Matthews International Corp (MATW) 2002 Q2 法說會逐字稿

If you should require assistance during the call, please press zero then star, and an operator will assist you. As a reminder, this teleconference is being recorded. I would now like to turn the conference over to the Chief Financial Officer, Mr Ed Boyle. Please go ahead sir.

Good morning. Thank you Bill. My name is Ed Boyle. On the call from Matthews today with me are Dave Kelly, our Chairman of the Board, President and CEO, and Steve Nicola, our VP of Accounting. Today's conference call is set up with the phone company for one hour. We are conducting the call to comply with the Securities and Exchange Commission regulation FD. This call will be available for replay at approximately 1.30pm today. To access the replay, dial 1-320-365-3844, and enter the access code 634359. The replay will be available until 11.59pm May 3rd 2002. If you access our web site at www.matw.com, and click on the recent quarterly result icon, you will have access to the second quarter earnings release and financial information we will discuss this morning. This data is available now. For those of you who will be asking questions, we request that you limit your questions to one question and a follow up question until all those who have questions have an opportunity to participate in the Q&A session. At the advice of our legal counsel, I have been advised to read the following disclaimer as it pertains to forward looking statements: Any forward-looking statements in connection with this discussion are being made pursuant to the safe harbour provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risk and uncertainties that may cause the Company's actual results in future periods to be materially different from management's expectations. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ from those discussed today, are set forth in the Company's form 10-K, and other periodic filings with the SEC. I might also add that the balance sheet and income statement data we provide today are preliminary data, since our 10-Q for the quarter ended March 31st 2002 will not be filed with the SEC until May 15th 2002. To begin the conference, I will review the financial results for the quarter. Dave Kelly will then provide general comment on our operations. Following that, we will open this discussion for questions. As you noted from our press release yesterday, the comparison of this quarter's results to the same quarter a year ago was impacted by a slowdown in the economy, which has affected equipment sales in our Marking Products segment. Continued weak demand and price pressure for printing plates sold into the corrugated and flexible packaging industries. Also, our quarter and year-to-date comparisons for sales and operating profits have been affected by the sale of our 50% investment in Tukaiz, which occurred in January 2001. In addition, since last March we acquired York Bronze, York Casket, and Rudolf-Reproflex, a German graphics business. Also, as we reported last week, we sold our Granite Imports business in March 2002, and incurred a one-cent loss per share on the transaction. This loss was a component of the Bronze segment results for the quarter. Finally, last week we reported that our second quarter results would include a charge for goodwill impairment. The Company revaluation of goodwill, which was conducted by reporting units of business, determined that approximately $5 million of goodwill, or 3.5% of the total goodwill balance, was considered to be impaired. The impairment was primarily related to a reporting unit within the company's Bronze segment. This accounting charge had a negative impact of earnings per share of 10 cents for the quarter. However, it did not impact cash, sales, or the operating results that we will discuss this morning. Sales for the quarter increased 66%. The increase was mainly due to the benefit of acquisitions completed since March a year ago, which more than offset lost revenues resulting from the divestiture of Tukaiz, which on an annual basis generated $23 million in sales. The quarter-to-quarter sales increase was $44 million, of which $34 million was due to Casket segment revenue. Bronze segment sales increased $9 million, mainly due to the acquisition of York Bronze, which was completed in late May a year ago. Graphics Imaging sales increased slightly due to the acquisition of Rudolf, which more than offset a decline in sales due to divesting Tukaiz. Marking Product sales declined 9.6% for the quarter. Year-to-date consolidated sales are up 47%, or $62.5 million. The explanation for the year-to-date increase is the same as for the quarter. Same store sales, year to date, are down 1% compared to the first half of fiscal 2001. The decline is mainly due to a 13% sales reduction in Marking Products. Operating profit for the quarter was $17.3 million, up $4.7 million, or 37.4% over the same quarter a year ago excluding special items of $1 million booked in the second quarter last year. This increase was primarily due to the addition of the York Casket business, which earned $4 million for the quarter. Internally, it is our opinion that the operating results for the Bronze and Graphics segment should have been better than they were for the quarter. We have three operating locations that are either candidates for divestiture, consolidation into other facilities, or have sales volume issues that have affected profitability. We have a corrective action plan in place for each of these businesses. We also sold our Granite Import business in March, and recorded a loss on the sale, which was included in the Bronze segment results. Year to date, this business had also incurred an operating loss, and on an annual basis, sales for the Granite business totalled approximately $5 million. Second quarter operating margins by segment are as follows: Graphics, 12% of sales; Marking Products, 14.9% of sales; Bronze, 20.5% of sales; York Casket, 11.8% of sales; and for the consolidated corporation, the operating margin was 15.7% of sales. Our second quarter consolidated operating margin for fiscal 2001 was 19% of sales versus 15.7% of sales for this quarter. The reduction from last year reflects the addition of York Casket, which has an operating margin of 11.8%, and a lower margin in Bronze, due to the acquisition of the York Commemorative Products business, combined with a year-to-date increase in mausoleum sales. Year-to-date mausoleum sales are up 20% over the first six months of fiscal 2001. Earnings per share for the quarter were 30 cents, excluding the goodwill impairment charge, versus 26 cents a year ago. This is an increase of 15.4%. The largest contributor to the earnings per share increase was the higher level of operating income, which was basically due to York casket. If we compare earnings per share for both quarters, excluding unusual items, this quarter would have been 31 cents, absent the loss on the sale of our Granite Import business. The second quarter a year ago would have been 25 cents excluding the one-time gain booked on the sale of Tukaiz. Absent these unusual items, earnings per share for the quarter increased 24%. However, I would also like to point out that a year ago we were amortizing about five cents per year for good will, or 11/4 cents of goodwill amortization per quarter. So if you adjust the second quarter of fiscal 2002 for the absence of goodwill expense, and the loss on the sale of the Granite Import business, earnings per share for the quarter is 30 cents, compared to 25 cents a year ago excluding the gain on the sale of Tukaiz. So, on an apples-to-apples basis, earnings per share for the quarter were up 5 cents, or 20%. Gross margin for the quarter was 36.6% of sales, versus 42.5% of sales a year ago. The 5.9% percentage point decline in gross margin is mainly due to the inclusion of York Casket results, which were not in the second quarter a year ago. Although we do not disclose gross margin by segment of business, the casket segment has the lowest gross margin percent of sales of any of our four business segments. SG&A expense for the quarter was 20.9% of sales, versus 23.6% a year ago. This reduction also reflects the inclusion of York Casket, which has a low SG&A expense as a percentage of sales compared to our other segments, because the majority of their products are sold through distributors. For the quarter, investment income was $272,000, down $506,000, or 65% below the prior year. The decline reflects lower interest income rates, combined with a lower cash balance. Last May, we had to use $30 million of our cash balance to purchase the York Commemorative Products business. Interest expense for the quarter was $1,189,000, up $895,000 over a year ago. This increase reflects the additional debt we incurred in December 2001 for the York Group acquisition. Other Income and Deductions net was an expense of $40,000 for the quarter, compared to an expense of $465,000 a year ago. Last year's second quarter results included a special contribution to our [indiscernible] trust, of $500,000. Minority interest deduction was $656,000 for the quarter, up $179,000 over the prior quarter, mainly due to the income generated by Rudolf, our German graphics business, which we did not have a year ago. Our year to date tax rate is 38.6% of pre-tax income, unchanged from a year ago. We closed out the March quarter with a cash and investment balance of $48.5 million. Prior to March 31st, we paid down $10 million on our revolving credit facility. Year to date, we have $20 million principal, on the $124 million credit facility that was outstanding on December 3rd 2001.

At March 31st 2002, our Current Ratio is 2.2:1 versus 1.5:1 at September 30th. The increase resulted from an increase in current assets, as a result of the York Casket acquisition, combined with an £11 million payment in October for the acquisition of Rudolf, which was recorded as a current liability at September 30th. For the quarter ended March 31st, our outstanding accounts receivable balance was $67.1 million, which represents 54.9 days' sales outstanding, compared to 59.4 days' sales outstanding at September 30th. The decrease in DSO from fiscal year end reflects the addition of York Casket, which had a DSO of 49 days for the quarter.

This concludes the financial review, and now Dave Kelly will comment on out operations.

Thank you, Ed. I would like to elaborate on three areas. First, I'd like to talk a little bit about the acquisition of the York Bronze business, which we completed in May of last year. As I mentioned in the last quarterly conference call, this acquisition has gone extremely well. We are very pleased with the result, and the employees that have come aboard [indiscernible] and have made significant contributions to our results already. We expect even greater contributions in future as we continue to make operating and productivity improvements, and try to get their performance up to the level of some of our other plants. So we are very very pleased with that acquisition.

Also in December of last year we completed the York Casket acquisition, and that continues to go extremely well. A couple of comments there. One is that we've ended up with a very strong distributor network, which sells the York products. Our distributors are our customers and partners. We believe that they are the best in the industry, and that they are going to play an important role in building that business even further.

Secondly, we believe that the employees of York Casket are a tremendous asset to us. We've already begun programs to introduce them to Matthews, and Matthews' benefits, and to capitalise on their ability to continue to make productivity improvements, delivery reliability improvements, and basically to ensure customer satisfaction.

Finally, we have made in an important move with adding John Maurer to be the President of the York Casket Company. We believe that John will provide strong leadership that will be important to us going forward, and building this business to even greater levels of profitability. In that regard we, together with the management team at York Casket, have identified numerous opportunities for further investment and productivity improvements, and we have a well-structured plan to go about and try to capitalize on those in the coming year.

Finally, I would like to comment briefly on the Granite Resources divestiture. Ed mentioned that it was business that did not live up to our expectation. As I said in the past, I believe that the secret to our acquisition program is not to not make mistakes, but rather to have successes which significantly outweigh our mistakes. In that regard, I think that one of the key things to do is in cases where we have successes is to support those successes with continuing investment and realize the benefits on a continuing basis; and on the other side of the table, where we have problem areas to recognize those as early as we can, and to divest those operations and move on. And that is the policy that we are strictly adhering to, so where we do have problems we will identify them and address them, and ride with our successes.

Ladies and gentlemen, if you wish to ask a question, please press the one on your touchtone phone. You will hear a tone indicating that you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If using a speakerphone, please pick up the handset before pressing the number. Once again, if you do have a question or a comment please press the one at this time, and one moment for our first question. The first question will come from the line of Bill Burns at John [Rice] Company. Please go ahead.

Good morning.

Good morning.

Dave or Ed, I wonder if we could go back to the Bronze area. I have a question about your comments about maybe there was some facilities that were underperforming. From my estimates the revenue was about where I was expecting it, but the margins were a little bit weaker. I just wonder if you would elaborate on any weakness that the management might have spotted in that area.

Bill, let me take a crack at that. First of all, our underlying bronze memorial business remains really quite strong, which is not to say that we do not see further opportunities for improvement. We are still hopeful that the pre-deed business is going to build to a higher level, but basically it's very sound. But in some of the acquisition areas - we're mentioned Granite Resources as a specific point - they haven't really lived up to our expectations, and that's affected our business. And I think that I might also mention - I think that Ed covered this in his comments - that in areas of the Bronze business where we have margins below our average, where we see sales increases in those businesses it affects our overall margin, and we have a little bit of that in this past quarter.

I have a housekeeping follow-up question. Ed, do you have handy what depreciation amortization was in the fourth quarter?

Not right now...

I'll call you back then.

but we can get that during the call.

Okay. Thanks very much.

Our next question will come from the line of Darren Seegar at Direct Equity Group.

Hi, good morning guys. I also had a couple of smaller points. One is the loss you guys had in the Bronze business in the Granite sale. Can you guys quantify that for us on a pre-tax basis?

Well, lets see. On an after tax basis, Darren, that was one cent a share, so on a pre-tax basis it is about $500,000 in operating income.

Okay, good. And that's buried within the Bronze segment operating profit disclosed?

That's correct, so, you know, the rule of thumb here is that for every $300,000 of net income, it's a one cent per share plus or minus impact. So with a roughly 40% tax rate that converts to $500,000 pre-tax.

Okay. And the impaired goodwill charge, you guys said it was within the Bronze segment. Can you be more specific about that?

We said that it was within the Bronze segment, but we are not required to disclose what particular business unit that that was. And we also said that we have a couple other businesses that aren't performing up to snuff, and we're not going to disclose what they are, because obviously there could be selling price issues there if we try to divest one of those businesses, and there is also some people impact. So we're sensitive to the employees, and wouldn't want to say anything that wouldn't come to fruition here.

Okay, fine. And lastly Dave, can you address whether you will be looking to replace the Granite Resources deal with maybe another import company of granite products?

Darren, we've concluded that's not a good business fit for us. We didn't get the synergies that we were looking for, and we could never get the margins of that business up to the levels that we wanted them to be. So no, we are going to focus on the Bronze business, which is getting a much better return for us.

Okay, great. Thank you very much guys.

You're welcome. Just to back up to Bill Burns's question, year to date, our deprecation and amortization is $7 million approximately, and $3.5 million for the quarter.

And our next question will come from the line of Greg Halter at LJR Great Lakes. Please go ahead.

Good morning. Following up on that question on depreciation and amortization, what are your thoughts there in total for the fiscal year?

Roughly double where we are Greg year to date. 14 million.

And capital spending for the full year?

Capital spending for the full year, probably still in the range of $12 million.

Okay. And Dave, I wonder if you could comment on the acquisition program, and what you are seeing out there at the present time.

Our acquisition program is quieted down a bit. We are still focused on absorbing last year's acquisitions, which are extremely important to us. And that is getting, I think, most of our management attention at the current time. We will be opportunistic if the right situation presents itself, but we think our best interests are served in the next twelve months in just beefing up the profitability of the businesses that we already have.

Okay, great. And I also wondered if you could comment on the competitive landscape in the four different areas.

When you say the four different areas you are talking about our four different business segments?

Right.

Well, you know, starting with our Bronze business, we continue to enjoy a strong market share position there. We continue to believe that the product is valued by our customers and their customers, and continue to expect strong sales there. You know, we are very satisfied with our competitive position. With respect to the casket business, we are the number two player in the industry, but we believe that we have a strong market position. We have - as I mentioned in my comments - an excellent distribution network, and really good employees. What we are going to do is just focus on our productivity and improving our bottom line. In comparison to competitors, our operating profit level is far lower, so we think that there are significant opportunities for improvement there. With respect to Marking Products, the business is affected by the economy. A lot of our customers are manufacturing companies. We've seen a recent pick up in large-type orders, but we still have relatively low activity for one-off sales, where people are replacing. So we believe that budgets continue to be tight. And in the Graphics business, I think that same comment applies that business tends to be tight. We are making progress in penetrating new areas of business and building relationships with major accounts.

Okay. And two other ones if I could, quickly. Ed, wonder if you have the cash flow from Operations?

We don't have the cash flow statement put together yet Greg.

Okay. And last question, regarding [Linn], Indiana. I think there's a contract up in June. Can you run through the status of what's going on there?

Yes. Our human resources people and our operations management people have begun discussions and planning for that contract. We have what we believe is a very good relationship with our employees there, with the union, and at this point in time we anticipate being able to come to a successful conclusion to those negotiations. Of course, you know, nothing is done until it is done, so we will have to wait through June to get it all finalized.

Great. Thanks.

Our next question will come from the line of Joe Milano at T. Rowe Price. Please go ahead.

Good morning guys.

Good morning, Joe.

Dave, I was wondering if you could just comment and give us an update in terms of the productivity improvements that you are targeting in both the York Bronze and the Casket businesses? What inning are you in in terms of an analogy there?

Okay, Joe. In the case of York Bronze, we've already had some very significant improvements. The groundwork for that was basically shifting products around, so we could focus plants on areas of specialization, for example high volume small products we've focused in [indiscernible] Arkansas, and King Wood is a source of midsize products for us. So we already have established a good basis. We've implemented systems at these different places. Now, we have to get into areas that require a little bit more in the way of capital investment. Things such as changing over the Sulphur Dioxide system that we use at King Wood would be an example. I would say that in a nine-inning game, we're probably in the third inning, and we still have substantial room for improvement based on where the margins are, and where we think they can be. I think that you also asked about the Caskets business. I don't think we fully know the answer yet as to how far we can go. The management team has made a preliminary estimate. I think that we're still pretty early in the game there. I think that it's going to take some major actions to realize some of these gains, so it's probably a two-year project, but I expect to see continued progress on a year-by-year basis.

Okay. I wonder if you could also comment, Dave, on the performance of Caggiati, and what you are seeing internationally.

Yes. Internationally the business continues to be quite strong. It's a very very solid cash generator for us. We are making some very minor acquisitions over in Italy. We continue to have an extremely strong management position there, and market position there, so we are very pleased with that acquisition. We think that is was one of our better ones.

Okay. And Ed, for you, last question. In terms of the significance of mausoleum sales as a percentage of Bronze, I know that when you did the Gibraltar deal a couple of years ago it was a 15 million-ish type of business. Can you give us a flavor for how significant that is as a piece of Bronze?

Well, when we first acquired them, Joe, our sales weren't quite up to the level that they had been running. But on a year-to-date basis, we are running at a $15 million run rate right now. But, you know, if you go back two or three years we were probably in the 11 or 12 million dollar run rate, halfway through the year. But it looks like this year we will probably exceed $15 million in sales, and, as I said, we are up over 20% year to date in this business compared to a year ago, so we've got an excess of $1 million in sales through the first six months of this year. And that has had a negative impact on the overall operating margin for the Bronze segment, because, as Dave pointed out, our operating margins at the traditional bronze foundry businesses are much higher than for this business.

Good. Nice job in the quarter.

Thank you.

And once again ladies and gentleman, if you do have a question or comment please press the one at this time on your touchtone phone. We have nobody queuing up at this time, please continue with your presentation.

Well, I would like to thank everyone. That's all we have for today. We look forward to talking to everyone at the end of the next quarter. And have a good day and a good weekend.

Ladies and gentlemen, this teleconference will be available for replay beginning at 1.30pm today, and running through May 3rd. You may access the AT&T Executive Playback service at any time by dialing 320-365-38-44, and your access code is 634359. Again, the replay will start at 1.30 today and run through May 3rd, and your dial in number is 320-365-38-44, and your access code is 634359. That does conclude your teleconference for today. Thank you for your participation, and for using the AT&T Executive Teleconference. You may now disconnect.