and the third component is simply growth through acquisitions, which will support the successful execution of the first two segments of the strategic framework.

Our major focus in 2008 will be on the successful implementation of the first component of our framework, which is our best-in-class initiative, with the desired result of improving performance at the roof top level. In this initiative, we are taking a page from world-class companies with a continuous improvement mindset to improve all business processes and apply that practice to our roof tops as well.

In comparing our businesses, it is clear that we have a bell shaped curve in relations to performance with a large number of standard deviations. We have star businesses and less than star businesses that are trying to become stars. We believe our best-in-class initiative will enable us to narrow the performance gap, while moving our company's average performance upward.

We intend to both measure results and results oriented behaviors. To do this, we are instituting key measures, those few and powerful metrics that drive performance at local levels. Markets will differ but our key measures will be consistent throughout Stewart Enterprises and will provide a common performance language across all of our businesses. Our key measures will allow us to narrow our focus on the activities that matter most to our roof tops to achieve the desired results.

Our system will not only track results, but provide diagnostic tools and proven solutions when a key measure is tracking negatively.

Additionally, our system gives us the ability to rank each location by key measure, which allows us to identify top performers and take their best practices to the locations who are underperforming in that key measure. We want our people going home at night knowing they are successful, and better serving customers and growing the value of their location or if they are not as successful at that moment that they will know why and what they can do to become successful, and to have the resources and the help to do so. We believe management's time in the field is critical to achieving the desired results of the best-in-class initiative. And we are focusing on the best and highest use of management's time and talent to ensure a significantly higher percentage of time is spent on teaching, training and solution implementation at our roof tops.

Continuing with progress made over the past two years, we will be taking actions to significantly improve our internal processes in the home office and the field to eliminate waste and inefficiency, and to free up more time to invest on growing and improving our businesses. We are rolling out the best-in-class initiative to the field as we speak.

We believe successful implementation of the best-in-class initiative will enable us to grow organically, and to have the empirical knowledge of the value of the Stewart way and what that brings Stewart business, which will allow us to grow more aggressively by acquisitions of strategic businesses.

Finally, earlier in the call, I briefly mentioned the second or the innovation component of our strategic framework, which has intended to grow our company by adding new products or services not now in the portfolio. Our first priority is to the best-in-class initiative. We are taking steps to move the second component forward. While there is nothing to report or count on at this time, we are quite energized with the opportunities we see to look at our business in different ways to generate new revenue and profit sources for the company in the future. While the market we serve has many challenges, as to all businesses in the industries, we are committed to the success of our best-in-class initiative, and achieving continued positive results for 2008 and beyond.

With that, we are now ready to take your questions.

Question-and-Answer Session

Operator

Very good. [Operator Instructions]. Our first question will come from Edward Yruma with JPMorgan.

Daya - JPMorgan

Hello. Good morning. It's actually [Daya] calling here for Ed.

Tom Crawford

How are you?

Daya - JPMorgan

Fine. Thanks. How are you?

Tom Crawford

Good. Thank you.

Daya - JPMorgan

Actually in terms of the recent reconstruction of your Lake Lawn facility, I was wondering what volumes you are seeing there, and how it compares to the pre-Katrina levels, and also, if you could let me know about the build capacity there?

Tom Crawford

I'm sorry, I missed the last part of that.

Daya - JPMorgan

The build capacity at the Lake Lawn facility -- like what's your capacity levels there?

Tom Crawford

Okay, the overall capacity level?

Daya - JPMorgan

Yeah.

Tom Crawford

Right now, at the Lake Lawn cemetery, our volume is not back up to the Katrina -- pre-Katrina level. But we're seeing a good volume increase. We feel very positive about the results. And I will tell you in the other market areas that we are affected, not only in Lake Lawn, but the other New Orleans properties, we've seen a very big increase in volume and growth. So, we feel very pleased with the progress at this point in time. At Lake Lawn, with the capacity that we have, we have -- we continue to market our private estates. We have growth and opportunity to move that forward. So, we don't feel capacity constrained in any way, shape or form at Lake Lawn.

Daya - JPMorgan

Okay. Thank you. And if I may ask, the increase in health insurance costs and the property, casualty and general liability insurance costs this quarter, should we expect to see them return to their more normalized levels going forward?

Tom Kitchen

That's our expectation, the health care costs in particular, was adversely affected in the fourth quarter of '07 by the existence of a larger number of high-dollar value claims and the experience in the prior year in '06 was really the opposite. So, we had a favorable experience in '06 countered by an unfavorable experience in '07. We have done some checking even subsequent to October and it seems -- certainly for the month of November, it seems to be running inline with what we expected and more inline with what we incurred, say, for prior year same month.

So, the property and casualty has been impacted over the last two fiscal years, largely because of the results and the fallout from the Hurricane Katrina. We increased significantly our property and casualty expense in FY'06 and then there was a further increase in FY'07. By the way, our insurance program for property and casualty coincides with the company's fiscal year.

When we went to the market this year and renewed it effective November 1st of '07, what we saw was an improvement in the insurance market, fairly significant. And so, our expectation is that we will probably drop down below the '07 experience from -- when we go into '08 with regards to the property and casualty. Now, I do have to caution you that we are self insured and there are some claims that are paid, which not always depends on what the experience is going to be. But as far as the premium associated with the programs, and what we see going forward is certainly a lower premium experience than what was incurred in '07.

Daya - JPMorgan

Great. Thank you very much. And a final follow-up question, if I may is, could you comment a little bit on the California markets, how it has trended through the quarter? Thank you very much.

Tom Crawford

The California market through the quarter…

Tom Kitchen

What we are seeing is that in the northern part of the state, which is heavily dominated by the cremation marketplace, we have seen some softness, but that really existed throughout the fiscal year. It really stood in contrast to the experience in FY '06 which was, let's say, up from the previous fiscal year. In the southern part of the state which is dominated by our Los Angeles Archdiocese funeral homes. We have seen somewhat of a decline in the preneed selling. However, we do see a fairly consistent volume with regard to the number of funeral services that we perform.

Tom Crawford

As Tom mentioned, 2006 was a tremendous year out in California. 2007 was not as good, and those things will tend to balance out from year-to-year.

Tom Kitchen

Okay. Thank you very much.

Tom Crawford

Thank you.

Operator

Our next question is from Jamie Clement with Sidoti & Company.

Jamie Clement - Sidoti & Company

Good morning, gentlemen.

Tom Kitchen

Good morning, Jamie.

Jamie Clement - Sidoti & Company

Well, I just had a -- just a follow-up question on the P&C insurance situation, is -- I mean, is the expectation, I want to make sure I heard you correctly, obviously claims are going to fluctuate, but from a premium standpoint, I mean, are you as of the first quarter of fiscal '08, are you seeing a decrease of what you were paying in 2007, did I hear you right?

Tom Kitchen

That's correct.

Jamie Clement - Sidoti & Company

And is that like a material increase like it's almost, kind of, in line with the increase that you experienced in the fourth quarter, or I am just trying to get a sense of percentages?

Tom Kitchen

My expectation is that part of that increase in the fourth quarter would certainly being mitigated.

Jamie Clement - Sidoti & Company

Okay, okay.

Tom Kitchen

Yeah. And we experienced increases in FY '06 as well as FY '07, almost equal amounts, so in dollars, and what we have been able to do is negotiate going forward [bringing that] would certainly rollback the '07 increase so to speak.

Jamie Clement - Sidoti & Company

Okay. And again, just to make sure I heard correctly, on the health insurance side, it sounds like there were -- this was claims related more than it was rate or premium related. Is that right?

Tom Kitchen

That's correct.

Jamie Clement - Sidoti & Company

Okay.

Tom Kitchen

And when we went through – and by the way, we did negotiate a new healthcare coverage that was effective May 1, and since then as we expected, that does show some favorable results for the year. We are known in that, Jamie as always, (inaudible).

Jamie Clement - Sidoti & Company

Absolutely. I just wanted to make sure that I got it clear. That I mean, it sounds like, it's the long-term trend from a -- from premier perspective, it's actually heading in the right direction for you guys, although obviously, it sounds like before you got hit by some -- caught by unusual items or that kind of thing. Okay.

Tom Kitchen

That's correct.

Jamie Clement - Sidoti & Company

Moving on, with respect to depreciation, obviously, you have got the accelerated depreciation, kind of going on right now. Can you give us a sense of, is -- at some point in time over the next couple of quarters, does that portion, the systems that are being depreciated in an accelerated manner? Does that kind of – does that start to roll off at all? Can you sort of give us a sense of the timing of that?

Tom Kitchen

What we have is, really, probably for the next six months, we will have some part of it. We had two systems that we are implementing that caused up to accelerated depreciation and one of the systems was implemented in the summer of '07, and the next one would be implemented in the spring of '08. So, there was some additional depreciation recognized during the fiscal year '07 owing to both the systems and accelerated depreciation, but then we also are probably going into fiscal year '08, but one of them will still have some reminiscence or some trailing impact as a result of the acceleration of the deprecation.

Jamie Clement - Sidoti & Company

Okay. Fine . Fair enough. And just moving just towards the volume and pricing trends, particularly on the funeral side, obviously, I mean, it sounded from other folks in your industry and obviously they are not reporting on an October basis, but some volume declines throughout the country were actually, it seems for a good stretch your quarter were a lot worse than what you ended up reporting here. So, that's good news. On the flip side, your average revenue per the increase per traditional funeral not quite as high as what we have been seeing over the last, I don't know, six to eight quarters or so. Is there any fundamental change on the average revenue side that you have seen here or is this part of just kind of running up against the tough comp and that sort of thing?

Tom Crawford

Well, I think we see here a couple of things, is that the funeral packages actually started rolling out in 2006. So, now we have gone through a full year of getting the benefit of those packages, so the rate of increase is not going to be as high as the tail end as it was in the first.

Jamie Clement - Sidoti & Company

Sure.

Tom Crawford

Now, what we have also done is we are going to [take] a look at our packages and we think they have done a tremendous job, but we gathered up of our folks, took a fresh look at it to see what we have done and where we can improve and we found there are opportunities for us to improve as good as the program has been the packages have performed. We found some things that simply need to be changed and we are doing that, that, that was undertaken about a month ago, just started to implement a new fresher package than what we have, where it is more consistent. Actually, we have better merchandising of the services than we had before, but we thought we did well. We have -- we can do a better job. So, now we are just taking a fine toothcomb through our packages and making improvements as I mentioned before. So, again those -- we've got the full benefit of the cycle and now we are going back in and proving what we have right now.

Jamie Clement - Sidoti & Company

Okay. Fair enough. And then, last question, I will get back in the queue. Some areas of the country saw some unusually warm weather, late fall or early winter is -- has the weather phenomenon impacted your business as you have kind of started to move into your seasonally stronger period of time. Like in other words, is there any unusual weakness that you are seeing, or any expectation that -- the sort of guess - my guess sort of cycled back in the winter a little bit more this year than they normally have?

Tom Crawford

Right now I would say that we have -- that's not a great deal of discussions in our meetings right now as far as the weather pattern. As a matter of fact, we were -- when we look at our volumes, as Tom said it's down, we are not happy with that, but we look at that in relation to in trying to get the best market day we have and comparing ourselves with others. We felt like, we did a relatively good job.

Jamie Clement - Sidoti & Company

Absolutely.

Tom Crawford

And we have seen a definite increase in our shares, so those are the positives. What I will tell you is, month-to-month just from my past experience outside this industry, as a supplier and now in the industry is they can swing, month-to-month, quarter-to-quarter but over the long holiday tend to balance out. So, we don't see that as any one pocket that gives us any alarm. We are delighted, it’s been a little bit warmer and that maybe we have a little bit of an impact early on, but we just -- we are continue to press in and we are pleased that our market share appears to have picked up.

Jamie Clement - Sidoti & Company

Okay, Very good, thanks a lot for your time. I appreciate it.

Tom Kitchen

Okay.

Tom Crawford

Thank you, Jamie.

Operator

[Operator Instructions]. We will next move to Mike Scarangella with Merrill Lynch.

Mike Scarangella - Merrill Lynch

Hi, good morning, guys.

Tom Crawford

Good morning, Mike.

Mike Scarangella - Merrill Lynch

You talked about your three-prong strategy and the timing of those various phases. It sounds like you are very focused on phase I. You are starting to think about the innovation phase. I don't think I heard you talk about the timing of the third phase, which I think was acquisitions. Can you just comment on when you might be focused on that?

Tom Crawford

Well, the acquisition, as I mentioned, I look at that as really support of the first two. And in the acquisition phase, we are looking at companies today. So, we are searching. We are looking. I will tell you we've got some things in the pipeline, nothing to report on. But we are very active in that. What we are not and again, please take this correctly, we're not usually aggressive, kind of the payment we have got to bring in, we are selectively looking at the right deals and we have that process that continues on today.

What we would like to do is, why does best-in-class is so important? Is that as we are able to -- we've got a wonderful database here. As we have that -- as we implement that, we are successful. We will be able to tell what the value is. And we think that will help us be even more positive and more aggressive going forward.

So, acquisitions, we are still looking today. We are with this phase II initiative that we're talking about. Again, we are moving that forward and getting that momentum going and we're looking at some investment opportunities. Again, nothing to report at this point in time. But we will invest our capital to grow our business in those two areas.

Mike Scarangella - Merrill Lynch

Can you give us a sense as to some of the deals -- the size of some of deals in the pipeline? Would they be considered, do you think, as tuck-ins? Are they large enough for example, if they might need financing?

Tom Crawford

No. What we're looking at right now are strategic opportunities that augment where we -- our business is today. So now, we're not looking at having to go out and issue any new securities to cover these. But these are on the smaller side. They are more strategic. They augment our existing businesses. And I will also tell you we are investing in Greenfield operations as well. And we have just -- the Board just approved an investment for us to take forward in a community that we are very thrilled with, very pleased with. The growth rate is phenomenal. We have opportunity to partner out with a cemetery and we feel terrific about that. So, again, we're investing in our own businesses. We're investing in tucking opportunities, and we continue to look.

Mike Scarangella - Merrill Lynch

That's helpful. And just the last one is, you mentioned that you monetize some mineral rights in some of your cemetery properties. That's a new one for me. Can you just kind of explain what that entails and is there more of that do to?

Tom Crawford

I'll let Tom talk about that. I will tell you after we did that, we started seeing what else -- looking at Oklahoma, what have we got in Oklahoma? But that was a very good positive for us and we think that's going to work out well. I'll let Tom tell you details.

Tom Kitchen

We were approached by a firm that was exploring in the area where we had our cemetery and there was -- in fact it was in Dallas area. And it was a very active trend for them to put together the properties and we had a large piece of property that was a real integral part of their plans.

Going forward, in addition to the $2.1 million of upfront money, if they are successful in finding oil and gas, we are going to realize royalty from the production. We took a quick look at other cemeteries throughout our operations in the 26 different states. And at this point in time, don't know of something else that presents quite that same opportunity, that was a bit more of a (inaudible) case of owning some property in the right location, and we were able to benefit from it. But nevertheless, it's significant because we'll continue to use the property as cemetery. It doesn't interfere. It's going to have directional drilling, which is going to be off of our property. And there is nothing that is going to come to or within 600 feet at the surface. So, for all intents and purposes, it's really, I think by visiting our property we'll not notice anything different. But we'll realize the benefit from that drilling.

Mike Scarangella - Merrill Lynch

So, this is -- it sounds like your property has been utilized or is this unused cemetery property?

Tom Crawford

It's a combination but for the most part it's utilized.

Mike Scarangella - Merrill Lynch

So, they are drilling underused cemetery property?

Tom Crawford

No. They are directionally drilling this as a offsite and they are coming underneath, and that's why I've said they are not going to be any closer than 600 feet to the surface of the cemetery.

Mike Scarangella - Merrill Lynch

And there is no risk if they disturb remains…?

Tom Crawford

No.

Tom Kitchen

No.

Mike Scarangella - Merrill Lynch

So, that you get into any kind of regulatory issues with them?

Tom Kitchen

No. We've won the traps on the legal and regulatory issues and there is none there.

Tom Crawford

There will be no indication of anybody visiting our facility maybe in these events whatsoever.

Mike Scarangella - Merrill Lynch

Okay. Very creative, interesting. Thanks, guys.

Tom Kitchen

Okay.

Tom Crawford

Well, thank you. And I will tell you also I refused to talk -- call Tom Kitchen, [Bobby Ewing] after this took place.

Mike Scarangella - Merrill Lynch

Fair enough.

Tom Crawford

I think that also dates me just a little bit right there…

Mike Scarangella - Merrill Lynch

A little bit, but I got it. Thanks.

Tom Crawford

Yeah. Some of the people in the room who are looking, like, who is Bobby Ewing.

Mike Scarangella - Merrill Lynch

And I got it.

Tom Crawford

Explain it afterwards.

Operator

No further questions, Mr. Scarangella, is that correct?

Mike Scarangella - Merrill Lynch

Yes. Thank you.

Operator

All right. Very good. We do have one remaining in the queue and that is Robert Willoughby, Banc of America.

Robert Willoughby - Banc of America

Yeah. Tom, I was glad the mineral rights didn't relate to granite, I thought that might have been…

Tom Crawford

That's a little bit more difficult.

Robert Willoughby - Banc of America

I jumped on the call late; did you guys have comments on lower preneed funeral sales, what did drive that?

Tom Crawford

Well, on the preneed sales, we had lower preneed sales in or…

Robert Willoughby - Banc of America

On the funeral side?

Tom Crawford

On the funeral side. Yeah, I think right now for us it was more market related than anything else. There was nothing that we did unusual or try to slow that down. I will tell you the mix that we had this year of preneed sales to cemetery sales, we were very pleased with. And I think that was -- again for us it was more market related.

Tom Kitchen

One of the things that in the preneed sales in particular Southern California, New York State is market, in '06 our preneed sales probably increased 33 to 38, almost 40% from the '05 period of time. This year it was probably off about 10% from '06, but 10% drop of '06 is still about 25% better than where we were in '05. So, it is somewhat of a reflection of a very strong FY '06 period of time.

Robert Willoughby - Banc of America

Okay. Would you attribute anything to economic issues or on the margin?

Tom Crawford

No. Not that we see it. And I would also tell you that in relation to California, we have just entered into an agreement with the Archdioceses that we will in addition to preneed selling at funerals, we'll be selling cemetery property as well, as they turn to Stewart because we believe we can do a much better job. So, again, as Tom said, we had a heroic year in 2006 came back down in 2007, but we have got very positive indicators for a strong 2008.

Robert Willoughby - Banc of America

Okay. And just giving cash reserves, I was a little bit surprised that share repurchase might not have been stronger in light of the some of the weaker volume trends and some of the insurance costs you did incur. Any reason not to push that further here?

Tom Kitchen

We've been actively in the market, we have repurchased 1.4 million shares through Friday of last week. The Board on Monday -- excuse me, on Tuesday, approved another $25 million repurchase. So, we've got slightly more than $38 million remaining and our plans are to, when we are able to get back in the market, our plans are to go out and repurchase shares.

Robert Willoughby - Banc of America

You are not in danger of violating any covenants or anything like that, by any means?

Tom Kitchen

No.

Tom Crawford

No.

Tom Kitchen

Not even close.

Robert Willoughby - Banc of America

Okay. Thank you.

Tom Crawford

Thank you.

Operator

And with that there are no further questions in the queue. I would like to turn the conference back to Tom Crawford for our closing comments.

Tom Crawford

Okay. Well again, we appreciate the time that you spent with us. We appreciate your continued support to Stewart Enterprises and finally, at this time of the year we would like to wish all of you, you, your loved ones, a peaceful, restful and wonderful holiday season. And we look forward to talking with you in approximately three months. Thank you very much.

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