Matthews International Corp (MATW) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first quarter financial results conference call. At this time, all participants are in a listen-only mode. Later there will be an opportunity for questions. 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, Steve Nicola. Please go ahead, sir.

Thank you, good morning, I'm 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 p.m. today. To access the replay, dial 1-320-365-3844 and enter the access code 905326. The replay will be available until 11:59 p.m. , February 8, 2008. We have posted on our website, which is matw.com, the first 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 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 the 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. I might also add that the balance sheet and income statement data provided today are preliminary data since our Quarterly Report on Form 10-Q for the period ended December 31, 2007 will not be filed with the SEC until around February 4, 2008.

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

For the quarter ended December 31, 2007, the Company reported earnings per share of $0.56 compared to $0.44 for the same period a year ago. Earnings for the current quarter included a one-time benefit of $0.06 per share related to a favorable tax adjustment in income tax expense. As a result of the recent income tax reductions in Europe, an adjustment to the corresponding deferred income taxes was required under U.S. accounting principles.

The results for the quarter last year reflected a charge of approximately $0.01 per share related to the earn out provisions in connection with the Milso acquisition related agreements. Consolidated sales for the first quarter of fiscal 2008 were $182 million compared to $175 million for the same quarter a year ago, which represented an increase of approximately 4%.

The growth in consolidated sales reflected a combination of higher currency exchange values, the acquisition of an interest in a small marketing products operation in China in June last year, and improved price realization in the Memorialization businesses. These items were partially offset by a decline in North American sales of marking products and the sale of the merchandising solutions consulting business in August 2007.

In our Memorialization businesses, sales for the Bronze segment were $54 million for the first quarter compared to $ 50 million last year. The increase in sales for the current period principally reflected higher selling prices in connection with the continued high level of Bronze metal costs. Volume for the period declined slightly reflecting a lower death rate for the period compared to a year ago.

Sales for our Casket segment were $56 million for the current quarter compared to $54 million a year ago. Although volume in this segment also declined, partly reflecting the lower death rate, reported sales were higher than a year ago. Improved pricing and the transition to direct distribution in certain territories were the main reasons for the revenue growth. Direct distribution sales, i.e., sales directly to funeral service providers, generally have higher unit selling prices than sales to independent distributors.

Sales for the Cremation segment in the quarter ended December 31, 2007, were $6.4 million compared to $6.6 million for the same period last year. In our Brand Solutions Group, first quarter sales for the Graphics Imaging segment were $35 million compared to $33.8 million a year ago.

The Group benefited from higher foreign currency exchange rates and an increase in sales in the North American market, which were partially offset by continued weakness in the U.K. graphics market. Excluding the impact of exchange fluctuation, sales in the German market was relatively flat compared to a year ago.

First quarter sales in the Marking Products segment increased $1 million or 7.5% over the first quarter a year ago, primarily as a result of the acquisition of an interest in the small Chinese inkjet equipment company. Excluding the effect of this acquisition, sales for this segment declined from a year ago. North American sales were lower than a year ago principally reflecting a downturn in several of the key markets served by this segment, which are the housing and related building products market and the material handlings market. However, the segment reports that incoming orders have been improving recently to a level consistent with a year ago.

Sales for our Merchandising Solutions business were $16.3 million for the fiscal 2008 first quarter compared to $17.1 million a year ago. The decline resulted from the sale of the segment's marketing consultancy business in August 2007. Excluding this portion of the segment, sales in the first quarter a year ago were $15.6 million.

Consolidated operating profit for the quarter ended December 31, 2007, was $26.8 million compared to $24.2 million for the same quarter a year ago. Operating income improved in five of the Company's six business segments.

In our Memorialization businesses, the Bronze segment reported operating profit of $13 million for the fiscal 2008 first quarter compared to $11.6 million a year ago. Higher sales and an increase in the value of the euro were the principal factors in the operating profit improvement.

Operating profit for the Casket segment was $7 million for the fiscal 2008 first quarter compared to $5.9 million a year ago. The increase in sales for the period was the primary factor in the operating profit growth. Additionally, the first quarter last year reflected a charge of approximately $700,000 related to the earn out provisions in connection with the Milso acquisition related agreements.

Operating profit for the Cremation segment was $1 million in the current period compared to $776,000 a year ago. Higher average selling prices, including an improved product mix, and cost improvements contributed to the increase in profits.

In the Brand Solutions Group, the Graphics Imaging segment reported operating profit of $2.7 million for the quarter ended December 31, 2007 compared to $2.2 million a year ago. An increase in North American sales, higher foreign currency values, and the benefit of cost structure improvements implemented last year were the principal factors in the improvement.

The Merchandising Solutions segment reported operating profit of $1.6 million for the fiscal 2008 first quarter compared to $1.3 million in the first quarter last year. Even without the marketing consultancy business, which was sold in August 2007, operating profit improved for the period as a result of higher sales of merchandising systems and displays relative to a year ago and the benefit of last year's cost structure initiatives.

Operating profit for the Marking Products segment was $1.4 million for the quarter ended December 31, 2007, compared to $2.4 million a year ago. Lower sales in North America as a result of the recent economic slowdown in certain of its domestic markets were the principal factor in the decline in profitability.

First quarter sales in operating income by segment are posted on our website. Operating margins by segment were as follows: Bronze 23.9% of sales, Casket 12.6%, Cremation 16.4%, Graphics Imaging, 7.8%, Marking Products 9.7%, and Merchandising Solutions, 9.6% of sales. Our first quarter consolidated operating margin for fiscal 2008 was 14.7% of sales compared to 13.8% in the first quarter last year.

Gross margin for the quarter ended December 31, 2007, was 39.5% of sales versus 37% for the same period a year ago. The increase related partially to the transition in the Casket segment to a higher proportion of direct distribution sales which have a higher gross margin, but also have a higher level of selling costs. The improvement in gross margins also reflected the increase in consolidated sales.

SG&A expense for the current quarter was 24.8% of sales compared to 23.2% of sales in the same quarter last year. As I just noted, part of this increase reflects the transition in the Casket segment to a higher proportion of direct distribution sales. In addition, lower North American sales in the Marking Products segment adversely impacted the SG&A percentage relative to sales.

For the fiscal 2008 first quarter, investment income was $512,000 compared to $411,000 for the same period a year ago. The increase in investment income principally reflected a higher average level of invested funds. Interest expense for the current quarter was $2.1 million compared to $1.8 million for the same period a year ago.

The rise in interest costs principally resulted from a higher average level of debt and higher interest rates during the current period. Minority interest deduction was $552,000 for the current quarter compared to $520,000 a year ago. The fiscal 2008 first quarter effective income tax rate was 29.8% of pre-tax income.

Excluding the favorable impact of the one-time adjustment, our fiscal 2008 first quarter tax rate was 37.4% which is slightly lower than the fiscal 2007 effective tax rate of 37.6%. Favorable rate changes in Europe and the impact of the U.S. federal manufacturing credit were the primary factors in the reduction in the consolidated effective tax rate.

At December 31, 2007, the consolidated cash and investment balance was approximately $73 million compared to $56 million at September 30, 2007. Our current ratio was 2.2 to 1 both at December 31 and September 30, 2007. Our outstanding accounts receivable balance at December 31, 2007, was approximately $108 million which represented 53 days sales outstanding.

Outstanding accounts receivable at September 30, 2007 approximated $121 million which represented 59 days sales outstanding. At December 31, 2007, consolidated inventories totaled approximately $92 million compared to $94 million at September 30, 2007. At December 31, 2007, the Company had approximately 31.116 million shares outstanding.

During the fiscal 2008 first quarter, the Company purchased approximately 99,000 shares under its share repurchase program at a repurchase cost of approximately $4.3 million. At December 31, 2007, approximately 1.9 million shares remained under the current repurchase authorization. Our long term debt balance at December 31, 2007, both current and long-term portions, approximated $164 million, $143 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 September 2012.

Depreciation and amortization expense for the quarter ended December 31, 2007, was $5 million. Capital Expenditures for the same period were $2.1 million.

In summary, we are pleased to report that, excluding the favorable income tax adjustment, we achieved our internal earnings expectations for the fiscal 2008 first quarter. This was despite a difficult quarter in several of the principal markets served by our Marking Products business and continued weak demand in the U.K. graphics industry.

In addition, as Joe will touch on in a few moments, our Casket segment demonstrated good progress in the transition of its business model. We remain encouraged about our opportunities for growth this fiscal year and are maintaining our fiscal 2008 earnings guidance of $2.48 to $2.54 per share, excluding the one-time income tax adjustment and any other unusual items that may occur. This concludes the financial review and Joe Bartolacci will now comment on our operations.

Good morning, and thank you, Steve. I'd like to reiterate what Steve said. We are generally pleased with how the results of the quarter have ended up. In five of our six segments, we showed a substantial improvement over prior years. More importantly, with respect to that, those five segments were able to offset a significant decline in our Marking Products division which is directly related to the economic conditions in which it operates.

We fully expect our Marking Products division to return to its prior profitability once this economic situation improves. Also, this quarter, we saw the benefits of some of our prior years' efforts to improve the efficiency at a number of our locations. If you look at our IDL results, our IDL results this quarter show significant improvement over prior year despite the sale of the consulting business.

Our efforts there are hopefully going to show us results coming into the near future here, however, I will caution you that that business is substantially connected to the economic conditions in the marketplace and may be subject to some downturn should we have some difficult times in the marketing budgets of some of our customers.

Also in our Casket division, we are finally starting to see the efforts of consolidation in our business. This quarter was the first time we were able to fully integrate the assets that we received in the resolution with Yorktowne. As a result, we've begun the process of product rationalization and warehouse rationalization which has showed some fruit this quarter. We expect it to continue to show that benefit over the course of the next year or two.

Our Bronze division continues to perform exceptionally well. We have a wonderful group of people there who continue to prove year in year out that they are top class. And with that, I'd like to open it up to questions.

Yes, at this time we would like to open the call to questions. For those 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. Gloria?

(OPERATOR INSTRUCTIONS) One moment, please, for our first question. We will go to the line of Robert Labick with CJS Securities. Your line is open.

Good morning, congratulations on a good quarter.

Thank you, Bob, good morning.

Hi. First question I wanted to ask was as it relates to Graphic Imaging, I know you touched on this a little bit. I was hoping you would expand a little more. The fluctuation in margin quarter-to-quarter, particularly fourth quarter you had a great quarter, I think it was 16% plus margin, and we didn't think that would be necessarily sustainable at that level quite yet, but you've also talked about a two to three year plan to grow margins.

There was a drop off this quarter. Could you just tell us where we are in the plan and what specifically happened in this quarter and your time horizon for that 15%?

Bob, part of that is cyclical in the first quarter, in our first fiscal quarter we typically have lower margins in our Graphics segment because relative to our total annual sales in that quarter, this quarter tends to be slightly lower because of the number of work days with the holidays both in November and December. So the first quarter tends to bear a little more of the fixed cost versus total revenue.

We still believe that our first quarter results demonstrate the progress particularly in some of the markets that we took some action in a year ago. The U.K. margin improved from a loss last year to slightly better than breakeven this quarter, and then in the U.S. market we showed some improvement in sales and corresponding profitability.

Great. That's helpful, and then I guess for my follow-up I'll just kind of stay in the Brand Solutions, and in Marking Products you mentioned that you expect margins to return when the economy improves or changes? Could you just give us, were there any charges in this quarter?

No, Bob. There were no charges. The fact of the matter is is a significant portion of the revenues that are derived by Marking Products come from the housing and manufacturing industries who are both large consumers of the product and the consumables that are sold through that division.

We have seen a precipitous fall in that volume over the last six or so months and although we have had a long tradition of doing very well in that industry, we think that this is a period of time that we're just going to have to weather the the storm. I think the benefit of having the five other divisions that have pulled through to make up that shortfall is the benefit of this group.

Absolutely. It's just it has been going down for six months plus. It's unusual that again the change is so quickly from the last two quarters to this quarter in margin.

Well, we have, I mean, without giving too much information, we have customers in fact, that are significant customers that are down 60% and 70% at this point in time, all in the course of six months or so.

The other thing we see and sometimes you see it in December, Bob, is when you get to an end of the calendar year which is the end of a budget period for a lot the of companies, and recognizing that it's a lot of what we sell in our Marking Products Group are capital purchases, sometimes these orders end up in the following calendar year and don't make it into this quarter for budget purposes, which is why we think we see the order level now becoming more consistent with the levels they were a year ago -- going into the second quarter.

Okay, terrific. I will get back in queue, thank you.

You're welcome.

Next we'll go to the line of Jamie Clement with Sidoti. Please go ahead.

Good morning, Joe, good morning, Steve.

Good morning.

With respect to the Casket division, Joe, I think you gave us a little bit of an update on the distribution angle. With respect to the asset purchase that you all made over the summer, where are you in percentage terms in terms of working through that inventory that you purchased because, and can you give us a sense of, I mean, I would assume you would have had marked that up so you might have sales of some of that inventory in this quarter but no corresponding profitability. Do you have a sense of how much that might have cost you?

We don't necessarily have a sense on how much it would cost us, but I will warn you, Jamie, what we're talking about is a difference between a distributors price and our manufacturing costs.

We had to repurchase that at the distributors price. There was some markup for the distributors margin margin, if you will, so we don't have that quantified, but we probably have another three to four months where we're working through that inventory, and we expect to see that coming out on the back side.

Yes, but just to clarify, presumably, though, once you work through that, right, your Casket profitability is going to improve, right?

It is, but just to follow-up on Joe's point, Jamie, it's not going out in major lumps, if you will, so we've seen a lot of that impact already in our margins and it hasn't significantly impacted our margins just because it's kind of feathered its way out over three, four months now and we expect that to continue.

Okay.

But I'd say from here forward, I wouldn't expect any significant impairment of margin as we work through what's left.

Okay --

We're starting to see the benefit of the margins now.

Okay, very good, and switching to Brand Solutions just to follow-up there, I don't know how much, you're alluding to the Marking Products business and some of the calendar impact, if times get tough and maybe some stuff goes from December into the first quarter of the new calendar year.

Can you discuss your outlook a little bit for Graphics and for Merchandising with respect to your clients marketing budgets and that sort of thing? I mean, or has the economy made an impact here? What are you seeing?

Well, it's interesting, of all of our businesses, these are probably the only two that are consumer related in some sense.

Uh-huh.

And as you can tell by the results in the quarter, IDL did not have a significant impact. Partly because they went out and landed some new business, and there's some new business in the pipeline right now.

Okay.

The question is when they're going to pull the plug on us and let us do the work. We have a nice pipeline of work in IDL. It is subject to their approval in the marketing budgets and we're cautious on that part of our business more than any other.

Okay, but in general, it sounds like with other than maybe Marking Products where have you to weather the storm with respect to Merchandising and Graphics, you feel pretty good about things is I think what I'm hearing?

Yes. We think that that's a fair statement. We don't have anything today that I can point to you and say next quarter will be a very difficult quarter as a result.

Okay, very good.

Jamie, we should point out that from a comparability standpoint next quarter in our Merchandising Solutions business, if you remember last year we had the Microsoft Vista project that was a nice benefit to our second quarter.

Yes, and last year, you actually didn't give the Company name or the project. (laughter)

(laughter) Well, we just did.

All right, thanks very much for your time.

You're welcome.

And next we'll go to the line of Scott Blumenthal with Emerald Advisers, your line is open.

Good morning, Steve, good morning, Joe.

Good morning, Scott.

Can you talk about, and you did mention in your remarks, Joe, when you alluded to the the consolidation of some of the warehouses in your Casket distribution, can you talk about your ultimate goals for and where you think the inventory levels are going to stabilize in that segment, and, also, what you see that's going to do to the SG&A?

Yes. Well, Scott, we clearly have a goal of continuing to reduce our inventory. We've taken about $2.5 million to $2.7 million worth of inventory out in this first quarter. That is the result of a couple of efforts.

One is some product rationalization that we will do every year forward until we get to a solid one product line. So over the course of the next couple of years as we continue to refine that we'll get that benefit, and then we shut down several warehouses, although we're not seeing too much of the benefit yet as we still have lease payments and the equipment related to those warehouses this quarter.

We expect our distribution function to get better and better every year for the next several years until we get to the profitability we expect. We expect that whole division to be somewhere in the mid-teens over the course of the next two to three years.

Can you give us any idea as to how long it's going to take for some of those lease payments and residual costs from exiting some of these facilities, how long they're going to last and when you think you'll be completely through those?

Scott, that's a difficult question to answer, only because we're in the beginning stages of the process of determining where the customer concentrations are and where the distribution infrastructure ultimately needs to be, and each of our warehouses have different arrangements.

Yes, we're trying to sublet the locations that we have and depending on our success there, it could be shorter or longer.

Yes, but our goal is that over the next two to three years, have a program in place where, say by the end of the 36th month, we should be where we think we should be.

Okay, but I guess we can suffice it to say that it's going to be less than it is now and continue to go down?

Well, yes.

Yes, in fact, I'd say that the last two years you've seen a significant use of cash of this Company, a significant use of our free cash flow in the build up of this infrastructure and the build up of inventory and receivables, and we're looking for that to be a contributor to cash in the future, at least for the next fiscal year.

Okay, great. And, Steve, can you give us maybe some guidance on depreciation and CapEx for the year?

I think depreciation should be around the same level as it was in fiscal 2007, so I would assume somewhere in the $21 million, $22 million level, and right now, CapEx, as we project it today, should be slightly less than that. I would put that in the high teens.

Okay, that's really helpful. Thanks a lot and congratulations on a good quarter.

Thank you.

Thank you, Scott.

Next we'll go to the line of Susan Christ with Hendershot Investments. Please go ahead.

Good morning.

Good morning.

Good morning.

I jumped on the call a little late, I'm wondering could you discuss your operating cash flow for the quarter including CapEx and how that compares to last year, and also could you repeat the information that you gave on your share repurchases for the quarter?

Sure. I'll start with the share repurchases for the quarter. We repurchased approximately 99,000 shares for the quarter and our cost was about $4.3 million.

And then we didn't discuss operating cash flow for the quarter other than to say our depreciation expense was about $5 million for the quarter, depreciation and amortization, and our CapEx for the quarter was about $2.1 million.

And do you have an operating cash flow number?

At this point we do not.

Okay, thank you.

You're welcome.

Next we'll go to the line of Greg Halter with Great Lakes Review. Your line is open.

Good morning, Greg.

Good morning, guys. On that last point, on your sheet, you do provide cash flow from operations of $31.5 million, am I correct to presume that was for the current quarter?

Oh, I'm sorry. We provide that on the website?

Yes.

Oh, I'm sorry, then I didn't have that handy with me, Greg.

Okay.

That's on the website, it's $31.5 million. I apologize to the previous caller.

Okay. Excellent improvement from $11 million in the prior year.

Yes.

And that brings me to the next point is your cash position is building, your debt is down to about 17% net of the cash on a capitalization basis, and the stock price has been moving higher, so you may be hesitant to buy back stock given the higher prices, but just wondering what your uses are for cash here going forward?

Well, we have always been opportunistic, Greg, so right now, we're alway looking at opportunities both for acquisitions as well as to acquire shares when it's appropriate.

We don't, we think keeping our powder dry is not a bad thing to do right now, and so we don't currently have any direct plans for that.

Okay, and can you discuss who within the Company works on the acquisition front, and if you got anything that's looking more feasible than not and also the pricing environment these days?

You know, with regard to how we handle our acquisitions, our segments have division presidents who are responsible for growing their businesses and flushing out acquisition opportunities, so we push that down into the divisions.

Obviously, the diligence work and contractual matters come up through corporate and go through the necessary approval processes. But with regard to pricing, I would tell you that pricing out there is still somewhat high relative to where we've been in the past, but prices that we think we can live with, if they're the right deal. It was not that way in the last 18 months, I would say.

Okay, all right, great. Thank you.

We'll go back to the line of Robert Labick with CJS Securities. Your line is open.

Good morning, again, thanks.

Okay, Bob.

Hi. I wanted to just ask a question, obviously, a lot of commodities, you use a lot of commodities in your products and everything.

Could you give us just a sense of what you're seeing in commodity prices be it copper, or bronze, or steel, or how that may impact you, and if we were to go into a recession, how you think commodity pricing impacts you in your pricing strategy on your products? If commodity prices do fall, how quickly do you lower pricing, do you get some kind of margin benefit in that scenario or just walk us through what you're seeing in that strategy, please?

Sure, my opinion is we have three major commodities that we use, actually four, that would be, largest being copper related, which is bronze, steel, wood and petroleum. Those are the four largest commodities we probably go through throughout the organization.

With regard to copper our current estimate is looking forward to build around the current range of pricing for copper somewhere between $3 and $3.20, so if we end up having significant dips in that, I will tell you that we've had some pretty good support from our customers as we've been forced to pass on some of those material price increases.

How much we would have to give back, our customers are savvy also and watch what's going on out there. Would we have a pick up? Possibly, but I also think maintaining the goodwill within our organization is not a bad thing to do either.

With regard to steel, it's interesting you would say that because steel is a large part of our Casket business and we are seeing some potential problem, not material at this point, but potential problems with material or with steel prices in the second half of the year where our current pricing is being placed right now.

That trend if we have some recession it lowers those prices would be favorable because pricing on Caskets are set once a year and that would be beneficial. But right now, we're not seeing it yet. And petroleum, obviously, we buy a lot of gasoline when we deliver a lot of these Caskets, as well as freight so to the extent we can get a drop there that would be a direct benefit.

Great, appreciate it. Thanks very much.

Sure.

You're welcome.

(OPERATOR INSTRUCTIONS) No questions, sir.

Okay, well, we would like to thank everyone for attending this morning in the first quarter conference call, and we look forward to our second quarter conference call in April. Thank you, and good morning.

Ladies and gentlemen, this conference will be available for replay starting today at noon through February 8 at midnight. You may access the AT&T Teleconference replay system at any time by dialing 320-365-3844 and entering the access code 905326. The number, again, is 320-365-3844.

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