Matthews International Corp (MATW) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the year-end financial conference call. [OPERATOR INSTRUCTIONS] As a reminder, today's call is being recorded. I would now like to turn the conference over to Chief Financial Officer, Steve Nicola. Please go ahead, sir.

Thank you, Jeanine. Good morning, I'm Steve Nicola. On the call with me today is David Kelly, Chairman of the Board and Chief Executive Officer of Matthews; and Joseph Bartolacci, President and Chief Operating Officer. Today's conference call is set up for one hour. The 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 801647. The replay will be available until 11:59 p.m. November 30, 2005. If you access our website at www.matw.com, and click on the investor information icon, you will have access to the fourth quarter and fiscal year 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 update. 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 annual report on Form 10-K for the year-ended September 30, 2005 will not be filed with the SEC until around December 14, 2005.

To begin the conference, I will review the financial results for the quarter and year ended September 30, 2005. 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, 2005, the Company reported earnings per share of $0.48 compared to $0.51 for the same period a year ago. For the 2005 fiscal year earnings per share were $1.84 compared to $1.72 last year, representing an increase of 7%. The decline in earnings per share for the current quarter primarily reflected costs incurred in connection with the es -- with establishing a Mexican casket manufacturing facility and lower operating results for several of our recent acquisitions. The improvement in our results for the fiscal year primarily reflected higher income in our bronze and marking products segments, the full year impact of several of the acquisitions completed in fiscal 2004 and the favorable effect of currency exchange rate changes on the reported results of our international operations.

Consolidated sales for the quarter increased 20%, or $29.6 million. Year-to-date consolidated sales increased $131 million, or 26%. The Company's acquisitions in the fiscal 2004 fourth quarter, which included the Cloverleaf Group, the InTouch Group and the Holjeron Corporation, and the acquisition of Milso Industry in July 2005 were the significant contributors to the sales increases for the quarter and fiscal year. Changes in foreign currency rates did not have a significant impact on sales for the fourth quarter. However, on a consolidated basis for the fiscal 2005 year, we estimate that changes in foreign currency rates favorably impacted sales by $5.9 million compared to last year.

Beginning with our memorialization businesses, bronze segment sales for the fiscal 2005 fourth quarter were $55.5 million compared to $53.1 million for fiscal 2004 fourth quarter. For the year, the bronze segment reported sales of $205.7 million versus $197.4 million last year. The sales growth for the quarter and fiscal year principally resulted from higher sales of memorial products and price surcharges related to the continued increases in bronze metal costs. These increases more than offset a decline in mausoleum sales. Sales in our casket segment were $42.7 million for the fiscal 2005 fourth quarter, compared to $25.4 million for the fourth quarter last year. The increase resulted from the acquisition of Milso in July 2005. Excluding this acquisition, sales for the casket segment declined sli -- slightly. For the year ended September 30, 2005, casket segment sales totalled $135.5 million, compared to $116.6 million in fiscal 2004. Excluding Milso, year-over-year casket sales were relatively consistent.

Sales for the cremation segment were $5.5 million for fiscal 2005 and $21.5 million for the full fiscal year. This compares to $5.9 million and $22.5 million for the same periods respectively a year ago. The declines primarily reflected lower sales of cremation caskets. In our brand solutions businesses, graphics imaging segment sales were $36.6 million for the fiscal 2005 fourth quarter, compared to $30.8 million for the same quarter last year. A significant portion of the increase related to the full quarter impact of the acquisition of InTouch. In addition, our North American operations contribute to -- contributed to the quarter's sales increase.

For the fiscal year, sales for the graphics imaging segment were $143.2 million compared to $113.2 million for the prior year. The increase principally resulted from the InTouch acquisition and an increase in the value of the euro. For the quarter ended September 30, 2005, our new merchandising solution segment reported sales of $22.6 million, compared to $21.1 million for the same period a year ago. This represents an increase of 6.8% reflecting a full quarter's results for this segment compared to a year ago. This business was purchased in mid-July last year. For the fiscal year, the merchandising solutions segment reported sales of $88.3 million. Sales for the marking product segment were $13 million for the fiscal 2005 fourth quarter and $45.7 million for the year compared to $9.9 million and $38 million for the comparable periods last year respectively. The segment sales growth primarily resulted from the acquisition in July 2004 of Holjeron Corporation. Higher sales volume also contributed to the sales improvement.

Operating profits for the fiscal 2005 fourth quarter was $27.3 million, which was $1.3 million or four por -- 4.4% lower than the same period a year ago. For the year, operating profit was $101.3 million, which was $3.5 million or 3.6% higher than last fiscal year. The reduction in operating profit for the quarter compared to last year resulted from costs related to the Mexican casket facility and lower results from several of our recent acquisitions. For the 12 month period, the improvement in operating profit reflected an increase in the profitability of our bronze and marking products segments, the full year impact of acquisitions completed late last fiscal year and the favorable impact of currency exchange rate changes.

On a consolidated basis, changes in foreign currency rates did not significantly impact operating profit for the quarter, but on a year-to-date basis, it improved operating profit by $1.3 million compared to the average exchange rate from fiscal year 2004. In the memorialization businesses operating profit for the bronze segment was $18.6 million for the fiscal 2005 fourth quarter, compared to $19 million in the same period a year ago. The decline is attributable to the significant increase in bronze ingot costs compared to last year. For the 12 months ended September 30, 2005, the bronze segment generated operating profit of $60.9 million compared to $54.3 million in fiscal 2004. The year-over-year increase of 12% principally related to higher sales and improved productivity.

Operating profit for the casket segment was $760,000, and $13.1 million respectively for the quarter and year ended September 30, 2005. For the quarter and 12 months ended September 30, 2004, the casket segments operating profit was $1.2 million and $14.6 million respectively. The declines for the quarter and fiscal year reflect the Company's investment in establishing a manufacturing facility in Mexico. The project is now substantially complete and is beginning to ramp up production at a measured pace. The total cost incurred to date for the project is approximately $12 million. For the year ended September 30, 2005, costs of $3.7 million were charged to the income statement under accounting rules. For the fiscal 2005 fourth quarter, start-up costs of $1.7 million were expensed. As the operation is still in the start-up stages, we expect costs to exceed revenues in the first quarter of fiscal 2006.

The cremation segment reported operating profit of $648,000 for the fourth quarter of fiscal 2005, which was relatively unchanged from the $646,000 operating profit generated in the fourth quarter last year. For the 12 months ended September 30, 2005, operating profit for the cremation segment was $912,000, compared to $1.5 million last year. Lower sales and higher material costs were the principal causes for the decline in profitability for the year. The segments operating margin as a percent of sales improved in the fourth quarter and division management is continuing to work on strategies for further improvement.

With respect to our brand solutions businesses, operating profit for the graphics imaging segment was $4.6 million for the 2005 fourth quarter, and $15.5 million for the full fiscal year compared to $4.7 million and $19.3 million respectively for the same periods last year. The segment's lower profitability reflected continue -- continued price pressure and competition in North America, investments in developing new domestic accounts and lower results from several of our European acq -- acquisitions and operations including our recently acquired InTouch operation in the U.K. Management has already initiated plans to improve the profitability of this business for fiscal 2006.

The merchandising solutions segment reported operating profit of approximately $750,000 for the quarter ended September 30, 2005 compared to $1.6 million for the fourth quarter last year. Lower productivity and cost related to the facilities consolidation contributed to the segment's decline in profits. The facilities consolidation is expected to be completed in March 2006. For the 2005 fiscal year, the merchandising solutions segment reported operating profit of $3.3 million.

Operating profit for the marking products segment approximated $2 million for the fiscal 2005 fourth quarter and $7.6 million for the fiscal year. Last fiscal year operating profits for the marking products segment was $1.5 million for the fourth quarter and $6.5 million for the full year. The acquisition of Holjeron and higher sales were the principal contributors to the year-over-year increases on a quarter and year-to-date basis.

Fourth quarter and fiscal year sales and operating profit by segment are posted on the website. Year-to-date operating profit percentages by segment are as follows. Bronze 29.6% of sales, York 9.7%, cremation 4.2%, graphics 10.8%, merchandising solutions 3.7%, marketing products 16.6%. Our fiscal 2005 fourth quarter consolidated operating profit as a percent of sales was 15.5% of sales compared to 19.5% in the fourth quarter last year. Our consolidated operating profit as a percent of sales for fiscal 2005 was 15.8% of sales, compared to 19.2% last year. Gross margin for the quarter was 35.9% of sales versus 37.6% a year ago. Gross margin for the year ended September 30, 2005 was 34.9% of sales compared to 38.1% a year ago. The declines 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 gross margins than other Matthews businesses.

SG&A expense for the quarter was 20.4% of sales compared to 18.1% for the fourth quarter last year. For the year, SG&A expense was 19% of sales compared to 18.9% a year ago. The increase for the quarter reflects the acquisition of Milso Industries which generally has higher SG&A expenses as a percent of sales compared to other Matthews businesses because of its direct distribution of caskets. For the quarter ended September 30, 2005, investment income was $721,000, compared to $515,000 for the same period a year ago. For the year investment income was $1.7 million, compared to $1.6 million last year. These increases reflected higher rates of return compared to the prior year periods. Interest expense for the fiscal 2005 fourth quarter was $1.4 million, compared to $505,000 for the same period a year ago. For the year ended September 30, 2005, interest expense was $3 million, compared to $2 million last year. These increases resulted principally from new borrowings under the Company's domestic revolving credit facility to fund the Milso acquisition in July 2005.

Minority interest deduction was $2 million for the fiscal 2005 fourth quarter compared to $1.5 million for the same quarter a year ago. For the current year, minority interest deduction was $5.8 million compared to $5.5 million last year. These increases reflected higher profitability for several of our European graphics businesses. Our year-to-date effective tax rate was 37.6% of pre-tax income compared to 38.8% for fiscal 2004. The reduction reflects lower estimated state and foreign income taxes.

Our cash and investment balance at September 30, 2005 was approximately $50.7 million, compared to $74.4 million at September 30, 2004. Stock repurchases were a significant use of cash in the first half of the current fiscal year. At September 30, 2005 our current ratio was 1.6 to 1 compared to a ratio of 1.8 to 1 at September 30, 2004. Our outstanding accounts receivable balance at September 30, 2005, was approximately $115.4 million which represents 58 days sales outstanding compared to 51 day sales outstanding at September 30, 2004. The increase reflects the recent acquisition of Milso.

Our long term debt balance at September 30, 2005, both current and long-term portions, approximated $147.7 million. $122.5 million of this balance represents borrowings under our domestic revolving credit facility. The remainder is primarily dead on the books of our Italian and German subsidiaries In July 2005 we increased our outstanding borrowings under the revolving credit facility as a result of the acquisition of Milso. The maturity of the revolving credit facility is April 2009.

At September 2005, we had approximately 32 million shares outstanding. Due to the acquisition of Milso, stock repurchase activity was nominal during the second half of fiscal 2005. For the fiscal year the Company has purchased approximately 793,000 shares of its common stock in the open market. At September 30, 2005, approximately 1,379,000 shares remained to be purchased under the current repurchase authorization. With the increase in bank borrowings related to the Milso acquisition, we expect stock repurchase activity to continue to be limited in the near future in favor of debt repayments.

Depreciation and amortization expense for the quarter and fiscal year ended September 30, 2005 were $5.2 million and $19.9 million respectively. Capital expenditures for the quarter and 12 months ended September 30, 2005 were $6.5 million and $28.1 million respectively. These amounts are significantly higher than the same periods a year ago principally related to current year investments in the Mexican casket facility and the purchase of a facility in western Pennsylvania for the consolidation of several merchandising solutions operations.

Looking forward, the Company remains cautious about earnings growth for fiscal 2006, particularly given the continued high cost of metal and recent challenges in our casket business. As stated earlier, the Company expects its start-up costs for the Mexican facility to still exceed related revenues in the fiscal 2006 first quarter. As such, our fiscal 2006 first quarter earnings are not expected to be significantly different than the fiscal 2005 first quarter. For the year ending September 30, 2006, the Company is projecting earnings per share to be in the range of $2.10 to $2.15 per share. These projections reflect an estimated impact of the implementation of new accounting rules related to the expensing of stock options. This concludes the financial review and Dave Kelly will now comment on our operations.

Thank you, Steve. I -- I'd like to address two topics this morning. One is a few comments to amplify on what Steve said with respect to 2005, and then a few comments with respect to 2006. To start off with, the results -- [novo] results in 2005 were pretty much as we expected during the course of the year. We have been predicting somewhere in the $1.80, $1.85 range. We ended up with $1.84. But as usually happens there were both surprises and disappointments during the year and I just might mention a couple of those. One, the bronze business was a pleasant surprise, particularly towards the end of the year. Volume picked up more than we really had expected and -- and that was a boost. On the negative side, in the casket business, we -- we continued to deal with higher material costs. We had some disruptions in our distribution during the course of the year which impacted us and then finally as Steve mentioned we had somewhat of a delay in the Mexican plant start-up. And that's not to be unexpected in a project of that magnitude.

On the graphics front, we suffered some volume declines and some pricing pressure both in North America and in Europe. And that impacted our -- our results more than we anticipated. And we had kind of an opposite problem in the merchandising solutions area. Rather than lower volume, we had higher volume. And unfortunately we had that higher volume just as we were consolidating from multiple facilities here in Pittsburgh into a single new facility. And that level of activity led to some higher costs, led to some rework, et cetera. We think the management team there has that situation under hand now and we expect to be enjoying shortly the benefits of that consolidation.

Moving over to 2006, of course, everyone realizes that it's really early in the year and we have at this point some budget numbers. But, it's very difficult to protect -- to project the year at this early point. But as Steve noted, we're --we're anticipating earnings in the $2.10 to $2.15 range. That's roughly a 17% improvement over 2005. We actually expect all of our operations to do better in 2006. But there are a couple of areas where we expect some rather sharp improvements. And I just might highlight those.

One is the casket business. We would expect our operating profit would be up quite significantly in 2006. But that's due of course to the full year impact the Milso acquisition, the start-up of our Mexican facility, particularly in the latter part of the year and then manufacturing realignment which we're working on as part of our manufacturing strategic plan. Merchandising solutions should also see significant operating profit improvement. The consolidation as I mentioned a minute ago will help us and then the management team there has done a lot of work on operational and improvements, particularly to focus on quality which will help us reduce rework. So those two areas in particular I think will give us a -- a boost in 2006.

And at this point in time we - we still are sticking to our long-term goal which is 12 to 15% growth earnings per share. We've done that consistently now for some 10 years -- 10-plus years, and we think we can still do that going forward. Although it's obviously a challenge to -- to keep up that type of a track record. So those are few brief comments. I'd like to open the meeting now to questions.

[OPERATOR INSTRUCTIONS] We'll go first to the line of Bill Burns with Johnson Rice. Please go ahead.

Good morning.

Morning, Bill.

I'll -- I wonder if you were -- if you can, just maybe give me your position -- the Company's position on this Yorktown Casket situation where Hillenbrand's out trying to buy it.

Yes, Bill, I might emphasize that we have a contract with Yorktown, which is a major distributor of caskets in North America, which runs through April of 2007. And we were advised that they still had the intention of purchasing Yorktown. And that frankly confused us. We -- we didn't really understand how a competitor could buy one of your distributors and then act in -- in your best interest while being a competitor at the same time. So we took action in -- in court and asked that the -- the acquisition if it takes place be delayed until the end of our contract and that issue, in the past have seen we -- we received a preliminary injunction and the discussions with all of the parties are still underway and the courts still underway. But our expectation is that Yorktown will -- will continue to live up to the terms of the contract and we will continue to live up to the terms of the contract through April 2007. And that time frame will give both parties an opportunity to work out what their plans are for the future.

Okay. And -- and as a follow-up, I got on the call late. That you talked about on the casket side again, distribution disruptions, you mentioned. I was wondering if you could go over that again.

Well, during the course of last year we had another of our distributors which was located in the mid-south region who decided to handle a different brand of equipment and that meant that we had to set up alternate distribution which set up a series of warehouses in the territory and started to sell our product directly to the marketplace. As you do that -- as you make that transition, you lose some volume and that negatively impacted us during the year. And will continue to negatively impact us until we're able to build up the volumes to the levels of what it was previously.

Okay. Thank you very much.

Our next question comes from the line of Jason Rogers with Great Lakes Review. Please go ahead.

Good morning.

Morning, Jason.

I wondered if you could give an estimate for your capital expenditures for fiscal '06?

As of this time, Jason, we don't -- we don't have an estimate on that yet. So it'd be difficult for me to do that now. It -- it certainly will -- will be less than 2005 because we're not going to have the significant investments -- or the investments of the significance that we have in Mexico and also the building that we have in western Pennsylvania for merchandising solutions.

And what tax rate would you expect going forward?

Right now we're still expecting it to be around the 37.6% that we had in 2005.

All right. Thank you.

You're welcome.

Our next question comes from the line of James Clement with Sidoti. Please go ahead.

Morning, gentlemen.

Morning, Jaime.

Quick -- quick question, Steve. I -- I know you said it. Your -- your fiscal '06 guidance that does include options expense or does not?

That does.

Does. Okay. And just another -- another question, how -- how are you guys sourcing your bronze right now? Are you under a contract right now or are you in the open market just -- can you help us sort of -- just so we can kind of monitor copper prices and that kind of thing and have an idea what's going on?

Jamie, we buy bronze short-term in the marketplace. Sometimes we'll go out a few months, but we don't enter into any type of long-term purchase agreements to buy copper. So we are subject to fluctuations in the marketplace. If we think it's going up, though, we'll -- we'll -- we'll go out a few months to help protect us in the short-term.

O -- okay. And just a -- a -- a follow-up to that, as -- as it relates to your press release, I think you alluded to some of the -- the bronze price increase being mitigated by productivity initiatives and -- and -- and price changes and that sort of thing. Other than the -- the restructuring or whatever initiatives, however you'd refer to it that I believe occurred more towards the beginning of this past fiscal year, have there been initiatives that -- that you guys have taken sort of as this year has progressed as well?

I would characterize it this way, Jaime. You're right, the -- the reference you made to cost structure improvements were made actually toward the end -- actually the middle part of last fiscal year. And our folks at the bronze division continue to work on productivity improvements on an ongoing basis. So there isn't one significant element that I can point to similar to what we did a year ago. They just continue to -- to work on doing what they can.

Okay. Thanks very much. I'll let somebody else get on. I appreciate it.

Our next question comes from the line of Joe Naptha with Pittsburgh Tribune. Please go ahead.

Yes, I was wondering what court issued an injunction in the case against Hillenbrand? Is that a state court, a federal court?

It's the common pleas court of Allegheny County.

Oh, It was common pleas. Okay. Thank you very much then, sir.

Ladies and gentlemen, as a reminder, if you would like to ask a question, press star then one at this time. We do have a question from Deforest Hindman with Paradigm Capital Management. Please go ahead.

Hi, guys.

Morning.

One -- I know you per -- talked about the acq -- or the Hillenbrand trying to acquire Yorktown. Are -- is that a business that we would potentially want to acquire or -- or how are we thinking about this and what effect would this have on our business model if Hillenbrand would eventually acquire Yorktown?

Well, certainly the -- the fundamental strategy of Matthews is to present two brands to the marketplace. One is our York brand and the other is the Milso brand. So we do require distribution for our York brand. We have al -- alternatives if we cannot work out a mutually satisfaction -- satisfactory arrangements with Yorktown and that would be to establish our own direct distribution channel. We can't really speculate on what Hillenbrand's intentions are, or what their reasoning is, but as I mentioned before we -- we do think that any arrangement between -- between Hillenbrand, Batesville and -- and Yorktown should take place after the con -- contract expires. And the advantage to us of that is that gives us time to work through an appropriate transition from Yorktown.

All right. And another question if I could. Would the inventory build we saw year-over-year, can you talk about that?

Well, the -- the inventory increase has a lot to do with the acquisition completed this -- of -- of Milso completed in July so there's a natural bump in inventory. And also it's the -- it's the different type of casket business in the sense that they are a direct distributor. So as a proportion of their business, they would carry more inventory than our traditional York business holds.

All right. Thank you.

Our next question is from the line of Charlie Smith with Fort Pitt Capital. Please go ahead.

Yes, good morning. You mentioned you expected a nice bump up in profitability merchandising next year or this fiscal year, I guess. Can you give us an idea what kind of sales number you expect and would be linear for the year or back end or frond end loaded or what that was going to look like?

We really don't give in our projections, Charlie, we really don't give individual segment sales projections so I really can't comment specifically on that other than we can comment that we do expect some level of sales growth year-over-year.

Okay.

Yes. The -- the -- I think very positively is is that the business model appears to be working quite well for us where part of the acquisition of the Cloverleaf Group involved a marketing consultancy which has successfully generated spin-off business for our fixturing and display business, IDL, and their products have been well received in the marketplace and they've been able to build their volume, too. So, we expect a rather significant increase in volume, let me put it that way, next year. And that volume increase plus being established in our new facility should help us quite a bit.

All right. Thank you.

As a reminder, if you would like to ask a question at this time, press star and then one. And we do have a follow-up from Deforest Hindman with Paradigm. Please go ahead.

Just another question. You guys had talked about margin improvement in the merchandising solutions. Do we have an idea where -- when it's going to start to improve? Because I think you said on a previous call that we're thinking 7% margins for that segment.

Yes. Let me address the status of the consolidation which is kind of critical to the margin improvement process. We've had seven facilities in Pittsburgh. Four of those seven have now been moved completely. The -- this month we're moving the headquarters operation which is significant move for us. And we have one facility which is primarily holding some inventory, is not really a big factor. And then finally we have our -- our printing plant which does screen printing which we plan to move at the end of the first quarter of next year in the March type time frame. So, by March we'll have all of the operations done and we -- we think at that point in time the margins should be up at the levels that we had previously expected. However, the fact that we have got so much moved already means that we should see margin improvements starting this quarter because we're going to be able to be -- better manage the volume. And we've already -- we have completed one month of our year, and of course one month up in the year make, but the results in merchandising solutions were quite encouraging.

All right. Thank you.

And again, ladies and gentlemen, if there are any additional questions, press star then one at this time. I'm showing no additional questions. Please continue.

Okay. Well we thank everyone for attending this morning and we look forward to speaking again at our next conference call after the first quarter earnings release. Thank you and have a good morning.

Ladies and gentlemen, today's call will be available for replay beginning at 1:30 P.M. eastern time today and running through the 30th of November at midnight. You may access the replay system by dialing 320-365-3844, and entering the access code 801647. That number again is 320-365-3844, and with the access code 801647. That does conclude our conference for today. Thank you for your participation and for using AT&T's executive teleconference service. You may now disconnect.