Matthews International Corp (MATW) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Matthews International second quarter financial results conference call. At this point all the participant lines are in a listen only mode. There will be an opportunity for your questions. Instructions will be given at that time. (Operator Instructions)

At this point I'll turn the conference now to the 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 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 198841. The replay will be available until 11.59 PM, May 9, 2011. 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 homepage under Investor Relations, you can click on Investor News to access the earnings release, and click on Reports to access the quarterly financial data. The documents are presented 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 March 31, 2011, will not be filed with the SEC until the first week of May.

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, 2011, the Company reported earnings of $0.56 per share compared to $0.53 for the second quarter last year, representing an increase of 5.7%. Consolidated sales were $220 million for the current quarter compared to $201 million for the same quarter a year ago, representing an increase of 9.6%. For the current quarter an increase in sales volumes in our Casket segment and Brand Solutions businesses, as well as the impact of recent acquisitions, were the principal factors in the sales growth compared to a year ago. For the six months ended March 31, 2011, consolidated sales increased 8.6% to $427 million compared to $394 million a year ago. The year-to-date increase reflected higher sales in all of the Company's business segments resulting primarily from increased sales volumes in our Brand Solutions group and the impact of recent acquisitions.

Consolidated operating profit for the quarter ended March 31, 2011, was $28.5 million compared to $27.1 million for the same quarter last year, representing an increase of 5%. Year-to-date consolidated operating profit for the current year was $50.5 million compared to $49.3 million for the same period last year. The improvements in operating profit compared to a year ago primarily reflected the impact of higher sales and the benefit of acquisitions, which were partially offset by increases in commodity costs such as bronze, steel, and fuel. Changes in foreign currency values against the US dollar did not have a material impact on the Company's sales and operating profit for the current quarter compared to the second quarter last year. On a year-to-date basis, changes in foreign currency values against the US dollar were estimated to have an unfavorable impact of approximately $3.4 million on the Company sales, and approximately $460,000 or $0.01 per share on operating profit compared to the first six months of fiscal 2010.

Sales for the Bronze segment were $52.9 million for the fiscal 2011 second quarter compared to $53.7 million last year. For the six months ended March 31, 2011, Bronze segment sales were $103.4 million compared to $103 million a year ago. The decrease in sales for the current quarter was primarily related to a decline in unit volume of memorial products and an unfavorable shift in product mix. For the six-month period, the segment's current year sales benefited from the impact of the acquisition of United Memorial Products in December 2009. Operating profit for the Bronze segment was $10.8 million for the current quarter compared to $12.2 million a year ago. On the year-to-date basis, Bronze segment operating profit was $20.9 million for the current period compared to $22.6 million last year. The declines in operating profit for the quarter and year-to-date period resulted primarily from the impact of changes in sales, including an unfavorable shift in product mix and higher bronze metal costs compared to last year.

Casket segment sales were $65.9 million for the quarter ended March 31, 2011, compared to $55.2 million for the fiscal 2010 second quarter. For the first six months, Casket segment sales were $126 million for the current period compared to $106 million a year ago. The quarter and year-to-date increases resulted primarily from recent acquisitions. In addition, for the current quarter, unit volumes were higher than the second quarter last year. Operating profit for the Casket segment for the fiscal 2011 second quarter was $8.9 million compared to $8.7 million for the fiscal 2010 second quarter. For the first six months of fiscal 2011, Casket segment operating profit was $14.8 million compared to $14.5 million a year ago. The benefit of higher sales and recent acquisitions was partially offset by an increase in commodity costs such as steel and fuel.

Fiscal 2011 second quarter sales for the Cremation segment were $9.8 million compared to $9 million for the same quarter last year, representing an increase of 9.1%. For the first six months of the current fiscal year, Cremation segment sales were $19.5 million compared to $17.5 million a year ago. The acquisition of a Cremation equipment manufacturer in England last year, March 2010, was the principal contributor to the sales improvement, offset partially 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 equipment backlog, which generally runs in the range of 9 to 12 months of sales, has increased. Operating profit for the Cremation segment for the quarter ended March 31, 2011, was $1.1 million compared to $953,000 a year ago, representing an increase of 17%. Year-to-date operating profit as of March 31, 2011, for the Cremation segment was $2.2 million compared to $2.1 million last year. The improvement in operating profit primarily resulted from the impact of the recent UK acquisition.

For our Brand Solutions group, Graphics imaging sales were $65 million in the fiscal 2011 second quarter compared to $60 million a year ago, representing an increase of 7%. The segment reported sales growth in all of its geographic markets including Europe, the United States, and Asia. On a year-to-date basis our graphics business reported sales of $125 million for the current period compared to $120 million last year, reflecting year-over-year sales growth, offset partially by unfavorable changes in foreign currency values. Changes in foreign currency values, principally the euro, had an unfavorable impact of approximately $4 million on the segment sales for the current period compared to the first six months last year.

Second quarter operating profit for the Graphics Imaging group was $5.9 million for the current year compared to $4.6 million a year ago. For the first six months of the current year, operating profit for the graphics business was $9.6 million compared to $8.6 million, representing an increase of 12%. Higher sales and improvements in the segment's US cost structure were the significant factors in the operating profit growth. Marking product segment sales for the quarter ended March 31, 2011, were $14.5 million compared to $11.9 million for the same quarter last year. For the first six months of the current fiscal year, Marking Product segment sales were $27.4 million compared to $23.4 million last year, representing an increase of 17%. The increases in sales for the quarter and year-to-date periods were primarily attributable to higher unit volumes of equipment and consumable products in the United States and China. In addition, the segment completed a smaller acquisition in the US in March 2011 that contributed to the sales increase.

As a result of the sales improvement, operating profit from the Marking Product segment increased to $1.9 million for the fiscal 2011 second quarter compared to $1.3 million a year ago. The segment's year-to-date operating profit increased to $2.9 million for the current year compared to $1.9 million last year.

Fiscal 2011 second quarter sales for the Merchandising Solutions segment were $12.3 million compared to $10.7 million a year ago. On a year-to-date basis, the segment reported sales of $26.2 million through March 31, 2011, compared to $23.9 million last year, representing an increase of 9.9%. The increases in quarter and year-to-date sales were attributable to higher sales to several global customers. As a result, the segment's operating results improved from an operating loss of $631,000 for the second quarter last year to a loss of $183,000 for the current quarter. For the six months ended March 31, 2011, the Merchandising Solutions segment results were slightly better than breakeven compared to an operating loss of $342,000 a year ago.

Sales and operating profit by segment for the quarter are posted on our website for your reference. Our fiscal 2011 second quarter consolidated operating margin was 12.9% of sales compared to 13.5% a year ago. For the first six months of fiscal 2011 our consolidated operating margin was 11.8% of sales compared to 12.5% a year ago. The decline in operating margin primarily reflected the impact of higher commodity costs such as bronze, steel, and fuel, and the Company's recent casket acquisition.

Gross margin for the quarter ended March 31, 2011, was 40% of sales compared to 38.7% for the same period a year ago. Year-to-date gross margin for fiscal 2011 was 39.3% of sales compared to 38.4% last year. The improvements in gross margin percentages were 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 administrative expense for the current quarter was 27.1% of sales compared to 25.2% for the same quarter last year. Selling and administrative expense for the first six months of the current fiscal year was 27.5% of sales compared to 25.9% of sales 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 second quarter was $498,000 compared to $809,000 a year ago. Year-to-date investment income was $1.6 million compared to $2 million last year. The declines in investment income primarily resulted from lower average levels of invested funds for the current year. Interest expense for the current quarter was $2.1 million compared to $1.8 million for the same period last year. For the first six months of fiscal 2011, interest expense was $3.8 million in fiscal 2011 which was slightly higher than a year ago. The increased interest cost resulted primarily from higher average level of outstanding borrowings.

Other income deductions net for the fiscal 2011 second quarter represented a deduction of $697,000 compared to $633,000 a year ago. For the first six months of fiscal 2011, other income deductions net represented a deduction of $966,000 compared to $731,000 a year ago. Other income and deductions generally include, among other items, the impact of currency gains or losses on inter-Company debt and bank fees. The deduction for net income from non-controlling interest was $532,000 for the current quarter compared to $364,000 a year ago. The increase principally reflected higher operating income for Saueressig, which is the Company's 78% owned graphic subsidiary in Germany. Please note that the Company is closing on the purchase of the remaining 22% interest this month.

On a year-to-date basis, the deduction for net income from non-controlling interest was $841,000 for the current year compared to $1 million last year. The year-to-date 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 year-to-date fiscal 2011 effective income tax rate was 35.2% of pre-tax income compared to 36% for the same period last year. The reduction in the consolidated effective income tax rate for the current period reflects the impact of recent operating structure initiatives in Europe which is expected to result in an ongoing benefit.

At March 31, 2011, the Company's consolidated cash and short-term investment balance was approximately $62 million compared to $61 million at September 30, 2010. Our current ratio was 2.5 at March 31, 2011 compared to 2.3 at September 30, 2010. Outstanding accounts receivable at March 31, 2011, were approximately $150 million which represented 61 day sales outstanding. Outstanding accounts receivable at September 30, 2010, approximated $151 million which represented 63 day sales outstanding. Consolidated inventories at the end of the current quarter were $122 million compared to $108 million at September 30, 2010. Acquisitions and currency changes contributed to the increase in inventories during the current year.

Our long term debt balance at the end of March 2011, both current and long term portions, approximated $259 million compared to $237 million at September 30, 2010. The increase resulted mainly from borrowings in connection with the acquisition of Freeman Metals in October 2010. At March 31, 2011, $210 million of the outstanding debt balance represented borrowings under our domestic revolving credit facility. As we announced last quarter, we signed a new domestic revolving credit facility in December which provides an increased borrowing limit of $300 million and a maturity of December 2015. The Company had approximately 29.5 million shares outstanding at March 31, 2011. During the current fiscal year, the Company has purchased 211,890 shares under its share repurchase program at a cost of approximately $7.4 million. At the end of the current quarter, approximately 1,438,000 shares remained under the current share repurchase authorization.

Depreciation and amortization expense for the quarter and six months ended March 31, 2011, were $6.9 million and $13.6 million, respectively. Capital expenditures for the quarter and six months ended March 31, 2011, were $3.9 million and $7.7 million, respectively. 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. In January, we reaffirmed this guidance. 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 are important considerations for our Bronze and Casket businesses. In addition, comparative price conditions and shifting product mix for our bronze memorial products remain challenges. However, we are encouraged by the recent unit volume growth for our Casket segment and Brand Solutions business, and the increase in equipment order backlog for our Cremation segment. 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.

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

Thank you, Steve. Good morning. Our second quarter results were pretty much as expected. Continued improvement in our Brand Solutions segment, including a particularly strong quarter from some of our German operations, improvement in our US Graphics and Merchandising divisions, and continued good performance out of our Marking Products division allowed us to meet our quarterly expectations. Our Bronze division saw a reduced order rate during the quarter which we believe was impacted by bad weather and some customer deferrals. Our Bronze division for the first six months, however, has delivered higher volume over prior year but at higher bronze costs and lower prices as consumers move to lower price product offerings.

In our Casket division, we continue to make improvement, integrating the recent acquisitions. And we expect to continue to see the benefits of this volume through our facilities as we integrate further during the balance of the year. Our Cremation division struggled during the quarter with unprecedented equipment deferrals, but we expect a better performance in the second half of the year as we work through our backlog which has grown, to deliver equipment to customers who are willing and able to take equipment during the next six months. We believe that a substantial portion of the equipment deferrals were economically driven as customers either could not finance the acquisition or the construction needed for the equipment, or they just wanted to wait until the economic stability had taken general hold.

All in all, we met our expectations for the quarter and anticipate a better second half of the year based on our backlogs. Consumer goods companies have begun the process of innovation and marketing which should lead to additional work in our Brand Solution segments. Opportunities to improve our stone business and better cremation realization give us confidence for the balance of the year as we move forward. With that, we expect to hold our full year guidance of mid to high single digit EPS growth over prior year.

At this time, we would like to open the call 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 those who wish to participate in the Q&A session have had an opportunity to do so.

(Operator Instructions) Clint Fendley with Davenport.

Thank you, good morning, Joe and Steve. Surprised a bit to see the unit volumes lower in the bronze business. I wondered if you could discuss that a little bit more. I know you talked about the weather and some of the challenges there. But if you also could just talk a little bit more about the product mix challenges as well.

Sure, Clint. If you take a look, as I said in my comments, the volume delivered to date, which is really indicative of what we have to work with, is actually up. And we've seen that over the first 6 months. That volume is better than it was prior year, reflecting a relatively flat to slightly up burial rate over prior year. The mix issue is a different issue. Over the years, what we've seen is the need to continue to raise our prices to cover our cost to the extent possible. That has moved some folks, we believe, downstream in the value chain. Ultimately, however, we think over time it is in the best interest of our customers to sell our higher-product mix, so I would tell you that we believe that to be a shorter-term problem.

Could you update us on the bronze foundry in Mexico?

We're on hold. The realities of what's going on down in Mexico has really slowed us down, Clint. We have pretty significant plans for Mexico, both for the bronze division and other divisions that we have. But until we feel a little more comfortable with the environment down there, we're a little bit on hold. What we have there is running just fine and is the seeing the results we expected at this time, so it is not a drain on our results. In fact, it is a slight contributor to where we were. But I would tell you that further investment is going to take a little bit of comfort on our side.

Okay. And just on the volume side, the organic growth in the Casket business for the quarter?

It was in line with the market results. We had slight increases both in market share and demand as a result of death rates. So we are right in line. Today, we think, with our acquisitions we should be pushing somewhere around the 20% market share.

Okay. And then finally, I wondered, Steve, just a share count number for the quarter?

At the end of the quarter?

Yes.

We're sitting about 29.5 million shares outstanding at the end of the quarter.

Okay, great, thank you, guys.

Liam Burke with Janney Capital Markets. Please go ahead.

Steve, just talk a bit about Saueressig. It looks like the graphics business, you mentioned that all markets were up. I know the business is more profitable in lower volumes, but is that still true or are there any changes in Saueressig right now?

Liam, that's still true. We had a very good end of the quarter for Saueressig. We installed, actually replaced, some equipment in a line there during the first quarter. It affected volumes even into early in the second quarter. But we've seen the results of the new line in improved productivity as we completed the second quarter, and have a nice backlog of business finishing up the end of the second quarter. And the year-over-year quarterly results, not only for Saueressig but the whole German market, improved year-over-year.

Okay, great. And Steve, on the SG&A line, was up almost about 17.5%. I know you mentioned acquisitions as being a contributor to the higher SG&A, but is there anything else in there that would make that line increase that much?

There's a couple of key issues for you to remember. Every time we do an acquisition, especially on the Casket side of the business, Liam, we add warehouses in locations where we don't currently operate, especially when we added some of the distributors that were part of the original network. Those folks, that warehousing cost in areas where we don't have presence, will add SG&A. That is probably the most significant contributor. We're still operating with a higher pension cost over the last several years, so that is also in that number. But those are the two largest contributors to it.

That's right. I'd say the other piece of that, Liam, although a smaller piece of it, the cremation acquisitions that we did in Europe, those businesses have lower overall margins than the US equipment businesses, so that pushes SG&A up a little bit, as well.

Greg Halter with the Great Lakes Review. Please go ahead.

Good morning. Steve, I think you mentioned that the inventory number is up on a year-over-year basis. Some of that is due to acquisitions and so forth. Do you have a figure on what core inventory may have increased on a year-over-year basis?

Greg, I don't have that in front of me, but core inventory was up, as well, for a couple of reasons. First, with respect to bronze pricing, that would have driven inventories up a little bit. And then currency movements. Currency movements from the end of September, particularly the euro, until March 31 would have contributed to a US-dollar-reported increase in our German inventories, including Saueressig.

And it also would include our Italian business over there, as well.

Okay. And any revision in your forecast on capital spending for the year? I think you had been saying it would be around $20 million for the year.

No significant changes foreseen at this time.

(Operator Instructions) Scott Blumenthal with the Emerald Advisors.

Good morning, Joe, good morning, Steve. Steve, you had a nice margin performance in Cremation, which is ostensibly a steel-based business, cremation equipment. You weren't able to get the same type of leverage in Casket. Can you talk a little bit about how the dynamics in those 2 businesses are different, and how you're able to maybe pass through materials better in 1 segment than the other?

You also need to recognize in the reported earnings for the Cremation business, Scott, we include our Cremation Caskets, which are not metal based. So we're feeling the same impact of commodities on the steel side and have very similar results relative to our Casket business when you look at the steel costs for cremation equipment as well as for caskets. It is the cremation caskets that run through that side of the business that have brought those kind of increased margin results to the bottom line.

Okay, Joe, that's really helpful. Can you maybe give me a little bit of an idea as to how much of the Cremation business sales are casket as opposed to equipment?

Steve? Do you have that readily available?

I would approximate about $10 million on the cremation casket sales that might be included on an annual basis.

And they do a pretty good job of managing that business, so we've seen improvement over the last several years as they continue to get better at it.

And to the presenters, no further questions in queue.

Thank you, John. We would like to thank everyone for participating in our second-quarter conference call this morning. And we look forward to our third-quarter conference call in July. Have a good day.

Once again, ladies and gentlemen, this conference is available for replay. It starts today at 12 PM Eastern, will last until May 9 at Midnight. You can access the replay at any time by dialing 320-365-3844 and entering the access code 198841. That does conclude your conference for today. Thank you for your participation. You may now disconnect.