Matthews International Corp (MATW) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Matthews International second quarter financial results conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Steve Nicola.

Please go ahead.

Thank you, Linda.

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're conducting the call to comply with Securities & 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 994803.

The replay will be available until 11:59 p.m.

May 7, 2009.

We have posted on our website, which is www.MATW.com, the second quarter earnings release and financial information we will discuss this morning.

In the left column of our home page under Investor Relations, you can click on Investor News to access the earnings release or click on Reports to access the quarterly financial data.

The financial data is presented under the heading Preliminary Quarterly Reports in a PDF file format.

Before beginning the discussion, at the advice of our legal counsel, I have been advised to read the following disclaimer as it pertains to forward-looking statements.

Any forward-looking statements in connection with this discussion are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results and 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 information provided today are preliminary data since our quarterly report on Form 10-Q for the period ended March 31, 2009, will not be filed with the SEC until the week of May 4, 2009.

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 March 31, 2009, the Company reported earnings of $0.42 per share.

Earnings for the second quarter included unusual charges of $0.11 per share, which primarily consisted of costs related to the consolidation of certain production operations within the Company's Bronze segment, severance costs in connection with cost structure initiatives and other segments, and asset adjustments resulting from current market conditions.

In addition, changes in the values of foreign currencies relative to the U.S.

dollar had an unfavorable impact of approximately $0.02 per share in the current quarter compared to the second quarter last year.

Earnings per share for the second quarter last year were $0.65 per share.

For the six months ended March 31, 2009, the Company reported earnings of $0.79 per share.

Year-to-date earnings included unusual charges of $0.25 per share, which primarily consisted of severance and other costs related to the consolidation of certain production operations within the Company's Bronze segment, severance costs in connection with the cost structure initiatives in other segments, and asset adjustments resulting from current market conditions.

In addition, current year earnings included a one-time benefit of $0.03 per share, which was recorded in the fiscal 2009 first quarter related to a favorable adjustment in income tax expense.

This adjustment related to the Company's ability to utilize a European tax loss carryover, which was generated in prior years.

Also, changes in the values of foreign currencies relative to the U.S.

dollar had an unfavorable impact of approximately $0.03 per share in the current year compared to the first six months last year.

Earnings per share for the first six months of last fiscal year were $1.21 per share and included a one-time tax benefit of $0.06 per share related to a favorable adjustment in income tax expense, which was recorded in the fiscal 2008 first quarter.

As a result of tax rate changes in Europe, an adjustment to the corresponding deferred income taxes was required under U.S.

accounting rules.

Consolidated sales for the second quarter of fiscal 2009 were $197 million compared to $198 million for the same quarter a year ago.

Consolidated sales for the first six months of fiscal 2009 were $389 million compared to $380 million last year.

Sales for the current year reflected the acquisition in the Company's Graphics Imaging segment of Saueressig GmbH & Co.

KG in May 2008.

Excluding the impact of this acquisition, sales were lower than a year ago for the quarter and year-to-date periods, basically reflecting the impact of the recession.

Saueressig reported sales of $25 million and $50 million for the quarter and six months ended March 31, 2009, respectively.

In addition, changes in the values of foreign currencies against the U.S.

dollar unfavorably affected sales by approximately $9 million for the fiscal 2009 second quarter and $14 million year-to-date compared to the same periods a year ago.

In our Memorialization businesses, sales for the Bronze segment were approximately $53 million for the second quarter compared to $61 million last year.

On a year-to-date basis, Bronze segment sales were $102 million through March 31, 2009, compared to $115 million last year.

Lower unit volume was the principal factor in the sales decline.

Currency rate changes also had an unfavorable impact of approximately $3 million and $5 million on Bronze segment sales for the second quarter and year-to-date periods, respectively, compared to a year ago.

Sales for our Casket segment were $55 million for the current quarter compared to $61 million a year ago.

Year-to-date Casket segment sales were approximately $108 million compared to $117 million last year.

A decline in unit volume and a lower product mix have unfavorably impacted sales.

In addition, a decline in the death rate in many of our markets contributed to the reduction in sales in both the Bronze and Casket segments.

Second quarter sales for the Cremation segment were $8 million compared to $6.4 million for the same period last year.

Year-to-date sales for this segment were $14.3 million compared to $12.8 million last year.

The acquisition of a small European cremation equipment manufacturer in the fiscal 2009 first quarter was the principal factor in the year-over-year sales increase.

In our Brand Solutions group, sales for the Graphics Imaging segment were $56 million in the fiscal 2009 second quarter compared to $39 million a year ago.

The increase resulted from the acquisition of Saueressig, which reported sales of $25 million for the current quarter.

Year-to-date sales for the Graphics Imaging segment were $113 million compared to $74 million for the first six months last year.

Excluding the Saueressig acquisition, sales declined from a year ago primarily reflecting lower volume as a result of the current recession.

Currency rate changes also had an unfavorable impact of approximately $5 million and $8 million on Graphics Imaging sales for the second quarter and year-to-date periods, respectively, compared to a year ago.

The Marketing Products segment reported sales of slightly under $10 million for the current quarter compared to almost $15 million in the same quarter last year.

For the first six months of the current fiscal year, sales for the Marketing Products segment were $21 million compared to approximately $30 million last year.

Of the Company's businesses, this segment continues to be the most economically sensitive as a result of lower industrial capital spending and a decline in the sales of consumables.

Sales for our Merchandising Solutions segment were $16.5 million for the fiscal 2009 second quarter compared to $15.6 million a year ago.

Year-to-date sales for this segment approximated $30 million compared to $32 million last year.

An increase in the freight component of several projects was a significant factor in the sales increase for the current quarter.

The decline in year-to-date sales is a reflection of the impact of the current economy on merchandising spending.

Looking forward, project order rates in this business remain soft.

Consolidated operating profit for the quarter ended March 31, 2009, was $23.4 million compared to $34.4 million for the same quarter a year ago.

Operating profit for the fiscal 2009 second quarter included approximately $4.9 million of unusual charges.

In addition, changes in foreign currency values against the U.S.

dollar had an unfavorable impact of $1.1 million on second quarter operating profit compared to the same quarter a year ago.

As I noted earlier, unusual charges for the current quarter primarily consisted of costs related to the consolidation of certain production operations within our Bronze segment, severance costs in connection with cost structure initiatives in other segments, and asset adjustments resulting from current market conditions.

Asset adjustments that affected operating profit primarily included charges to bad debt expense.

Under the Company's accounting policies, we generally provide a reserve for outstanding accounts receivable that exceed certain aging thresholds.

It is important to note, however, that while the additional aging is a reflection of the current market environment, the Company to date has not yet seen a corresponding increase to the same degree in actual uncollectible accounts.

In addition, consistent with the first quarter, unusual charges also included one-time costs related to the integration of the Saueressig acquisition and the Company's expansion of the SAP system into certain of its other business segments.

In our Memorialization businesses, the Bronze segment reported operating profit of $12.2 million for the fiscal 2009 second quarter compared to $16.9 million a year ago.

The decline in operating profit reflected lower sales for the period.

In addition, unusual charges of $2.2 million were recorded in the current quarter primarily representing costs and asset impairment charges in connection with the consolidation of certain production operations.

Year-to-date operating profit for the Bronze segment was $21.5 million as of March 31, 2009, compared to approximately $30 million last year.

Unusual charges for the first six months of this year totaled $5.5 million for the Bronze segment.

Operating profit for the Casket segment was $5.4 million for the fiscal 2009 second quarter compared to $7.7 million a year ago.

Lower sales and an increase in the segment's bad debt reserve contributed to the decline in operating profit from the second quarter last year.

Unusual charges for the Casket segment during the current quarter were approximately $1.5 million, mainly consisting of the increase in the segment's bad debt reserve.

Casket segment operating profit for the six months ended March 31, 2009, was $11.8 million compared to $14.8 million last year.

Year-to-date operating profit for the Casket segment included unusual charges of approximately $2.5 million.

The Cremation segment reported operating profit of $1.3 million for the fiscal 2009 second quarter, which was relatively unchanged from a year ago.

On a year-to-date basis, operating profit for the Cremation division was $2.1 million compared to $2.4 million last year.

Excluding the impact of the acquisition of a small European equipment manufacturer, lower product mix and higher material costs were the principal factors impacting operating results for the current quarter.

In the Brand Solutions group, the Graphics Imaging segment reported operating profit of $3.1 million for the quarter ended March 31, 2009, compared to $4.7 million a year ago.

For the first six months of fiscal 2009, the Graphics Imaging segment reported operating profit of $5.7 million compared to $7.5 million last year.

The decline in operating profit reflected lower sales and the impact of unusual charges of approximately $900,000 for the second quarter and $1.8 million year-to-date.

Unusual items mainly included severance charges and costs incurred in connection with the integration of Saueressig.

These declines were partially offset by a small operating profit reported by Saueressig for the current quarter and year-to-date periods.

The Merchandising Solutions segment reported operating profit of $977,000 for the fiscal 2009 second quarter compared to $1.4 million in the same quarter last year.

Year-to-date, the Merchandising Solutions segment reported operating profit of $1.3 million compared to approximately $3 million last year.

Reduced operating margins due to a higher freight component of sales, which is basically a pass-through cost, in the second quarter and lower first quarter sales were the main factors in the reductions in operating profit from the comparable periods last year.

In addition, unusual charges for the segment, which were incurred in connection with employee terminations, approximated $150,000 for the current quarter and $300,000 year-to-date.

Operating profit for the Marketing Products segment was $374,000 for the quarter ended March 31, 2009, compared to $2.3 million a year ago.

For the first half of fiscal 2009, the Marketing Products segment reported operating profit of $1 million compared to $3.7 million last year.

The decline in operating profit from last year resulted principally from lower sales.

Year-to-date, unusual charges for the segment were approximately $500,000, which principally consisted of severance costs incurred in the first quarter as a result of the segment's cost structure initiatives.

Sales and operating income by segment for the quarter and year-to-date periods are posted on our website.

We have also posted estimated unusual charges by segment for your reference.

Our fiscal 2009 second quarter consolidated operating margin was 11.9% of sales.

Unusual charges included in operating profit for the current quarter were approximately $4.9 million, or 2.5% of sales.

Our consolidated operating margin was 17.4% in the second quarter last year.

For the first six months of fiscal 2009, our consolidated operating margin was 11.2% of sales compared to 16.1% of sales last year.

Unusual charges included in operating profit for the first six months of this fiscal year totaled $10.7 million, or 2.8% of sales.

Gross margin for the quarter ended March 31, 2009, was 37% of sales compared to 40.6% for the same period a year ago.

Year-to-date gross margin for fiscal 2009 was 36.3% of sales compared to 40% last year.

The decline resulted from lower sales excluding the Saueressig acquisition, and unusual charges.

In addition, the current gross margin percentage for Saueressig is lower than the average for the Company.

Selling and administrative expense for the current quarter was 25.2% of sales compared to 23.2% of sales in the same quarter last year.

SG&A expense for the first six months of the current fiscal year was 25.1% of sales compared to 23.9% of sales a year ago.

Lower sales and the impact of unusual charges were the principal factors in the increase in the percentage of SG&A costs relative to sales.

For the fiscal 2009 second quarter, investments generated a net loss of $307,000 compared to income of $491,000 for the same period a year ago.

Year-to-date investments generated a net loss of $695,000 compared to income of $1 million last year.

Unusual charges for the current fiscal year included mark-to-market asset adjustments of approximately $400,000 and $1.2 million for the second quarter and year-to-date periods, respectively, representing unrealized losses in the value of investments held in long-term trusts for certain employee benefit plans.

Under the Company's accounting policies, unrealized gains and losses on these investments are recorded through the income statement.

Interest expense for the current quarter was $3 million compared to $1.9 million for the same period a year ago.

For the first six months, interest expense was $6.3 million in fiscal 2009 compared to $4 million last year.

The increase in interest costs resulted primarily from a higher level of debt as a result of the acquisition of Saueressig.

Minority interest deduction approximated $100,000 for the current quarter and year-to-date periods compared to a deduction of $715,000 and $1.3 million, respectively, for the same periods a year ago.

At the end of fiscal 2008, the Company purchased the remaining interest in one of its German companies which, was the primary reason for the decline in the deduction from a year ago.

The year-to-date fiscal 2009 effective income tax rate was 34% of pretax income.

Excluding the favorable impact of a one-time first quarter adjustment that I mentioned earlier, our year-to-date fiscal 2009 effective tax rate was 36.6%.

Excluding the one-time favorable adjustment from income tax expense a year ago, the effective tax rate for the fiscal year ended September 30th, 2008, was 36.2%.

At March 31, 2009, the consolidated cash and investment balance was approximately $61 million compared to $60 million at September 30, 2008.

Our current ratio was 2.1 at March 31, 2009, and 1.9 at September 30, 2008.

Our outstanding accounts receivable balance at March 31, 2009, was approximately $129 million, which represented 59 day sales outstanding.

Outstanding accounts receivable at September 30, 2008, approximated $145 million, which represented 60 day sales outstanding.

At March 31, 2009, consolidated inventories totaled approximately $95 million compared to $96 million at September 30, 2008.

At March 31, 2009, the Company had approximately 30,480,000 shares outstanding.

During the first six months of fiscal 2009, the Company purchased approximately 615,000 shares under its share repurchase program at a repurchase cost of approximately $23 million.

At March 31, 2009, approximately 400,000 shares remained under the current repurchase authorization.

Our long-term debt balance at March 31, 2009, both current and long-term portions, approximated $259 million.

$191million 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 six months ended March 31, 2009, were $8.9 million and $15.9 million, respectively.

Capital expenditures for the same periods were $3.5 million and $6.6 million, respectively.

Last month, we provided an update to our earnings guidance for the year, basically to reflect the impact of the current economic conditions both in the United States and overseas.

As we pointed out, the severity of this recession has impacted all of our businesses, including our Memorialization segments, which has changed the buying patterns of many of our customers and affected unit volumes and product mix.

It is our current expectation that these conditions will continue, at least through the remainder of this fiscal year.

During this downturn, our business leaders are taking actions to adjust the cost structures of their operations to the degree practical to reflect current revenue run rates.

These actions are reflected in many of the unusual charges incurred this year.

We're continuing to evaluate further actions on an ongoing basis and for this reason, expect additional unusual charges.

As a result of the actions that we have taken to date, and plan to take, combined with a decline in commodity costs such as copper, steel and fuel, we are maintaining our updated guidance at this time.

This guidance projects only a modest decline, less than 8%, in profitability from fiscal 2008, which equates to an earnings per share target of $2.30 per share for the current year, excluding unusual items.

In addition, because of the cost structure initiatives taken to date, we have a reasonable degree of confidence that we can return closer to our fiscal 2008 profitability run rates if economic conditions improve and favorably impact our unit volumes and product mix.

Finally, we continue to believe our actions have put the Company in a good position to achieve our long-term growth objectives as the economy improves.

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

Thank you, Steve.

Good morning.

As we stated last quarter in our revised guidance, which we issued a few weeks ago, fiscal 2009 continues to be a difficult year for all of our businesses.

A decline in the death rate, mixed degradation, deferrals and cremation continue to challenge the sales volume of our Memorialization businesses.

Additionally, slowing promotional activity and cancellations of new product launches have impacted our Packaging Graphics and Merchandising Solutions businesses.

And lastly, tight capital spending and slow manufacturing activity by customers of our Marketing Products division made for challenges in that division.

All in all, each of our businesses have felt the impact of this recession.

We are, however, not sitting on our hands.

As you can see by the restructuring charges cited by Steve, we're active in reducing costs in each of our businesses to match our costs to reduce levels of volume.

Our plant closure in our Bronze division will soon be completed, and we expect to start to see some of the benefits of that closure later this year.

We continue to look for opportunities to improve productivity and better differentiate our products through merchandising programs and product launches, but these programs will take time to have an impact on our results.

Looking forward to the balance of the year, recent volume levels have caused us to revise our guidance several weeks ago.

As we stand today,we feel comfortable with that guidance to the extent our volumes remain constant at current levels.

However, I must caution that our visibility with regard to revenues continues to be limited, and the impact of unanticipated drops in revenue would have an effect on our results.

Having said that, however, our actions to improve productivity and control our costs would have a positive effect on our operating results should volume return to the more normalized levels that we're used to.

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.

(Operator Instructions).

We do have a question from the line of Bob Labick with CJS Securities.

Please go ahead.

Good morning.

Hi, Bob.

I wanted to start out on the Bronze division, and I was hoping you could give us a little more detail about the actions you're taking for the restructuring, the timing, and the expected impact to the extent, how much utilization should change or how much capacity you're taking out and where utilization will go and what we can expect in terms of some type of recovery in margin in the out years or how are you looking at it on a cost benefit analysis as well?

Sure.

Let's talk a little bit about -- there is a lot of questions in there, Bob, so we'll try.

It was one question.

Okay.

Essentially, where we are with the Bronze closure, as you recall, we had a facility in West Virginia and Searcy, Arkansas, as well as here in Pittsburgh, and Seneca Falls.

We have chosen to shut down our West Virginia facility.

The closure of that facility from a production facility will be completed sometime in the next several weeks, what we would call the last pour.

We're ramping up our other facilities as we talk right now.

We've had the impact of multiple facilities running at inefficient levels so far, so we'll start to see that a little better here by the end of the quarter in terms of profitability as we go forward, but I have to be frank with you, we continue to look for other opportunities within that mix.

Whether we need one facility more or whether we need to look at alternative sources for manufacturing, alternative sites, excuse me, is a priority for us at this time, Bob.

Okay, and in terms of the top line, you mentioned obviously the death rate and FX as impacts, and I don't think you can control either of those.

Are there any actions you can take to impact the top line or volumes in this business?

Sure.

What we're doing at this point in time is having to become a little bit more aggressive with customers trying to get more volume from them and prices that maybe historically, we may not have wanted to do, so we are becoming more aggressive in the marketplace, at least things don't turnover quickly, but these accounts have not been our accounts in some cases for a long time, and having to transition them through will take some time, but expect us to be a little more aggressive out there.

Great.

I will get back in queue and ask some more in a minute.

Thank you.

Next, we have a question from the line of Jamie Clement with Sidoti.

Please go ahead.

Hey.

Good morning.

Good morning, Jamie.

Joe and Steve, I don't know if there is any way of really isolating this number, but if you look at the quarter year-over-year revenue declines in your Memorialization business, and you look at, for example, like the CDC data our there for the first quarter, do you think that whatever the decline in the mortality rate was, do you think that's like a one for one decline in your revenue from in those two business lines?

It is hard to say, Jamie, because we do look at the CPC data, and obviously you have as well.

Mortality rates are different in different parts of the country and where our product is shipped to.

A perfect example is our Casket business.

We sell pretty heavily into the Northeast part of the United States, and as a result, if you see data, it is a different number than you saw.

We're in the high single digits in terms of changes at year-over-year in death rates.

We do think there is probably some impact also by cremation and lower cost solutions than our customers they have out there, so it is hard to isolate a one for one, but I would say there is a pretty high correlation.

Okay.

And Joe, just a follow-up there.

One of the things we're seeing kind of across the economy is from manufacturing companies and that sort of thing is that their customers and distributors and that kind of thing, there's been a massive inventory correction across the economy.

Is that something that to the extent the areas of the country where you sell through distributors, have they, in your opinion, corrected their inventories and, yes, anyway, that's the question.

There's two sides to that, Jamie.

Frankly, yes, several of our distributors, especially our largest distributor has in fact adjusted his inventory levels.

His payment terms like our payment terms have been stretched by the customers, not seeing default, so he is a little tighter with his inventory.

The real question is going to be whether he is able to continue to operate long-term at these lower levels.

So, will we get a return to a higher inventory level, hard for us to tell.

We'll probably get to a more normalized run rate level as we move forward.

And then, changing gears, same kind of question, the areas of the country where you self-distribute, some of your competitors are going to be distributors in those markets, and particularly, I assume, in the lower price point kind of area.

Exactly.

There has been some discussion that there may be some inventory dumping going on at the lower price points.

Do you have any kind of insight or thoughts on that?

In fact, that's exactly what we see, Jamie, is what part of the mix degradation that we're talking about has been a move to maybe a lower cost, lower price, lower quality, local suppliers who are just -- they're a hodgepodge of collection of providers everywhere from the United States to overseas, and as a result, in this difficult time, sometimes people are looking for a cheaper product.

Our funeral director who is typically accustomed to our quality and our delivery service may be forced to look for an alternative.

Okay.

And, Joe, to attempt to find a silver lining in all of this, correct me if I'm wrong, but this industry is not one where distributors are carrying enormous amounts of inventory, and is it possible that the stretch we saw here in the March quarter and maybe what you're seeing right now is really a correction in that normal order flows will start up again?

Yes.

I would love -- it is a nice one for me to answer, but I don't have an answer on that.

I would like to say yes, but if I do, I am just not certain of that.

Okay, okay.

Great.

Thanks very much for your time.

Next we have a question from the line of Liam Burke from Janney Montgomery Scott.

Good morning, Joe.

Morning, Steve.

Good morning, Liam.

You mentioned the tradedown on caskets for the funeral directors as the economy softens and people looking to save money.

I know have you a lower cost alternative.

How does that fit in in the margin mix compared to your higher priced product line on the casket?

Well, Liam, we have, in fact, come out with lower product line for exactly that purpose.

We're recovering some of the volume, and the margin is still good, but the reality is it is not the same margin dollars, so we're responding as appropriate here.

We prefer not to go that route, but I think we have to at least in the short run here.

Okay.

Now, on the cremation side, I know it is a really, really small part of the Memorialization business, so what costs or what material costs were up so much that it would hold back your operating profit?

It is steel.

It is the flow through of steel.

We're seeing the impact of it now.

We expect that over the course of the balance of the year we'll get more adjusted to what current steel rates are.

Great.

Thank you very much.

You're welcome.

Next, we have a question from the line of [Clint Finley] with Davenport.

Please go ahead.

Good morning, Joe and Steve.

Good morning, Clint.

I know you guys have spoken recently about deferrals both within the memorialization and the brand segments.

Within Memorial, how long might we expect the customer to be able to defer some of these purchases here?

I would tell you that in fact, Steven and I were talking about that this morning.

Typically, we would see a six to eight-week deferral in a normal course of business where people would -- a death would occur before they ordered a memorial.

We can't tell you the answer how long they're actually deferring, but it seems clear to us they're deferring beyond that.

And any thoughts on the branding side?

Branding, we talked about deferrals.

Especially when you look at our Packaging Graphics and our Bronze Solution business or our Merchandising Solutions businesses, we have projects that are sitting around and we're waiting for a yes/no, and especially in Merchandising Solutions, we'll have a yes one week and it gets canceled the week after.

It is a very difficult time in that business, and in the Packaging Graphics side, we have talked about some repackaging in our European businesses for the tobacco industry.

It has to happen and it's going to occur.

How big that is going to be is really questionable right now because they continue to put that off.

We're seeing bits and pieces of it.

It needs to be in place sometime I think by 2011, so there is some work to come there.

Projects also that when we talk about projects side, Clint, is if you take a look at our Saueressig acquisition, part of their business is an engineering business, it's a small part, but it is a part of it, and it has been historically a significant contributor to the profitability of that business.

That's a capital good.

And that capital good has really dried up right now.

Now, do we have products people want?

We do.

We have a lot of interest, but nobody is pulling the trigger.

That's very helpful.

When would you expect to see, as far as an operating margin basis, some of the benefits of the restructuring within the Graphics Imaging segment?

Probably the latter part of this year we'll start to see it.

We're seeing it already.

Unfortunately, we see it in the curtailment of some of the difficult locations we have, but we'll start to see benefits -- last month we saw it at Saueressig.

We'll continue to see it going forward, and assuming volume remains where it is or if not better, we'll see a definite improvement.

Great.

Thank you, guys.

You're welcome.

Next, we have a question from the line of [Adam Hamel] with Gates Capital Management.

Please go ahead.

Yes, hi.

From your guidance, it looks like you guys need some sequential operating profit improvement in the second half to meet those targets.

Can you talk about where you get the confidence you're going to meet those goals?

I'll let Steve answer that.

Well, typically from a seasonality standpoint, we do see an uptick in our earnings in the third and fourth quarters, particularly relative to the first quarter, and we do see to some degree those seasonal patterns continuing.

The second element to the confidence in our guidance, if you will, is that we do have lower commodity costs going into the second half of the year relative to the first half of this fiscal year and the second half of last year.

Okay.

And it is not the restructuring kind of flowing through your P&L?

No, that's a piece of it also.

That's also a piece.

And would second half restructuring be greater or similar to the first half?

In terms of total costs associated?

Yes.

No.

So it will be less?

Okay.

We'll still have some, but nowhere near to the extent that we've had so far.

Okay.

Thank you.

You're welcome.

Next, we have a question from the line of Greg Halter with Great Lakes Review.

Please go ahead.

Hello.

Good morning, guys.

Good morning, Greg.

Steve, I don't know if you mentioned it, but did you break out the costs on the restructuring, the $4.9 million between cost of goods sold and SG&A?

No, and I apologize.

I don't have that number handy.

Okay.

And I noticed on a year-over-year basis, and I realize that Saueressig has some influence here, that both your inventories and receivables were up on a year-over-year basis, although I think they were both down -- inventory was down sequentially, receivables up, wondered if you could comment on those excluding Saueressig and what your thoughts are, where you would like to be going forward?

Well, we continue -- first off, let me comment on where they are relative to a year ago.

Excluding Saueressig, the receivable number is higher -- in the higher aging categories than where we want it to be, as you can tell by the unusual charges that we have, but we continue to be okay in the more current categories, and that's reflected in the overall day sales outstanding, and from an inventory standpoint, we do expect or we do continue to expect to look for ways to reduce inventory levels, particularly in our Casket segment as we continue to work on our distribution infrastructure, so our expectation is for those numbers to continue to improve relative to historical levels.

However, in the current recessionary environment, that's also a little difficult to predict.

Okay.

And one last one, given spending, I think $6.6 million so far in capital expenditures and so forth.

Just wonder what your plans are for the full year now?

The full year, our plan for the full year still hasn't changed.

We're still expecting somewhere in the $15 million, $16 million range.

Even though we're not trending to that pattern right now, we do have some spending that occurs in some of the early summer months with some seasonal shutdowns of some of our operations, and in addition to that, we do have a ongoing SAP expansion project, which will result in some capital spending also this fiscal year.

Okay.

Thanks.

You're welcome.

Next, we have a question from the line of Scott Blumenthal with Emerald Advisors.

Please go ahead.

Good morning, Steve.

Good morning, Joe.

Hi, Scott.

Gentlemen, you just spoke to Greg a little bit about the inventory levels in the self-distribution caskets.

Could you talk a little bit about -- I know a couple of years ago or eighteen months ago or so when we were deep into this project, you had numerous facilities that, I guess, you characterize as being temporary until you could gauge what the demand is and then kind of, boom, right in the middle of that, we were hit with this economic situation.

Are you able to get a gauge on how much of that you -- you're going to stick with and how much you think of that you can take out or maybe give us an idea of how far you are through that or can you even make an assessment on that right now?

Sure.

Give you an idea, Scott, we -- if you looked at our inventory on an apples-to-apples basis, we continue to reduce our inventory.

The reality is that metal costs have significantly increased the values of our inventory right now.

If you look at fiscal 2008, correct me if I'm wrong, Steve, I think we took about $10 million out of the casket inventory.

Now, that was the low hanging fruit.

We'll continue to take some out.

If I were looking on an apples-to-apples basis, we'll probably end up at about a unit level that would be equivalent to another couple of million going out this year and we'll continue to reduce that inventory to a more reliable level over the next several years.

So, I would tell you that we're probably 60% to 65% of the way through at this point.

The key has been with raw material going where it went, our inventory values went up.

Okay.

And so, if you were to look then right now, Joe, at the composition, and I guess Steve, you can chime in here if you need to help, the composition of the inventory now, are we kind of wood heavy or are we metal heavy at this point?

We're probably -- when we talk about heavy, you're talking about value, we're probably heavy on the metal side only because of where metal prices have gone year-over-year.

Okay.

And, Steve, with regard just to steel inventory since you mentioned getting some benefit from lower steel, lower copper, just focusing then on steel inventories, how often do you turn steel and kind of what are your minimum purchase requirements when dealing with your suppliers?

Well, of the minimum purchase requirements are really governed by the steel companies themselves and the arrangements that we have with them.

Unfortunately for us, we really can't dictate or buyout steel or commit to it to any significant degree at pricing levels that we would like to, so I can answer the question on inventory turnover in general.

It typically takes us maybe three or four months in order for us to start to see the impact of steel cost changes flow through our P&L, our income statement, and that varies depending on type, model, and production.

Okay.

So I guess, then, it would be, or would it be safe to say that that's already starting to occur?

Yes, to a limited degree right now, but as we move further into the third quarter and into the fourth quarter, we should start to see more of that benefit.

Okay.

And I guess my last one, this is my follow-up, Joe.

Can you give us any idea as to what the demand level is out there from customers, wood versus metal?

Sure.

We sell about one-thirds wood to two-thirds metal.

Okay.

That's really helpful.

Thank you.

Okay.

Next, we have a question from the line of Bob Labick with CJS Securities.

Please go ahead.

Thank you.

Hi.

I just wanted to ask kind of a big picture question in terms of your cost cutting and restructuring, how do you balance cutting costs to maintain margin now with maintaining enough capacity for a recovery?

How do you think about that and where do you feel like you stand in that process?

It is always a challenge.

We've always worried about cutting below the bone, as we say here.

Frankly, we probably have left a little bit more in the system in light of what we expect volume will come back, so if we were purely adjusting to current levels, we probably would cut further than we are right now, but not significantly.

So, I would tell you that we're prepared to handle more volume if it came on quickly.

It would not be a problem.

If we stay here, we have more to cut.

Okay.

Great.

Thanks very much.

Next, we have a question from the line of Greg Halter with Great Lakes Review.

Please go ahead.

Yes, you talked about the steel.

I wondered if you could also comment on your plans, as well as what you have maybe bought forward on the copper side, the bronzing, and so forth, what your outlook is there.

Sure.

And with respect to bronze, historically, we had been able to buyout maybe two, three, four months on our bronze levels, and really limit it to that.

When the pricing of copper was lower, particularly in the first fiscal quarter and as we know copper has since gone up since then, but we were able to push a little bit harder in terms of trying to go out.

Now, I really can't say how far out we really have gone, but I can tell you we have been successful in at least feeling confident enough with that element of our forecast, with that element of our guidance this fiscal year.

And would that also lead to somewhat of a higher inventory just because you have more bronze in there or do you take options or how does that work?

Actually, it can work two days, Greg.

A, we can take the inventory and we take a little bit of that, and, B, it is just a question of purchase orders and scheduling timing of shipments, which some of our suppliers have allowed as well, so it is a little bit of both.

Okay.

And one last one.

What was your average interest rate that you paid in the quarter?

I apologize on that one, too.

Off the top of my head, I don't know the answer to that.

But when I get it, I will let you know.

I think it was 4% in the first quarter.

Any reason it would have varied much from there?

No.

I don't expect that that's going to be much higher than that.

In fact, on average it might have actually declined a little bit.

Without going on record, I would tell you that if you approximate that 4%, you're probably in very close in the ballpark.

Okay.

Thank you.

There are no further questions at this time.

Please continue.

Well, we thank everyone for attending and participating in the call this morning, and we look forward to our conference call related to the third quarter results in late July.

Thank you, again, and have a good day.

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