Matthews International Corp (MATW) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Matthews International first quarter financial results conference call.

(Operator Instructions)

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

With that being said, I'll turn the conference over to the CFO, Mr. Steve Nicola. Please go ahead.

Thank you, John. Good morning. I'm Steve Nicola, Chief Financial Officer of Matthews. Also on the call this morning is Joe Bartolacci, our Company's President and CEO.

Today's conference call has been scheduled for one hour, and will be available for replay later this morning. To access the replay, dial 1-320-365-3844; enter the access code 315195. The replay will be available until 11:59 PM February 7, 2014.

We have posted on our web site, which is www.matw.com, the first-quarter earnings release and financial information we will discuss this morning. On the top of our home page, under the Investor tab, click on Investor News to access the earnings release. For the quarterly financial data, click on Financial Reports to access the information under the section Matthews International Quarterly Reports. The documents are presented in a PDF file format.

Before beginning the discussion, at the advice of legal counsel, I've 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 quarter ended December 31, 2013, will not be filed with the SEC until the week of February 3.

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 December 31, 2013, the Company reported earnings of $0.29 per share. On a non-GAAP basis, the Company's adjusted earnings were $0.38. The net amount of these non-GAAP adjustments was $0.09 per share for the FY14 first quarter, and $0.12 a year ago. In our earnings release, we've provided a reconciliation of earnings per share on a GAAP and non-GAAP basis.

The FY14 non-GAAP adjustments included the following. Pension and post-retirement expense: Consistent with last year for our non-GAAP disclosure, we have adjusted pension and post-retirement expense to reflect only the service cost components of this expense.

Cost reduction initiatives: As we have been reporting for the past year, we have significant ongoing strategic cost-reduction programs in our businesses. The additional costs associated with these initiatives unfavorably impacted earnings by approximately $0.06 during the current quarter compared to $0.03 per share a year ago.

And litigation costs: We are currently in a legal dispute with one of our competitors in the funeral home product segment. Due to the extent of the anticipated costs in connection with the litigation of this matter, we are including this expense in unusual items in FY14. Unusual items for the prior period also included acquisition-related expenses, and costs related to the ERP implementation for the cemetery product segment.

Consolidated sales for the FY14 first quarter were $229.9 million compared to $225.6 million for the same quarter a year ago, representing an increase of $4.3 million. The increase primarily resulted from sales growth in the Company's marking and fulfillment systems segment, and the benefit of recent acquisitions. The Company acquired Wetzel GmbH and Pyramid Controls in the first quarter last year.

Consolidated operating profit for the FY14 first quarter was $15 million compared to $16.5 million a year ago. Lower sales in the memorialization businesses and the merchandising solutions segment were the primary factors in the decline. As I noted earlier, unusual charges impacted operating profits for both periods.

Sales for the cemetery products segment were approximately $50 million for the FY14 first quarter compared to $53 million a year ago. Lower unit volume of memorial products was the main factor in the sales decline. Based on published CDC data, we estimated that the number of casketed in-ground burial deaths in the United States declined during the FY14 first quarter compared to a year ago. As a result of the decrease in sales, operating profit for the cemetery product segment for the current period was $6.1 million compared to $6.4 million a year ago.

Sales for the funeral home product segment were $59 million for the quarter ended December 31, 2013, compared to $61 million last year, primarily reflecting the change in the casketed in-ground burial deaths. Operating profit for the funeral home product segment for the current quarter was $6.8 million compared to $7.7 million for the first quarter last year. Excluding unusual items from both periods, operating profit for this segment increased for the current quarter compared to a year ago. The increase in adjusted operating profit reflected the benefit of our recent production and distribution cost initiatives. Unusual items for the current period primarily included the cost of lean initiatives and the litigation-related costs mentioned earlier.

FY14 first-quarter sales for the cremation segment were $8.9 million compared to $11.1 million for the same quarter last year. Declines in equipment sales in the UK and Europe were the principal factors in the change from a year ago. In general, the current-period sales decline is attributable to timing, as US equipment order rates were relatively consistent with a year ago, and the segment is projecting overall sales growth for FY14. As a result of the sales decline, the cremation segment reported an operating loss of $402,000 for the quarter ended December 31, 2013, compared to operating profit of $475,000 a year ago.

For our brand solutions group, graphics imaging sales were $73 million in the FY14 first quarter compared to $62 million last year. The acquisition of Wetzel in the first quarter last year, and favorable changes in currency rates, were the primary factors in the sales improvement. First-quarter operating profit for the graphics imaging segment was approximately $1 million for the current year compared to $292,000 a year ago, primarily reflecting higher sales. The operating margins for this segment continued to be challenged by European market conditions.

Sales for the marking and fulfillment systems segment for the FY14 first quarter were $21.5 million compared to $17.9 million for the same quarter last year. The increase in sales for the quarter was primarily attributable to higher sales volume and the benefit of the December 2012 acquisition of Pyramid Controls. As a result, operating profit for marking and fulfillment systems was $1.1 million for the current quarter compared to $376,000 for the FY13 first quarter.

FY14 first-quarter sales for the merchandising solutions segment were $18.4 million compared to $20.6 million a year ago. The decrease was primarily due to lower sales to several national accounts. As a result, the segment's first-quarter operating profit was $277,000 for the current quarter compared to $1.3 million a year ago. Similar to the cremation segment, the current-period sales decline for merchandising solutions is also considered to be timing, as the segment is projecting sales growth for FY14.

Sales and operating profit by segment, including unusual items for the quarter and fiscal-year periods, are posted on our website for your reference. There was a reposting recently to adjust some of the percentage change items for operating profit, as the initial posting had incorrect percentages.

Our FY14 first-quarter consolidated operating margin was 6.5% of sales compared to 7.3% a year ago. Excluding unusual items, our operating margin was 7.7% for the current quarter compared to 8.7% last year. For FY13, our full-year consolidated operating margin was 11.2%, excluding unusual items. Our first fiscal quarter generally is lower on a seasonal basis. Gross margin for the quarter ended December 31, 2013, was 35.4% of sales, which is comparable to a year ago.

Selling and administrative expense for the current quarter was 28.9% of sales, compared to 28.1% for the same quarter last year. The increased percentage mainly reflected the impact of lower memorialization sales.

Investment income for the FY14 first quarter was $874,000 compared to $233,000 a year ago. The increase resulted from higher investment performance on assets held in trust for certain of the Company's benefit plans.

Interest expense for the current quarter was $2.9 million compared to $3.2 million for the same period last year. The lower interest costs for the current quarter resulted primarily from a lower level of outstanding debt.

Other income deductions net for the FY14 first quarter represented a deduction of $1 million compared to $1.1 million a year ago. Other income and deductions generally include, among other items, banking-related fees, and the impact of currency gains or losses on certain intercompany debt.

Net income from non-controlling interests for the current quarter resulted in additional income of $8,000 compared to $252,000 a year ago. One of the factors in the year-over-year change included the purchase of the remaining ownership interest in our Turkish subsidiary last year.

The Company's effective income tax rate for the current quarter was approximately 34% of pre-tax income. The effective tax rate was 32.7% for the fiscal year ended September 30, 2013. The effective rate for FY13 included the benefit of a European tax-loss carry back.

At December 31, 2013, the Company's consolidated cash was $63 million compared to $59 million at September 30, 2013. Our current ratio was 2.3 at the end of the current quarter compared to 2.2 at September 30, 2013. Accounts receivable at the end of the current quarter totaled $172 million compared to $188 million at the end of FY13. Consolidated inventories at December 31, 2013, were $140 million compared to $131 million at September 30, 2013.

Long-term debt at the end of the current quarter, including both current and long-term portions, approximated $377 million compared to $375 million at September 30, 2013. At December 31, 2013, $310 million of the outstanding debt balance represented borrowings under our domestic revolving credit facility at an average interest rate of around 2.5%. The borrowing capacity of this facility is $500 million, with a maturity date of July 2018.

The Company had approximately 27.3 million shares outstanding at the end of the current quarter, and purchased approximately 102,000 shares under its share repurchase program at a cost of $4.2 million. At the end of the current quarter, approximately 1.1 million shares remained under the current share repurchase authorization.

Depreciation and amortization expense for the quarter ended December 31 was $9.3 million. Capital expenditures for the current quarter were $4.6 million.

In developing our outlook for the remainder of FY14, some of the more significant factors we considered included the following: our strategic cost-structure initiatives, particularly with respect to lean and sourcing will continue. As I noted earlier, we've started to realize some of the benefits of these initiatives, and as these projects progress, the unusual costs associated with these actions will also continue. Consistent with our existing practice, we plan to identify and disclose these costs as they are incurred.

Based on published CDC data, we estimated that the number of deaths in the United States in the most recent quarter increased slightly from a year ago, with a decline in the number of casketed, in-ground burial deaths. This indicates that the death-rate trends have moderated from FY13 to a more normal trend. As such, this would project a small increase in overall deaths, with a decline in casketed in-ground burial deaths for the remainder of FY14.

The challenges stemming from the European economic weakness are expected to continue. While we are forecasting some growth, the economic climate is expected to be difficult in the near term, and remains a risk to our European businesses. And as I indicated earlier, the first-quarter declines in sales in our cremation and merchandising solutions businesses are currently considered to be timing, as both segments are still projecting sales growth for the full fiscal year.

Based on our first-quarter results and current forecasts, we are maintaining our guidance at this time. Accordingly, excluding unusual items, we project our adjusted non-GAAP earnings per share to be in the range of $2.62 to $2.70 for FY14. In addition, we currently expect the FY14 second-quarter earnings per share to be relatively consistent with the second quarter last year, excluding unusual items.

Lastly, the Board yesterday declared a dividend of $0.11 per share on the Company's common stock. The dividend is payable February 17, 2014, to stockholders of record February 3, 2014.

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

Good morning. Our first quarter was generally as we expected. Deferral of packaging innovation projects throughout our businesses caused a slow start for our packaging graphics division. Similarly, the delayed timing of projects in our merchandising business was also expected, causing us to have a slow start in this business as well.

Our cremation division suffered some anticipated shipment delays by customers, which impacted the first-quarter results. While our cemetery products and funeral home products divisions saw a decline in casketed deaths versus the prior year, bringing our results down in cemetery products, but up in funeral home products when one-time charges were excluded. This increase reflected some of the benefits of our strategic initiatives which we started last year.

From a very positive perspective, our fulfillment business had another strong quarter, especially in our [pectolite] products business. And we saw a strong increase in equipment orders for the first time in several years, which we believe bodes well for the economy and for our Business. We also have had a very strong order intake in our Pyramid warehouse control business, which we expect to deliver over the balance of the year.

We've also won some significant new accounts in our US graphics business, moving us further down the line of transformation towards CPG customers in this segment, which has lagged for years. Another positive for this segment comes from a multi-year exclusive contract we recently signed with Phillip Morris for our European gravure businesses. This contract will allow us to expand our penetration in the global tobacco industries, including a new facility in Russia, which we expect to open within the year.

We also expect further good news from our cremation division, where order rates remain strong. And our industrial incineration products business is bidding on several very large projects, which could be impactful on the overall full-year results of our Business. We've also landed a very large contract with a major consumer product company in our merchandising business, which we expect to deliver over the full year as well.

As you're also aware, we have continued our strategic initiatives, and we believe that we are only beginning to see some of the benefits of these actions. It has taken longer to see those benefits than expected, and perhaps some of them will take longer to realize fully, but we can see the path to improved performance from all of our actions. Given our anticipated slow start and the many positives we are beginning to see, we are cautiously optimistic about our full-year results. We expect challenges, but we also expect opportunities, therefore, we are maintaining our full guidance for the year, which is adjusted for unusual items.

At this time, we would like to open the call 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. John?

(Operator Instructions)

First, we'll go to the line of Daniel Moore with CJS Securities. Please go ahead.

Good morning, gentlemen. It's Bob Labick backing up for Dan.

Bob, how are you? Good to see you again.

Good to have you again.

It's nice to talk to you guys again, too, thanks. Wanted to start off in the marketing and fulfillment. You mentioned organic volume growth and then also growth from the acquisition. And Joe at the end there, you highlighted it a little bit. Could you maybe go into a little more detail and tell us what are the drivers that you're seeing there, and what are expectations? And does this organic growth have legs?

Yes, we've got a couple of things there, Bob. First off, for those of you that have followed us for many years, you also are aware that this division for us has been a leading indicator of economic turn around and decline for that matter. We started to see a decline in equipment order rates in somewhere around 2007, 2008 before the crisis actually hit. And it held true, and the market collapsed underneath us for a while.

This last quarter, we saw a very high order rate for equipment orders, which we have not seen in literally years. The ink sale that come with that, which is really the indicator of production, is still lagging. But we expect that to follow, now that the equipments are beginning to turn, so. What you hear at a more macro level about, maybe this is the year of the capital spend, we're starting to see that in our equipment sales there.

With regard to our fulfillment businesses, we have developed what we think is a very unique, high-value proposition for the fulfillment of warehouse -- automated warehouse systems. We do have legs, we believe. When we couple that -- all the bits and pieces we've cobbled together into a sophisticated alternative to some of the larger integrated solutions that are out there, and couple that with some of our equipment that we have, and particularly with respect to a new control system that we have out there called Viacode, we think we've got some legs.

Now, Bob, you've known us for years. This is one piece of a six-piece stool here. So we've got a -- it's a good part. We've got great stories behind it. We expect to continue to add to that puzzle as we go forward, so we expect to see as the economy improves both improvement organically and the opportunities to add pieces to the puzzle through acquisition.

That's great. That sounds terrific. And then jumping for my quote-unquote follow-up, you also mentioned a multi-year exclusive with Philip Morris in Europe. Can you update us on the tobacco advertising changes and the timing of when that -- those equipment sales might happen?

Let me give you a little feel, because over the last couple of years you saw us in 2008 or so acquire one of the gravure businesses, which is the lead player in our European business called Sauressig. About two years ago, we purchased a business in Turkey where we saw a little bit of challenges through our integration.

That Turkish business was driven -- acquisition was driven by our large tobacco company's interest in having a strong supplier for the Middle East. We did that acquisition last year about this time, a little earlier, probably November of last year, we acquired the number-two provider to the tobacco industry in Germany, solidifying our position.

Today we've been rewarded both with a contract and with the trust of Philip Morris to take that model elsewhere in the world. What we've done is entered an exclusive arrangement with Philip Morris that will start to kick in over the course of the next -- I would say the next quarter or so we'll start to see that. Why that is important, tobacco is a very, very high-end packaging consumer that can only be done, frankly, in gravure.

As the exclusive provider to Philip Morris, the largest provider of tobacco in the world, we think we've got ourselves a nice little niche to continue to grow that portion of our business. Tobacco regulation around the world varies, but the reality is that tobacco is growing in other parts of the world, while they remain flat to declining in certain parts of the world.

So it's varied, but we've entered into a partnership with Philip Morris that will allow us to expand wherever they think they need us. So we're very positive about it.

Great. Congratulations. Thank you very much.

Our next question is from Liam Burke with Janney Capital Markets. Please go ahead.

Thank you. Good morning Joe; good morning, Steve.

Hi Liam.

Good morning, Liam.

On the follow-on, on the Philip Morris contract, a couple of things on the graphics packaging. Does that take all of your capacity, or do you have the ability to service other customers, especially on the global consumer side?

We are able to service -- it's taken more of our capacity, let's put it that way, but nowhere near all of it. For example, one of the places where we're going to be moving some of the businesses is the Russian market, which is growing and growing rapidly. So we will -- we're going to add -- you're going to see a little bit of CapEx in that business over the next 12 months, as we put some equipment up there. The good news is we've had graphic artists sitting in Russia for four or five years. They're already trained. Our ramp up in Russia, given the contract terms that we have with Philip Morris, should be relatively quick.

Okay. And when you talk about global, obviously, you don't have a presence in the US. Would this give you an opportunity or the large enough customer to be able to take this business domestically?

If you understand how Philip Morris and Altria split their business. Altria only has the US business. Philip Morris has Canada, Latin, and the rest of the world, so theoretically, could we come to the US? We certainly could. The end of the day, what we're going to have to try to find is a way to service either Canada or Latin America from the US, giving us a foothold in the US market.

Great. Thank you, Joe.

(Operator Instructions)

We'll go to Scott Blumenthal with Emerald Advisers. Please go ahead.

Good morning, gentlemen.

Good morning, Scott.

Good morning, Scott.

Joe, can you talk about the memorialization customer sentiment currently? Are they still buying at the low end, or have you started to get any indication that they're willing to maybe pay up for some of the more premium products?

We probably have a bifurcated business at this point in time. I would tell you that our lower-end products continue to be our larger product selection than we've seen historically. But I would tell you that there is relative stability at the high end. It's just smaller than what we're used to seeing.

Now, as all of you know, we have a new tool that goes live. It's called eVantage, our e-commerce solution. We expect that to go live globally here -- nationally. I wish it were globally, but we're going to go nationally sometime early March. We don't expect it to have a rapid increase and rapid change in our business model, but it is a system through which we expect to see some increase in our mix over the course of time.

Okay. That was a pretty good lead-in for my next question then, Joe. Steve, if you want to chime in here. Maybe you can give us the status of some of the other internal projects other than eVantage, maybe some of the pilot projects that you're working in marking and fulfillment, strategic sourcing Lean.

Good, yes, and Scott, I'll speak to those, what we call our strategic cost initiatives. Lean is progressing. We are substantially through, I'll call it the Lean implementation, the Lean initiatives in the cemetery products, although as you're familiar, Lean never ends. It's a continuous process. And this year we are rolling that into our funeral home products segment and our merchandising solutions segment, which is why you see an uptick in the unusual charges in those segments, and strategic sourcing continues also.

It's -- we call it the -- this phase of it is our Source To Pay project, and that's going to impact all of our segments to some degree or other, and that's really just initiated. So those are the two -- Lean and Sourcing are the two significant strategic cost initiatives that are still going on this year.

Steve, I'm sorry, I realize I had two here, but since you're on the subject, are you ready yet at this point to give any cost-reduction targets or margin-improvement targets related to some of those things, or haven't we gotten to that point yet?

The one thing that I would tell you, Scott, is one thing that we have learned -- and I had an investor on the West Coast tell me -- they're never as big or as fast as you think you are, and I think that's what our realization is. It's taking a little longer to get to achievement than we thought, so we're a little cautious in putting numbers out there, but we do see significant improvements coming over the next 12 to 24 months.

Yes, and Scott, we've already seen them. I think you see evidence in the funeral home products business, where even though volumes decline during the quarter, if you take out the one-time charges associated with these activities, you'll see an improvement in their margins. And I -- and we are still projecting margin expansion in almost all, if not all, of our businesses this fiscal year, and a lot of that has to do with what's going on.

Another way you could see it, Scott, is you could take a look at our cemetery products. We did have a decline in our sales rate, but as Steve talked about in his report, but the decline in the operating profit relative to that is significantly lower than the drop-through of the margins you'd normally see.

Right, yes, I do realize that, especially in the second half of last year, we did have very good margin performance in cemetery products. Okay. Thank you.

You're welcome.

(Operator Instructions)

And to the presenters, no further questions coming in.

Okay. Well, thank you, John. We'd like to thank everyone for participating in the call this morning, and we look forward to our next quarterly conference call, which will be in April. Thank you, and have a good day.

Ladies and gentlemen, once again, this conference is available for replay. It starts today at 11 am Eastern, will last until February 7 at midnight. You may access the replay at any time by dialing 320-365-3844 and entering the access code 315195. That does conclude your conference for today. Thank you for your participation. You may now disconnect.