Matthews International Corp (MATW) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Matthews International first-quarter financial result conference call. At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session with instructions to be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our Chief Financial Officer, Mr. Steve Nicola. Please go ahead.

Good morning. I am Steve Nicola. On the call with me today is Dave Kelly, our Chairman of the Board, President, and CEO.

Today's conference call is set up with the phone company for one hour. We are conducting the call to comply with 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 715045. The replay will be available until 11:59 PM, February 3, 2004. If you access our website at MATW.com and click on the Investor Information icon, you will have access to the first-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 had 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 Harbor provisions 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 annual report on 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 Form 10-Q for the quarter ended December 31, 2003 will not be filed with the SEC until around February 11, 2004.

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 earnings per share of 20.7 percent, from 29 cents a year ago to 35 cents for the current quarter. The improved operating results for the current quarter reflected higher sales, an increase in the value of foreign currencies against the U.S. dollar, and operating improvements in several of our segments.

In addition, demand for our marking products in the United States was stronger compared to the same quarter a year ago, which is to say we have seen a recent pickup in orders domestically. Results from our domestic graphics operations have also improved as a result of our recent cost structure initiatives.

Consolidated sales for the quarter increased 7.2 percent, or $7.8 million. All segments of the company's business reported higher sales for the quarter. Graphics imaging segment sales were up $2.9 million, or around 13 percent for the quarter, resulting from an increase in the value of the euro and the acquisition of Reproservice Munich. Reproservice Munich is a German graphics business which was acquired by Matthews in August 2003.

Bronze segment sales increased $2.5 million, or around 6 percent over the prior period, reflecting the favorable impact of the change in the euro and an increase in sales for the segment's Italian operation.

Sales for the marking products segment increased 22 percent for the quarter. This was volume-driven, reflecting higher demand with the improvement in a domestic economy.

York Casket sales were up only slightly for the period. However, the prior-year first quarter included sales from a small manufacturing operation and several distribution operations which were divested by the company during fiscal 2003. Excluding the sales from these operations, York Casket sales increased around 3 percent for the period.

Sales for the cremation segment increased approximately 13 percent over the same period last year, reflecting increases in the sales of both cremation equipment and cremation caskets. As I stated earlier, consolidated sales increased around 7 percent for the quarter. Excluding the favorable impact of foreign currency exchange rates, I estimate that consolidated sales increased 3 percent for the quarter.

Operating profit for the quarter was $3 million, or 17.9 percent over the same quarter a year ago. The increase was mainly due to the increase in consolidated sales and the favorable impact of foreign currency exchange rates. Excluding the impact of exchange rates, I estimate that operating profit increased 12 percent for the quarter.

The graphics imaging segment reported the largest dollar increase in operating profit for the quarter, an increase of $1.3 million over the same period last year. The improvement resulted from the higher value of the euro and the acquisition of Reproservice Munich. In addition, our domestic graphics operations reported higher operating profit for the quarter as a result of its recent cost structure improvements.

Operating income for the marking products segment increased over 80 percent for the quarter, mainly due to higher sales and improved operating margins. In addition, this segment's operating results also benefited from a higher value of the Swedish krone compared to the U.S. dollar.

Operating profit for the York Casket segment increased approximately 17 percent for the quarter, reflecting continued improvements in manufacturing efficiency, higher sales, and the absence of lower margin sales from the divested operations. The segment's operating margin was 13 percent for the current quarter, compared to 11 percent last year.

The bronze segment had a 4 percent increase in operating profit, which was driven primarily by higher sales and improved foreign currency rates.

Operating profit for the cremation segment was relatively consistent with the prior year, despite an increase in sales. Beginning in fiscal 2004, the segment implemented changes in certain employee benefits which resulted in a slight increase in this related expense over the prior year.

First quarter and year-to-date sales and operating income are posted on the web site, so I won't repeat them now. But our first-quarter consolidated operating margin for fiscal 2004 was 17 percent of sales, compared to 15.4 percent in the first quarter last year.

Earnings per share for the quarter was 35 cents, versus 29 cents a year ago, an increase of 20.7 percent. The largest contributor to the earnings per share increase was the 17.9 percent increase in operating income for the quarter combined with lower interest expense. These increases were partially offset by an increase in minority deduction expense as a result of increased profitability at our foreign graphics locations.

Gross margin for the quarter was 36.5 percent of sales versus 35 percent a year ago. The increase primarily reflected improved margins in the marking products and graphics imaging segment. Gross profit dollars were up $4.4 million for the quarter, an increase of 11.6 percent. SG&A expense for the quarter was 19.5 percent of sales, which is relatively consistent with 19.6 percent a year ago.

For the quarter, investment income was $351,000, compared to $275,000 for the same period a year ago. The increase reflected a higher cash and investment balance during the current period. Interest expense for the quarter was $451,000, down 518,000 from a year ago. This decline reflected the lower level of debt and lower interest rates for the quarter.

Other income deductions net was a reduction to income of $86,000 for the current quarter, compared to a reduction of $17,000 for the same period last year. Minority interest deduction was $1.1 million for the current quarter, compared to $970,000 for the prior period, due to higher profits from our less-than-wholly-owned European graphics businesses.

Our first-quarter tax rate is 38.8 percent of pretax income, which is unchanged from last year.

We closed out the December quarter with a cash and investment balance of $75.2 million. Prior to December 31, 2003, we paid another $10 million on our revolving credit facility. Our revolving credit facility, which totaled $124.5 million on December 3, 2001, has been reduced by $90 million, and is now $34.5 million. Since the inception of this loan, we have made nine quarterly payments, each of $10 million, which was our objective. Since the maturity of this facility is November 30, 2004, the remaining outstanding balance has been classified as a current liability on our balance sheet.

At December 31, 2003, our current ratio was 1.5-to-1, compared to a ratio of 2.2-to-1 at September 30, 2003. The decline reflects the current liability classification of the outstanding balance under our revolving credit facility.

At December 31, 2003, our outstanding accounts receivable balance was $60.3 million, which represents 46 days sales outstanding, compared to 48 days sales outstanding at September 30, 2003.

As of December 31, 2003, shares outstanding totaled 32,113,969. We purchased approximately 219,000 shares of our stock during the first quarter in the open market. At December 31, 2003, approximately 449,000 shares remained to be purchased under the current buyback authorization.

Our long-term debt balance at December 31, 2003, both current and long-term portions, was $53.8 million. 34.5 million of this balance is our domestic revolving credit facility. The remaining balance is dead on the books of our Italian subsidiary, which was used primarily to finance the purchase of that company.

Depreciation and amortization expense for the first quarter totaled $3.8 million, and capital expenditures for the first quarter were $1.8 million.

Finally, our earnings per share for the current quarter of 35 cents was in line with our internal expectations. As such, we're maintaining our earnings per share target for the year of $1.58 per share, which is within our 12 to 15 percent growth objective.

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

Thank you, Steve. I'd just like to make a few comments this morning. Let me start with repeating Steve's comment -- our earnings are up 20.7 percent for the quarter. I think in looking at that number, it's appropriate to take out the favorable effect of currency. If you do that, I think our earnings increase was closer to a 15 percent increase, which of course, as Steve said, is in line with our long-term goal.

I think what's particularly notable about the quarter is that we had broad participation in achieving that 15 percent growth in our earnings per share. Our bronze group had a very nice operating profit increase on modest sales improvement. Our York group had operating profit up, in line with our long-term plan. And that's important, because it indicates that our productivity improvement plan is working quite well -- although, as you all know, we have a long way to go.

Our graphics group -- I think what's particularly notable there is that the North American operations, which we have been working on for some time now, showed a sharp improvement. And that reflects the closing of less profitable operations and performance improvements in our remaining operations as we adopt some of the techniques that have worked well for us in Europe.

In our marking products division, we had quite a substantial increase in both sales and operating profit, reflecting not only improved economic climate, but I think also a lot of work that has been done by that business segment to improve product and product quality and product delivery.

The cremation group set, I think, a foundation for improvement in the future. They're making progress, but we still have a job to be done in that operation.

I think I need to point out that the credit for the improvements go to the management teams and the employees of those business segments. They're really doing a tremendous job.

Looking out for the year -- as Steve said, we are maintaining our earnings per share target of $1.58. We think that the quarter supports that. But I hasten to add, as I think most of you know, that because of the seasonal nature of our business, most of our operating profit comes in the second and third quarter. So we really have to go through the second and third quarter to get a real firm grip on the year.

With those comments, I would like to open the meeting up now for questions.

(OPERATOR INSTRUCTIONS) Bill Burns, Johnson Rice.

Good morning. Dave, I wonder if you could comment on, you know, a macro, big-picture item -- just where is the company's focus for 2004 here? What are we going to try to accomplish this year?

Well, Bill, I think I'll answer that question in two ways. One is -- as we do every year, we focus on a 12- to 15-percent improvement in our earnings per share. And you know, that involves all the things we do in terms of trying to increase our sales through internal growth and productivity improvements, etc.

But if in that word -- you use that word macro -- you're referring to "how do we set the table for the long term," I think one of the key things that we're now doing that we were not doing in the past couple of years is that we're starting to gear up our acquisition program once again. As we said previously, we have been focusing on absorbing what we have done in the year 2001. That seems to have worked fairly well. Our debt has gone down quite substantially. So I think we're now in a position to look out to the future beyond 2004 to '05 and '06.

And domestic market for acquisitions -- are those looking to as attractive as the ones in Europe?

In terms of potential?

Yes, in terms -- just the economy getting stronger.

Yes, I think that there are opportunities out there. But I hesitate to say that track -- that acquisitions ever look attractive. They always seem too expensive to me.

Good for you, good for you. We like to hear that.

So I think that it takes a lot of work. And it takes a lot of hunting to find the right situations which fit in with our own operations, and where we can bring something to the party to meet our long-term 20-percent return on capital objective.

And if I could real quick, Steve -- do you happen to have in front of you your equity balance at the end of the quarter?

Yes, it's about $270 million.

270 -- thank you very much.

James Clement, Sidoti.

Good morning, guys. Hey, two quick questions for you. One is -- I know that back sort of late summer/early fall, you all alluded to -- you know, that you were proceeding an increase in your marking products segment. It appears as if that's actually translated into operating income in that segment, or an operating income improvement.

To what extent do you think that some of that was pent-up demand that may not be than sustainable for the rest of the year? Or do you think that it's maybe a little bit too early to tell? Or are you pretty optimistic about that segment for (ph) -- let's say, you know, the second and third quarter?

Well, Jamie, I do think there was some pent-up demand. And it did have some favorable impact in the quarter. However, I think underlying the quarter was some really new, solid product introductions. New inkjet DOD valve equipment has been extremely well-received in the marketplace. We've strengthened our sales force, improved our ink offering. So I think that -- you know, I'm cautiously optimistic that marking products are going to have a very solid year.

Let me ask you another follow-up question. You know, I know that you all -- you know, you announced an acquisition in roughly mid-August of Reproservice Munich. Is it a little bit too early to tell how that's going, because I know you all have been very forthright historically about the performance of your acquisitions? So do you have any comments on that?

Yes, Reproservice Munich is super. We're very fortunate that we got a leader there -- Mr. Jakob, Dieter Jakob, who has done just a wonderful job for us. And the business is doing extremely well.

Thanks, guys, appreciate it.

(OPERATOR INSTRUCTIONS) Greg Halter, LJR.

Good morning, guys -- good quarter. I'm just wondering about hearing all the increases in steel and copper and so forth what kind of impact raw material price increases are having on your business or businesses?

That's a good question. Bronze prices have really gone up quite substantially. They were -- Steve, you can help me out, but they were under a dollar at -- before the year started, and they're over a dollar right now. (multiple speakers)

Bronze pricing, that's right.

And so it's enough of an increase that it's certainly not insignificant at this point in time. So what that means to us, Greg, is that we've got a run a little bit faster and do a few more things in order to keep our record intact of 18 years of consecutive improvements in sales and operating profit. And you know, what I can say is that our guys in the bronze division are well aware of this issue, and are taking it into account in their planning, and are trying to do the things that have to be done to still make the budget numbers for the year despite the bronze price increases.

Okay.

Are we still there?

Bill Burns, Johnson Rice.

Dave, I was wondering -- just following up there -- what about the steel price?

The steel prices -- Dave, can you help us out there?

We've seen some increase -- we're anticipating a little bit in stainless. We haven't seen it yet.

I don't think Bill, for our -- the principal place we use steel, of course, are casket operations. And at this point in time, it's not enough of an increase that is a major problem for us.

Okay. Then -- real -- the question -- if we could, just for a minute, focus on the graphics. You had sales up 12.7 percent, and operating profits up 49.4 percent. And you gave some reasons -- I think, you know, you'd sold some businesses that were marginal. Obviously, the currency helps you. And then the acquisition played a part. And then the fourth thing you mentioned was adopting techniques that are working better in Europe than they are in the U.S. and adopting those here in the US. If you just say a couple of sentences on that?

Well, you know, a couple of things. One is that we've known for a long time that product mix is important in that business. Some products produce better margins than others. That of course was confirmed by our experience in Europe. So it accelerated our efforts to change our product mix here in North America to a more favorable product mix, which involved going out and getting new technology, training people, and then going out and getting new customers. And so that is going, I think, well.

Secondly, we found that there was substantial productivity differences. And there were some specific reasons for that. One example would be that Europe tends to organize in teams around particular product offerings or customer groupings, where we tend to be more departmentally oriented here in North America. So we've changed that, and we've adopted the European scheme there. And it appears to be working quite well, in that it's facilitated communication and sped up our processes, if you will.

So that, Bill, gives you an example of the types of things that I was referring to.

Very good. Thank you very much.

Charlie Smith, Fort Pitt Capital.

Yes, thank you. Dave, in the cremation business -- year over year, you had a nice sales increase. Could you talk a little bit about what's driving that business, where your successes are coming, and when you think the profitability will begin to show through there?

Well, that business really comes in two parts. One is the cremators that we manufacture down in Florida and cremation caskets that we manufacture in Richmond. Of course, we have long known that the cremation business is the fastest-growing segment of the death care industry. And I think that's, to some degree, is reflected in our sales increase.

But the cremation division has done a lot of work, particularly in the cremation casket area, in terms of introducing new products. And we think that in 2004 we should see some improvements as a result of that new product series.

But we've done a lot of work over the course of the past year in trying to get the right organization in place. And we think we've largely accomplished that. And I think the team just needs a little bit of time to implement some of the plans that they have in place for improving profitability. Hopefully, by the end of this year going into 2005, we will see that operation on the upswing.

Is that an area where potentially acquisitions may happen?

I think all areas of our business are open to acquisition. We tend to try and focus on our existing businesses where we know something about them. Certainly, cremation would be an area that we would have an interest in because of the growth in that particular part of the industry.

Congratulations on good quarter.

Greg Halter, LJR.

Yes, regarding your share repurchase -- the number of shares purchased in the quarter, do you have the amount that was spent and the high price paid per share?

Yes, Greg -- I can ballpark that for you, Greg. It was about -- we spent about $6 million on the share repurchases -- so somewhere in that $27-a-share range, I think, on average.

Okay. And a couple of other housekeeping items. Do you have your total assets figure for the quarter or for year -- December 31?

Yes, actually, total assets didn't change much from September 30th. It's still around that $435, $437 million range.

And accounts payable?

Accounts payable is around $21 million.

Okay, and --

I'm sorry, let me check that for you -- it's around 17 million.

And goodwill and other intangibles?

Sitting at about 170 million.

Okay -- and that seems up a little from the last quarter, sequentially. Would that be due to currency?

Yes, that would be due to currency.

Okay. And do you have the cash flow from operations figure for the quarter?

Cash flow from operations is in the $14 to $15 million range.

All right. And I presume depreciation and amortization should be around 15 million for the year with cap-ex -- at 10 to 15 or so?

Well, that's -- again, that's a little hard to gauge. That's a nice wide range on the cap-ex, so I could go with that. The first quarter for depreciation and amortization was 3.8. So if you annualize that, that puts us in that range, too.

Okay. And on the capital spending, are there any plans or needs for anything of significance beyond fiscal '04?

I would say that at this point, it's safe to extrapolate based upon our past spending.

Okay. And regarding price in each of your five businesses, are you seeing any sort of -- either price pressure or the (ph) ability to get prices through?

Well, we find that, I think, without exception, our businesses remain very competitive. And it's quite difficult to have any price increase. And the price increases we've had have been very modest. And we have to focus on improving our operations internally to see improvement on our bottom-line.

Okay. And your pension plan -- I believe you contributed, I think, 7 or 7.5 million last quarter. How is that looking as of December 31st?

That is looking fine. At this point in time, we're not projecting any major requirements for contributions to our pension plan.

Okay. And Dave, I know you have one of those plans on selling your own shares -- a 10(b)-5, or whatever they call them. When does that run out, or expire, or whatever the right term is for it?

It goes through March of this year.

Through March, okay. All right, thank you.

There are no further questions. Please continue.

Okay, well, thank you. We appreciate your time this morning, and thank you for participating on the call. And we look forward to the second quarter.

Ladies and gentlemen, this conference will be available for replay after 1:30 PM today Eastern Time, through Tuesday, February 3, at 11:59 PM. All participants may dial the AT&T replay number of 320-365-3844 with the access code of 715045. That number again is 320-365-3844 with the access code of 715045.

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