Matthews International Corp (MATW) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Matthews International third quarter financial results call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

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

Thank you, Paul. 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 around Noon today. To access the replay, dial 1-320-365-3844 and enter the access code 209507. The replay will be available until 11.59 PM, August 4, 2011.

We have posted on our website, which is www.MATW.com, the third 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 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 disclaimers as pertains to the 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 of future periods to be materially different from Management's expectations. Although the Company believes 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, 2011 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, 2011, the Company reported earnings of $0.74 per share compared to $0.68 for the fiscal 2010 third quarter. Both periods included a $0.02 per share benefit related to favorable special income tax adjustments. Excluding these adjustments, fiscal 2011 third quarter earnings per share were $0.72 compared to $0.66 last year, representing an increase of 9.1%.

Consolidated sales were $232 million for the current quarter compared to $213 million for the same quarter a year ago, representing an increase of 8.5%. The sales improvement for the current quarter was primarily attributable to higher unit volumes in our casket, graphics imaging, and marking products segments and the benefit of recent acquisitions. In addition, changes in currency exchange rates favorably impacted reported sales for the current quarter compared to a year ago.

Consolidated operating profit for the quarter ended June 30, 2011 was $35.1 million compared to $34.5 million for the same quarter last year. The improvement in operating profit compared to the same quarter a year ago primarily reflected the impact of higher sales and the benefit of acquisitions, which were partially offset by significant increases in commodity costs such as bronze, steel, and fuel. For the nine-months ended June 30, 2011, consolidated sales increased 8.5% to $659 million compared to $607 million a year ago.

Each of the Company's segments reported higher year-to-date sales, resulting primarily from increased sales volumes in our graphics, imaging, and marking products segment and the benefit from recent acquisitions. Year-to-date consolidated operating profit through June 30, 2011 was $85.5 million compared to $83.8 million for the same period last year. Similar to the results for the third quarter, the improvement in year-to-date operating profits compared to a year ago primarily reflected the impact of higher sales and the benefit of acquisitions, offset partially by increased commodity costs.

Changes in foreign currency values against the US dollar did not have a material impact, less than 1%, on the Company's year-to-date sales and operating profit compared to last year. Sales for the bronze segment were $62.8 million for the fiscal 2011 third quarter compared to $62 million last year. For the nine-months ended June 30, bronze segment sales were $166.1 million in the current fiscal year compared to $165 million a year ago.

Favorable foreign currency rate changes were a significant factor in the improvement for the third quarter. For the nine-month period, the segment's current year sales benefited from the impact of the acquisition of United Memorial Product in December 2009. Excluding the impact of acquisitions and currency, bronze segment sales declined for the quarter and nine-month periods compared to a year ago, reflecting lower unit volume of bronze memorial and architectural product, and an unfavorable shift in product mix.

Operating profit for the bronze segment for the fiscal 2011 third quarter was approximately $18 million compared to $18.5 million a year ago. On a year-to-date basis, bronze segment operating profit was $38.9 million for the current period compared to $41 million last year. The declines in operating profit for the quarter and year-to-date periods resulted primarily from the impact of lower bronze product sales, including an unfavorable shift in product mix, and a significant increase in bronze metal costs compared to last year.

Casket segment sales were $58.3 million for the quarter ended June 30, 2011 compared to $52.4 million for the third fiscal quarter last year. For the nine-months ended June 30, 2011, casket segment sales were $184.4 million compared to $158.3 million a year ago. The quarter and year-to-date increases resulted primarily from recent acquisition. In addition, for the second consecutive quarter, unit volumes were higher than the comparable quarter last year.

Operating profit for the casket segment for the fiscal 2011 third quarter was $6.3 million compared to $5.5 million for the fiscal 2010 third quarter. For the first nine-months of fiscal 2011, casket segment operating profit was $21.1 million compared to $20 million a year ago. The improvement in operating profit for both the quarter and year-to-date period reflected the benefit of higher sales and recent acquisitions, partially offset by an increase in commodity costs, such as steel and fuel.

Fiscal 2011 third quarter sales for the cremation segment were $11.1 million compared to $10.9 million for the same quarter last year. Year-to-date cremation segment sales were $30.6 million as of June 30, 2011 compared to $28.4 million a year ago.

The sales improvement for the current quarter was primarily attributable to an increase in US equipment sales. Prior to this quarter, the segment had experienced a year-over-year decline in US equipment sales due primarily to delays related to customer financing and permitting requirements. For the year-to-date comparison, current year sales included the benefit of the acquisition of a cremation equipment manufacture in England last year. The acquisition occurred in March 2010.

Operating profit for the cremation segment for the quarter ended June 30, 2011 was $1.8 million compared to $1.3 million a year ago. For the nine-months ended June 30, 2011, the segment's operating profit was $4 million compared to $3.3 million last year. The improvement in operating profit primarily resulted from cost containment efforts in the US, and the impact of the recent acquisition in the UK.

For our brand solutions group, graphics imaging sales were $68.5 million in the fiscal 2011 third quarter compared to $58 million a year ago, representing an increase of 18%. The segment reported sales growth in all of its geographic markets, including Europe, the United States, and Asia.

In addition, the segment sales benefited from favorable changes in foreign currency rates. Changes in foreign currency values, principally the Euro, had a favorable impact of approximately $6 million on the segment sales for the current quarter compared to the same period last year. Year-to-date, our graphics segment reported sales of $193.3 million for the current year compared to $178.1 million last year, principally reflecting higher sales volume. Fiscal 2011 third quarter operating profit for the graphics imaging segment was $6.1 million compared to $5.5 million a year ago, representing an increase of 11%.

For the first nine-months of the current fiscal year, operating profit for the graphics segment was $15.7 million compared to $14.1 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 improvement.

Marketing product segment sales for the quarter ended June 30, 2011 were $15.7 million compared to $13.2 million for the same quarter last year, representing an increase of 19%. For the first nine-months of fiscal 2011, marketing product segment sales were $43.2 million compared to $36.7 million last year, representing an increase of 18%. The increases in sales for the quarter and year-to-date periods were primarily attributable to higher unit volumes in the United States and China. In addition, the segment completed a small acquisition in the US in March 2011 that contributed to the increase in sales.

Operating profit for the marking products segment was $1.8 million for the fiscal 2011 third quarter compared to $2.1 million a year ago. An unfavorable change in product mix, specifically higher sales of equipment versus consumables product, and in investments in new product development initiatives, were the principal factors in the year-over-year decrease. The segment's year-to-date operating profit increased to $4.7 million for the current year compared to $4 million last year, mainly as a result of higher sales.

Fiscal 2011 third quarter sales for the merchandising solutions segment were $15.1 million compared to $16.8 million a year ago. Third quarter sales a year ago included a significant merchandising project that did not repeat in the current year. In addition, several projects slated for shipment in the current quarter were delayed by customers to next quarter. As a result, the segment's operating profit for the current quarter declined to $1.1 million compared to $1.7 million a year ago.

On a year-to-date basis the merchandising solutions segment reported sales of $41.3 million for June 30, 2011 compared to $40.7 million last year. The year-to-date sales increase resulted primarily from higher sales to several global customers during the first two quarters this year. The segment's year-to-date operating profit was $1.1 million compared to $1.3 million last year, reflecting a shift in sales mix.

Sales and operating profit by segment for the quarter and nine-month period are posted on our website for your reference. Our fiscal 2011 third quarter consolidated operating margin was 15.2% of sales compared to 16.2% a year ago. For the nine-months ended June 30, our consolidated operating margin was 13% of sales this year compared to 13.8% last year. The decline in operating margin primarily reflected the impacts of higher commodity costs and the Company's recent casket acquisition.

Gross margin for the quarter ended June 30, 2011 was 39.7% of sales compared to 39.8% for the same period a year ago. The slight decline for the quarter reflected the impact of commodity price increases on direct material costs for the bronze and casket segments. Year-to-date gross margin for fiscal 2011 was 39.4% of sales compared to 38.9% last year. The improvement in the year-to-date gross margin percentage 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.

Selling and administrative expense for the current quarter was 24.6% of sales compared to 23.7% for the same quarter last year. Selling and administrative expense for the first nine-months of the current fiscal year was 26.4% of sales compared to 25.1% 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 third quarter was $595,000 compared to a loss of $96,000 a year ago. Year-to-date, investment income was $2.2 million compared to $1.9 million last year. The increase in investment income primarily resulted from higher rates of return on invested securities during the current year.

Interest expense for the current quarter was $2.2 million compared to $1.9 million for the same period last year. For the first nine-months of fiscal 2011, interest expense was $6 million compared to $5.6 million a year ago. The increased interest costs for the current period resulted primarily from a higher average level of outstanding borrowings, which were due primarily to recent borrowings for the purchase of the remaining 22% interest in Saueressig in April 2011.

Other income deductions net for the fiscal 2011 third quarter represented a deduction of $559,000 compared to $329,000 a year ago. For the first nine-months of fiscal 2011, other income deductions net represented a deduction of $1.5 million compared to $1.1 million a year ago. Other income and deductions generally include among other items the impact of currency gains or losses on inter-company loans and banking related fees.

The deduction for net income from non-controlling interest was $296,000 for the current quarter compared to $798,000 a year ago. The reduction during the current quarter principally resulted from the Company's purchase of the remaining 22% interest in Saueressig. The Company acquired its initial 78% interest in this entity in May 2008. On a year-to-date basis, the deduction for net income from non-controlling interest was $1.1 million for the current year compared to $1.8 million last year.

The year-to-date decrease resulted principally from the Company's Saueressig purchase and effective as of the beginning of this fiscal year, the purchase of the remaining 25% ownership interest in one of its other German graphic subsidiaries. The year-to-date fiscal 2011 effective income tax rate was 34.2% of pre-tax income compared to 35.3% for the same period last year. The third quarter of both fiscal years included favorable income tax adjustments equivalent to $0.02 per share related to the closure of certain prior income tax periods. Excluding the favorable impact of the unusual tax adjustments reported in the third quarters of both fiscal years, the year-to-date effective tax rates through June 30 were 34.9% this year compared to 36.1% at this time last year.

The reduction in the consolidated effective income tax rate for the current year reflects the impact of recent operating structure initiatives in Europe, which are expected to remain an ongoing benefit. At June 30, 2011, the Company's consolidated cash and short-term investment balance was approximately $56 million compared to $61 million at September 30, 2010. Our current ratio is 2.4 at June 30, 2011 compared to 2.3 at September 30, 2010.

Outstanding accounts receivable at the end of the current quarter approximated $161 million, which represented 63 day sales outstanding compared to approximately $151 million, or 63 day sales outstanding at September 30, 2010. Consolidated inventories at June 30, 2011 were $132 million compared to $108 million at September 30, 2010.

Acquisitions and currency changes contributed to the increase in inventories during the current year. In addition, the recent implementation of a hub and spoke distribution system for the northeast region has resulted in a short-term increase in casket inventories. However, this system is expected to result in a reduction in inventories over the next 12 months.

Long-term debt at the end of June 2011 including both current and long-term portions approximated $269 million compared to $237 million at September 30, 2010. The increase resulted principally from borrowings in connection with the acquisition of Freeman Metals in October 2010 and the Saueressig transaction in April 2011. At June 30, 2011, $204 million of the outstanding debt balance represented borrowings under our domestic revolving credit facility at an average rate of 2.98%.

In December 2010, the Company signed a new domestic revolving credit facility which provides an increased borrowing limit of $300 million and a maturity of December 2015. The Company had approximately 29.4 million shares outstanding at June 30, 2011. During the current fiscal year, the Company has purchased approximately 394,000 shares under its share repurchase program at a cost of approximately $14.3 million. At the end of the current quarter, the Company had approximately 1,256,000 shares remaining under the current share repurchase authorization.

Depreciation and amortization expense for the quarter and nine-months ended June 30, 2011 were $6.8 million and $20.4 million respectively. Capital expenditures for the current quarter and nine-month periods were $8.2 million and $15.9 million respectively. Capital expenditures for the current quarter included new automated cylinder production equipment for Saueressig and a new printing press for the merchandising solutions segment. For the current fiscal year, the Company is currently expecting capital expenditures to be in the low $20 million range.

In November, we provided guidance that our fiscal 2011 earnings per share were projected to grow in the mid to high single-digit range over fiscal 2010 excluding unusual items. Despite a significant increase in commodity costs from a year ago, the Company has been able to achieve this targeted growth level through the first nine-months of the year.

In our projections for the fourth quarter, higher commodity costs and ongoing demographic trends remain important considerations for our bronze and casket businesses. Also, competitive price conditions and shifting product mix will still be challenges for these businesses in this economic climate. However, we continue to see favorable trends relative to a year ago in unit volume for our brand solutions group, as well as the casket segment. In addition, delivery rates for cremation equipment improved from the slowdown we experienced during the first two fiscal quarters.

Also, acquisitions and recent cost structure initiatives are expected to continue to benefit earnings compared to a year ago. 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.

We are generally pleased with the operating results for our third quarter. Our overall business continued to improve as sales grew nicely in several of our businesses as a result of both organic and acquisition growth. We expect to see continued improvement in our operating profit as we further integrate these acquisitions, especially in our casket division, where sales and operating profit improved over prior periods. We expect to see margin expansion in this division over the next several years, as we further integrate product lines into our manufacturing facilities and capitalize on our recently launched hub and spoke distribution system.

As you can see from our balance sheet, we have seen an increase in our inventory, as we prepared for the launch of our new distribution system. We also expect to see steady improvements in inventory utilization as a result of this new system.

Our bronze business struggled with commodity costs, which are at levels far in excess of the costs incurred last year. Despite efforts to reduce costs and improve plant utilization, our third quarter and year-to-date results in this business have suffered significantly by the escalation in the cost of copper. We do not expect to see improvement in our commodity costs in the near term, but we are making plans to further improve our manufacturing costs to help absorb the impact. The benefits of these plans will not be felt immediately, but they will position this business for years to come, as the lowest cost provider in the industry.

After a difficult first half of the year, our US cremation division saw a return to normalcy in equipment sales resulting in a good improvement in operating profit. We are currently expecting this division to continue this performance through the end of the year. Our graphics imaging group continued to show signs of improvement as all of our larger brand customers released new packaging programs at a more normalized rate.

The recent addition of Kroma, our gravure cylinder acquisition in Izmir, Turkey, should add modestly to the results for the fourth quarter causing this division to show a strong improvement over prior year. We expect to see continued growth from this acquisition, particularly in the fast-growing Turkish market.

Similarly, our merchandising solutions business performed well, albeit at lower profits than prior year. Strong performance during the third quarter of 2010 made quarterly comparisons difficult for this division. The merchandising group has done a good job of positioning itself for a more normal marketing environment, as they have penetrated further into their brand owner customers. We expect to see improvement in this division as backlog for the fourth quarter is good.

Lastly, our marking products division had a good improvement in sales during the quarter, resulting from better equipment sales, but slightly lower operating profit caused by a change in mix of sales. Principally the lower sales of our consumable goods. This division has been a leading indicator for us of the general health of the economy.

In the final weeks of the third quarter, we saw a decline in consumable sales and an inability to obtain commitments for new equipment from our customers, which is a reversal of what we have seen over the past several quarters. All in all, we are performing as planned in a very difficult environment. Challenges remain, particularly on the commodities front, but we believe that when the fourth quarter is closed, we will have delivered what we have promised. Thus, we are maintaining our guidance of a mid to high single-digit EPS growth over prior year.

With that, I would like to open it up to questions.

At this time, 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) Liam Burke, Janney Capital Markets.

Could you give us a little -- you talked about the unit volume increase in systems for cremation in the US. Could you give us some color as to how the business is progressing in Europe?

Liam, we've had some deferrals in Europe, quite frankly, in a couple of our business. We have 2 operations, 1 in Udine, Italy and 1 in Manchester, England. Those businesses continue to land additional projects through government bidding processes.

However, delays in delivery and commitment dates have pushed out some of those sales. Timing is going to be on their side as they try to get their financing in place, much -- these are all sold to municipalities. As the municipalities find themselves in difficulty, this is 1 thing that they push off and the government has accommodated by pushing off their compliance date. So, we'll see improvement over there, we think over the next year or 2. Our backlogs continue to grow, so we remain positive.

Great, thank you. And, Steve, you talked about the inventory with the new hub and spoke system and caskets. How much does bronze, or the inventory on the bronze affect the levels here?

Well, certainly there's an increase in our total inventories that are related to bronze and the ingot costs, but because of the nature of that business and the custom nature of those products, there's not a lot -- that business does not have finished goods so to speak. So, it's really just raw materials, raw materials inventory. But you're absolutely correct, that the commodity prices would affect the value of that inventory.

The 1 thing I would add to that, Liam, is there is a significant portion of our bronze business that is in Europe. And between currency and commodity prices, we have seen an increase in our US dollar denominated value of bronze.

(Operator Instructions) At this time, there are no further questions in queue.

Okay, Paul. Well, that was a short question-and-answer period, so we certainly look forward to the fourth quarter and look forward to our earnings release and conference call, which will be in early November. Thank you, and have a good day.

Ladies and gentlemen, this conference will be available for replay after Noon, Eastern time today through Midnight, Eastern time on Thursday, August 4. You may access the AT&T Executive Replay Service at any time by dialing 320-365-3844, entering access code 209507. That number again is 320-365-3844, access code 209507. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.