Benefits of scale and size

Crawford agreed that the convenience of this arrangement is key to the success of the company… “We have the highest percentage of cemetery/mortuary combinations and our cemeteries tend to be much larger than average. That separates us from our competitors.

“We tend to grow faster with those combinations, and we have better margins because we can utilize the benefit of scale and size. We can use our resources much more wisely and economically.

“Every little bit helps… the death rate grows at a little less than 1% a year. Now it’ll start to speed up a little bit in the next few years as the population ages, but it’s a slow-growth industry.”

A cash-flow focus

With the focus one appreciates in a CEO, Crawford stated, “As we manage the company, we look at cash and what we generate. We really manage for cash flow. I’ve seen many companies that grow their earnings at a rapid rate but have absolutely no cash. They’re burning it up in investing heavily in accounts receivable, or they can’t collect it.

“As we run our business, we look at not just what our investments do to our bottom line, but we make sure they have a good cash return as well.”

Going forward

I asked the gentlemen if they felt the banking crisis could impact possibilities like mergers or acquisitions in their sector. Admittedly, that was a not-so-veiled reference to their current situation. Crawford reflected, “Clearly we’re in un-chartered waters right now. I don’t think I’ve ever seen anything as turbulent in the financial markets as this… I don’t think anybody has. We go through economic cycles and they aren’t a bad thing. And we haven’t been in a downturn for some time.

“As far as business combinations, I don’t know how it’s going to impact them. For us, all we can do is run the company in the best interest of the shareholders. And the good thing about us is that we generate some pretty good cash. So we will have the flexibility to do things in the future that others might not have. We have plans that five years down the road we think will add a tremendous amount of value. They will be different than what we’re doing today — tangential — but different. We’re trying to find ways to grow the business at a faster rate.”

A mix shift

I pointed out that, as he had mentioned, the death rate is on the verge of picking up. Crawford agreed, “It’s going to pick up, but then we have cremation that continues to grow.

“So we have a mix shift and we have to make sure we do what the consumer wants. Historically, this is a slow-to-change industry where you have generations doing it the same way.

“We track cremations by regions and locations so that we know exactly what’s going on. We could do a better job of taking care of families that choose cremation… we acknowledge that. That’s one of our challenges going forward.

“Cremation is not a threat – it’s where the market is heading.”

Regarding growth

I noticed that Stewart owned many more locations in Florida than, for example, New York. When asked about expansion and the role an aging demographic may play in those decisions, Crawford stated: “Some areas are more attractive than others from a legislation standpoint. New York is one of those areas we find it difficult to do business in.”

Regarding growth prospects, he clarified, “Yes, we’d like to grow… but we’d like to grow organically by just being better with what we have.

“Historically, this whole industry grew rapidly through consolidation and a whole bunch of acquisitions. Both our company and SCI grew dramatically through consolidation. And there are two schools of thought…

“If you look at our friends at Carriage Services (NYSE:CSV), they try to be very decentralized in how they manage. They let their people make local decisions… and make sure they are motivated and have the incentives to do that. That can be very good and very powerful.

“We’ve taken a different tack. We want our people to be entrepreneurial in what they do, but at the same time, we want the benefit of size and scale. So we try to get more consistency in our procedures.

“We’ve invested heavily in better systems, better processes… our IT investment is incredibly high. We’ve got a great number of people processing a lot of information to eliminate waste and increase efficiency.

“If we do that, we think we can grow without having to go buy one more company… In the near term, the more we can routinize and standardize the processes, the more we can eliminate waste and inefficiency.

As we get our processes and systems right, our future acquisitions will be more valuable as we bring them into the ‘Stewart Way’.”

A new vision

The company learned much, said de Lauréal, when it had facilities (since sold) in Mexico and other nations. “That international experience opened our eyes and taught us a lot about the wide array of services we can offer with different choices… whether they be cremation, whole body internment or entombment.

“In Mexico, we owned a firm that did 5,000 services a year. More than half those services were cremation. This was for the top-shelf, crème-de-la-crème of Mexico — which is a conservative country and one of the most Catholic.

“It wasn’t about price… families would select what would be a $10,000 mahogany casket in the U.S. for a cremation. Then the cremated remains would be placed in a sterling silver urn that was put in a niche in the Basilica.

“It wasn’t about the money… it was about what the family wanted. And oh… by the way… that was a cremation. So what?

“For some, cremation may be viewed as a headwind. It has a financial impact – it’s a mix change – one is $2,000, the other is $6,000.

“You may initially have lower revenue per unit sold, but if you are serving your customers better with greater value delivering what they want, over time you can grow your average revenues and earnings.”

Consumer-driven

According to Crawford, in the end, it’s about helping families get through one of the most difficult experiences in life. On average, consumers in the U.S. will make that decision once every 17 years. They therefore have little experience or knowledge. He said, “That’s why we are not in that rut of how it’s always been done. Consumers will lead you to where they want to go if you listen.”

Crawford looks to both consumers and his on-site staff for direction. According to him, it’s the people in the field who see the changes first. Maybe try new things… “In the San Francisco area, they’ve pulled out the chapels because people are pulling away from chapels and moving towards reception centers.”

Ready for change

Crawford and his team seem ready to tackle the future: “We just hired a ‘cremation specialist’ with the sole focus of bringing to our system those goods, services and practices that are most valued by cremation-oriented families.

“We like to have a learning culture… and one with humility. We admit when we make a mistake. We don’t like to put a lot of spin on things. Our results — if they’re good — will sustain themselves.

“We’ve got this situation with our friends [SCI] hanging over our heads right now, but we’re still looking over the horizon five years.

“Stewart Enterprises is based on good fundamentals, good values and making a difference.”

“We try to do things with integrity, honesty, with an absence of spin… and that really last long-term.”

I can’t think of anything more for which investors could ask.

Source: An interview with the CEO and VP of Corporate Development for Stewart Enterprises, Inc. (STEI)

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