Matthews International Corp (MATW) 2006 Q2 法說會逐字稿

Welcome to the Matthews International second quarter results conference call. [OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Mr. Steve Nicola, Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, I'm Steve Nicola. On the call with me today is Dave Kelly, Chairman of the Board and CEO of Matthews. Today's conference is set up for one hour, and we are conducting the call to comply 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 the access code 825097. The replay will be available until 11:59 p.m., May 10, 2006. If you access our website at matw.com and click on the investor information icon, you will have access to the second quarter earnings release and financial information we will discuss this morning. This data is available now. For those of you who will be asking questions, we request that you limit 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.

Before beginning the discussion, I have been advised by our legal counsel 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. In addition, the balance sheet and income statement data provided today should be considered preliminary data, since our quarterly report on Form 10-Q for the quarter ended March 31, 2006, will not be filed with the SEC until around May 10, 2006.

To begin the conference, I will are 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 March 31, 2006, the Company reported earnings per share of $0.52, compared to $0.45 for the same period a year ago, representing an increase of 15.6%. For the six-month period ended March 31, 2006, earnings per share were $0.92 compared to $0.83 for the first six months last year. Higher sales and operating improvements in several of our businesses, combined with the impact of the acquisition of Milso Industries in July, 2005, were the principal factors in the earnings growth. I should also point out that other income for the first six months last fiscal year was $1.6 million, or about $0.03 per share higher than the current period, as a result of one-time currency gains on inter-company advances to our overseas affiliates. Please note that prior period earnings per share amounts have been restated by $0.02 for the second quarter, and $0.03 year-to--date, to reflect the adoption of Statement of Financial Accounting Standards number 123(R), which is the accounting rule requiring expensing of stock options.

Consolidated sales for the second quarter of fiscal 2006 were $181 million, representing an increase of 16% or $25 million over the same quarter a year ago. On a year-to-date basis, consolidated sales were $351 million, as of March 31, 2006, representing an increase of 15% or $46 million over the same period last year. The acquisition of Milso was the principal driver in the quarter and year-to-date increases. In addition, sales were higher in our Bronze marking products and Cremation businesses for these periods. In our Memorialization business, sales for the Bronze segment were $53 million for the second quarter and $102 million year-to-date, representing increases of 5% and 8% respectively over the comparable period last year. These increases are primarily attributable to higher pricing and an increase in mausoleum sales from the prior year.

Casket segment sales for the quarter and six months ended March 31, 2006, were $55 million, and $103 million respectively, compared to $33 million, and $63 million respectively in the same period last year. These increases resulted from the acquisition of Milso. \Excluding Milso, casket sales declined for the quarter on lower unit volume, which is partially attributable to a lower death rate and partially related to the transition to company-owned distribution in certain territories. Sales for the Cremation segment were $1.1 million, or 20% higher for the second quarter, and $1.7 million, or 16% higher year-to-date, relative to the same period a year ago. Higher unit volumes and better pricing for both cremation caskets and cremation equipment were the principal factors in the sales growth.

In the Brand Solutions business, our marketing products segment reported an increase in sales over last year of $2.6 million, or 25% for the second quarter, and $4.4 million, or 21% year-to-date. New product offerings including higher sales from the segment's [Holderon] operation, which was acquired in July, 2004, attributed to the growth in sales. Graphics imaging segment sales declined $1.2 million or around 3%, and $2.9 million or 4% year-to- date, compared to last year. The decline resulted primarily from a decline in the value of the Euro compared to the U.S. dollar. Excluding this effect, sales for the current periods were slightly higher than the same periods last year. The merchandising solutions segment reported a decline in sales from last year of $2.2 million, or 11% for the second quarter, and $4.8 million, or 11% year-to-date. The reduction in sales was primarily due to lower volume of merchandising systems and displays. Part of this reduction reflected the inclusion of several large promotional programs in last year's first fiscal quarter, which did not repeat this fiscal year.

Consolidated operating profits for the quarter ended March 31, 2006, was $29.1 million, compared to $25.5 million for the same quarter a year ago. For the first six months of fiscal 2006, consolidated operating profit was $51.5 million, compared to $45 million last year. These increases resulted from higher operating income in five of our six business segments. Please note, again, that prior period operating profit amounts have been restated to reflect the accounting change to expense stock options. In our memorialization group, the Bronze segment reported operating profit of $15 million and $27 million respectively for the quarter and six months ended March 31, 2006. For the six month period, this represented an increase of $2.2 million or 9%. However, for the second quarter, the increase over the prior year was less than 3%. In addition, second quarter operating profit, as a percent of sales, declined for the bronze segment from the same quarter a year ago. This reduction in margin percent is directly attributable to a significant increase in Bronze medal costs.

For the fiscal 2006 second quarter, average Bronze ingot costs increased over 30% from the same quarter a year ago. I should also point out that Bronze metal costs, as of today, are already now more than 50% higher than the quarter that we just completed. For this reason, we anticipate higher metal costs will have a more significant impact on the Bronze segment's operating results for the second half of the current fiscal year. Management is continuing its efforts to look for ways to reduce costs, to mitigate some of this impact. It is also worth noting that today's cost of Bronze is almost four times the cost it was less than three years ago.

Operating profit for the Casket segment for the three months ended March 31, 2006, was $6.9 million, compared to $5.2 million last year. Year-to-date, operating profit for the Casket segment was $10.5 million, compared to $8.6 million a year ago. The improvement in operating profit reflects the acquisition of Milso. Excluding Milso, operating profit would have declined for the period, as a result of lower sales, and costs related to the new manufacturing plant in Mexico. For our Mexican operation, operating costs in excess of revenues were approximately $1.3 million, and $2.7 million respectively, for the quarter and six months ended March 31, 2006. For the same period last year, these amounts were approximately $600,000, and $1.1 million respectively. In addition, the Casket segment incurred costs in the current quarter of approximately $500,000, in connection with the shut-down of its manufacturing facility in Lynn, Indiana.

Operating profit for the Cremation segment was $1.1 million, and $1.7 million respectively, for the second quarter and first six months of the current fiscal year. Higher sales volume, improved pricing, and cost reductions were the principal factors in the operating profit growth. For Brand Solutions, second quarter and year-to-date operating profits for the Graphics Imaging group were 16% and 14% higher respectively, than the same period last year. Cost structure changes, principally in the U.S. and UK operations, which were initiated in the fourth quarter of fiscal 2005, more than offset the unfavorable impact of the decline in the value of the Euro. Marketing products operating profit for the second quarter of the current fiscal year was $2.4 million, compared to $1.5 million last year. For the six months ended March 31, 2006, the segment's operating profit was $4.4 million, compared to $3.1 million a year ago. The increase in operating profit is directly attributable to the segment's sales growth.

The merchandising solutions segment reported an operating loss of approximately $500,000 for the sec -- for the current quarter, and operating profit of $400,000 year-to-date. Prior year second quarter and year-to-date operating profit amounts were $500,000, and $1.9 million respectively. The reduction in operating income is a result of the segment's lower sales. The Company continues to develop and implement actions intended to address the low margin rate in this business. Its profitability is expected to improve in the second half of this fiscal year, as a result of these actions, but likely more toward the fourth quarter. Second quarter and year to date sales and operating income by segment are posted on the website.

Year-to-date operating margins by segment were as follows: Bronze, 26.5% of sales; Casket, 10.2%; Cremation, 13.6%; Graphics Imaging, 11.3%; Marking Products 17.2%; and Merchandising Solutions, 0.9% of sales. Our second quarter consolidated operating margin for fiscal 2006 was 16% of sales, compared to 16.3% in the second quarter last year. Consolidated operating margin for the first six months of fiscal 2006 was 14.7% of sales, compared to 14.8% for the same period last year. Gross margin for the quarter ended March 31, 2006, was 37% of sales, versus 34.8% for the same period a year ago. Gross period for the six months ended March 31, 2006, was 36.5% of sales versus 33.7% for the same period last year. The gross margin increase for both periods primarily reflected Milso acquisition and improved margins in our Graphics Imaging and Cremation businesses. These increases were partially offset by a decline in Bronze gross margin, with a significant rise in metal costs.

SG&A expense for the current quarter was 20.9% of sales, compared to 18.5% of sales in the same quarter last year. SG&A expense for the first six months of the current fiscal year was 21.8% of sales compared to 19% of sales in the same period last year. The increase relates principally to the Milso acquisition. Because Milso in the Casket distribution business, it generally has higher SG&A expenses as a percent of sales, compared to York Casket, which sells primarily through independent distribution. Also, Bronze SG&A costs were lower for the quarter and year-to-date periods, due to cost containment efforts intended to mitigate some of the increase in bronze metal costs.

For the current quarter, investment income was $244,000, compared to $316,000 for the same period a year ago. Year-to-date, investment income was $571,000, compared to $639,000 last year. The reduction in investment income reflects lower levels of invested cash. Interest expense for the current quarter was $1.6 million, compared to $538,000 for the same period a year ago. For the six months ended March 31, 2006, interest expense was $3 million, compared to $1 million last year. The rise in interest costs principally reflected a higher average level of debt and interest rates during the current periods. Minority interest deduction was $704,000 for the quarter compared to $1.2 million a year ago. For the six months ended March 31, 2006, minority interest deduction was $1.3 million, compared to $2.6 million last year. In September, 2005, the Company purchased additional ownership interest in one of its less than wholly owned German subsidiaries. This is the primary reason that the minority interest deduction is lower for the current period.

Our second quarter and year-to-date tax rate was 37.6% of pre-tax income, which is equivalent to the effective rate for fiscal year 2005. At March 31, 2006, the consolidated cash and investment balance was approximately $48 million, compared to $51 million at September 30, 2005. At March 31, 2006, our current ratio was two to one, compared to a ratio of 1.6 to one at September 30, 2005. Our outstanding accounts receivable balance at March 31, 2006 was approximately $109 million, which represents 54 days sales outstanding. Outstanding accounts receivable at September 30, 2005, approximated $115 million, which represented 58 days sales outstanding. At March 31, 2006, consolidated inventories totaled approximately $82 million, compared to $71 million at September 30, 2005. The increase in inventories relates mainly to the Company's expansion of its casket distribution capabilities.

At March 31, 2006, shares outstanding totaled 32,118,431. No significant shares have been repurchased under the Company's share buyback program during fiscal 2006. At March 31, 2006, approximately 1,378,000 shares remained to be purchased under the current repurchase authorization. Our long-term debt balance at March 31, 2006, both current and long-term portions, approximated $167 million. $138 million of this balance represents borrowings under our domestic revolving credit facility. The remainder is primarily debt on the books of our German and Italian subsidiaries. The maturity of the domestic revolving credit facility is April of 2009. The increase in borrowings during the credit quarter related to two acquisitions, one of which was our southwest independent casket distributor and the other a small graphics operation in the U.S.

Depreciation and amortization expense for the quarter and six months ended March 31, 2006, were $5.3 million and $10.7 million respectively. Capital expenditures for the quarter and six months ended March 31, 2006, were $3.7 million and $7.5 million respectively. As I previously indicated, operating income for the second quarter was impacted by the significant increases in bronze metal costs and, unfortunately, these increases are expected to have a more significant impact on earnings in the second half of the fiscal year.

Earlier in the fiscal year, we were cautiously optimistic that our earnings per share growth in 2006 would exceed our long-term annual growth target of 12 to 15%. However, due to the current high level of bronze metal costs and considering the status of our ongoing efforts to improve the performance of our Merchandising Solutions business, and as we work through various issues in our Casket business, we now believe our current year earnings growth over the prior year, which was $1.79 per share, adjusted for stock option expense, will be more in line with our traditional 12 to 15% growth targets. Accordingly, we have modified our earnings guidance for the year, and currently expect earnings per share in the range of $2.00 to $2.10 per share.

This concludes the financial review, and Dave Kelly will now comment on our operations.

Thank you, Steve. Good morning, everyone. As Steve just mentioned, we anticipate earnings for the year will be 12 to 15% higher than the comparable figure for last year. On the surface, this would seem to be in line with our long-term objectives, of 12 to 15% growth in earnings per share, but under the surface, we are disappointed the level of earnings this year does not get us to the return on investment that we want.So we have work cut out for us for the balance of 2006, to put ourselves into a position where we can see further improvements in 2007. I'd like to focus on three areas that Steve has touched, but I'd like to go into a little more detail in three areas to help explain the situation. Those three areas, Bronze, our Brand Solutions business and our Casket business.

Starting off with Bronze, we have a -- what's turned out to be a very difficult supply situation with our bronze ingot. We are, frankly, quite surprised by the turn of events, particularly in the past six months, to see the size of the increases. I don't think there is anybody on the planet that would have predicted six or 12 months ago that we'd be looking at $3 bronze cost per pound. And even the experts that we used to help us forecast [inaudible] in many cases, have been quite surprised by the magnitude of the increase. We are looking at a lot of different options, you know, including a lot of hedging strategies and extended purchases, et cetera. We are also redoubling our cost reduction efforts. The Bronze division over the years, has done an outstanding job of cost reduction, and they continue to look at alternatives for keeping costs under control.

Of course, we have to continue to look at pricing options, also. But when you have price increases of this magnitude in such a short period of time, it's going to present some temporary disruption to our -- to our business. I remain convinced, though, that longer term, that the situation will stabilize, and that as it stabilizes, that our profitability will return to a level that we expect. But I can't, at this point in time, project exactly what's going to happen with bronze prices. So there's quite a bit of uncertainty for the balance of this year, so I think it is prudent for us to be conservative with respect to our earnings forecast, as a result.

With respect to our Brand Solutions business, it's been a disappointment to us in the second quarter, and I think the third quarter will also be a disappointment, because it's not yet generated the returns that we expected and the Brand Solutions management team expects. Our cost improvement program, which I've spoken about in the past, has gone well. It's principally revolved around consolidating facilities, and we have consolidated all of our facilitates now except for one. The last one is a printing plant, and we're trying to time the consolidation of that with the arrival of new printing equipment. The new printing equipment will be installed in the new facility, and will facilitate the move for us. That printing equipment has been somewhat delayed, but we expect it to be completed in August. And that will be the final stop in that program. And in the meantime, the management team has put together really a comprehensive look at all of our other costs, and you know, areas such as purchasing, error reduction, how much money we're spending on outbound freight, outsourcing, a whole range of things to help improve the cost structure.

But these actions have been driven by an unexpected drop in the volume, which occurred in the third -- in the second quarter and is expected to continue into the third quarter. In reviewing that situation, the driver, I think as Steve indicated earlier, has been principally the need of customers to delay the introduction of new programs. And we just had an unfortunate coincidence where a number of significant customers have had delays, pushing programs back into the end of 2006 and in some cases, into 2007. I expect that the profitability will get back to the levels we anticipated towards the end of this year, but it is going to depend upon our ability to generate volume. I think the lesson we've learned here is that you cannot focus, obviously, on cost reduction only. You've got to keep your eye on the volume picture, and you got to look through the fog, so to speak, and get behind the customers' businesses, and understand where they might have delays that could impact us.

With respect to the Casket business, I just returned, along with Steve, from a board of directors meeting, which we held down our Monterey facility. We are very proud of our new plant down there. It is -- it's meeting all of our expectations. Our principal goal was to produce a state-of- the-art casket of the highest quality, and the plant is doing that. We're blessed with a wonderful group of employees down there who are very dedicated to that objective. Our volume has reached the break-even level that we had, in previous discussions, anticipated for the end of the second quarter, where they're pretty much there now. And our new challenge, if you will, is now to get the volume up to a full one-shift operation. We expect that's going to take place by the end of this year. And that, then, will help drive the resurgence of profits in the Casket business.

I might mention that we remain committed to this business. We think it's going to be an excellent business for us on a return on investment basis. We continue to make what we think are intelligent capital investments. In addition to our new Mexican plant, we are investing in capital to improve the production levels, and the quality of product in our other plants. We are making major inventory investments of finished goods inventory to support our direct distribution. We have built up and invested in distribution centers throughout the country, and I think we now have some 41 distribution centers that we operate throughout the United States. We are making major computer systems investments that are necessitated by being in a finished goods inventory business and being able to manage and control that inventory. And we made a purchase of one of our former independent distributors, which I think is going to help us greatly. So we continue to look very favorably on this business, and are confident that, as the items that I mentioned take place, that profitability will get back to the levels that we expected.

I also want to just quickly mention that three of our divisions have done extremely well, and the prospects are very good for the balance of this year. The Cremation business has had its profitability rebound very strongly, and we're very pleased with what management team has done. Our Marketing Products division continues to have outstanding results and, frankly, has a pretty good, I think, opportunities for the balance of this year, so we have a high level of expectations there. And in our Graphics business showed improvement in the most recent quarter, and it looks like that should continue into the rest of the year. So there are some bright spots, too, as well as challenges.

With that said, I would like to turn the meeting over to questions.

Thank you. [OPERATOR INSTRUCTIONS] The first question comes from the line of James Clement, Sidoti and Company. Please go ahead.

Good morning, guys.

Good morning.

Dave, if I could just ask you a question just sort of on the balance sheet and maybe you could give us a sense of, you know, what acquisitions, if any, might be on the pipeline. Your total debt to EBITDA, you know, obviously is basically -- essentially one to one, and your stock's relatively close to a 52-week low. Where do you -- I mean would you consider buying -- you know, escalating the share buyback at this level, or are there potential acquisitions in the pipeline? Where do things stand?

I think right now, Jamie, we really redoubled our focus on improving our operating profit. Frankly, our balance sheet needs improvement, particularly because of the -- our decision to do direct in the Casket business. Obviously, that increases your investments and receivables, and inventory. And as I mentioned, we're be making systems investment in that area. Part of the reason for that is we need to better control those balance sheet investments, and I think this is a significant opportunity to reduce, particularly our inventory. But the first thing we have to be after, if you will, is customer satisfaction. So we're going to put whatever investment's required on the ground to make sure we can deliver to our customers' expectations. And then, over time, through systems investments improve that situation, reduce our inventory, and free up capital. As we free up that capital, we would love to buy back stock, particularly at these levels. But frankly, you know, we don't want our debt to be any more than it is right now. We're not actively engaged in an acquisitions right now. We think that the operating improvements I mentioned earlier can drive our earnings into 2007, you know, without any problem for us.

Okay. Thanks very much for the time.

You're welcome.

Your next question comes from the line of Jason Rodgers, Great Lakes Review. Please go ahead.

Morning.

Morning, Jason.

For your guidance for the year, what assumptions are you using for bronze prices for the remainder of fiscal '06?

Well, specifically, we've been -- we've projected that they're going to continue to increase between now and the balance of the year. I mean that's the best I can tell you. I really can't give you the specific numbers for bronze ingot that we've used at this point.

We have -- we're hearing numbers now that go over $3 a pound through the balance of this year. And I think, if we talk to smelters and use guidance that we get from them, they're as uncertain as we are as to what's going to happen. So however, again, we said earlier, it just seems like there is a lot of speculation in the market right now, and the current prices are not really supported by the underlying demand. And at some point in time, maybe not 2006, but in 2007, 2008, we should see a downward adjustment of these prices.

Okay. And what do you expect for capital expenditures for fiscal '06?

What we've said for that, Jason, in the past is we -- right now, we anticipate depreciation and amortization for the year to be about $21, $22 million. And we haven't really put out a CapEx number projection for the year, but we do have some investments going on in several of our businesses, so the only guidance we've given there is in terms of modeling. I wouldn't model the capital expenditures to be any higher than our depreciation and amortization estimate.

Okay. Thank you.

You're welcome.

Our next question comes from the line of John Harlow with Marlin Hanley. Please go ahead.

Help me understand how the accounting or whatever explanation explains how you've avoided the margin squeeze from your bronze ingot until now? Seems to be remarkable you've not felt the pain of the price increases until now. Why's that?

Well, the reason for that is the management of that division has --you know, had a history of focusing on cost improvements. And , just one example, in this past year, we closed a plant, and what we used to do in that plant we moved to another plant, and that move was made possible by efficiency improvements in the plant, you know, receiving the new business. And so it has been a constant attention to finding ways, better ways to do our business that has really permitted. And frankly, it has been somewhat remarkable. But when have you a 50% increase in such a short period of time, it finally catches up with it.

Are you on LIFO?

Pardon me?

LIFO.

No.

Are you on LIFO?

No, we are not.

What do you use?

Average cost.

Okay. Thank you.

Our next question comes from the line of Charlie Smith with Morgan State Capital. Please go ahead.

Yes, good morning. In Brand Solutions, are there any problems with the offering or the relationships in terms of the change of ownership have that created the sort of anemic sales numbers there? I mean, delays in product orders are one thing, but I'm wondering if there is something fundamental, in terms of the business.

No, the owners of that business are still with the company. They're an excellent group of managers. They have a very extensive knowledge of the business, and they have very strong relationships with our clients. We have -- here and there, we'll lose a customer, which is normal in that business. But the vast majority of our sales problems in the second quarter and this quarter, the third quarter, is simply due to delays in customer programs. And they're not lost programs, they're just postponed.

Our next question comes from the line of [Neal Pender] from Ivory Capital. Please go ahead.

Yes, hi. Can you comment on the effect of bronze or potentially other raw materials impacting margins on the casket -- casket side of your business?

Well, on the casket side of the business, of course, you know, we have two basic materials, wood and metal. The metal is predominantly steel, although we do make a few precious metal caskets, you know, for example, copper, stainless steel, et cetera. But they're, by far, the minority of our casket production. We have, you know, seen more reasonable inflation numbers in steel and so far, the industry really has been able to cope with that, so it's not nearly the same issue that we have with bronze. I just, you know, can't explain what is happening to copper prices relative to other raw material. You know, I just -- I just have a feeling. as I indicated earlier, that there is some degree of speculation. And if copper producers were able to produce copper a couple of years ago at $0.83 a pound and it's now $3, common sense tells you that if that stays that way, there's going to be a lot more copper production coming on line fairly quickly and prices should go back down again.

Yes, we do have sensitivity in our Casket business with respect to those costs, so that's a good question. Last year, we did have an impact on our operating profit related to the rise in steel costs, if you recall.

But -- and given where copper's come, what percentage of your units or your COGS on that side of the business is copper?

We really don't disclose the material cost component of our cost structure for competitive reasons.

Can you give me an idea just sort of in terms of your unit mix on the casket side, sort of how many caskets are copper caskets or --

Very few. it's predominantly steel caskets is what makes up the mettle.

It would be less than 5%.

Less than 5%.

Yes.

And then you don't have any bronze caskets?

We do, but they're trophy caskets. They're very small quantity and very, very high prices. And they have been even before the increase in bronze.

Sure. Okay. Great. Thanks.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of [Scott Blumenthal] with [inaudible] Advisors. Please go ahead.

Good morning, Steve. Good morning, Dave.

Good morning, Scott.

Can we switch to the other side of the equation and can you tell us -- or give us a little bit of clarity on what the opportunities are like in the Brand Solutions business, compared to, let's say, where you were at the end of the year, or perhaps this time last year? And also, what's your pipeline look like in marking products?

Okay. Starting off with the first question concerning Brand Solutions, I'm actually kind of very excited about that business. We have taken advantage of the fact that we're consolidating our business, to kind of retool the facility. We have already installed a brand new digital press. We have a superb new five-station color press coming in August, as I mentioned earlier, and we're looking at a -- an additional capital expenditures for another press. We think these capabilities are going to give us a lot more flexibility, as we go into the fourth quarter. And that, then, gives us the ability to respond even more quickly to our customers. That's going to put us in a good position, as business levels rebound. Also, we have had really a flurry of activity recently in our marketing consultancy group, and several new major accounts have started up, and we think that bodes well for the coming year. So our basic strategy remains intact. We have to work through this slump, if you will, in our sales. and when it rebounds, I think we're going to reach the higher levels of operating profit, and -- that we enjoyed beforehand and it is going to meet our expectation levels.

You mentioned on a number of occasions during the call servicing the current customers. How about the prospect of some new ones?

Yes, we -- you know, I hate to get into names, but we just started up business with one of the major office supply company. Just started in the month of March, and it's kind of building up in April, and that was really good news for us. We have a major beverage company in North America that our consultancy just started doing work on one of their products for retail displays, and that's very exciting to us. There are lots of opportunities out there. We just got to, somehow, convince our customers to move a little bit more quickly. I also -- you also asked about marking products. We are a very excited about a new product development. We introduced a new low-cost industrial printer this past year. It is is doing extremely well, and it has been well received in the the marketplace. We have really done quite well in our -- with our move-it, you know, track-it strategy. Our whole drawing group has enjoyed some major contracts in the past year, and we expect that that business will continue its run, if you will, well into 2007.

Very good. Great. Can we switch over to talk about casket distribution for a little bit? And can you talk about your footprint now, compared to where you want to be when Yorktown kind of rolls off?

Yes, first thing I should mention is that we recognize that distribution is an extremely important part of this industry. And it was a primary driver, as we discussed in the past in our Milso acquisition. You know, a wonderful company, with outstanding results and substantial distribution experience. So we're utilizing that experience base to help us develop our own distribution in the areas where it is needed. We continue to rely on select a group of independent distributors and characterize where they have strong positions, and excellent results.

Over time, we have a lot more work to be done in distribution. We need to get volume up in selected areas. It is not enough to simply have a DC. We have to have that distribution center, but then you've got to get adequate volume through it to carry its overhead costs, so that's a challenge for us. And then we have to work, as I mentioned earlier, on this whole inventory control and forecasting, planning system, in the area where we need, you know, more expertise and more experience, and I think that will come in time.

Our casket outlook is long-term. We have mentioned that, currently, the industry is going through a little bit of a downturn, if you will, because of the death rates. And you think back, you know, there was, obviously, a reduction of birth rates in North America in the World War II time frame. But as we work through that, and you look out five to ten years, we're going to get into a period where that death rate is going to go up. And you know, if we look to that point in time, we think this business is going to be really quite successful.

The acquisition of one of your distributor, I know you mentioned that acquisitions are not going to be your focus, at least in the next 12 to 18 months. But is that something that you're going to continue to pursue? Is that a strategy that you're going to continue to pursue in the future? I guess --

If we did, it would be a situation which was opportunistic, a situation where for reasons that we don't see today, but both our distributor and ourselves decided it was the right thing to do. But we think we're in a relatively stable situation with respect to that right now, nd our focus really is on improving the efficiency and increase in the volume of what we have today.

Okay. Very good. Thank you.

Thank you, Scott.

Our next question comes from the line of Jeff Holmes with [inaudible]. Please go ahead.

Yes, hi. You mentioned that the management in the bronze area had done really an admirable job in the past of cost containment, and had some levers to kind of pull to get you to this point regarding margins. In the second half of the year, are there some more of those levers that they can negotiate to offset this most recent price increase, or are there some things out there that they can do in the second half? Can you help us with that?

Yes, you know, successful cost reduction is not an on/off switch. It's really a long-term outlook, you know, constantly thinking about what you can do not only this year, but next year and the year after. So, you know, in our strategic planning process, they've looked at things that go out for a three-year period that can be done in terms of consolidating various facilities, et cetera, et cetera. And those programs are really quite active, and there are quite a few things going on, which will impact us this year and next year.

Our problem is not that. Our problem is that we've had such an incredible spike in such a short period of time, that it is hard for any management team to make, you know, adjustments that quickly. And you've got to kind of question whether, if you could, whether it is a smart thing to do, to -- you know, to try and compensate for 50% price increases in bronze in a very short period of time might lead to you do something that might not be intelligent for the long term. So the margins through all of this remain extremely strong. They're going to be impacted somewhat, but I'll predict that when ingot prices return to a normal range, that we'll be a significant beneficiary of that, because we'll be a leaner, meaner Company and we will be able to take advantage of those discounts.

Thank you.

Next question comes from the line of Charlie Smith from Morgan State Capital. Please go ahead.

Yes, cremation obviously continues to gain share. Can you talk about your investment plans in that business and what you expect for intermediate to long-term sales and profit growth rates?

Yes, there's a difference between the growth of cremations in North America and the growth of our Cremations business. The outlook for cremations continues to be, you know, rapid growth. The industry expects that, over time, we'll get to a 40% cremation rate in North America. We're currently in the high 20s. The cremator business, because one cremator can handle, obviously, multiple cremations, is not necessarily driven only by the increase in cremations. It's driven by other factors, too. For example, a big driver is better environmental and pollution controls, and that's been an area where we've been kind of a leader within the industry, in terms of developing new products. So, I think our focus there is new product development. Our focus is on manufacturing efficiencies, and manufacturing improvements. And it's also on expanding our cremation casket business. Our Cremation group consists of two basic equipment lines, if you will. One is the cremators and the other is caskets. Of course, we also have a very active supplies business and service business. The Casket business is also a focus of ours, and we expect that there's some further growth opportunities there. And we have some exciting new products that we've introduced this year into the marketplace, which are doing quite well right now..

Would the margins on the cremation caskets be less than your general Casket business?

Not the margins necessarily, but the absolutely dollars would be, because the cremation casket is a lower dollar value product than a regular casket. So, in dollar terms, yes.

Thanks.

I'm showing there are no further questioning at this time.

Okay. Well, we would like to thank everyone for participating this morning. And we look forward to our next call after the third quarter earnings release. Have a good morning.

Ladies and gentlemen, as a reminder, a replay will be available for this conference after 1:30 p.m. today and available until May 10, 2006 at midnight. You may access the AT&T replay by dialing 320-365-3844, with an access code of 825097. That does conclude today's Matthews International second quarter results conference call. We thank you for your participation and for using AT&T executive teleconference. You may now disconnect.