Matthews International Corp (MATW) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Matthews International first-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. Instructions will be given at that time.

(Operator Instructions)

And as a reminder, this conference is being recorded. I would now like to turn the conference over to Steve Nicola, Chief Financial Officer. Please go ahead.

Thank you, Mary. 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 scheduled 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 186719. The replay will be available until 11.59 PM February 4, 2011.

We have posted on our website, which is www.matw.com, the first-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, and Reports to access the quarterly financial data. The quarterly data is presented under the heading 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 statements in connection with this discussion are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from Management's expectations.

Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ from those discussed today are set forth in the Company's annual report on Form 10-K, and other periodic filings with the SEC. 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 December 31, 2010 will not be filed with the SEC until the first week of February.

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

For the quarter ended December 31, 2010, the Company reported earnings of $0.45 per share, compared to $0.43 for the first quarter last year. Consolidated sales were $207 million for the current quarter, compared to $193 million for the same quarter a year ago, representing an increase of approximately 7.4%. The Company reported higher sales in all business segments for the quarter. An increase in sales volume in our Brand Solutions businesses and the impact of recent acquisitions were the principal contributors to the sales growth.

Consolidated operating profit for the quarter ended December 31, 2010 was approximately $22 million, compared to $22.2 million for the same quarter last year. Unfavorable changes in foreign currency rates and higher commodity costs contributed to the year-over-year decline. Changes in foreign currency values against the US dollar were estimated to have an unfavorable impact of approximately $4.4 million on the Company's sales, and $500,000, or $0.01 per share, on operating profit compared to the quarter ended December 31, 2009.

For the Bronze segment, sales were $50.5 million for the fiscal 2011 first quarter, compared to $49.3 million last year. The increase in sales was primarily related to sales of granite products, resulting from the acquisition of United Memorial Products in December 2009. This increase was offset by a decline in bronze product revenues.

Based on available data, it appears that total US deaths were slightly lower in the fiscal 2011 first quarter, compared to the same quarter a year ago. Although total sales for the Bronze segment were higher, operating profit for the fiscal 2011 first quarter was approximately 2% lower than a year ago, primarily reflecting the decline in bronze product revenues, which generally have higher margins than granite products, and higher bronze costs.

Casket segment sales were $60.2 million for the quarter ended December 31, 2010, compared to $50.7 million for the fiscal 2010 first quarter. The increase resulted from recent acquisitions. Excluding acquisitions, the segment sales were lower than the year ago by less than 1%. Operating profit for the Casket segment for the fiscal 2011 first quarter was slightly higher than the same quarter last year. The benefit of recent acquisitions was substantially offset by the decline in sales on a same-store basis, and higher commodity costs, such as steel and fuel. In addition, the segment's recent acquisitions have not yet been significantly accretive to earnings, as the operations are still in the integration process.

Fiscal 2011 first-quarter sales for the Cremation segment were $9.7 million, compared to $8.5 million for the same quarter last year. Higher sales for the segment's Italian operation, and the impact of the acquisition of a cremation equipment manufacturer in England last year, March 2010, were partially offset by a decline in US equipment sales. Order and shipment delays related to customer financing and permitting requirements were the general reasons for the decline in US equipment unit volume.

However, the segment's US equipment backlog, which generally runs in the range of nine to 12 months of sales, continues to remain consistent. The segment's operating profit for the current quarter declined 7% from a year ago, mainly reflecting the shift in the segment's overall mix to a higher level of European sales, which generally have lower margins than the US.

In our Brand Solutions group, Graphics Imaging sales were $60 million in the fiscal 2011 first quarter, compared to $59.8 million a year ago. The segment reported sales growth in Europe, the United States, and Asia, which was significantly offset by an unfavorable change in currency exchange rates. Changes in foreign currency values, principally the Euro, had an unfavorable impact of $4 million on the segment sales for the current period, compared to the fiscal 2010 first quarter. First-quarter operating profit for the group in the current year was $3.7 million, compared to $4 million last year. The unfavorable currency impact and lower margins in several European operations were the main factors in the operating profit decline.

Marking Products segment sales for the quarter ended December 31, 2010 were $12.9 million, compared to $11.6 million for the same quarter last year. The increase was primarily attributable to higher unit volumes of equipment and consumable products in the United States and China. As a result of the sales improvement, the segment's operating profit for the current quarter was $1 million, compared to $600,000 a year ago.

Fiscal 2011 first-quarter sales for the Merchandising Solutions segment were $14 million, compared to $13.2 million a year ago. The sales volume continued to increase on a year-over-year basis in the current quarter, which has become a more consistent trend in recent quarters. The segment's operating profit for the current quarter was $196,000, compared to $289,000 a year ago, as a result of an unfavorable shift in sales mix. Sales and operating profit by segment for the quarter are posted on our website for your reference.

Our fiscal 2011 first-quarter consolidated operating margin was 10.6% of sales, compared to 11.5% a year ago. The decline in operating margin primarily reflects the impact of the Company's recent acquisitions. As noted earlier, these acquisitions in aggregate have generated lower operating margins, and as a result, have not yet been significantly accretive to earnings. The more significant acquired operations, particularly in the Casket segment, are still in the integration process.

Gross margin for the quarter ended December 31, 2010 was 38.5% of sales, compared to 38% for the same period a year ago. The improvement in gross margin percentage for the quarter was primarily attributable to higher sales in the Brand Solutions businesses, and the impact of recent cost structure initiatives. These increases were partially offset by higher commodity costs in the Bronze and Casket segments. Selling and administration expense for the fiscal 2011 first quarter was 27.9% of sales, compared to 26.5% a year ago. The impact of recent acquisitions was the principal factor in the increase in our SG&A percentage on a year-over-year basis.

Investment income for the fiscal 2011 first quarter was $1.2 million, which was slightly below the same period a year ago, reflecting a lower level of average invested funds for the period. Interest expense for the current quarter was $1.8 million, compared to $1.9 million for the same quarter last year. The decline in interest expense resulted primarily from lower average interest rates. Other income deductions, net, for the fiscal 2011 first quarter represented a deduction of $269,000, compared to a deduction of $98,000 a year ago. Currency losses on inter-company debt were the main factor for the increased deduction in the current period.

The deduction for net income from non-controlling interest was $309,000 for the current quarter, compared to $660,000 a year ago. The decrease resulted principally from the Company's purchase, effective as of the beginning of this fiscal year, of the remaining 25% ownership interest in one of its German subsidiaries. The effective income tax rate for the fiscal 2011 first quarter was 35.9% of pretax income, compared to 36% for fiscal 2010 first quarter. The effective tax rate for the fiscal year ended September 30, 2010, excluding unusual items, was 35.8%.

At December 31, 2010, the Company's consolidated cash and short-term investment balance was approximately $55 million, compared to $61 million at September 30, 2010. Our current ratio is 2.4 at December 31, 2010, compared to 2.3 at September 30, 2010. Outstanding accounts receivable at December 31, 2010 were approximately $139 million, which represented 61 days sales outstanding. Outstanding accounts receivable at September 30, 2010 approximated $151 million, which represented 63 days sales outstanding.

The decrease in accounts receivable from September 30, 2010 primarily reflects normal seasonality in the Company's sales. Consolidated inventories at the end of the current quarter were $116 million, compared to $108 million at September 30, 2010. The increase in inventories during the current quarter resulted principally from the acquisition of Freeman Metals in October 2010.

The Company had approximately 29.6 million shares outstanding at December 31, 2010. During the current quarter, the Company purchased approximately 81,500 shares under its share repurchase program, at a cost of approximately $2.7 million. At the end of the quarter, the Company had approximately 1.568 million shares remaining under the current share repurchase authorization. Our long-term debt balance at the end of December 2010, both current and long-term portions, approximated $248 million. $203 million of this balance represented borrowings under our domestic revolving credit facility.

As we announced in December, we recently signed a new revolving credit facility, which provides an increased borrowing limit of $300 million and a maturity of December 2015. While the new facility has a higher interest rate spread than the previous facility, it still represents a very competitive rate relative to current market spreads, and more importantly, will allow us to take advantage of the current low interest rate environment for longer-term borrowings. Our previous facility had a maturity of September 2012. Depreciation and amortization expense for the quarter ended December 31, 2010 was $6.8 million. Capital expenditures for the current quarter were $3.7 million.

In November, we provided guidance that our fiscal 2011 earnings were projected to grow in the mid- to high-single-digit range over fiscal 2010, excluding unusual items. This guidance contemplated first-quarter results relatively consistent with the same quarter last year. Accordingly, our consolidated results for the fiscal 2011 first quarter were slightly ahead of our internal expectations. For the balance of the current fiscal year, we still expect certain market conditions could have a significant influence on our expectations. Rising commodity costs and ongoing demographic trends will continue to challenge our Bronze and Casket businesses.

In addition, although we are encouraged by a recent pattern of improvement, we still remain cautious with respect to the economic environment and its impact on the consistency of sales trends in our Brand Solutions group. On this basis, we are maintaining our estimate for fiscal 2011 earnings to grow in the mid- to high-single-digit percentage range over fiscal 2010, excluding unusual charges from both years.

Further, based on our current forecasts, we expect earnings for the fiscal 2011 second quarter to grow in the mid-single-digit percentage range over the second quarter of fiscal 2010. This concludes the financial review, and Joe will now comment on our operations.

Thank you, Steve. Our first quarter was generally in line with our expectations. All of our business segments reported higher sales, and we saw rays of light emerging from the shadows of the recession in some of our businesses. Our Marking Products business, which has been a leading indicator for us of the general well-being of the economy, continued to see improvement in sales, and our machine order backlog has grown. We are also seeing the benefits of our restructuring efforts in this business, as the drop-through to the bottom line of the additional sales was very positive.

Our graphics business, on a year-over-year basis, saw improvement in sales and profit, but those benefits were dampened by the impact of the stronger US dollar versus prior year. In our Casket division during the quarter, we completed the acquisition of Freeman Manufacturing, a regional casket manufacturer in the southeastern part of the United States. Although Freeman added very little profit in the first quarter, we expect to see the benefits of this acquisition in the future as we integrate Freeman into our organization.

We also continued to add to our European cremation equipment backlog during the quarter, as we have won several projects in the UK and in Belgium. But financing issues and the lack of customer readiness in the US during the quarter has delayed deliveries and caused us to have a flat year-over-year performance.

All in all, it is difficult to say that we are satisfied with our results, but instead, we believe our results have met our current expectations. We have used the downturn in the economy to improve our businesses and seek out new opportunities. We expect that we will benefit from these opportunities and improvements as the return to normalcy continues, but we have not been complacent.

A good example is our granite acquisition completed last year. Although we are still introducing this offering to the market, we do see opportunity in expanding our product offering on a national basis. It remains difficult for us to foresee far into the future, but we remain confident in our initial guidance of mid- to high-single-digit EPS growth.

Having said that, we are cognizant of the certain risks to our forecast. But we believe, however, that we have anticipated most of those, including higher metal costs and a weaker Euro and a stagnant economy. We will continue to advise you of any changes in those projections as the year progresses. With that, I'd like to open it up to questions.

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

Thank you. (Operator Instructions). Our first question comes from the line of Bob Labick from CJS Securities. Please go ahead.

Good morning. This is actually Larry Solow calling in for Bob, who is traveling. A couple questions on the gross margin, if I may, and the rising material costs. Can you guys maybe just give us a little more color, have you done some forward buying to offset some of the rising commodity prices? And I know, just looking at copper, for instance, I think when you gave your guidance, copper is now up like 30%, 40% since then. So, how does that all play out? And do you expect gross margins just based on where commodity prices are today to sort of weaken through the year?

Larry, yes, to answer that question, in general, what we try to do, particularly with bronze -- I'll start with bronze, is that we try to buy out several months, and we try to be opportunistic with our buys. So that when we do have opportunities when we see the lower prices, where we can get the better pricing from our suppliers and where we can get a few months of supply, then we try to take advantage of that. So, that has helped us even in this period of rising copper costs.

On the steel side, the steel has been gradually rising -- I'm sorry, on the casket side, the steel costs have been gradually rising. That's a little bit more difficult for us to buy up to any significant degree. However, in terms of our projections, when you think about caskets and you think about production processing, you think about the inventory that we hold, it takes some time for those rising commodity costs to work their way all the way through the production and the inventory cycle, before the significant part of those cost increases will impact us. So, that's what helps us frame our guidance for the year.

Okay. And then, just on the casket side, you mentioned that, I guess, Reynoldsville and Freeman are still sort of integrating. Can you give us an update on that, and you would expect that to be accretive?

Sure, Larry.

Any timeline?

Absolutely, those will be accretive in the long term. This is entirely consistent with our expectations when we purchased these companies, that we expected at the outset that it's going to take some time to transition from their existing operations into the Matthews family. So, this is not outside the range of expectations for us, and as time progresses that process will get more efficient and more efficient.

Okay. And then a follow-up to that. You obviously have a new credit facility. Are there opportunities in the regional casket area or -- ?

There continues to be opportunities in all of our businesses, Larry. We have had a couple of recent acquisitions in the casket side of our business, but that's not to preclude other opportunities we've seen elsewhere. So, right now the renewal of the revolving line of credit, we just thought was a good time to do it, not because we have any specific need for the additional funds.

Okay. Great. Thank you very much.

Thank you. We now go to the line of Jamie Clement from Sidoti Company. Please go ahead.

Joe, Steve, good morning.

Good morning, Jamie.

Good morning, Jamie.

Joe, one quarter's in the books. You talked a little bit about the second quarter. I was just curious for your expectations in terms of the two different business lines -- the Brand Solutions versus the death care. Is your expectation that as the year progresses, we should probably see more improvement on the Brand Solutions side vis-a-vis last year, than the death care side, because of commodity costs? Is that your expectation?

I think that's a fair comment, Jamie. We saw some recovery that is occurring in our Brand Solutions being a little bit more economically sensitive. You see that in our Marking Products business, as sales have increased, and what we're seeing in that side of the business is more consistency of orders, at least right now. We've been there before, though, Jamie. As you know, we've talked about this. The rug gets pulled out from underneath us the last minute sometimes. So, we're confident. We seem to have the orders. And when they deliver, we should see better results.

Okay. So then, Joe, if I could just ask a follow-up there. In the graphics business, relatively flat sales year-over-year. If you back out the currency impact, was Europe comparatively better year-over-year than the US? I had a hard time sorting through some of the language which you guys had in the prepared remarks.

It was. Europe was better. We saw not a significant improvement, but a reasonable improvement in our European operations, recognizing that our European businesses did not necessarily have as deep of a drop as our US operations. Our one business specifically, S&T in Germany, had a wonderful quarter. And simultaneous with that, we had some issues with one of our other businesses that we think will turn in the second quarter. So, we're pretty comfortable with year-over-year going there.

Okay. Great. Just, Joe, just refresh my memory, what's the status of the tobacco packaging regulations over there?

Turkey is done, and we're still rolling forward in other countries.

Okay. Great. All right, thanks very much.

Thank you. We now go to the line of Liam Burke from Janney Capital Markets. Please go ahead.

Good morning, Joe. Good morning, Steve.

Hi, Liam.

Good morning, Liam.

Joe, could you talk a little bit more about the granite business? To expand further outside of California is going to either require some increased distribution. Could you give us some background on how you plan on doing that?

There's two ways. We've identified some key granite distributors around the country that may result in acquisition, or if we think there's significant volume to be able to do a greenfield operation, it's not a significant investment. It's just a question of how quickly we want to get into the market, and whether or not we want to take a competitor out. So, we expect both, organic and acquisition.

Then how is it proceeding in California?

It's doing well. Currently, it is a little slower than we would like, but it is proceeding well. The bigger issue is, we've had some pretty good response to some of the proposals we've made on projects -- some of the cremation niche gardens and products that were offered by UMP by some of our other accounts. And as a result, we think that that's what's giving us the confidence to say that we think we've touched on something that is the right thing to do over the longer term. It is not going to be a fast roll-out, though, Liam.

Okay, great. And Steve, SG&A stepped up pretty precipitously year-over-year. Is that a function of acquisition-related costs, or what's in that number?

That is, for the most part, that is a function of -- I wouldn't say acquisition costs completely. I would say some acquisition costs, but really, more the operations that we acquired. For example, we acquired some casket distributors between this point in time this year and this point in time last year. And we acquired some -- the Freeman Metals here in October, and both of those bring higher SG&A expenses as a percent of sales.

Liam, you need to recognize that all of the warehousing and sales functions that the distributors bring are added to that line.

Okay, fine. I mean, there isn't any one-time in there, that's typically what I should look at?

Maybe a little bit of one-time, but for the most part, that's what you ought to look at. As we continue to improve the efficiency of those operations, though, that should get better.

Great. Thank you.

Thank you. We now go to the line of Greg Halter from Great Lakes Review. Please go ahead.

Yes, good morning.

Good morning, Greg.

Good morning, Greg.

Wondered if you could comment on the pension expense, and how much of that was incrementally higher year-over-year?

Yes, Greg. That was not significantly incremental higher, the year-over-year from a year ago. As you recall, a year ago, fiscal 2010 relative to fiscal 2009, our pension expense was about $5.2 million, $5.4 million higher, or about $1.3 million per quarter, fiscal 2010 over fiscal 2009. This year, incrementally, I would put it very much in the normal range in terms of inflationary increase.

Having said that, we're still operating at about $6 million higher than we were 2 years ago.

Correct.

Okay. And I think there was a question about the cigarette packaging. Any movement in the US, so far, in regard to -- I think the designs came out not too long ago?

Yes, we are evaluating. We've had some solicitations from a couple of customers to see what our involvements would be. We're still evaluating what position we're going to have with respect to (inaudible) in the United States. So, it's part of our process of looking at opportunities.

Okay. And I don't know if you saw, but yesterday Danaher announced the acquisition of EskoArtwork. I don't know if you're familiar with them or not, but -- .

Oh, we are familiar.

Okay. Was that a company that you may have looked at, or do they compete -- .

No.

-- with anything you do?

No, they are a software provider to the graphics industry. We are their customers.

Okay. All right, thanks.

(Operator Instructions). And we do have a follow-up from the line of Greg Halter. Please go ahead.

Yes, hello again.

Okay, Greg.

Just wondering if I could get an update on what's happening in Mexico relative to the two operations, the casket business as well as the bronze foundry that's being built there.

The casket business is running quite well for us. We are very pleased with our results down there. We are still migrating product down there. We would like a little bit more stability, or at least a feeling that there is more stability, before we kind of move forward with the balance of our business there or evaluate the elimination of that business in the United States. But the bronze foundry that we started, albeit small, is performing quite well, as well. We have moved more of the standard of, let's say, off-list items, some of the [vases] and things that are smaller as a part of our overall business, to Mexico. And today, it's performing as expected.

So, the bronze facility is operating, is open?

Yes, it is open, but small.

Okay. But plans to grow it over time?

Yes, but subject to the market in Mexico.

Okay. In terms of the -- .

At [political], not in anything else. Nothing else.

Okay. And I think there's about $71 million in cash and investments. Where is that primarily located?

For the most part, it's located in Europe, particularly in our German countries. Now, when I say primarily, of the $71 million, maybe a little over 50% might be located there. And then obviously pockets around the world. And still a fair amount of that sits here in the US, between cash and investments.

Okay. And what would you estimate your capital spending to be for the year, in light of what you did in the first quarter?

I still think for us, on our maintenance CapEx will still be around $20 million. The Mexican facility for bronze may drive that a little bit higher, but right now the timing on that's just a little difficult to predict.

Okay. And one last one for you. Both receivables and inventory were both up higher than sales, and obviously I realize there's some acquisitions in there. But is there any way to frame how much those would have been up or down on an organic basis?

On an organic basis, actually, the receivables and inventory would have declined a little bit, excluding the acquisitions. But again, I would still put that in the category of relatively consistent with year-end, absent acquisition.

Okay. Thanks.

Greg, when we've done these other acquisitions over the course of 24 to 36 months, we change out products and we integrate them into our warehouses. So we expect to see -- the receivables might stay a little higher than historic, but inventory will come down.

Okay. Thank you.

Thank you. And there are no further questions.

Okay. Well, we would like to thank everyone for participating in the call this morning, and we look forward to our second fiscal quarter Earnings Release and conference call in April. Thank you again, and have a good morning.

Thank you. Ladies and gentlemen, this conference will be available for replay after 10 AM Eastern Time today through Midnight February 4. You may access the replay service by dialing 320-365-3844, and entering the access code 186719. Again, that does conclude our conference for today. Thank you for using AT&T Executive TeleConference. You may now disconnect.