Matthews International Corp (MATW) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Q3 results for Matthews International Corporation Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions being given at that time. If you should require assistance during the call, please press * then 0 on your touchtone phone. And as a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Ed Boyle. Mr. Boyle, please go ahead.

Thank you. I'm Ed Boyle. On the call with me today are Dave Kelly, Chairman of the Board, President, and CEO of Matthews, and Steve McCullough, 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 1.30 P.M. today. To access the replay, dial 1-320-365-3844, and enter the access code 691110. The replay will be available until 11.59 P.M. August 5th.

If you access our website at matw.com and click Investor Information and then the Quarterly Report icon, you will have access to the financial information we will discuss this morning. This data is available now. I have got a few calls this morning that folks have advised us they couldn't reach that, get that information off the website. If you want it faxed to you at this moment, call 412-442-8215 and we will fax the information to you.

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 of those who have questions have an opportunity to participate in the Q&A session. At the advice of our legal counsel, I have be 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 harbor of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risk in 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 10K and other periodic filings with the SEC. I might also add that the balance sheet and detailed income statement data that we provide are preliminary data, since our 10Q for the quarter ended June 30, 2003, will not be filed with the SEC until August 14, 2003.

To begin the conference, I will review the financial results for the quarter. Dave Kelly will then provide general comments on our operations. Following that, we will open the discussion for questions.

As you noted from our press release yesterday, the company reported an increase in EPS of 15.2% from $0.33 a share a year ago to $0.38 a share for the current quarter. The operating results for the quarter were improved despite lower sales, primarily due to a combination of lower selling and administrative costs, an increase in the value of foreign currencies against the U.S. dollar, and manufacturing efficiencies in our Bronze Division.

On a year to date basis, sales and operating profit results for 2003 increased over the prior year, reflecting the inclusion of two additional months of business this FY for York Casket, which was acquired December 3, 2001, and higher foreign currency exchange rates. Prior period results have also been restated to reflect the reporting of the Cremation Business segment effective with the first quarter of 2003.

A few other general comments about the quarter before we get into an analysis of the sales and operating results by segment of business. The value of the Euro has averaged $1.07 versus the U.S. dollar for the first nine months of fiscal 2003, which is the nine months ended June 30, 2003 for Matthews, compared to $0.90 for the same period last year, and increase of 19%. The Canadian and Australian dollars in the Swedish Krona, also gained in value versus the U.S. dollar during the same time frame.

The increased value of these currencies had a favorable impact on sales and income for our Graphics Imaging, Marking Products, and Bronze segments for the third quarter and first nine months of fiscal 2003. The products that we produce in Europe, Canada, and Australia are for the most part sold into those markets and are not exported to the parent company for resale into the U.S. market.

Our YTD comparison for the Bronze segment was also affected by the divestiture of two small businesses since the first quarter a year ago. Last year, the Bronze segment reported a loss of approximately $500,000 from the sale of one of these businesses in the second quarter, and these two operations combined incurred an operating loss of $600,000 during the first nine months of fiscal 2002.

There continues to be weak demand and price pressure for printing plates sold into the domestic corrugated and primary packaging industries, but our European graphics businesses continue to be strong. Demand for our Marking Products equipment in the U.S. and Canada has increased from the prior FY, which is to say we have started to see a pick up in orders from some domestic manufacturing businesses.

Worldwide, our sales volume for Marking Products is up 14.2% YTD, reflecting the higher U.S. volume and the addition of new distributors in Eastern Europe, primarily in Poland and the Czech Republic.

Sales for the quarter declined 2.3%, or $2.7m. Sales in our death care related businesses which is Bronze, York Casket and Cremation, were down for the quarter reflecting lower sales of mausoleums, metal caskets, metal stampings and cremation caskets. Marking product sales were up 14% due to increased volume and improved foreign currency exchange rates. Graphics Imaging sales increased slightly, also due to the increased value of the Euro. However, this increase was partially offset by lower demand for primary packaging products and services in the U.S.

YTD, consolidated sales are up 8%. York Casket Sales YTD are up 25%, reflecting the inclusion of two additional months sales in fiscal 2003. Our YTD consolidated sales on a same store basis were up $7.9m, or 2.4% over fiscal 2002. The same store comparison adjusts for the two added months of York Casket and the divestiture of two businesses in the Bronze segment, which generated sales revenue of $2.3m for the first nine months of fiscal 2002. We also estimate that 40% of our consolidated YTD sales increase resulted from foreign currency translation.

Operating profit for the quarter was $21.6m or 14.2% over the same quarter a year ago. The two largest components of the increase were generated by the Bronze and Graphics Imaging segments. The improvement for Graphics Imaging came from our European operations, primarily from the increase in the value of the Euro. The Bronze improvement consisted of favorable foreign currency exchange in Europe, Canada, Australia, improvements in manufacturing costs and lower selling and administrative expenses. Operating profits for Marking Products also improved for the quarter on higher sales.

Q3 and YTD sales and operating income by segment are posted on the website, so I will not read them off individually. However, I will read the operating margins by segment on a YTD basis. Graphics Imaging, 13.3%; Marking Products, 12.6%; Bronze, 25.8%; York Casket, 10.8%; Cremation, 5.9%; and the consolidated operating margin is 17.3% YTD.

Our Q3 consolidated operating margin for fiscal 2003 was 18.6% of sales, up 2.7 percentage points over the same quarter last year. YTD, our operating margin is up 1.5 percentage points from 15.8% to 17.3%.

EPS for the quarter was $0.38 versus $0.33 a year ago, an increase of 15.2%. The largest contributor to the EPS increase was the 14.2% increase in operating income, combined with lower interest expense. These improvements were partially offset by an increase in minority deduction expense as a result of increased profitability at our foreign graphics locations, and an increase in shares outstanding.

Gross margin for the quarter declined $700,000, but was 38.3% of sales versus 38% of sales a year ago. The reduction in gross profit dollars is a direct result of lower sales for the quarter. We do not report GM by business segment, however manufacturing costs, improvements in the Bronze segment and higher sales in Graphics Imaging and Marking Products, which both benefited from the increased value of the Euro, resulted in higher GM percentage for the quarter.

YTD GM is 37% of sales, versus 37.2% a year ago. The slight declined in the YTD GM percentage is due to York Casket being included in nine months results this FY versus seven months for the first nine months a year ago.

SG&A expense for the quarter was 19.7% of sales versus 22.1% a year ago. YTD SG&A expense is 19.7% of sales compared to 21.5% for the same period last year. Lower selling and administrative costs in the Bronze segment and the absence of the loss on the sale of the segment's granite import business were the primary factors for the improvement. The Bronze segment incurred a loss of approximately $500,000 on the sale of its granite import business in March last year.

YTD investment income is down $219,000, due primarily to lower investment income rates. However, investment income for the quarter was higher than a year ago, due to realized investment losses incurred in last year's Q3. Interest expense is down for the quarter and YTD as we continue to reduce our loan balance and benefit from lower interest rates. Minority interest deduction is up because of higher profits from our European graphics business, all of which are less than wholly-owned companies.

Our Q2 and YTD tax rate is 38.8% of pretax income. We closed out the December quarter with a cash and investment balance of $71.7m. Prior to June 30, 2003, we paid $10m on our revolving credit facility. Our revolving credit facility, which totaled $124.5m on December 3, 2001, had been reduced by $70m, and is now $54.5m.

Since the inception of this loan, we have made seven quarterly payments, each at $10m, which was our stated objective. We also contributed $7.5m during Q3 to our company's pension plan which was underfunded since September 30, 2002.

At June 30, 2003, our current ratio is 2.1.1, up from a ratio of 1.8.1 in September 30, 2002. At June 30, 2003, our outstanding AR balance was $66.6m, which represents 51.6 DSO compared to $66.2m or 52.4 DSO at September 30, 2002. As of June 30, 2003, shares outstanding total 32,190,881.

We did not purchase any shares of our stock during the quarter. YTD, we have purchased 92,900 shares of our stock in the open market. Shares remaining to be purchased under the current buyback authorization total 828,000. Our current and long-term debt balance at June 30, 2003, was $73.6m. $54.5m of this balance is our domestic revolving credit facility. The balance of the debt on our books represents our Italian subsidiary, which borrowed money to finance the purchase of that company in 1999.

Depreciation and amortization expense for the quarter totaled $3.7m, and capital expenditures for the quarter were $2.6m. YTD, depreciation and amortization expense was $11m and capital spending is $6.8m. For the quarter ending June 30, 2003, we were $.01 ahead of our EPS projection. Accordingly, we are raising our EPS target for the FY from $1.37 to $1.38. If we meet the $1.38 estimate, EPS for 2003 will be up 15% over 2002.

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

Thank you, Ed. I'd like to address my comments this morning to the areas of sales, operating margins and EPS. As Ed has already noted, our sales YTD are up 7.4%, and you'll perhaps recall, at the beginning of the year, we indicated that we expected sales to be fairly flat for this year, and indeed, the sales situation has turned out pretty much as we had expected. But given Ed's last comment concerning cash and debt balance, our cash and debt are in rough balance now.

So we are in a position, we believe, to begin investing again prudently in attractive acquisitions. In that line, we hope to complete an acquisition into Q4, a small acquisition in Q4. That will be the first one we've done in some period of time. As I've said in past comments, we've pretty much focused on trying to improve operations during the course of the past year and a half.

With respect to operating margins, when you have flat sales, you have to focus on productivity improvements. I think the wisdom of our anticipating the flat sales position is borne out by our operating results, which have come about because we have indeed focused on operating margins and improved productivity. For example, just looking at a couple of our groups, Bronze and Graphics groups both had relatively flat sales, yet showed substantial improvements in their operating profit YTD.

I might add that we are not afraid of making continuing investments for the future. Two examples of that this year in our Cremation group, which we established this past year, we've had substantial expenses in reorganizing this business. We pulled the Cremation equipment business from Bronze, and the casket business from York Casket to set up this Cremation business, and we've undergone expenses in terms of new systems and new people to get it up and running. But we believe that is going to be a good investment for us and it's going to pay out in 2005 and beyond.

On the same line, we did the same thing with our York Casket business that I mentioned in the past. We have made some very substantial, one-time investments in that during the current year. A couple of examples, once again, one is a quality area where we made some substantial investments in terms of putting in place quality processes, which over time we believe will produce an attractive return. But initially, particularly when you focus on increased screening, that raises your cost. And other areas are one of our plants we've made a substantial investment in continuous flow and that project is going on quite nicely, but it won't be finished until well into next year. When it's completed, we expect to have an attractive return.

With respect to EPS, of course we're very pleased, as Ed mentioned, that we're bumping up our guidance to $1.38, which would be 58% for the year, and it's quite attributed to our operating management that we've been able to accomplish that in spite of the flat sales. I would caution people that are doing the arithmetic that we're currently estimating Q4 to be about $0.35, which would be about a 9% increase over the prior year. Keep in mind that Q4 is traditionally one of our slower quarters because of vacations, plant shutdowns, and other factors. So, we will expect a little bit less of an increase in Q4 than we incurred in the three quarters to date.

With those comments, I'd like to open the meeting up to questions.

Ladies and gentlemen, if you do wish to ask a question, please press the * and then 1 on your touchtone phone. You'll hear a tone indicating that you have been placed in queue and you may remove yourself from that queue at anytime by depressing the # key. If you're using a speakerphone, please pick up your handset before pressing any numbers. One moment please for our first question.

And the first question will come from the line of Bill Burns [ph] with Johnson Rice [ph]. Please go ahead.

Good morning Dave and Ed. Dave, I wonder if I could get you to talk about York Casket? I'm just looking at the margin sequentially, Q1, Q2, Q3. This quarter was, I think, a little below 10%.

You want me to comment on the margins?

Yes, I mean we were 11% in Q1 and now we're below 10% in Q3.

Yes, and I believe that Q3 was just about 10%, Bill, but it was down from our YTD margins which were about 10.8%.

OK, yes, I mean what is the cause there, what is the outlook?

OK, the factors involved in that is somewhat of a drop in our sales, which have impacted us. As I mentioned just a few minutes ago, our continued investments in the future of the business, particularly in quality area and the manufacturing and improvement area. I might also add that we're investing in new product development, and all things which, I think, in retrospect maybe some of these investments should have been made in prior years, and to some extent we're playing catch up.

But, they are things that should be done and must be done for the continued success of the business going forward. We think that what we're doing today is going to be an engine that is going to drive our profitability to 2005 and beyond. We think they're intelligent things to do. And even though we're sacrificing somewhat in terms of current operating performance, that it will pay the right type of dividend in the future.

OK, thank you very much.

Next will come a question from the line of Darren Searer [ph] with Select Equity Group. Please go ahead.

Hi, good morning. This is Darren. Good quarter to both of you guys. I wanted to know your thoughts on share buyback at this point. You guys stopped that for the last 18 months. Maybe you can talk to us about what your outlook for that might be?

Well, Darren, I think we have to give some thought to this whole issue between now and the end of the year. First, we focused on debt repayment. But as Ed indicated, we made very substantial progress in that regard, and we are still generating a very substantial amount of cash, which means that you know we need to look at what our other priorities are.

Now some of the things we have to consider, certainly a share buyback is one of our preferred alternatives. It's worked very well for us in the past and we're going to give that a lot of consideration. But we also want to take a look at the dividend in light of the new tax law and we want to compare what the benefits to our shareholders are from both of those alternatives.

Finally, in that whole mix, we have to put acquisitions. The right type of acquisition has the potential for the highest return, but of course, it brings along with it more risk. So, those are the types of things that we have to weigh in the coming quarter, and I think traditionally, we review our dividend at the end of the year or beginning of the new year. So I think that will be kind of an impetus for us to make some decision as to how we're going to direct our cash in the coming months.

When you look at acquisitions, can you give us a sense on what side of the business they may come on? And are there deals that could use your $40m to $45m of free cash flow per year, are those size of deals out there, or a number of small deals to utilize that kind of cash?

Our first preference is for deals with high returns on investment. That's what we're looking for. The one I mentioned in my comments fits that criteria, and we expect a high return on investment. But it's a relatively small deal. We have been engaged in an internal process, looking at other alternatives, and it's early in that process. So I don't think we're prepared to say at this point that we have identified ways to use our $40m or $45m. But it's still early in the game and I think our past track record has demonstrated that patience will be rewarded.

Would you say those deals would be U.S. or overseas? You've had some pretty good success in the Graphics side overseas as well as on the Bronze side.

We're looking at all alternatives around the world, and I just as soon not be too specific at this point in time. However, I will second what you just said, that our European businesses have been extremely successful and not just because of currency translation, but the underlying businesses have done extremely well. So that's certainly an area that we would actively consider for a further expansion.

OK, great. Thank you very much. Good first nine months.

Thank you.

Thank you, and next will come a question from the line of Greg Halter [ph] of Great Lakes. Please go ahead.

Good morning gentlemen. I was just wondering if you could provide some more information on the balance sheet, some of the items that we didn't see there, like inventory, payables, equity, and total assets?

Sure, the inventory balance, Greg, is $26.3m at June 30, 2003. That's up slightly from the same period a year ago. I gave the AR at $66.6m. Equity is $236m, and I'm sorry, did you ask for a third one?

Payables, if you have that?

Payables and you also mentioned what, total assets?

Yes, total assets.

Total assets are $430m and AP is $17.1m.

OK, great. And the equity is up $26m sequentially. Your income was about $12m. I'm just wondering about the difference there, is that stock options and currency?

Yes.

OK, great. Thank you.

Thank you, Mr. Halter. Ladies and gentlemen, if anyone does have a further question, please press *1 on your touchtone phone at this time. Thank you, and we do have a question from the line of Steven Baumgarden [ph] with Parker Hunter, Incorporated. Please go ahead.

I was wondering if you could comment on some of your sales trends for both the Casket division and the Cremation division? They appear to be down in the mid- to high-single digits this quarter.

OK, the sales trends for both of those business, let me start with Casket. The sales trend for the Casket business is flat. When we acquired this business, we acquired it with the realization that the industry is not a growing industry. The reality is that the increase in the cremation rate pretty much offsets any growth in deaths in the United States. So our whole business strategy there is aimed at trying to improve productivity and improve operating margins and generate healthy cash flow. That's kind of our strategy, and going forward I would not expect any substantial growth in industry revenue.

With respect to the Cremation business, the situation is different. You know we think there is opportunity for growth in that business. We have had a lull in sales this year that has impacted us to some extent, but we do believe that we'll resume our growth pattern again next year. And we think in the interim the things we have done to establish a business that's totally focused on Cremation and working that part of the industry as far as we can will pay off.

Steven, one other factor on the Cremation side of the business, a lot of that has to do with the decline for the quarter is based on the number of units shipped. And units shipped, some of that depends on getting the proper permits to get the equipment installed. And right now our forecast for Q4 shows higher units shipped in Q4 than in Q3, and so there may be some shifting here from quarter to quarter, not necessarily on an annual basis.

Great, thank you very much.

Thank you. We want to have a follow-up question from the line of Greg Halter. Please go ahead.

Hello, again. I wondered if you have available the cash flow from operations figure for the quarter or the YTD at this point?

About $30m Greg, but I don't have all the components of it.

OK, and your capital expenditures look like they could be around $9m this year, if I do the math right.

Right now, the way it's going, I tend to think Q4 may be a little higher than the other quarters during the year because, as Dave mentioned, we are investing for the future here primarily in the Casket business, and we have approved several projects early here in Q4. All that money may not get spent in Q4, but I can see a gradual pick up in the capital request just part way through one month of Q4. It's not going to exceed $10m for the year.

Is there any reason to believe that number ramps up significantly going into '04 and '05?

No, no.

Do you have an impact on what the currency did in EPS and income on the bottom line?

Are we talking for the quarter or YTD?

Well if you have them both, but the quarter I would take.

On the net income for the quarter, I would say it would be about a little over $0.01 for the quarter, and less than $0.04 YTD.

OK, great.

Around $0.04 YTD.

OK, and one last one. On the last call, you talked about your investments briefly, mostly the short term, fixed income types. Has that philosophy changed at all?

No, in fact, it can't with our covenants on our bank agreements.

OK, great. Thank you.

We can't tie up long-term money with debt that's due.

OK, thank you.

Thank you once again, Mr. Halter. At this time, no one else is queued up at this time, ladies and gentlemen. So please do take this opportunity to press * then 1 on your phone if you have a question.

And gentlemen, no one is queuing up at this time. Please continue.

Well, this wraps up the call for Q3. We appreciate everybody's participation, and we will be announcing the Q4 conference call sometime late in October, because we usually clear our results for the fiscal year about a week before Thanksgiving. So, thanks everybody for participating, and this ends the call.

Thank you ladies and gentlemen. Once again, this conference will be available for replay after 1.30 P.M. Eastern time today, and running through Tuesday, August 5 at midnight. You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and entering the access code of 691110. International participants may dial 320-365-3844. Those numbers once again are 1-800-475-6701 and 320-365-3844, with an access code of 691110.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

Thanks, Dave.

Thank you, Mr. Boyle.