Matthews International Corp (MATW) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Matthews International third quarter financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer sessions, and instructions will be given at that time. (Operator Instructions).

I would now like to turn the call over to your host, Steve Nicola, Chief Financial Officer. Sir, you may begin.

Thank you Dorinda. Good morning. I am Steve Nicole, 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, and enter the access code 363844. The replay will be available until 11:59 PM August 14, 2015.

We have posted on our website, which is www.MATW.com, the third quarter earnings release and financial information we will discuss this morning. On the top of our homepage, under the Investor tab, click on Investors 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 have been advised to read the following disclaimer as it 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 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 June 30, 2015 is not due to the filed with the SEC until August 10, 2015. To begin the conference, I'll 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 June 30, 2015 the Company reported earnings of $0.70 per share, compared to $0.69 per share a year ago. On a non-GAAP basis the Company's adjusted earnings per share were $0.88 for the current quarter, compared to $0.88 a year ago. The net amount of these non-GAAP adjustments was $0.18 per share for the 2015 fiscal third quarter, and $0.19 for the same quarter a year ago. As we anticipated, a significant portion of the 2015 non-GAAP adjustments included costs and other charges in connection with the integration of Schawk Inc., or SGK.

In our earnings release yesterday, we included a reconciliation between GAAP and non-GAAP earnings per share. The other non-GAAP adjustments in our fiscal 2015 third quarter earnings included costs in connection with the pending acquisition of Aurora Casket Company, and a gain on the buyout of an installment payment obligation related to a previous settlement of an SGK pension obligation. In addition, third quarter non-GAAP adjustments included a loss related to a theft of funds identified during the quarter. In our year-to-date earnings for fiscal 2015, we have three additional non-GAAP adjustments, which included charges related to our ongoing cost reduction initiatives, the first quarter litigation settlement net of costs, and the write-off of certain trade names in the second fiscal quarter.

Consolidated sales for the fiscal 2015 third quarter were $365 million, compared to $280 million for the same quarter a year ago. The acquisition of SGK contributed $105 million to the Company's sales increase. Changes in foreign currency rates unfavorably impacted sales by $17 million compared to a year ago. In addition the third quarter last year included the benefit of a significant merchandising display project, and a waste incineration project. Consolidated sales for the nine months ended June 30, 2015 were $1.1 billion, compared to $757 million for the same period last year. Year-to-date SGK sales were $311 million. Currency changes unfavorably impacted sales by $39 million on a year-to-date basis.

Consolidated operating profit on a GAAP basis for the quarter ended June 30, 2015 was $27.4 million, compared to $31.8 million a year ago, reflecting the impact of acquisition-related and other charges. These charges totaled $13.8 million in the current quarter, compared to $5.5 million a year ago. In addition, year-over-year comparability was impacted by a significant increase in intangible amortization resulting from the acquisition. Intangible amortization was $4.7 million for the current quarter, compared to approximately $900,000 a year ago. Year-to-date operating profit for the current period was $72.3 million, compared to $67.1 million last year. Acquisition-related and other charges totaled $25.4 million in the current year, compared to $14.1 million last year.

Intangible amortization was $13.9 million for the current year, compared to $3.3 million a year ago. Consolidated adjusted EBITDA for the quarter ended June 30, 2015 was $59 million, compared to $48.7 million a year ago, representing an increase of $10.3 million, or 21%. Year-to-date, consolidated adjusted EBITDA as of June 30, 2015 was $154 million, compared to $117 million a year ago, representing an increase of $37 million, or 32%. The quarter and year-to-date increases resulted primarily from higher adjusted operating profit, and the SGK acquisition, a reconciliation of adjusted EBITDA is provided in the quarterly financial data posted to our website.

Beginning this fiscal year, the Company realigned its operations into three reporting segments, SGK brand solutions, Memorialization, and Industrial. The SGK brand solutions segment is comprised of the graphics imaging business including SGK, and the merchandising solutions operations. The Memorialization segment is comprised of the Company's cemetery products, funeral home products, and cremation operations. The Industrial segment is comprised of the Company's marketing and automation products and fulfilment systems.

Sales for the SGK brand solutions segment increased to $205 million for the current quarter, compared to $116 million for the same period a year ago, primarily resulting from the incremental sales related to the acquisition of SGK. In addition the segment reported sales growth in its European markets. Changes in foreign currency rates had an unfavorable impact of approximately $13 million on the segment's current quarter sales compared to a year ago. The segment's year-to-date sales were $598 million, compared to $306 million for the same period last year. The SGK brand solutions segment reported operating profit of $5.3 million for the current quarter, compared to operating profit of $6.6 million for the same period a year ago. Excluding charges related to the acquisition, integrations, and cost structure initiatives from both periods, the segment reported operating profit of $17.8 million, compared to $10.7 million last year. The year-over-year increase primarily relates to the SGK acquisition and sales growth.

In addition the prior quarter included the benefit of a significant merchandising display project. Year-to-date, the segment's operating profit, excluding charges related to acquisition, integration, and cost structure initiatives, was $37.8 million, compared to $8.2 million last year. Operating profit for this segment also reflects intangible amortization expense of $4.1 million for the current quarter, compared to approximately $200,000 for the same quarter last year. Year-to-date this intangible amortization expense was $12 million in the current period, compared to $1 million last year. The significant increases resulted from the incremental amortization in connection with the SGK acquisition.

Memorialization segment sales for the fiscal 2015 third quarter were $126 million, compared to $138 million for the same quarter a year ago. The third quarter last year included the benefit of a significant waste incineration project. Changes in foreign currency rates had an unfavorable impact of $3 million on the segment sales. The segment reported higher sales of memorial products during the current quarter. In addition sales of cremation equipment in North America increased in the recent quarter. However European equipment sales remained slow. Year-to-date sales for the Memorialization segment were $372 million at June 30, 2015, compared to $381 million for the same period a year ago.

Operating profit for the Memorialization segment for the fiscal 2015 third quarter was $17.7 million, compared to $22.4 million for the same quarter a year ago. The third quarter last year included the benefit of a significant waste incineration project. The current quarter benefited from higher sales of memorial products and improvements from the segment's recent cost structure initiatives. Year-to-date operating profit for the Memorialization segment as of June 30, 2015 was $57 million, compared to $52 million for the same period last year. The increase primarily reflected higher year-to-date sales of memorials and caskets, and the benefit of a gain from a litigation settlement recorded in the Company's fiscal 2015 first quarter.

The industrial segment reported sales of $34.1 million for the quarter ended June 30, 2015, compared to $25.7 million for the same quarter last year. The segment reported year-to-date sales of $88 million at June 30, 2015, compared to $70.1 million for the same period last year. The increases primarily resulted from higher sales of warehouse control systems, and increased unit volume of Marking Products and related inks. Operating profit for the industrial segment was $4.4 million for the current quarter, compared to $2.8 million for the same period last year. The segment's operating profit for the nine months ended June 30, 2015 was $9.4 million, compared to approximately $5.8 million a year ago. The operating profit improvement resulted primarily from the benefit of the segment's sales growth. In addition, costs related to the segment's research and development products increased approximately $800,000 and $1.3 million respectively for the current quarter and year-to-date periods over the same periods last year.

A summary of 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 fiscal 2015 third quarter consolidated operating margin was 7.5% of sales, compared to 11.4% a year ago. On an adjusted basis our operating margin was 11.3% for the current quarter, compared to 13.3% last year. Our consolidated operating margin for the nine months ended June 30, 2015 was 6.8% of sales, compared to 8.9% a year ago. On an adjusted basis our operating margin was 9.2% for the current period, compared to 10.7% last year. The operating margin declines primarily reflected the impact of incremental intangible amortization expense from the SGK acquisition.

The Company's consolidated adjusted EBITDA was 16.2% of sales for the fiscal 2015 third quarter, and 14.6% year-to-date. Gross margin for the quarter ended June 30, 2015 was 37.1% of sales, which was relatively consistent with a year ago. Gross margin for the nine months ended June 30, 2015 was 36.7% of sales, compared to 36.4% a year ago. Selling and administrative expense for the current quarter was 29.6% of sales, compared to 25.9% for the same quarter last year. The increase primarily resulted from the impact of acquisition-related costs and incremental intangible amortization expense.

Year-to-date selling and administrative expense for the current period was 29.8% of sales, compared to 27.6% for the same period last year. Investment income for the fiscal 2015 third quarter was $58,000, compared to $456,000 a year ago. Year-to-date investment income was $1 million for the current period, compared to $1.7 million last year. The year-over-year changes primarily reflected investment performance on assets held in trust for certain of the Company's benefit plans. Interest expense for the current quarter was $4.8 million, compared to $2.8 million for the same period last year. Interest expense for the nine months ended June 30, 2015 was $15.1 million, compared to $8.2 million a year ago. The increases resulted from additional borrowings in connection with the SGK acquisition.

Other income deductions net for the fiscal 2015 third quarter represented an addition to pre-tax income of $9.8 million, compared to a deduction of $899,000 a year ago. Other income deductions net for the first nine months of the current fiscal year represented an addition to pre-tax income of $6.4 million, compared to a deduction of $2.8 million a year ago. The income for the current period resulted from a pre-tax gain on the buyout of an installment payment obligation in connection with the previous settlement of an SGK pension obligation. Other deductions also included the respective period portions of the theft loss. 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 the deduction from income of $74,000, compared to $376,000 a year ago. Year-to-date net income from non-controlling interests for the current year resulted in additional income of $189,000, compared to a deduction of $286,000 last year. The year-over-year changes primarily reflect the minority interest portion of losses for our European cremation operations.

The Company's effective income tax rate for the nine months ended June 30, 2015 was 28.3% of pre-tax income. The effective tax rate was 34.5% for the fiscal year-ended September 30, 2014. The effective rate for the fiscal 2015 year-to-date period included the benefit of the utilization of certain tax attributes, resulting from organizational restructuring during the fiscal 2015 first quarter, and favorable adjustments in the third quarter with the corporate income tax return filings. Excluding these benefits the Company is currently estimating and effective tax rate for fiscal 2015 of 32%. The effective tax rate last year reflected the unfavorable impact of non-deductible acquisition-related costs.

At June 30, 2015 the Company's consolidated cash was $70 million, compared to $63 million at September 30, 2014. Accounts Receivable at the end of the current quarter totaled $268 million, compared to $283 million at the end of fiscal 2014. Consolidated inventories at June 30, 2015 were $143 million, compared to $153 million at September 30th, 2014. Long-term debt at the end of the current quarter including the current portion was $688 million, compared to $729 million at September 30, 2014. The reduction resulted primarily from repayments on the Company's domestic revolving credit facility. At June 30, 2015, $655 million of the outstanding debt balance represented borrowings under our domestic revolving credit facility, at an average interest rate of around 2.5%. Last year the borrowing capacity of this facility was increased to $900 million, with a maturity date of July 2018 to accommodate the SGK acquisition.

Additionally as we previously disclosed we received a complaint from a customer and funded a drawer on a letter of credit in the amount of $13 million. The Company has assessed the customer's claim to be without merit, and as such pursuant to action initiated by the Company, a court order has been issued requiring these funds to ultimately be deposited with the court until the matter is resolved.

The Company had approximately 33 million shares outstanding at June 30, 2015. During fiscal 2015 the Company has purchased approximately 213,000 shares under its share repurchase program, at a cost of approximately $10 million. At the end of the current quarter approximately 753,000 shares remained under the current share repurchase authorization. Depreciation and amortization expense for the quarter and the nine months ended June 30, 2015 was $15.2 million and $47.1 million respectively, compared to $9.1 million and $28 million respectively a year ago. The increases resulted primarily from the acquisition of SGK and the related intangible amortization.

Capital expenditures for the quarter and nine months ended June 30, 2015 were $15.1 million and $34.7 million respectively, compared to $8.9 million and $18.8 million respectively a year ago. The increases primarily resulted from the SGK acquisition and integration, capital expenditures by our Gravier operations in Europe, and purchases of casket delivery vehicles.

During the recent quarter we identified a theft of funds from the Company by an employee that occurred over a multi-year period through May 2015. The cumulative amount of the loss has been determined to be approximately $14.8 million. The amount of loss in any period was not material to any prior period financial statements. However, because of the significance of the cumulative out of period adjustment to the fiscal 2015 third quarter, the prior period's financial information has been revised.

The Company expects to recover the loss, primarily through insurance and recovery of assets, and is working with law enforcement agencies. The Company's Board of Directors, through its audit committee, immediately initiated an independent investigation of this matter, and has retained independent legal counsel and accounting support to assist with the investigation. No members of management have been identified as participants to this incident. This matter has been determined to constitute a material weakness in internal control, as defined under Rule 12-B-2 of the Securities Exchange Act of 1934 as amended. In response to this assessment, the Company has taken immediate action and implemented changes to the design of the controls.

As reported in our press release yesterday, consolidated earnings for fiscal 2015 third quarter were in line with our expectations, and we are still on track towards our target for the fiscal year. The SGK integration continues to progress well, and we remain confident of our synergy objectives. The costs associated with this integration will also impact our results for the fiscal 2015 fourth quarter, and consistent with our practice we will identify these costs. In addition, in June we signed an agreement for the acquisition of Aurora Casket Company. The transaction which is subject to regulatory approval is expected to close this quarter. Finally the Board last week declared a dividend of $0.13 per share on the Company's common stock. The dividend is payable August 17, 2015 to stockholders of record, August 3, 2015. This concludes the financial review, and Joe will now comment on our operations.

Thank you Steve. Good morning. We are very pleased with our results for the third quarter of 2015. During the quarter we faced difficult comparisons to prior year, due to the large non-recurring projects that were completed in the third quarter of 2014 in both our incineration business and our merchandising business. We also had strong headwinds caused by negative currency translation, and we intentionally increased our research and development spending. The sum of these items created a $0.22 per share hurdle for our businesses to overcome, when we compare our performance to prior year.

Nevertheless our core businesses performed well, and the addition of SGK allowed us to achieve our goals and position us to meet our full year expectations. We also continued to do a great job on the balance sheet, reducing debt, collecting receivables, managing inventory and being proactive in reducing our pension liabilities. All are evidence of the efforts of our management team and our focus on good practices. During the quarter, we generated cash flow from operations of almost $50 million, which is the result of those efforts. Regarding the individual businesses, there are a lot of good things to talk about.

The integration of SGK continues to go well, and we will achieve our first year synergy targets. We also have a clear path to achieve our expected synergies for 2016. This team has done an excellent job of bringing two cultures together from two successful businesses, and we expect this combined business to be well-positioned as the market leader. As Steve noted earlier, we continue to see strong demand in our industrials groups, which is the result of multiyear multimillion dollars investments which are now yielding results.

We have intentionally increased our R&D spending in this business throughout the year, and especially in the past quarter, as we work on yet another new product which we believe to be a winner. Given our confidence, we will maintain this higher level of R&D spending for the next year or two, but we will identify it for you so that you can get a clearer picture of the performance of the business.

In our Memorialization business we are now seeing the benefits of our prior investments with record on time deliveries and customer satisfaction. This team has done a fine job of not only returning the business to normalcy after the challenges caused by our ERP installation, but also materially improving the business as well. As you are aware, we announced the acquisition of Aurora Caskets earlier this quarter. We remain very encouraged by our continued integration planning, which has solidified our expected synergies, and by the positive response that we have received from the market. We expect to close on this transaction during the fourth quarter, and begin the process of integration immediately thereafter.

With respect to the theft that we discovered during the quarter, there is very little we can talk about at this time, because there is an ongoing criminal investigation. You should know, however, that we have taken the necessary action to correct the situation internally. Moreover, it is important to note that this has not impacted any prior year operating performance or cash flows of our businesses, and we are taking all of the necessary actions to recover the losses as quickly as possible. At this time we would like to open it up for questions.

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

Thank you.

(Operator instructions). Operator^ Our first question comes from Dan Moore from CJS Securities. Your line is open.

Good morning. It's actually Bob Labick backing up Dan Moore this morning. I wanted to start off first question on the M&A things that you just touched on, you highlighted you are on track with the integration. I was hoping that you could expand a little more and tell us what steps are necessary this year and next year to reach those synergies, and how confident you are that you have those in place, or what else has to happen for you to reach all of those synergies?

Well, Bob, for 2015 we have actually taken the actions that will yield the results that we expect. We're pretty much in line with everything that we communicated, and everything that we had expected. For 2016 we are, I just returned yesterday, in fact last night from Europe, where we had a kickoff meeting with a lot of our team over there with regard to the ERP installation. As we've said in the past, a large part of the synergies that we expect to achieve is derived from the installation of a common ERP system which we call Core. The Core team met in Europe in the last several days. We were reviewing the final provisions of the installation and the implementation. We expect to go live with that beginning in October. And we will carry that out over the next 18 to 24 months from there. That will drive the largest part of our synergy goals. Today we remain very confident, I can tell you, having seen what I saw yesterday and on the day before, I remain pretty confident as well. So the synergy line items are very clear. The actions necessary to take them, to achieve those results are also well defined. We need to get the implementation going to get there.

Okay. Great. Then sticking with the M&A you mentioned you're on track for the closing of Aurora. Could you remind us of the remaining hurdles to close. And I don't know if you can talk about this or not yet, but if you can the process and timing for integration on that, assuming it does move forward?

Yes, the issues with respect to Aurora are solely in the hands of the FTC. That is the only hurdle for us to overcome to closing. We expect, based on customers' feedback and the support we're receiving, and the general conversations we're having with the FTC, that we would be able to close that this quarter, although there are never any promises. We're pretty confident at this point in time that it's going to occur this quarter. When it occurs in the quarter, I can't tell you. But we have plans in place already that, from day one through day 365, that will begin that integration, and we're ready to kick it off. That team, as you might not be aware, I mean the way we are organized as an entity, this is a separate team that runs this portion of the business. So there is very little overlap, other than here at the senior levels with regard to that integration.

Okay. Terrific. Respecting your one and one follow-up, I'll get back in queue. Thank you.

Great, Bob.

Our next question is Liam Burke from Wunderlich, your line is open.

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

Hi, Liam.

Joe, the margins on industrials stepped up pretty nicely year-over-year for the quarter. Even with the additional R&D expenditure. Is there a one-time product mix in there? Or is this a trend that we can continue to see here?

The largest, clearly we're seeing improvements in that business, and it is both product, economic, and acquisitions. The reality is that business today is clicking on all cylinders, and it's going to create a difficult challenge for them next year to fill that void, if we create it. But the fulfillment business, which it has been a wonderful addition to our businesses, has significantly added to the margin percentages of the business. But even what I would call our core business, with the investments we made with new products that we call, for example, Imperia is out in the marketplace getting rave reviews. But the economics of where we operate are also helping us. We are selling a lot of ink. And when we sell a lot of ink we make good money. So all of the pieces of the puzzle right now are pointing in the right direction.

Okay. For the quarter and for the first nine months of the year, you had very, very strong free cash flow. Approximating free cash flow per share approximating your adjusted EPS numbers. Is that a trend that we can count on when we look at the balance of the year?

Yes, that's what we have been trying to communicate, Liam, we generate a lot of cash. Almost $50 million of operating cash flow this quarter alone. We think that is a part of the story that we will continue to emphasize, and we think it's a reliable number.

Great. Thanks Joe.

Our next question comes from Jason Rodgers with Great Lakes Review. Your line is open.

Good morning.

Morning, Jason.

Good morning.

The $3 EPS target that you talked about earlier in the year, is that still a good figure to use for --?

That's what we're holding to right now, Jason. Right now we have every expectation that's our target.

All right. Can you talk a little bit about the CPG companies, the latest as far as their spending levels and outlook?

Sure. I think it's going to be more CPG-specific. But as you all have been reading the same newspapers that we read as well, we see it on the customer side in clients. There's a little bit of turmoil with brands being sold at some of our larger accounts. Entire entities being merged or acquired by private equity. We're going through a transitional period in some of those accounts. The good news is what we've said all along, the team has done a wonderful job of retaining every single significant account that we really wanted to retain. And to the extent that they spend, we will get it. But we continue to look forward to the FLMA, the Federal Labeling Modernization Act, and its implementation, some time right now in 2017 is our expected date. That can get pushed. And that could be causing some holdback as well.

Okay, and if you said this I apologize, but did you give a current outlook for your capital spending for fiscal 2015?

No, we didn't give that before, Jason. But right now we're anticipating that's going to be somewhere in the $35 million to $40 million range.

Thanks very much.

We think that's our ongoing maintenance cap.

Thank you.

Our next question comes from Dan Moore from CJS Securities. Your line is open.

Hi. It's Bob again. I just wanted to follow up on your last comment there as well, in terms of the food labeling requirements changing in fiscal 2017. Could you just kind of talk us through the impact there? Is there maybe, as you were just saying, a potential lull? And then when would you expect to see the benefits from that change, and how should we think about that?

Well again, this is one of those items we don't control. So it's really going to depend on the effective date of the implementation. And when it may be. We do a lot of work in the food business. And so as currently drafted and designed, the regulations would impact the nutritional aspects, and the disclosure on nutrition for every single food product on the grocery store shelf. It's more anecdotal than fact. But every single package will have to be modified. So it only stands to reason that they're going to modify it significantly other than tweaks and turns. They're going to wait until they have an implementation date, and do the entire innovative packaging at that time. Again, this is just anecdotal. We don't have any hard and fast evidence to that effect, but it makes sense. I also think what I would call turmoil in the product lines, what's going to be retained, what are we going to invest in, you see it in some of the larger CPGs, that's also impacting their marketing spend with respect to the packaging as well.

Got it. Thank you very much.

Let me clear a comment on Jason's question before about capital expenditures. That was maintenance capital expenditures for the current year. Total capital expenditures this year should be approaching $45 million.

(Operator Instructions). One moment please.

I am showing no questions at this time, sir.

Well, if there are no further questions, we appreciate everyone's participation in the call this morning, and we look forward to our fourth quarter earnings release and conversation call in November. Thank you, and have a great day.

Ladies and gentlemen, this conference will be available for replay after 11 AM today through August the 14th, 2015. You may access the AT&T replay system by dialing 1-800-475-6701, and entering the access code 363844. International participants may dial 320-365-3844,

And the access code 363844. This does conclude today's teleconference. Thank you for using AT&T Teleconference. You may all disconnect.