Matthews International Corp (MATW) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the second quarter financial results for Matthews International conference call. At this time, all participants under a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, please press star and then zero. As a reminder this conference is being recorded. I would now like to turn the call over to Mr. Steve Nicola. Please go ahead.

Good morning, I'm Steve Nicola. On the call with me today is David Kelly, Chairman of the Board, President and CEO of Matthews. Today's conference call is set up for one hour. The 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 777486. The replay will be available until 11:59 p.m., May 3, 2005. If you access our website at www.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 have questions, we ask that you please limit them to one question and a follow-up question until all those who wish to participate in the Q&A session have had an opportunity to do so.

We are conducting the call to comply with the Securities and Exchange Commission Regulation FD. 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 information we provide today should be considered preliminary data, since our 10-Q for the quarter ended March 31, 2005 will not be filed with the SEC until around May 10, 2005.

To begin the conference, I will review the financial results for the period ended March 31, 2005. Dave Kelly will then provide general comments on our operations. Following, that we will open the discussion for questions.

For the quarter ended March 31, 2005, the Company reported an increase in earnings per share of 11.9%, from $0.42 a year ago to $0.47 for the current quarter. For the first six months of fiscal 2005, earnings per share were $0.86, compared to $0.77 for the same period last year, representing an increase of 11.7%. The improvement in earnings per share for the current quarter and first six months primarily reflected sales and operating income growth in our Bronze segment, the acquisition of the Cloverleaf Group which represents our new Merchandising Solutions segment, and an increase in the value of foreign currencies against the U.S. dollar.

Consolidated sales for the quarter increased 25%, or $31.3 million. Year-to-date consolidated sales increased $63.1 million, or 26.1%. The Company's acquisitions in the fiscal 2004 fourth quarter were the main cause of these increases. These acquisitions included the Cloverleaf Group, the InTouch Group and Holjeron Corporation.

Changes in foreign currency rates were also a factor in the sales increase. On a consolidated basis, changes in foreign currency rates favorably impacted sales by 1.5% for the second quarter and 1.8% year-to-date versus the comparable periods last year.

Our new Merchandising Solutions segment reported sales of $21 million for the second quarter, and $45.5 million year-to-date. Graphics Imaging segment sales were up $6.8 million, or around 23%, for the quarter and are up $15.5 million, or 28%, for the first six months of the fiscal year. The higher level of sales resulted from the acquisition of the InTouch Group in August, 2004 and an increase in the value of the Euro. The InTouch Group is our new graphics business which is headquartered in Leeds, England.

Bronze segment sales rose $3.4 million, or 7%, over the prior quarter and $2 million, or 2%, year-to-date. These increases were principally the result of higher memorial sales during the current quarter, and the temporary price surcharge implemented last year, which more than offset a decline in mausoleum sales. Sales for the Marking Products segment increased $900,000, or 9%, for the second quarter and $2.1 million, or 11%, for the first half of fiscal 2005. The segment sales growth primarily resulted from the acquisition in July, 2004 of Holjeron Corporation and higher sales in North America.

York Casket sales declined 2% for both the second quarter and six month periods. The segment's lower sales volume during these periods reflects a decline in the death rate from the same periods a year ago.

Second quarter sales for the Cremation segment were relatively unchanged from the same quarter a year ago and down 6% year-to-date. The year-to-date decline reflected a reduction in volume of both cremation equipment and cremation caskets.

Operating profit for the quarter was $2.2 million, or 9%, higher than the same quarter last year. For the six months ended March 31, 2005, operating profit was $2.5 million, or about 6%, higher than a year ago. The increases were primarily the result of improvements in our Bronze segment and the acquisition of the Cloverleaf Group. These increases were partially offset by lower than expected results in our Graphics Imaging businesses.

Changes in foreign currency rates were also a factor in the operating profit improvement. On a consolidated basis, changes in foreign currency rates favorably impacted operating profit by 2% for the second quarter, and 2.2% year-to-date, versus the comparable periods last year.

The Merchandising Solutions segment reported operating income of approximately $500,000 for the quarter and $2 million year-to-date.

The Bronze segment reported an increase in operating profit of $4.4 million for the second quarter and $4.9 million for the first six months of fiscal 2005, compared to the same periods a year ago. The rise in operating profit reflected an increase in sales for the period, which included the temporary surcharge, and the benefit of productivity improvement initiatives. One of these initiatives included a personnel reduction program in March, 2004, which resulted in a one-time charge for severance costs that negatively affected the segment's reported results for the second quarter last year. The segment's results for the current year were also unfavorably affected by significantly higher bronze costs.

Operating profit for the Graphics Imaging segment declined $2.1 million for the second quarter and $2.7 million for the first six months compared to the same periods last year. Weak demand in the U.S. markets and lower margins in several of our European businesses were the main factors in this decline. In addition, investments during the current period in developing new accounts also affected the segment's domestic profitability.

Operating profit for the Marking Products segment in the second quarter was relatively equivalent to the same quarter a year ago, and down slightly on a year-to-date basis. Although the segment's results were favorably affected by the acquisition of Holjeron and higher sales in North America, these gains were offset by costs incurred in new product development initiatives.

Operating profit for the York Casket segment declined 5% for the second quarter and 8% year-to-date, relative to the same periods in fiscal 2004. A decline in sales, the significant increase in metal costs and expenses incurred in establishing a casket manufacturing facility in Mexico were the principal factors in the reduction in operating income. Year-to-date costs charged against income for the Mexican facility approximated $1 million.

The Cremation segment reported a decline in operating profit of approximately $250,000 for the second quarter and approximately $860,000 year-to-date, compared to the same period last year. Lower sales and operating margins were the primary factors in this decline.

Second quarter and year-to-date sales on operating profit by segment are posted on the website. Year-to-date operating profit percentages by segment are as follows: Bronze 26.8% of sales, York Casket 14.1%, Cremation 0.9%, Graphics Imaging 9.9%, Merchandising Solutions 4.4%, and Marking Products 15.5%.

Our second quarter consolidated operating profit as a percent of sales for fiscal 2005 was: 16.9% of sales compared to 19.3% in the second quarter last year. Our year-to-date consolidated operating profit as a percent of sales for fiscal 2005 was 15.2% of sales, compared to 18.2% last year.

Gross margin for the quarter was 34.8% of sales versus 38.1% a year ago. Gross margin for the six months ended March 31, 2005 was 33.7% of sales compared to 37.3% a year ago. The decline primarily reflected the significant increase in metal costs, lower margins in our 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 17.9% of sales, compared to 18.8% for the second quarter last year. Year-to-date SG&A expense was 18.5% of sales, compared to 19.1% a year ago. The decline related principally to cost controls in the Bronze segment and the acquisition of the Cloverleaf Group, which generally has lower SG&A expenses relative to sales as compared to other Matthews' businesses.

Interest income for the current quarter, investment income was $316,000 compared to $311,000 for the same period a year ago. Year-to-date, investment income was $639,000, compared to $662,000 last year. Interest expense for the current quarter was $538,000 compared to $429,000 for the same period a year ago. For the six months ended March 31, 2005, interest expense was $1 million, compared to $880,000 last year. The rise in interest costs principally reflected a higher average level of debt during the current periods.

Minority interest deduction was $1.2 million for the quarter, compared to $1.5 million a year ago. For the six months ended March 31, 2005, minority interest deduction was $2.6 million, which was relatively consistent with the same period last year.

Our second quarter and year-to-date tax rate was 38% of pretax income compared to 38.8% for fiscal 2004. The decline reflects lower estimated state and foreign income taxes.

We closed out the March, 2005 quarter with a cash and investment balance of approximately $52 million. At March 31, 2005 our current ratio was 1.8 to one compared to a ratio of 1.8 to 1 at September 30, 2004. Our outstanding accounts receivable balance at March 31, 2005 was approximately $91 million, which represents 52 days sales outstanding compared to 51 days sales outstanding at September 30, 2004.

At March 31, 2005, we had approximately 31.9 million shares outstanding. We have have purchased approximately 790,000 shares of our stock in the open market since September 30, 2004. At March 31, 2005, approximately 1,380,000 shares remained to be purchased under the current repurchase authorization.

Our long-term debt balance at March 31, 2005, both current and long term portions, approximated $63 million; $45.5 million of this balance represents borrowings under our domestic revolving credit facility. The remainder is principally debt on the books of our Italian subsidiary. The maturity of the domestic revolving credit facility is April, 2009.

Depreciation and amortization expense for the quarter and six months ended March 31, 2005, were $4.9 million, and $9.8 million, respectively. Capital expenditures for the quarter and six months ended March 31, 2005 were $4.7 million, and $7.9 million, respectively. We expect a significant increase in capital-- capital spending during the second half of the fiscal year, principally related to the Mexican casket facility, and the planned purchase of a facility in western Pennsylvania for the consolidation of several Merchandising Solutions operations. The total cost of the Mexican project is currently estimated to be in the range of 11 to $12 million, which includes both capital and expense charges.

Finally, as stated in our press release, due to the current high cost of bronze and steel and continued weakness in the Graphics business, and taking into consideration our ongoing Mexican project, 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 Steve noted, operating profit was up 6% for the first half year, and a little bit more than that, 9% for the second quarter. We're pleased with these results given the substantial investments that Steve noted. We are making these investments not only in new facilities but also new products and productivity improvement in several of our divisions. s

York Casket's plan to build a new manufacturing facility is well underway and on plan. We fully expect that this plant will help to improve our cost structure beginning next year.

Merchandising Solutions has begun to move into a new facility, which is just north of Pittsburgh. Over the course of the next year, we'll consolidate seven different plants into one facility, generating what we think will be substantial cost improvements. This is the first of several steps that we'll-- we will be taking to improve the profitability of the Merchandising Solutions division. Our target is a 2% per year improvement in operating profit over the next several years.

The Cremation division has completed the development of several important new products. We expect that Cremation will benefit in the coming year from the release of these products. We also expect that other actions already taken to increase prices and improve productivity will also help their profitability.

Last year we had an exceptionally strong second half. So I don't expect a repeat of that this year. And as a result, as Steve noted, we are maintaining our previous guidance of earnings per share in the range of $1.80 to $1.85. With those comments I'd like to open the meeting to questions.

[Operator Instructions]. Bill Burns, Johnson Rice.

My question-- let's go to the Mexican facility by York Casket. I may have the wrong notes here, but last time that we were chatting on the conference call, we were talking about that facility running about $10 million. Of course, I may be mistaken here. Now we're talking 11 to 12, I wonder if you could correct me if I'm wrong or explain the difference.

Yes, I think, Bill, last year-- or I'm sorry, last quarter we cited the range of 10 to 11-- I'm sorry, 10 to $12 million, and it's -- it looks like it's more like $11 to $12 million.

Okay. And also we weren't sure about what was going to get capitalized and what was going to have to run through the expense and current P&L. Have you -- have we got any closer resolution on that, Steve?

We have been running about $0.5 million per quarter in what's gone through the expense line, but in terms of forecasting for the rest of the year, since we still have the majority of that to spend, Bill, and still need to talk with our-- through a lot of those with our accountants, I really-- I'm not in a position to comment.

Greg Halter, LJR Great Lakes Review.

We've heard from some others regarding the prices of caskets coming down, and I don't know if that's to the -- from the funeral home side or from the manufacturing side. Can you discuss that a little bit further on what you're seeing regarding casket pricing?

Yes, Greg. The past practice in the casket industry has been to increase prices in the November/December type time frame, once a year and generally there have been no changes of those prices in the intervening year. So if you-- and York has not had any change in its list prices in that period of time. So if we are seeing changes in the marketplace, it's probably at the funeral home level, would be my guess.

Okay. And can you comment on your raw material costs, on what you're seeing currently relative to copper and steel? And we've heard that steel has come down in price and seen the stories in the newspaper. But what are you guys actually experiencing there and what's your outlook going forward?

Well what we have seen so far is from the -- late in last fiscal year, related to, let's say copper or bronze, we've seen bronze continue to increase. I'm going to say the bronze copper prices were about $1.25 to $1.35 a pound and they're about $1.50 today. So they've continued to go up. In the-- in the steel, we haven't seen our prices decline, but they seem to have leveled off here first quarter to second quarter.

Gary McCam, McCam & Company. (ph)

Explain to me again, please, why you bought a company with operating profit of 4.4% of sales. I'm just -- I'm -- I'm still missing the logic of buying the Merchandising Solutions folks.

Okay. Gary, let me take a crack at that. First let me tell you that the-- that particular business tends to have -- is a seasonal business. It tends to have a much stronger second half year than first. So the 4.4%, although a very low number is actually above our budget for first half of the year and we're fully expecting that they will meet our budget for the second half of the year.

The reason we bought that business is really twofold. First, it's a strategic decision. We feel that we can build a brand solutions group, which-- which can have synergy amongst its different pieces. You'll perhaps recall that the Merchandising Solutions business consists of a marketing consultancy, as well as a display company. The marketing consultancy has been successful in our first, oh, roughly nine months in generating significant new business which gives us, you know, hope for the future that the strategy will play out as we expect.

Secondly, when we acquired the business, we recognized that there were -- and this still is recognized that there was some inherent operational problems, and we addressed those to some extent in our comments by talking about the consolidation of facilities. We have an internal plan, which we feel fairly confident about, that doing the things that we have on the table will significantly increase the profitability of that group. And as I said in my comment, our target's roughly 2% per year over the next several years. So we think we have good strategy the long term and we think we have a plan to get the profitability where it needs to be.

Bill Burns, Johnson Rice.

Just housekeeping, Steve. You'd mentioned the debt of 63.3. And I believe you broke it out between what was in Italy and what was in the credit facility and I missed that.

Oh, that's okay. It was about 63 million, 45.5 million is in our domestic facility.

And have you got an estimate what your equity balance currently is?

Equity balance is currently over -- a little over 300 million.

Greg Halter, LJR Great Lakes Review.

Further detail on the balance sheet, Steve. Do you have an estimate on your -- the goodwill payables and total asset figures?

Goodwill is about 225 million. The total assets are a little over 500 million. And what was your other question?

Payables.

I don't have that figure yet.

Okay. And do you have a -- any indication on what receivables or inventories would have been impacted or looked like on an apples-to-apples basis without currency and the acquisitions?

I don't -- I don't have those figures available, Greg, in front of me, no.

Okay. And you commented about currency or foreign exchange helping operating profit by about 2%.

Right.

In the quarter. Do you have that in dollars?

In dollars, I think that was about -- it's been about $400,000 per quarter on operating profit.

Okay. And excluding acquisitions and currency, or including those, what did those account for in terms of the earnings per share figure, if you strip those out?

Greg, I'll have to -- I'll have to get offline with you on that one potentially. I don't have those figures in front of me either.

Okay. That's fine. And on the share repurchase, you commented on the 450,000 shares bought in the quarter. How much was spent in the quarter?

Well, year-to-date, we -- year-to-date we've spent about $27 million on share repurchases. So if you have the first quarter 10-Q.

Yep. Okay, no, problem. Any early indication on your cash flow from operations for the quarter?

Year-to-date, it's going to be somewhere between 26 and $27 million.

Okay. And what-- what's your outlook for either the uses of cash on acquisitions, dividend increases or a continuation of the share repurchase?

Well, we've maintained our dividend at its current rate and, right now, I think the only thing we could speak with any clarity to is going to be the capital expenditures. We've been -- you know we've been pretty -- you know, pretty aggressive -- I don't want to use the term aggressive, but we've repurchased at a higher rate this year than we did a year ago. But, again that all depends on what our other uses of cash are. So that one's-- that one's a little harder target for me to-- to estimate for you.

Okay. And on acquisitions, are there still things in the hopper that you're looking at or are you busy integrating the Merchandising Solutions?

Both. We are very busy integrating Merchandising Solutions, and that really is a top priority; however, we are also actively working on a couple of acquisitions. And we've always felt that when the right situations come along, and they look good to us, you know, that we've got to be flexible enough to take advantage of them. So we are doing that too.

And what comfort level of debt would you have relative to total capitalization? Would it be as high as 50% or 40% or 30%?

I think our primary goal is return on capital, and so, you know, we-- we would focus there. 50% sounds awfully high to me, you know for our company. We tend to be a little bit more conservative. I'd say 30% would tend to be more comfortable, but I think the real driver is return on capital.

Yes, I think it's just going to depend on the opportunity.

Scott Blumenfeld, Emerald Advisors. (ph)

Just a couple of housekeeping things. You mentioned the consolidation of the Merchandising Solutions into one facility north of Pittsburgh.

Yes.

Correct.

How long do you think that's going to take? When do you expect to be done with all of that?

It will take one year. It's already started. And we expect it to be finished with the end of the second quarter in '06.

Mr. Blumenfeld did you have additional questions?

Yes, I-- was there a cost for the move, the consolidation?

Yes there's substantial cost, as you can well imagine, because in some cases we have to overlap our production activities in two different sites, and then we have the move expenses associated and then we have the move expenses associated with people and equipment, and in some cases we have training expenses associated with new people because the distance is far enough that not everyone can-- can make the change. So during the course of this year, we'll have some significant expenses along those lines. But we've included all of those into our-- our forecasts.

And the other thing was, you mentioned that you have had several new cremation products in the pipeline. I was wondering if you could give us a little bit more detail or if you had any more detail for us?

Actually they've already been released. We have a new veneer cremation casket, which is a, you know, very beautiful product and that has been released and it has been slowly building up sales momentum. It really hasn't reached our early expectations, but we think it's just a matter of time before the marketplace adapts to that. And then we also have a new line of wood trim upholstery fabric caskets which we also expect is going to get good acceptance. But the sales have been a little bit slow start, this industry is one that's very traditional. So it takes time for new ideas to catch hold.

Charlie Smith, Fort Pitt Capital.

Did you mention the expected total CapEx in the second half of the year?

No. We purposely didn't. Primarily because we're still going -- we're expecting significant costs related to our Mexican facility, and also the -- you know this consolidation that's going on in Cloverleaf. And it's just -- it's difficult for us to project those numbers right now.

Can you give an idea of what the mix would be, the breakout between those two?

No. At this point, I really couldn't.

Okay. You mentioned that you expect to try to improve operating margin, is it 200 basis points per year?

Yes.

What would be your long-term target be for operating margin in that business?

Well, it would certainly be north of 10%. I'd say in the 10 to 15% range.

Okay. Obviously very much a seasonal business. In the second half of the year, for this year, any idea what your operating margin might be in that business?

Well, I think it would be not unreasonable to expect a full year to be somewhere around 7%. And we're 4.4% through the first half of the year.

And at this time, there are no further questions in queue.

Okay. Well, we certainly thank all for participating in our conference call. And we look forward to the third quarter, and that related conference call in July. Thank you, and have a good day.

Ladies and gentlemen, this conference will be available for replay after 1:30 p.m. eastern time today, through midnight eastern time on Tuesday, May 3rd. You may access the AT&T Executive replay service at any time, by dialing 320-365-3844, and entering access code 777486. That number again is 320-365-3844, access code 777486. That does conclude our conference for today. Thank you for your participation, and for using AT&T Executive Teleconference. You may now disconnect.