Matthews International Corp (MATW) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Matthews International fourth-quarter and year-end results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

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

Thank you, Rich. Good morning. I'm Steve Nicola. On the call with me today is Joe Bartolacci, our President and Chief Executive Officer.

Today's conference call 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 PM today. To access the replay, dial 1-320-365-3844 and enter the access code 846588. The replay will be available until 11:59 PM November 30, 2006.

We have posted on our Web site, which is MATW.com, the fourth-quarter earnings release and financial information we will discuss this morning. In the left column of our homepage under "Investor Relations", you can click on "Investor News" to access the earnings release, or click on "'Reports' to access the financial data. The financial data is presented under the heading "Preliminary Quarterly Reports" in the PDF file format.

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 annual report on Form 10-K for the year ended September 30, 2006 will not be filed with the SEC until around December 14, 2006.

To begin the conference, I will review the Company's financial results. Joe Bartolacci will then provide general comments on our operations. Following that, we will open the discussion for questions.

For the quarter ended September 30, 2006, the Company reported earnings per share of $0.59 compared to $0.47 for the fourth quarter last year. For the fiscal year ended September 30, 2006, earnings per share were $2.06 per share compared to $1.79 for fiscal 2005. Please note that the 2006 fourth-quarter and fiscal year results included unusual items which had a net favorable impact of $0.04 per share on our reported results. These items included a net gain on the sale of property in our Bronze segment and the impairment of certain redundant assets and related costs in our Casket segment.

In addition, please note that prior-period earnings per share amounts have been restated by $0.01 for the fourth quarter and $0.05 for the year to reflect the adoption of Statement of Financial Accounting Standards number 123R, which is the accounting rule requiring expensing of stock options.

Consolidated sales for the fourth quarter of fiscal 2006 were $183 million, representing an increase of $7 million or 4% over the same quarter in 2005. For the year, consolidated sales were $716 million in fiscal 2006, compared to $640 million last year, representing an increase of $76 million or 12%. The acquisition of Milso Industries in July last year was the most significant factor in the quarter and fiscal year increases.

In our memorialization business, sales for the Bronze segment were $59 million for the fiscal 2006 fourth quarter and $218 million for the year, representing increases of 6% over the comparable periods last year. The growth in the sales reflected higher memorial product revenues, which were mainly related to pricing, and an increase in mausoleum sales over the prior year. Casket segment sales for the quarter and year ended September 30, 2006 were $48 million and $201 million, respectively, compared to $43 million and $136 million respectively in the same period last year. These increases resulted from the acquisition of Milso. Excluding Milso, casket sales declined on lower unit volume for the year, which is partially attributed to a lower death rate and partially related to our transition to Company-owned distribution in certain territories.

Sales for the Cremation segment for the quarter and year ended September 30, 2006 were $6.7 million and $26 million, respectively, compared to $5.5 million and $21.5 million, respectively, in the same periods last year. Higher unit volumes and better pricing for both cremation caskets and cremation equipment continued to be the main contributors to the segment's sales growth, which approximated 21% on both a quarter and fiscal year basis compared to the same periods last year.

In the Brand Solutions businesses, our [marketing] products segment reported sales of $14 million for the fiscal 2006 fourth quarter and $52 million for the fiscal year, compared to $13 million and $46 million for the same respective periods in fiscal 2005. The segment sales growth resulted primarily from higher unit volume compared to last year, reflecting an increase in demand for the segment's products, particularly in North America.

Graphics imaging sales for the fiscal 2006 fourth quarter were $37.4 million, compared to $36.6 million in the fiscal 2005 fourth quarter. For the year, sales for the graphics imaging group were $141 million, compared to $143 million in fiscal 2005. Excluding the impact of changes in the value of the euro compared to the U.S. dollar, the group sales for both the fourth quarter and fiscal year declined slightly from the comparable fiscal 2005 periods, reflecting a decline in demand for the Company's products in certain German markets.

The Merchandising Solution segment reported sales of $18.4 million for the fiscal 2006 fourth quarter, compared to $22.6 million for the 2005 fourth quarter. For the 2006 fiscal year, the segment sales were $78 million compared to $88 million in fiscal 2005. The decline in sales primarily resulted from lower volume of merchandising systems and displays. The decline reflected tighter market conditions in the current year, certain project delays by customers, and some distraction relative to the segment's recent facilities consolidation. Part of this reduction for the fiscal year also reflected the inclusion of several promotional programs in last year's first fiscal quarter, which did not repeat in this fiscal year.

Consolidated operating profit to the quarter ended September 30, 2006 was $31.9 million compared to $26.8 million for the same quarter a year ago. For the 2006 fiscal year, consolidated operating profit was $114 million, compared to $98 million last year. Please note that the fiscal 2006 operating profit for both the fourth quarter and fiscal year included unusual items, which had a net favorable impact on operating profit of approximately $1 million. Again, these items included a net gain on the sale of property in our Bronze segment and the impairment of certain redundant assets and related costs in our Casket segment.

In addition, please note 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 $21.1 million for the fiscal 2006 quarter, compared to $18.4 million for the same period last year. For the 2006 fiscal year, operating profit for the Bronze segment approximated $65 million compared to $59.7 million for fiscal 2005. The segment's operating profit for the fiscal 2006 fourth quarter and year included the net gain on the sale of property. Excluding the gain, operating profit as a percent of sales declined for the quarter and fiscal year, relative to last year, principally as a result of an increase in bronze metal costs. However, despite this increase in material costs, division management so far has been able to mitigate any significant decline in its operating margin percentages through cost reduction initiatives and pricing changes.

Casket segment operating profit for the fiscal 2006 fourth quarter was $1.4 million, compared to 700,000 in the fiscal 2005 fourth quarter. For the 2006 fiscal year, operating profit for the Casket segment was $17 million compared to $12.6 million a year ago. The impairment of certain redundant assets and related costs negatively affected the segment's operating profits for the fiscal 2006 periods. The improvement in the segment's operating results primarily reflected the acquisition of Milso and productivity improvements, particularly in the segment's Mexican operation. These improvements were partially offset by lower sales when you exclude the Milso acquisition impact.

Fourth-quarter operating profit for the Cremation segment was $665,000 in fiscal 2006, compared to 618,000 for the same quarter a year ago. For the year, the segment's operating profit was $3.4 million compared to $700,000 last year. Higher sales volume, improved pricing and cost reductions were the principle factors in the segment's significant growth in operating profit.

In our Brand Solutions business, operating profit for the graphics imaging group increased 12% to $5 million for the fiscal 2006 fourth quarter, compared to $4.5 million for the fourth quarter last year. For the 2006 fiscal year, the segment's operating profit increased 11% to $16.6 million compared to $14.9 million last year. Cost structure changes in the U.S. and UK operations, which were initiated in the fourth quarter of fiscal 2005, were the principle factors in the segment's operating profit improvement.

Marketing products operating profit for the fiscal 2006 fourth quarter was $2.5 million, compared to $1.9 million a year ago, representing an increase of 29%. For the fiscal 2006 fiscal year, the segment's operating profit was $9.1 million, which is a 23% increase over its operating profit of $7.4 million last year. The segment's operating profit improvement resulted directly from higher sales.

The Merchandising Solution segment reported operating profit of $1.3 million for the fiscal 2006 fourth quarter, compared to $689,000 for the fourth quarter last year. For the year, the segment's operating profit was $2.9 million compared to $3.1 million last year. Despite the lower sales for the four quarter, the segment's operating profit increased as a result of the Company's recent cost structure initiatives, which were intended to address the low margin rate in this business. The segment reported operating margin as a percent of sales of 7.1% in the fiscal 2006 fourth quarter, compared to 3.1% in the same period a year ago.

Fourth-quarter and year-to-date sales and operating profit by segment are posted on the Web site. Year-to-date operating margins by segment were as follows--bronze, 29.8% of sales; casket, 8.4%; cremation, 13%; graphics imaging, 11.7%; marketing products, 17.3%; and merchandising of solutions, 3.7% of sales.

Our consolidated operating margin for the fiscal 2006 fourth quarter was 17.4% of sales, compared to 15.2% for the fourth quarter last year. Consolidated operating margin for the year ended September 30, 2006 was 15.9% of sales compared to 15.4% for fiscal 2005.

Gross margin for the quarter ended September 30, 2006 was 40.2% of sales versus 35.9% for the same period a year ago. Gross margin for the year ended September 30, 2006 was 38% of sales versus 34.9% for the same period last year. The gross margin increase for both periods primarily reflected the Milso acquisition and the transition to company-owned casket distribution in certain territories formally served through independent distribution. Sales through company-owned distribution facilities generally result in higher gross margins and higher SG&A expenses as a percent of sales compared to sales through independent distributors. Gross margin percentages were also higher in all other segment except Bronze. The gross margin percentage for the Bronze segment declined from a year ago as a result of a significant rise in metal costs.

SG&A expense for the fiscal 2006 fourth quarter was 22.8% of sales compared to 20.7% of sales in the same quarter last year. SG&A expense for the fiscal 2006 fiscal year was 22.1% of sales, compared to 19.5% of sales for fiscal 2005. The increase principally reflected the acquisition of Milso and the transition to company-owned casket distribution in certain territories. Also, Bronze SG&A costs were lower for the fourth quarter and fiscal year due to actions intended to address--to control costs in an effort to mitigate some of the increase in bronze metal costs. SG&A costs in the merchandising solutions segment were also lower due to cost-containment efforts. Consolidated SG&A cost also included the net gain from unusual items reported in the fiscal 2006 fourth quarter.

Investment income was $483,000 for the fiscal 2006 fourth quarter, compared to $721,000 for the fiscal 2005 fourth quarter. For the year, investment income was $1.4 million compared to $1.7 million last year. The reduction in investment income reflected lower average levels of invested cash.

Interest expense for the fiscal 2006 fourth quarter was $2.1 million compared to $1.4 million for the same period a year ago. For the 2006 fiscal year, interest expense was $7 million compared to $3 million last year. The rise in interest cost principally reflected an increase in the average level of debt and higher interest rates during the current periods.

Minority interest deduction approximated $1 million for the fiscal 2006 fourth quarter, compared to $2 million a year ago. For the 2006 fiscal year, minority interest deduction was $3 million compared to $5.8 million last year. The reduction principally reflected the Company's purchase in September of 2005 of additional ownership interest in one of its less-than-wholly-owned German subsidiaries.

Our effective tax rate for the year ended September 30, 2006 was 37% of pre-tax income, compared to 37.6% for fiscal 2005. The reduction principally related to a favorable tax impact from our fourth-quarter property sale. At September 30, 2006, the consolidated cash and investment balance was approximately $41 million, compared to $51 million at September 30, 2005. At September 30, 2006 our current ratio was 1.9-to-1, compared to a ratio of 1.6-to-1 at September 30, 2005.

Our outstanding Accounts Receivable balance at September 30, 2006 was approximately $122 million, which were presented 59 Days Sales Outstanding. Outstanding Accounts Receivable as of September 30, 2005 approximated $115 million, which represented 58 Days Sales Outstanding.

At September 30, 2006, consolidated inventories totaled approximately $85 million, compared to $71 million at September 30, 2005. The increase in inventories related mainly to the Company's expansion of its casket distribution capabilities.

The Company had 31,634,295 shares of its common stock outstanding at September 30, 2006. During the fiscal 2006 fourth quarter, the Company purchased approximately 458,000 shares under its share repurchase program. At September 30, 2006, approximately 860,000 shares remained to be purchased under the current repurchase authorization.

Our long-term debt balance at September 30, 2006, both current and long-term portions, approximated $149 million. $123 million of this balance represented 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, 2009. The increase in borrowings during the current year 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 year ended September 30, 2006 were $5.3 million and $21.5 million, respectively. Capital expenditures for the quarter and year ended September 30, 2006 were $7.4 million and $19.4 million, respectively.

As we look back on fiscal 2006, we are generally pleased with the Company's operating results. We entered the year with some confidence about our earnings growth opportunity but faced a number of challenges early during this period. The more significant of these challenges included a significant rise in bronze medal cost, continued work on the start-up of our Mexican casket plant, the transition to company-owned casket distribution in certain territories, and the facilities consolidation efforts in our merchandising solutions business. Despite these issues, the Company was still able to meet its long-term growth target of 12 to 15% growth in earnings per share.

As we move into fiscal 2007, we continue to have confidence in our ability to meet our growth objectives. However, we still face several of these same issues. For example, bronze medal costs continue to remain high. However, these prices seem to have been more stable recently, but we remain cautious as any future volatility could create further challenges.

In our casket business, we will still be working through the transition of company-owned distribution in certain territories in 2007. In addition, as the production rate of our Mexican facility continues to increase, we will be further evaluating our manufacturing capacity needs.

Lastly, our facilities consolidation and our merchandising solutions business is substantially complete. The early results of this consolidation have been encouraging, as we have seen an improving trend in their operating profit as a percent of sales for the past two quarters. However, as we are in the early stages of the improvements generated from this consolidation, we still expect some challenges.

For the year ended September 30, 2007, the Company is currently projected earnings per share growth of 12 to 15% over fiscal 2006 earnings, which is in line without long-term growth objectives. Please note that this projection excludes the favorable impact of the fiscal 2006 fourth-quarter unusual items and the impact of any unusual items in fiscal 2007, such as any payouts which may be earned in fiscal 2007 under the acquisition-related agreements for Milso.

This concludes the financial review. Joe Bartolacci will now comment on our operations.

Thank you, Steve.

I want to just take a few moments here to try to highlight some of the points in our operations that have seen some significant challenges and what we see going forward.

First off, let me say I agree with Steve that we are generally very pleased with our operations this year. All of our operations in the fourth quarter had increases over the prior year and only one of our operations did not improve operating results for the full year of 2006.

Specifically, let me give you some credit to our Bronze division. Despite higher rising cost over there and additional cost associated with some plant shutdowns, they've done a great job of trying to get their costs in order and have been able to maintain profitability as we have needed them to.

The casket division, as Steve has said, is still going through some transition items. They faced pretty big hurdles. We're not really happy with our operating profit as a percent of the sales this year, but we're starting to see some turnaround in many of those problems that we've seen. As Steve said earlier, we faced some ramp-up costs in our Mexican facilities, some distribution start-up costs and some cost associated with our shutting down of one of our facilities there. But as we look forward into 2007, we've seen a turnaround in Mexico where we are very, very pleased with the quality of the product that is coming in. We have seen some of our distribution costs associated with the start-ups get under control, and we are very, very hopeful about the results in 2007.

Wonderful improvement also in our Cremation segment--Cremation had a substantial improvement. Albeit a small segment of our company, it had a substantial improvement. We also saw a significant improvement both in our U.S. and our European operations, specifically in Europe our English operations had a substantial improvement. America also has had a wonderful improvement. We're very pleased about that and we look forward to another year where we can have some improvement as some of the costs associated with bringing on new business hopefully will be behind us.

The Merchandising Solutions segment of our business was the one this year that we're probably most unhappy about. Their operating profit as a percent of sales is not exactly where we would like it to be. Although this year, they have seen a lot of one-time costs associated with the consolidation of the facilities and some distraction associated with that move, we think the management team there at this point in time has focused their attention back onto the operations. We look forward to a good result this year as some contracts expect to come to fruition will in the foreseeable future.

Our Marking Product division continues to have a wonderful improvement year-on-year. They have some wonderful opportunities. They are a smaller part of our business overall, but an excellent management team there has brought to us a number of opportunities that we see going forward into '07 and beyond for continued improvements.

With that, I want to reiterate that--what Steve had said earlier. We are maintaining our long-term guidance with respect to our earnings growth at 12 to 15%. I will put some caution that on a quarter-by-quarter basis there may be some volatility as we continue through some of these changes, but we do not want to change our long-term guidance at this time.

Yes, at this time, we would like to open up the call to questions. 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.

Thank you. (OPERATOR INSTRUCTIONS). James Clement, Sidoti.

Good morning, gentlemen! Joe and Steve, can you give us a sense? I know that I think copper and I would assume therefore bronze pretty much peaked over the summer and then has since come down. Was your--were your bronze costs the highest that you've seen in 4Q or in 3Q?

Actually it would be--they were the highest in Q4.

Q4.

Okay, okay. So with respect to guidance, you're not betting your guidance range on the price of copper one way or the other, I would assume.

No, actually we are--when we speak about copper prices or when we include it in our forecast for next year, Jamie, average prices for bronze are still, on average, we are expecting them to be higher than they were on average in 2006. So again but that's you've got to consider that the first part of 2006, the prices for lower than they were in Q3 and Q4. So overall, the average this coming year is going to be higher than it was this past year.

The other thing I'll caution you, Jamie, is despite having seen some decline in copper prices, we have not seen that directly translated into the bronze (indiscernible) that we purchase yet.

Okay, understood. One just follow-up and then I will let somebody else get on, but you know, in terms of the challenges that you face and some issues related to April of 2007, are you guys pretty much out of the acquisition market right now? I noticed obviously you've bought back a bunch of shares this last quarter. Or are the still things that are potentially in the pipeline for you?

When you refer to April of '07, I assume you mean the termination of the Yorktown contract, Jamie?

That's exactly right.

Okay. With that in mind, I would not say that we are out of the acquisition market. It is not our focus right now. We have plenty of opportunities within our existing facilities to improve our profitability to achieve those results. Having said that, if the right opportunity presents itself, we will not be afraid of taking that chance.

Okay, very good. Thank you very much for your time.

Bill Burns, Johnson Rice.

My question is on the casket side. It showed improvement but you were comparing--fourth quarter last year was an extremely weak quarter in terms of just margin. It sounded like the impairment costs you took--where they all in the casket segment? I'm trying to get a feel for profit margin. It was (multiple speakers).

Yes, the impairments that we're referring to, Bill, were all in the casket segment.

The $0.04, that was net of--you've got again and then a charge and the net is $0.04?

That's correct. The gain, net of the charge, is $1 million, and when you translate that to after-tax, because we got a tax benefit on that property sale, it ended up being $0.04.

Had you not had the impairment charge in the casket segment, do you think you can return to double-digit margins in that segment?

Well, I can't speak to what they would have been in the fourth quarter, but, Bill, going forward that's certainly our target. We believe that double-digit operating profit as a percent of sales for that segment is certainly something that we should be able to achieve.

Bill, as you know, we target all of our businesses to try to achieve at least a 15% operating profit. We don't see that as something that this business cannot achieve over time.

Thanks. Joe, I look forward to working with you.

Greg Halter, Great Lakes Review.

Good morning. I just had a follow-up on the previous question. Can you break out what the gain was in the bronze and then the charge on the casket business?

Greg, we are not quantifying those at this point in time.

Okay. I noticed that your inventory was up 20% year-over-year. Can you elaborate on the reason for the increase?

Yes, the reason for the increase is the casket business. As we transition some of these territories in the U.S. from using independent distributors to company-owned distribution, we had to ramp up inventory. So that means we've had to open up warehouses in these territories and stock them with inventory, where in the past, it was the independent distributor that held the inventory and owned the inventory. So those are the reasons for the increase.

Greg, along that line to help explain it a little further, as you might know, we have two different product lines that we're having to integrate, and we are in the process of doing that. That's part of the integration of Milso. So as we've ramped up in those territories, we've chosen the side of having a little extra inventory on hand to be able to satisfy customer needs as we confront those territories where we've lost independent distribution. We are in the midst of working through a narrowing of that product line and hopefully we will start to see some improvement on that here.

Okay. One last one--has your ImageCast product been patented at this point?

Not yet, we are in the process, though. I don't think as quickly as we would like to be.

Scott Blumenthal, Emerald Advisors.

Good morning, gentlemen. Steve, as we consolidate the--I guess we are now, as you mentioned, substantially through the consolidation of the Merchandising Solutions businesses, I guess we're going to see fewer locations in Merchandising Solutions, more locations now because we are into company owned distribution on the casket side. Is that going to be more or less a wash from personnel and G&A perspective, or how do we look at that going forward?

Well, that's going to result in an increase in the G&A costs--SG&A costs, I should say, especially the 'S' part of that in the casket business. But in terms of SG&A in the Merchandising Solutions business, that won't result in as much of a reduction. The casket increase will certainly be more significant because the facilities consolidation on the Merchandising Solutions side should be more of a benefit to the factory overhead gross margin line.

Okay. So what we're doing here is I guess we are swapping kind of fixed costs for variable there, right?

Actually, in (technical difficulty) repeat that? I'm not sure I understand your question.

So in Merchandising Solutions, what we are doing is I guess then kind of swapping fixed costs for some variable?

Actually, we are taking out some fixed costs and hopefully not adding back any variable, just hopefully we gain more incremental margin on the sales.

We've seen a reduction both in facilities and personnel on our manufacturing side as a result of this consolidation in merchandising.

Okay. I saw that you mentioned the 12 and 15 EPS. Do you have any projections or are you prepared to talk about what you think is going to happen on the revenue side for next year?

Well, the revenue side is going to--we are not talking on the revenue side because there are a number of factors, as you know, some uncertainty, especially on the casket side, going into 2007, some we wanted to stay away from revenue projections.

Yes, I saw that the most recent quarters, Steve, you had really nice operating leverage on the 4% sales increase, so you know, can we kind of project that similar type of performance for next year, and which would (technical difficulty) that 1, 2% revenue increase is going to translate to the 12 to 15% then?

Well, keep in mind that a fair amount of that translation of the 4% to the bottom line, a piece of that had to do with the nonsales-related gain on the sale of property. That net was about $1 million. Then a fair amount of that 4% increase was pricing-related.

Looking forward, we have a great deal of opportunity on our manufacturing side in our casket division, as well as leverage opportunity on our merchandising side. So we intend to be able to bring those results to the bottom line this year.

Okay, fair enough. Thank you.

Daniel [Yayery], Litmus.

Nice quarter, guys. Can you give me a sense for how big the Milso earn-outs will be in 2007?

Excuse me, I didn't hear that.

The Milso earn-outs, you talked about that in the press release, for 2007. Can you give a sense for how big that is likely to be?

Well, I guess I would have to refer back to the agreement because that amount, the total amount isn't definitive, but it could be as high as--I guess, by contract, could be as high as 3.75 million at this point.

Okay, great. Thanks a lot. That's it.

(OPERATOR INSTRUCTIONS) Charlie Smith, [Fork Pitt] Capital.

Good morning, gentlemen. Joe, on the Merchandising Solutions area, you are obviously a long way from even double-digit operating profit margin there. What kind of sales growth are you looking for for next year? Is there any seasonality to that?

Well, the Merchandising Solutions business is a little bit different than some of our other businesses in that the predictability on a quarter-by-quarter basis of the sales side is a little bit more--it's more of a feast or famine type business. We are currently looking at some fairly significant improvement on the sales side but not enough that you would think it is going to bring huge results. The benefits are going to come from our cost-containment efforts, and looking past some of the one-time charges that we had last year as a result of the move, Charlie. (multiple speakers)

You're looking for a sales increase from that (multiple speakers)?

We are, we are.

Can you get to 100 million?

Not next year, we don't think so.

The other question on the buyback during the quarter, the 458,000 shares--what was the total cost of the buyback?

Those shares were bought back in the 34, $35 ranges.

Okay, thanks, guys.

Greg Halter, Great Lakes Review.

I noticed that your capital spending for the year ended '06 was down and wondered what your plans are for fiscal '07.

Yes, I would look at it this way, Greg. I would tell you that because last year, we bought a facility for Merchandising Solutions and we had the significant amount of our capital spending for Mexico, when I say last year, 2005, that's why you see the reduction in 2006. I would say, going forward, barring any significant items like that, I would look for that to be in the 15 to $20 million range, a little bit below what our depreciation and amortization rate is, which is about $22 million today.

Okay. Can you comment on the status, the profitability status of your Mexican casket plant and where it stands in terms of capacity?

Yes. We have, in the fourth quarter of '06, we have turned a corner in profitability. As we had said in earlier conference calls, we expected that to occur and as we move into the first quarter of '07, we expect that to continue. We are currently running at about 60% capacity right now. We are targeting to be at near full capacity if not by the year end, probably the end of the first quarter of calendar '07.

Looking at the Merchandising Solutions, you mentioned that you are substantially complete. Does that mean, I guess it was a large piece of equipment you are waiting to install that (multiple speakers).

Yes, and just to clarify that, everything is where it needs to be. The word "substantially" is there is because obviously that's relatively recent, so as they I guess figure out, finalize and revise or refine production, that would take the word "substantially" off of that.

In terms of the particular piece of equipment, the last part of the move, which was probably the most critical part, was the moving of the screen press, printing presses. There are quite a few of them that needed to be moved while we were still continuing production in the fourth quarter. That occurred in about August of last year. As a result--these are fairly delicate machines. Once you reset them, you do need to calibrate them and test them again to get them back to where you are used to working those machines.

Okay, and one last one--on the share repurchase, can you indicate whether or not it was done early in the quarter or late in the quarter?

It was actually done throughout the quarter.

Okay, thanks.

James Clement, Sidoti.

Good morning again. Guys, can you give us a sense--of areas of--staring April in the face, can you give us a sense of areas of the country where you've gone from using a distributor to self-distributing? Can you give us a sense of some of the lessons that you've learned and just sort of provide a little bit more color on that front, if that's possible?

Well, I'm not sure we have lessons that we've necessarily learned, Jay. Facing '07, the April '07 termination of the Yorktown contract, what we've had to do is to ramp up facilities a little earlier than we would otherwise have done, therefore have incurred costs that we would not have incurred. Essentially as a result of the injunction that we issued against the transaction proposed by Batesville, we've been sitting on facilities that are undercapacity, when it comes to distribution, for the better part of the year, while we waited for the determination at the court levels and the expiration of this contract. So the lesson that you learn is probably not anything from that. We would probably not have incurred some of these costs as early as we have incurred had we not had the situation that surrounded our contract with Yorktown.

Okay, well, that's very fair. Thank you very much.

Bill Burns, Johnson Rice.

I want to kind of follow-up Jamie's thought there but a different tack. On the caskets, it looks like Service Corp. is going to end up buying [Alderwoods] and I just wanted to get a feel for what your take on that. I'm pretty sure that Services signed the contract with your competitor.

Right. The result of that is they've signed a contract. We don't know the terms and details of that contract, or if there is a written contract at all. The expression we've heard is that they intend to buy product from Batesville for the foreseeable future. That really does not have any negative impact to us. We did not have any significant volume of caskets, either from [Alderwoods] or from SCI, so going forward from us right now, we don't see any negative impact. In fact, we may see some opportunities as they begin to spin off some of these facilities that are redundant to them.

Got you. Thanks, Joe.

There are no further questions in queue at this time. Please continue.

Okay, well, we thank everyone for attending the call this morning. We appreciate your attendance and your questions, and have a good day.

Thank you.

Ladies and gentlemen, once again, this conference will be available for replay after 1:30 PM today through midnight on November 30. You may access the AT&T teleconference replay system at any time by dialing 1-320-365-3844 and entering the access code 846588. (Operator repeats numbers.)

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.