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
Stewart Enterprises Inc. (STEI) F4Q07 (Qtr End 10/31/07) Earnings Call December 20, 2007 11:00 AM ET
Operator
Welcome to today's Stewart Enterprises' Fourth Quarter 2007 EarningsCall. As a reminder, today's conference is being recorded. [OperatorInstructions]. Now, I would like to turn the conference over to Leslie Loyet ofFinancial Relations Board. Ms. Loyet, please go ahead.
Leslie Loyet
Thank you. Good morning and thank you all for joining us. Onbehalf of Stewart Enterprises, I would like to welcome everyone. By now, youshould have all received a copy of the press release that was distributed thismorning. If not, please contact Liz Dolezol at 312-640-6771 and she will send youa copy immediately, or visit Stewart's website at stewartenterprises.com for acopy.
Management will provide an overview of the fourth quarter andfull year and then we will open the call to your questions.
Before I turn the call over to management, please be advisedthat the information contained in this call is current only as of the time ofthis 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 factsare forward-looking statements. Examples of forward-looking statements includeprojections of revenue, earnings, growth rates, free cash flow, debt levels,tax benefits, and other financial items; statements regarding plans andobjectives of the company or its management; statements regarding industrytrends, competitive trends and their effect on future performance; andassumptions underlying the forward-looking statements regarding the company andits business.
The company's actual results could differ materially fromany forward-looking statements due to several important factors which aredescribed in the company's Form 10-K for the year-ended October 31, 2006 andForm 10-Qs for the quarter's ended January 31, April 30 and July 31, 2007, allfiled with the SEC.
The company uses EBITDA and free cash flow as financialmeasures. These financial measures are not in accordance with accountingprinciples generally accepted in the United States of America or GAAP and areintended to supplement rather than replace or supersede any informationpresented in accordance with GAAP.
Reconciliation to the most directly comparable GAAPfinancial measures can be found on the company's website, again atwww.stewartenterprises.com, under Investor Information, Reconciliation ofnon-GAAP financial measures. It can also be found in the company's pressrelease dated December 20, 2007.
With that said, I'd like to introduce management. Today wehave 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 toTom Crawford. Please go ahead.
Tom Crawford
Leslie, thank you, and good morning to all. On behalf of allthe employees of Stewart Enterprises, we welcome you and thank you for joiningus on our year-end conference call.
For today's call, we will followmuch of the same patterns we have in the past and then I will provide aperformance summary for the year and the quarter and Tom Kitchen, the company'sSenior Executive Vice President and Chief Financial Officer, will provide anin-depth review of the results. After Tom's call, I will discuss a few of ourstrategic initiatives for 2008 and then open up the call for your questions.
I am pleased to report our resultsfor the first -- for the fiscal year of 2007. We generated an $8.6 millionimprovement in revenue, a $1.7 million improvement in net earnings fromcontinuing operations and a $0.03 increase in earnings per diluted share.
For the year, we generated operatingcash flow of $81.9 million and had the strongest reoccurring free cash flow inthe past five years at $59.6 million.
We improved our capital structureby repurchasing $64.2 million worth or 7.7 million shares of our Class A commonstock and issued $250 million worth of senior convertible notes which reducedour borrowing costs. In September this year, the Board approved a $25 millionstock repurchase program of which we have purchased 1.4 million shares of ourClass A common stock for an average of $8.14 for an investment of $11.4million.
Today, the company announced thatwith Board approval, an additional $25 million for stock repurchase leaving thecompany with $38.6 million available under both programs.
From an operational standpoint,our product and service packages have been successful and increased our averagerevenue per traditional service by 3.4% and average revenue per cremation by7.4%.
We are pleased with our progressin this area, and we'll continue to refine the packages to improve our 2008average revenue performance. My enthusiasm for the year is somewhat tampered bythe results of the fourth quarter compared to the same period of last year.
The fourth quarter of 2006 wasone of our strongest quarters in terms of earnings, which makes the quarterlycomparison for our results of 2007 all the more of a challenge. Tom Kitchenwill review the details of the year end and quarter results and thecontributing causes of our unfavorable comparison to the strong fourth quarterof 2006.
Notwithstanding this toughcomparison for the fourth quarter, there were positives. The company continuedto increase our average revenue per event for both, traditional and --traditional funeral and cremation services. We also continued to grow our cemeteryproperty sales as well.
Our same-store calls did declinefor the quarter but at a lesser rate than the overall market decline.Additionally, despite a down earning quarter compared to the prior year, ourcash generating performance was exceptional, as we were able to significantlyincrease our operating cash flow from $12 million to $27 million and increasedour reoccurring free cash flow from $3 million to $18 million. We are verypleased with those results.
With that, I will now turn thetime over Tom Kitchen to give you an in-depth review of our financialperformance for the year and fourth quarter ending October 31, 2007. Tom?
Tom Kitchen
Thanks, Tom, and a good morningto everyone. I'll begin my review with the highlights of our fiscal year and thenmove on to our fourth quarter.
Overall, we recorded favorable results in fiscal year '07which are due in part to the strong balance we maintain between the funeral andcemetery segments of our business. Our cemetery activity and in particular, ourpreneed production, which is not completely dependent upon mortality rates hasa strong stabilizing influence on our overall performance of the company,resulting in a 6.2% increase in gross cemetery property sales, and a $9.5million increase in cemetery revenue during the year. In fiscal year 2007, thecompany reported net earnings from continuing operations of $39.3 million or$0.38 per diluted share compared to net earnings from continuing operations of $37.6million 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 $1.6million in funeral revenue related to the out-of-period accounting adjustmentsand $2.8 million of business interruption insurance proceeds related toHurricane Katrina, funeral revenue would have increased $3.5 million. Weachieved an increase in the same-store average revenue per funeral service forthe year of 3.5%, and a 70 basis point increase in same-store cremation ratefrom 38.6% in fiscal year '06 to 39.3% in fiscal year '07.
In addition, we experienced a 7.4% increase in the averagerevenue per cremation service, and a 3.4% increase in the average revenue pertraditional funeral service. The company's same-store funeral calls decreased2.2% for the year, which we believe is consistent with reported industry data.Furthermore, we believe we have done a good job each quarter with improvingcall volumes throughout the year from a decrease in calls of 5.5% as of thefirst quarter to a decrease of 2.2% for the year. While we are not happy withthe decline in volume, we are pleased with the progress made during the year.
Our cemetery revenues remain strong with an increase of $9.5million to $243.5 million for fiscal year '07. These improved cemetery resultsare primarily due to an increase in construction during the period on variouscemetery projects and a $6.7 million or 6.2% increase in gross cemeteryproperty sales, primarily due to serving customers interested in large cemeteryproperty purchases such as private estates.
These increases were partially offset by a decrease inmerchandise delivery revenue due to a reduction in cemetery interments and anincrease in the reserve for cancellations, which is due in large part to animprovement in the reserve for cancellations in the '06 year followingHurricane Katrina, which occurred in our fiscal year '05.
Gross profit decreased $2.2 million for the year, mainly dueto certain items primarily affecting the funeral segment. Funeral gross profitdecreased $2.3 million due to the -- a $900,000 decrease in revenue aspreviously mentioned, and a $1.4 million increase in expenses. The increase inexpenses is due primarily to a $2 million increase in property, casualty andgeneral liability insurance costs and a $700,000 impairment charge.
In addition, there was $4.1 million increase in hurricanerelated charges in '07 over '06. We recorded a $2.5 million charge for nethurricane-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 fiscalyear '08. However, we do not expect these costs or any hurricane-relatedcharges after that to be material.
Our EBITDA from continuing operations was $110.6 million forfiscal 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 interestexpense due to a reduction in the average interest rate incurred during theyear due primarily to the 2007 senior convertible note transaction. In June of'07, we issued two tranches of senior convertible notes totaling $250 millioncarrying an average coupon rate of 3.25%.
For the year, we experienced a $4.2 million income taxbenefit due to the utilization of a capital loss carryforward and thecompletion of an audit in the Commonwealth of Puerto Rico.
We are very pleased with our operating cash flow of $81.9million, which was lower than fiscal year '06 cash flow by $8.2 million. Whenwe consider the prior year included nearly $15 million of unusual trustwithdrawals compared to only $2.1 million in '07, we see that the currentyear'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 carryforwardthat was utilized in fiscal year '06. The decreases in cash flow were partiallyoffset by $1.3 million of cash inflows in excess of insurance proceeds recordedrelated to Hurricane Katrina in '07, compared to $3.8 million of cash outflowsin '06.
Additionally, we received $2.1million due to the execution of a lease of our mineral rights at one of ourcemeteries to an outside third party. Our recurring free cash flow is as strongas 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 millionin income taxes.
Now, I would like to move on andtalk about our fourth quarter. After a very strong fourth quarter last year, asTom has previously mentioned, we have a very challenging fourth quartercomparison this year. Funeral revenue in the fourth quarter of '07 decreased$2.9 million to $66.9 million. However, the unusual items mentioned in theyear-to-date results also play a part in the quarter results as well.
After adjusting funeral revenuefor the $2.4 million resulting from the out-of-period accounting adjustmentsand the $400,000 from business interruption insurance proceeds recorded duringthe fourth quarter of '06, funeral revenue is relatively flat for the quarter.
We achieved an increase in thesame-store average revenue per funeral service for the quarter of 1.1% and atthe same time experienced a 100 basis point increase in same-store cremationrate 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 apercent increase in the average revenue per traditional funeral service.
The company's same-store funeralcosts decreased eight-tenths of a percent or 112 events to 14,055 same-storeevents performed. We believe the industry-wide data indicates a larger funeralcall decreased in our results.
Our cemetery revenue decreased $1.1million to $59.4 million for the fourth quarter of '07 primarily due to adecrease in merchandise delivery revenue, which is due in part to a decrease ininterments in our markets. The decrease is partially offset by an increase ingross cemetery property sales of 2.8% or $800,000.
In regards to gross profit, weexperienced a $5.9 million decrease quarter-over-quarter due to the $4 milliondecrease in revenue as previously mentioned, and the $2 million increase inexpenses.
The increase in expenses is due primarilyto a $1.2 million increase in health insurance costs, $1 million increase inproperty, casualty and general liability costs, and a $700,000 impairmentcharge.
In addition, we also experienced$2.8 million increase in hurricane related charges from net recoveries of $2.6million in the fourth quarter of '06, to net charges of $200,000 in the fourthquarter of '07.
Our EBITDA from continuingoperations was $22.6 million for the fourth quarter of '07 compared to $30.4million for the fourth quarter of '06. EBITDA for the fourth quarter wasimpacted by $5.9 million decrease in gross profit previously mentioned, and a$2.8 million increase in hurricane related charges compared to the fourthquarter of '06.
Investment and other incomedecreased $1.1 million to $900,000 primarily due to a $1.3 million decrease ininterest income receivable from the Internal Revenue Service. Our interestexpense decreased $1.5 million to $5.8 million during the fourth quarter of '07due to a reduction in interest resulting from the issuance of the new seniorconvertible notes.
For the quarter, our effectivetax 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 inadditional tax of some $500,000, due primarily to increases in state and USpossessions tax expense.
Our cash flow provided byoperating 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 thefourth quarter of fiscal year '07. This increase in cash flow is due to variousreasons. Company paid $4.8 million less in net tax payments, partially due totax saving strategies and a $3.4 million less in interest payments due to thetiming of payments as a result of the issuance of the new senior convertiblenotes.
Lastly, the company executed alease of our mineral rights at one of our cemeteries to an outside third partyfor $2.1 million. This improved cash flow for the quarter, and we willrecognize this amount as revenue over the next year during the term of thelease.
Our recurring free cash flowincreased significantly by $14.6 million from $3.2 million in the fourthquarter of '06 to $17.8 million in the fourth quarter of '07.
And finally, we are pleased toreport that we have reopened all of our Louisianabusinesses affected by Hurricane Katrina.
I would like to turn the callback 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 knowwe can do better.
Over the past two years, great progress has been made inconsolidating and integrating operations both in the field and in the homeoffice to better obtain the benefit of size and scale. For 2008 and beyond, ourintent is to continue to build on the success and to take it up a couple ofnotches.
Our forward-looking strategic framework is based on threecomponents. An operational improvement component, which we have simply entitledthe best-in-class initiative, which focuses on improving earnings, cash flow,and return on invested capital from our existing business; an innovationcomponent, which emphasizes additional growth through products or services notnow in our portfolio; and the third component is simply growth throughacquisitions, which will support the successful execution of the first twosegments of the strategic framework.
Our major focus in 2008 will be on the successfulimplementation of the first component of our framework, which is ourbest-in-class initiative, with the desired result of improving performance atthe roof top level. In this initiative, we are taking a page from world-classcompanies with a continuous improvement mindset to improve all businessprocesses and apply that practice to our roof tops as well.
In comparing our businesses, it is clear that we have a bellshaped curve in relations to performance with a large number of standarddeviations. We have star businesses and less than star businesses that aretrying to become stars. We believe our best-in-class initiative will enable usto narrow the performance gap, while moving our company's average performanceupward.
We intend to both measure results and results orientedbehaviors. To do this, we are instituting key measures, those few and powerfulmetrics that drive performance at local levels. Markets will differ but our keymeasures will be consistent throughout Stewart Enterprises and will provide acommon performance language across all of our businesses. Our key measures willallow us to narrow our focus on the activities that matter most to our roof topsto achieve the desired results.
Our system will not only trackresults, but provide diagnostic tools and proven solutions when a key measureis tracking negatively.
Additionally, our system gives usthe ability to rank each location by key measure, which allows us to identifytop performers and take their best practices to the locations who areunderperforming in that key measure. We want our people going home at nightknowing they are successful, and better serving customers and growing the valueof their location or if they are not as successful at that moment that theywill know why and what they can do to become successful, and to have theresources and the help to do so. We believe management's time in the field iscritical to achieving the desired results of the best-in-class initiative. Andwe are focusing on the best and highest use of management's time and talent toensure a significantly higher percentage of time is spent on teaching, trainingand solution implementation at our roof tops.
Continuing with progress madeover the past two years, we will be taking actions to significantly improve ourinternal processes in the home office and the field to eliminate waste andinefficiency, and to free up more time to invest on growing and improving ourbusinesses. We are rolling out the best-in-class initiative to the field as wespeak.
We believe successfulimplementation of the best-in-class initiative will enable us to groworganically, and to have the empirical knowledge of the value of the Stewartway and what that brings Stewart business, which will allow us to grow moreaggressively by acquisitions of strategic businesses.
Finally, earlier in the call, I briefly mentioned the secondor the innovation component of our strategic framework, which has intended togrow 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 tomove the second component forward. While there is nothing to report or count onat this time, we are quite energized with the opportunities we see to look atour business in different ways to generate new revenue and profit sources forthe company in the future. While the market we serve has many challenges, as toall businesses in the industries, we are committed to the success of ourbest-in-class initiative, and achieving continued positive results for 2008 andbeyond.
With that, we are now ready to take your questions.
Question-and-Answer Session
Operator
Very good. [Operator Instructions]. Our first question willcome from Edward Yruma with JPMorgan.
Daya - JPMorgan
Hello. Good morning. It's actually [Daya] calling here forEd.
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 LakeLawn facility, I was wondering what volumes you are seeing there, and how itcompares to the pre-Katrina levels, and also, if you could let me know aboutthe build capacity there?
Tom Crawford
I'm sorry, I missed the last part of that.
Daya - JPMorgan
The build capacity at the Lake Lawnfacility -- 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 volumeis not back up to the Katrina -- pre-Katrina level. But we're seeing a goodvolume increase. We feel very positive about the results. And I will tell youin the other market areas that we are affected, not only in Lake Lawn,but the other New Orleansproperties, we've seen a very big increase in volume and growth. So, we feelvery 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 privateestates. We have growth and opportunity to move that forward. So, we don't feelcapacity constrained in any way, shape or form at Lake Lawn.
Daya - JPMorgan
Okay. Thank you. And if I may ask, the increase in healthinsurance costs and the property, casualty and general liability insurancecosts this quarter, should we expect to see them return to their morenormalized 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 alarger number of high-dollar value claims and the experience in the prior yearin '06 was really the opposite. So, we had a favorable experience in '06countered by an unfavorable experience in '07. We have done some checking evensubsequent to October and it seems -- certainly for the month of November, itseems to be running inline with what we expected and more inline with what weincurred, say, for prior year same month.
So, the property and casualty has been impacted over thelast two fiscal years, largely because of the results and the fallout from theHurricane Katrina. We increased significantly our property and casualty expensein FY'06 and then there was a further increase in FY'07. By the way, our insuranceprogram for property and casualty coincides with the company's fiscal year.
When we went to the market this year and renewed iteffective November 1st of '07, what we saw was an improvement in the insurancemarket, fairly significant. And so, our expectation is that we will probablydrop down below the '07 experience from -- when we go into '08 with regards tothe property and casualty. Now, I do have to caution you that we are selfinsured and there are some claims that are paid, which not always depends onwhat the experience is going to be. But as far as the premium associated withthe programs, and what we see going forward is certainly a lower premiumexperience than what was incurred in '07.
Daya - JPMorgan
Great. Thank you very much. And afinal follow-up question, if I may is, could you comment a little bit on the California markets, howit 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 thenorthern part of the state, which is heavily dominated by the cremationmarketplace, we have seen some softness, but that really existed throughout thefiscal 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 statewhich is dominated by our Los Angeles Archdiocese funeral homes. We have seensomewhat of a decline in the preneed selling. However, we do see a fairlyconsistent volume with regard to the number of funeral services that weperform.
Tom Crawford
As Tom mentioned, 2006 was atremendous year out in California.2007 was not as good, and those things will tend to balance out fromyear-to-year.
Tom Kitchen
Okay. Thank you very much.
Tom Crawford
Thank you.
Operator
Our next question is from Jamie Clementwith Sidoti & Company.
Jamie Clement - Sidoti & Company
Good morning, gentlemen.
Tom Kitchen
Good morning, Jamie.
Jamie Clement - Sidoti & Company
Well, I just had a -- just afollow-up question on the P&C insurance situation, is -- I mean, is theexpectation, I want to make sure I heard you correctly, obviously claims aregoing to fluctuate, but from a premium standpoint, I mean, are you as of thefirst quarter of fiscal '08, are you seeing a decrease of what you were payingin 2007, did I hear you right?
Tom Kitchen
That's correct.
Jamie Clement - Sidoti & Company
And is that like a materialincrease like it's almost, kind of, in line with the increase that youexperienced in the fourth quarter, or I am just trying to get a sense ofpercentages?
Tom Kitchen
My expectation is that part ofthat increase in the fourth quarter would certainly being mitigated.
Jamie Clement - Sidoti & Company
Okay, okay.
Tom Kitchen
Yeah. And we experiencedincreases in FY '06 as well as FY '07, almost equal amounts, so in dollars, andwhat we have been able to do is negotiate going forward [bringing that] wouldcertainly rollback the '07 increase so to speak.
Jamie Clement - Sidoti & Company
Okay. And again, just to makesure 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 thatright?
Tom Kitchen
That's correct.
Jamie Clement - Sidoti & Company
Okay.
Tom Kitchen
And when we went through – and bythe 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 theyear. We are known in that, Jamie as always, (inaudible).
Jamie Clement - Sidoti & Company
Absolutely. I just wanted to makesure that I got it clear. That I mean, it sounds like, it's the long-term trendfrom a -- from premier perspective, it's actually heading in the rightdirection for you guys, although obviously, it sounds like before you got hitby some -- caught by unusual items or that kind of thing. Okay.
Tom Kitchen
That's correct.
Jamie Clement - Sidoti & Company
Moving on, with respect todepreciation, obviously, you have got the accelerated depreciation, kind ofgoing on right now. Can you give us a sense of, is -- at some point in timeover the next couple of quarters, does that portion, the systems that are beingdepreciated in an accelerated manner? Does that kind of – does that start to rolloff 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 thatcaused up to accelerated depreciation and one of the systems was implemented inthe 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 '07owing to both the systems and accelerated depreciation, but then we also areprobably going into fiscal year '08, but one of them will still have somereminiscence or some trailing impact as a result of the acceleration of thedeprecation.
Jamie Clement -Sidoti & Company
Okay. Fine . Fair enough. And just moving just towards thevolume and pricing trends, particularly on the funeral side, obviously, I mean,it sounded from other folks in your industry and obviously they are notreporting on an October basis, but some volume declines throughout the countrywere actually, it seems for a good stretch your quarter were a lot worse thanwhat you ended up reporting here. So, that's good news. On the flip side, youraverage revenue per the increase per traditional funeral not quite as high aswhat we have been seeing over the last, I don't know, six to eight quarters orso. Is there any fundamental change on the average revenue side that you haveseen here or is this part of just kind of running up against the tough comp andthat sort of thing?
Tom Crawford
Well, I think we see here a couple of things, is that thefuneral packages actually started rolling out in 2006. So, now we have gonethrough a full year of getting the benefit of those packages, so the rate ofincrease 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 lookat our packages and we think they have done a tremendous job, but we gatheredup of our folks, took a fresh look at it to see what we have done and where wecan improve and we found there are opportunities for us to improve as good asthe program has been the packages have performed. We found some things thatsimply need to be changed and we are doing that, that, that was undertakenabout a month ago, just started to implement a new fresher package than what wehave, where it is more consistent. Actually, we have better merchandising ofthe services than we had before, but we thought we did well. We have -- we cando a better job. So, now we are just taking a fine toothcomb through ourpackages 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 andproving what we have right now.
Jamie Clement -Sidoti & Company
Okay. Fair enough. And then, last question, I will get backin the queue. Some areas of the country saw some unusually warm weather, latefall or early winter is -- has the weather phenomenon impacted your business asyou 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 anyexpectation that -- the sort of guess - my guess sort of cycled back in thewinter a little bit more this year than they normally have?
Tom Crawford
Right now I would say that we have -- that's not a greatdeal of discussions in our meetings right now as far as the weather pattern. Asa matter of fact, we were -- when we look at our volumes, as Tom said it'sdown, we are not happy with that, but we look at that in relation to in tryingto get the best market day we have and comparing ourselves with others. We feltlike, we did a relatively good job.
Jamie Clement -Sidoti & Company
Absolutely.
Tom Crawford
And we have seen a definite increase in our shares, so thoseare the positives. What I will tell you is, month-to-month just from my pastexperience outside this industry, as a supplier and now in the industry is theycan swing, month-to-month, quarter-to-quarter but over the long holiday tend tobalance 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 littlebit of an impact early on, but we just -- we are continue to press in and weare pleased that our market share appears to have picked up.
Jamie Clement -Sidoti & Company
Okay, Very good, thanks a lot for your time. I appreciateit.
Tom Kitchen
Okay.
Tom Crawford
Thank you, Jamie.
Operator
[Operator Instructions]. We will next move to MikeScarangella 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 ofthose various phases. It sounds like you are very focused on phase I. You arestarting to think about the innovation phase. I don't think I heard you talkabout the timing of the third phase, which I think was acquisitions. Can youjust comment on when you might be focused on that?
Tom Crawford
Well, the acquisition, as I mentioned, I look at that asreally support of the first two. And in the acquisition phase, we are lookingat companies today. So, we are searching. We are looking. I will tell you we'vegot some things in the pipeline, nothing to report on. But we are very activein that. What we are not and again, please take this correctly, we're notusually aggressive, kind of the payment we have got to bring in, we areselectively looking at the right deals and we have that process that continueson today.
What we would like to do is, why does best-in-class is soimportant? Is that as we are able to -- we've got a wonderful database here. Aswe have that -- as we implement that, we are successful. We will be able totell what the value is. And we think that will help us be even more positiveand more aggressive going forward.
So, acquisitions, we are still looking today. We are withthis phase II initiative that we're talking about. Again, we are moving thatforward and getting that momentum going and we're looking at some investmentopportunities. Again, nothing to report at this point in time. But we willinvest 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 sizeof some of deals in the pipeline? Would they be considered, do you think, astuck-ins? Are they large enough for example, if they might need financing?
Tom Crawford
No. What we're looking at rightnow 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 tocover these. But these are on the smaller side. They are more strategic. Theyaugment our existing businesses. And I will also tell you we are investing in Greenfield operations aswell. And we have just -- the Board just approved an investment for us to takeforward in a community that we are very thrilled with, very pleased with. Thegrowth rate is phenomenal. We have opportunity to partner out with a cemeteryand we feel terrific about that. So, again, we're investing in our ownbusinesses. We're investing in tucking opportunities, and we continue to look.
Mike Scarangella - Merrill Lynch
That's helpful. And just the lastone is, you mentioned that you monetize some mineral rights in some of yourcemetery properties. That's a new one for me. Can you just kind of explain whatthat entails and is there more of that do to?
Tom Crawford
I'll let Tom talk about that. Iwill 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 positivefor 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 thatwas exploring in the area where we had our cemetery and there was -- in fact itwas in Dallasarea. And it was a very active trend for them to put together the propertiesand we had a large piece of property that was a real integral part of theirplans.
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 atother cemeteries throughout our operations in the 26 different states. And atthis point in time, don't know of something else that presents quite that sameopportunity, that was a bit more of a (inaudible) case of owning some propertyin 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. Itdoesn't interfere. It's going to have directional drilling, which is going tobe off of our property. And there is nothing that is going to come to or within600 feet at the surface. So, for all intents and purposes, it's really, I thinkby visiting our property we'll not notice anything different. But we'll realizethe benefit from that drilling.
Mike Scarangella - Merrill Lynch
So, this is -- it sounds likeyour property has been utilized or is this unused cemetery property?
Tom Crawford
It's a combination but for themost part it's utilized.
Mike Scarangella - Merrill Lynch
So, they are drilling underusedcemetery property?
Tom Crawford
No. They are directionallydrilling this as a offsite and they are coming underneath, and that's why I'vesaid they are not going to be any closer than 600 feet to the surface of thecemetery.
Mike Scarangella - Merrill Lynch
And there is no risk if theydisturb remains…?
Tom Crawford
No.
Tom Kitchen
No.
Mike Scarangella - Merrill Lynch
So, that you get into any kind ofregulatory issues with them?
Tom Kitchen
No. We've won the traps on thelegal and regulatory issues and there is none there.
Tom Crawford
There will be no indication ofanybody 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 tellyou also I refused to talk -- call Tom Kitchen, [Bobby Ewing] after this tookplace.
Mike Scarangella - Merrill Lynch
Fair enough.
Tom Crawford
I think that also dates me just alittle bit right there…
Mike Scarangella - Merrill Lynch
A little bit, but I got it.Thanks.
Tom Crawford
Yeah. Some of the people in theroom 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 haveone remaining in the queue and that is Robert Willoughby, Banc of America.
Robert Willoughby - Banc of America
Yeah. Tom, I was glad the mineralrights didn't relate to granite, I thought that might have been…
Tom Crawford
That's a little bit moredifficult.
Robert Willoughby - Banc of America
I jumped on the call late; didyou guys have comments on lower preneed funeral sales, what did drive that?
Tom Crawford
Well, on the preneed sales, wehad lower preneed sales in or…
Robert Willoughby - Banc of America
On the funeral side?
Tom Crawford
On the funeral side. Yeah, Ithink right now for us it was more market related than anything else. There wasnothing that we did unusual or try to slow that down. I will tell you the mixthat we had this year of preneed sales to cemetery sales, we were very pleasedwith. And I think that was -- again for us it was more market related.
Tom Kitchen
One of the things that in thepreneed sales in particular Southern California, New York State is market, in'06 our preneed sales probably increased 33 to 38, almost 40% from the '05period of time. This year it was probably off about 10% from '06, but 10% dropof '06 is still about 25% better than where we were in '05. So, it is somewhatof a reflection of a very strong FY '06 period of time.
Robert Willoughby - Banc of America
Okay. Would you attributeanything to economic issues or on the margin?
Tom Crawford
No. Not that we see it. And I would also tell you that inrelation to California,we have just entered into an agreement with the Archdioceses that we will inaddition to preneed selling at funerals, we'll be selling cemetery property aswell, 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 bitsurprised that share repurchase might not have been stronger in light of thesome 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 1.4million shares through Friday of last week. The Board on Monday -- excuse me,on Tuesday, approved another $25 million repurchase. So, we've got slightlymore than $38 million remaining and our plans are to, when we are able to getback 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 anythinglike 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. Iwould like to turn the conference back to Tom Crawford for our closingcomments.
Tom Crawford
Okay. Well again, we appreciate the time that you spent withus. We appreciate your continued support to Stewart Enterprises and finally, atthis time of the year we would like to wish all of you, you, your loved ones, apeaceful, restful and wonderful holiday season. And we look forward to talkingwith you in approximately three months. Thank you very much.
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