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Alderwoods Group
Re: 2Q Results

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By SVF018
July 27, 2004

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These are a bit disappointing, but I don't see a reason for serious concern.

I agree. I extracted some of the negative and positive points mentioned in AWGI's 2Q Management and Discussion Analysis (MD&A) and would like to share in this discussion board (from where I always receive plenty of interesting info):

Negatives:
- Consolidated revenue of $164.1 million for the 12 weeks ended June 19, 2004, decreased by $2.4 million, or 1.5%, compared to $166.5 million for the corresponding period in 2003, primarily as a result of decreases in the funeral and cemetery revenues, which were partially offset by an increase in insurance revenue. Consolidated gross margin as a percentage of revenue decreased to 17.5% for the 12 weeks ended June 19, 2004, from 19.8% for the corresponding period in 2003.

- Funeral revenue of $108.1 million for the 12 weeks ended June 19, 2004, decreased by $3.2 million, compared to $111.3 million for the corresponding period in 2003, primarily as a result of a decrease of 1,302, or 4.6%, in the number of funeral services performed, partially offset by an increase of $71, or 1.8%, in average revenue per funeral service performed.

- Funeral gross margin as a percentage of revenue decreased to 21.2% for the 12 weeks ended June 19, 2004, compared to 22.0% for the corresponding period in 2003. Due to the fixed nature of funeral costs over the short term, the Company believes that decreases in funeral revenue will not result in a corresponding decrease in funeral costs, which negatively impacts funeral gross margins.

- Cemetery gross margin as a percentage of revenue decreased to 13.9% for the 12 weeks ended June 19, 2004, compared to 19.2% for the corresponding period in 2003, primarily as a result of the decrease in cemetery revenue.

Positives:
- Pre-need funeral contracts written for the 12 weeks ended June 19, 2004, were $44.8 million, compared to $36.2 million for the corresponding period in 2003. The Company is continuing its program to increase pre-need sales. For the 12 weeks ended June 19, 2004, 26% of funeral volume was derived from backlog, compared to 25% for the corresponding period in 2003.

- Insurance revenue for the 12 weeks ended June 19, 2004, increased $4.0 million, or 28.9%, compared to the corresponding period in 2003, primarily due to increases in premium and investment income. Insurance premium revenue is up in 2004 primarily due to the impact of the Company's subsidiary, Rose Hills, beginning to sell the Company's insurance products.

- Interest expense on long-term debt for the 12 weeks ended June 19, 2004, was $14.5 million, a decrease of $3.9 million compared to the corresponding period in 2003, reflecting the effect of lower effective interest rates and debt repayments made by the Company during 2003 and the 12 weeks ended June 19, 2004, which were partially offset by a premium of $1.1 million included in interest expense for the 12 weeks ended June 19, 2004, as a result of the repurchase of the principal amount of $9.3 million of the 12.25% Senior unsecured notes, due in 2009. As a result of the debt reduction and lower rates of interest on the Company's remaining debt, the Company expects interest expense in 2004 to decline compared to 2003.

- General and administrative expenses for the Company for the 12 weeks ended June 19, 2004, were $9.5 million, or 5.8% of consolidated revenue, compared to $11.9 million, or 7.2% of consolidated revenue for the corresponding period in 2003.

Summary: Why do I consider that the positives outweigh the negatives? (Please bear in mind that I own shares of AWGI)

- Management is delivering on its promises of keeping the restructuring at a fast pace in every way it can directly influence. Long-term debt continues to be repaid. Expenses are going down as a % of revenues, non-core assets are being divested, etc.

- In the areas where management cannot act directly, it is taking the right moves to improve the situation. A good example being the increase in pre-need funeral contracts written which will help smooth/increase future funeral revenues.

Catalysts for the recovery of the stock price

- In addition to the continuation of the restructuring, there are many events which may function as catalysts for a higher share price. The one-time impairment charge that brought losses to last quarter might trigger a one-time gain in the near future. Taken from the MD&A:

"As a result, the Company was required to record a long-lived asset impairment provision of $11.5 million within discontinued operations for the 12 weeks ended June 19, 2004, primarily because unrealized gains associated with properties in the original packages were no longer available to offset these impairment amounts. Provided that the properties are ultimately sold for estimated proceeds, accumulated unrealized gains of approximately $13 million will be included in income upon disposition."

I apologize for such a long message and will try to make them shorter in the future. Please also accept my apologies for some lack of clarity in the message as I am a Brazilian writing in a non-native language.

Many thanks for your attention,

SVF


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