Matthews International Corp (MATW) 2004 Q4 法說會逐字稿

Welcome to the fourth quarter and year-end results for Matthews International. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. [Caller Instructions] And as a reminder, this conference is being recorded today, November 17, 2004. I would now like to turn the conference over to our host, Mr. Steve Nicola. Please go ahead.

Good morning. I'm Steve Nicola. On the call with me today 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 today. To access the replay, dial 1-320-365-3844 and enter the access code 750709. The replay will be available until 11:59 p.m. December 1, 2004. If you access our website at MATW.com, and click on the Investor Information icon, you will have access to the earnings release and financial information we will be discussing 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 asks have had the opportunity to participate in the question-and-answer session.

Before beginning the discussion, 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 quarterly reports on form 10-Q, 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 annual report on form 10-K for the year-ended September 30, 2004, will not be filed with the SEC until around December 14, 2004.

To begin the conference, I will review the financial results for the quarter and fiscal year ended September 30, 2004. Dave Kelly will then provide general comments on our operations. Following that, we will open the discussion for questions.

For the quarter ended September 30, 2004, the Company reported earnings per share of 51 cents compared to 36 cents for the same quarter a year ago, representing an increase of 41.7%. For the 12 months ended September 30, 2004, earnings per share were $1.72 compared to $1.39 last year, representing an increase of 23.7%. The increase in earnings for the fourth quarter and the year resulted principally from the Company's recent acquisitions and increase in the value of foreign currencies against the U.S. dollar, higher sales and operating improvements in several of our segments. Consolidated sales for the quarter increased $28.2 million, or 23.9%, compared to the prior year. For the year, consolidated sales increased $49.9 million, or 10.9%. Graphics Imaging segment sales were up $3.4 million, or around 13%, for the quarter; and were up $14.2 million, or 14.3%, for the fiscal year. The higher level of sales for the quarter reflected an increase in the value of the Euro and the recent acquisition of the InTouch Group, which is a graphics business located in Leeds, England. The sales improvement for the year resulted primarily from the increase in the value of the Euro and the acquisitions of InTouch this year and Reproservice Munich, a German graphics business, last year.

Graphics Imaging sales for the year were also favorably impacted by sales growth in its other European operations. Bronze segment sales increased $3.9 million, or 7.8%, over the prior quarter and increased $10.4 million, or 5.6%, for the year. Higher sales for the Bronze segment reflected the favorable impact of the change in the Euro on its Italian operation, higher sales of architectural products, and the temporary price surcharge implemented beginning in April, 2004. Mausoleum sales declined for the year. Sales for the marketing product segment increased approximately $1.5 million, or 18%, for the fourth quarter and $5.7 million, or 17.8%, for the year. The segment sales growth resulted from its recent acquisition of Holjeron, the favorable impact in the change in the Swedish Corona against the U.S. dollar, and higher demand for its products with the improvement in the domestic economy.

York casket sales declined for the fourth quarter and the year. However, prior year amounts included sales from a small Canadian manufacturing operation and several distribution operations which were divested by the Company. Excluding the sales from these operations, York casket sales were down for the quarter, reflecting lower volume and relatively flat for the year. Sales for the cremation segment increased approximately $800,000, or 15.3%, over the same quarter a year ago And $2.3 million, or 11.3%, year-to-date. Sales of both cremation equipment and cremation caskets were higher than a year ago. As I stated earlier, on a consolidated level, sales increased 28.2 million, or 23.9%, for the quarter, and $49.9 million, or 10.9%, for the year. The Cloverleaf Group which represents our new merchandising solutions segment reported sales of $21.1 million, from the acquisition date in July till the end of our fiscal year. In addition, we estimate that the favorable impact of changes in foreign currency exchange rates contributed approximately $2.7 million to the increase in sales for the quarter, and approximately $12.5 million to the increase year to date.

Operating profit for the quarter was $28.6 million, representing an increase of $7.4 million, or 35%, over the same quarter last year. For the 12 months ended September 30, 2004, operating profit was $97.8 million, representing an increase of $17.7 million, or 22%, from a year ago. These increases were mainly due to our recent acquisitions, the favorable impact of foreign currency exchange rates, higher consolidated sales, and operational improvements in several of our business segments. We estimate that the impact of currency exchange rate changes contributed approximately $1.1 million to the increase in operating profit for the quarter, and approximately $3.2 million to the increase year-to-date. Operating profit for the Graphics Imaging segment increased $2.6 million for the quarter, over the same period a year ago, and $7.7 million for the year. The higher level of profitability reflected the recent acquisition of InTouch, the higher value of the Euro, the prior year acquisition of Reproservice Munich, and sales growth in the segments other European operations. In addition, our domestic graphics operations reported higher operating profit as a result of various fiscal 2003 cost structure initiatives.

Operating profit for the Marking Products segment increased approximately $400,000, or 38%, for the quarter and $2.4 million, or 59%, for the year. The segment's operating profit for the quarter benefited from its recent acquisition of Holjeron. For the fiscal year, the improvement in operating profit reflected higher sales and improved operating margins. This segment's operating results also benefited from a higher value of the Swedish Corona that compared to the U.S. dollar. Fourth quarter operating profit for the York Casket segment declined $1.5 million from the same period last year, but was $1.8 million higher for the fiscal year. Results for the quarter were negatively impacted by a significant rise in steel costs and the quarter also included some asset impairment charges. For the full fiscal year, the segment contributed -- or the segment continued to benefit from improvements in manufacturing efficiency, and the absence of lower margin sales from the divested operations. The segment's operating margin was 12.5% for the year ended September 30, 2004, compared to 10.6% last year.

Since the acquisition in December, 2001, operating profit as a percent of sales for the casket business has steadily improved, primarily as a result of our productivity initiatives. However, we continue to face several challenges, including low market growth, domestic competition, the threat of overseas competition, and significant increases in metal prices. We expect these issues to continue in fiscal 2005. The Cremation segment reported operating profit of approximately $600,000 for the quarter, and $1.5 million for the year. The increase over the prior year respective periods reflected higher sales. Operating profit for the Bronze segment increased $4 million for the quarter, compared to the same quarter a year ago. For the year, the segment's operating profit was up $3.9 million, or 7.7%. The year-over-year comparisons reflected a combination of factors, including an improved product mix, with higher sales of architectural products and lower mausoleum sales.

Material costs for the segment were unfavorably affected by a significant increase in bronze ingot costs. Bronze ingot costs during the year had reached levels in excess of 60% over last year's prices. Due to the significance of these cost increases, the Company implemented several operating initiatives to mitigate some of their impact. In March, 2004, the segment implemented a personnel reduction program that resulted in a one-time charge for severance costs in the second quarter, which favorably affected the segment's costs in the third and fourth quarters. In April, 2004, the segment implemented a temporary surcharge on selling prices. Fourth quarter and year-to-date sales and operating income by segment are posted on the website. Year-to-date operating margins are as follows: Bronze, 27.5% of sales. Marking Products, 17.2% of sales. Graphics, 17% of sales. York Casket, 12.5% of sales. Merchandising Solutions 7.4% of sales. And Cremation, 6.6% of sales.

Our fourth quarter consolidated operating margin for fiscal 2004 was 19.5% of sales, compared to 18% in the fourth quarter last year. Our consolidated operating margin for fiscal 2004 was 19.2% of sales compared to 17.5 last year. Earnings per share for the quarter were 51 cents compared to 36 cents a year ago, an increase of 41.7%. Earnings per share for the year ended September 30, 2004 were $1.72 compared to $1.39 a year ago, an increase of 23.7%. The improvements in earnings per share reflected the increases in operating income for the quarter and year. In addition, we estimate that favorable changes in exchange rates contributed two cents to earnings per share for the quarter and six cents year-to-date. Gross margin for the quarter was 37.6% of sales, versus 37.5% a year ago. Gross margin for the year ended September 30, 2004, was 38.1% of sales compared to 37.1% a year ago. The increases primarily reflected improved products in the Marking Products and Graphic Imaging segments.

Gross profit dollars were up $10.8 million for the quarter, an increase of 24%, and $23.5 million, or 14%, year-to-date; reflecting the impact of higher sales, the Company's recent acquisitions, the favorable exchange rate changes, and the improved margin percentages. SG&A expense for the quarter was 18.1% of sales, compared to 19.5% for the fourth quarter last year. For the year, SG&A expense was 18.9% of sales compared to 19.7% a year ago. These declines resulted principally from cost structure improvements and lower selling & administrative costs as a percent of sales for the acquired businesses. Investment income was $515,000 for the quarter, compared to $298,000 for the same period a year ago. The increase reflected higher levels of invested cash during the period. Year-to-date investment income was $1.6 million, compared to $1.3 million last year. Interest expense for the current quarter was $505,000, compared to $602,000 for the same period a year ago. For the year, interest expense was $2 million, compared to $2.9 million last year. This decline reflected a lower average level of debt during the period, and lower interest rates.

Minority interest deduction was $1.5 million for the fiscal 2004 fourth quarter, which was slightly higher than a year ago. For the year, minority interest was $5.5 million, compared to $4.8 million last year. The higher level of minority deduction reflected an increase in the value of the Euro and higher profits from our less than wholly-owned European graphics businesses. Our fourth quarter and year-to-date tax rate was 38.8% of pre-tax income which was unchanged from last year. We closed out the fiscal year with a cash and investment balance of approximately $73 million. At September 30, 2004, our current ratio was 1.8 to 1 compared to a ratio of 2.2 to 1 at September 30, 2003. Our outstanding accounts receivable balance at September 30, 2004 was approximately $87 million, which represents 51 days sales outstanding compared to 48 days sales outstanding at September 30, 2003.

As of September 30, 2004, shares outstanding totaled 32,410,574. We have purchased approximately 498,000 shares of our stock in the open market since September 30, 2003. At September 30, 2004, approximately 2,170,000 shares remain to be purchased under the current purchase reauthorization, which reflects the latest increase approved by the board in April, 2004. Our long-term debt balance at September 30, 2004, both current and long-term portions, approximated $71 million; 52.5 million of this balance represents borrowings under our domestic revolving credit facility. The remainder is primarily debt on the books of our Italian subsidiary, which was primarily used to finance the purchase of that company. The maturity of the domestic revolving credit facility was extended during the year to April, 2009. Depreciation and amortization expense for the quarter and fiscal year ended September 30, 2004 were $4.3 million and $15.5 million, respectively. Capital expenditures for the quarter and year-ended September 30, 2004, were $3.5 million and $10.4 million, respectively.

In summary, our earnings per share for the current quarter of 51 cents and $1.72 for the year were well ahead of our internal expectations. As noted earlier, one of the significant factors contributing to the increase was the favorable impact of exchange rate changes, which we obviously would not be in a position to forecast this to continue. The growth in our European graphics businesses was also better than expected, and we currently do not forecast similar growth in fiscal 2005. In addition, the company remains concerned with continued high cost of bronze and steel. While some of our actions and productivity improvements helped mitigate some of this impact, the significantly higher costs will be a challenge, particularly in the competitive markets in which we serve. Finally, as reported in our earnings release yesterday, we are adding a new lower cost casket manufacturing facility in Mexico and the costs associated with this expansion will negatively affect short-term operating results. For these reasons, we are cautious about the next 12 months, and are currently forecasting fiscal 2005 earnings per share to be in the range of $1.80 to $1.85. This concludes the financial review and Dave Kelly will now comment on our operations.

Thank you, Steve. As you can tell from Steve's comments, 2004 was truly an exceptional year for Matthews. The 22% increase in operating profit was above our expectations and enabled Matthews to be well above its long-term goal of a 12 to 15% annual increase in earnings per share. A significant factor for 2004 was that all of our business segments performed well compared to the prior year. They did this in spite of numerous obstacles which we mentioned in our mid-year conference call. As a result, three of our business segments, as Steve mentioned, Bronze, Marking Products and Graphics, have operating profit as a percent of sales greater than 15%. Two others, York Casket and Cremation made significant progress during 2004 towards that goal. I'd like to reiterate at this point that our best estimate for earnings per share for 2005 is in the range of $1.80 to $1.85. I want to emphasize that this is by no means a guaranteed range, but rather is a best estimate based upon what we know at this point in the year. Clearly events during the course of the year, both positive and negative, can cause our estimates to change.

Our earnings per share growth is forecasted to be lower in 2005 than our long-term historical average, principally because we will incur substantial one-time expenses associated with long-term investments, including a new Mexican plant in our York Casket segment. Again, our long-term goal is a 12 to 15% annual increase in EPS. By long-term, we mean 10 years. It is not necessarily our goal to produce a 12 to 15% earnings growth each and every year. We will not hesitate to make smart long-term investments in order to assure achieving our long-term goal even at the expense of earnings per share in the short-term. Because we are willing to make appropriate investments, we continue to believe that our long-term strategic goal of a 12 to 15% growth in EPS is both appropriate and feasible. We are excited going forward by the opportunities that many of our business segments have for further improving their performance. Our Graphics and Merchandising Solutions businesses, in particular, offer us additional opportunities for growth in both revenue and operating profit.

In closing, I'd like to recognize the 2004 accomplishments of operating management and employees throughout the company. In a year which presented many obstacles, their early and aggressive action enabled us to post an outstanding year. It is precisely these demonstrated skills for our people together with our financial strength that gives me continued optimism for the future. At this point I would like to open the meeting for questions.

Thank you. [Caller Instructions] Bill Burns.

Dave, my question is about the Mexican facility. Wondering if I could get some more information on it. Could you tell us what this is going to cost? Is this going to be a wood facility? Information like that.

Bill, I can --

Well, I can jump in on the cost, Bill, first.

Sure, Steve.

We don't have -- we're still in the early stages of the project, and we still don't have an accurate estimate of those costs, so I'd be hesitant to put a dollar figure on what the total cost of that expansion is going to be at this point.

Okay. Then what about -- what product are we going to make?

We're going to initially begin in the factory by making metal caskets. We believe the facility will have enough flexibility that we can make a wide range of products there, but our plan is to start slowly and build up over time at a measured pace.

And what was -- if you can maybe give me some macro, what was the Board's, you know, why go down there, you know, what was involved in this decision?

Well, there are a number of factors. We believe that looking forward, that the market is going to be competitive in the future, perhaps even more competitive than it is today. And that Mexico offers us an opportunity to address the segment of the market which is going to demand a lower cost product. We think there are advantages to operating in Mexico. We'll have the flexibility to design a facility from the ground up, which we think will enable us to maximize its efficiency. We'll benefit from lower labor costs. We'll benefit from having land transportation from Mexico to North America. And we think that we'll get an attractive return on investment over time.

Thanks, Dave. And then a quick follow-up, Steve, on the revolver, how much did you say was outstanding, 52 --

52.5.

52.5.

James Clement.

I had a quick follow-up question about Mexico and then if I could ask another question. I guess, Dave, I'm wondering about the challenges in terms of transportation. I know you just alluded to, you know, the attractiveness of having ground transportation from Mexico. From a distribution standpoint, can you help us think about that? Because I would imagine that that could conceivably be, you know, something you guys are thinking about right now.

Yes, Jamie, we have-- as you know, we have a distribution presence in the with west coast and thought the southwest, as well as a strong presence in the midwest and the east, and actually, we think a Mexican location will be favorably located with respect to many parts of the United States. And we'll see little or no impact on our transportation costs.

Okay.

But where we have an impact in terms of transportation costs, we think they're going to be more than offset by other favorable factors.

Okay. And let me ask you another quick question. I believe, Steve, did you say that Graphics Imaging margins for the quarter were about 17%? Is that correct? Did I get that right?

That was a year-to-date figure I gave you, Jamie.

Oh, that was the year to date figure. Okay, well that's fine. I believe, you know, going back a year or so, I thought that you guys had sort of established a 15% margin rate in that segment, as sort of a target. Now, you know, you're pretty substantially past that. Your press release, you allude to, you know, the strength in that segment, particularly in Europe. How should we think about Graphics Imaging kind of margins on a long-term basis? I mean would you rethink that 15% number now?

Well, I think we would certainly like to think in terms of 17.

Yeah, okay. [ Laughter ]

But I think-- that's an important question, Jamie, and I think going forward, that we think there are rather substantial growth opportunities here. So I think we're satisfied with 17%, and would prefer to see us maintain that level, and grow our business through internal growth, as well as acquisitions.

Greg Halter.

Dave, I know in the past you've historically provided your thoughts on acquisition progress and performance and, I know it's early, but can you do that on InTouch and Cloverleaf so far?

Well, Greg, we acquired InTouch and Cloverleaf at the end of the summer so we have maybe, you know, three or four months of operating results. So all I can tell you is, at this point in time, and this is probably the most important thing, is that we are very, very impressed by the people who are operating these two companies. I think a large part of the attraction was the skills of the people there, and we think given time, that not only are those groups going to perform well, but they present synergy opportunities for us with the rest of our graphics businesses. So we continue to be very excited about the potential going forward. And I think I alluded to that a little bit in my comments by saying that merchandising solutions is particularly a business area where we look for improved results in the coming year.

Okay. And one follow-up, we heard the other day that one of your competitors on the casket side is raising prices in December. Do you have any thoughts about that relative to your own business?

Yes, we are -- our market share in the casket business is substantially lower than our principal competitor. So I think it's been past practice in that industry for the principal competitor to establish price increases, and the rest of the industry tends to track those. So in this year, there will be no exception to that. We're anticipating having a price increase on December 1, and that price increase will be approximately the same as that that's been previously announced.

Charles Smith.

Question on the merchandising business. Could you give us a couple specific examples of the synergies you just mentioned with your graphics business? And also, any kind of long-term operating margin targets for that business? I know it's all about growing absolute profit dollars, so I would expect the sales would grow pretty healthily given that you're running at a 7.5% margin number now. Could you kind of give me some background on both of those?

Yeah, and let me once again reiterate the, you know, the basic strategy and then give some examples. We believe that there's an opportunity to establish contacts high in the management levels of our target consumer products companies. So we're talking about the chief marketing officer, the COO, the CEO. In the Cloverleaf group, there is a marketing consultancy firm, Big Red Rooster, and they have been very successful in establishing consulting businesses with companies in the past several years. That has indeed generated spinoff business. An example would be, they would go in and design a new retail store which would include the layout of the store, the fixturing of the store, et cetera; and then would provide an opportunity for a sister company, IDL, to provide that fixturing.

We believe that same type of approach applies to the graphics. So in other words, in part of their consultancy, they might very well recommend a certain new graphic design and then we would be in a position to implement that for the packaging component that the consumer product company needs. And we think that that capability, once developed in North America, is extendable overseas too where we already have a strong position in the graphics business.

Okay. Any comment on where you expect margins to go in that business over time?

Yes, I think I'd draw a parallel with our acquisition of the York Casket business, which occurred back in 2001. At the time we acquired that business, it had margins approximately the same as Merchandising Solutions does today, around 7%, and today it's about 12.5%. And we knew going into that acquisition that there were significant opportunities for improvement. We think the same thing applies to Merchandising Solutions. And their management team has produced some fairly aggressive plans to step-by-step improve that operating profit, and we have every expectation that that's going to occur.

Greg Halter.

Hi, Steve, I know you -- early on the Mexican facility, but overall, can you give us a range on you what think your capital spending will be in fiscal '05 as well as depreciation and amortization?

No, Greg, right now, I'm really not in a position to give you a range on that capital spend. Our total capital spending for the current year was a little over $10 million. So we're certainly going to significantly exceed that next year. Probably, you know, again, if I had to -- if I had to put a forecast on it, on the basis of assuming that our -- we're going to maintain that regular level of capital spend say at $10 million, we'd probably be in the 15 to $20 million range next year.

Yeah, I think it is also fair to say that our capital expenditures are going to continue to be very modest as a percentage of sales. Even with -- I think an extraordinary level, I would be very much surprised of it went beyond 3 or 4% of our revenue for the year, and I think for most businesses that's fairly modest and well within our -- well within our financial ability to pay, and probably not too far above our annual depreciation.

Okay. And I know it is preliminary, but Steve, do you have an equity balance at this point in your cash flow from operations for the year?

The cash flow from operations was about $80 million. And then the equity balance, just give me a second here, Greg, the equity balance is a little over $300 million.

Okay. And what is your goodwill approximately and other intangibles at this point?

About -- a little over $200 million.

Gary McCann.

Help me think this through, please. If there is a need, if you see more competition in the future for lower cost caskets, comment if you will please on you think -- what you think the sustainability of price increases will be from your -- from not only your competitors but yours too. If there's -- if more people are wanting lower priced caskets, how do you think these price increases are going to go over?

Well, I think the increased competition is going to cause lower prices and, indeed, I think the price increase that's going into effect on this December 1 is lower than what we would have seen in past years, and that-- to some extent. And that does reflect the increased levels of competition. And hey, you know, this is -- this is capitalism at work. I mean you have increased levels of competition, it forces you to be innovative, it forces you to do different things, and it creates better customer value in the long run, so we're not going to fight that trend. We know we can't. We're go try to be innovative and creative and be ahead of the curve so, you know, we can maintain our levels of customer satisfaction.

Well, let me ask it a different way then. I know you don't know yet, but do you expect the price increases to meet some resistance?

I think every year our price increases meet resistance. And I don't think this year will be any exception, and I think we will, you know, have to have continued discussions with not only our customers, but their customers, to work our way through these things. But I think to the best of our ability, we've taken this all into account in preparing our budget and our plans for '05.

Well, is the attempt then with Mexico to have a broader range of prices? I mean are you, in effect, adding a lower cost product kind of like a BMW added a 3 series and the car companies are adding a broader range of prices, is that what the attempt is here?

Let me say that we think we'll have the capability of doing that, and that's what we're really after. We didn't want to be in a position where our manufacturing cost structure prevented us from reacting to marketing forces. Now, exactly what's going to happen in that segment of the business, I think it's a little bit too early to say with certainty. But we think we're going to be well positioned because we'll have flexibility that we do not have today.

[Caller Instructions] And it does look like we have no further questions. Please continue.

Okay. Thank you. We appreciate everyone's participation in the call this morning. And we certainly look forward to the next call in January. Have a good morning.

Ladies and gentlemen, this conference conference will be available for replay after 1:30 p.m. today through midnight December 1, 2004. You may access the AT&T teleconference replay system at any time by dialing 320-365-3844, with an access code of 750709. Those numbers again are 320-365-3844, with an access code of 750709. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

Thank you.