Matthews International Corp (MATW) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Matthews fiscal year end call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session, with instructions being 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, Carey. 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 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 967430. The replay will be available until 11:59 p.m. November 27, 2008.

We have posted on our website, which is www.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 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 with 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, please note that the balance sheet and income statement data provided today are preliminary data since our Annual Report on Form 10-K for the year ended September 30, 2008, will not be filed with the SEC until the end of this month.

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. Matthews reported earnings per share of $0.66 for the fiscal 2008 fourth quarter, compared to $0.64 for the same period a year ago. The fourth quarter a year ago included one-time favorable items totaling $0.08 per share, related to litigation settlements, and a gain on the sale of the Company's marketing consultancy business.

Earnings per share for the current quarter benefited from a lower effective consolidated income tax rate. For the fiscal year ended September 30, 2008, earnings were $ 2.55 per share, compared to $2.04 last year. Current year earnings include a one-time benefit of $0.06 per share, related to a favorable adjustment in income tax expense, which was recorded in our first fiscal quarter. As a result of income tax rate changes in certain European countries, an adjustment to our corresponding deferred tax income tax balances was required under US accounting rules.

Earnings per share last year reflected special charges net of the one-time fourth quarter favorable items of $0.17 per share, principally related to the resolution of the Milso acquisition employment agreement, and various cost structure initiatives. Consolidated sales for the fiscal 2008 fourth quarter were $ 219 million, compared to $185 million for the fourth quarter a year ago.

For the 2008 fiscal year, consolidated sales were $819 million, compared to $749 million for fiscal 2007. Sales in the current year included the Company's recent acquisition, in our Graphics Imaging segment of Saueressig GmbH & Company KG in May 2008. Saueressig reported sales of approximately $49 million from the acquisition date through the end of September.

Consolidated sales in fiscal 2007 included a large one-time project in the Merchandising Solutions segment, which generated over $10 million in revenue in last year's second fiscal quarter. Other factors impacting comparability of consolidated sales relative to a year ago, included the acquisition of an interest in a small Marking Products operation in China in June 2007, and the sale by the Merchandising Solutions segment of it's marketing consultancy business in August 2007. In addition, changes in currency exchange rates favorably impacted consolidated sales by $18 million compared to last year.

In our Memorialization businesses, sales for the Bronze segment were $61 million for the fourth quarter, which represented a slight decline compared to approximately $62 million a year ago. For the year, Bronze segment sales were $243 million, compared to $230 million last year. The fourth quarter decline from a year ago resulted principally from lower volume, reflecting a decline in the death rate for the period. The increase for the fiscal year primarily reflected higher selling prices offset partially by a volume decrease.

Fourth quarter sales for the Casket segment in Fiscal 2008 were $49 million, which is approximately the same level as a year ago. Higher average selling prices were offset by lower volume in the current quarter. For the year, fiscal 2008 Casket segment sales were $220 million, compared to $211 million for fiscal 2007 reflecting increases in unit volume and average selling prices.

The increase in average selling prices was partially attributable to a change in channel mix, with the recent transition to direct distribution in several territories. 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 current quarter were $7.1 million, compared to $5.7 million for the fourth quarter last year. For the year, fiscal 2008 Cremation segment sales were $26.7 million, compared to $25.2 million last year. Higher equipment and service and repair revenues were the principal factors in the segment sales improvement for the quarter and fiscal year.

In our Brand Solutions Group, Graphics Imaging segment sales were $72 million for the fiscal 2008 fourth quarter, compared to $39 million a year ago. For the year-ended September 30, 2008, Graphics Imaging sales were $204 million, versus $146 million for fiscal 2007. A significant portion of the increase in sales for the fourth quarter and fiscal year, resulted from the acquisition of Saueressig. Saueressig reported sales of approximately $49 million from it's May 2008 acquisition date through the end of the fiscal year.

The Graphics Imaging Group also benefited from favorable currency exchange rate changes and higher sales in the German markets. Fourth quarter sales for the Marking Products segment were $14.7 million in fiscal 2008, compared to $15.5 million a year ago. The decline primarily reflected the continued weakness in the US economy.

For the year, fiscal 2008 Marking Products sales were $60 million, versus $57 million last year. The sales improvement resulted from last year's acquisition of an interest in a small Chinese Inkjet equipment company, and the benefit of higher currency exchange rates. Excluding the effect of these items, sales for the segment declined for the year on lower volume in the North American market.

Sales for the Merchandising Solutions segment were $15.6 million for the fiscal 2008 fourth quarter, which was slightly higher than sales of $15.3 million a year ago. For the year-ended September 30, 2008, Merchandising Solutions sales were $65 million compared to $80 million last year. Fiscal 2007 sales included a large one-time project, representing over $10 million in revenue in the second quarter, which did not repeat in the current year. In addition, the segment sold it's marketing consultancy business in August 2007.

Consolidated operating profit for the fiscal 2008 fourth quarter was $35 million, which was slightly ahead of consolidated operating profit of $34.9 million for the same quarter a year ago. The fiscal 2007 fourth quarter included the favorable impact of litigation settlements, net of legal costs, in our Casket segment totaling $2.8 million. The fourth quarter a year ago also included a net gain of $1.3 million on the sale of the Company's marketing consultancy business.

For the year, consolidated operating profit was $133 million in fiscal 2008, compared to $112 million last year. Operating profit for fiscal 2007 included special charges, net of the favorable one-time items in the fourth quarter of approximately $9 million. In our Memorialization businesses, the Bronze segment reported operating profit of $21 million for the fiscal 2008 fourth quarter, compared to $19.7 million a year ago. For the year, Bronze segment operating profit was $71.6 million for fiscal 2008, compared to $66.3 million last year.

Despite a rise in average commodity costs for the year, the segment's operating profit increased over last year, reflecting higher selling prices, various cost improvements, and favorable changes in the values of foreign currencies against the US dollar. Casket segment operating profit for the fiscal 2008 fourth quarter was $3 million, compared to $4.1 million a year ago. The fiscal 2007 fourth quarter included a net favorable benefit of $2.8 million in connection with litigation settlements. For the year, the Casket segment reported operating profit of $23.3 million in fiscal 2008 compared to $11.8 million last year.

Special charges, net of the fourth quarter litigation settlements, were approximately $7 million last year. These special charges principally included the resolution of the Milso employment agreement, and certain cost structure initiatives. Excluding these one-time items from last year results, the fiscal 2008 fourth quarter and fiscal year operating profit for the Casket business increased, reflecting he benefit of higher sales and improvements in the segment's manufacturing and distribution infrastructure.

Fourth quarter operating profit for the Cremation segment in Fiscal 2008 was $1.9 million, compared to $670,000 a year ago. For the current year operating profit for the Cremation segment was $5.5 million, compared to $3.6 million last year. Higher sales and cost control efforts were the principal reasons for the operating profit improvement.

In the Brand Solutions Group, the Graphics Imaging segment reported operating profit of $5.8 million for the fiscal 2008 fourth quarter, compared to $6.4 million a year ago. Declines in the US and UK markets during the quarter contributed to the segment's lower profitability. For the year, Graphics Imaging Group operating profit was $ 18.6 million in fiscal 2008, compared to $14.4 million last year. Last year's operating results included special charges in connection with cost structure initiatives in the UK and US operations, which benefited current year results.

Higher sales including the benefit of favorable currency exchange rate changes also contributed to the year-over-year operating profit improvement. Results for Saueressig have been generally breakeven since it's acquisition in May 2008, but positive from an EBITDA perspective. This acquisition is expected to contribute to the Company's operating profit growth in fiscal 2009.

The Merchandising Solutions segment reported operating profit of $315,000 for the Fiscal 2008 fourth quarter, compared to $922,000 a year ago. For the year, operating profit for the Merchandising Solutions segment in fiscal 2008 was $4.8 million, compared to $5.7 million a year ago.

Operating results for the fourth quarter last year included a gain of $1.3 million on the sale of the segment's marketing consultancy business. Fiscal 2007 also included the benefit of the large second quarter sales project that I discussed earlier. Excluding a $1.3 million gain from last years results, the segment's operating profit improved for the current quarter and fiscal year, as a result of the benefit of recent cost structure initiatives.

Operating profit for the Marking Products segment was $3.1 million for the quarter ended September 30, 2008, which was approximately the same as the fourth quarter of fiscal 2007. Cost improvements offset a decline in sales for the quarter. For the year, the segment's operating profit declined from $9.9 million in fiscal 2007 to $9.1 million for the current year. Lower sales in North America, resulting from the US economic slowdown was the principal factor in the decline in profitability.

Fourth quarter and fiscal year sales and operating income by segment are posted on our website. Operating margins by segment for the fiscal year were as follows, Bronze 29.4% of sales, Casket 10.6%, Cremation 20.5%, Graphics Imaging 9.1%, Marking Products 15.2%, and Merchandising Solutions 7.4% of sales. Consolidated operating margins for the quarter and fiscal year ended September 30, 2008, were 16% and 16.2% of sales respectively. Consolidated operating margins for the same period last year were 18.8% and 14.9% respectively, reflecting impact of last year's one-time items.

Gross margin for the fiscal 2008 fourth quarter was 38.2% of sales, compared to 38.8% for the same period a year ago. A lower gross margin for Saueressig was the primary reason for the decline in the current quarter. For the year, the Company's consolidated gross margin was 39.5% of sales in Fiscal 2008, compared to 37.4% last year. The increase for the current year 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 a higher level of selling costs. Prior year's gross margin also included the impact of special charges.

SG&A expense for the fiscal 2008 fourth quarter was 22.3% of sales, versus 20% for the same period a year ago. One-time favorable items significantly impacted SG&A expense in the fourth quarter last year. For the year the Company's SG&A expense was 23.2% in fiscal 2008, compared to 22.5% last year.

This increase principally reflects the transition in the Casket segment to a higher proportion of direct distribution sales. One-time items significantly impacted last year's consolidated SG&A expense. Investment income was $413,000 for the fiscal 2008 fourth quarter, compared to 660,000 for the same period a year ago. For the year, investment income was $1.8 million in fiscal 2008, compared to $2.4 million last year. The reduction in investment income principally reflected a lower average level of invested funds, and a decline in investment performance.

Interest expense for the fiscal 2008 fourth quarter was $3.7 million, compared to $2.3 million last year. For the year, interest expense was $10.4 million for fiscal 2008, compared to $8.1 million a year ago. The increase in interest costs principally resulted from a higher average level of debt, as a result of the recent acquisition of Saueressig.

Minority interest deduction was $1.2 million for the current quarter, compared to $900,000 a year ago. For fiscal 2008 minority interest deduction was $3.3 million, compared to $2.7 million for fiscal 2007. The acquisition of a small Chinese Marking Products business in June last year was the primary reason for the increase.

The effective income tax rate for fiscal 2008 was 34.6% of pre-tax income. Excluding the favorable impact of the one-time first quarter income tax adjustment, our fiscal 2008 effective income tax rate was 36.2%, which represents a reduction from our fiscal 2007 effective tax rate of 37.6%. Favorable changes in Europe, the impact of the US Federal manufacturing credit, and the closure of certain tax years, were the primary factors in the reduction and the consolidated effective tax rate. The Company's consolidated cash and investment balance at September 30, 2008, was approximately $60 million, compared to $56 million a year ago.

Our current ratio was 1.9 to 1 at September 30, 2008, compared to 2.2 a year ago. Our outstanding Accounts Receivable balance at September 30, 2008, was approximately $146 million, which represented 60 Days Sales Outstanding. Outstanding Accounts Receivable at September 30, 2007 approximated $121 million, which represented 59 Days Sales Outstanding.

The increase in Accounts Receivable, primarily resulted from the Saueressig acquisition. Consolidated inventories totaled approximately $96 million at the end of fiscal 2008, compared to $94 million a year ago. The increase in the consolidated inventory balance primarily reflects the Saueressig acquisition, offset partially by lower inventory levels in the Casket segment.

At September 30, 2008, the Company had approximately 30,859,000 shares outstanding. During fiscal 2008 the Company purchased approximately 981,600 shares under it's share repurchase program, at a repurchase cost of approximately $46 million. As of the end of fiscal 2008, approximately 1 million shares remained under the current repurchase authorization.

Our long term debt balance at September 30, 2008, both current and long term portions approximated $254 million. $173 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 and fiscal year ended September 30, 2008, were $7.7 million and $ 24.9 million respectively. Capital Expenditures for the quarter and fiscal year ended September 30, 2008, were $4.2 million and $12.1 million respectively.

In summarizing the results discussed this morning, fourth quarter earnings were generally in-line with our expectations. For the fiscal year, when we exclude the one-time tax benefit from the first quarter this year, and the special items recorded a year ago, our earnings grew 12.7% on an apples-to-apples basis. We are pleased to report that this performance is within our long term 12 to 15% growth target, despite the recent difficult market environment.

Looking forward to fiscal 2009, the weakness in the US economy has deepened. We have seen recent softness in sales for both our Memorialization and Brand Solutions businesses. There has also been further volatility in commodity costs, such as bronze and fuel, however, while these costs have declined in the last few months, the extreme volatility creates challenges in our annual selling price decisions.

Additionally, the recent strengthening in the US dollar will unfavorably impact fiscal 2009 reported results for our overseas operations, when compared to Fiscal 2008. With these challenges, all of our businesses are continuing to work to increase their productivity. We anticipate that operating margins will grow further in our Casket business, as they continue to look to improve their distribution and manufacturing infrastructure. We also expect our Merchandising Solutions business to continue to grow it's operating margins, as a result of recent profitability initiatives. In addition, in fiscal 2009 we expect our most recent acquisition, Saueressig, to contribute to improved results over fiscal 2008.

Lastly, Management of our Bronze segment is planning to consolidate certain production operations, to better utilize the capacity in this business and increase productivity. Please note that these activities are expected to result in some special charges during fiscal 2009. We are currently not in a position to disclose these at this time, but will communicate these quarterly as they occur.

These challenges in the current market environment have continued into fiscal 2009 first quarter, and as a result, will impact our operating results especially in the near term. We hope to see conditions improve as the fiscal year progresses, and at this time, we are targeting earnings per share for fiscal 2009 in the range of $2.62 to $2.74 excluding unusual items, based on our current projections. This range represents an increase of approximately 5 to 10% over fiscal 2008, excluding the one-time tax benefit in fiscal 2008. Finally, assuming market conditions improve, we continue to target our long term growth rate in the range of 12 to 15%.

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

Thank you, Steve. Good morning. Fiscal year 2008 was a successful year for Matthews despite some challenging conditions. As we normally do, at the beginning of fiscal 2008 we developed goals in each of our businesses, with a focus on improving our performance and better positioning our Company for the future.

I am pleased to report that many of those goals were achieved, and represent the basis of our success for 2008. Probably the most significant of those goals was the integration of several acquisitions in our Casket division, and the improvement of the division's profitability and asset utilization. We have met our internal goals in each of these areas, and as proven by the significant reduction in our inventory, and the material improvement of our operating profit as a percent of sales.

We will look forward to having this division continue to improve throughout the coming years. Similarly, three years ago, our Merchandising Solutions business embarked on a facility consolidation program, which was completed early last year. The completion of this effort allowed us to focus on other operational improvements, which were realized in 2008, and resulted in a good performance for this business. Strong Sales and Marketing efforts in our Cremation division allowed us to exceed our internal expectations, and perform in an exceptional level for this business. Finally, our reliable Bronze division continued to perform well, despite challenging economic conditions.

Now moving to next year, we again have laid the plan for continuing to improve all of our businesses, and will measure our success against results of those plans. We recently have taken action to reduce staffing to meet demand in our German graphics operations, and have announced plans for plant consolidation in our Bronze division, which will take advantage of our continued productivity improvement efforts in this division. As you are aware, however, economic conditions throughout the geographies and industries that we serve have begun to deteriorate, starting in the final months of the last quarter. Unfortunately, that trend has accelerated significantly in the first several weeks of this quarter.

The deteriorating economic environment, coupled with rapid declines in commodities and exchange rates, have made it difficult for us to forecast our expected results in the short-term. Our current expectations are that the impact of the economic environment on most of our businesses will not extend throughout the year, and that we will see a trend to more normal levels of performance starting some time in the second quarter. But I must caution you that we cannot be certain. These are our current assumptions, and they form the basis of our fiscal 2009 range of $2.62 to $2.74 per share.

We will be vigilant and proactive wherever possible in an effort to mitigate the impact of the economy, but as we have stated in the past, we are not immune to the economies within which we operate, and we will make decisions in the running of our day-to-day business that are in the long term best interests of our shareholders and the Company.

With that, I would like to open it up for 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 of those who wish to participate in the Q&A session have had an opportunity to do so. Carey?

Thank you. Ladies and Gentlemen, (OPERATOR INSTRUCTIONS). Our first question comes from Bob Labick of CJS Securities.

Good morning. Congratulations on a strong quarter in a tough environment.

Good morning Bob.

I want to start with the Bronze segment. I was hoping you could elaborate a little on the volumes in the quarter, and then once you give us your thoughts on that and that trend, two things that we have been thinking about in terms of next year could be potential, tell us what is happened in the last recession for potential trade down out of Bronze or not in recessions, and then also the timing of raw material costs have come down materially. What is the timing for that to flow through to your margins? Could you just walk us through how to think about all of that?

Bob, that is a lot of questions, but I will try to paraphrase some of them into an answer here. First off, what we have, you need to recognize the various components of our Bronze business. Our Bronze business is made up of our plaque business for cemeteries, but as well there is architectural signage, as well as some discretionary items that can or cannot be decided upon by a cemetary, based on their needs and their economy.

An example is the mausoleums and features and other things of that nature, that are not necessarily at-need expenditures. We have seen some turn down in a lot of that. Similarly, as we have said in the past, the need to raise some of our pricing to accommodate for the rise in commodity prices, has probably caused us to lose some fringe customers, and some fringe decision makers on lower price product.

We are going to use that effort right now with some of the raw material declines, to try to recapture some of that. It may take some time. We have seen a little bit of downturn in our volume but we expect we can recover that over time. Does that answer your question?

Yes. Most of them. And then just if you could give us a sense of the trends of volumes, and also just typically in recessions, you talked about on the discretionary versus non-discretionary, at-need or not, but in terms of the even on the at-need, are there, how is the consumer making the decision during a recession versus not? Have there been trends in the past? I am just trying to get a sense.

We have seen, it is hard for us to recall what occurred in the last recession, but we have seen some trends in our business down, both in terms of mix as well as volume, so we are seeing a little bit of that impact, not that is not any suggestion that there is a material change, but there is a trend down.

Got it. And then raw materials ultimately, do you expect margins to, if you are going to potentially try to recapture some sales, would you expect margins to be similar to this year, above or below given the commodity change?

It is hard for us to predict right now, only because we don't buy at-need for our material costs, but I would expect our margins to probably go down slightly over time, as we try to recapture some of the volume.

Great. I will get back in queue and let other people ask as you requested. Thank you very much.

Thank you. Our next question comes from Sidoti & Company, and the person's name is Jamie Clement. Please go ahead.

Joe, Steve, good morning.

Good morning, Jamie.

Joe, could you just give us a little bit of a sum up on the Casket segment, fiscal 2008, what you guys accomplished, and sort of what kind of the plan is longer term, and just looking out to 2009 to continue to improve those margins to get that business where you want it to be? Because I know you have always laid this out as a multi-year plan, so what did you accomplish last year, and what do you expect to do this year ?

Jamie, thank you. It is part of a multi-year plan, and last year was probably the integration year for a lot of different things. As we started off the year, we told you that we had a number of warehouses that were put up early on. We started to see the benefit of reductions in those warehouses as leases came due, and we were more solidified where our volume was coming from.

We did experience some downturn as we lost a few of the salespeople as a result of the turnover at the Senior Management level that we had, as a resolution of the Milso acquisition employment agreement, but all-in-all it was a pretty successful year in consolidating three acquisitions would occur the year before.

If you looked at our inventories, and we don't disclose this information directly, but on an apples-to-apples basis we are probably close to $11 million reduction in our inventory. We expect that our run rate as a result of that will improve out of our facilities over the course of the year, because as you can tell, we had to sell, that 11 million went to customers we didn't produce, we probably produced in prior years, so we expect our performance out of our plants to get a little better.

We expect our performance out of our warehouses to continue to get a little better, and now we are focusing on trying to get a little bit more sales in an environment that has seen some significant price increases because of commodities. A lot going on there.

Now just on the Casket side again, just in terms of how you guys are distributing your distribution network, I know you mentioned the warehouses and that kind of thing. I mean, do you feel that you are in better position to more efficiently distribute than you were 12 months ago?

We are better, but we are not at our best, is a fair way to put it. About 70% of our volume run through direct distribution, that is more or less a number that we rely on right now. The rest of it runs through independent distributors, Steve corrects me, and says it is about 70 to 75%. And a fair way to say it is, that we are direct distribution East of the Mississippi, most West of the Mississippi are independent distributors. We will continue to work on our footprint on the East of the Mississippi side, as well as start to focus on trying to get some hub-and-spoke systems for distribution as we move forward. So that is a lot of where we expect to see improvement over the coming years.

Okay, guys, thank you very much for your time.

Thanks Jamie.

Thank you. Our next question comes from Great Lakes Reviews, Greg Halter. Please go ahead.

Good morning guys.

Hi, Greg.

Wondered if you could detail your assumptions for fiscal '09 that are embedded in the 2.62 to $2.72 EPS forecast, for both the tax rate and foreign exchange or foreign currency.

The tax rate fortunately because of some favorable tax rate changes in Europe, we think our tax rate, we are projecting it somewhere in the 36.5-ish range, and foreign currencies we are projecting those to hold where they are today.

Okay.

It is significantly down from where it was last year.

Right. And one other quick one relative to the raw materials, steel, and wood, and all of the other things you use, I know there has been large declines at least in the commodity markets, it takes a while for that to flow through to guys like you, including on the Bronze side, wondering what you are seeing currently in that regard, and how you would envision that for fiscal '09?

Greg, where we generally have never bought out for the month. We always bought out beyond that, and we have been opportunistic in the past. Unfortunately the opportunistic buying that looked good several months ago on the bronze and steel side, don't look so great today. So as a result, we will work through our inventory.

Ultimately the decline in the commodities will be beneficial to us and to our customers as we move forward, but the timing of that is difficult for us to tell, and whether or not it will be available when we need it. One of the things that we have seen is a reluctance on some of our bronze smelters to adjust their rate too far in advance.

We might be able to do some spot buys, but lack of a willingness to sell longer term at these prices is not something they are real happy about doing, so they are slow to adjust. We have not seen a lot of change on the wood side up or down frankly, so we don't think that that is a material change either way. And steel, once again, we are not a large buyer of steel when you look at the automobile industry, or some of the appliance industries, so we don't have the power to wield some influence over that, and you know as well as I do what you read in the steel industry is some contraction in capacities at various mills across the country, will that be enough to curtail the decline in pricing when we need the products? It is hard to tell, Greg, but assuming everything stays the same it is favorable. We just are in a difficult position to predict that frankly.

And that buying out ahead, will you say that it is two months, three months, seven months? Any kind of estimate there?

It is various on different products, and we have been in a situation in the past Greg, where I am not trying to avoid your question, but we have been in situations in the past where we have bought out ahead, especially on steel, and had our suppliers come back and say they don't have that product available anymore.

Okay.

And if you want steel, it is at a new price.

Yes, thanks.

Thank you. And our next question comes from Davenport, Clint Fendley.

Good morning Joe and Steve.

Good morning, Clint.

A question on the consolidation of the production operations here. I wondered if you could speak to the timing that you are expecting, and also the longer term margin implications here of this decision?

On which one?

On the two --

Are you saying Bronze? I am sorry I missed the beginning part of that.

Yes.

The timing we are expecting that to occur throughout fiscal 2009, and the reason for that, first off, this is as we call it our work horse, the Bronze division is a very important business for us and they are all custom products, so we will not make a mistake, Clint, I know you are new to us, when we went through the Mexican facility, we will satisfy our customer first, and ultimately achieve our long term financial goals, but we think that will take better course of this year, and maybe a little bit into next year as we do that.

Okay, so as far as the margin implications probably something we wouldn't expect much of a change in until 2010?

Next year. Yes, 2010 is probably a fair assumption assuming everything goes well, but once again, to caution you, we will not want to make any mistakes here.

Okay, and one final question on the Cremation side, you guys did much better than we had expected in the quarter. You mentioned that part of the upside in the operating margin was due to cost savings here. How sustainable do you expect these margins to be as we head into '09?

Well, it is going to be interesting to tell, because steel is a large component of our Cremation division, and the ability to buyout is going to be an issue there. We expect 20% is probably a little high for that industry, but it was a good year this year, we have got some good things going on down there, we are hoping that would continue but I would adjust that down to the mid to high teens.

Okay, great. Thank you guys.

Thank you. And our next question comes from Emerald Advisers, Scott Blumenthal, please go ahead.

Good morning Steve, good morning Joe.

Good morning, Scott.

Steve, you talked about your improvements in manufacturing and distribution infrastructure, then you went on to talk about share repurchases so on and so forth, and I noticed the crash flow from operations year-over-year kind of reflected the economic conditions. Can you talk about your priorities for cash? I know you still have the million share outstanding buyback, you have got a little bit more debt, how you are going to manage that especially over the next couple quarters, as the economic conditions dictate?

Scott, that is a good question, and we are mindful of the economic conditions. We certainly are keeping close tabs in terms of customer collections if you will, for example, in managing our cash flow, but I would tell you that based on our projections, based on what we see for the coming year, I don't think our priorities have changed, other than we will be in the short-term, just by necessity we will be a little bit careful and guarded with our cash flow.

But our priorities again with respect to share repurchases, debt repayments, or seeing right opportunity to invest those in businesses, if I have to put those in order I would tell you that the investment in businesses will always be our first priority if we see the right opportunity for them, but these are different times, and as we see opportunities from a share repurchase standpoint, our program is as we have defined in the past an opportunistic one, and again debt repayments are certainly on the radar.

Okay, I guess lucky for us investors that you haven't had as good an opportunity as most other companies to repurchase your shares.

(laughter). That is one way to look at it.

I guess my other question then would be can you talk about the magnitude, Joe, the magnitude of the contribution that you expect from Saueressig, and I am going to try and fold another question in there, also the credit condition if you are seeing any issues with any of your customers with regard to their ability to pay?

Scott, let me take the credit conditions first, and I will let Joe speak to the Saueressig question. Are we seeing significant credit issues at this point in time? No, we are not. What we do see though, and it is not to be unexpected, we certainly see some slowdown in the pattern of payments, but it hasn't been material at this point in time. We haven't seen any material defaults if you will, but certainly, I think I would be misleading to say we haven't seen some slowdown but it is not material, but again, it gets back to my point that we certainly from a cash flow management perspective will want to stay guarded.

Okay.

With regard to Saueressig, Scott, when we do acquisitions, we generally look for profitable businesses. This was a profitable business when we bought it, as we did our due diligence and confirmed that for the prior years before that. Unfortunately timing is everything and we did acquire this right at the beginning of what appears to be a recession in Germany, and we are taking steps to the extent we can. We are in an environment which is a German union environment, which is not quite as flexible as it is in the US, so that is one of the issues that we have about, we expect it to be profitable, we are trying to take all of the steps we can, but when we have talked about the geography, that is a significant geography for us right now with Germany being a large part of our graphics business.

So how positive, Scott, it's hard for me to tell you but I can tell you that it's not, it was not a 15% operator when we bought them, but it was in the high-single digits when we expect that kind of performance if it's not today, soon.

Okay, Joe, that is really helpful, thank you.

Thank you. Our next question comes from CJS Securities, Bob Labick. Please go ahead.

Hi, thank you. Just wanted to continue down talking about the Graphics Imaging. If you could talk about just the outlook there obviously given the economy, and by geography a little bit, and also any packaging rule changes on the horizon over the next 12 to 24, months which would tend to benefit your operations in that regard, things for us to look out for?

Sure, Bob. Ironically our footprint is strongest in the US, UK, and in Germany, the three largest economies in the world that are having the most important problems that we see right now, so we have not lost customers as much as we have lost timing of projects. There has been a push-out, that we can see today of projects of when they will start, and the size of projects have been cut back, so we do have some variability in that.

I don't think this can be a permanent adjustment. I think at times when the economy turns around in those areas it will get better, so that is what we are seeing, and the other part of your question I'm sorry, I forgot.

Sure just packaging change rules I believe something to do with cigarettes?

Yes, we talked about that in the last couple of conference calls, the cigarette rule in Europe I believe is to be implemented some time by the end of 2010. Earlier discussions with our tobacco customers, we are expecting that to be rolling out soon. I have to tell you that slowed down those kind of discussions. There is no great urgency on their part. Capacity is available on our side, and I think that just puts it out for cash reasons.

Got it. Okay, thank you very much.

Thank you. Our next question comes from Great Lakes Review, Greg Halter. Please go ahead, sir.

Yes, thank you again. On the Accounts Receivable side, I know you mentioned that there was an increase there obviously, and Saueressig had something to do with it, but if you could parse that out on a relative basis, how much the increase was due to acquisitions, that would be helpful?

Almost all of it.

Oh, okay.

That was easy.

Yes. And on the capital spending side, 12 million in fiscal '08 versus about almost 21 in '07, obviously a decline there, wonder if you could comment on that first, and then secondarily, what you expect for fiscal '09?

We expect fiscal '09 to be in that $20 million plus range. I think what you saw in fiscal 2008 was a bit interesting, as the economy got a little bit tighter, our businesses tend to get conservative in their spending, and don't necessarily distinguish between what is the expense line, and what is the capital line, so I think we saw a little bit of that creep into this fiscal year, plus I would tell you that next year, part of the makeup of that $20-plus million number is probably some normal spending that we will see out of our latest acquisition Saueressig, and there was really not much capital spending to speak of from that group during this fiscal year since this acquisition date.

Okay, and one last one. Depreciation and amortization for the full year '09 with the full Saueressig in there on the amortization side, I guess their own depreciation, what would you envision there, obviously higher than the 25 million you had for '08?

It will be higher than the 25 million, and it will be closer to the $30 million mark.

Okay, thank you.

Thank you. We have a question from Sidoti & Company, Jamie Clement.

Yes, hi, Joe, Steve again. Just a question of clarification. I think Joe, you were saying, or it almost seemed like you were implying that Saueressig was not profitable. I thought, I think what maybe you meant to say was wanted to ask about that was it was not accretive to your EPS, but it sounds like it is in fact profitable and might just be, maybe it is the intangible amortization of the incremental interest expense, but on a standalone basis it is generating cash right?

Oh, yes, for sure, Jamie.

Yes, Jamie in fact from an EBITDA perspective, it generated about a $4 million EBITDA for the year. For the five months.

And Steve, what is the full quarter incremental intangible charge related to Saueressig? Because it was only a partial in June, and now you have the full quarter, so do you know what that number is off the top of your head?

I apologize, Jamie, I don't know that number off the top of my head.

Okay, thank you all very much.

You are welcome.

Thank you. We have no more questions in queue. Please continue.

Well, thank you.

We would like to thank all of the participants in the conference call this morning, and we certainly look forward to our conference call at the end of the fiscal 2009 first quarter, which will be held in late January. Thank you again, and have a good morning.

Thank you. Ladies and gentlemen, this conference will be available for replay after 12 p.m. Eastern Time today through Midnight November 27, 2008. You may access the AT&T replay system any time by dialing 320-365-3844, entering the access code 967430.

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