Matthews International Corp (MATW) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for your patience in standing by. Welcome to the Matthews International Second Quarter Financial Results Conference Call. At this time all of your participant phone lines are in a listen-only mode, and later there will be an opportunity for question. (Operator Instructions) And just as a reminder, today's conference is being recorded. I'd now like to turn the conference over to Chief Financial Officer Steve Nicola.

Thank you, Justin. Good morning, I'm Steve Nicola, Chief Financial Officer at 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 390969. The replay will be available until 11:59 p.m., May 12, 2016.

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've been advised to read the following disclaimer as it pertains to forward-looking statements.

Any forward-looking statements in connection with this discussion are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from management's expectations. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ from those discussed today are set forth in the Company's annual report on Form 10-K and other periodic filings with the SEC.

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 March 31, 2016, the Company reported earnings of $0.43 per share compared to $0.27 per share a year ago. On the non-GAAP basis, the Company's adjusted earnings per share was $0.75 for the current quarter compared to $0.67 a year ago. The increase primarily reflected the impact of the acquisition of Aurora Casket Company, higher sales of bronze and granite memorials, and the realization of acquisition integration synergies.

The net amount of the non-GAAP adjustments for the fiscal 2016 second quarter was $0.32 per share compared to $0.40 for the same quarter a year ago. As we anticipated, a significant portion of the 2016 non-GAAP adjustments included costs and other charges in connection with the integrations of the acquisitions of Schawk, Inc., or SGK, and Aurora Casket Company.

In our earnings release yesterday we included a reconciliation between GAAP and non-GAAP earnings per share. In our second fiscal quarter a year ago, non-GAAP adjustments affecting consolidated operating profit primarily included SGK integration-related costs including the write-off of certain intangible assets and other costs related to cost-reduction initiatives.

Operating profit for the first six months a year ago also included the benefit of a litigation settlement in our Memorialization segment.

Consolidated sales for the fiscal 2016 second quarter were $367 million compared to $349 million for the same quarter a year ago. Consolidated sales for the six months ended March 31, 2016, were $721 million compared to $693 million for the same period last year. The increases primarily reflected the acquisition of Aurora and higher sales of bronze and granite memorials.

Consolidated operating profit on a GAAP basis for the quarter ended March 31, 2016, was $26.4 million compared to $19.3 million a year ago reflecting the impact of the Aurora acquisition, higher sales of bronze and granite memorials and the realization of acquisition integration synergies. Operating profit for both periods was impacted by acquisition integration costs.

In addition, the current year reflected an increase in intangible amortization resulting from the Aurora acquisition. The second quarter a year ago also included a write-off of intangible assets in connection with the SGK integration.

Year-to-date operating profit for the current period was $38.5 million compared to $44.9 million last year. Last year's operating profit included the benefit of a $9 million gain on a litigation settlement in the Memorialization segment.

Consolidated adjusted EBITDA for the quarter ended March 31, 2016, was $56.1 million compared to $51.5 million a year ago. Year-to-date, consolidated adjusted EBITDA as of March 31, 2016, was $103.1 million compared to $95.3 million a year ago. The increases resulted primarily from the incremental operating profit impact of the Aurora acquisition, higher sales of bronze and granite memorials, and the realization of acquisition integration synergies offset partially by unfavorable currency rate changes. A reconciliation of adjusted EBITDA is provided in the quarterly financial data posted to our website.

Sales for the SGK brand solution segment were $184 million for the current quarter compared to $192 million for the same quarter a year ago. The segment's year-to-date sales were $363 million compared to $393 million for the same period last year. Currency rate changes had unfavorable impacts of $4.5 million and $15.9 million, respectively, on the segment sales for the quarter and year-to-date periods compared to a year ago.

In addition, slower brand market conditions in the US and Europe also unfavorably impacted sales, which were partially offset by higher sales in the segments UK and Asia Pacific markets and an increase in merchandising project sales.

The SGK Brand Solution segment reported operating profit of $5.5 million for the current quarter compared to an operating loss of $1.6 million for the same period a year ago. Excluding charges related to the SGK acquisition integration and other cost reduction initiatives, the segment reported operating profit of $13.1 million compared to $10.5 million last year.

The year-over-year increase primarily related to the realization of acquisition synergies and other cost reductions. Year-to-date, the segments adjusted operating profit, excluding charges related to the acquisition integration and cost reduction initiatives was $23.2 million compared to $20 million last year.

Memorialization segment sales for the fiscal 2016 second quarter were $157 million compared to $130 million for the same quarter a year ago. The increase primarily resulted from the acquisition of Aurora. In addition, the segment reported higher sales of bronze and granite memorials during the current quarter.

Sales of cremation equipment in North America were also higher. Casket sales were lower than a year ago reflecting a decline in deaths in the United States during the recent winter. Year-to-date sales for the Memorialization segment were $305 million at March 31, 2016, compared to $246 million for the same period a year ago.

Operating profit for the Memorialization segment for the fiscal 2016 second quarter was $19.5 million compared to $18.2 million for the same quarter a year ago. Excluding charges related to the Aurora acquisition operating profit for the Memorialization segment for the fiscal 2016 second quarter was $20.2 million compared to $18.8 million for the same quarter a year ago. The increase primarily reflected the impact of the Aurora acquisition and higher sales of bronze and granite memorials.

Year-to-date operating profit for the Memorialization segment as of March 31, 2016, excluding acquisition-related charges, was $35.1 million compared to $31.4 million excluding acquisition costs and the gain on the litigation settlement for the same period last year.

Operating profit for the segment also reflected intangible amortization expense of $1.2 million for the current quarter compared to approximately $400,000 for the same quarter last year. Year-to-date, this intangible amortization expense was $2.5 million compared to approximately $900,000 last year. The significant increases resulted from the incremental amortization in connection with the Aurora acquisition.

The Industrial Technology segment reported sales of $25.4 million for the quarter ended March 31, 2016, compared to $27.4 million for the same quarter last year. The segment reported very good results last fiscal year and, as a result, represents a challenging comparable for the current year.

In addition, as we started to see at the end of last quarter, the segment's principal markets are generally reflecting slower market conditions. The segment reported year-to-date sales of $53.7 million at March 31, 2016, compared to $53.9 million for the same period last year.

Operating profit for the Industrial Technology segment was $1.5 million for the current quarter compared to $2.7 million for the same quarter last year, primarily reflecting the sales change. The segment's operating profit for the six months ended March 31, 2016, was $3.1 million compared to approximately $5 million a year ago, primarily reflecting an unfavorable change in product mix.

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 2016 second quarter consolidated adjusted EBITDA margin was 15.3% of sales compared to 14.8% a year ago. Consolidated adjusted EBITDA for the six months ended March 31, 2016, was 14.3% of sales compared to 13.8% a year ago. The EBITDA margin improvements primarily reflected the impact of acquisition synergies and other cost reduction initiatives.

Gross margin for the quarter ended March 31, 2016, was 37.5% of sales compared to 36.5% a year ago. Gross margin for the six months ended March 31, 2016, was 36.6% of sales compared to 36.4% a year ago. The improvement in gross profit as a percent of sales reflected the favorable impact of cost reduction initiatives partially offset by the write-off of Aurora inventory step-up value.

Selling and administrative expense for the current quarter was 33.3% of sales compared to 31% for the same quarter last year. The decline primarily resulted from a reduction in acquisition integration costs. Year-to-date selling and administrative expense for the current period was 31.3% of sales compared to 29.9% for the same period last year. The increase primarily resulted from the impact of the Aurora acquisition integration costs and incremental and tangible amortization expense. The year-to-date percentage last year also included the net gain from the litigation settlement.

Investment income for the fiscal 2016 second quarter was $235,000 compared to $702,000 a year ago. Year-to-date investment income was $936,000 for the current period compared to $973,000 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 approximately $6 million compared to $4.9 million for the same period last year. Interest expense for the six months ended March 31, 2016, was $11.9 million compared to $10.3 million a year ago. The increases resulted primarily from additional borrowings in connection with the Aurora acquisition.

Other income deductions net for the fiscal 2016 second quarter represented a deduction of $192,000 compared to $2.1 million a year ago. Other income deductions net for the first six months of the current fiscal year represented a deduction of $1.1 million compared to $3.4 million a year ago. The prior quarter and year-to-date amounts included the respective period portions of the theft identified last year. Other income and deductions generally include, among other items, banking-related fees and currency gains or losses on certain inter-company debt.

The company's effective income tax rate for the six months ended March 31, 2016, was 29.1% of pretax income, the effective tax rate was 29.4% for the fiscal year ended September 30, 2015. These effective rates included certain favorable tax benefits in those periods. The Company is currently estimating an effective tax rate for fiscal 2016 of 31.5% excluding these benefits.

At March 31, 2016, the Company's consolidated cash was $59.3 million compared to $72.2 million at September 30, 2015. Accounts receivable at the end of the current quarter totaled $274 million compared to $284 million at the end of the fiscal 2015.

Consolidated inventories at March 31, 2016, were $169 million compared to $171 million at September 30, 2015. Long-term debt at the end of the current quarter including the current portion approximated $888 million compared to $903 million at September 30, 2015. The reduction resulted primarily from repayments on the Company's domestic revolving credit facility.

Since the SGK acquisition in July 2014, the Company has made gross debt repayments of over $100 million.

Outstanding borrowings on the domestic revolving credit facility at March 31, 2016, were $859.4 million at a weighted average interest rate of approximately 2.5%. On March 26, 2016, the Company amended to divest the credit facility to increase its total borrowing capacity from $900 million to $1.15 billion through the addition of a $250 million five-year amortizing term loan. The amended facility generally maintains the interest rate structure of the existing revolving credit facility. In addition, the amendment extends the maturity of the facility to April 2021.

Additionally, as we previously disclosed, we received a claim from a customer in September 2014 seeking to draw upon a letter of credit of approximately $13 million. We made payment on the draw, and the Company was recently advised that the funds were ultimately received by the customer. Pursuant to an action initiated by the Company, a court order was issued requiring these funds to be remitted to the court pending resolution of the dispute between the parties.

Management has assessed the customer's claim to be without merit and based on information available as of this filing, expects that the courts will ultimately rule in our favor. However, as the customer has not yet remitted the funds to the court, it is possible the resolution of this matter could have an unfavorable impact on Matthews' results of operations.

The Company had approximately 33 million shares outstanding at March 31, 2016. For fiscal 2016, the Company purchased approximately 151,000 shares year-to-date under its share repurchase program at a cost of $8.2 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 and six months ended March 31, 2016, was $16.4 million and $32.2 million, respectively, compared to $16.5 million and $31.9 million, respectively, a year ago.

Capital expenditures for the quarter and six months ended March 31, 2016, were $9.8 million and $23.9 million, respectively, compared to $10.3 million and $19.6 million respectively, a year ago.

Finally, the Board, last week, declared a dividend of $0.15 per share on the Company's common stock. The dividend is payable May 16, 2016, to stockholders of record, May 2, 2016.

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 quarter. Despite challenging market environments in several of our businesses, our synergy capture and good cost containment allowed us to exceed market expectations for the quarter. Continued higher volume in our Cemetery Products group and good synergy achievement in our Aurora acquisition all contributed to offset lower death rates.

Similarly, with regard to our brand business, softness in the North American and European markets and significant currency headwinds were offset by execution, which captured the expected synergies. Good cost management and strong performance in our merchandising, UK and Asia operations, all benefited as well.

Meanwhile, our Automation Group, which is contending with a difficult year-over-year comparable still continues to deliver good results and is expected to have yet another strong year. All in all, we are headed in the right direction, and we are excited about the many things happening throughout our business.

With regard to the two significant integration efforts that we have underway, we remain on track to deliver our targeted cost synergies and maybe more. As we have communicated in the past, we began the most significant part of our ERP launch on April 1st for our SGK brand segment, and I'm happy to report it is going very well.

A special thanks goes out to the team across the world who have dedicated a lot of time and effort to make this a successful launch. Assuming the continued success of the ERP implementation, we remain very confident in our ability to deliver our projected synergies of $45 million, which is at the high end of the range, which was previously communicated.

With regard to Aurora, our plans are finalized, and the integration has begun in earnest. We are very confident that we will deliver all of the projected benefits of this acquisition and perhaps more as well. As I've stated before, we must and will continue to provide seamless service to our valued customers so our detailed integration plans to include significant investment to assure exceptional service levels.

Even with these investments, however, we still expect to add over $40 million of incremental EBITDA from this transaction over the 24-month period after acquisition. As we have previously stated, expected synergies -- dissynergies, excuse me, have impacted the immediate benefits of this acquisition. But during the quarter, we began to see the benefit of early synergy capture.

During the quarter, we have chosen to rename our Industrial segment to better reflect the true nature of the underlining business. Many of you may recall this segment to have been our Marketing Products division, the historical roots of our business. Today, given the evolution of this business and the scope of its current and future product lines, there is no better descriptor that encompasses the core of this business other than Industrial Technologies.

With that, our Industrial Technologies segment continues to see great performance despite high R&D spending, which totaled $1.4 million during the quarter. Expanded products, creative solutions, and great people who focus on innovation every day will allow us to continue to grow this business well beyond its current size. From a financial standpoint, we generated over $40 million of operating cash flow for the quarter, and we are very confident in our full-year target of approximately $100 million of free cash flow, which includes a substantial investment in both our integration efforts.

With regard to those integrations, we believe that we have peaked in our integration costs, and the amounts are expected to decline significantly during the next six months. Thus, we expect free cash flow on a forward basis to approach $140 million beginning next year, which will push our free cash flow yield at the current stock price to over 8%.

We also expect to generate around $245 million of adjusted EBITDA for this fiscal year, all while keeping our capital expenditures in check at around $40 million to $45 million. With this strong cash generation, we have, and we will continue to focus on reducing our outstanding debt. To that end, we are proud to announce that we have made over $100 million of debt repayment since closing on SGK in late 2014. Keep in mind, that we made those debt repayments despite having incurred significant integration costs, and those costs are waning.

To that end, we are targeting additional repayments of up to $40 million for the balance of 2016. Clearly, the addition of SGK and Aurora and continued strong performance from our historical businesses has allowed us to materially change the financial picture of the Company.

As we look to the balance of 2016, we remain confident of our ability to achieve our operating objectives that have been communicated including the amount of synergies that we expect to achieve. We have exceeded market expectations for the first two quarters and feel very comfortable with our target of $3.25 per share adjusted and possibly more.

We remain cautious of the economies in which we operate but optimistic about our own ability to manage through those difficulties as we have demonstrated this quarter. We will remain proactive in taking actions to mitigate the potential effects of these and other challenges as we move throughout the balance of the year.

Also, as we have communicated in the past, we have recently made permanent, through a term loan, a portion of our bank revolver debt adding further stability to our balance sheet and affording us the opportunity to lock in favorable interest rates for years to come.

For all these reasons, we are proud of our results for the quarter and optimistic about our internal opportunities and those opportunities that are created by our proven ability to integrate acquisitions.

With that, let's 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 wish to participate in the Q&A session have had an opportunity to do so. Justin?

(Operator Instructions) Dan Moore.

Good morning, thanks for taking the questions. Joe, can you, perhaps, quantify -- you talked about the synergies you realized, obviously, significantly confident in getting to the high end. How much of those synergies for Schawk and Aurora you realized in the quarter and year-to-date and are you achieving them faster than you expected?

Well, let's talk about SGK first. SGK, we have communicated a range of $35 million to $45 million. Today we have confirmed for you that we're at the high end of that range and maybe a little bit more beyond that.

The run rate at this point in the fiscal year, we're running at about a little more than half that. We expect that by the end of the year we should be pushing $30 million of that $45 million at a run rate. So we've communicated historically that's going to take 24 to 36 months to get through. We're still right on track with respect to SGK.

On the Aurora side, we're pleased to report we're slightly ahead, but, I mean, and it is modest because, frankly, right now, the dissynergies are still outweighing the synergies that we are achieving.

Having said that, we've only recognized several million dollars' worth of the cost synergies we expect. There's still a lot more to come. We think we've stabilized the dissynergy portion of it, and it should be upside from here.

Very helpful. By year-end for Schawk, you said $30 million? Did I hear that? Or higher?

$30 million by the end of the year.

Got it, okay, that's helpful. And you called out bronze and granite memorials, obviously, first, seeing some decent growth year-over-year. How much of a factor was the mild weather in placements during the quarter versus a more sustainable uptick? What's your view there?

The fact of the matter is we can't tell how much that is, but we can't deny that a milder winter is going to make placements a little better. But we also know some other things. As you all -- for many of you who have been the shareholders for a while, we had a challenging ERP implementation in that segment of the business a few years back. As we suggested at that time, we lost some of our more regional accounts, and that team right now has done a wonderful job of going back after those accounts. And we are picking up market share that we had lost during that time period.

Along the same line, the team on our stone side of the business is doing great work. We're seeing double-digit increases that we think are going to continue for a while. We've always proposed that we think we can be a significant player in the stone business, which is a good adjunct to what we have on the bronze side, and we're seeing that come to fruition as we speak.

So great performance, I mean, that challenging ERP implementation is paying its benefits now. Service levels are beyond anything we've had in the last 100 years from a delivery standpoint. So we're pretty proud of what we've done on that side of the business, and that team has done a great job for us.

Okay, and then, lastly, and I'll jump back in queue. Brand solutions -- any signs of an improved climate either in North America or in Europe? And when do you think we might start to see some benefit from the changes in packaging regulations or legislation?

We think Europe is turning, as we speak. We've had some information from customers and clients over there that suggested that we should see some upside tick in volumes as marketing dollars are being freed up a little bit more.

In North America, frankly, our historical customers remain very, very stable but at lower run rates. But we did see the beginnings of what we think are what the Food Modernization and Labeling Act -- a tongue-twister there -- that, as we look at Vermont. Vermont has pushed several of our large consumer product companies on the food side to do GMO labeling, as many of you may be aware, and we've seen good volume coming through as a result of that.

So, it's early, but we think that there's some pent-up demand associated with that regulation, and we'll see that come through in the next 12 to 24 months.

(Operator Instructions) [Limon] Burke.

Yes, good morning, Joe. Good morning, Steve. Joe, on the Aurora acquisition, on the revenue side, have you been able to stabilize that side of the business, and have you seen the integration on the revenue side come through okay?

Actually, the revenue side is just starting to turn, Liam, as we speak. Much of the dissynergies occurred prior to our closing on that acquisition in the time period where the Federal Trade Commission doesn't allow us to speak neither to customers nor know too much about the inside of the business.

We've stabilized that, and I would tell you, Liam, that today we fully expect to be the most cost-effective manufacturer of caskets in the United States, and we don't think that, long term, that this will be a challenge for us to be able to maintain that revenue, going forward.

Okay. And in the old marking business, how did that part of the business perform in terms of Consumables?

Consumables are below what our expectations were but still at a higher rate than historically it has been. As we've said in the past, the marking portion of our -- of what we are calling our Industrial Technologies business, is really the bellwether for us in economic conditions around the word.

Consumables are the part of that that really tells us, pretty early on, what the economy is doing. And as you've read in the papers, Liam, they're reporting a slow first quarter. We felt that slowness in our Consumables but, at the same time, this team has demonstrated, year over year over year for the last 10 years that they find ways to create new solutions.

We have great promise in that division, and I think good people doing it. So I think it's a blip in the quarter and, frankly, it wasn't a bad quarter.

At this point, sir, we have no further questions in queue.

All right, well, we'd like to thank everyone for participating in our 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.

Ladies and gentlemen, that does conclude the conference for this morning. We do thank you very much for your participation, and a replay of today's recording will be available by dialing 320-365-3844 and using the access code of 390969. It will be available from 11 a.m. today through May 12th of 2016. So, once again, you can dial 320-365-3844 using the access code of 390969. You may now disconnect.