Matthews International Corp (MATW) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the second quarter financial results teleconference.

[OPERATOR INSTRUCTIONS].

As a reminder this teleconference is being recorded. I would now like to turn your teleconference over to the Chief Financial Officer, Mr. Steve Nicola. Please go ahead, sir

Thank you. Good morning. I'm Steve Nicola. On call with me is Dave Kelly, Chairman of the Board, President and CEO of Matthews.

Today's conference call is set up with the phone company for one hour. 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 725504. The replay will be available until 11:59 p.m., May 4, 2004. If you access our Web site at matw.com and click on the investor information 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 had an opportunity to participate in the question and answer session.

We are conducting the call to comply with the Securities and Exchange Commission regulation F.D. 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 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 quarterly reports on Form 10-Q, annual report on Form 10-K and other periodic filings with the SEC.

I might also add that balance sheet and income statement data we provide today are preliminary data, since our 10-Q for the quarter ended March 31, 2004, will not be filed with the SEC until around May 14, 2004. To begin the conference, I will review the financial results for the period ended March 31, 2004. Dave Kelly will then provide general comments on our operations. Following that, we will open the discussion to questions.

As you noted from our press release yesterday, the company reported an increase in earnings per share for the second quarter of 16.7%. From 36 cents a year ago, to 42 cents for the current quarter. For the six months -- for the first six months of fiscal 2004, earnings per share were 77 cents compared to 65 cents for the same period last year.

Representing an increase of 18.5%. The improved operating results for the current quarter and first six months reflected higher sales and increase in the value of foreign currencies against the U.S. dollar and operating improvements in several of our segments.

Consolidated sales for the quarter increased 8.1% or $9.4 million. Year to date, consolidated sales increased $17.2 million or 7.7%. All segments of the company's business reported higher sales for the quarter and year to date. Graphics imaging segment sales were up $5 million or around 21% for the quarter, and were up $7.9 million or 16.9% for the first six months of the fiscal year.

The higher level of sales resulted 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 $2.4 million or 5.3% over the prior quarter and increased $4.9 million or 5.6% year to date.

Higher sales for the bronze segment reflected the favorable impact of the change in the euro on its Italian operation and higher sales of memorialization products for the current year. Sales for the marking product segment increased $1.7 million or 21.3% for the second quarter and $3.3 million or 21.5% for the first half of fiscal 2004. The segment sales growth resulted from higher volume, reflecting higher demand with the improvement in the domestic economy.

York Casket sales were up slightly for the second quarter in six-month period. However, prior year amounts 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% for the quarter and year to date.

Year-to-date sales for the cremation segment increased approximately 6.7% over the same period a year ago, but only slightly for the second quarter.

For the current six-month period, sales of both cremation equipment and cremation caskets were higher than a year ago, but sales for the second quarter were only slightly ahead of last year due to a recent slowdown in orders shipped.

As I stated earlier, consolidated sales increased 8.1% for the quarter and 7.7% year to date. Excluding the favorable impact of foreign currency exchange rates, we estimate that the consolidated sales increase 4.4% for the quarter and 3.7% year to date.

Operating profit for the quarter was $3.7 million or 18% over the same quarter last year. For the six months ended March 31, 2004,operating profit was $6.7 million or 18% higher than a year ago. The increase was mainly due to the increase in consolidated sales, the favorable impact of foreign currency exchange rates, and operational improvements in several of our business segments.

Excluding the impact of exchange rates, we estimate that operating profit increased 12.6% for the quarter and 12.5% year to date.

The graphics imaging segment reported the largest dollar increase in operating profit for the quarter and year to date. Increases of $2 million and $3.3million respectively 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 as a result of its fiscal 2003 cost structure initiatives.

Operating profit for the marking products segment increased 66% for the quarter and 74% year to date. 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 Kroner compared to the U.S. dollar.

Operating profit for the York Casket segment increased approximately 51% for the quarter and 35% year to date reflecting continued improvements in manufacturing efficiency, higher sales, and the absence of lower margin sales from the divested operations.

The segments operating profit is a percent of sales with 15% for the six months ended March 31, 2004, compared to 11% for the same period last year.

Since our acquisition, the margins in the casket business have steadily improved. However, we continue to face several challenges including low market growth, domestic competition, the threat of overseas competition, and recent increases in metal prices.

During the second quarter, recent significant increases in steel costs started to impact the margins of the casket business. These increases are expected to have a more material impact on the segments margins in the second half of the fiscal year.

Second quarter operating profit for the cremation segment was approximately twice that of the year ago. An increase in the segment's gross margin percentage and administrative cost improvements contributed to the higher level of operating profit for the quarter.

As a result, year to date operating profit for the segment increased approximately 34%. Operating profit for the bronze segment declined $1.2 million for the second quarter and approximately $800,000 year to date compared to the same period a year ago.

Operating results for the prior second quarter and six-month periods reflected the favorable impact of a one-time adjustment in the segment's finishing cost liability. In addition, material cost for the segment in the current year is being adversely impacted by significant increase in bronze ingot costs. Bronze ingot costs have increased around 65% from this same time last year. These increased costs are projected to have a more significant impact in the second half of the company's fiscal year.

As a result, the company has implemented several operating initiatives in an attempt to mitigate some of the impact. One of these actions included a personnel reduction program, which resulted in a one-time charge for severance cost in March 2004 that negatively affected the segment's reported results for the quarter.

Second quarter and year-to-date sales and operating profit by segment are posted on our Web site. Year to date operating profit percentages by segment are as follows: Graphics images, 17.6% of sales. Marking products, 17.9% of sales. Bronze 22% of sales. York Casket, 15% of sales and cremation, 8.4% of sales. Our second quarter consolidated operating profit as a percent of sales for fiscal2004 was 19.3% of sales compared to 17.7% in the second quarter last year.

Our year to date consolidated operating profit, as a percent of sales for fiscal 2004 was 18.2% of sales compared to 16.6% last year. Earnings per share for the quarter was 42 cents versus 36 cents a year ago. An increase of 16.7% earnings per share for the sixth month's ended March 31, 2004 was 77 cents compared to 65 cents a year ago, an increase of 18.5%.

The largest contributor to the earnings per share increase was the 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 38.1% of sales versus 37.5% a year ago. Gross margin for the sixth month's ended March 31, 2004 was 37.3% of sales, compared to 36.3% a year ago.

The increase primarily reflected improved margins and the marking products and York Casket segments. Gross profit dollars were up $4.2 million for the quarter, an increase of 9.8% and $8.7 million or 10.6% year to date. SG&A expense for the quarter was 18.8% of sales compared to 19.8% for the second quarter last year.

Year to date, SG&A expense was 19.1% of sales compared to 19.7% a year ago. Cost structure improvements in the York Casket and graphics imaging segments contributed to this reduction.

For the current quarter, investment income was $311,000 compared to $356,000 for the same period a year ago. The decline reflected lower short-term interest rate returns during the period. Year to date, investment income was $662,000, compared to $631,000 last year.

Interest expense for the current quarter was $429,000 compared to $703,000 for the same period a year ago. For the six months ended March 31, 2004, interest expense was $880,000, compared to $1.7 million last year.

This decline reflected the lower level of debt and lower interest rates for the quarter. Minority interest deduction was $1.5 million for the quarter, compared to $1.1 million for the prior period.

For the six-month period ended March 31, 2004, minority interest deduction was $2.6 million compared to$2.1 million for the same period last year. The higher level of minority interest deduction reflected an increase in the value of the euro and higher profits from our less than wholly owned European graphics businesses.

Our second quarter and year to date tax rate was 38.8% of pretax income, which is unchanged from the prior year. We closed out the March quarter with a cash and investment balance of approximately $90 million. Prior to March 31, 2004, we paid another $10 million in our revolving credit facility. Our revolving credit facility, which totaled $124.5 million on December 3, 2001, has been reduced by $100 million and is now $24.5 million. Since the inception of this loan, we have made 10 quarterly payments each of $10 million, which was our objective.

Since the maturity of this facility is November30, 2004, the remaining outstanding balance has been classified as a current liability on our balance sheet. At March 31, 2004, our current ratio was 1.7 to 1 compared to a ratio of 2.2 to 1 as of September 30, 2003.

The decline reflects the current liability classification of the remaining outstanding balance under the revolving credit facility. At March 31, 2004, our outstanding accounts receivable balance was $65.6 million, which represents 47-day sales outstanding, compared to 48 days sales outstanding in September 30, 2003.

As of March 31, 2004, shares outstanding total 32,368,866 shares. We have purchased approximately 231,000 shares of our stock in the open market since September 30, 2003. At March 31, 2004, approximately 437,000 shares remain to be purchased under the current repurchase authorization. Our long-term debt balance at March 31, 2004, both current and long-term portions, is $43.2 million. $24.5 million is our outstanding revolving credit facility.

The balance is dead on the books of our Italian subsidiary, which is primarily used to finance the purchase of that company. Depreciation and Amortization expense for the quarter in six months ended March 31, 2004 were $3.7 million and $7.5 million respectively.

Capital expenditures for the quarter in six months ended March 31, 2004 were $1.4 million and $3.2 million respectively.

Finally, our earnings per share for the current quarter of 42 cents was in line with our internal expectations. However, with the recent significant increases in bronze and steel costs, the company's ability to achieve its stated targeted earnings of $1.58 per share for fiscal 2004 will depend on the level and duration of these cost increases and the success of our initiatives to mitigate their impact. This concludes the financial review.

And Dave Kelly will now comment on our operations.

Thank you, Steve. I'd like to -- to do three things this morning. One I would like to highlight some of the comments that Steve has made concerning our first half year. Secondly, I'd like to talk a little bit about the second half of the year. Finally, I'd like to wrap up with what I think the outlook for earnings will be for the full year.

To start off with, I'm very proud of the accomplishments of our management team and employees during the first half of this year. As Steve mentioned, we have had a very substantial increase in our operating profit. And I might highlight the fact that four out of our five business segments reported operating profit as a percent of sales, for half year greater than 15%. That's been a long time goal or objective of ours is to get our operating business segments up over 15% and congratulations, due to all of the employees who have made that possible. The fifth one, cremation has substantial improvement over the prior year. And is continuing in their efforts to improve it even more for the coming year.

Also, I might point out, as Steve mentioned, that two of our business segments, graphics and marketing products had a substantial sales increases. Graphics imaging, 16.9%, and marking products, 21.5%. So I think particularly in the marking segment, it's an indication of stronger business environment and ability to grow our business as a result.

So, once again, congratulations to the team that made that possible.

Looking out to the second half of the year, the major issue that we're fighting with is what's going to happen with some of these commodity price increases.

I note that in "The Wall Street Journal" they indicated that copper prices have gone up from 72 cents at this time a year ago to a high of $1.37 this past Monday. That's really, if you stop and think about it, a phenomenal increase in the price of copper.

And that is something, which, you know, we have dealt with, I think, successfully in the first half of the year. But a lot of the increase came to us late in the half year and I think face a greater challenge in the second half of the year.

Now to combat that increase and the steel increase which is probably, you know, maybe in the 20% to 25% range, we have, in some cases, implemented limited price surcharges. But by no means are we able to cover all of the increases in our raw material costs.

To a large extent, we have had to absorb those through improvements -- internal improvements in our own operations. You know, we've done things such as early retirement programs and we really continue to focus as we always do on our productivity programs. How this will shake out for the second half of the year, I think, largely depends upon what happens to commodity prices going forward.

Our current assumption is that copper is now peaking out. And probably peaking out, hopefully, in this month. We have seen a dip in the price, actually, this week. And steel prices have peaked out. Now we're going to presume that these price levels are going to remain with us for the balance of this year. And we've kind of designed our plans and forecast with that expectation for the balance of the year. However, there is somewhat of an uncertain operating environment.

And, so, in light of that, I -- I think it's prudent to be conscience in our earnings forecast for the full year and I would anticipate that a range of earnings from $1.55 to $1.58 might be more appropriate than our previous guidance which indicated $1.58. So with those comments, I'd like to turn the meeting over to questions.

Thank you.

[OPERATOR INSTRUCTIONS]

The first line we're going to open is the line of Bill Burns with Johnson Rice. Please go ahead.

Good morning Dave and Steve.

Good morning, Bill.

Hi.

Dave, I wonder if you might elaborate a little bit on the margins at York Casket. You know, I guess I've always been on your case about when will the margins improve and the margins now have. So I was -- I guess I can't complain about them anymore. But they were up significantly.

Well, Bill, two points -- you know, first, my hat off to the York management team and really the employees. We've gotten a tremendous cooperation from employees throughout the organization and it's through their efforts that we have largely achieved these rather substantial operating margin improvements. And they've been due to the types of things that we've talked about in our past conferences, you know, continuous slow manufacturing, new processes, capital investments, etc., new products, product standardization.

Now that being said, I think no one in York organization would be surprised to say that, you know, my opinion we need to go further. We're certainly not at the level of the better performers in the industry at this point in time. So there's got to be a continuing effort on our part to seek either further improvement in the coming year.

Okay. And then, as a follow-up, Steve, what is the equity balance at the end of the quarter?

The equity balance at the end of the quarter is about $280 million.

280? Okay, that's what I thought. And would you -- I'm sorry, but you would repeat how many shares you bought and what's remaining?

Right now, year to date, we've purchased about 200 -- hold on just a second, Bill, let me pull that.

You gave it to me. I'm sorry.

We purchased about 230,000 shares since September 30. And we have 437,000 -- about 437,000 shares as of March 31 remaining to be purchased.

Thanks, Steve.

You're welcome.

Next line will open is the line of James Clement at Sidoti. Please go ahead.

Good morning, guys

Good morning, James.

A couple quick questions. One, I think Steve; you mentioned a slight personnel reduction in the month of March. Was that exclusively in the bronze division?

That was related to the bronze division, yes.

Now is that, you said that you incurred a modest charge. Is that included in this quarter's 42 cents or is the 42 cents excluding that charge?

That's included in the 42 cents.

Any idea of the magnitude of that charge?

That's something we haven't disclosed.

Okay, okay. That's fine. Let me just change gears just a tad. In term of -- in terms of the acquisition market, first of all, what -- did I -- I don't know if you guys disclosed your cash balance.

Yes, we did approximately $90 million.

$90 million. Okay. So you're -- you certainly got a fair amount of money there. What are you seeing in the acquisition market? Are there some sort of general types of properties that you guys are looking at now? And, you know, has the, you know, rebound in the general economy changed the way you look at acquisitions or changed the pricing market at all?

James, let me try and answer that. We have stuck to a very carefully thought out plan with respect to acquisitions. Just to go back since December of 2001,we have slowed down our acquisition program to pair back our debt. We largely completed that now.

Our debt balance, as Steve mentioned, was $24.5 million on the original borrowings related of York acquisition. So we have switched gears once again to begin to actively look for acquisitions.

We've always said that our growth strategy first focuses on internal growth, secondly, it involves share buy backs and thirdly, it involves acquisitions. So acquisitions remain an important part of our overall plan. We have now for sometime been working on an acquisition, you know; this is not something, which happens overnight. And we have several that we're working on right now. And I would not be surprised if we were able to complete some of these by the end of this year. Although, nothing is guaranteed until, you know, the final signature is inked.

The next line will open is Greg Halter at LJR Great Lakes. Please go ahead.

Hi, guys.

Good morning, Greg.

Good morning. Do you have a figure available preliminarily on the cash flow from operations either for the quarter or year to date?

I don't have the quarter figure, Greg. But it's around $40 million year to date.

Okay. That's perfect. And on your capital spending, it's been only $3 million year to date. What do you envision for the rest of the year? And looking out over the next year or two?

I'm not sure I can answer that specifically, Greg. You know, generally, I mean you've seen -- you've seen that we've published our capital budget. But sometimes -- which has been in the 11, 12, $13 million range. But historically, we've spent a little less than that. I think on average the last couple of years it's been around -- around $9 million.

I would -- I wouldn't be surprised by the end of this fiscal year if we were close to our historic average. I don't think -- I don't think at this point we'll get to, you know, spend all of our budget for the year. And the only thing I would tell you about looking forward is I don't think today we see anything that is going to change that -- change those economics for the next year or two.

Okay. So there's no real components anywhere that are requirements for any significant capital expenditures?

We don't see anything today in our current businesses, no.

The past utilization and so forth, is that a factory?

Yes.

Okay. And relative to marking products and graphics, those businesses both have rebounded nicely here with the economy and currency as well.

And the margins are hanging in there nicely. What kind of upside is there assuming the economy continues to improve here? I mean where would you like to see that business?

Well, Greg, let me start with the marking products business. This business is very profitable for us at this point. And we have a really outstanding management team there that had done really a great job. So I would like to see this business grow and, indeed, the past year we've been working on strategic thrust that would get us into new business areas.

So one of my expectations would be that, you know, a year from now we will have announced new initiatives there that will enable us to broaden our product offering and hopefully expand our business. It's still quite a small business in a relatively large industry.

So I think there is a lot of opportunity for us to grow. With respect to graphics, over all, it's become a -- overall, it's become a very profitable business for us. And we're quite interested in growing that business further, both in North America and in Europe. And there are several different things that we're pursuing there.

So I would be surprised if we had some new initiatives there before, you know, within the course of the next year.

And those could be either acquisitions or internal development?

Both.

Okay.

Both, yeah.

The next line will open is Gary McHam (ph) at McHam & Company. Please go ahead.

First a follow-up on the shares bought, shares still to buy. What's your average price per share on the 230,000 you've bought? Secondly, on the shares to buy, does -- do your plans for acquisition, will that slow down? Does that imply a slowdown in working off the 430,000?

And third question is -- and if you mentioned this earlier, I joined the conference call late for which I apologize. Are you hedging in the copper and steel markets?

Let me take the first of those questions. You had asked on the share repurchase program what our average price is. I don't have that specifically handy.

But I would guess for year to date it's been around 27, $28 a share from September 30 forward. And then --

Are you doing that in the open market or not?

Yes. Yeah. There are -- there are new SEC guidelines that went into effect sometime during the first six months of this year that we have to follow in terms of patterns, who we buy from and how much we can buy on a particular day.

So, yes, we are doing that in the open market. And following those protocols. The last of your questions was with respect to hedging on metal and steel prices.

And, no, we -- we do -- we have in the past. And, you know, and I'm sure we will in the future as pricing opportunities allow us to buy out for some period of time.

And sometimes we buy on spot. Sometimes we buy out. But we haven't entered into any hedging contracts. And certainly right now wouldn't be a time that we would be looking to lock in prices.

What about the 437,000 shares still to buy? Would the acquisition -- does the fact you're going to step up on acquisitions imply a slowdown in that, in the share repurchase program?

I -- I would answer that this way -- You know, again, Dave has said before that, you know, we've stepped up our acquisition program in terms of looking at acquisition candidates. In the past, even during periods of acquisition, we have repurchased shares. I think we use all three of those elements in our growth strategy. So one doesn't necessarily -- wouldn't necessarily take away from the other.

Okay. All right. Thank you.

You're welcome.

[OPERATOR INSTRUCITONS] The next line will open is Rob McArthur (ph) at Access Security. Please go ahead.

Hi, this is Rob McArthur Access Securities. I was wondering if you would tell me about your inventory purchasing pattern, kind of what you started with at the beginning of the quarter and what you ended with. I'm trying to establish if you intentionally underbought or overbought at a specific time anticipating which way copper prices might move.

I'd have to pull those numbers. But the answer to the question is we, you know, we didn't specifically change our buying patterns.

Is there any sort of seasonality that would change that?

Well, there is seasonality in our businesses, for example, in the bronze business this quarter and next quarter are our peak periods. And in the York Casket business, the winter to spring months tend to be the peak periods. So those would be more indicative of when we would be purchasing materials.

So you said you put a surcharge on the bronze products. Can you tell me how big that is and how your customers are reacting to it?

The -- most customers, I think, are understanding. I mean they know that copper prices have gone way up. We've had a relatively modest surcharge relative to the amount of the copper increase. But, of course any price increase from our customers' perspective is quite substantial. It's been the (inaudbile) magnitude of 10%. It's our intention to follow the, you know, prices of the commodity markets closely and to, you know, make adjustments as appropriate.

Great. Thank you.

You're welcome.

[OPERATOR INSTRUCITONS] And we have nobody queuing up at this time. Please continue with your presentation.

Well, we would like to thank everyone for joining us this morning and for your questions. And we look forward to speaking to you again at the end of our third quarter. Thank you.

Ladies and gentleman, this teleconference will be available for replay beginning today at 1:30 and running through May 4. You may access the AT&T Executive Playback Service at anytime by dialing 320-365-3844, and your access code is 725504. [OPERATOR INSTRUCTIONS].

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