Matthews International Corp (MATW) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the Matthews International third quarter financial results.

At this time, all participants are in a listen only mode and later we will conduct a question and answer session, with instructions being given at that time.

(Operator Instructions).

If you should require any assistance during safe call please press star and then zero.

And, as a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host, Chief Financial Officer, Mr.

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 will be available for replay at approximately noon today.

To access the replay, dial 1-320-365-3844 and enter the access code 163383.

The replay will be available until eleven fifty-nine PM, August 5th, 2010.

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

In the last column of our home page under Investor Relations, you can click on reports to access the earnings release and quarterly financial date.

The documents are presented under the heading Matthews International Quarterly Reports in a PDF file format.

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

Any forward-looking 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 which 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, income statement, and cash flow information provided today are preliminary data, since our quarterly report on Form 10-Q for the period ended June 30, 2010, will not be filed with the SEC until the first week of August.

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 June 30, 2010, the Company reported earnings of $0.68 per share compared to $0.60 for the third quarter last year.

Earnings for the current quarter included a favorable income tax adjustment of $0.02 per share relative to the closer of certain prior tax periods.

In addition, current period earnings were negatively impacted by an increase in pension expense of $1.3 million or $0.03 per share compared to the third quarter last year.

Earnings for the third quarter a year ago included unusual charges of $0.03 per share, which primarily consisted of costs related to consolidation of production within the Bronze segment, cost structure initiatives in other segments, and asset adjustments.

Changes in the values of foreign currencies relative to the US dollar did not have a significant impact on the reported results for the fiscal 2010 third quarter, less than $0.01 per share compared to the third quarter last year.

For the nine months ended June 30, 2010, the Company reported earnings of $1.64 per share compared to $1.38 per share a year ago.

Year to date earnings through June 30, 2010, reflected the $0.02 favorable tax adjustment reported in the third quarter.

In addition, year to date earnings were negatively affected by an increase in pension expense of $3.9 million or $0.08 per share compared to the first nine months a year ago.

Earnings for the first nine months last year were negatively affected by unusual items totaling $0.24 per share.

This included $0.28 of unusual charges offset partially by favorable income tax adjustments of $0.04 per share.

Last year's unusual charges primary consisted of costs related to the consolidation of production within the Bronze segments, cost structure initiatives, and other segments, and asset adjustments.

Consolidated sales for the fiscal 2010 third quarter were $213 million compared to $192 million for the same quarter a year ago, representing an increase of 11%.

Higher unit volume in several of our businesses and the impact of recent acquisitions were the principal contributors to the sales growth.

Consolidating operating profit for the quarter ended June 30, 2010 was $34.5 million compared to $29.8 million for the same quarter a year ago.

The increase was primarily due to higher sales, the benefit of recent cost structure initiatives, and acquisitions.

Third quarter operating profit for the current year reflected in an increase in pension cost of $1.3 million.

In addition, the third quarter last year included unusual charges of $2.1 million.

Consolidated sales for the first nine months of fiscal 2010 were $607 million, compared to $581 million last year, representing an increase of almost 5%.

The increase in sales over the prior year was primarily due to higher volume in several segments, and acquisitions.

Year to date consolidated operating profit for fiscal 2010 was $83.8 million compared to $73.3 million last year.

Operating profit for the current year reflected an increase in pension expense of $3.9 million compared to the same period last year.

In addition, operating profit for the first nine months last year included unusual charges of approximately $12.8 million.

In our memorialization businesses, sales for the Bronze segment were $62 million for the fiscal 2010 third quarter, compared to $57 million last year.

Higher unit volume of memorial products and the impact of the acquisition of United Memorial Products in December of 2009 were the significant factors in the sales increase.

Although sales were higher, the segment's operating profit for the fiscal 2010 third quarter was relatively unchanged from a year ago, primarily reflecting an increase in pension expense and acquisition related costs.

Operating profit for the third quarter a year ago included unusual charges totaling $1.1 million, related primarily to plant consolidations.

On a year to date basis, Bronze segment sales were $165 million through June 30, 2010 compared to $159 million last year.

The increase primarily reflected the acquisition of United Memorial Products and the favorable changes in foreign currency rates offset partially by the impact of lower casketed deaths in the United States.

Operating profit for the Bronze segment for the first nine months of fiscal 2010 was approximately $1 million or 2.4% higher than a year ago.

The segment's year to date results last year included unusual charges totaling $6.7 million.

The current year's results included an increase in pension costs compared to last year.

Casket segment sales were $52 million for the fiscal 2010 third quarter compared to $48 million for the same quarter last year.

The increase resulted from acquisitions completed over the past 12 months, the most recent of which was Reynoldsville Casket in April of 2010.

Excluding acquisitions, the segment sales declined from a year ago, reflecting a continued decline in US casketed deaths.

Based on available industry data, US deaths were estimated to have declined around 1% during the quarter ended June 30, 2010, compared to the same quarter last year, with non cremation, casket, and in-ground burial deaths estimated to have declined over 3%.

Operating profit for the casket segment for the current quarter was $1.6 million or 42% higher than last year.

Cost structure improvements in the segment's manufacturing and distribution operations were the primary contributors to the improved profitability.

Year to date casket sales were approximately $158 million this year, compared to $156 million last year.

The impact of the segment's recent acquisitions was offset partially by decline in unit volume.

The segment's operating profit for the first nine months of the current fiscal year was $20 million, compared to $15.7 million last year.

The increase primarily reflected the benefit of the segment's recent cost structure improvements.

The prior year included unusual charges totaling $2.6 million in connection with these cost structure initiatives.

Third quarter sales for the Cremation segment were $11 million compared to approximately $8 million for the third quarter last year.

Higher sales for the segment's Italian operation and the impact of a recent small acquisition in England were the primary factors in the sales increase.

The segment's operating profit for the current year was $1.3 million compared to $1.5 million a year ago.

The decline primarily reflected the impact of an unfavorable change in product mix and higher pension costs.

Cremation segment sales for the first nine months of 2010 were $28 million compared to $22 million last year.

Similar to the third quarter, higher European sales and acquisitions were the principal contributors to the year to date sales improvement.

Operating profit for the Cremation segment was $3.3 million for the current nine month period, compared to $3.6 million a year ago, primarily reflecting the impact of an unfavorable change in product mix and higher pension costs.

In our brand solutions group, sales for the graphics imaging segment were $58 million in the fiscal 2010 third quarter, which was relatively the same as the third quarter last year.

Higher sales for the Company's German operation, particularly Saueressig, were substantially offset by weakness in the United States.

Third quarter operating profit for the group in the current year was $5.5 million, compared to $5.3 million last year.

The prior period included unusual charges totaling approximately $600,000.

Year to date sales for the Graphics Imaging segment were $178 million as of June 30, 2010, compared to $171 million for the first nine months last fiscal year.

The increase principally resulted from growth in sales from the group's Saueressig facility, the acquisition of a small operation in Hong Kong in July 2009, and favorable changes in the average year to date foreign currency rates, which were partially offset by lower sales in the US and UK operations.

The group's operating profit for the first nine months of fiscal 2010 was $14.1 million, compared to $11.1 million a year ago.

The increase primarily reflected a significant improvement in the profitability of Saueressig.

In addition, the prior year included unusual charges of $2.3 million, principally for severance charges within the group and costs incurred in connection with the integration of Saueressig.

For the fiscal 2010 quarter, the Marking Products segment reported sales of $13 million compared to slightly less than $10 million in the same quarter last year.

The increase was primarily attributable to higher unit volumes of consumables products, such as inks, and the acquisition of a small distributor in Germany.

In addition, equipment orders showed improvement during the recent quarter.

Third quarter fiscal 2010 operating profit for the marking product segment was $2.1 million compared to $445,000 a year ago.

Higher sales and the benefit of last year's cost structure actions were the main reasons for the increase.

For the first nine months of the current fiscal year, sales for the Marking Products segment were $37 million compared to $31 million last year.

The increase principally reflected higher unit volume, particularly in sales of consumables and the small acquisition in Germany.

Favorable changes in average currency rates on a year to date basis also contributed to the sales increase.

The segment's year to date operating profit was $4 million as of June 30, 2010, compared to $1.5 million last year.

The increase primarily reflected higher sales and the benefit of last year's cost structure initiatives.

In addition, the year to date results last year for this segment included unusual charges of approximately $700,000, which principally consisted of cost structure actions.

Merchandising Solutions segment sales for the fiscal 2010 third quarter were almost $17 million compared to $12 million a year ago.

The volume of projects increased during the current quarter as the order rate showed intermittent signs of improvement.

As a result of the sales increase, the segment's operating profit for the current quarter was $1.7 million, compared to $185,000 a year ago.

Year to date sales for this segment in fiscal 2010 were approximately $41 million, compared to $42 million last year.

Several large projects were completed in the second quarter of last fiscal year that did not repeat in the current year.

Operating profit for the Merchandising Solutions segment was $1.3 million for the first nine months compared to $1.5 million a year ago, reflecting the decline in sales.

In addition, unusual charges for this segment, which were incurred in connection with employee terminations, approximated $300,000 for the first nine months last fiscal year.

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

We have also posted last year's unusual charges by segment for your reference.

Our fiscal 2010 third quarter consolidated operating margin was 16.2% of sales compared to 15.5% a year ago.

The current quarter included an increase in pension expense of $1.3 million, or 0.6% of sales.

Unusual charges included in operating profit for the third quarter last year were approximately $2.1 million or 1.1% of sales.

For the first nine months of fiscal 2010, our consolidated operating margin was 13.8% of sales compared to 12.6% a year ago.

The current period included an increase in pension expense of $3.9 million or 0.6% of sales.

Unusual charges included in operating profit for the first nine months of last year totaled 2.2% of sales.

Gross margin for the quarter ended June 30, 2010 was 39.8% of sales, compared to 39.3% for the same period a year ago.

Year to date gross margin for fiscal 2010 was 38.9% of sales compared to 37.3% last year.

The improvement in the quarter and year to date gross margins was attributable to the inclusion of unusual charges in prior year's results and the current period benefits from the fiscal 2009 cost structure initiatives, particularly in the Saueressig operation.

Selling and administrative expense for the fiscal 2010 third quarter was 23.7% of sales compared to 23.8% for the third quarter last fiscal year.

Selling and administrative expense for the first nine months of the current fiscal year was 25.1% of sales, compared to 24.6% of sales a year ago.

Higher pension costs and the impact of recent acquisitions were the principal factors in the increase in our SG&A percentage on a year to date basis.

For the fiscal 2010 third quarter, investments generated a loss of $96,000 compared to income of $1.3 million for the same period a year ago.

The current quarter included mark to market adjustments for unrealized losses in the value of investments held in long-term trusts for certain employee benefit plans due to the recent decline in the equity markets.

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

Unusual items in the third quarter last year included a favorable mark to market asset adjustment of $800,000.

For the first nine months of fiscal 2010, investment income was $1.9 million compared to $629,000 for the same period last year.

Unusual charges for the prior fiscal year included unfavorable mark to market asset adjustments of approximately $400,000.

Interest expense for the current quarter was $1.9 million compared to $2.8 million for the same period a year ago.

For the first nine months, interest expense was $5.6 million in fiscal 2010 compared to $9.1 million last year.

The decrease in interest costs resulted primarily from a decline in interest rates.

Other income deductions net for the fiscal 2010 third quarter represented a deduction of $329,000 compared to income of $80,000 a year ago.

Currency losses in the current period on intercompany debt were the primary reason for the year over year change.

Year to date, other income deductions net represented a deduction of $1.1 million in the current year, compared to income of $83,000 last year.

The deduction for net income from noncontrolling interest was $798,000 for the current quarter, compared to $742,000 a year ago.

On a year to date basis, the deduction for net income from noncontrolling interest was $1.8 million for the current year, compared to $819,000 last year.

The improvement in the operating results for Saueressig was the primary factor in the increased deduction for the current fiscal year.

The year to date fiscal 2010 effective income tax rate was 35.3% of pretax income compared to 34% for the same period last year.

Excluding the favorable impact of the unusual tax adjustments recorded in the current quarter, the year to date effective tax rate through June 30, 2010 was 36.1%.

Excluding the favorable impact of the unusual tax adjustments recorded through the third quarter last year, the year to date effective rate for June 30, 2009 was 35.8%.

The effective income tax rate for the full 2009 fiscal year excluding unusual adjustments was 35.9%.

At June 30, 2010, the Company's consolidated cash and short term investment balance was approximately $57 million compared to $58 million at September 30, 2009.

Our current ratio was 2.1 at June 30, 2010, compared to 2.3 at September 30, 2009.

Outstanding accounts receivable at June 30, 2010 totaled approximately $143 million, which represented 60 days sales outstanding.

Outstanding accounts receivable on September 30, 2009 approximated $139 million, which represented 62 days sales outstanding.

At June 30, 2010, consolidated inventories totaled approximately $99 million compared to $94 million at September 30, 2009.

The Company had approximately 29.892 million shares outstanding at June 30, 2010.

During the first nine months of fiscal 2010, the Company purchased approximately 634,000 shares under its share repurchase program at a cost of approximately $21 million.

At June 30, 2010, approximately 2.1 million shares remained under the new repurchase authorization, which was granted in January 2010.

Our long-term debt balance at June 30, 2010, both current and long-term portions, approximated $232 million.

$183 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 nine months ending June 30, 2010 were $7.5 million and $20 million respectively.

Capital expenditures for the same periods were $2.6 million and $11 million respectively.

As Mr.

Bartolacci commented in our earnings announcement yesterday, the Company was pleased with the results for the fiscal 2010 third quarter.

Sales were higher in all of our segments, and the increase in unit volumes in many of our businesses is encouraging.

In addition, the cost structure actions taken last year have resulted in improvements in our operating results this year.

Excluding unusual items from both periods, our earnings per share for the fiscal 2010 third quarter on an apples to apples basis were $0.03 higher than last year.

On a year to date basis, our earnings per share for the first nine months of fiscal 2010 are equivalent to the same period last year, excluding unusual items from both periods.

This performance occurred despite a $0.03 per share increase in pension expense for the current quarter and $0.08 year to date.

In November 2009, we provided guidance that our fiscal 2010 earnings would approximate fiscal 2009 excluding unusual items.

As such, this guidance contemplated earnings per share of 2010 in the $2.21 range.

Our original guidance contemplated earnings in the first and second quarters to be below the same periods last year, with the short all to be recovered in the third and fourth quarters.

As of June 30, 2010, we are ahead of this pace as our year to date earnings per share excluding unusual items are now equivalent to the same period year ago.

As our year to date results were slightly ahead of our internal expectations, we are now projecting our earnings for fiscal 2010 to be slightly ahead of our original estimates.

We continue to remain cautious given the continued decline in casketed deaths, uncertain economic conditions, and the recent volatility in the value of the Euro.

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

Thank you, Steve.

Good morning.

Our third quarter results reflect improvement in most of our businesses.

Our Memorialization division saw improved volume in our Bronze Memorial business as well as increasing interest in our United Memorial Granite offering.

We believe some of the increase in volume if our Bronze business may be attributable to the marking of previously unmarked graves, while the United Memorial growth is part of our strategy of offering granite throughout the markets we serve.

We are hopeful that the marking of unmarked graves will continue throughout our markets, but we have not anticipated this in our forecast.

Our casket business saw increased volume due to acquisitions, including the most recently Reynoldsville Caskets, which has gone very smoothly.

We expect to expand our Wood Products offering to Reynoldsville customers throughout the next 12 months as we integrate this business further.

We are entering the slow season for our casket business, but we remain optimistic about our year over year results in this division.

In our [brand] solutions business, our European graphics divisions continue to perform reasonably well, especially at Saueressig, where we continue to see significant improvement.

Although our sales run rates in these businesses are lower than we would like, largely due to the economic conditions in Europe, our group has done a good job of managing their costs and delivering quality service.

In the United States, we continue to struggle with the low volume, but we hope to see a turnaround as the economy improves.

Our Marking Products division saw significant improvement over the prior year and we expect this business to continue to grow as the economy improves.

We have adjusted our cost structure in this business to better take advantage of our Chinese presence, so that as our volumes improve throughout our markets, our results should improve quickly.

Lastly, our merchandising solutions business saw the realization of several projects during the quarter which had been deferred by certain key customers.

This group has performed well during this difficult period and is positioned to deliver improved results as volumes return.

All in all I'm pleased with the performance of our businesses.

We expect to continue to see the improvement in all of our businesses as the economy continues to recover and the impact of certain strategies begin to take hold.

In the interim, we saw opportunity in our stock price as Steve has mentioned, especially during the third quarter where we were active with our buy-back program.

We expect to see the benefit of this action in the earnings per share calculations next year, and with that I'd like to open it up for questions.

For those of who you will be asking questions, we request you limit them to one question and a follow-up question until all those who wish to participate in the Q&A session have had an opportunity to do so.

(Operator Instructions).

Our first question will come from the line of Bob Labick of CJS Securities.

Congratulations on a nice quarter.

Thanks, Bob.

I want to start off asking about on the Memorialization side, you had a couple of acquisitions which seem to be beneficial in the quarter.

I was hoping you could expand on the United Memorial first and tell us more or less where you're selling geographically there, and do you see geographic expansion for the Headstone business and how that's playing out versus your expectations?

Sure.

United Memorial, as we've spoken to you in the past, is a key part of our longer term strategy of expanding into our existing markets.

It's more than just a headstone offering.

For example, one of the things we offer is a cremation niche garden program where we design the cremation niches into [other] products and assist with the installation, or do the installation in some cases.

That is where we're seeing significant interest with our larger customers as they move forward with efforts to confront cremation as an opportunity in their markets.

We think that will continue to be a part of our growth well into the future, although I will tell you it's not Bronze type margins.

We've said that in the past.

But it's good business to be in and we expect to continue to see that going forward.

We have not expanded significantly geographically.

It is located right now only in California.

But having said that, as we speak to some of our larger customers who are present throughout the United States and may carry some inventory especially on these cremation niche gardens, we don't have to be present locally to deliver that.

So right now, we're still very limited.

We're going to grow this thing.

It will take some time, but we see good opportunity going forward.

Okay.

Great.

And just as my follow-up to that, if you could talk a little more about other acquisition opportunities in the space or how you intend to continue to grow in the memorialization space?

How we continue to grow -- the principal way of continuing to grow in this space will ultimately be a strategy to confront cremation with our existing product lines.

And at the end of the day, we are working on many strategies to bring all the pieces of our business together into one total solution for our customers.

We're the only player in the market that's able to offer when fully integrated a stone offering, a bronze offering, a granite mausoleum offering, a casket offering, and a cremator offering.

To the extent we can pull all those pieces together, and we intend to do that -- it will take some time, but we intend to do that -- and provide to our customers value and a strategy for addressing the cremation market, that will be the most significant opportunity for growth in the years to come.

In the short term, we'll be looking at some of these acquisitions like a Reynoldsville or some small granite offerings across the United States to help give us some geographic presence.

But over the course of the short term, we will add on bolt-on acquisitions like this to help us grow.

Longer term, it's cremation.

Great.

I will get back in queue.

Thank you.

And next we'll go to the line of Clint Fendley at Davenport.

Good morning, Joe and Steve.

Question on the Bronze unit volume increases we saw.

I wonder if this is a trend that accelerated throughout the quarter or was it relatively stable month to month?

Clint, it was relatively stable.

We didn't see any peaks and I would tell you our conclusion, my conclusions which I stated in my comments relative to unmarked graves is just an assumption.

There was not an increase in the death rate.

In fact, there was a decline.

So it is unlikely that any of our customers may have gained any significant number of deaths through market share gain or otherwise.

So the only thing we can conclude is the marking of other graves, and that may or may not occur over the next several months.

We're not counting on it, but we've stated in the past we think it's out there.

And Clint, traditionally this time of year, seasonally, this is the time of year we start to see the increase in memorialization and the purchase of memorials.

And have the trends remained strong then for the first few weeks here of July?

Frankly, I can't answer that.

We're not that close to the day to day volumes, but I can't -- we don't know for sure, Clint.

We can get back to you on that.

Any color just on any geographical strength or relative weakness?

Geographical, when it comes to some of our markets, the Northeastern part of the United States as it relates to the casket business is a little lighter, particularly as it relates to the death rate.

If you look at the CDC data, it continues to show a lower death rate particularly in the Northeast, so that's where we see the challenges.

But at the same time, we think we picked up some market share in some other markets, especially on the casket side where we were a little lighter to start with.

Okay.

Good, and just a follow-up question on the brand solutions business, I wonder if you could compare the demand and relative strength that you're seeing in that business between the US and Europe?

It's not necessarily demand relative to US and Europe as much as it is our customer mix in the US and Europe.

When you look at some of our European businesses, particularly when you look at Saueressig, which is almost exclusively primary packaging, that business has been relatively stable both in the US and Europe.

I would say in the US, what we've seen is a little more choppiness with the launching of projects, so we generally need a new launch of packaging or a new promotional activity to do that.

And as in our merchandising solutions business, we've seen deferral of some of those.

I think that's probably consistent with both markets, but given our scale in Europe, we've been able to manage through that a little better.

Secondly in Europe, we've mentioned in the past we have this project that is called the Picture Pack project as relates to tobacco industry in the European markets, where they are putting photos of things the impact of tobacco on your health on to the packaging.

We've done that in country or two over there.

There's still quite a few countries to get through.

We think we'll see that kind of strength as we go forward.

Having said that, the volumes are still below where we bought that business, so we expect that as the economy continues to recover, both the European and US markets should benefit.

Great.

Thanks, guys.

Thank you.

Next is the line of Jamie Clement of Sidoti and Company.

Followup question about Clint's questions, about the unit volumes in Bronze and you guys' conclusion in terms of what's going on there.

Is it also just -- is it possible that last year at the depths of the recession, there were maybe more customers than you thought that might have just been trading down and out of the Bronze segment?

They could possibly trade out.

We did say there might have been a blip in the cremation side of it, although that data is not currently available, but I think you're right, Jamie.

I think there's also been, especially with our larger customers, a more significant effort to get the graves marked, a broader sales function.

Now are these deaths that would have occurred in the last 12 to 24 months, or does the timeframe actually go back longer than that?

Probably 12 to 24 months.

Okay, okay.

And just another follow-up question on the European graphics business.

Obviously there was a lot of bad news out of Europe in, I guess around the May period of time, people getting very antsy, that kind of thing.

Is your business -- was your business and the nature of your customer base, did you notice that antsiness during that period of time?

Or is your business more inherently stable?

I would tell you, Jamie, our business, first off, we have what we believe to be the premiere operation in Europe.

So as a result, we have some pretty premiere customer base over there.

Those customers have been a little more stable than we've seen in the US.

They are fast-moving consumer goods that are trying to entice people to buy.

We've seen a little more stability there than in the US.

Great.

Thank you very much for your time.

Next is the line of Steve Baumgarten with Janney Montgomery Scott.

Good morning, Steve.

Steve, on the cremation, you said that the equipment sales were up in Europe.

One of your initiatives has been to go back to the growing cremation market and grow the Memorialization sales into that market.

How has the progress been in that area?

Into the European market?

I'm sorry, in the US market, excuse me.

Into the US market, I'll let Joe take that.

There's a number of initiatives that we have on our side of the table, some that we don't necessarily want to talk about just right now, but clearly we think there is a vast opportunity to offer a memorial to unmarked or unmemorialized cremation services.

We are talking to a number of players in the industry and that's part of what you're seeing with the United Memorial and cremation niche gardens we're selling.

Many customers we feel, based on survey and customer data we gather -- when I say customers, family members, we're now down to the private individual rather than the direct customer -- they'll know there's an option for them.

You're seeing the Catholic church get a little bit stronger with their recommendation of what needs to be done with respect to cremation.

It includes memorialization at a cemetery.

We intend to do a lot of education and informing both of our customer base as well as the public as we move forward to let them know, one, there's an option and two, this is what should be done.

Great, Steve.

I mean Joe.

Steve, in terms of your cash flow, you reduced your debt outstanding during the course of the year by about 8% to 9%.

With the balance of the year, the priority cash, would that be buying back and reducing debt or do you want to keep some dry powder for acquisitions?

I'd say we'd like to keep dry powder for any investments we think are appropriate.

But as Joe mentioned earlier and as you can see with the number of shares, the activity in the third quarter, share repurchases at these price levels are attractive.

Great, thank you.

Thank you.

Next we'll go to the line of Scott Blumenthal at Emerald Advisers.

Good morning, Steve, good morning, Joe.

Hello, Scott.

I have three calls going on at the same time, so you may have covered this.

But as we look at the nice expansion in sales and the cremation segment, doesn't seem to be pulling down to the operating profit line.

Joe or Steve, I guess, could you talk a little bit about that and whether we're looking for -- if we have some startup costs in there, project startup costs, we need more volume, what's going on there?

In sum, Scott, it is product mix and geographic mix.

What we've seen, as we've been telling you all, we see pretty significant opportunity with the European market as we've done a couple small acquisitions that have yielded well as it relates to performance in those businesses, and we continue to see opportunity over there.

Those businesses in Europe, however, operate at a lower margin than we have in the United States at this time.

And we've only acquired these within the last 12 to 18 months, so we haven't been able to really focus on improving profitability, because frankly, we've been landing some business over there and growing those businesses pretty well.

They're small, but they were expected to be bigger as we go forward.

The US market, on the other hand, what we're seeing is some deferral on of the projects.

We've got a couple of pieces of equipment that are fairly significant, one being our buyer cremation project.

It could be a $0.5 million project we can't seem to get regulatory approval on.

Others have had other similar issues, including financing.

Our backlog in that business continues to be where we want it to be, if not more.

So there's no long-term expectation there's going to be any change there, and what you also see in the cremation numbers is an absorption of a higher pension cost year over year.

That must have been the part that I missed.

Thank you.

That's a lot to swallow there.

And keeping on the margin theme here, I guess you and Steve set the expectations that the United margins would be lower overall than the Bronze segment overall, Joe, and you mentioned that in the comments to one of the earlier callers.

How have you been able to hold the margin pretty close in that segment with the addition of the United and do you see the margins from Granite sales at this point actually better than you would have expected?

I'll tell you what we're seeing.

As it relates to Bronze, obviously we've said to the market recently that significant changes in Bronze prices are not going to be able to be made up with spikes in pricing, so we're going to get normal pricing increases over the course of time and recover our costs over time.

We think that's in the best interest of our business.

Having said that, on the United Memorial side of the business, we do think this business in time should be a mid-teens operating business.

It is not operating at that point now.

It is as expected to be.

We're working through some inventory and some contractual obligations, that over the course of time we think it will be a mid-teen business.

That's still lower than our mid-20s Bronze business.

So overall, it may be a drag on the overall margin as a percent of sale as time moves forward, but still a good business for us to be in.

Scott, just to clarify a little bit more on your question, the margins for Bronze overall are higher in the third quarter compared to the first two quarters and year to date because the third quarter traditionally is the higher quarter.

But compared to last year, it is a little less than a year ago, and that's where the Granite margins and higher pension costs and some of the acquisition related costs to United Memorial come into play.

Got it.

I appreciate that.

Okay.

Great quarter.

Thank you.

Thank you.

Next to the line of Jason Rodgers with Great Lakes Review.

Good morning.

Good morning, Jason.

Congratulations on the year over year improvement.

Thank you.

I wonder if you could talk about the merchandising solutions, if you still have projects that you've deferred that you've been working on or worked through the majority of those at this point?

Jason, this business is a relatively short term project.

We may be looking 90 days out.

Given our customer base, which are very significant consumer goods companies, we're constantly involved in their planning and projecting for marketing programs.

We always think we have a lot of projects in the works.

Realization of that over the 12 months has been difficult to project.

So we think that if I talked to our team and I have, we've got a good outlook for the fourth quarter, but nothing that's going to knock the socks off, and nothing on the downside early.

I wonder if you could comment on steel and bronze pricing, how that factors into your outlook going forward?

We have included what our expected costs both for steel and bronze are for the balance of this year, so as we move out through the balance in this fiscal year, we're okay -- and incorporated that into our expectations.

As we move into 2011 and take a look at where our budgets are rolling out and where our purchases may be, we'll give you a better perspective at that time about our expectations.

Clearly both the cost of copper and cost of steel are moving up.

Okay.

And Steve, do you have the contribution from acquisitions in the quarter as well as your expectation for pension costs for the fourth quarter?

In terms of acquisitions contribution, no, I don't have that number, Jason, but the pension cost increment quarter over quarter should be the same, which is $1.3 million.

Thank you.

You're welcome.

(Operator Instructions).

We do have a follow-up from the line of Bob Labick at CJS Securities.

Thanks.

I want to talk a little more about Marking products.

I think it's the first time you've mentioned a pickup in the equipment sales there.

Can you just give us a little more color there, and is there any visibility in that business?

I don't think it's a backlog type business, but what are you hearing or thinking?

Is this a turn?

Our quotes are normal highs.

We are at normals highs in terms of quotes.

There clearly is a demand for our product.

The quote doesn't seem to be turning into as much as orders as we like, as many orders, but we are seeing some impact.

As I said, we did a pretty good job of moving some of those costs over to our Chinese manufacturing facility, and as this thing turns, we think we're going to get a pretty good drop through.

Right now, what we're saying to you is we have a little bit more interest and a few more orders than we had expected, and we always hope for more, but I can't tell you that it's solidifying into a consistent order rate for equipment.

Okay.

Great.

Thanks for the color.

Thank you.

Gentlemen, there are no further questions in queue at this time.

Okay, Keeley.

We'd like to thank everyone for participating in our call this morning and we look forward to our fourth quarter conference call in November.

Thank you again and have a good day.

Thank you.

Again, ladies and gentlemen, today's conference will be available for replay after 12 noon eastern time today until August 5th at midnight.

You may access the AT&T Executive Playback Service at any time by dialing 1-320-365-3844 and entering the access code of 163383.

That does conclude your conference for today.

Thank you for your participation, and for using AT&T Executive Teleconference.

You may now disconnect.