Matthews International Corp (MATW) 2005 Q1 法說會逐字稿

Welcome to the Matthews International first quarter results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions 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 host, Vice President of Accounting, Mr. Steve Nicola. Please go ahead, sir.

Thank you. Good morning, I'm Steve Nicola. On the 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. We are conducting the call to comply the with the Securities and Exchange Commission Regulation FD. This call will be available for replay at approximately 1:30 p.m. today. To access the replay dial 1-320-365-3844, and enter access code 761202. The replay will be available until 11:59 p.m., February 4, 2005. 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.

Before I begin 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 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 provided today are preliminary data since our 10-Q for the quarter ended December 31, 2004, will not be filed with the SEC until around February 8, 2005.

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.

For the quarter ended December 31, 2004, the company reported earnings per share of $0.39 compared to $0.35 cents for the same period a year ago, representing an increase of 11.4 percent. The improved operating results for the current quarter primarily reflected the impact of the Company's recent acquisitions and an increase in the value of foreign currencies against the U.S. dollar. Consolidated sales for the quarter were $148.7 million, representing an increase of 27 percent, or $32 million, over the same period a year ago. The acquisitions of the Cloverleaf Group and the InTouch Group in the fiscal 2004 fourth quarter and favorable changes in exchange rates were the main factors in this increase. For the fiscal 2005 first quarter the Cloverleaf Group, which is our new Merchandising Solutions segment, reported sales of approximately $24.6 million. Favorable changes in foreign currency exchange rates contributed approximately $2.5 million to the consolidated sales increase.

Graphics Imaging segment sales were up $8.7 million, or around 33 percent for the quarter, resulting from the acquisition of the InTouch Group and an increase in the value of the Euro. Sales in the segment's domestic operations were lower than a year ago, primarily reflecting a decline in volume in the corrugated packaging market.

Bronze Segment sales declined approximately $1.5 million, or around 3 percent from the same period last year. A reduction in mausoleum sales was the principal factor impacting the division sales for the quarter. Bronze sales for the quarter were favorably impacted by changes in the values of foreign currencies against the U.S. dollar.

Sales for the Marking Products segment increased $1.2 million, or about 13 percent for the quarter. This growth in sales resulting primarily from the acquisition of Holjeron in July, 2004. The increase also reflected a favorable change in the value of the Swedish Corona relative to the U.S. dollar. York Casket sales declined 1.6 percent from the same quarter last year and sales for the Cremation segment were approximately $700,000 or 12 percent lower than the first quarter level. Cremation segment sales reflected a decline in unit sales of both cremation equipment and cremation caskets.

Operating profit for the quarter was $20.1 million compared to approximately $19.9 million for the same quarter a year ago. The most significant factors affecting operating profit for the current quarter included: the acquisition of the Cloverleaf Group in July, 2004, Cloverleaf generated operating profit of $1.5 million for the three months ended December 31, 2004; the favorable impact of changes in the values of foreign currencies against the U.S. dollar; a substantial increase over the prior year in the cost of bronze and steel, these increases had a significant impact on the operating results of the Bronze and York Casket segments; costs incurred with the establishment of a casket manufacturing facility in Mexico, these costs approximated $500,000 in the first quarter; and lower sales in our domestic Graphics operations and Cremation segment.

First quarter sales and operating income by segment are posted on the website. Operating margins by segment were as follows: Bronze, 23.5 percent of sales; York casket, 11.7 percent of sales; Cremation, negative 3.2 percent of sales; Graphics Imaging 9.5 percent of sales; Marking Products 15.6 percent of sales; and Merchandising Solutions, 6.2 percent of sales. Our first quarter consolidated operating margin for fiscal 2005 was 13.5 percent of sales compared to 17 percent in the first quarter last year. Gross margin for the quarter was 32.6 percent of sales versus 36.5 percent a year ago. The decline primarily reflected the significant increase in metal costs; lower sales volume in the Cremation segment and the domestic Graphics operations; and the acquisition of the Cloverleaf Group, which generally has lower margins than other Matthews businesses.

SG&A expense for the quarter was 19 percent of sales compared to 19.5 percent of sales a year ago. The decline related principally to our recent acquisitions which generally have lower SG&A expenses relative to sales as compared to other Matthews businesses. For the quarter, investment income was $323,000 compared to $351,000 for the same period a year ago. Interest expense for the quarter was $483,000 compared to $451,000 for the same quarter last year. This increase reflected a higher average debt balance for the quarter. Other income deductions net was an increase to income of $1.9 million for the current quarter, compared to a reduction of $86,000 for the same period last year. Other income in the current period included currency exchange gains on intercompany advances to our overseas affiliates.

Minority interest deduction was $1.4 million for the current quarter, compared to $1.1 million for the prior period due to higher profits from our less than wholly-owned European graphics businesses. Our first quarter tax rate is 38 percent of pretax income compared to 38.8 percent for fiscal 2004. The decline reflects lower estimated state and foreign income taxes. We closed out the December, 2004 quarter with a cash and investment balance of approximately $73 million. At December 31, 2004, our current ratio was 2 to 1, compared to a ratio of 1.8 to 1 at September 30, 2004. Our outstanding accounts receivable balance at December 31, 2004 was approximately $84 million which represents 50 days sales outstanding, compared to 51 days sales outstanding at September 30, 2004.

At December 31, 2004, shares outstanding totaled 32,305,883. We have approximately--we have purchased approximately 339,000 shares of our stock in the open market since September 30, 2004. At December 31, 2004, approximately 1,830,000 shares remained to be purchased under the current repurchase authorization. Our long-term debt balance at December 31, 2004, both current and long-term portions, approximated $69 million; $50 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 is April, 2009. Depreciation and amortization expense for the quarter ended December 31, 2004 was $4.9 million. Capital expenditures for the quarter ended December 31, 2004 were $3.2 million.

In our November conference call the Company expressed caution with respect to earnings projections for fiscal 2005. As expected our earnings for the first quarter of fiscal 2005 were adversely impacted by the significant increases in bronze and steel costs. We are also beginning to incur the costs related to establishing a casket manufacturing facility in Mexico, which we consider to be an important investment for the future of this business. We currently estimate the total cost of this project could be in the range of $10 million or more. However, we are not yet in the position to estimate how much of this amount will impact the income statement. We were fortunate this quarter to once again have the favorable impact of currency exchange rates on our reported results.

In summary we remain cautious about the balance of the fiscal year and are maintaining our forecasted fiscal 2005 earnings per share 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 I look at the first quarter, obviously the results were somewhat disappointing to us that they were not up to our budgeted levels of operating profit. I think there are four areas that we need to see improvement during the balance of the year. The first of these is our Graphics business. We have a couple of segments of our Graphics business which are facing volume problems, mix issues and some margin issues.

Also our Cremation business, the second area, we have a significant volume issue there and margin issues, and we need to see improvement in our operating profit in that business.

Thirdly, as Steve mentioned a few minutes ago, our York business, although performing well from a profit perspective year-to-date, has a big job in front of it for the balance of the year to get up our new plant. I think that management team is up to that task but it's a big job to be done.

And then finally in our Cloverleaf segment, they met our expectations for the first quarter but, as we've indicated in previous calls, the Cloverleaf management team has taken on a major assignment this year to improve their productivity and their plans are moving ahead. We've got a major consolidation project which we've initiated, but there's a lot of work to be done on that front. So at this early point in the year, I would characterize it as a year in which we have a lot to do in order to achieve the results we want by September. With those few comments I'd like to turn the meeting over to questions.

[Operator Instructions]. James Clement, Sidoti.

A couple of quick questions if I may. I believe you said about--about a half million dollars of income statement expenses related to Mexico.

Yes.

Is that right? Of the 3.2 million in CapEx for the quarter, how much was related to Mexico?

Jamie, I don't have that figure on hand but not much of it yet.

Would it be fair to assume less than the half a million that was expensed on the income statement?

I'd say so.

You'd say so. Okay. Another couple of questions, just sort of randomly, if I may. The Graphics business, I think you said that you noticed a little bit of a decline in the corrugated business. Could you talk maybe a little bit more specifically about that and sort of, is this a temporary thing or if it's--if it's something that you're going to have to contend with, what's kind of going on there?

Let me make a couple of comments about that, Jamie. And particularly in North America our business is heavily dependent upon the corrugated segment of the market. I think that business is in a long, structural decline for a couple of reasons. One, I think companies are doing everything they can to lower their costs and that includes trying to reduce the corrugated expenses as well as other things. And then secondly, I think you see more product coming from overseas. And that creates less opportunity for North American manufacturers of corrugated. So I think that that business is in a long structural decline. And I think we've known that for some period of time. And we just need to continue with our efforts to change the mix of our business and get into areas which are more stable and have more potential going forward.

I think also when you have a declining market you also have increasing price pressures and I think we're seeing that, too. So we just have to be prepared to deal with both of those factors.

If I could ask a question on another business. I know that it's relatively small for you guys, but the Cremation segment; from what I've seen in general, the national Cremation rate has sort of ticked up a little bit. I don't think that's necessarily disputable but I was just sort of wondering what exactly the nature of your declines are? And I would imagine a relatively small difference in units could kind of--could produce a pretty substantial revenue decline, but can you give a little more information on that?

Yes. We actually have a very, very substantial, "backlog" of equipment for our Cremation business. Our backlog consists of units for which customers have given us deposits. But, to a large extent, we haven't gotten the okay to go ahead and start constructing the units. Because in addition to giving us the deposit, the customer has got to get all of the regulatory approvals, environmental approvals, et cetera. And until that happens we don't put them into the product schedule.

So, to some extent, we've seen kind of a blip in terms of the flow of the orders into the factory. But above and beyond that, as I think the results of past years have indicated, none of us are satisfied with the margins we're getting out of that business. So we have very much a challenge in terms of finding ways to improve our productivity and get the manufacturing profit up.

Okay. I'll ask one last question and then I'll let some other people get on. In your fiscal year EPS guidance, what are you assuming, if you can share this, in terms of--in terms of other income related to currency exchange that you talked about? I think you said was about 1.9 million for the quarter.

Jamie, we really can't share that because there are a couple of pluses and minuses that have gone into that number. I'm really not in a position to share that.

Greg Halter, LJR Great Lakes.

A question regarding the repatriation of cash with the new rules in effect, whether or not you're looking at that to bring any of that back to the U.S.? I think had you about 37 million or so at the end of the year.

I can answer that for you, Greg. We have looked at it. We've already brought some level of cash back already. Some of the--a lot -- I shouldn't say some, a good portion of that cash, though, is tied up in some of the companies that we are-- we have a minority partner in. So to some degree-- I don't want to say it's restricted because it's not, but to some degree we just can't readily bring that cash back as we'd like it. And otherwise, too, we also want to be careful because we look to-- we continue to look to overseas markets as well as domestic markets for opportunities to use the cash. But it's on our radar screen and we've done some already and are continuing to look at the window that we have.

Okay. Related to that question, regarding your tax rate of 38 percent, would you expect that to be the same throughout the year?

Yes--yeah, yes we do. Right now that's what we're projecting for the year.

Okay. And one last one. Regarding some comments in the past about caskets coming in from overseas, China, so forth; have you seen any increase or any changes in regard to that?

Well, we don't have, obviously, direct information but it seems to us that it's leveled off and possibly even declined. However, whether it's leveled off to declined or not, I still think that it's a very clear message to us that cost is important in the industry and we have to continue to work on improving our costs.

[Operator Instructions]. Greg Halter, LJR Great Lakes.

Steve, do you know what the cash flow from operations was for the quarter?

I don't have an exact figure but it's about-- I'm saying it's about 16 or $17 million, somewhere in that range.

Okay and the foreign currency impact, you mentioned about sales, but what about on earnings or EPS earnings, whatever?

Well, most of the impact is going to be in that other income number that you've seen. So.

That's about six cents, then, I presume.

No, no, no, no, no because that's--you're talking about-- that's a pretax number in other income.

Okay,

So it's probably half of that.

Okay. Regarding the sales, you talked about Cloverleaf, and we know that added 24.6 million. FX was about 2.5. How much did InTouch and other acquisitions contribute to the top line?

The InTouch acquisition--well, I'll answer that this way, Greg. If you look to the increase in the Graphics Imaging segment, in their sales quarter-over-quarter, a lot of that-- a significant portion of that's InTouch.

Okay. And the Holjeron was, I presume, small.

Yes, that was relatively minor.

Okay. And on the balance sheet, do you have a couple other figures or preliminary numbers such as goodwill?

No, some of these figures we don't have yet, Greg. That's one I don't have.

Total assets?

That one should be in the --

Oh, is it there? Okay.

Let's see, little bit north of 500 million.

And payables?

Hold on just a second. I think I can give you that one. Over -- maybe 21, 22 million, something like that.

Okay. And your equity balance?

Right now that looks like in the range of a little over 300,000, maybe 325.

300 million?

Yes, I'm sorry, 300 million.

Yes.

And regarding the inventories and receivables, is there any way to quantify how much of the increase was due to acquisitions in foreign currency?

I don't have that reconciliation in front of me so it would take me some time in case anybody has any other questions.

Okay.

I probably ought not do that now.

But is it fair to say that a lot of that increase was due to acquisitions in foreign exchange because I think it's 50 percent on --

Yes, I'd say that's a fair conclusion.

Okay. And one last one, on the share repurchase, you mentioned the 339,000 repurchased in the quarter.

Right.

Do you have an average price paid or the total amount paid for those?

Let's see, I don't have they say figures, but why tell you that it's probably in the, you know, I mean the prices for our stock during the quarter have been around 35, 36, 37. So that'd probably be a fair average neighborhood to look.

John Walthausen, Paradigm Capital Management.

Quick question on your answer about the imported caskets, I thought our government was keeping pretty good statistics on everything. Is it an issue that you're not getting timely information, or am I wrong that they would be keeping that in detail and not making it public.

It's just not information that we readily track. It's just not something that we have our fingertips on, John.

Right. Is it you don't track it because it's not significant enough?

We estimated that -- we estimate there are about 1.6 million casketed deaths in the United States and our last estimate of imports from China were somewhere in the 10 to 40,000 range. So it's just not a very significant number to us at this point in time and I think we have enough feel for the market that, as I said earlier, we don't think it's growing.

Steve McBoyle, Lord Abbett

Could you just talk a little bit about the material cost increase, bronze and steel costs? Can you just refresh me as to percentage of sales that those two materials would represent? And curious in terms of the pricing that you would have seen year-over-year.

Well, we don't publish the material costs as a percent of sales, but I can give you some--some numbers with respect to-- for example, bronze. About a year ago we were probably paying in the-- I guess a year ago this quarter we were probably-- copper was probably in the range of $0.90 a pound and copper is about 86 percent of bronze. And this past quarter, copper rose to the $1.45 to $1.50 range. So that ought to give you some idea as to the magnitude of that. And then we've seen significant rises in the steel cost as well. So.

And are you only challenged with pricing or is there allocation related issues?

Right now it's just pricing. I mean allocation, especially -- not with bronze, but especially with respect to steel, allocation certainly can be a risk. But we haven't had that issue yet.

And do you have multiple suppliers there? Are you contracted?

Yeah, we do have a couple of alternatives.

All domestic?

I believe so.

And your outlook just in terms of general material cost increases through the year?

I really couldn't guess at that. I would tell you that we didn't expect they would get this high.

But is it fair to say that imbedded within your guidance, you're anticipating that those costs will continue to increase?

I would say no, that we're not -- we haven't embedded in the guidance continued increases in prices, no.

Okay. And can you just elaborate a little bit more about Cloverleaf? It looks to be 6 percent operating margin. What can the business earn from a profitability standpoint and what would your outlook generally be there for rates of growth?

Well, we, when we acquired the Cloverleaf business we had a plan with the management of Cloverleaf to, over time, try and increase the margins above 10 percent to, hopefully, close to 15 percent. It's not going to happen rapidly. It's going to take a multi-year program. But as I indicated in my comments earlier, we've already started that process this year and I would hope we'd be able to show one or two margin points improvement every year. In terms of the sales outlook, I think the possibility to increase in the volume is actually quite substantial. However, I think our first priority at this point in time needs to be to work on the profit side of the equation and then as that improves then try to look for opportunities to build the volume up further.

So I should interpret that 1 to 2 percent margin improvement as being through cost initiatives as opposed to volume increases?

Right, that's correct.

And when you say you've launched on a major restructuring, what exactly are you doing?

Well, when we acquired the business the management team pointed out that they were currently operating in the Pittsburgh area with 7 relatively small plants. And they felt, and we agreed, that if they could consolidate those facilities there would be substantial efficiency improvements. So we're in the process of acquiring a new building. And then we're going to move those facilities into the single building and we think as a result transportation costs will go down, damage costs will go down, supervision will go down, et cetera. However, there's going to be a period of time in which there's going to be some disruption as we make the change and some transition costs. But I don't think there's any question that we can improve the situation over the course of the year.

Is there any seasonality in that business?

Yes, there is seasonality. But there's-- different phases of the business have different seasonality. So it actually, overall, it tends to balance out.

Okay. And just looking at the-- obviously the positive other income line. Should that be additive through the year? Is that a fair assumption?

That depends on exchange rate, so I couldn't answer that.

Okay. And then on the Mexican facility, can you just elaborate just in terms of what the timetable there is, what level of capacity that will add? And then just broader picture in terms of what the strategy is in terms of substituting manufacturing there over time?

Well, I think with any new plant one's very prudent to plan on a slow build up, which is what we're doing. We would hope to be able to begin some modest production at the end of the spring. And then ramp it up during the balance of the year and then going into next year be in a position to run the plant at full one shift capacity. And the size of the plant should be roughly equal to our other plants. What we're going to do in terms of producing what where depends upon the circumstances at that point in time. So we really haven't decided at this point.

And have you talked before in terms of the incremental cost savings. Mexico versus U.S.?

Steve?

You mean -- I don't understand your question.

Well, I think the question is, how much lower will our cost of manufacture be in Mexico rather than-- let it just suffice to say that the reason we're doing this and making the investment is because we think those savings will be significant.

Yeah, that's right. And we don't have--we have not talked publicly about any savings estimates at this point.

James Clement, Sidoti.

Thanks a lot. Most of what I wanted to ask was asked and answered but I did have a two-part question. To what extent do you view the Cloverleaf Group as a platform to look at potentially acquiring some other properties? And I guess the second question would be, do you guys need to get what you have now up to some productivity level above where the business is now to start looking at those deals?

I think we're blessed with our Cloverleaf Group with, really, an outstanding group of management people. And we believe that they have a very sound business model and a very sound business strategy. And they have a high degree of motivation to grow the business profitably. We will make acquisitions on a selective basis as the opportunity presents itself. However, I would like, barring such an opportunity I'd like to keep managements attention focus on improving the bottom line.

[Operator Instructions]. Speakers, we have no one else queueing up for questions at this time.

Okay. Thank you for your participation in the conference call this morning. And we appreciate the questions and answers and we look forward to speaking again in our second quarter conference call in late April.

Very good.

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