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Executives

Martin R. de Laurèal - Senior Vice President of Corporate Development & Investor Relations

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

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

Analysts

Robert M. Willoughby - BofA Merrill Lynch, Research Division

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

James Clement - Sidoti & Company, LLC

Dick Innes - JC Clark Ltd.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

Stewart Enterprises (STEI) Q2 2012 Earnings Call June 7, 2012 11:00 AM ET

Operator

Welcome to the Stewart Enterprises Second Quarter 2012 Earnings Conference Call. My name is Sandra, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Martin de Laurèal, Senior Vice President of Corporate Development and Investor Relations. Martin, you may begin.

Martin R. de Laurèal

Thank you, Sandra. Good morning, everyone. On behalf of Stewart Enterprises, I would like to welcome everyone. By now, you should have already received a copy of our press release. If not, please visit our website at www.stei.com. On today's call, management will provide an overview of the second quarter 2012 and then we'll open up the call for your questions.

The information contained in this call is current only at the time of this call. Statements made by the company that are not historical facts are forward looking statements. The company assumes no obligation to update any statements, including forward-looking statements made during the call. Examples of forward-looking statements include: projections of revenue or 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 forward-looking statements regarding the company and its business.

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

The company uses adjusted earnings, adjusted EPS, adjusted EBITDA, net debt and free cash flow as financial measures. These financial measures are not in accordance with accounting principles generally accepted in the United States of America, or GAAP, and are intended to supplement rather than replace or supersede any information presented in accordance with GAAP. The reconciliation to the most directly comparable GAAP financials measures can be found on the company's website, again, at www.stei.com under Investor Information. The reconciliation of non-GAAP financial measures can also be found in the company's press release dated June 6, 2012.

With that said, I'd like to turn -- I'd like to introduce the management of Stewart Enterprises. On the line with us today, we have Tom Kitchen, our President and Chief Executive Officer; and Lew Derbes, our Chief Financial Officer.

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

Thomas M. Kitchen

Thank you, Martin. Good morning, and thank you for joining us on the call today. I'll offer a few opening comments, and then I'll turn the call over to Lew. He'll review the second quarter financial performance in more detail before we open up for some Q&A.

We believe the second quarter represents the company's strongest performance in 4 years, which is supported by experience in the highest quarterly revenue; gross profit and adjusted earnings per share in 4 years; producing impressive preneed funeral and cemetery property sales with increases in the second quarter of 18% and 10%, respectively, improving both our Funeral and Cemetery gross profit dollars and margins and generating strong year-to-date operating cash flow of $28.5 million.

For continuing operations during the second quarter of 2012, we reported a 30% increase in adjusted earnings per share to $0.13, compared to $0.10 for the same period of last year. Adjusted net earnings increased to $11.4 million for the first half of 2012 from $9.4 million for the first half of last year.

We're pleased with the top line performance and the ability to control operating expenses, which led to margin expansion for both the Funeral and Cemetery segments, especially encouraged with the strong performance of our Cemetery segment where we increased cemetery revenue by over $3 million or 6%, achieved a 40% improvement in cemetery gross profit and a 430 basis point improvement in cemetery gross margin. These results were due in part to double-digit increases of 10% in cemetery property sales compared to the second quarter of 2011 and 20% compared to the first quarter of this year. We believe this performance demonstrates that customers recognize the value of our products and services provided by dedicated employees who make this possible.

Overall, for the Funeral segment, while our funeral revenue was essentially flat, we improved our average revenue per funeral service and effectively controlled our expenses, resulting in an improvement in funeral gross profit dollars and margins compared to the same quarter of last year. Our preneed funeral sales increased 18% compared to the second quarter of 2011 and 27% compared to the first quarter of this year. In fact, for the first 6 months of 2012, we've had the best start to a fiscal year in preneed funeral and property sales in more than 5 years. We remain committed to preneed sales and believe the strong emphasis we place on preneed is important to the company's long-term potential and helps maintain and expand market share.

In addition, during the quarter and after a comprehensive evaluation to identify Best in Class sales practices, we announced the restructuring of our sales and operations, as well as a separate workforce reduction. Once completed, we expect the cumulative impact of these changes will result in approximately $10 million in total annual savings. More importantly, the changes provide the company the foundation for future success in expanding sales and profitability and delivering an improved customer experience for every family we serve.

We also continue to invest in our cremation inventory development projects, which have contributed to a nearly 30% improvement in our cemetery cremation sales for the first half of 2012 compared to the same period of last year. This highlights the early success of our ongoing cremation initiative.

And finally, during the quarter, our board increased our annual cash dividend again by 14% from $0.14 to $0.16 per share, which helped to return almost $6.5 million to our shareholders so far this year. Over the last 2.5 years, the board has increased our dividend by 60%, which reflects our commitment to returning capital to our shareholders through the payment of dividends, continued confidence in the company's financial condition and our ability to consistently generate strong positive cash flow.

And with that summary, I'll turn the call over to Lew.

Lewis J. Derbes

Thank you, Tom. Today, I'd like to provide some further insight on a few key areas for the quarter. First, I'll discuss the company's operating performance in a little more detail. Second, give you some additional information on the performance of our trust portfolio. And finally, discuss our cash flow.

As it relates to our operating performance during the second quarter, we generated $133 million in consolidated revenue, including $73 million in funeral and $60 million in cemetery. Overall, funeral revenue remained relatively flat with a $200,000 decline compared to the same period of last year, primarily as a result of a 2.7% decline in same-store funeral calls.

We believe this decline in funeral calls compares favorably with the overall market data that we monitor. The decline in calls was partially offset by a nearly 1% improvement in average revenue per funeral service and an 18% improvement in insurance commission revenue, primarily as a result of the significant increase in preneed funeral sales compared to the same period of last year. Though our funeral revenue was relatively flat for the quarter. As a result of our continuing focus on effectively controlling our cost, we realized a 3% increase in gross profit to $18.5 million, as well as a 70 basis point improvement in gross profit margin to 25.4%.

We are pleased with the 18% improvement in preneed funeral sales compared to last year. While the increase in these sales does not benefit us currently as revenue, the sales are deferred into our backlog and will be recognized in the future as the underlying contracts are performed.

Preneed sales are important to the company's long-term potential, and we believe it provides a strong indication of our market share.

The performance of our Cemetery segment was also strong during the quarter. We generated a 6% increase in cemetery revenue, a 40% improvement in cemetery gross profit and a 430 basis point improvement in cemetery gross profit margin. These results were obtained by selling $28 million of cemetery property, representing a 10% increase compared to the same quarter of last year, while improving our reserve for cancellations.

We also experienced a 22% improvement in revenue related to trust activities, primarily as a result of the positive trust performance during the second quarter. This $850,000 improvement was a significant contributor to the improved cemetery operating performance. We achieved these strong cemetery results despite having approximately $4 million in cemetery property sales that have not yet met the criteria to be recognized as revenue. These sales have been deferred into our backlog and will be recognized as revenue in the future. It is only a matter of time.

As Tom previously mentioned, during the quarter, we completed a comprehensive evaluation to identify Best in Class sales practices designed for future success in expanding sales production and profitability, while delivering an improved customer experience to each family that we serve. After completing this analysis, we announced the restructuring of our sales and operations, as well as a separate workforce reduction, resulting in a $2.5 million charge. Once completed, we expect the cumulative impact of these changes will result in approximately $10 million in total annual savings going forward.

Finally, our adjusted EBITDA increased more than 14% to $30 million for the second quarter of 2012 compared to $26.3 million last year. In regards to our trust portfolio, we are pleased with the 4% total return in both our preneed and perpetual care trusts for the quarter and the 15% and 16% total annual returns in our preneed and perpetual care trusts, respectively, over the last 3 years.

These returns are the results of the steps we have taken to continue to diversify our portfolio. Currently, nearly 25% of our portfolio is invested in asset classes which were not represented in our trust just 3 years ago, including REITs, high yields and MLP, among others.

Considering the overall volatility of the financial markets, we consider this to be a significant achievement and a very positive indication regarding our future performance. Throughout the first 6 months of the fiscal year, the fair market value of our trust portfolio has improved by $43 million. This bodes well for future revenue recognition associated with the undelivered preneed contracts in our backlog. We continuously evaluate our investment strategies to have an asset allocation that provides consistent returns with sufficient diversification.

And finally, as it relates to our cash flow, during the first 6 months of 2012, we generated $28.5 million in operating cash flow. Throughout the remainder of the fiscal year, we will continue to use our cash wisely where we can get the highest and best long-term results for our shareholders.

During the second quarter, we continue to repurchase our outstanding common stock in the open market. For the fiscal year, we repurchased 1.9 million shares for $11.6 million, resulting in a 5% decrease in the total -- in the number of total shares outstanding over the last 12 months. In total, over the last 7 years of our share repurchase program, we have bought back more than 26 million shares of our stock for $187 million, resulting in a 24% decrease in the number of total shares outstanding. In addition, over the past 4 years, we have reduced the face value of our outstanding debt by some 26% or $119 million.

We also plan to grow our base business through both internal initiatives, as well as strategic acquisitions. Our cremation initiative is another important component of our strategic plan. During the first half of 2012, we improved cremation sales to our cemetery customers by 30%. We have completed a total of 16 cremation projects and have over 30 additional projects either under construction, expected to begin construction in the near future or under feasibility review. During the first 6 months of 2012, we invested approximately $5 million in developing new cremation inventory. And as a result of the early success of these projects, we are planning to invest a total of approximately $12 million this fiscal year.

In addition, we still expect to pay nominal federal cash tax payments throughout the balance of this year. We continue to pursue additional tax planning strategies and are cautiously optimistic they may generate further cash tax savings in the future.

Even after considering the repurchase of stock, the payment of dividends, investment in our cremation initiative and acquisitions, we finished the second quarter with more than $62 million of cash and marketable securities on hand and have no amounts borrowed on our $150 million credit facility.

And finally, our leverage coverage ratio as measured on a net of cash basis, remains solid at 2.6x as of April 2012, which further attests to the strong financial condition of the company.

That concludes our prepared remarks. Sandra, we're now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from Robert Willoughby from Bank of America Merrill Lynch.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

I know you're not keen on giving forward guidance ever, but as you look at the cemetery experience, that's certainly not something we would model going forward, unless you see a real compelling reason to do that. That's always been kind of a lumpy business. Are we better kind of taking a more conservative approach over the next couple of quarters from a top-line perspective?

Thomas M. Kitchen

Bob, yes, I think with regard to the production on cemetery and even preneed funerals, those are exceptionally strong performances during the second quarter. And we're pleased with it. But our internal models would cut back on that and reduce it down to a growth that would be probably more sustainable in the mid-single-digit growth.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Okay, that's helpful. And if you -- you mentioned the preneed. It's been very strong for you all and for your larger competitor there as well. I mean, how much of this is industry, do you think? And how much of this is, hey, just throwing more sales reps at, better training, better practices?

Thomas M. Kitchen

Well, you really have 2 different factors that need to be considered. One is the preneed funeral experience as well as the cemetery sales. I think on the -- with regard to the preneed funeral, first and foremost, and it also applies with our -- with regard to our cemetery sales, we have a very talented sales force and they're dedicated to continuously improving the sales. But we also recognize that we've got great facilities with heritage, a lot of heritage that's built up over many, many years of serving the families that we serve. We also believe that our combo operations give us a significant competitive advantage. Approximately half of our cemeteries have a funeral home that are placed on the cemetery grounds, and we believe that is a significant competitive advantage. And then it's also a factor that relates to, I believe, the baby boomers, that while the baby boomers are still with us in large numbers, they are reaching an age where they need to consider what those end-of-life decisions have to be and that will bode well for preneed funeral, as well as cemetery property sales. Also with regard to, specifically, cemetery sales, we believe our new cremation gardens have been a real positive uplift to our cemetery sales production. And we have a number of projects under construction or recently completed that have been providing some uplift recently with regard to cemetery preneed property sales. So both of those, we believe, that there's a variety of factors that contribute to the success. We believe that we've got, right now, the right organizational structure for us to continue that success going forward in the year and into 2013 as well.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Is there any type of productivity metric per sales rep that you could speak to? Is one individual generating x more in future backlog for you than he was a year ago? I would assume that's the case.

Thomas M. Kitchen

In some cases, that is the case. Not something we could share specifically, but we track and monitor sales by type of sale, by region, by sales manager, location and sales counselor. And we have, for example, dashboards that we put in a place in conspicuous spots in each of our locations so everybody knows where they stand with regard to their production. They know what their goals and their targets are. Each year we set goals and targets that we believe will stretch goals and targets for them and are very pleased to report that the individuals are rising up to the occasion to achieve those targets.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

And lastly, did you break out much in the way of detail from the discontinued operation? What was that? And what kind of operating loss do we remove going forward from the numbers?

Thomas M. Kitchen

That discontinued operation was an e-commerce business that we explored a couple of years ago and for the last 18 months have been developing. It was an online sympathy gift business for the company. We launched it 1st of November of 2011. And while we were successful in some respects, we just didn't see the traction there, or we didn't see the -- enough positive signs for us to continue this. It would be a much longer term effort for us if we're going to be successful and get that to a profitable venture that would pay the returns that we really would want to see. So we made the hard decision to terminate that and to discontinue the operation. With regard to the ongoing cost, that probably, in the first 2 quarters of this year, we probably spent somewhere between $400,000 and $500,000, somewhere in that $400,000 to $450,000 of operating expenses related to it.

Operator

And the next question is from Clint Fendley from Davenport.

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

I wondered, any color on the types of expense control that contributed to the better-than-expected performance in the quarter and just any thoughts on how sustainable those cost controls might be for the remainder of the second half here?

Lewis J. Derbes

Clint, this is Lew. Several years ago, we established a continuous improvement department to evaluate all our procedures. We've done a lot of training and understanding of financials with our operational employees so that they can get a better understanding of what levers to pull and what drives the business. We have a continuing focus on it. We had certain costs that came in favorably for us this quarter. We will continue to have that department that focuses in on all those processes, and we'll continue to attempt to control our cost in any way possible.

Thomas M. Kitchen

And Clint, while we did not realize the benefit related to the reduction in force that we announced during the quarter, we do believe that, that reduction in force is going to have a positive impact going forward. And we announced, and as we cited in the script, that between the sales reorganization -- the sales and operations reorganization and the reduction in force, that on an annual run rate we would anticipate somewhere in the neighborhood of $10 million annually. And the final point on that, the investments in technology that Lew referred to has been able -- it's enabled us to reduce the headcount. Just checked our employment level a couple of weeks ago, and we are approximately 200 people below where we were, say, about 12 to 18 months ago. So the investments in technology that we've been able to make, the restructuring, those are all continuing to help us become, what I call, more productive. People are able to do more with the same amount of resources or less.

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

Any change on just the level of the restructuring benefit that you guys would expect to get in the third and fourth quarter then?

Thomas M. Kitchen

No, at this point in time, we've talked about the $10 million and we're comfortable with that on an annual run rate. The changes going through the operations and the sales right now are being implemented. And I believe when we disclosed the changes, indicated that it would take about 90 to 120 days for that to play out. So we're still going through that realignment process for both the operations and sales, and people are understanding better what their roles and responsibilities are going to be going forward. And that effort will take us through the third quarter. I'm not -- from a restructuring and realignment, I'm not counting on significant cost reductions in the third quarter. But I think once we get -- the dust settles on that realignment, I think that we'll be able to hit a stride and we'll be able to achieve the $10 million target.

Lewis J. Derbes

Clint, just to add, as we've discussed in that release, there were really 2 separate announcements. Tom's kind of hit on the sales and operations realignment and reorganization. The second part of it was related to the reduction in force. They were both estimated to be about $5 million. The sales and operations alignment is going to take some time. The reduction in force is something that we'd expect to show a little more quickly.

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

Understood, understood. And one more question here. On the $4 million in sales that were deferred into the backlog, just wondering when you would expect to meet the criteria to recognize that. If it might be in either the third or fourth quarter?

Lewis J. Derbes

Clint, we would expect that to turn around in the near future. The $4 million, if you recall, if we go back to the first quarter, we had some significant sales top-line production that didn't meet the revenue recognition criteria. And it was really split into 2 categories. One is those that we sold preconstruction, where we sold the mausoleum crypt or a space before the mausoleum had been constructed. We have some significant ongoing construction projects now that will complete on the balance of the year and we'd expect that portion to be recognized as revenue in the near future. The balance is related to the payment threshold. We discussed in the last quarter, we kind of use a bright line of 10% payment. Those, as they're financed over a long period, as we receive payments over the next couple of quarters, we would expect that to be recognized. Now while it's $4 million, I don't want to make it seem that, well, everything we sold in the first quarter has still not been recognized as revenue. This is a very normal procedure. We have it every quarter. Every quarter, we have sales of either preconstruction sales or we have sales where we have a down payment that's less than the 10% threshold. So some are coming out of the bucket and -- from being deferred and being recognized as revenue today, while we're adding others. I do want to reemphasize that we -- every one of our property sales, there's a -- the minimum down payment percentage is 5%. We would never take less than that. So it only will take 3 or 4 months or so for that 5% down payment under standard amortization schedules to meet the revenue recognition criteria. We look at that 4 million deferral as a backlog for us on property sales that's going to be recognized for us in the future. It's a positive, if you will. Yes, we'd like every sale to meet the revenue recognition criteria. But we have a backlog that we simply collect payments on or we make constructions that's going to be recognized as revenue here in the near future.

Operator

[Operator Instructions] And the next question is from Jamie Clement from Sidoti & Company.

James Clement - Sidoti & Company, LLC

Tom or Lew, was wondering if you could just give us your updated thoughts on the 2014s and the 2016s? I know it's a ways off and you all have a ton of flexibility. Rates are obviously low. I mean, you could roll that into your credit facility if you wanted to but, when the time comes. But can you give us your thoughts on when you might think about addressing those?

Lewis J. Derbes

Jamie, this is Lew. We look at our capital structure very frequently. We have about $85 million to $86 million maturing in '14 and about $40 million to $45 million in '16. At this juncture, there are attractive rates for us, an average of 3.25% on those 2 instruments. We have the liquidity on the balance sheet. We have the access to the revolver. That's something we give consideration to. When we were a little more active in retiring some of that outstanding debt, it was really related to, let's say, the dislocation in the market where we had an opportunity because they were trading at a significant discount, and so we were able to take the debt out. We took almost half of the debt, or about $120 million to $125 million of the convertible bonds out at a $26.5 million discount. If you look at the pricing today, both of those instruments are trading at or near par, and so that opportunity is not there. We do evaluate it. We'll consider it going forward. But if not, it's something that we would have the ability to take care of at its maturity.

James Clement - Sidoti & Company, LLC

Okay, that's very fair. Tom, was curious for your general thoughts. I believe it was a 2.7% same-store funeral services decline. You all in your press release said that, according to your data, you think that was probably better than the marketplace. I would agree with that. Can you give us some kind of...

Thomas M. Kitchen

Well, for example, one of the things that we're doing is much more of an outreach program at our operations and getting our managers much more involved, getting to know the community influences that we described that are important to developing a relationship and to ultimately make, if a death occurs, make people in the community think of our facility's name when that happens. So that -- we also do presentations in the community, in each community, to help -- primarily talk about the benefits of a prearrangement. We know there's some corollary or some spill-over benefit to creating some positive name recognition for our operations, our funeral homes in the markets that we serve. We also believe the combination operation are very competitive -- gives us a competitive advantage. And then, finally, Jamie, we have been focused on driving volume and have been moderating some of the price increases that sometimes people are resorting to. So improvement in quality of the experience is important for us. The customer is number one. In fact, when we did the reorganization, the -- my communications with all of our employees and management group was we're doing this for 3 reasons: This reorganization was done primarily with our customers in mind. We need to give them the best possible experience that we can, and I just felt that the previous organizational alignment wasn't giving us that optimal customer experience. Secondly, we need to hire, train and coach and mentor the employees to provide that right customer experience. And then finally, we need to operate the business in a profitable way that's sustainable for us to generate positive cash flow, as well as earnings. So it is a continuous effort on our part to emphasize the importance of all of our management people in the communities to establish the right relationships with the influences in the community that would help us drive some volume and business to our locations.

Operator

And the next question will be from Richard Innes from JC Clark.

Dick Innes - JC Clark Ltd.

Two questions. The first one is on the restructuring program. Of the $10 million savings on an annual run basis, was there any impact in Q2?

Lewis J. Derbes

The announcement came out April, mid-April, okay? We had some transition, so we don't -- we didn't anticipate or envision any impact happening in the second quarter. We -- Tom talked a second ago that the sales and operational restructuring was going to take course over the next 60 to 120 days. So that will really begin to impact in the third quarter and as you get into the fourth, but it's going to take some time for that to kind of transition into the new structure. The announcement, as related to the reduction in force, may have had a small impact in the second quarter, but that'll be something that you can count on going forward in the -- for the balance of the year.

Dick Innes - JC Clark Ltd.

Okay. Second question is on acquisitions. I don't think you've made any acquisitions so far this year. Is that strategic? How does the pipeline look? Could you give us a little bit of color on that?

Thomas M. Kitchen

Yes, Dick, we did do one small acquisition. It was a standalone funeral business. But we have had a very active pipeline of opportunities for us to evaluate, and we have submitted a number of proposals and offers to owners and operators of funeral homes and cemeteries. What we see in the marketplace for the properties that we've had an interest in, we see price expectations by the owners that are north of what we would consider to be economic and what we're willing to pay. This has been a recurring issue for the last several quarters, that we're following a disciplined pricing structure, at least a disciplined way of valuing the businesses, and we are going to stretch, in some cases, for businesses that warrant us to stretch and others we're not. In some of the proposals submitted during the second quarter, I could tell you that I thought 2 or 3 of those were fully priced proposals that were stretched farther than I would have liked, and we still didn't get the businesses. So we'll continue that, but we're just not going to get sucked into this bidding war that sometimes seems to erupt on properties, and where we're paying numbers that are 50% and 60% higher than what we think the business is really worth.

Operator

The last question will be from Nicholas Jansen from Raymond James.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

Two questions. First on that $4 million deferral on the construction. What's the normal quarter to think about it? I know you said it's kind of a normal process. And maybe just think about it, in any given quarter, how much have you kind of have in your backlog that you expect to recognize over the next 2 quarters?

Lewis J. Derbes

I mean, our objective, Nicholas, would be we're adding to the backlog and then we're taking out because it's meeting the revenue recognition criteria every period. What I'm describing as normal is it's very normal for us to sell cemetery property preconstruction or to sell where we have less than a 10% down payment, but we don't go below 5%, okay? So we're always adding property sales to that bucket that will be deferred. Our objective is, if we could add and then have the same number of contracts, meet the criteria to be recognized, that would be a perfect world for us. It's positive that we have a backlog. The fact that it was $4 million, we thought, beared [ph] mention because our property sales have been so high, but it hasn't been recognized as revenue in this period. That's why we wanted to put an emphasis on the significant amount that had been deferred. For example, the $4 million number that I had referred to is the balance for the year. The activity during the second quarter, it was almost flat. The amount of sales that didn't meet the revenue recognition criteria that got deferred almost equaled exactly the amount that were sold previous to this quarter that did meet the criteria that came out. So it was almost a wash for the quarter. But we have a backlog that we sold this fiscal year that we would expect to recognize over the balance of the fiscal year.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

That's very helpful. And then lastly on kind of leverage and capital deployment. It seems like you’re at 2.6, if I heard you correctly. I guess, what are your near-term priorities in terms of buybacks, dividend increases, M&A? It seems like, if I just heard you correctly, that some of the pricing on the M&A is a little bit more higher than what you like, and with more than $60 billion of -- $60 million of cash on the balance sheet, now I wouldn't be surprised if you guys picked up speed on the share buybacks. Any help on that will be great.

Thomas M. Kitchen

Sure. Well, in terms of capital deployment, the board feels it's important for us to use our capital to return to shareholders in the event that we don't have a better alternative use for it within the business. I think, first, we would like to grow the business. We think that's in the best interest of our shareholders. And we'll do that organically, as well as we'll try to do it through acquisitions. But if the acquisitions are not going to be priced at levels that we consider to be attractive, and our liquidity needs are being addressed through our internal generation of cash flow, then we'll continue to return that capital to the shareholders through dividends, as well as through share buyback. We have got approximately $30 million on the share repurchase remaining and we plan to be active because we believe that the price of what the stock has been trading, it's an attractive acquisition, or it's an attractive purchase for us. So we'll be, in the absence of acquisitions, we will be continuing to invest internally in our cremation properties and other businesses to drive our sales and cash flow. And then we'll take the remainder and we'll use it for purposes of dividends, as well as share repurchases.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

And do you guys have a set target optimal leverage that you'd like to be operating in so we can just compare it to where it is today?

Thomas M. Kitchen

The -- we're comfortable with where it is, but we also would be comfortable at a higher level. We think that we've been -- we operated very effectively at 4x EBITDA. If we saw the right acquisition opportunity, you probably would see us willing to take on some leverage in order for us to accomplish that and we'd be very comfortable. The cash flow aspects of this business is such that it can stand more leverage than where we currently are at 2.6, and we plan on using that to our advantage to make an acquisition where it's appropriate.

Operator

Thank you. I will now turn the call over to Tom Kitchen for closing remarks.

Thomas M. Kitchen

Thank you, and thanks for joining us today. In summary, our strong second quarter results and the recent changes in our organization structure cause us to give us optimism about the future. We remain committed to our strategic plan, continue to emphasize the need to provide exceptional customer service, invest in our people, facilities and technology to help grow our base business and effectively control our expenses, while seeking additional growth through opportunistic acquisitions. We'll utilize our strong cash flow to the advantage of our shareholders to periodically assess the proper capital deployment, including dividends, share repurchase and debt retirement and acquisitions. Off to a good start this year. Look forward to further success. We believe our actions are moving the company in the right direction. And finally, I wish to thank and express my gratitude for the hard work of all of our team members. Their contributions and efforts are the principal reason for the -- our success. I'd like to thank you all for joining us today and appreciate your interest and support of Stewart Enterprises. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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Source: Stewart Enterprises Management Discusses Q2 2012 Results - Earnings Call Transcript
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