Matthews International Corp (MATW) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Matthews International second-quarter results conference call. For the conference, all the participant lines will be in a listen-only mode. However, there will be an opportunity for your questions and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded. I would now like to turn the conference over to the Chief Financial Officer, Mr. Steve Nicola.

Thank you. Good morning. I am Steve Nicola. On the call with me today is Joe Bartolacci, President and CEO 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 PM today. To access the replay, dial 1-320-365-3844 and enter the access code 868881. The replay will be available until 11:59 PM May 3, 2007. We have posted on our website, which is www.MATW.com, the second-quarter earnings release and financial information which 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 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 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. 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 March 31, 2007 will not be filed until early May 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 quarter ended March 31, 2007, the Company reported earnings per share of $0.58, compared to $0.52 for the same period a year ago, representing an increase of 11.5%. For the six-month period ended March 31, 2007, earnings per share were $1.02, compared to $0.92 for the first six months last year. It should be noted that fiscal 2007 earnings for the quarter and six-month periods included charges of approximately $0.01 per share and $0.03 per share, respectively, related to the earn-out provision under the acquisition-related agreements for Milso Industries, which was acquired in July, 2005.

The improved operating results for the fiscal 2007 second-quarter relative to last year reflected a significant project in our Merchandising Solutions business. This segment reported sales and operating profit of $30.3 million and $3.5 million, respectively, in the fiscal 2007 second-quarter, compared to $18.8 million in sales and an operating loss of $473,000 in the same period last year. Our fiscal 2007 second-quarter operating results also reflected higher profitability in our Bronze and Cremation segments compared to a year ago, but lower operating profit in our Casket, Graphics, and Marking Products businesses.

For the year-to-date period ended March 31, 2007, all segments, except the Graphics Imaging group, reported improved operating profit. Weakness in the graphics market in England has been the significant factor in the segment's decline in profitability. All other businesses reported an increase in operating profits on higher sales.

Consolidated sales for the second quarter of fiscal 2007 were $203 million, representing an increase of 12%, or $22 million, over the same quarter a year ago. For the first six months of fiscal 2007, consolidated sales were $378 million, representing an increase of 8%, or $27 million, over the same period last year. Higher sales in the Merchandising Solutions and Casket businesses were the more-significant contributors to the consolidated sales growth.

In our memorialization business, sales for the Casket segment were $59 million for the second-quarter and $113 million year-to-date, representing increases of 7% and 9%, respectively, over the comparable periods last year. These increases were primarily attributable to the transition to company-owned distribution and higher pricing.

Bronze segment sales for the quarter and six-months ended March 31, 2007 were $56 million and $107 million, respectively, compared to $53 million and $102 million, respectively, in the same periods last year. Higher selling prices, which were generally related to the increase in the cost of Bronze ingot, were the principal reasons for the sales increase.

Fiscal 2007 second-quarter sales for the Cremation segment were relatively unchanged from the sales level a year ago and higher by approximately $90,000 on a year-to-date basis. Higher unit volumes and pricing for both Cremation caskets, and Cremation equipment was (technical difficulty) factors in the sales growth.

In our brand solutions group, as I noted earlier, the Merchandising Solutions business was the most significant contributor to the group's sales improvement over the prior year, both on a quarter and year-to-date basis. The Marking Products segment reported sales of $14 million for the fiscal 2007 second quarter, compared to $13 million last year. For the six months of -- for the first six months of the fiscal year, the segment's sales increased from $25 million last year to $28 million in fiscal 2007. This business reported higher sales both domestically and internationally.

Graphics Imaging segment sales increased $2.6 million, or about 8%, for the quarter and $3.1 million, or 5%, year-to-date compared to last year. Higher sales in the German markets and an increase in the value of the euro and British pound against the U.S. dollar were the principal factors in the sales improvement. The year-to-date sales declined in both the U.S. and UK markets, however sales in the U.S. market improved in the second-quarter compared to a year ago.

Consolidated operating profit for the quarter ended March 31, 2007 was $31.6 million, compared to $29.1 million for the same quarter a year ago. For the first six months of fiscal 2007, consolidated operating profit was $55.8 million, compared to $51.5 million last year. In our memorialization group, the Bronze segment reported operating profit of $15.9 million for the fiscal 2007 second quarter, compared to $15 million a year ago. For the six-month period, the segment's operating profit was $27.5 million this year, compared to $27 million in fiscal 2006. Higher sales and an increase in the value of the euro contributed to the year-over-year improvement.

Operating profit for the Casket segment for the quarter ended March 31, 2007 was $5.6 million, compared to $6.9 million last year. Year-to-date operating profit for the Casket segment was $11.5 million as of March 31, 2007, compared to $10.5 million a year ago. The improvement for the year reflected higher sales. For the second-quarter, the decline reflected an increase in selling and administrative costs as the business transitioned certain territories from independent to company-owned distribution. In addition, the fiscal 2007 second quarter and six-month period included charges of $667,000 and $1.3 million, respectively, related to the Milso earn-out accrual. The fiscal 2007 second quarter also included some additional costs related to the shutdown of the segment's metal casket plant in Marshfield, Missouri.

Operating profits for the Cremation segment was $1.2 million for the fiscal 2007 second quarter, compared to $1.1 million last year. For the first six months of fiscal 2007, the segment's operating profit was $2 million, compared to $1.7 million a year ago. The improvement reflected higher sales for the period.

For the brand solutions group, again, our Merchandising Solutions business was the most significant contributor to the group's operating profit improvement over the prior year, both on a quarter and year-to-date basis. Fiscal 2007 second-quarter and year-to-date operating profit for the Graphics Imaging group were $3.3 million and $5.5 million, respectively, which were well-below the comparable amounts a year ago. Despite higher sales overall for the group, weakness in the UK graphics market and higher overhead costs caused the decline in the group's profitability. The Company is currently implementing actions to address these issues. The segment's domestic operations reported an improvement in operating profit for the second quarter over a year ago.

Marking Products operating profit for the second-quarter of the current fiscal year was $2.1 million, compared to $2.4 million last year. For the first six months of fiscal 2007, the segment's operating profit was $4.5 million, compared to $4.4 million a year ago. Higher overhead costs impacted the segment's operating profit during the current quarter.

Second quarter and year-to-date sales and operating income by segment are posted on the Web site. Year-to-date operating margins by segment were as follows -- Bronze, 25.8% of sales; Casket, 10.2%; Cremation, 15%; Graphics Imaging, 7.8%; Marking Products, 16.1%; and Merchandising Solutions, 10.2% of sales. Our second-quarter consolidated operating margin for fiscal 2007 was 15.6% of sales, compared to 16% in the second-quarter last year. Consolidated operating margin for the first six months of fiscal 2007 was 14.8% of sales, compared to 14.7% for the same period last year.

Gross margin for the quarter ended March 31, 2007 was 36.6% of sales, versus 37% for the same period year ago. Gross margin for the first six months of fiscal 2007 was 36.8% of sales, versus 36.5% for the same period last year. Higher overhead costs in our UK graphics operations have unfavorably impacted the current year consolidated gross margin.

SG&A expense for the current quarter was 21% of sales, compared to 20.9% of sales in the same quarter last year. SG&A expense for the first six months of the current fiscal year was 22% of sales, compared to 21.8% of sales in the same period last year. The transition to company-owned casket distribution in certain territories was the principal contributor to the consolidated increase.

For the current quarter, investment income was $439,000, compared to $244,000 to the same period year ago. Year-to-date investment income was $850,000, compared to $571,000 last year. The increase in investment income reflected higher average levels of invested funds and higher rates of return.

Interest expense for the current quarter was $1.9 million, compared to $1.6 million for the same period year ago. For the six months ended March 31, 2007, interest expense was $3.7 million, compared to $3 million last year. The rise in interest cost principally reflected higher average level of debt and interest rates during the current periods.

Minority interest deduction was $591,000 for the current quarter, compared to $704,000 a year ago. For the first six months of fiscal 2007, minority interest deduction was $1.1 million, compared to $1.3 million last year. In September 2006, the Company purchased the remaining ownership interest in one of its less than wholly-owned German subsidiaries. As a result, minority interest deduction is lower for the current periods.

Our second-quarter and year-to-date tax rate was 37.6% of pre-tax income, which is equivalent to the effective rate for the same periods 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 March 31, 2007, the consolidated cash and investment balance was approximately $55 million, compared to $41 million at September 30, 2006. At March 31, 2007, our current ratio was 2.2 to 1, compared to a ratio of 1.8 to 1 at September 30, 2006.

Our outstanding accounts receivable balance at March 31, 2007 was approximately $119 million, which represents 53 Days Sales Outstanding. Outstanding accounts receivable at September 30, 2006 approximated $122 million, which represented 60 Days Sales Outstanding. At March 31, 2007, consolidated inventories totaled approximately $94 million, compared to $85 million at September 30, 2006. The increase in inventories related mainly to the Company's expansion of its casket distribution capabilities.

At March 31, 2007, shares outstanding totaled 31,594,913 shares. During the fiscal 2007 second quarter, the Company purchased 291,700 shares under its share repurchase program. At March 31, 2007, approximately 513,000 shares remained to be purchased under the repurchase authorization. Yesterday, the Company's Board of Directors approved a 2.5 million share increase in the number of shares authorized to be repurchased under the buyback program. As such, the total buyback authorization has increased to 12.5 million shares, with approximately 3 million shares remaining to be purchased.

Our long-term debt balance at March 31, 2007, both current and long-term portions, approximated $160 million. $137.5 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 2009.

Depreciation and amortization expense for the quarter and six months ended March 31, 2007 were $5 million and $10.3 million, respectively. Capital expenditures for the quarter and six months ended March 31, 2007 were $7.2 million and $10.7 million, respectively.

On a consolidated level, our fiscal 2007 second quarter and six-months results were in line with our internal expectations. With respect to the remainder of the fiscal year, we are not adjusting our guidance at this time. However, we continue to remain cautious. 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. Unfortunately, near-term visibility has recently become more difficult due to the current challenges in our Casket business, particularly in the transition to the company-owned distribution in certain territories. In addition, we have seen a resurgence in bronze costs over the past several months and continued weakness in the UK graphics market.

While we are not changing earnings guidance at this time, we may see some volatility for the remainder of the year. However, it is important to emphasize that our action plans and recent investments give us confidence that will achieve our long-term growth rate in the fiscal 2008.

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

Good morning. Thank you, Steve. In general, I was satisfied with the performance of the group on a consolidated basis, given the environment that we are operating in. We have a lot of headwind in front of us and we have been handling those headwinds quite well, we believe. This quarter, in particular, we saw the benefits of being a diversified company, as our Merchandising Solutions and our cremation segments performed very well, each producing substantial year-on-year improvements. Their performance, coupled with a good performance out of our Bronze division, allowed us to offset some disappoint performance of our Graphics Imaging segment, a flat performance out of our Casket segment, after taking into consideration the Milso earn-out, and a soft quarter in our Marking Products segment.

Each of our segments have plans in place to improve performance and I remain optimistic about the their performance during the rest of the year. But as Steve said, as we come to the end of the contract period with Yorktown, we remain cautious about the Casket segment for the next two quarters due to some issues on the foreseeability of volume in the Yorktown territory. We remain optimistic about the loyalty of the York product -- the loyalty to the York product and the substantial amount of resources that we have put in place into the territory will yield good results long-term, but volume may be delayed while Yorktown works down its inventory in that territory.

New products in the cremation division are being very well received and I remain very positive that the boost received from them will continue going forward, but delays in the launch of new products in the Marking Products segment have temporarily caused a delay in the revenue realization in that segment. We expect to make up a shortfall going forward and remain positive about our Marking Products future in our group.

Our graphics division in the U.S. and Europe have performed as planned, as Steve has said, but capacity adjustments in England have been slow and result in a less-than-satisfactory result there. We are taking steps to adjust that capacity, but it is a slow process.

All in all remain optimistic but cautious about the remainder of this fiscal year. We, however, remain positive about our long-term opportunities, given the new products that we are launching in several our segments, stability in our Casket volume going forward, continued improvement in our Mexican and Richmond casket manufacturing facility, and further capacity adjustments that are available to us in our other operations. We are also very pleased that our Board of Directors has again authorized an increase in our share repurchase plan, which allow us to be optimistic -- opportunistic in buying back our stock at favorable prices.

With that, I would like to open it up to questions.

Yes, and with respect to the earnings guidance that I just mentioned, I should be clear that this earnings expectation excludes the favorable impact of the gain of the sale of property and the impairment of assets we reported in the fiscal 2006 fourth quarter. And also, this expectation does not include the impact of any unusual items in fiscal 2007, such as any payouts that may be earned under the Milso acquisition-related agreements.

At this time, we would like to open 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.

(OPERATOR INSTRUCTIONS) Jaime Clement, Sidoti & Co.

Regarding the Merchandising segment, the revenue this quarter was, obviously, a substantial up-tick off of what you had been running, and I think you alluded to a large project. Is that project still ongoing or should we expect a more, sort of, reduction to more normalized revenue over the next six months or so?

That was a onetime project. However, we are always in efforts to try to land those types of projects, so we predict going forward a more-normalized rate, however, we would love to land a few more of those.

As you know, this can be a lumpy business.

Okay, are you now in a position in Merchandising where after consolidating the facilities and being a little bit capacity-constrained that you can be a little bit more aggressive in going out and targeting new business?

Actually, Jaime, that is exactly what our plan is. We have gone through some turmoil. We still have a little bit to do out there and in cost reductions, but we went up to nine facilities to one. This quarter you're starting to see the benefits of that. We will continue to improve performance and, as a result, be able to be more competitive in the marketplace with new business.

Final question and I'll get back in the queue. Regarding the UK graphics market, I could be a little bit wrong with the timing, but I think it was maybe about 18 or so months ago, where you all felt you were sort of having some issues over there and you took some steps and improved results. I don't know whether it took six months or so, but that is my recollection of the time frame, but you certainly worked your way through it. Do you see similarities between what you are going through now and what you were going through, maybe, 16 to 19 months ago?

Actually, Jaime, that is a very good question. What we're seeing today in the UK is a little bit different in the sense that when we acquired the UK business, we had some immediate departure of some of our customers that was not anticipated and we were slow -- given after the fact that it was a new acquisition, we were slower to react listening to management on hand at that time that new business was coming. What you're seeing now is we have not necessarily lost any significant customers. What we're seeing is some temporary market volume issues, we believe, in the UK. However, at the same time, we are adjusting our business model there to better deal with slowdowns in the marketplace a lot quicker. But given the UK's regulation, this is not quite the U.S., where we can adjust that overnight.

Okay, thank you very much for your time.

Scott Blumenthal, Emerald Advisers.

You mentioned some delays in the launch of new products in your Marking Products segment. Could you talk about how long you think it will be? Have you already started to get some of those new products in the pipeline? Just give us a general idea of what we have coming and what you kind of expect as a percentage of sales?

That is a good question. We are already in the works of moving that product out. We have told the group in the past some new distribution channels that are waiting for that product. And that is the reason we have stepped up our overhead to deal with the increased volume, but I must tell you that they are minor, not major, new products. They allow us to complete our product line there and continue to service this new distribution channel, but we're not going to see -- I do not want you expect double-digit increases from these new products that are out there. This will allow us to achieve our goals that we had already predicted. We fell a little short on that due to some minor delays over several months.

Okay, and if I can ask a question about the casket distribution, in the areas in which you are now planning to compete with Yorktown, have you already started to -- I know you have moved product into those areas, but can you talk about how the sales and trends in those areas are going compared to your expectations?

Well, you know, Scott, it is a little difficult for us. I said we were in a difficult environment and so I was pleased with results, but the fact of the matter is we have had a lot of the costs in place for the last three to the six months. In fact, we have had all the costs in place for the last three to the six-months waiting for this transition. And right now, what we're seeing and one of the issues that we are confronted with is Yorktown working down their inventory and customers hesitant to make that conversion. But I think, at the same time, we're seeing a pretty good loyalty to our product and pretty good loyalty to the staff that we put in place out there. So right now that is why it is a little early for us, but we remain optimistic about the remainder of the year of achieving what we have said we would in that territory.

Okay, very well. All get back in the queue.

(OPERATOR INSTRUCTIONS) Greg Halter, Great Lakes Review.

You obviously mentioned the issue of the copper costs, the scrap bronze, whatever. Just wondering if you could parse that little bit better for us, relative to the Company's relationship with its customers and price increases, or your cost controls, or however you're handling that, this recent surge in prices.

Well, Greg, we are always looking at opportunities to improve our cost structure and moving forward will continue to do that. Price escalation has been a volatile issue for us. As you know, when profits gone up and down, and up and down, we generally are bought-out for a period of time, so we don't know what the price may be over the next several months. But at the same time, we are cautious about where price may be for the remainder of this year and the end -- the beginning of next year, which may cause us some concerns. The flexibility that we have with our customers really is dependent on their size and we are doing our best, both pricing, where appropriate, and cost containment where we can.

Okay, and one other higher level picture, and I know Company has been put together on the form of the two main businesses, but in light of Bronze's operating margins close to 30% relative to the others, probably double that, is there any thought of just turning Matthews into a bronze company only?

Well, we continue to believe that there are opportunities in all of our businesses, Greg. We always look for businesses that can yield a 15% operating profit and in all of our businesses, we would love to have only businesses that generated 25 to 30% operating margins. However, we don't think there's a lot of them out there, at least none in the industries that we work in. So we continue to believe these are good businesses to be in, but we do consider all alternatives. If there is an opportunity, we think, to create shareholder value otherwise, we would do that.

All right, thank you.

Gregory Macosko, Lord Abbett.

Just a question about the Cremation. I believe you said sales were flat and was that the result of higher prices there or is that volume there too?

I'm sorry, could you repeat the question?

With regard to Cremation, I believe you said sales were flat in the quarter -- year-over-year, in other words, in the quarter. Was that correct?

Yes, right.

You also mentioned price increase, so does that mean units were down or --

We have a number of items. The cremation division consists of a number of products.

This is Steve. It is a bit of a mix. Cremation casket units were actually a little bit up, but the cremation equipment units -- and then, you can imagine the significance of a cremation equipment unit. There were actually a couple of those, several of those that were anticipated to ship, but did not ship. So yes, there is a mix of price, casket volume, and equipment volume that you have to consider.

We do has some new product in that segment, in the Casket -- Casket portion, specifically, which is at a better price point and we're getting better efficiencies out of our plants, so the results are also impacted by that.

Casket in the Casket division, correct?

No, these are Cremation caskets.

Okay, and then with regard to Marking, the profit there was down a little bit on higher overhead, I believe.

Right, correct.

Was there any factor with regard to the product introductions? You said that they were delayed there. I just wondered if maybe that had an effect.

That is exactly what it is. We have staffed up for a higher volume level that was really related to product the launches. Those product launches had been delayed for a short period of time and we have the staffing in place for it.

You feel comfortable that that new staff can be productive now as those new products are out?

That is our expectations.

And then the inventory. I assume you have more inventory now as a result of the Yorktown changeover and what is happening there?

Right, in fact, Gregory, what we have is in an order to satisfy our customer needs and also to put us in a better position to convert Yorktown caskets upon termination, we are carrying a product line that is both made up of Milso product as well as York product. So in many of those warehouses that we have out there, we have duplicative inventory. Over time, we will go through the process of working through and creating one product line in that territory, but strategically we just did not think that was the right thing to do right now

Okay, but you're going to keep that higher inventory, I assume, on an ongoing basis?

No, no, we expect that inventory to drop over time -- as we go to a single product line. Right now, we have two product lines in those inventory. Once customers made their commitment, once customers have made that commitment over time, over the next twelve months or so, it will allow us to begin to isolate one product line that would make sense for all customers.

Then, finally -- I know I have asked a few more questions than I should have -- but with regard to the near-term visibility, you said it is tougher. Did you mean that relative to generally the business, or was just with regard to Bronze and the cost of bronze?

No, it means a lot of different things, but the largest portion that it relates to would be the casket volume. We do not have a good feel. We have our own plans and our estimates and we expect those estimates to be achieved. But until a customer decides to convert or not, we do not know if we have that volume.

I see, thank you very much.

Follow-up from Jaime Clement.

Let me ask you, is Yorktown contractually obligated to run through their York casket inventory even after the change of control takes place?

Honestly, Jaime, we don't know what Yorktown's obligations are as it relates to Batesville, so we don't know that answer.

All right, well, thanks very much.

A follow-up from Scott Blumenthal.

One last question, if I may. You did mention, Joe, you said further capacity adjustments in some segments and I kind of missed that. What we're you referring to?

Further capacity adjustments in seven segments did you say? Some segments. No, what we're looking at it is opportunities in all of our businesses. As you know, we run multiple plants around the world and where we can find capacity adjustments that make sense for better efficiency, we're going to do that.

Okay, that's all that I have. Thank you.

A follow-up from Greg Halter.

You discussed the share purchase, 291,000 shares, but the share count was basically flat sequentially. Were those shares purchased late in the quarter?

Yes, actually they were purchased a little bit later in the quarter, Greg.

What was the total cost of the shares purchased in the quarter?

I believe the average cost per share -- I don't have the total dollar amount at my fingertips, but we were paying average prices probably around the $39 range. So anywhere between $38.50 and $40 was probably the prices we were paying.

Okay, I have not heard any discussion about, given the Company's balance sheet, which is in pretty good shape, your appetite for any sort of acquisitions.

We are always, Greg, out in the marketplace looking for appropriate acquisitions, although we still remain optimistic about what we have performing where we may be. Nevertheless, we will do deals that make sense for us in the time that make sense, so we are still out there.

Okay, thank you.

Gentleman, there are no further questions in queue.

Okay, well, we would like to take the opportunity to thank you for listening to our conference call at this time and we certainly look forward to our similar call in the third quarter. Have a good morning.

Ladies and gentlemen, this conference is available for replay. It starts today at 1:30 PM Eastern, will last until May 3 at midnight. You may access the replay at any time by dialing 320-365-3844. The access code is 868881. (OPERATOR INSTRUCTIONS) That does conclude your conference for today. Thank you for your participation. You may now disconnect.