Matthews International Corp (MATW) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Matthews International second-quarter financial results conference call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to turn the conference call over to your host, Chief Financial Officer, Steve Nicola. Please go ahead.

Thank you, Allen. Good morning. I'm Steve Nicola. Also on the call with me this morning is Joe Bartolacci, our Company's President and CEO. Today's call is been scheduled for one hour and will be available for replay later this morning. To access the replay dial 1-320-365-3844 and enter the access code 324027. The replay will available until 11:59 PM May 6, 2014.

We have posted on our website, which is www.matw.com, the second-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 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 March 31, 2014 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; Joe will then provide general comments on our operations; following that, we will open the discussion for questions. For the quarter ended March 31, 2014, the Company reported earnings of $0.41 per share. On a non-GAAP basis, the Company's adjusted earnings per share were $0.59. The net amount of these non-GAAP adjustments was $0.18 per share for the FY14 second quarter and $0.10 for the same quarter of a year ago. In our earnings release, we provided a reconciliation of earnings per share on a GAAP and non-GAAP basis.

The FY14 non-GAAP adjustments included the following. One, 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.

Two, acquisition costs. Several weeks ago, we announced the signing of a definitive merger agreement for the acquisition of Schawk. During the current quarter, acquisition-related costs, which included due diligence work and integration planning, totaled approximately $0.11 per share. This amount also included an unfavorable $0.02 per share income tax impact for the non-deductible portion of these costs.

Three, cost-reduction initiatives. As we've consistently reported, we have significant ongoing strategic cost reduction programs in our businesses. The additional costs associated with these initiatives unfavorably impacted earnings by approximately $0.04 per share during the current quarter compared to $0.06 a year ago. For the six months ended March 31, these costs totaled $0.09 per share each for both this year and last year.

And four, litigation costs. As we've previously reported, our Funeral Home Products segment is currently in a legal dispute. Due to the extent of the anticipated costs in connection with this litigation, we are including this expense as a non-GAAP adjustment in FY14. Non-GAAP adjustments for the prior period also included acquisition costs, a net gain on acquisition-related settlement, and costs related to the ERP implementation for the Cemetery Products segment.

Consolidated sales for the FY14 second quarter were $247 million compared to $256 million for the second fiscal quarter a year ago. Consolidated sales for the six months ended March 31, 2014 were $477 million, compared to $482 million for the same period a year ago. The declines resulted from lower sales in the Company's Memorialization segments and Merchandising Solutions business, offset partially by higher sales for Graphics Imaging and Marking and Fulfillment Systems.

Also, the current six-month period included incremental sales of $10.5 million related to acquisitions. In addition, year-over-year changes in foreign currency exchange rates had a favorable impact of $4 million on year-to-date consolidated sales for the current year.

Consolidated operating profit for the quarter ended March 31, 2014 was $20.9 million compared to $25.1 million a year ago, representing a decrease of $4.2 million. Non-GAAP adjustments recorded for the current quarter were $5.7 million compared to $2.4 million a year ago. Excluding the impact of these adjustments, consolidated operating profit decreased approximately 3.2% from the FY13 second quarter. Higher operating profit on an adjusted basis for the Cemetery and Funeral Home Products segments was offset by declines in our other businesses.

Consolidated operating profit for the six months ended March 31, 2014 was $35.9 million, compared to $41.6 million a year ago. Non-GAAP adjustments recorded for the current period were $8.5 million, compared to $5.6 million a year ago. In addition, the current six-month period included incremental operating profit of $878,000 related to acquisitions.

Sales for the Cemetery Products segment were approximately $53 million for the FY14 second quarter compared to $56 million a year ago. Year-to-date, the Cemetery Products segment reported sales of $103 million for the current period, compared to $109 million last year. Lower unit volume of memorial products was the main factor in the sales decline. Based on published CDC data, we estimate that the number of casketed, in-ground burial deaths in the United States declined this fiscal year.

Operating profit for the Cemetery Products segment was $8.1 million for the FY14 second quarter compared to $5.9 million a year ago. On the non-GAAP adjusted basis, operating profits for the Cemetery Products segment was $8.3 million for the FY14 second quarter compared to $7.8 million a year ago. Despite the decline in sales, the segment's operating profit on an adjusted basis and related operating margin increased from a year ago, reflecting the benefit of the Company's recent cost structure initiatives such as lean and strategic sourcing.

Non-GAAP adjustments for this segment for the current fiscal year primarily included costs related to the Company's strategic cost structure initiatives. Non-GAAP adjustments for the prior year included costs associated with the segment's ERP implementation. Year-to-date, the Cemetery Products segment's operating profit on a non-GAAP adjusted basis was $14.8 million for the current period, compared to $15.2 million last year.

Sales for the Funeral Home Products segment were $63 million for the FY14 second quarter compared to $68 million a year ago, reflecting a decline in casket unit volume. Year-to-date, the Funeral Home Products segment reported sales of $122 million for the current period, compared to $129 million last year. Operating profit for the Funeral Home Products segment was $9.1 million for the FY14 second quarter compared to $9.8 million a year ago.

On a non-GAAP adjusted basis, operating profit for the Funeral Home Products segment was $10.4 million for the FY14 second-quarter, compared to $10.1 million a year ago. Similar to Cemetery Products, despite the decline in Funeral Home Products sales, the segment's operating profit on an adjusted basis and related operating margin increased from a year ago, reflecting the benefit of the Company's recent cost structure initiatives.

Non-GAAP adjustments for the Funeral Home Products segment for the current fiscal year primarily included costs related to lean initiatives and the litigation-related costs mentioned earlier. The prior year included costs associated with the Company's cost structure initiatives. Year-to-date, the Funeral Home Products segment's operating profit on a non-GAAP adjusted basis was approximately $18.8 million for the current period compared to $18.2 million last year.

FY14 second-quarter sales for the Cremation segment were $9.7 million compared to $12.3 million for the same quarter last year. Year-to-date sales for the Cremation segment were $18.6 million as of March 31, 2014, compared to $23.4 million for the same period last year. Declines in equipment sales, mainly in the UK and Europe, were the principal factors in the change from a year ago.

Based on the segment's current backlog, including a significant incineration equipment project in Saudi Arabia, the segment is expecting to fully recover the current decline and is projecting overall sales growth for FY14. As a result of the current sales decline, the Cremation segment reported operating profit of $565,000 for the current quarter compared to $997,000 a year ago. Year-to-date, the segment's FY14 operating profit was $163,000 compared to $1.5 million last year.

For our Brand Solutions group, Graphics Imaging sales were $80 million in the FY14 second quarter compared to $79 million last year. The increase primarily reflected higher European sales, including the benefit of favorable currency exchange rate changes. For the first six months this fiscal year, Graphics Imaging sales were $153 million compared to $141 million last year. The acquisition of Wetzel in the first fiscal quarter last year and favorable currency rate changes were the primary contributors to the sales improvement.

Second-quarter operating profit for the Graphics Imaging segment was $1.3 million for the current quarter compared to $5.5 million a year ago. Non-GAAP adjustments for this segment, which primarily included costs in connection with the pending acquisition of Schawk, totaled $3.7 million for the current quarter. Year-to-date, the Graphics Imaging segment reported operating profit of $2.4 million compared to $5.8 million a year ago. Non-GAAP adjustments were $4.1 million for the first half of this fiscal year compared to $1.2 million a year ago.

Sales for the Marking and Fulfillment Systems segment for the 2014 second quarter were $22.8 million, compared to $22.4 million for the same quarter last year. The increase reflected higher volume in North America, offset partially by a sales decline in China. Year-to-date sales for this segment were $44 million this year compared to $40 million for the same period last year. This increase resulted from a combination of higher sales volume, and the benefit of the December 2012 acquisition of Pyramid Controls.

Operating profit for the Marking and Fulfillment Systems segment was $1.8 million for the current quarter, compared to $2.4 million for the FY13 second quarter, reflecting an unfavorable change in product mix. On a year-to-date basis, the segment's operating profit was approximately $3 million compared to $2.8 million last year, reflecting this increase in sales.

FY14 second quarter sales for the Merchandising Solutions segment were $18 million, compared to $19.5 million a year ago. Year-to-date Merchandising Solutions sales were $36.5 million this year, compared to $40 million a year ago. The decrease was primarily due to lower sales to several national accounts. The Merchandising Solutions segment reported a slight operating loss for the current quarter compared to operating profit of $554,000 a year ago.

Year-to-date, the segment's operating profit was $254,000, compared to $1.8 million last year. The declines reflected lower sales and the impact of costs related to the segment's lean initiatives. Non-GAAP adjustments for the current quarter and year-to-date periods were $415,000 and $807,000, respectively. Based on their current backlog for the third and fourth fiscal quarters, Merchandising Solutions is expecting to fully recover the current decline and is projecting overall sales growth for FY14.

Sales and operating profit by segment, including non-GAAP adjustments for the quarter and fiscal year-to-date periods are posted on our website for your reference. Our FY14 second-quarter consolidated operating margin was 8.5% of sales, compared to 9.8% year ago. On a non-GAAP adjusted basis, our operating margin was 10.8% for the current quarter, compared to 10.7% last year. Year-to-date, our consolidated operating margin on a non-GAAP adjusted basis was 9.3% for the current year, compared to 9.8% last year.

Gross margin for the quarter ended March 31, 2014 was 36.5% of sales compared to 37% a year ago, primarily reflecting lower Memorialization sales for the current quarter. Year-to-date gross margin was 36% this year compared to 36.3% last year.

Selling and administration expense for the current quarter was 28% of sales, compared to 27.2% for the same quarter last year. Year-to-date, selling and administrative expense for the current year was 28.5% of sales compared to 27.7% for the same quarter last year. The increased percentages mainly reflect the impact of acquisition expenses, and costs related to the Company's strategic initiatives.

Investment income for the FY14 second quarter was $353,000 compared to $607,000 a year ago. Year-to-date investment income of $1.2 million compared to $840,000 a year ago. The year-over-year changes reflected investment performance on assets held in trust for certain of the Company's benefit plans.

Interest expense for the current year was $2.6 million compared to $3.1 million for the same period last year. Interest expense for the first six months this fiscal year was $5.5 million compared to $6.3 million for the same period last year. Lower interest costs for the current periods resulted primarily from lower interest rates.

Other income deductions net for the FY14 second quarter represented a deduction of $790,000 compared to $1.1 million a year ago. Year-to-date, other income deductions for FY14 represented a deduction of $1.8 million compared to $2.2 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 inter-Company debt.

Net income from non-controlling interest for the current quarter resulted in additional income of $82,000 compared to $137,000 a year ago. Year-to-date, net income for non-controlling interest for the current year resulted in additional income of $90,000 compared to $389,000 a year ago. One of the principal 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 six months ended March 31, 2014 was 35.9% of pre-tax income. The effective tax rate was 32.7% for the fiscal year ended September 30, 2013. The effective rate for the current period was impacted by the non-deductible portion of acquisition costs. Excluding the impact of these nondeductible costs, our effective rate was 34.1% for the current period. The effective rate for FY13 included the benefit of a European tax loss carryback.

At March 31, 2014 the Company's consolidated cash was $62 million compared to $58 million at September 30, 2013. Our current ratio was 2.5 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 $185 million compared to $188 million at the end of FY13. Consolidated inventories at March 31, 2014 were $143 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 $378 million compared to $374 million at September 30, 2013. At March 31, 2014, $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 March 31, 2014; since September 2013 the Company has only purchased approximately 109,000 shares under its share repurchase program at a cost of $4.3 million. As you would expect, our repurchase program was curtailed as a result of the pending acquisition. 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 and six months ended March 31, 2014 was $9.7 million and $18.9 million, respectively. Capital expenditures for the current quarter and year-to-date periods were $5.3 million and $9.9 million, respectively.

In developing our outlook for the remainder of FY14, some of the more significant factors we considered included the following. We will continue to incur costs in connection with the pending acquisition of Schawk. These costs are expected to be significant and we will identify and disclose these costs as they are incurred.

Our strategic cost structure initiatives, particularly with respect to lean and sourcing, will continue. As we have seen in our current year results, the Company is realizing some of the benefits of these initiatives, which are expected to be ongoing. As these projects progress, the cost 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 casketed, in-ground burial deaths in the United States in the most recent quarter and six month periods decreased from a year ago. This indicates that the death rate trends have moderated from FY13 to a more normal trend. As such, this may project to a decline in casketed in-ground burial deaths for the remainder of FY14.

The European economic climate remained soft, but appears to have been stabilizing recently. While we are forecasting some growth, the region is still expected to be uncertain in the near-term and remains a risk to our European businesses. And, as I indicated earlier, despite the declines in sales in our Cremation and Merchandising Solutions businesses for the first half of this fiscal year, most segments are still projecting sales growth for the full fiscal year, based on their respective backlog of orders.

Based on our year-to-date results and current forecast, we are maintaining our guidance at this time. Accordingly, we project our non-GAAP adjusted earnings per share to be in the range of $2.62 to $2.70 for FY14. This projection excludes any impact from the pending acquisition of Schawk since the closing date has not yet been determined. The transaction is still expected to close in our FY14 fourth quarter.

Lastly, the Board on Thursday declared a dividend of $0.11 per share on the Company's common stock. The dividend is payable May 12, 2014 to stockholders of record April 28, 2014. This concludes the financial review and Joe will now comment on our operations.

Thank you, Steve. Good morning. Our second-quarter results were in line with our expectations. Revenue challenges in our Cemetery Products and our Funeral Home Products division from a slower casketed death rate were offset by good margin expansion from our recent strategic initiatives. We are pleased with how these initiatives have taken hold and expect to see continued margin improvement over the coming quarters.

Our Cremation division continued to struggle with getting orders released to production, while our backlog in this division continued to be strong. Our recent investment in new incineration technology has opened the door to new possibilities, and has resulted in a $15 million incineration product in Saudi Arabia, which is scheduled to be delivered in the fourth quarter. We have several other projects in the works in this new area of our business, which we hope to also have some benefit from over the coming quarters.

Our Packaging Graphic business saw increased [briefing] activity in our European businesses, which is expected to have a strong second half of the year, particularly from our tobacco customers. Similarly, our Marketing and Fulfillment business saw very strong equipment orders and improving ink orders, which has historically indicated an uptick in an overall economic activity.

Our Fulfillment businesses, which are project-based, had a slow quarter as a result of old projects coming to completion, and new projects waiting to be begun. Recent wins in the Fulfillment business and expected continued strong equipment and ink sales gives us comfort for a very successful year in this division, as well. Our Merchandising business had a slow quarter, but we expect to have a very significant second half of the year, with very large projects expected to be delivered before September 30.

All in all, we are confident with our full-year forecast, but we are cautious as usual. We have become more dependent on large projects, the timing of which are not always in our control. Our near-term vision is good and our ability to deliver on time and profitably is also good, but shifts in the project delivery dates could impact the timing of our results.

With regard to our recently-announced acquisition of Schawk, our timing is progressing as planned. We recently received all the necessary anti-trust approvals and we expect the Schawk team to soon file their proxy with the SEC for their review. We are beginning in-depth integration planning today and we are currently expecting to close on the transaction in the fourth quarter. With that, I'd like to open it up to questions.

(Caller Instructions)

Allen?

(Operator Instructions)

Our first question comes from the line of Daniel Moore with CJS Securities. Please go ahead.

Good morning. Thank you for the color, Joe and Steve.

Can you elaborate a little bit on the strength you're seeing in order activity in backlog in Brand Solutions. You mentioned some pick-up at equipment sales and marking and improved ink sales. Are you seeing better capital spend? And outside of tobacco, what verticals are you seeing strength in that gives you confidence about the second half of the year?

A pretty complex question, but let me give you bits and pieces of that. The reality is we've always said -- and we've said this to the market in the past, we saw the coming recession, both in 2008 and the early 2000 from our Marking and Fulfillment business, and we're seeing the uptick coming out of it as well. We think we're going to have pretty strong equipment sales for the full year; we had a very strong equipment sale for the first six months and I would tell you that order activity on the fulfillment side is also pretty good. So what we're seeing there and we expect to continue based on the backlogs we have, is a strong, I would call, small capital market continuation of economy as we expect. So that's good.

On the European brand side, we did talk about our graphics business. There's a couple things are going on over there. We mentioned in the past that there was some new regulations coming out in Europe that have some -- that are giving some of the players some time to get up to speed with the new labeling requirements. Very similar to our FDA requirements here. That in and of itself is picking up some activity. And we think that -- we are getting the briefings now that give us comfort that, that looks like it's starting to turn.

Tobacco is as expected. Tobacco -- the timing for some of the tobacco projects we had really is what did not give us the strong quarter in graphics that we wanted, but based on what we see right now, tobacco will be very strong for the second half. But that is the result largely of some efforts -- we mentioned before that the acquisitions in -- of Wetzel and in Turkey have given us the opportunity to solidify our relationship with some of the tobacco market. So we are by far, the dominant player, and in some cases, the exclusive player in the tobacco markets in Europe, so to the extent they have projects coming through, we expect to get it, and we're starting to see that.

The last piece of it, is what I would call marketing pick-up. Our IDL business -- our Merchandising Solutions business for public reporting purposes -- we have very strong backlogs. They are very, very large projects. We are doing a large project right now, which we expect to deliver into the late part of the third quarter for Samsung, which is basically a store-in-store concept.

We are seeing more of that type of activity as brands start to get more comfortable with an expanding consumer base, and we think that's going to be favorable for us for the second half. So based on our backlogs, right now where we stand, particularly with backlogs in our brand solutions side of the business, and not the least of which is our Cremations business, new portion of that in the Incineration side, we're pretty comfortable with the year.

Appreciated it. And a follow-up, shifting over to the memorialization side of the business. How far down did you see casketed deaths in the quarter? What you seeing so far in April? And in memorials, do you expect positive year-over-year growth going forward given some potential pent-up demand after a really brutal winter?

Well -- oh good, Steve.

I'll take the first part of that Dan. We actually don't have an aggregate number that we're comfortable with because we're in various regions of the country and it did vary by region. But needless to say, overall, and I'm sure you folks see the same CDC data, it was down year-over-year.

With regard to the backlog, it was a difficult winter. You don't place a lot of our cemetery products during the winter months, especially when you have a long cold one. But the backlogs we're seeing are not tremendously significantly higher than we thought they would be. That could be timing. So at this point in time, we don't have that visibility to tell you what the full year would look like, but we're not expecting any surprises.

Helpful. I'll jump back in queue. Thanks.

We'll next go to the line of Liam Burke with Janney Capital Markets. Please go ahead.

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

Joe, you talked about visibility in backlog in the second half on the Cremation side, and then you highlighted the Saudi Arabian order. In terms of the rest of the market, Europe and North America, how does the backlog looked there on the Cremations?

We're starting to see more activity, but again, when I said release to production, that's what I was referring to. Our US business generally runs about a year's worth of backlog and we're probably a little high on that right now -- just a little bit. Getting those orders released to production is not in our control. The operators need to have that ready -- the facility ready and all the regulatory permits available for them to do that.

In Europe, I can tell you that it is still slow. We're not seeing a major pick-up. Having said that, we don't expect Europe to be a drag on us, which it has been over the last couple of years.

Okay. Great.

Then on the Marking and Fulfillment, you talked about ERP orders being -- completing some and then pent up for the second half of the year. How do they look on a year-over-year basis? Are you seeing some new introduction as you have the combined warehouse management solution?

Yes and when you're saying the ERP, you're referring to our warehouse control systems in the fulfillment side of the Marking and Fulfillment business. We expect our full sales rate to be in excess of that. Now the timing -- that's what I started to warn at the end -- some of that timing is not in our control. We have commitments and orders in-house, but whether folks are willing to take that is not necessarily in our control.

The one thing that is different about that side of the business, and this is -- as we approach the Christmas season, we expect that to slow down so that if we can't orders installed -- systems installed -- before the fourth quarter, we won't get it installed till the beginning of the year. So that's just the nature -- retailers do not -- companies do not want us in their warehouses around Christmas time.

Great. Thank you, Joe.

We have a question queued from the line of Clint Fendley with NewBridge Group. Please go ahead.

Thank you. Good morning, Joe and Steve. Question on the new incinerator technology that you guys were talking about. You seem pretty bullish on this segment going forward. I'm just wondering, will that materially change the investment that would be required for most of the funeral homes that don't currently own the equipment that might be considering (inaudible -- multiple speakers)?

Clint, this is more -- when we call it incineration, this is more industrial. So these are -- what we're talking is anything from very small portable incinerators for waste -- for campsites for oil well drilling and shale gas drilling that -- where you can't take -- it is too expensive to take the waste out and you burn it on site, to huge $15 million projects like we're doing in Saudi Arabia today for municipal waste disposal for a limited use. So this does not impact that side of the business from the funeral home side; it just gives us a new avenue of revenue with similar technology, which is combustion.

Yes, and Clint just add to that, a little over a year ago, maybe two years ago now, we purchased a small company in the UK, in addition to the existing small company that we had maybe three or four years ago, that not only do they have the technology for cremation equipment, but also waste incineration equipment, and this is where we've gotten the order in Saudi Arabia for the second half the year.

And as I said in my comments, there's still -- there's a lot of bids out there and that could be significant impact. We're just not ready to call them wins yet.

Got it. That's an exciting development. Do you guys anticipate that the Saudi Arabia project will be completed by the end of the year then?

Money is in hand and it is our job to get it there. We've got a pretty substantial deposit already and the commitment is to get it there by September 30. So, yes we do.

One last question. I just wondered, you mentioned that the stock repurchases were curtailed and that did impact the quarter some. I'm wondering how active you guys are planning on being with your repurchases between now and the closing on Schawk?

It will still be limited between now and the closing, but post-closing, we will resume normal activity.

Yes. Most of that has been through the advice of counsel that's limited us.

Understood. Thank you guys.

And we have a question from the line of Jamie Clement with Sidoti. Please go ahead.

Joe, Steve good morning.

Joe, as you look at what was the Marking Products business and is now the Marking and Fulfillment Systems business, particularly in light of the acquisition of Pyramid, what do you think longer-term the operating profit margin of that business should be, when you factor in the warehouse systems and those kinds of things? Obviously, there is going to be some lumpiness to those order deliveries over time.

But how do you think about profitability in that segment? And obviously, we know the ink and the consumables were high-margin pieces of business, but obviously not necessarily high-revenue dollar pieces of business, as for example, the warehouse business would be?

Jamie our expectations and what we've seen out of those businesses early is consistent with our traditional margins in that business. We've always operated somewhere in the 15% to 17% range, and we think that is where our target is. Frankly, one of the areas -- when we take a look at some of the pension cost -- is being allocated to there. We see that as a nice adjustment to getting there. Some of the strategic initiatives are just starting to take hold there. So, I think 15% to 17% is a good number to count on long-term. You are right; it is going to be lumpy, though.

Yes. Okay. And then just a follow-up on the Cemetery products side, with respect to winter weather, obviously it's a pain in the neck to be putting memorials into frozen ground. So, how much business do you think may have been deferred into the June quarter from the March quarter? Historically, the June quarter in the bronze business before some of the acquisitions, it was obviously weighted towards the June quarter, so there was a natural delay in the business. But, in this particular year with the weather, should we -- I couldn't quite reconcile your comments -- but should we see a little bit -- should we see less of a decrease than we saw it in the second quarter here when we look to the third quarter?

We are actually projecting pretty good stability in that business going forward, Jamie. Your comments are right. We would expect to see more coming out of the second half and we will see. We don't have that visibility right now to be able to commit it, but you're right. We know that the weather has deferred that. I just came back from a tradeshow where I spoke with a lot of customers, small and large, who are feeling the same impact, so I would not be surprised to see a more normalized rate going for the next couple of quarters.

Okay. Last question, Steve. Just a follow-up to Clint's question -- by the way, welcome back, Clint -- on the share repurchase. What was the weighted average diluted share count for the quarter, Steve? Do you by any chance have that off the top your head or in front of you?

Hold on just a second, but I believe it was -- when you think about the effective weighted average -- because we've got -- because of the way the earnings per share is calculated under the accounting rules, it gets a little bit complicated, but I would tell you the effective weighted averages is about 27.5 million shares outstanding, is the number that we used.

Okay, that makes sense. Thank you very much.

27.5 million. Okay.

We have a question in queue from the line of Scott Blumenthal with Emerald Advisers. Go ahead, please.

Good morning, Joe. Good morning, Steve. Joe, with regard to the industrial incineration opportunity, could you maybe characterize the overall opportunity, and give us an idea as to what you're currently looking at. I would imagine that if you're in the Cremation business and you're only dealing with the funerals that that's a much, much, much smaller overall opportunity than if you're getting into industrial and municipal waste incineration?

We think there's good leg room in this, [Scott], to be honest with you and we are just getting started. One of the reasons that we are having the success, the investment we made was around $1 million, so it was not a significant investment. But the technology was good, and the business was challenged by not having the capital resources to take on projects of the size that we're looking at.

So the market has been there, it's just not -- this particular Company has not had the scale to participate in that, but the projects we are seeing are in the millions of dollars per. We are just starting to get some notoriety in this industry. The Middle East is a strong market for this because of the waste that's going on in campsites with drilling and so forth, and we think there's an uptick opportunity there. We've got a wonderful project we've been bidding on for a while in China, and we think that, that could be significant, as well. So I would tell you it's more in the, for lack of a better term, underdeveloped markets, but -- and we're just getting started.

Does this double, triple, quadruple the overall opportunities for this segment?

If I had that kind of vision, I be great. But let's put it this way -- it gives us a lot more opportunity than we had, and what I would tell you in the Cremation business, which a relatively stable business, this is a little extra cream on the top that we're really counting on.

And would you expect margins for such a thing to be similar to selling cremation equipment?

Right in line.

Okay. And if I might ask one more of Steve.

Sure.

Steve, in the press release, you talked about reaffirming the guidance, strong order backlog, and then some of your comments and Joe's comments talked about backlog in Cremation, backlog in fulfillment being subjected to backlog and then also merchandising. At some point, do you think that you might be able to give us some backlog numbers?

Because if you add Cremation, fulfillment, merchandising, then you're almost getting to the scale of the amount of business that you do in cemetery products, becomes a meaningful number to get our arms around and understand. Do you think you might be able at some point in the future to talk about backlog or at least backlog currently, relative to last year?

Yes, Scott. That gets a little bit difficult because of the lumpiness of this business, and what Joe said before, the timing of these projects, because we know orders that we have in-house and we know the contemplated timing. But sometimes, and I would say not infrequently, that timing can be challenged, can be pushed out. So, that would make us hesitate in providing any type of backlog and trying to identify and quantify backlog for future quarters.

Okay. Well, just thought I'd ask. Nice try, huh? (Laughter) Thank you.

We will move now to the line of Jason Rodgers with Great Lakes Review. Please go ahead.

Hi. Good morning. Do you have the FX impact on sales and operating income for the quarter?

I believe for the year, year-to-date the impact on sales was $4 million. For the quarter, I don't have that number handy. But I believe it was relatively small.

Okay, thank you.

We have a question in queue from the line of Adam Hamill with Gates Capital Management. Go ahead, please.

Hi. I'm just trying to bridge the gap between -- year-to-date EPS is down about 6%; you said third quarter, you expect to be flat; and then for the year, the mid-point of your guidance is up about 7%. Is that all Cremation and Marking and Fulfillment or are there some other benefits in the fourth quarter?

Adam, we didn't -- I don't think we said that the third quarter was going to be flat. In fact, we expect our third and fourth quarters to be up over last year.

Okay.

Again, maybe what you're referring to is when we came out of our conference call in January, we had expected this quarter that we just finished to be relatively flat, which it turns out we were relatively flat with a year ago. But we do expect our third and fourth quarters to be better than a year ago. Again, on an adjusted basis.

In the press release it says you anticipate relatively flat operating performance for the current quarter. Is that just for the cemetery business?

Adam, let's take this -- how about if we take this online because I'm not seeing where you're referring to.

Okay. And have you -- where are you in discussions on upsizing your revolver for the acquisition? Are there any terms for what that interest expense might be yet?

Yes, we actually have a commitment letter from our lead bank to upsize the revolver to approximately $850 million in order to facilitate financing the Schawk acquisition.

And would the interest expense be similar or is it--?

The interest cost will increase as our leverage ratio increases. Typical with these revolvers, there is a grid in which the interest rate spread is based on leverage rate -- the company's leverage ratio. The base rate will still be based on LIBOR, which wouldn't change based on the amount of borrowings, but the spread between -- or the spread that we have to pay based on leverage ratio will certainly increase a little bit.

Okay. Thank you.

(Operator Instructions)

We have a follow-up question from the line of Daniel Moore was the CJS Securities.

Thank you again. Obviously, starting to see some nice benefit from cost savings and reduction initiatives. Can you give us a little bit of an update, how much incremental benefit is still possible beyond what we saw in the numbers for fiscal Q2?

I can't give you a quantified number, but let's put it this way. Some of our strategic sourcing initiatives are only starting today as contracts have just come to fruition. Other ones -- we've sourced them last year, contracts were being completed and signed, old ones rolled off, and now we're on to new ones. So we think there's still more runway to go. I can't give you a number, especially when you start speaking about lean. Lean is a culture. We've set some targets for ourselves. We are not at those targets. So we think every year we are going to see modest but continued improvement.

Okay, so no big step function beyond this, but the continued steady improvements from here?

Right. Right.

And then Steve, CapEx was about $10 million for the first half. Do you still expect to spend $30 million this year, given the impending Schawk acquisition?

Actually, at this point. I would expect that to be lower than the $30 million, Dan. I would be in the $25 million range for your modeling.

Perfect. And then, and not to beat a dead horse, but lastly, as I think about Q3 and Q4, obviously with regard to the backlog in some of the segments and big orders coming from Q4, expect to see some growth, but it's fair to say we'd see faster year-over-year growth in Q4?

No.

Not necessarily?

No. Some of the projects are pent up for the last couple of quarters, frankly, and we have got a very, very significant project that's going to be delivered by June 30.

June 30. Okay. Very good. That's helpful. Thank you again.

We have no further questions in queue at this time.

All right. Thank you, Allen. We would like to thank everyone for participating in our conference call this morning and we look forward to our third-quarter earnings release and conference call in July. Thank you and have a great day.

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