Matthews International Corp (MATW) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the first quarter financial results conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded. At this time, I'd like to introduce our host, Chief Financial Officer of Matthews International, Mr. Steve Nicola. Please go ahead.

Thank you. Hello, I'm Steve Nicola. On the call with me today is Joe Bartolacci, President and Chief Executive Officer of Matthews. Today's conference call has been 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 857651. The replay will be available until 11:59 p.m. February 1, 2007.

We have posted on our web site, which is www.MATW.com, the first quarter earnings release and financial information we will discuss this morning. In the left column of our home page, under Investor Relations, you can click on investor news to access the earnings release or click on reports to access the quarterly financial data. The financial data is presented under the heading preliminary quarterly reports in a PDF file format. Before beginning the discussion, at the advice of our legal counsel, I have been advised to read the following disclaimer as it pertains to forward-looking statements.

Any forward-looking statements in connection with this discussion are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from management's expectations. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ from those discussed today are set fourth in the Company's annual report on Form 10-K and other periodic filings with the SEC. I might also add that the balance sheet and income statement data provided today are preliminary data since our 10-Q for the quarter ended December 31, 2006, will not be filed with the SEC until around February 9, 2007.

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

For the three months ended December 31, 2006, the Company reported earnings of $0.44 per share compared to $0.40 per share for the same quarter last year representing an increase of 10%. Net income for our fiscal 2007 first quarter was $13.971 million, compared to $12.9 million a year ago representing an increase of $1.1 million. Please note that earnings for the current period reflected a charge of $0.01 per share in connection with the earnout provisions of the Milso Industries acquisition agreement.

Consolidated sales for the first quarter of fiscal 2007 were $175.4 million compared to $170.1 million a year ago representing an increase of $5.3 million. In our memorialization businesses, Bronze segment sales were up $1.7 million or 4% for the quarter. Higher pricing was offset partially by lower unit volume of memorial products compared to the same quarter last year. Casket sales for the fiscal 2007 first quarter increased to $53.8 million compared to $48.2 million in the same period last year. The increase of $5.6 million or 12% reflected higher unit volume through our Company owned distribution facilities.

Sales for the Cremation segment for the quarter ended December 31, 2006, increased 16% to $6.6 million compared to $5.7 million for the same quarter last year. This increase resulted principally from higher unit volume of Cremation Caskets.

In our Brand Solutions business, our marking product segment reported sales of $13.7 million for the current quarter compared to $12.3 million for the same quarter last year. Higher unit volume was the principal contributor to to this segment sales growth. Our graphics imaging segment reported a $461,000 sales improvement compared to a year ago. Higher sales in the German markets coupled with an increase in the value of the euro against the U.S. dollar more than offset declines in demand in the U.S. and UK markets.

The Merchandising Solutions segment reported a decline in sales of $4.9 million for the first quarter of 2007 when compared to the first quarter last year. Timing on a significant customer project impacted the segment sales for the current quarter. This project is being shipped this month. Operating profit for the fiscal 2007 first quarter was $24.2 million compared to to $22.4 million for the same quarter a year ago. The increase of $1.8 million or 8% resulted from higher operating income in four of our six business segments.

In our Memorialization Group, first quarter operating profit for the Bronze segment declined $300,000 from the same quarter last year. Its operating profit as a percent of sales also declined from 24.5% in the first quarter a year ago to 23.1% in the current quarter. The significant rise in the cost of Bronzing it compared to the same quarter a year ago was the principle factor affecting the reduced operating profit and related margin.

Operating profit for the Casket segment for the quarter ended December 31, 2006, was $5.9 million compared to $3.6 million a year ago. The $2.3 million improvement was due principally to higher sales for the period and improved productivity in the Company's Mexican facility. Operating profit for the Cremation segment improved 35% in the first quarter of fiscal 2007 to $776,000 compared to to $573,000 a year ago. Higher sales volume and the continued favorable impact of cost structure changes initiated early last fiscal year contributed to the operating profit growth.

In the brand solution side of our business, operating profit for the marking product segment was $2.4 million for the fiscal 2007 first quarter compared to $1.9 million a year ago. The increase reflected higher sales and improved operating margins. The graphics imaging group reported operating profit of $2.2 million for the current quarter compared to $3.6 million in the same quarter last year. The decline in sales in the U.S. and UK markets were the principal factors in the reduction in the segments operating profit. In addition, investments in developing new primary packaging business in the U.S. also contributed to the decline.

The Merchandising Solutions segment reported operating profit of approximately $1.3 million for the fiscal 2007 first quarter compared to to $842,000 a year ago. Despite a significant reduction in sales for the quarter, operating profit improved as a result of the segments recent facilities consolidation and related cost structure initiatives. The segments operating profit as a percent of sales increased to 7.6% compared to 3.8% in the first quarter last year.

First quarter sales and operating income by segment are posted on our website. Operating margins by segment were as follows--Bronze 23.1% of sales, Casket 11%, Cremation, 11.7%, Graphics Imaging, 6.5%, Marking Products 17.4%, and Merchandising Solutions 7.6% of sales. Our first quarter consolidated operating margin for fiscal 2007 was 13.8% of sales compared to 13.2% in the first quarter last year.

Gross margin for the quarter ended December 31, 2006, was 37% of sales versus 36% for the same period a year ago. The increase primarily reflected improvements in the Casket and Merchandising Solutions businesses offset partially by the impact of higher Bronze metal costs. SG&A expense for the current quarter was 23.2% of sales compared to 22.8% of sales in the first quarter last year. A higher level of Casket sales through company owned distribution facilities and the Milso earnout accrual were the principal factors in the increase.

For the fiscal 2007 first quarter, investment income was $411,000 compared to $327,000 for the same period a year ago. The increase reflected a higher average investment rate of return. Interest expense for the current quarter was $1.8 million compared to $1.4 million for the first quarter last year. This increase reflected a higher average debt balance for the quarter and higher interest rate.

Other income deductions net resulted in an increase to pretax income of $131,000 for the current quarter compared to a reduction to income of $33,000 for the same quarter last year. Minority interest deduction was approximately $500,000 for the current quarter compared to about $600,000 for the prior period. In September, 2006, the Company purchased the remaining ownership interest in one of it's less than wholly owned German subsidiaries. As a result, minority interest deduction is lower for the current period.

Our first quarter tax rate is 37.6% of pre-tax income which is equivalent to the effective rate for the first quarter a year ago but higher than the 37% effective tax rate for the full fiscal 2006 year. The fiscal 2006 full year effective rate reflected a tax benefit on the sale of property. At December 31, 2006, the consolidated cash and investment balance was approximately $47 million compared to $41 million at September 30, 2006. At December 31, 2006, our current ratio was 2.1 to 1 compared to a ratio of 1.8 to 1 at September 30, 2006.

Our outstanding accounts receivable balance at December 31, 2006, was approximately $116 million which represented 60 day sales outstanding. Outstanding accounts receivable at September 30, 2006, approximated $122 million which also represented 60 day sales outstanding. At December 31, 2006, consolidated inventories totaled approximately $95 million compared to $85 million at September 30, 2006. The increase in inventories relates principally to a significant Merchandising Solutions project which is being shipped this month and the continued expansion of the Company's Casket distribution capabilities.

At December 31, 2006, shares outstanding totaled 31,703,347. During the fiscal 2007 first quarter, the Company purchased 60,000 shares under it's share repurchase program. At December 31, 2006, approximately 800,000 shares remain to be purchased under the current repurchase authorization. Our long term debt balance at December 31, 2006, both current and long term portions, approximated $157 million. $133 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.

Depreciation and amortization was $5.3 million for the quarter ended December 31, 2006. Capital expenditures for the quarter ended December 31, 2006 , were $3.5 million. In November, 2006, we provided guidance projecting fiscal 2007 earnings per share growth of 12 to 15% over fiscal 2006 which is in line with the Company's long term growth objectives. At this point in the fiscal year, we are maintaining this guidance. Please keep in mind that our projection excludes the favorable impact of the fiscal 2006 fourth quarter unusual items and of course the impact of any unusual items that may occur in fiscal 2007 such as any payouts that may be earned under the acquisition related agreements for Milso.

While we continue to have confidence in our ability to meet our fiscal 2007 growth objectives, it is important to note several challenges. For example, Bronze metal costs continue to remain high. While the price of copper has declined recently, the price of Bronze has not declined at a similar rate. As such, we remain cautious as to any future volatility.

In our Casket business, we are still working through the transition to company owned distribution in certain sales territories. In addition, we recently announced the facilities closure to adjust our metal Casket manufacturing capacity to reflect anticipated needs. The closure is expected to occur in the spring and as you would expect, any transition of this nature raises caution in the near term. Lastly, we experienced another quarter of improved operating margins in our Merchandising Solutions business as a result of it's recent facilities consolidation. These early results are certainly encouraging--however as we are in it's early stages, it is appropriate to still expect some challenges. This concludes the financial review and Joe Bartolacci will now comment on our operations.

Thank you, Steve, and good morning to everybody on the phone. In general, we're pretty pleased with the consolidated results of our company. We are finally starting to see the results of some of our efforts on a number of fronts. Casket volume was good throughout the quarter and we began to see the profitability improve in our Mexican facility. The growth in volume has come mostly from our new warehouses we've opened over the last year and this resulted in a nice improvement in our operating profit; however we remain vigilant and cautious as it relates to Yorktown which -- with which the contract for Yorktown expires here in April but in general we're pleased with the results in our Casket division.

Regarding Brand Solutions, Merchandising Solutions showed as Steve said a good improvement in operating profit as a percent of sales despite a decline in volume. As we've been saying this improvement is the result of our consolidation in cost reduction efforts which began about 18 months ago. We will now focus on growing the top line while we continue to streamline our operations. Also, we are pleased with the improvement we've seen in Brand Solutions. The marking products and Cremation divisions continued their good performance throughout the quarter and we -- and were positive contributors to our overall results. These businesses have done a great job of containing their COGS while adding new products to their offering and we look forward to continued improvement from them. Bronze, however, had a flat year on year performance as a result of full impact of the metal prices -- metal price increases incurred so far which are being reflected this quarter as compared to the first quarter last year. But in general, the division has done an excellent job of managing their costs during this period of escalation of raw materials.

Our mainland European graphics operation reported solid sales and continue to show to be a strong performer in the group while revenues in the U.S. and the UK were a little soft, we expect some of those revenues to return as some of that business is cyclical; however this resulted in a decline on a year-over-year basis for this division. We are planning to take some actions with respect to a couple of locations to adjust our volume there and we'll keep you posted as we go forward.

To reiterate we are retaining our guidance for fiscal 2007 and now I'd like to open it up to questions if we have any?

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 of those who wish to participate in the Q&A session have had an opportunity to do so.

[OPERATOR INSTRUCTIONS] We'll go to the line of Jamie Clement with Sidoti & Company. Please go ahead.

Good morning, gentlemen.

Good morning, Jamie.

Joe, Steve, approximately what kind of volume had been running through the Marshfield plant and what percentage of that shifts over maybe to Indiana versus Mexico? How should we think about kind of the -- how that volume is going to get distributed over the remaining facilities?

Well Jamie, it's hard for us to answer that at this point in time. We have been shifting some of our volume to both locations more on a skew basis rather than on a total 30,000 here, 20,000 there. I think it's more dependent on what the manufacturing people believe is the right skews to go to Mexico versus Richmond, but you are right. Some of it will go to both locations.

Well, roughly how much of your metal volume was being done at Marshfield though?

We are currently running somewhere around 40 to 45,000 units.

Okay. And just if I can ask just changing gears just a little bit and then I'll let somebody get on, the graphics business, you refer to some demand weakness in the UK.

Right.

And the U.S. I mean, is that -- I know you're trying to grow your primary business and I know that you mentioned that on the call a little bit. Was the demand weakness across both the primary and the corrugated markets or was it one more than the other? Can you give us a little bit more flavor in terms of what you saw there?

Well, the one thing that you need to be aware of, the UK business is 100% a primary packaging business, and in the primary packaging business, we have businesses with contractual relationships with brand owners across Europe and the UK for that matter. Those customers have cyclicality to their business and we saw very flat performance from most of our customers in the U K. We don't expect that we will have lost -- we have not lost any customers. We expect that volume to come back. On the U.S. side, we saw softness also in the packaging, or excuse me, the corrugated side as well as our primary packaging side so I would say a little bit on both. The Germans saw something else though.

Now, is January historically a seasonally soft month for you guys on the primary side or is January an okay month?

Well, December clearly is a soft side but this was a little softer than expected but January also in Europe is a soft side. As you know the vacation schedules are a little different over there. By the time people get back to work at some time--. -

Okay. Thanks a lot for your time.

You're welcome.

We'll go to the line of Bill Burns with Johnson Rice. Please go ahead.

Follow-up on Jamie's last question. Could you address your investment in the U.S. to develop your primary packaging? What kind of impact did that have on lowering the margins there with the softer sales?

Well, Bill, this is Steve. That one is hard to quantify because some of that amount is what I would call regular operating costs and some of it was investment in people. I mean, just suffice it to say that our margins weren't where they should have been and in that respect, in one of our facilities it was unprofitable for that reason.

Bill, as a practical matter, what Steve is referring to, we started a new operation to service a particular account in the U.S. and we've had to transport some employees from the U.S. and the UK to support that operation right now.

Okay. And then a separate question. That was the -- graphics imaging was one of the areas that I overestimated what I thought would happen but then the good news was on the Europe side it was much better than I had anticipated. I thought that you said the volumes were up?

Yes. Volume, mostly coming through, on our own distribution as you know, Bill, we've gone through a transition over the last 12 to 24 months as in a couple of our territories, we have been forced to go direct to the consumer, to the funeral home, excuse me, and we've opened quite a few warehouses across that territory, and we're starting to see the benefits of some of those sales ramping back up so we're starting to see, if -- you also know, when we sold to distributors, we sold at wholesale prices versus retail prices.

Right.

And we're seeing the benefits of that also.

Okay. Thank you, Joe, Steve.

Sure, Bill.

You're welcome.

Our next question is from the line of Scott Blumenthal. With Emerald Advisors. Please go ahead.

Hi, Steve, hi, Joe.

Good morning, Scott.

Could you tell us how many months or even quarters of Bronze inventory that you tend to hold at any one-time and how much of the inventory balance approximately is represented by Bronze?

Well, I'll answer that this way, Scott.

Okay.

That Bronze inventory level varies. It varies depending on what kind of pricing we can get when we purchase it. It depends on what the availability is and what our suppliers are willing to ship at any one point in time. It can go from anywhere from where we can buy out a month to three, four months. It just, again, it really depends on market conditions at that time, so there really isn't any standard or average especially in the last 12 to 18 months with this price escalation.

Okay.

And Bronze is by far the most significant material component relative to what we would hold in inventory other than maybe some resins that are part of the foundry and manufacturing process.

Okay, so I'm kind of assuming that that $95 million in inventory represents certainly a ramp up in Casket inventories through company owned distribution, but I would imagine that a smaller piece of that inventory is also Bronze; correct?

Yes, but not much smaller. We don't want to mislead you into thinking it's a significant number.

Right.

Okay, very good. And just one other kind of unrelated question. Joe, you mentioned that there was an increase in Cremation Casket volumes. Can you talk a little bit about, it's kind of the dynamics or -- of the Cremation Casket market and how that's growing and the margins on a Cremation Casket as compared to a burial Casket?

Sure.

Where does it go in all of that?

Right. First, I think we should report that the Cremation Casket volume is reported not through our Casket division, it's reported through our Cremation division so first the segregation of that is important.

Thank you.

Secondly, to let you know, really what is happening on the Cremation side, as I said, like in the marking products division we've come out with some new products that have some pretty good eye appeal at a slightly higher price, and as a result, we're the seeing benefits of that. Our volume, however, in the Cremation Casket division has improved, but it is directly linked to some of our distributors also. As we lose a couple of these distributors, we may see a slight downtick in that volume. What you're seeing now is also the full integration of the Cremation Casket into our own direct distribution which took a little while to substitute products so in general, it's been a good quarter for them. We expect this to be -- continue for awhile but it's not a significant number in our overall performance.

Okay. Thank you.

You're welcome.

Our next question is from the line of Greg Halter with Great Lakes Review. Please go ahead.

Hello. In regarding the Milso acquisition, I believe there's additional purchase consideration of $7 million that will be paid in fiscal '07 at least according to your 10-K and I'm wondering if that's a number that's taxed? Is that a pre or after-tax number or is there any tax impact on that?

That $7 million was additional purchase price under the agreement, Greg, so that's just part of purchase price, and we paid that before the end of December.

Okay. So that is not in relation to the $0.01 that you're--?

No, no, no no no, that's additional what I would call bonus accrual or bonus earnout related to the acquisition agreement.

And is there anymore potential bonus payout?

Yes. The way the agreements are structured, the earnouts can run potentially 3 to 4 years and this obviously is based on the way it's written is the first period that we have an accrual related to that.

Okay. And looking at the Pittsburgh consolidation for the Merchandising Solutions, is that completely finished now and I wonder if you could characterize how you view that at this point?

Well, the consolidation at this point is completed. I would not tell you that the continued streamlining projects that we have going on on there are completed. When we purchased this business as we said before, they were operating in eight or nine locations all within a five or ten mile radius. We acquired a facility that was large enough to house all of those locations in one, transferred all equipment and also personnel that wanted to move to that location. That portion is completed, and we're seeing the benefits of that. We are now focusing on internal improvements on the operations including some new equipment that we'll be adding over the course of time that should continue to improve profitability there. And reduce cost more importantly.

Thank you.

And we'll go to the line of Jamie Clement with Sidoti & Company. Please go ahead.

Hi, there. Just another follow-up on merchandising, if I can. I think that you all had said over the last couple of quarters that a long term margin goal at merchandising, a good place to sort of have expectations kind of long term would be in the high single digit range for the margin of the business and I think you were 7 something this quarter with, I guess, a large job that did not ship, so it seems like you're almost already there and you still have some streamlining to do. I mean, could you see a double digit margin in this business at some point down the road?

Yes, Jamie, let me answer that. We think that all of our businesses should be able to achieve a margin of 15% or better long term and we've got a few of them that aren't there. The one exception is the Merchandising Solutions business and the reason for that is there's a significant component of their sales are more significant, I should say, related to freight, and when you rebill freight and you're re billing a significant freight component under accounting rules, that freight is sale as well as cost of sale. Therefore, it impacts the margin percentage. Having said all of that, we think that that on a long term basis, Merchandising Solutions should be a 10% operating margin.

Okay, okay. Fair enough and last follow-up question. Are we going to see some kind of charge related to Marshfield in the March quarter numbers?

We might see some depending on timing.

Okay. Thank you very much.

You're welcome.

[OPERATOR INSTRUCTIONS] Gentlemen, there's nobody else queueing up at this time.

Okay. Thank you.

We thank everyone for their participation in the session this morning, and we look forward to next quarter. Thank you again.

Ladies and gentlemen, this conference will be available for replay after 1:30 this afternoon until February 1, at midnight. You may access the AT&T executive playback service at any time by dialing 1-320-365-3844 and entering the access code of 857651. Those numbers once again are 1-320-365-3844. Please enter the access code of 857651. And that does conclude our conference for today. Thank you for your participation, and for using the AT&T Executive Teleconference Service. You may now disconnect.