Matthews International Corp (MATW) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen, and thank you for standing by. Welcome to the Matthew's International fourth-quarter earnings conference call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). I will now turn the conference call over to your host, Vice President of Accounting and Finance, Mr. Steve Nicola. Please go ahead, sir.

Good morning. I'm Steve Nicola. On the call with me today is Dave Kelly, Chairman of the Board, President and CEO of Matthew's. As you are aware, Ed Boyle, our Chief Financial Officer, will be retiring in the near future. Unfortunately, he is unable to participate in this call, but he did ask that I extend his appreciation to those of you who have worked with him and supported him.

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 today. To access the replay, dial 1-320-365-3844 and enter the access code 703896. The replay will be available until 11:59 PM November 26th, 2003.

If you access our website at Matw.com and click on the investor information icon, you will have access to the fourth-quarter earnings release and the financial information we will discuss this morning. The financial information is under the tab quarterly report. This data is available now. However, you may need to click your refresh icon in order to display the fourth-quarter data.

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 had questions have an opportunity to participate in the 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 Harbor provision of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks 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 detailed income statement data that we provide today and on the website are preliminary data, since our 10-K for the year ended September 30, 2003 will not be filed with the SEC until around December 22nd, 2003.

To begin the conference, I will review the financial results for the quarter and fiscal year. 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 earnings per share of 12.5 percent -- from 32 cents a year ago to 36 cents for the current quarter. The improved operating results for the current quarter reflect higher sales, an increase in the value of foreign currencies against the U.S. dollar, and manufacturing efficiencies in our York Casket segment.

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 fiscal year for York Casket, which was acquired December 3rd, 2001; and also higher foreign currency exchange rates. Prior period results have been restated to reflect the reporting of the cremation segment effective with the first quarter of 2003.

A few other general comments before we get into an analysis of the sales and operating results by segment of business. The value of the euro has averaged about $1.09 to the U.S. dollar for the fiscal year ending September 30th, 2003, compared to 92 cents for the same period last year -- an increase of 18 percent. The Canadian and Australian dollars and Swedish krona also gained in value versus the U.S. dollar. The increased value of these currencies had a favorable impact on sales and income for our Graphics, Marking Products and Bronze segments for the fourth quarter and full twelve months of 2003.

The products that we produce in Europe, Canada and Australia are, for the most part, sold into those markets, and not exported to the parent company for resale into the U.S. market. In addition, during the fourth quarter, the company realized a pre-tax gain of $2.6 million on the sale of its graphics imaging facility in Southern California. This gain was more than offset by a goodwill impairment charge of $3.6 million, pre-tax, related to a reporting unit within our Graphics Imaging segment.

Our year-to-date 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 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 operating losses of $700,000 during fiscal 2002.

There continues to be weak demand and price pressure for printing plates sold into the domestic corrugated and primary packaging industries. As a result, we consolidated our Southeast region operations in the fourth quarter of fiscal 2003. However, 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 fiscal year, and we have recently started to see a pickup in orders from manufacturing businesses in the U.S. Worldwide, our sales volume for Marking Products is up 12.5 percent, year-to-date, reflecting the higher demand and increase in the value of the Swedish krona, and the addition of new distributors in Eastern Europe.

Consolidated sales for the quarter increased 3.8 percent, or $4.3 million. Sales on our Graphics Imaging segment were up 10 percent for the quarter, reflecting the acquisition of (indiscernible) in August 2003; higher volumes in our European Graphics businesses; and an increase in the value of the euro. However, these increases were partially offset by lower demand for packaging products and services in the United States.

York Casket sales were 6 percent higher than the same quarter last year, reflecting increases in both price and unit volume. Marking Products sales were up 8 percent, due to increased volume and improved foreign currency exchange rates. Year-to-date consolidated sales are up 7.2 percent. York Casket year-to-date sales are up 20 percent, reflecting the inclusion of two additional months of sales in fiscal 2003.

Our year-to-date consolidated sales, on a same-store basis, were up $10.6 million, or 2.5 percent, compared to fiscal 2002. The same-store comparison adjusts for the two additional months of York Casket; the acquisition of (indiscernible); and a divestiture of two businesses in the Bronze segment and one in the Graphics Imaging segment. We also estimate that almost half of our consolidated year-to-date sales increase resulted from foreign currency translation.

Operating profit for the quarter was $21.3 million, or 13.9 percent over the same quarter a year ago. The two largest components of the increase were generated by the York Casket and cremation segments. The improvement for the York Casket segment resulted from higher sales and improvements in manufacturing efficiencies. The operating profit improvement for the cremation segment resulted from the absence of costs incurred during the fiscal 2002 fourth quarter, related to an acquisition which was not completed.

Graphics Imaging operating profit was down 7 percent from the same quarter last year. Improvements in the operating results in the segment's European operations, and a $2.6 million pre-tax gain on the sale of the segment's facility in Southern California, were offset by lower profitability in the segment's domestic operations and a $3.6 million goodwill impairment charge. Operating profits for Marking Products also improved for the quarter on higher sales. Fourth quarter and year-to-date sales and operating income by segment are posted on the web site, so I will not read them off individually.

Our fourth-quarter consolidated operating margin for fiscal 2003 was 18 percent of sales, up 1.6 percentage points over the same quarter last year. And year-to-date, our operating margin is up 1.6 percentage points from 15.9 percent to 17.5 percent.

Earnings per share for the quarter was 36 cents, versus 32 cents a year ago -- an increase of 12.5 percent. The largest contributor to the earnings per share increase was the 13.9 percent increase in operating income for the quarter, combined with lower interest expense. These increases were offset partially by an increase in minority deduction expense, as a result of increased profitability at our foreign graphics locations and an increase in average shares outstanding.

Gross margin for the quarter increased $1 million, and was 37.5 percent of sales, versus 38.1 percent a year ago. The increase in gross profit dollars resulted primarily from higher sales for the quarter. We do not report gross margin by business segment; however, the reduction in gross profit percentage resulted from a higher level of York Casket sales in the quarter. York Casket sales generally have lower gross margins than other Matthew's segments.

Year-to-date gross margin is 37.1 percent of sales, versus 37.5 percent a year ago. The decline, year-to-date, is due to York Casket being included in twelve-months results this fiscal year, versus 10 months in fiscal 2002.

SG&A expense for the quarter was 18.6 percent of sales, versus 21.7 percent a year ago. Year-to-date, SG&A expense is 19.4 percent of sales, compared to 21.5 percent last year.

Again, York Casket generally has a lower ratio of selling costs to sales, as its products are sold primarily through distributors. Lower selling and administrative costs in the Bronze division and the absence of the loss on the sale of the segment's granite import business were also factors for this improvement. The Bronze segment incurred a loss of approximately $500,000 on the sale of its granite import business in March of last year.

Investment income was down $85,000 for the quarter, and $304,000 year-to-date, due primarily to lower investment income rates. Interest expense is down for the quarter and year-to-date, 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 less-than-wholly-owned European Graphics businesses.

Our fourth quarter and year-to-date tax rate is 38.8 percent, pre-tax income.

We closed out the fiscal year with a cash and investment balance of $74.7 million. Prior to September 30th, 2003, we paid another $10 million on our revolving credit facility. Our revolving credit facility, which totaled $124.5 million on December 3rd, 2001, has been reduced by $80 million, and is now $44.5 million. Since the inception of this loan, we have made 8 quarterly payments, each at $10 million, which was our objective.

We also contributed $7.5 million during the third quarter to our company's pension plan, which was underfunded at September 30th, 2002. The assets of the plan now exceed the actuarial present value of vested benefit obligations.

At September 30th, 2003 our current ratio was 2.2 to 1 -- up from a ratio of 1.8 to 1 at September 30, 2002. At September 30th 2003, our outstanding accounts receivable balance was $63.7 million, which represents 48.5 day sales outstanding, compared to $66.2 million, or 52.4 day sales outstanding, at September 30th, 2002.

As of September 30th, 2003, shares outstanding totaled 32,162,049. We purchased 159,800 shares of our stock during the fourth quarter. Year-to-date, we purchased 252,700 shares of our stock in the open market. At September 30th, 2003, shares remaining to be purchased under the current buyback authorization totaled 668,100.

Our current and long-term debt balance at September 30th, 2003 was $63.1 million. 44.5 million of this is our domestic revolving credit facility. The balance is debt on the books of our Italian subsidiary, which was primarily used to finance the purchase of that company.

Depreciation and amortization expense for the fourth quarter totaled $3.8 million, and capital expenditures for the fourth quarter were $2.5 million. Year-to-date, depreciation and amortization expense was $14.9 million, and capital spending was 9.3 million.

For the year ended September 30, 2003, we reported earnings per share of $1.39, which was 1 cent ahead of our revised EPS projection. For fiscal 2004, we expect our earnings per share to be around $1.58 per share, which is within our 12 to 15 percent growth objective.

This includes the financial review. And now, Dave Kelly will comment on our operations.

Thank you, Steve. I would like to make a few comments about the year just completed, and a few comments about next year. First of all, I am very pleased with the results for 2003. I think we had a solid year. As Steve noted, our sales were up 7.2 percent, which was pretty much in line with our expectations. And our operating profit was up a very solid 17.5 percent, which, as I said, we are very quite pleased with.

I think also encouraging is the fact that in the fourth quarter, we saw a continuing firming of our business, as we indicated in our third-quarter conference call. So, I think that is a good indicator -- a positive indicator -- for the coming year.

As we look into 2004, I would like to give you kind of an overview of what our expectations are. The starting point in 2004 is, of course, 2003 earnings. And, if you to try and subtract out one-time items, both positive and negative, my sense is that they fairly-well balance. So, I think we have a fairly-good starting point, in terms of 2003 earnings for 2004.

In 2004, once again, I do not expect any substantial sales increase. I think this will be kind of a mirror of last year. Our sales gains will be modest. I also expect that we will see substantial productivity improvements in 2004, as we did in 2003. I think these are going to come from all of our divisions, but I think the two, in particular, that will contribute -- Graphics business, I think, we will have substantial gains in '04, as will York Casket division continue with the operating improvements that they have made. A lot of these productivity improvements will come from programs that we have completed in 2003. So, to a certain extent, we go into 2004 with some of these programs making contributions from the get-go.

We do not have any potential acquisitions in our plans for 2004 at the current time. As I indicated in our last call, we are considering acquisitions at this time, but nothing is imminent. And we will continue to march down that road during 2004.

Adding up all the pluses and minuses, Steve indicated in his comments, we think that it is quite reasonable to expect that we can meet our long-term goal of a 12 to 15 percent increase in our earnings per share. And that is, indeed, our target for 2004.

I will make one final comment. The year had started out well for us. As you know, our year begins in October. And, we had a solid month in October; pretty much in line with our expectations. And the business seems to be continuing to be firm, so that certainly is a good indicator.

So, with those comments, I would like to turn the meeting over to questions at this point.

(OPERATOR INSTRUCTIONS). James Clements (ph), Sidoti.

A quick question for your -- back when your reported your June quarter, I guess there was -- you guys experienced some weaknesses in a segment of your casket sales. I am not sure -- maybe I missed it at the beginning of your call, but can you give me a sense of what maybe went on there in September? Also, what are the prospects of the general industry-wide price increasing caskets at the beginning of calendar 2004? And, have you seen a pickup in caskets prior to that?

Okay, Jim, let me see -- you know, the starting point -- casket sales, as you know, were relatively flat because the businesses is just not growing. There have been price increases announced for the 2004 year and they were in the order of magnitude of 3 to 4 percent -- in that range -- kind of covering inflationary costs.

Our volume has, for the full year, increased slightly over the prior year -- pretty much where we had planned to be. And, we expected that situation to continue. And, as I mentioned in my previous comments, we are not really building our budgets around any significant increase in volume. We are just really building around making continued investments and improving productivity.

Okay. Thanks very much for your time.

Jason Rogers (ph), LJR Great Lakes.

Just a couple of questions here -- on capital expenditures and depreciation/amortization, do you have any estimates for fiscal 2004?

Right now, we don't have any firm estimates. But, I would say right now, it is safe to assume that our levels in fiscal 2003 will be a good benchmark for estimating 2004.

I would say that we might see a little bit of an increase in our capital spending, because we have, I think, identified some good opportunities, in terms of investing in our plants and plans to improve productivity. But it will not be material.

Okay. And, the cash balances -- the investments there -- is that still mostly short-term government securities?

That is correct.

No equity there?

No.

In foreign currency -- for the quarter, do you have a breakdown as far as what that did with sales and earnings?

Give me just a second --

I was going to say, for the quarter, the currency of impact on sales was around $4 million. And, on operating profit, it was a little bit less than $1 million. And, year-to-date, the currency impact, again, was about half of our increase in sales for the year. And, on operating profit, it had about a $3 million impact.

Okay.

Dave, good morning, it's Elliott Schlang. May I -- first of all, congratulations on the good quarter. And secondly, I would be interested -- with so many of our companies seeing opportunities to cut costs by moving facilities to China, are you contemplating anything like that?

Not only contemplating, but we have taken some initial steps already. Our first thrust, Elliott, is to source components where we think we can get a significant cost advantage. So, we've already begun activities in sourcing certain key components.

But, with respect to actually moving facilities, we are not contemplating that right now. We have considered it, but, to us, customer service, the ability to deliver quickly, and the ability to control our quality of service and our quality of our product are important. So, we hope to get the cost advantages, but without what we see to be the liabilities.

And secondly, you commented on raw material increases. To what extent do your '04 expectation include a continuation of that trend? And especially any comments on steel or any other raw materials that are affecting you?

I would say, to answer that question, we have factored in, at the division level -- for purposes of our budgets and forecasts -- what we expect to be -- and our raw materials might be normal inflationary impacts for the price of those components -- raw materials. But, I guess we really, as a company, would not be able to comment on where we think the price of steel or metals are going.

Yeah, if I had to make some general comments, I would say that it's anybody's guess what is going to happen to import tariffs. But, I think our general expectation is that steel might actually come down a little bit. And we're probably going to see an increase on the Bronze side and the copper side.

Thank you.

(OPERATOR INSTRUCTIONS). Stephen McBoyle (ph), Lord Abbett.

A question on the graphics side of the business. First of all, what percentage of revenue was it in the quarter? And then secondly, obviously you have had some profitability issues through the year, here in the U.S. Yet, when you talk about profitability gains next year, a portion of that, you mentioned, is coming from Graphics. If you could just talk to what initiatives or what management is anticipating will change on that side of the business to improve the profitability?

Sure, I would be glad to do that. To start off with, our Graphics sales -- a rough order of magnitude is about 20 percent of our business. So, I think I have not looked specifically at the fourth quarter. But, I think that would generally hold true, roughly 20 percent.

Okay. Great.

And, with respect to the improvements, I will just give you a couple of examples. We've had a couple of operations which did not live up to our expectations. And as Steve noted, we took a substantial write-off to close one of them this year. And we closed another one at the very beginning of the year and the end of the prior year. So, having done that, they will not have a negative drag on our earnings in 2004. So, you know, that is the type of thing which has gotten us off to a good start in 2004.

And, is safe to say that that closure is predominant, if not all, the incremental benefit that you're anticipating next year? Or, is there anything beyond that?

No. There are other things that are beyond that, that are going to help us. You know, another example is, as Steve noted in his comments, we acquired a company overseas and that is going to significantly add to our profitability. Plus, as Steve noted, our operating profit performance continues to be very good, particularly in Europe. And so, that is going to continue to help us.

And then finally, in our North American operations, we are doing a number of things that just -- day-to-day type things that improve productivity. So, you add that all together, and we are looking to have a nice improvement in '04 over '03.

Okay. On the casket side, I guess I was under the impression that this was a load- to no-volume growth type business. Yet, I think you made in your remarks, the comment that volume was growing. Is it your expectation, when you look out next year, that this could be a, kind of, two -- somewhere between 1 and 2 percent -- volume growth opportunity. And, if so, is that predominantly being driven by share?

Let me just clarify that. It is, as you said, a low- to no-volume-growth business. I think we might have confused you in our comments in that our business went up sharply in '03 because we had a full 12 months of results from York Casket.

Right.

Our comparable apples-to-apples basis was relatively flat, and we would expect that to continue. What is attractive to us about this business and continues to be attractive, is that we see significant opportunities for investment and productivity improvement. And that is, as I mentioned in my comments, what we are going after.

Just to that point, if you could refresh me -- when you acquired the business, what the margin levels were and what they are today? And perhaps what they may be 12 months from now? And I will leave it at that. Thank you very much.

Okay. You know, Steve you want to comment on that?

Yeah. At the time we acquired the business, for the 11 months leading up to the time we acquired the business in December 2001, the operating margin was about 7 percent. For last fiscal year, I believe we reported 9.3 percent. And, this year is in the 10.5, 10.6 percent range. And, as Dave mentioned earlier, we're looking to continually improve that, year-over-year.

And, again, the improvements would be driven largely by what specifically? Because, again, I think from a capacity perspective, most of that opportunity was behind you. Meaning, again, number of factories being cut in half and so forth.

Well, one example, as we discussed in previous quarterly conference calls, we're making a major effort in one of our factories to install our continue (indiscernible) manufacturing. We invested approximately $1 million on it last year with a consultant that is helping us with this process; working with a great team of people at our factory. And, you know, the results have been quite encouraging, so far, and we're going to continue that project into '04. So, that is just one example out of many of the types of things that are being done by the York Group quite successfully.

Great. Thank you very much.

I have no further questions in queue at this time. Please continue.

Thank you for participating in the call this morning. And, we will look forward to reporting our first-quarter results in January. Again, have a good morning.

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