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Stewart Enterprises, Inc. (NASDAQ:STEI)

F3Q08 Earnings Call

September 10, 2008 11:00 am ET

Executives

Leslie Loyet – Financial Relations Board

Thomas Crawford – President and CEO

Thomas Kitchen – Senior Executive VP and CFO

Analysts

Jamie Clement – Sidoti & Company

Analyst for Clint Fendley – Davenport & Company

Mike Scarangella – Merrill Lynch

Richard Guiness – JC Clark Limited

Colin Stewart – JC Clark Limited

[Maharth Kapor] – Credit Suisse

Operator

Welcome to today’s Stewart Enterprises, Inc. third quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the call over to Leslie Loyet of the Financial Relations Board.

Leslie Loyet

On behalf of Stewart Enterprises, I’d like to welcome everyone. By now you should’ve all received a copy of the press release that was issued yesterday. If not, please call Liz Dolezal at 312-640-6711 and she will send one to you immediately, or feel free to visit Stewart’s website at www.stewartenterprises.com for a copy. Management will provide an overview of the third quarter and then we’ll open the call up 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 time of this call, and the company assumes no obligation to update any statements, including forward-looking statements made during this call. Statements 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, 2007. The company uses EBITDA and free cash flow as financial measures. These financial measures are not in accordance with the accounting principals 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 financial measures can be found on the company’s website, again, at stewartenterprises.com under Investor Information, Reconciliation of non-GAAP financial measures and can also be found in the company’s press release dated September 9, 2008.

With that said, I’d like to introduce management. With us joining today are 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 over to Tom Crawford.

Thomas Crawford

Leslie, thank you very much and on behalf of all the employees of Stewart Enterprises, we’re delighted to have you on the call today and thank you for your interest in the company. All of you should receive the, should’ve received the press release and filing last evening with relatively detailed information, both financial and operating performance for the company, so Tom and I are going to try today not to replicate what you’ve already read and so hopefully our comments will be relatively streamlined and to the point.

First, let me say that were generally pleased with the quarter from an overall company standpoint, some parts obviously were better than others, but we are pleased with the results. We’re most pleased with the progression of our financial measures from growth in revenue to growth in net income and earnings per share.

As you have read, revenue increased by about 2%, which is a function of a 1% decline in volume at an overall growth in revenue per event at 3.5% with a very stable cremation mix. Early we would have preferred more growth, but given the state of the economy, the consumer’s mindset, and some of the distractions we’ve been working with, it’s a relatively good growth for the quarter. We were pleased that the 2% growth in revenue generated a 6% increase in growth profit, a 9% increase in operating earnings, a 12% increase in net income and coupled with our share buyback at 25% growth in earnings per share to $0.10 from $0.08.

Additionally, we’re very pleased that both funeral and cemetery operations grew gross margin dollars at a faster rate than revenue growth, which also translates into increases in margin percents of 50 and 90 basis points respectively. While the margin progression for the quarter was relatively aggressive, it is consistent with what we’re trying to achieve with our best in class initiative and our continuous improvement mindset. I sound like a broken record, but even a low growth industry, we believe we have sufficient opportunity to improve earnings and cash flow by applying proven management practices that are applied in other industries to our own. We’re pleased with how the organization has been [inaudible] initiatives and believe the results of the quarter underscore that commitment.

However, we also believe that we have much more work to do in fully capitalizing on all the benefits of the initiative. We’re encouraged at this point of time, and we’re also quite excited with the possibilities as we apply the tools to discover how much further we can to improve in our business. And I will tell you, philosophically what we’ve tried to do with this is that we want people identifying where we haven’t performed as well as we can. We want to reward that because then we can fix it, and that’s what we’re trying to incorporate. So when we find something that, let me call it just a little bit goofy from our standpoint, we really quite excited because that’s something that we can improve on and further increase the value of our business.

We’re also pleased for the quarter with our strong cash flow, as I said for the quarter, and also on a year to date basis. So with that, I’m going to turn the time over to Tom to review more additional information, performance measures for the quarter.

Thomas Kitchen

As Tom mentioned, by now all of you should’ve received a copy of the earnings release and the 10-Q for the period ended July 31, 2008. I’m not going to reiterate the topics discussed in the filing, but I would like to discuss several items of interest. I’ll begin by giving you some insight into the company’s cash flow for both the quarter and nine months.

For the quarter, operations provided cash of $23.9 million compared to $22.3 million for the same period of last year. This $1.6 million increase in operating cash flow is due in part to a $2.3 million reduction in net payments made during the third quarter of 2008. We paid $3.4 million in tax payments in the third quarter of ’07 compared to $1.1 million in the third quarter of ’08. The year-to-date period, our operations provided cash of $52.3 million compared to $54.8 million for the same period of last year.

The decrease is due primarily to Hurricane Katrina insurance proceeds received in the prior year. We received $3.2 million of this interruption insurance proceeds and $1.5 million of other insurance proceeds net of expenses in fiscal year ’07. In addition, we paid $9 million in net tax payments in the first nine months of ’07 compared to $11.8 million in the first nine months of ’08.

In view of our strong cash flow, we paid $7.1 million in dividends and repurchased $48.4 million or 6.6 million shares of our common stock at an average price of $7.33 for the nine months ended July 31. Since June of ’07 in the aggregate, we have repurchased 14.3 million shares of common stock for some $112.6 million. In June of ’08, the company announced an additional $25 million increase in the current stock repurchase program, leaving the company with some $26.6 million available under the current program. Ever since the announcement of the SEI did, we have not been active in repurchasing our common stock.

In regards to our trust performance, trust investment performance, our preneed funeral and cemetery merchandise trust investments along with our cemetery perpetual care trust investments continue to be impacted by the recent decline in market value to a broad-base decline in the overall financial markets. The financial impact from this is not recognized until the contract they relate to have actually performed. These funeral and cemetery contracts are inherently long-term and in some cases will not mature for ten or more years.

Consequently, the company has an opportunity with improved portfolio management in future periods to mitigate the effects of short-term market fluctuations. Therefore, it is more significant to focus on the annual returns over a longer period of time, which gives a better picture of the financial performance for our portfolio. In this regard, our five-year total annual returns, including the third quarter of ’08, were 4.2% and 3.5% for the funeral and cemetery merchandise and perpetual care trust funds respectively.

Turning now to our income taxes for the third quarter, our effective tax rate for continuing ops was 37% compared to 31.9% for the same period of ’07. The reduced rate in the prior year quarter is primarily due to an $800,000 tax benefit attributable to the completion of an audit by the Commonwealth of Puerto Rico for the tax periods ’99 through 2001. Without this tax benefit, the effective tax rate for the third quarter of ’07 would’ve been 38.5%.

For the first nine months of 2008, our effective tax rate for continuing operations was 37% compared to 29.4% for the same period of ’07. The reduced rate was primarily due to a $3.4 million tax benefit resulting from the utilization of a loss carry-forward and the $800 million Puerto Rican tax benefit I just mentioned. Excluding these tax benefits, the effective tax rate for the first nine months of ’07 would’ve been 38.1%, which is more comparable to the fiscal 2008 tax rate.

We’ve been advised that the Congressional Joint Committee on Taxation has approved our requested refund of $10.4 million related to the company’s amended Federal income tax returns for the years ended 1997 through 2000 and 2002 through 2004. In addition, when paid, we will receive approximately $2 million in interest payments related to the refund.

Also, the company filed with the IRS an application to change the tax accounting method, and this changed resulted in an income tax benefit of $8.9 million, resulting in a corresponding decrease of $4.5 million to our July 15 tax payments. We subsequently receive the remaining $4.4 million in August.

And finally, for the third quarter, EBITDA increased $1.9 million or 7% from the $25.8 million in 2007 to $27.7 million in 2008 due in part to the improved performance in both the funeral and cemetery segments.

Now, I’ll turn the call back over to Tom Crawford.

Thomas Crawford

In summary, I’d just like to make four points. First, given where some of our facilities and properties are located, we are impacted by the fury of Mother Nature, especially at this time of year. We were impacted by Fay on the East Coast and Hurricane Gustav in Louisiana, and we’re still waiting to see where Hurricane Ike decides to travel. With that, I’m please to say that we had relatively minimal damage from Gustav to property in Louisiana and our people came away relatively inconvenienced but unscathed.

We’re pleased with the preparation of the organization to make sure that after Katrina, the company could handle any weather related disaster without disruption or impact to the company. We have very dedicated employees. We had an infinite management team that relocated together into Florida to make sure that they could continue to guide the day-to-day operations of the company in the event of a disaster, and we appreciate all that they did. We also had a regional vice president and a sales executive in New Orleans that did not evacuate; but the minute the weather was clear, they manned chainsaws, which I don’t think is in their job description to get the property up and running as quickly as possible.

I should also say that we appreciate the support of shareholders. We’ve had many emails coming in to make sure we’re okay, and we appreciate that. One shareholder was worthy to note that one night his three-year-old daughter was praying and prayed on behalf of the wet people that we might be safe. On behalf of all the wet and for those who were without power, maybe some of the sweaty people as well, we thank everybody for your support.

The second item is in relation to SEI, as reported the special committee has hired Goldman Sachs and Skadden, Arps to do get the best help possible in examining the wide range of alternatives to maximize shareholder value. The process is clearly underway and the special committee of the Board is faithfully carrying out their responsibilities, and that’s a very active process right now. There really is not much more we can say about it at this point in time, but the process is well underway.

The third point is that even with all the things we’ve got going on, management is committing to executing our strategic framework, which I’ve mentioned before in prior conference calls. Our framework is based on three components, first achieving the best in class practice to achieve best in class results. That consists of implicating our core values throughout the company. It is absolutely measurement of critical business processes, it’s utilizing our dashboard system that is unique within our company, our analytical tools and our performance solutions all nestled within the dashboard system. It is experimentation and sharing of the best results into the best practices throughout the company. It is a continuous improvement mindset to eliminate waste and inefficiency. I should also say that during the quarter, we organized a continuous improvement department and staff that to fully capitalize on the investments that were made with outside consultants during the quarter, and we’re quite pleased and excited about the results that had taken and will take in the future.

Second, the second component is pursuing new invention where we create opportunities to further grow this business by unlocking new value from the existing assets and finally to use our cash generation capability to invest in the best in class acquisitions and to support new development opportunities and also, as demonstrated, to use our cash and our share repurchase program.

Right now, we are clearly entrenched in minding the value from the best in class initiative, but I will tell you we’re also turning attention to the new invention opportunities which we believe have exciting future potential.

The last point that I want to make is that while we never will be satisfied, I will tell you that we are pleased with the performance for the quarter.

So with that, we will now open the mike up to you for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take the first question from Jamie Clement with Sidoti & Company.

Jamie Clement – Sidoti & Company

Tom, can you give us a little bit more color on the best in class initiatives that you brought to the table? Over the last couple of quarters, where have been the early signs of success; and then over the next year or two, what are the next areas that you expect to see some improvements on, and then the Part B of that question is: I’m just curious, like what are the metrics that you were looking at internally to be able to kind of measure your success in this area?

Thomas Crawford

Well in a nutshell, where we believe we’ve seen some of the benefits right now, we can break that down into our customer interaction with how we deal with our customers, how we present, what is the process that we use, and also in our labor side to manage our field labor and also looking at our G&A as well in the home office. Just a couple of parenthetic or just anecdotal stories is that one of our locations just doing basic labor analysis,

I’m trying to think if I can make it more complex, but I really can’t, and it’s just utilizing the tools that we have looking at our labor comparing two facilities of like size, finding that one had eight people more than the other. The action was taken to reduce that headcount and manage to the volume and we found that the volume increased and by being more efficient in how we structure work, looking at the work, we’re able to take the volume increase without any additional labor after the reduction was made. Now that’s just an example of what we’re trying to get at in managing our labor, looking at comparable operations and really looking at a labor as a percent but also on a per event basis. That’s one of our measures as well.

The second aspect, as I mentioned, is how we present to our families. We see that in our increases in our average revenue. We also think we have to be careful in raising our prices. We will raise our prices as commodity prices or costs go up. At the same time, we believe there’s a huge opportunity just be improving our process with families when they come in, both in the funeral and cemetery side. We have empirical data that we’ve looked at, both numeric and others that have given us great hope that we can significantly improve the process and the results without having to go in and jack prices up. So we’re very conscientious of that.

As I mentioned earlier in the call, I will tell you one of the executives called me when we had one piece of Danish says, ‘You’re probably going to fire me when you hear this, but here’s what we’ve done.” My comment was, “Are you kidding? I couldn’t be more excited. The hair on the back of my neck is standing up with what we’ve learned about flaws in our process, and that’s what we’re trying to get at. It’s not much more complex than that. It’s process management. It’s trying to take it from an art. This is a very service oriented business, no two consumers behave the same way. We’ve got 5,000 people in our organization. They’re not going to behave the same way, but we’re trying to get it into without… We want people to be creative and expansive, but we also want to take the things that have worked well. So those are two examples.

But going forward, again, we really believe that the opportunities are on the presentation side with the family and just improving that process. We’re only beginning to scratch the surface. Our labor, we will continue to manage that. We have benchmarks that we’ve looked at with other companies and we can see where they do a much better job than we do, and that’s given us at least a vision of where we need to go. So it’s managing our labor also in our home office. We have processes from all the paperwork that we do and the handling of paper. Clearly, we have huge opportunities. That’s why we spend a lot time with consultants, and we’ve organized our department to focus on all those handoffs and eliminating the double and triple handling that we do and doing it right the first time. So we think that’s going to have an impact on our labor side, both home office and field as well.

Again, what we try to do in our dashboards is we simply tried to mimic, making it relatively simple with ten measures for our people in the field from revenue down to cash flow, without saying cash flow, without saying anything, we tried to put those in measures in place so you can see graphically where they are at any point in time and then that’s an opportunity to ask the why questions, which is what we’re pursuing. Additionally, we have invested heavily in technology. When you look at a lot of our costs in IT and our continuous improvement, we’ve invested in heavily through the years and those investments are going to start paying off which will help us once again reduce the number of handoffs and it will bring us more into the 21st Century on technology and how we do things. So those benefits we think will start to rebuild us as well.

Operator

I’ll take the next question from Analyst for Clint Fendley with Davenport.

Analyst for Clint Fendley – Davenport & Company

I was wondering on the pre-need funeral and cemetery sales, it’s been a little lumpy over the past couple quarters. Could you talk about, and is there some reason behind that or is that reflection of the inherent fluctuations within the business?

Thomas Crawford

Well on the pre-need sales, I’m assuming you’re talking about funeral and preneed cemetery sales as well.

Analyst for Clint Fendley – Davenport & Company

Yes, sir.

Thomas Crawford

On the pre-need funeral, we had a 5% plus increase for the quarter, which we felt was very good. We’ve struggled on the cemetery side this year. That’s always been one of our strengths. Actually we had a strong year the year before as well, so that’s a very strong part of our business. This industry is recession resistant, but it is not recession proof, and it’s impacted by the general economy, and that’s what we’ve seen.

In some of our markets, as we monitor, I will tell you: We’ve seen some of the people that we contend with have been taken some dramatic actions to spur sales as far as their terms and their discounts. I will tell you, we’ve resisted those. We’ve asked our people to try and be better, and we can always do the knee jerk reaction of reducing and discounting and expanding out no payments forever, but we’ve tried to resist that. It doesn’t mean we won’t be successful at doing that forever. We have to match up with the marketplaces that we’re in, but we are trying to push our people to do everything they can do on their own before we finally give in and revert to that. But, again, you are getting people. With the economy we’re in right now, buying property from a premium standpoint, you can’t hold off on that. That’s the decision I might make tomorrow or next week. It’s not as critical. At-need, you have to do something here and now, and that’s the beauty of this business is you can’t hide from that.

On the premium side, we are impacted by the economy and we think this quarter was actually probably relatively good versus what we’ve seen for the rest of the year.

Analyst for Clint Fendley – Davenport & Company

On the volume declines, could you help us break that out a little bit maybe between just the current environment, death rate environment in between the pricing actions that you have taken and where the larger impact is coming with the year-over-year volume declines?

Thomas Crawford

Well if you look at all of our regions, they vary. If we had one pattern, it would be much easier to go in and fix that. But we see regions that are up; we see that regions that are down. We see that they’re up last quarter; they’re down this quarter, and that is one of the things about this industry is it does vary. Year-to-year, the trend is probably pretty good and it hits with relative accuracy. But what I’ve seen in my experience here and in other places is that you will get those gyrations from month-to-month from quarter-to-quarter. But overall, this quarter we went down a little bit, which we don’t like. Again, the data that we monitor from a market share standpoint, it’s not absolute; it’s not precise, but we still feel like overall for the year we’re plus to the market relative to… Well, I should say just say relative to the market conditions.

Analyst for Clint Fendley – Davenport & Company

So would it be fair to say though that the pricing actions you have taken in cremation and traditional services have eliminated certain number of customers or contributed at least to some of those declines?

Thomas Crawford

No, I don’t think we have any empirical data on that. As a matter of fact, we’ve been… If there’s something that we have done that’s really lumpy, if I can use that term, I think you used that earlier, is that we can do a much better job in how we manage our price adjustments through the year. That’s one of the things that we learned in the first quarter and impact us in the first and into the second. So that’s good learning from our standpoint how we can improve on that. As I mentioned earlier, we will raise our prices, but we have to be very careful about that. We like volume. We like people coming into our doors because we think that helps us from some of the other things that we’re thinking about downstream as well. So we like people in our locations.

The low-end part of the marketing information is we’re not going to reach those consumers anyhow. The low end, the very low end information, I’d be surprised if they came into our location in all honesty. So our information average is we’re targeting a different group of people from the very low end. As I mentioned, we’re trying to make sure our present patient is all that it can be. We can jack our prices up, but we are resistant to do that. We think there’s huge opportunity, a better opportunity and much better way of doing it if we perfect how we deal with our customers.

Like I said, we’ve got enough evidence. On the one hand, we slap our foreheads of what we see, but the other hand we get really quite enthused because of what we’re learning. So for us, we think that’s a much better way to go and we have no evidence that we’re doing is what’s creating a decline for the month. Again, you’ve got information. We’ve got a very stable cremation mix for this quarter. I mean it actually dropped by a tenth of a percent. But cremation continues to increase; it’s not going to go away. It will continue to rise. So in our markets, we’ve been relatively stable. But overall, you’ve got a cremation rate that is not going to away, and our job is to make sure we are giving those families all the options they have in front of them, and that’s what we haven’t done a good job at. That’s what we’re striving to improve.

Analyst for Clint Fendley – Davenport & Company

Finally, just could you update us, am I correct in remembering that there should be some marginal benefit from continued cemetery construction projects in the fourth quarter this year?

Thomas Crawford

Yes, we should. Our backlog has remained the same. We had a good quarter as far as putting the construction projects through. Our backlog remains the same, so we’re not cleaning out the cover. So we feel good about that and we continue to emphasize that construction part.

Operator

We’ll go next to Mike Scarangella with Merrill Lynch.

Mike Scarangella – Merrill Lynch

I just had some follow-up questions around cremation. You mentioned that your mix was stable and actually down a little bit this quarter. If my data’s right, it’s been really in this 39% to 40% area for about six or seven quarters. So what do you attribute that? Would you say that’s partly due to where you’re geography, your geographic footprint, or is that something that you are doing consciously at the sales level to shift people from cremation to more full-service packages?

Thomas Crawford

You know what; I wish we could say we’re that bright and smart that we’re shifting people, but I can’t. The reality is: I don’t know that you really shift people. If they have their mind made up on cremation, I don’t believe they’re going to shift. I think any time you try and talk them out of that, you’re doing them a real disservice. It’s got to be their own free will and choice. Our obligation is to make sure that they are fully informed and that we just don’t bring past paradigms and past mindsets into play when we’re dealing with the family.

Now where we operate, we are already in areas that are relatively, I don’t want to call them saturated. That’s not the right word, but they’ve been advanced in cremation for some time. So when you look at the rate of the growth, they may be slowing to a degree. But I will tell you in some parts of the operations we’ve had several regions where the cremation rate has been low, actually bump quite a bit. So we have a mix of cremation on the rise in the low cremation areas. Plus we are today, I think we’re in Florida and California and you have cremation rates, so it’s the antithesis of being isotonic to the base. It’s just we’re relatively experienced there, so that’s why our rate may be slower than others.

Mike Scarangella – Merrill Lynch

Do you get the sense that the challenge in economic times are driving more preference towards or cremation or you think cremation is for non-economic reasons still a religious cultural reasons, et cetera?

Thomas Crawford

Well the data that we have says that it’s not economic as the first pass. It doesn’t mean that that doesn’t apply at all. But what you have in these kind of situations, I mean families are stressed without a question. Just pick up the paper, what you read? Families are looking for different ways to economize and look at what’s happened to the drive-in in the United States as a good indicator. I don’t think we’re immuned from that. I think families will look at that and they’ll start making trade-offs. So whether that shifts families into cremation, more cremation, it might; I cannot tell you what degree but right now from the data that we have, the information we have is that it is conscious choice and it’s because people may not find the same value that there was in a full service traditional funeral and so the offer cremation. But, again, the people who offer cremation typically are the better-educated higher income level people that we see. If you believe that, which I do, it says that because the economics are tighter that does not necessarily mean that people shift over to cremation.

Mike Scarangella – Merrill Lynch

I know you saw an increase in your cremation average, but can you give us what that average is in dollar terms at the end of the quarter?

Thomas Crawford

That’s one we tend not to, I don’t think we share that. We’ll tell you: Rates have changed, but absolutes we won’t. I will tell you that we have a cremation average.

Mike Scarangella – Merrill Lynch

Can you tell me if starts with a one, two, or a three?

Thomas Crawford

Somewhere between one and the three; how’s that? You are very persistent.

Mike Scarangella – Merrill Lynch

The last one will be easier, I think. You mentioned in the Q that you’re talking about extending your credit facility, any big changes we should anticipate there. Will you change the size? Of course, if you can comment on pricing change, that’d be helpful, but I imagine you probably can’t say anything about pricing yet.

Thomas Kitchen

Mike, we’re not anticipating the size of that credit facility. At this point in time, we did ’09 event.

Operator

We’ll go next to Richard Guiness with JC Clark Limited.

Richard Guiness – JC Clark Limited

Question with respect to revenue per call on funeral, which up 3.5% in the quarter, which is very encouraging, versus the 1.6% you had in the first half. Based on earlier comments, I guess that’s not driven by pricing. What have you done to make that happen?

Thomas Crawford

We did adjust prices. That’s one of the things that I’d think I give us a very low grade on for the first part of the year is that we were slow and we were a little bit inconsistent and that’s just part of the process that we have to improve on and we will do that. So we did adjust prices. What we are really focusing on is making a much better - - how we deal with the family and given them something more is what’s going to be bring them back, and we have some organizational changes to further drive that and that we had focused all of our training within the company under one area. That may not seem like a big deal, but we had parsed out in end plus one different places. Now we brought into one area with a superb individual leading that and his obligation and opportunity will be focused very much on our locations and working with customers and getting a consistent training program to further enhance the experience with our customers. That’s one of the things that we’ve highlighted now and into the future is enriching that customer experience as much as you can given the situation.

Richard Guiness – JC Clark Limited

Now the calls in the first half were up 2.6%, then in the third quarter they were down 1.2%. Do you think of any of that is related to the price increases, that’s a trade off there?

Thomas Crawford

No, I don’t believe that’s the case, no.

Richard Guiness – JC Clark Limited

With respect to the Katrina insurance litigation, what’s the upside/downside here in terms of dollars?

Thomas Kitchen

Dick, the upside is that we have filed a claim for the damages that we believe that we’re entitled to and there’s probably maybe about $20 million on the table. I think that we’ve justified that we have incurred about $45 million worth of damages and approximately $25 million has been reimbursed and that’s kind of plus or minus $1 or $2 million of being accurate. So there’s our $20 million on the upside. Downside, we’ve got litigation cost. We feel we have merit to the claims. We’re going through the discovery and deposition process. The trial is set for later in the calendar year. I believe it’s in the December timeframe, always subject to change, but nevertheless that’s what the current schedule calls for, and we’re confident in our position. So we’ll see and look forward to getting the thing litigated and getting it behind us and putting it to bed once and for all so we can get on to other things. But there is some potential for upside in the even that we’re successful.

Colin Stewart – JC Clark Limited

It’s Colin Steward with Dick here. I just had a couple questions on the trust funds. Have there been any changes to the equity fixed income proportional weightings in the trust funds? I know it’s something that the Board discusses on an ongoing basis and given that your five-year returns have been sort of it in that 3% to 4% range. Is there any contemplation that that equity weighting will be reassessed going forward or how do you sort of view that in the context of today’s markets?

Thomas Kitchen

Colin, we have looked at the asset allocation and the equity weightings and have been taking steps over the last couple years to reduce that and believe we’ve been successful in doing that. Although using the benefit of hindsight, we certainly would’ve moved more aggressively approximately a year ago to take some steps to reduce our exposure with regard to equities. But we do look currently every period at the asset allocation and we’ll continue to do that.

Might mention that our performance for the current quarter was let’s say adversely impacted by part of our investment strategy which has been to invest in preferred stocks because based on early studies, we believe the preferred stocks offered us an opportunity for yield and they behaved much like a fixed income security. All the studies that we had before we got into that strategy a few years ago gave us that support. I think in the last year that’s not quite as true because a lot of the preferred stocks issued by financial institutions, financial institutions have been along the worse hit and consequently the market value of those preferred stocks was dropped disproportionate to what the overall market has been.

So the performance in the current period has been exacerbated more because of the dependence upon the preferred stocks which over the past few years has been very successful for us but in the last year has not been.

Colin Stewart – JC Clark Limited

What’s the overall approximately across your trust funds, what would the overall equity weighting be today?

Thomas Kitchen

It’s about 60% - 63%.

Colin Stewart – JC Clark Limited

I don’t know if you disclose this, but approximately what would your exposure within that equity portfolio be to the financial sector?

Thomas Kitchen

Colin, we have never gotten to that level of detail. But let’s just say that the way I’ve kind of addressed that in the past is that our portfolio is in S&P 500 type of equity portfolio for the most part, and we have exposure across the different asset classes in the S&P 500. We are probably underweighted with regard to our financial stocks, our exposure going forward, so it’s a combination of the movement of the market value and quite frankly some of the steps we’ve taken that’s produced that. So it’s one of these things where we’re constantly evaluating it. We’ve gone out and actually engaged a new investment consultant for us to help the investment committee for the Board to take a fresh look at ways for us to improve the performance of the portfolio.

Operator

I’ll take our final question from Maharth Kapor with Credit Suisse.

Maharth Kapor – Credit Suisse

Just basically wanted to get your view on, I guess given your experience in the industry, what do you think would be the efficiency, the [inaudible] advantage given that the funeral home industry is pretty localized kind of business? I guess what are the efficiencies, the sale kind of advantages that [inaudible] merging with each other or combining each other? Just based on what you saw in the ‘90s or during that time, what do you think are I guess the fact that’s drive any value creation out of something like that?

Thomas Crawford

You know what, I’m going to stab at this, and I’m just going to start speaking. Please pick out anything I say what makes sense because I’m just going to, because I’m not sure I got the whole jest of what you’re saying and then Tom can jump in. In the ‘90s, my belief was that this was an industry that again went through rapid expansion. Acquisition was critical. To go forward, selling in advance of preneed selling was a very, very powerful tool but the accounting rules changed and then the world changed. Now my belief is regardless of what the accounting rules are, the issue is make a company more valuable what’s the cash you have at the end of the day. Are you generating cash? I’ve seen plenty of businesses that have generated high profitability on paper, but generate no cash on the value is questionable.

So from that model, what we’re trying to do right now is that Stewart was built on very good acquisition and making acquisitions we also have to take some companies that weren’t so good in the process. What we’re trying to do now in our model is to try and big standardization to the way we look at the world in that this was it sold best in class. There’s nothing magic about that, but it’s simply trying to bring people together to say if somebody’s got a great idea, why aren’t we applying that in more places? We have 350 laboratories, 360 laboratories out there that we can try different things without wrecking the whole ship; and if it works, we want to apply those across the board.

When something works, we want to capitalize on that. So it is trying to set scale and benefit and even right now we’re looking at on how we do some of our business where we have not taken advantage of the scale and our size because we’ve been far too diverse and so we’re trying to bring those things together and it’s fine balance the entrepreneurial spirit of funeral service versus trying to bring management discipline into how we look at things. We are trying to standardize dramatically.

Again, for us, I will say, talk about standardization, I even felt bad the other day because during the storm I was someplace else. I lost my cell phone capability and I had to come back to New Orleans; I was a little bit concerned about that, so I went out and bought a cell that wasn’t in our system. I’m apologizing to our people right and left that it’s not within our system; it’s out of whack, but I bought it anyway because I like it. Now I’m just being humorous when I say that, but we are trying to bring standardization and conformity into how we run our business. So that’s for us the model that we’re running. We think it has merit. Even if you had four or pick any number of great entrepreneurial guys together and when somebody has one great idea, why wouldn’t you want to share that with the rest and personalities aside, and that’s what we’re trying to accomplish.

Maharth Kapor – Credit Suisse

When those entities combined, during all the consolidation in the industry in the ‘90s, et cetera, was there like other benefits in terms of purchasing, like you can buy a casket easier or something of that sort or not really?

Thomas Crawford

Absolutely, there are a lot of benefits. Size and scale is a good thing. It’s a terrific thing. Clearly from the casket purchases, any kind of commodity purchases, the more you can bring that under one wing, the better you are. I think that’s some of the, I don’t think, I know that’s some of the great gains we felt in 2007/2006 or 2007 because we were like dropping a bag of marbles and going in 100 different directions. Now we’ve organized through a purchasing effort and we’ve got great benefits from using our size and scale, so that’s a huge opportunity. We haven't done as good a job as we have. We’re trying to rein that in right now, and that’s what we want to use the benefit that we have of our size to get our cost more in line, to get power and again eliminating the inefficiencies that we have in our system. We’ve got a long way to go but we are encouraged by what we’ve seen.

Operator

Having no further questions, I’d like to turn the conference back over to Mr. Crawford for any additional or closing remarks.

Thomas Crawford

We thank you very much. I’m a little bit disappointed here. I thought you were all going to ask me about SGI, so I could say no comment, and you haven’t done it. But anyway, thank you very much for your time and being on the phone with us. If I can just summarize, we’ve had a very good quarter and we’re pleased with that. I want to emphasize that the financial progressions that we had and we talked about earlier, they are aggressive, but they are directionally correct in what we’re trying to accomplish from a longer term standpoint with all of our policies and procedures in place, and we will continue to manage this business with an eye to the future and making sure that we’re balanced in what we do and looking forward. So with that, we thank you, and we’ll see in another three months.

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Source: Stewart Enterprises, Inc. F3Q08 (Qtr End 07/31/08) Earnings Call Transcript
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