Matthews International Corp (MATW) 2016 Q1 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Steven Nicola. Please go ahead.

Thank you, Stacy. 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 and enter the access code 383523. The replay will be available until 11:59 PM, February 12, 2016.

We have posted on our website, 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 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 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 subject to the filing of our quarterly report on Form 10-Q for the quarter ended December 31, 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 December 31, 2015, the Company reported earnings of $0.14 per share. On a non-GAAP basis, the Company's adjusted earnings were $0.60 per share. A year ago, the Company's GAAP and non-GAAP earnings were $0.43 and $0.55 per share, respectively. On a GAAP reported basis, the change in earnings per share primarily reflected the gain a year ago on the settlement of a litigation matter in our casket business.

In addition, acquisition integration costs were higher for the current quarter, reflecting the integration activities for both Schawk Inc, SGK, and Aurora Casket Company. The current quarter also included inventory step-up expense on the Aurora acquisition. On a non-GAAP adjusted basis, earnings per share were higher than a year ago, primarily reflecting the impact of the Aurora acquisition, the benefits of acquisition synergy realization, lower commodity costs, and higher sales of memorial products. These items were partially offset by unfavorable currency exchange rate changes.

In our earnings release yesterday, we provided a reconciliation between GAAP and non-GAAP earnings per share. Consolidated sales for the FY16 first quarter were $354 million compared to $344 million for the same quarter a year ago. The acquisition of Aurora and sales growth in the Company's industrial segment were significant factors in the year-over-year increase. The company also reported higher sales of memorial products compared to a year ago. Changes in foreign currency rates unfavorably impacted consolidated sales by approximately $14 million compared to a year ago.

Consolidated operating profit on a GAAP basis for the quarter ended December 31, 2016 was $12 million compared to $25.6 million a year ago. Last year included a gain of approximately $9 million from the settlement of litigation in our Memorialization segment. In addition, the current quarter reflected a $7.6 million increase in acquisition-related costs, primarily attributable to the Aurora integration and inventory step-up expense. Excluding these items, consolidated operating profit was higher than a year ago, primarily reflecting the impact of the Aurora acquisition, acquisition synergy realization, lower commodity costs, and higher sales of memorial products. These items were partially offset by the impact of unfavorable currency rate changes. Consolidated adjusted EBITDA for the quarter ended December 31, 2015 was $47 million compared to $43.8 million a year ago.

Memorialization segment sales for the FY16 first quarter were approximately $148 million compared to $116 million for the same quarter a year ago. The increase for the current quarter primarily reflected the impact of the acquisition of Aurora and an increase in sales of memorial products. Changes in foreign currency rates had an unfavorable impact of $1.8 million on the segment sales. In addition, casket sales, excluding the incremental sales from the Aurora acquisition, were lower than a year ago.

Operating profit for the Memorialization segment for the FY16 first quarter was $7.7 million compared to $21.5 million for the same quarter a year ago. The current quarter included costs of $7.2 million related to the Aurora acquisition, primarily representing integration costs and inventory step-up expense. The first quarter last year included a gain of approximately $9 million on the litigation settlement. Excluding these items, the segment's operating profit was higher than a year ago, primarily as a result of the Aurora acquisition, higher sales of memorial products, and lower commodity costs.

Sales for the SGK brand solutions segment were $178 million for the current quarter compared to $201 million for the same period a year ago. Changes in foreign currency exchange rates had an unfavorable impact of approximately $11 million on the segment's current quarter sales compared to a year ago. The segment reported lower sales in North America and Europe, reflecting slower market conditions during this quarter. In addition, the segment's divestiture of a small software business last year contributed approximately $3 million to the sales decline.

The SGK brand solutions segment reported operating profit of $2.8 million for the current quarter compared to $1.9 million for the same quarter a year ago. Excluding charges related to the acquisition, integration, and cost structure initiatives from both periods, the segment reported operating profit of $10 million for the current quarter compared to $9.5 million last year. The year-over-year increase reflected cost reductions, primarily resulting from synergy realization, which were partially offset by the impact of lower sales and the unfavorable impact of currency rate changes. Operating profit for this segment also reflected intangible amortization expense of $3.8 million for the current quarter.

The Industrial segment reported sales of $28.3 million for the quarter ended December 31, 2015 compared to $26.5 million for the same quarter last year. The increase primarily resulted from higher sales of warehouse control and fulfillment systems, offset partially by the unfavorable impact of currency rate changes. Operating profit for the Industrial segment was $1.6 million for the current quarter compared to $2.2 million for the same period last year. The current quarter reflected a significant increase in new product development spending and the unfavorable impact of changes in foreign currency exchange rates.

A comparative summary of sales and operating profit by segment for the quarter, including non-GAAP adjustments, is posted on our website for your reference.

The Company's consolidated adjusted EBITDA was 13.3% of sales for the FY16 first quarter compared to 12.7% a year ago. Gross margin for the quarter ended December 31, 2015 was 35.7% of sales compared to 36.3% a year ago. Inventory step-up expense in connection with the Aurora acquisition was the primary factor in the decline in gross margin percentage. Excluding this expense, the Company's consolidated gross profit as a percent of sales increased from the same quarter a year ago, primarily as a result of higher sales and cost structure changes from acquisition synergies.

Selling and administrative expense for the current quarter was 32.3% of sales compared to 28.8% for the same quarter last year. The increase primarily resulted from the impact of acquisition-related costs and an increase in intangible amortization expense resulting from the acquisition of Aurora. Investment income for the FY16 first quarter was $701,000 compared to $271,000 a year ago. The year-over-year increase primarily reflected higher investment performance on assets held in trust for certain of the Company's benefit plans. Interest expense for the current quarter was $5.8 million compared to $5.3 million for the same period last year. This increase primarily resulted from additional borrowings in connection with the Aurora acquisition.

Other income deductions net for the FY16 first quarter represented a deduction of $874,000 compared to $1.3 million a year ago. Other deductions a year ago included the respective period portion of a theft loss identified during the FY15 third quarter. 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 interests for the current quarter resulted in an addition to our net income of $111,000 compared to $115,000 a year ago, primarily reflecting the minority interest portion of losses for our European cremation equipment operations.

The Company's effective income tax rate for the quarter ended December 31, 2015 was 25.3% of pre-tax income. The effective tax rate was 29.4% for the fiscal year ended September 30, 2015. The effective tax rate for the current period included the benefit of lower tax rates in certain foreign jurisdictions and the benefit of the recent extension of the US tax credit for research and development expenses. The effective rate for FY15 included the benefit of the utilization of certain tax attributes resulting from organizational restructuring during FY15 and favorable adjustments in the third quarter with the corporate income tax return filings, offset partially by the unfavorable tax treatment of certain acquisition-related and other costs.

At December 31, 2015, the Company's consolidated cash was $65 million compared to $72 million at September 30, 2015. Restricted cash at December 31, 2015 and September 30, 2015 was $12.9 million. As we disclosed last year, restricted cash relates to a customer claim and related draw on the letter of credit during FY15. The Company has assessed the customer's claim to be without merit, and as such, pursuant to an 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.

Accounts receivable at the end of the current quarter totaled $268 million compared to $284 million at the end of FY15. Consolidated inventories at December 31, 2015 were $172 million compared to $171 million at September 30, 2015. Long-term debt at the end of the current quarter, including the current portion, was $914 million compared to $903 million at September 30, 2015.

At December 31, 2015, $872 million of the outstanding debt balance represented borrowings under our domestic revolving credit facility, at an average interest rate of around 2.3%. The Company had approximately 33 million shares outstanding at December 31, 2015. During the FY16 first quarter, the Company purchased approximately 120,000 shares under its share repurchase program at a cost of $6.7 million. At the end of the current quarter, approximately 3 million shares remained under the current share repurchase authorization.

Depreciation and amortization expense for the quarter ended December 31, 2015 was $15.7 million compared to $15.4 million a year ago. The increase resulted primarily from the Aurora acquisition and the related incremental depreciation and intangible amortization. Capital expenditures for the quarter ended December 31, 2015 were $14.2 million compared to $9.3 million a year ago. The increase primarily resulted from new equipment in the SGK brand solutions segment and purchases of new casket delivery vehicles.

Finally, the Board last week declared a dividend of $0.15 per share on the Company's common stock. The dividend is payable February 15, 2016 to stockholders of record February 1, 2016. This concludes the financial review and Joe will now comment on our operations.

Good morning. Thank you, Steve. We are very pleased with our first-quarter results. In almost segment of our business, we met or exceeded our expectations for the quarter. The addition of Aurora [with] synergy capture, focused expense management, commodity tailwinds, and good volume in our Cemetery products business all contributed to offset higher acquisition-related interest costs, softness in North American brand markets, and significant currency headwinds.

With regard to the two significant integration efforts that we have underway, I'm happy to report that we remain on track to achieve our targeted cost synergies. As we have communicated in the past, we had expected to begin the most significant part of our ERP launch in January for our SGK brand segment. Unfortunately, due to conditions beyond our control, we were forced to push the launch into April of this year. We expect this change to be a modest deferral [to] our expected synergies, but not materially impact our cost to achieve those synergies.

With regard to Aurora, we are finalizing our integration plans and we are pleased to confirm that we expect to deliver all of the projected benefits of this acquisition without disrupting service to our valued customers. As we have stated, early expected dissynergies have impacted the immediate benefits of this acquisition, but we are expecting to fully deliver the anticipated $35 million to $40 million of incremental EBITDA from this transaction.

In our Automation segment, we continue to see great performance despite increased R&D spending, which reached a record $1.5 million at the end of quarter, and which was over $500,000 more than prior year. We have great hopes for this segment as new products, new customers, and new markets continue to open doors for continued growth.

From a financial standpoint, we are targeting over $100 million of adjusted free cash flow for the fiscal year and almost $250 million of adjusted EBITDA. Our adjusted free cash flow yield at the current stock price is approximately -- is [approaching 7%], which we believe represents a significant opportunity. Nevertheless, we will continue our practice of being opportunistic with our stock repurchase plan by focusing on reducing our outstanding debt with a targeted reduction of $50 million for FY16. Clearly, the addition of SGK and Aurora and continued strong performance from our historical businesses have allowed us to materially change the financial picture of the Company.

As we look to the balance of FY16, we remain confident of our ability to achieve our operating objectives that we have been communicating, including the amount of synergies that we expect to achieve. We, however, remain somewhat cautious this year on the timing of those synergies, as we enter the most challenging yet most rewarding phase of our integration of SGK.

We also remain cautious due to some of the economies in which we operate. As always, we remain proactive in taking actions to mitigate the potential effect of these challenges. Also, as we have communicated, during the coming quarters, we are planning to make permanent a portion of our bank revolver debt, which will increase our total interest expense but will add considerable stability to our overall capital structure. Even with these challenges, due to the confidence that we have in our integration efforts, for now we will maintain our internal financial targets for 2016.

Let's open it up for questions at this time.

At this time, we would like to open the call for questions.

(Caller Instructions)

Stacy?

(Operator Instructions)

Our first question will go to Daniel Moore with CJS. Please go ahead.

Good morning, Joe. Good morning, Steve. Thanks for taking the questions.

Good morning, Dan.

First off, the last commentary you had, Joe. Obviously, you still feel comfortable with the full-year, albeit with some caveats. Maybe talk about what is driving the delay in the ERP implementation and is it -- if it is push out until April, is it basically be the synergies, that realization of synergies, is pushed out by a like amount, about a quarter, or could we see that pushed a little bit further into the future? And as it relates to that, the total cost of implementation, has that increased at all?

Sure. There's a lot of questions in there. I'll try to summarize it for you. The deferral on the ERP was caused simply by monsoons hitting our operations in Chennai, India. Chennai is our largest operating center around the world, with over 500 employees there, and we were essentially all hands on deck trying to cover the work that, that team was unable to perform over a two-week period.

It happened to occur mid-December, which is two weeks or so prior to the launch of the ERP, and we pulled the plug on the January start as we [brought] all the teams together to support the efforts that needed to get done there. We satisfied all the customers, which is the most important part of that message there.

The deferral that I mentioned, we think is modest. The team has really redirected its efforts during the quarter to try to take advantage of the downtime that we have while we prepare to go live again in April. The incremental cost, as I said, was going to be, in the grand scheme of things, probably less than $0.5 million. It would've been far more significant if we had made some other choices, but the team has done a great job of redirecting its efforts for the near term.

The deferral synergies -- it is too early to tell that right now, Dan because we are still bullish on achieving all those synergies, but sitting in the seat that I am, I have to be cautious in saying that time will tell.

We will be going live in April, and we will have a better ability to communicate to you shortly thereafter about any impact that we see from a timing standpoint on the synergy. Clearly, it does not impact the amount of synergies we expect to achieve. Does that answer your questions?

Got it. It does. Thank you for the detail. Shifting gears a little bit, your Industrial segment has always been a pretty good barometer of the overall industrial economy.

What are you seeing and hearing from your customers? What are they telling you as it relates to economic conditions, particularly in North America?

Interestingly enough, Dan, we said that internally. I would tell you that we're seeing softness, particularly in the North America markets. We see it largely in our ink sales.

The ink sales that we have are better than prior years, but given the amount of equipment that we've sold over the last several years, we would expect it to be more significant than that. So I would tell you that we are seeing the beginning of what we saw several years back, a slowing in the economy.

We have the good fortune that, that team has entered new markets with new products, with new customers, so we may be buffered by the direct impact of the slowness because we've -- on an apples-to-apples basis, we are getting a different mix. But at the end of the day, there is no question that we are seeing some softness in that market, particularly in the North American market, but also in our Chinese market, by the way.

Got it. Very helpful. Lastly, you touched on it, Joe, but the synergies from Aurora, it doesn't sound like any material changes to your expectations there now that we've got another quarter under our belt. Talk about -- is there even maybe a little bit of upside potential -- your confidence around that?

Dan, you know us better than that. We are confident in delivering $35 million to $40 million of incremental synergy. I would tell you that the dissynergies that -- are coming into line pretty close to where we expect them to be.

It is a highly competitive market out there right now. As soon as that settles down, which we believe it will over time, we'll get a better feel for where we are in that range.

My expectations, as -- we always strive for the high end and I would like nothing better than to tell you all that we are going to be above the high end. My team knows that, by the way. I know they are on the line.

All right. Appreciate the color.

We will go to Liam Burke with Wunderlich. Please go ahead.

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

Hi, Liam.

Joe, could you give us a little more color. You mentioned on the SGK side of the business that there was softness in both Europe and North America. Obviously, there is some macro headwinds there, but could you give us a little more detail on what you are seeing?

The comparisons are also muffled, Liam, because of about -- correct me if I am wrong, Steve -- $15 million to $16 million worth of currency changes so we're going to get muffled by that and the sale of a small business that would have added another $3 million. So what we are really seeing is softness in our core accounts.

It could be a number of things. It could be economic, it could be just people holding up because of the new labeling regulations that are coming out and [people are] going to do full package renews one-time rather than do it multiple times.

In Europe, it is just timing. I think that we will see that recover throughout the year. We are currently not projecting any misses on either of these businesses over the rest of the year, and [partly because we note] there have been no significant account losses that would impact it.

There is always fluctuations going both ways. We win some, we lose some. At the end of the day, looks like we are moving in the right direction, but we're just not seeing new package, new product innovation as quickly as we would like.

Joe, just on those numbers, the currency and the divestiture were about $14 million to $15 million of the decline, of course currency being the much larger piece of that.

Thanks, Steve.

Steve, while you are there, Joe laid out your free cash flow goal of $100 million this year. Looking just on the arithmetic, on cash flow from operations less CapEx, it turned out to be a negative number even though it looked like, from the working capital numbers, they look pretty good. Could you give us a sense on where the recovery will come from through the balance of the year?

Yes, Liam, and just to clarify with Joe had said, he is referencing an adjusted free cash flow number versus the actual free cash flow because a significant portion of what you are seeing in the first quarter is spending on acquisition integration-related costs, so that is what is impacting it. But if you take out -- if you adjust our current quarter cash flow for integration costs in the non-GAAP adjustments then you start to get a picture of how we get to the $100 million for the year.

Okay. Thank you, Steve. Thank you, Joe.

You're welcome.

(Operator Instructions)

We will go to Scott Blumenthal with Emerald Advisers. Please go ahead.

Good morning, Joe. Good morning, Steve.

Hi Scott.

Steve, could you maybe give us an idea as to what you are seeing right now in bronze costs, and what, if anything, you might have to give up in price on that? And also could you make a comment about steel costs regarding the Casket segment?

Sure. I will let Joe address the pricing part of that question, but with respect to costs, Scott, we are seeing lower bronze costs, which is attributable to a lower cost of copper. As you know, bronze being a byproduct, or the main constituent of bronze being copper and scrap copper, we've started to see the benefit of that in our results. And so we have been actively looking to lock in those costs going forward with some purchase commitments through our suppliers.

We are seeing some lower steel costs, as well. One of the caveats with respect to steel cost is that from the -- there is some time between the day we purchased steel and the time it ultimately flows through our income statement because it has to go through our production facility first and then to the warehouses and then to sale. But all that being said, we're starting to see that benefit, as well. Joe, did you want to touch on the pricing?

Yes. With regard to pricing, we do our best to try to hold our pricing. There are a lot of times, whenever price of coppers, or for that matter, bronze, have gone higher and we have been unable to pass those costs on. We think this is relatively short-term, so the swings go both ways. It would be imprudent to count on it, either giving up more pricing or using this as an opportunity to get more business.

Okay. And I know that in the past you mentioned that when prices were spiking a couple of years ago, customers had diminished interest in some of the bronze memorialization products. As things come in a little bit and prices moderate, are you seeing a pick-up at all? A little bit more interest in that?

We saw a good quarter. The volume in the Cemetery products have, both on the stone and the bronze side, were pretty good so perhaps that is occurring out there. We don't see significant shifts going on right now either way, though, Scott. The commodity prices being what they are right now is probably a temporary low and we will take the benefit of that for today and make our plans on what we think longer-term costs will probably be.

Okay. Fair enough. Thank you.

We will go to David Stratton with Great Lakes Review. Please go ahead.

Good morning. I was wondering if you could give a little more color around new product innovation and what you have in the pipeline and what we should be looking for as the future quarters unroll?

Sure. If you listened to us over the last several quarters, we've started to call out some significant R&D spending and particularly in our Automations group. We're not at liberty today to talk too much about what it is, but suffice it to say that it is directly in line with our current lines of business that we operated in.

But we are finding alternative uses for some of our products; for example, we do some work in the oil pipeline business for certain process control equipment. That's being used now in other areas like the supermarket conveyor systems that you see out there.

So the guys do a great job of looking elsewhere to use the exact product that we have in place now. From a new development standpoint, we are pretty bullish in our own mind on what's coming out of the group.

I would expect over time to add more pieces to the puzzle from the Automation side, the warehouse automation side. As you all know, we have a couple of very good businesses there that have really performed well for us.

There are still pieces of the puzzle that need to be added -- things like automated sorters and pickers and things of that nature. We will be looking at those pieces of the puzzle over the next 24 to 36 months and I wouldn't be surprised to see those be added to the toolkit.

All right. Thanks for that color. Appreciate it.

Next we will go to the line of Jason Rodgers from Great Lakes Review. Please go ahead.

Good morning.

Good morning, Jason.

Just curious about the Bio Cremation product and if that is seeing any traction?

Less than we would like. We've done a good job of bringing down the cost structure, making it a more palatable solution. We have a few facilities that are using it at this point in time. It is not as quick as we would like it to be, but I would tell you that it is a longer-term play as an alternative to incineration.

What is more interesting out of the group is the amount of just plain old incineration business that has been available to us as we take basic simple technologies that we use elsewhere and apply it to small-site incineration. That probably has more legs to it in the near-term than the Bio Cremation.

I might have missed it, but did you talk at all about the death rate for the quarter and what the expectations are for the second half of the year?

I wish I could tell you. I'll talk to the guy upstairs about what the expectations are. But it was modestly flat. Steve, correct me if I am wrong?

Joe, you are right. The overall death rates for the quarter, at least based on the data that we look at through the CDC, was flat to slightly up, which would indicate that casket and in-ground burials were down for the quarter.

Thank you.

We're not expecting material change either way over the next couple of quarters.

We will go to the next question. We'll go to Daniel Moore with CJS. Please go ahead.

Thank you again. Just two questions, two follow-ups. In terms of caskets, any competitive response to the acquisition of Aurora that you have noted or can -- or could share? And second in terms of memorials, any update on the adoption rates and interest levels in memorialized cremations?

As you recall, we did mention that there dissynergies associated with the early part of the transaction and that is what we're seeing right now. I don't think it is beyond our expectations. People will make choices and we'd like to think everybody loves us but it is not always the case and there is an opportunity to switch because of some transaction.

We are doing everything in our power to retain all the customers that came with Aurora, as well as providing minimal disruption for them and promising them that, but some of that is going happen. So nothing to report there that is out of line with what had built into our models. The other part of your question?

Memorialized cremations, how it's probably not moving the needle yet, but how that is being accepted and adopted?

I would tell you that it is not moving the needle yet, but I would tell you there is ever more conversation around it. People are realizing that it is something that the consumer wants, and as a result, you have to build inventory and market it.

It's a little different than -- part of the issue is really getting to the point where people have to recognize at the cemetery side that you have to market this. This is not common practice in the United States, but as those folks which start to market it realize there's opportunities to make some money in that, we think that is a trend that will continue down the line.

Very good. Thank you.

(Operator Instructions)

At this time, there are no questions in queue. Please continue.

All right. Thank you, Stacy. We would like to thank everyone for their participation in our call this morning and we look forward to our next earnings release and conference call for our second fiscal quarter in April. Have a great day.

Thank you, ladies and gentlemen. This conference will be available for replay after 11:00 AM today running through February 12 until midnight. You may access the AT&T replay system at any time by dialing 1-320-365-3844, and when prompted, enter the access code of 383523. Once again, those numbers, 1-320-365-3844, access code 383523. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.