Matthews International Corp (MATW) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Matthews International third quarter financial results conference call. (Operator Instructions)

As a reminder, today's call is being recorded.

I'll turn the conference now over to Mr. Steve Nicola, Chief Financial Officer and Secretary. Please go ahead, sir.

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

Today's conference call has been scheduled for one hour and will be available for replay later this morning. To access the replay, dial 1-320-365-3844 and enter the access code 398561. The replay will be available until 11:59 p.m., August 12, 2016.

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 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."

Before beginning the discussion, at the advice of legal counsel I've been advised to read the following disclaimers [as] 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'll open the discussion for questions.

For the quarter ended June 30, 2016, the Company reported earnings of $0.73 per share, compared to $0.70 per share a year ago.

Consolidated sales for the Fiscal 2016 third quarter were $382 million, compared to $365 million last year.

Consolidated operating profit for the quarter ended June 30, 2016, was $40.7 million, compared to $27.4 million a year ago.

The increase in consolidated sales primarily reflected the impact of Aurora and sales growth in international markets for the SGK brand solutions segment. In addition, merchandising project sales were also higher for the quarter.

The increase in consolidated operating profit for the quarter primarily reflected the impact of the Aurora acquisition, the realization of acquisition integration synergies, and lower commodity costs. 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.

For the nine months ended June 30, 2016, consolidated sales were $1.1 billion, representing an increase of $46 million compared to the same period last year. The year-to-date increase primarily reflected the impact of Aurora, higher cemetery memorial sales volume, an increase in sales in the UK and Asia-Pacific brand markets, and an increase in merchandising project sales.

For the nine months ended June 30, 2016, consolidated operating profit was $79.1 million, compared to $72.3 million last year. The year-to-date increase primarily reflected the impact of the Aurora acquisition, the realization of acquisition integration synergies, and lower commodity costs. 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.

Last year's operating profit included a $4.8 million write-off of certain intangible assets and the benefit of a $9 million net gain on a litigation settlement in the memorialization segment.

On a non-GAAP basis, the Company's adjusted earnings per share were $0.97 for the current quarter, compared to $0.88 a year ago. The increase primarily reflected the impact of the acquisition of Aurora, the realization of acquisition integration synergies, and the benefit of lower commodity costs.

The net amount of the non-GAAP adjustments for the Fiscal 2016 third quarter was $0.24 per share, compared to $0.18 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, or SGK, and Aurora. In our earnings release yesterday, we included a reconciliation between GAAP and non-GAAP earnings per share.

In the third fiscal quarter a year ago, non-GAAP adjustments affecting consolidated operating profit primarily included SGK integration-related costs, the favorable impact of the settlement of a pension plan installment payment obligation, and other costs related to cost reduction initiatives.

Year-to-date operating profit a year ago also included the benefit of a litigation settlement in our memorialization segment and the write-off of certain intangible assets of the SGK brand solutions segment.

Consolidated adjusted EBITDA for the quarter ended June 30, 2016, was $67 million, compared to $59 million a year ago. Year-to-date consolidated adjusted EBITDA as of June 30, 2016, was $170.1 million, compared to $154.3 million a year ago. The increases resulted primarily from the impact of the Aurora acquisition, the realization of acquisition integration synergies, and lower commodity costs. A reconciliation of adjusted EBITDA was provided in our press release yesterday and is included in the quarterly financial data posted to our website.

Sales for the SGK brand solutions segment were $199.6 million for the current quarter, compared to $205.1 million for the same quarter a year ago. The segment reported sales growth in its international markets -- Europe, the UK, and Asia -- and increased merchandising project sales in the US. The segment sales in North America were lower, primarily due to slower brand market conditions. Currency rate changes had an unfavorable impact of $2.1 million on the segment sales for the quarter compared to a year ago.

The segment's year-to-date sales were $562 million, compared to $598 million for the same period last year. Currency rate changes had an unfavorable impact of $18 million on the segment's year-to-date sales compared to a year ago.

The SGK brand solutions segment reported operating profit of $17.9 million for the current quarter, compared to $5.3 million for the same quarter a year ago. Charges related to the SGK acquisition integration and other cost reduction initiatives were $3.8 million for the current quarter, compared to $12.5 million last year. The year-over-year increase in operating profit, excluding these charges, primarily related to the realization of acquisition synergies and other cost reductions.

Year to date, the segment's operating profit was $26.1 million, compared to $5.5 million last year. Year-to-date charges in connection with the acquisition integration and other cost reduction initiatives were $18.7 million for the current quarter, compared to $32.3 million last year.

Memorialization segment sales for the Fiscal 2016 third quarter were $153 million, compared to $126 million for the same quarter a year ago. The increase primarily resulted from the acquisition of Aurora, which added sales of $31 million for the quarter. Sales of cemetery memorials and caskets were lower for the quarter, reflecting an estimated decline in casketed deaths in the United States.

Year-to-date sales for the memorialization segment were $458 million at June 30, 2016, compared to $372 million for the same period a year ago. Aurora contributed sales of $98 million for the nine months ended June 30, 2016.

On a year-to-date basis, cemetery memorial unit volume was higher than a year ago. Caskets sales were lower, primarily reflecting the decline in US casketed deaths.

Operating profit for the memorialization segment for the Fiscal 2016 third quarter was $20.9 million, compared to $17.7 million for the same quarter a year ago. The increase primarily reflected the impact of the Aurora acquisition and the benefits of lower commodity costs and cost reduction initiatives.

Year-to-date operating profit for the memorialization segment as of June 30, 2016, was $48.1 million, compared to $57.4 million for the same period last year. The current period included acquisition integration charges, and the prior year included a gain from the settlement of litigation. Excluding these items, current-year operating profit was higher as a result of the Aurora acquisition, the benefit of cost reduction initiatives, lower commodity costs, and higher year-to-date sales volume of cemetery memorials.

Operating profit for this 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 amortization expense was $3.7 million, compared to approximately $1.3 million last year. The significant increases resulted from the incremental amortization in connection with the Aurora acquisition.

The industrial technologies segment reported sales of $29.6 million for the quarter ended June 30, 2016, compared to $34.1 million for the same quarter last year. Lower sales in the fulfillment systems markets were a significant factor in the change.

Also, please note that the segment had a strong quarter a year ago and, as a result, presented a challenging comparable for the current year. For reference purposes, the segment reported sales of $25.7 million in the third quarter of Fiscal 2014.

In addition, as we started to see earlier this fiscal year, the segment's principal markets are generally reflecting slower market conditions.

The segment reported year-to-date sales of $83.4 million at June 30, 2016, compared to $88 million for the same period last year.

Operating profit for the industrial technologies segment was $1.9 million for the current quarter, compared to $4.4 million for the same quarter last year, primarily reflecting the sales change.

The segment's operating profit for the nine months ended June 30, 2016, was approximately $5 million, compared to $9.4 million a year ago, primarily reflecting lower sales and 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 third quarter consolidated adjusted EBITDA as a percent of sales was 17.5%, compared to 16.2% a year ago. Consolidated adjusted EBITDA for the nine months ended June 30, 2016, was 15.4% of sales, compared to 14.6% a year ago. The adjusted EBITDA margin improvements primarily reflected the impact of acquisition synergies and other cost reduction initiatives.

Gross margin for the quarter ended June 30, 2016, was 38% of sales, compared to 37.1% a year ago. Gross margin for the nine months ended June 30, 2016, was 37.1% of sales, compared to 36.7% a year ago. The benefits of cost reduction initiatives and lower commodity costs contributed to the year-over-year improvement in gross margin.

Selling and administrative expense for the current quarter was 27.4% of sales, compared to 29.6% 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 29.9% of sales, compared to 29.8% for the same period last year. The increase primarily resulted from incremental intangible amortization expense related to the Aurora acquisition. In addition, the year-to-date percentage last year included the impacts of the intangible asset write-off and the net gain from the litigation settlement.

Investment income for the Fiscal 2016 third quarter was $524,000, compared to $58,000 a year ago. Year-to-date investment income was $1.5 million for the current period, compared to $1 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 $6.3 million, compared to $4.8 million for the same period last year. Interest expense for the nine months ended June 30, 2016, was $18.1 million, compared to $15.1 million a year ago. The increases resulted primarily from additional borrowings in connection with the Aurora acquisition.

Other income, net for the Fiscal 2016 third quarter was $460,000, compared to $9.8 million a year ago. Other income (deductions), net for the first nine months of the current fiscal year represented a deduction of $606,000, compared to income of $6.4 million a year ago.

The prior-quarter and year-to-date amounts included the favorable impact of a settlement of a pension plan installment payment obligation. In addition, 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 nine months ended June 30, 2016, was 31.2% of pretax income. This rate reflects certain favorable tax benefits specific to the current period.

The Company is currently estimating an effective tax rate for Fiscal 2016 of 31.5%, excluding these benefits. The effective tax rate was 29.4% for the fiscal year ended September 30, 2015. The effective rate for Fiscal 2015 included the benefit of the utilization of certain tax attributes resulting from organizational restructuring.

At June 30, 2016, the Company's consolidated cash was $74.5 million, compared to $72.2 million at September 30, 2015.

Accounts receivable at the end of the current quarter totaled $285 million, compared to $284 million at the end of Fiscal 2015.

Consolidated inventories at June 30, 2016, were $167 million, compared to $171 million at September 30, 2015.

Long-term debt at the end of the current quarter, including the current portion, approximated $919 million, compared to $903 million at September 30, 2015. The increase resulted primarily from the repurchase in May 2016 of a portion of the shares held by several Schawk family members, which was partially offset by repayments. Since the end of June 2016, the Company has made additional debt repayments of approximately $30 million.

Outstanding borrowings on the domestic credit facility at June 30, 2016, were approximately $895 million, at a weighted average interest rate of approximately 2.6%.

On April 26, 2016, the Company amended the domestic credit facility to increase its 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 in September 2014 seeking to draw upon a letter of credit issued by the Company of GBP8.6 million with respect to a performance guaranty on a project for a customer in Saudi Arabia. We assessed the customer's claim to be without merit and, accordingly, initiated an action with the court.

Pursuant to this action, a court order was issued in January 2015 requiring that, upon receipt by the customer, the funds were to be remitted by the customer to the court pending resolution of the dispute between the parties. As a result, the Company made payment on the draw to the financial institution for the letter of credit, and the funds were ultimately received by the customer. The customer did not remit the funds to the court as ordered.

On June 14, 2016, the court ruled completely in favor of Matthews, following a trial on the merits. However, as the customer has not yet remitted the funds, it is possible the resolution of this matter could have an unfavorable impact on Matthews' results of operations.

The Company had 32.1 million shares outstanding at June 30, 2016. For Fiscal 2016, the Company repurchased approximately 1,131,000 shares year to date under its share repurchase program, at a cost of $57.9 million. This includes the purchase in May 2016 of 970,000 shares held by several Schawk family members. At the end of the current quarter, approximately 2 million shares remained under the current share repurchase authorization.

Depreciation and amortization expense for the quarter and nine months ended June 30, 2016, was $17.1 million and $49.3 million, respectively, compared to $15.2 million and $47.1 million, respectively, a year ago.

Capital expenditures for the quarter and nine months ended June 30, 2016, were $8.8 million and $32.7 million, respectively, compared to $15.1 million and $34.7 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 August 15, 2016, to stockholders of record August 1, 2016.

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

Thank you, Steve. Good morning.

We are again pleased with our results for the third quarter. During the quarter, we continued to deliver strong synergy capture and good cost containment, which allowed us to exceed market expectations again for this quarter.

One thing that we are particularly pleased with is that we reached our goals despite certain market challenges. During the quarter, in our cemetery products division we saw lower volumes, driven by the lower death rates in the previous quarters. As you know, given our market share in this division, it is difficult to overcome these short-term market downturns.

Even with this modest decline, we had solid results in our cemetery products division, which continue to have higher year-to-date volume over prior year in both our bronze and our stone product lines, representing good market share gains in that business.

Our Aurora acquisition continued to go very well, with expected synergies continuing to grow. We believe that we have passed our initial downturn of customer transition, thus limiting the anticipated dyssynergies resulting from their acquisition.

We remain confident that Aurora will add more than $40 million of EBITDA net of those dyssynergies once it is fully integrated, versus the $35 million to $40 million we initially anticipated. What is also important to recall is that this incremental EBITDA will be added with only modest increases in our capital needs, thus further increasing our free cash flows.

We think this acquisition will be a tremendous success. Moreover, we believe that the benefits of our efforts this year are not yet being fully realized due to the slower death rates. As death rates normalize, we expect to see significant improvement in our results. Our hats go off to the combined integration team for their good work.

With regard to our brand business, our SGK integration continues to go well and is approaching the final stage. If you recall, we had significant synergies related to a successful implementation of our ERP solution. I am happy to report that during the quarter we successfully launched our ERP in all legacy SGK locations globally. Like all ERP implementation, there is no such thing as an eventless launch, but this one was as close to perfect as you can get. I again tip my hat to the integration team for those efforts.

We still have to implement our ERP solution in our legacy Matthews brand businesses, principally in Europe, during the coming year, but we remain confident of our ability to complete those implementations as successfully as we have this quarter.

As you will note from our non-GAAP reconciliation of earnings, our integration costs have come down significantly this quarter versus prior year. We are well past the midway point from a total integration cost standpoint and substantially complete with spending on SGK. We still have significant integration costs related to the Aurora integration yet to be incurred attributable to plant consolidations, but most of those costs should be incurred by the end of Fiscal 2017.

Even with the remaining Aurora integration costs, we expect combined SGK and Aurora integration costs to be substantially lower in 2017 than has been incurred to date. Therefore, as we move into Fiscal 2018, our GAAP and non-GAAP earnings should be much more aligned and result in stronger cash flows.

During the quarter, we also repurchased approximately 1 million shares from the Schawk family, costing about $50 million. This will benefit shareholders for years to come, especially since we expect to have substantially repaid the entire share repurchase price by the end of this month. There is no better evidence of our ability to generate cash than this event.

From a full-year basis, we expect Fiscal 2016 adjusted operating cash flow to approach $120 million, which at today's stock price would represent a better than 6% cash flow yield. Needless to say, we are pleased with the choices we have made and the efforts of our global teams to execute on our commitments.

During the quarter, we also solidified our balance sheet by adding a $250 million term loan to our capital structure, thus making permanent a portion of our long-term debt at very attractive rates. We expect to make more of our long-term debt permanent in the coming quarters, with a goal of bringing our debt coverage ratio below 3-times during the coming year.

Meanwhile, our industrial automation group, which is contending with a difficult year-over-year comparable, still continues to deliver solid equipment sales, driven by recent product launches, but our fulfillment business began to see a slowing in the automated warehouse markets. We expect the coming quarter to continue to be a difficult comparison, especially for the fulfillment businesses, but we remain confident of the direction of this segment, particularly as we await some significant new products to launch in the next 24 months.

As we look to the balance of 2016, 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 remain cautious, however, given lower-than-expected death rates, sluggish North American brand markets, and a downturn in the automated warehouse markets. We remain optimistic, however, of our ability to capture synergies and to manage through those difficulties.

We are pleased with the direction of all of our businesses, despite the market challenges, and by the end of the year we will have substantially transformed our cost structure, and we expect to see more opportunity to [prove] that cost structure in the years to come.

As death rates normalize, brand markets begin to grow, and the other markets in which we operate return to being more robust, we expect to more fully see the benefits of our efforts this year drop to the bottom line.

With that, let's open it up to questions.

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

(Operator Instructions) Dan Moore, CJS Securities.

This is actually Robert Magic filling in for Dan today. Can you update us on the amount of synergies you realized for both Schawk and Aurora in the fiscal third quarter and year to date?

I would say year -- well, what we're projecting for the current year is a little bit over $30 million aggregate for both, most of that obviously being from Schawk, with a small portion of that being Aurora.

Okay. Thank you. And for brand solutions, can you update us on the trends in Europe and if you experienced any noticeable changes in spending patterns post-Brexit?

To date, not necessarily. Time will tell. We've had some slowing in our UK market as we kind of go through this, but not enough to materially change our results. Most of the projects we're working on have a longer lead time than the last several weeks. So, not yet. Let's put it that way.

I appreciate it. I'll jump back in the queue.

Liam Burke, Wunderlich.

Joe, could you give us a sense as to if you're seeing any kind of improvement over time in the North American market? I know there have been some regulatory issues that have been holding back consumer spending, but is it regulatory or is it more the economy that's holding back that spending?

As a practical matter, the -- as you all may be aware, the Food Labeling Modernization Act has passed, and the regulations associated with that have been finalized. We expect implementation to be [about] 2018, as it currently stands. There's some staggered implementation dates based on size.

So, we should start to see some pickup from that. We believe that we've had some hold-back with some of our brands as they get there.

But, you know Liam, if you look at the P&Ls of our largest CPG accounts that we do, they've struggled in their top lines, as well. And I think what we're seeing is just containment in their spending on the marketing side, especially as it relates to the packaging as we move forward.

So, I think that it has more to do with the economy and a sluggish consumer than it does with any changes in their desire to spend on packaging long term. So, we think it should be a matter of time. We should see those things return to more robust markets, and we're well positioned to take advantage of that.

Great. And Joe, on the fulfillment side you had a lot of interest from some large customers on some of the fulfillment technologies you're rolling out. Is that interest still there? Or, are they waiting for the new product release?

No question, the new product release is not necessarily in the fulfillment side. If you -- we take a look at some of the automated warehouse literature and statistics out there. It's just a bit of a downturn as we go through this. Generally, as we approach the Christmas season, people turn off their spending as it relates to [automated] warehouses. They do not want to be interrupting their distribution at the time of -- the busiest of their season.

We expect that to kind of return to normalcy through the first and second quarters of 2017. But at the end of the day, right now what we're seeing is a slowing, and we have enough of a lead time to see that it most likely will impact our next quarter there.

Okay. Great.

But it is a little bit more of a project-based business, Liam. And as a result, the projects come and go. The timing of those may impact a quarter or two, but generally the direction of that group continues to be the right one.

Great. Thanks, Joe.

Jason Rodgers, Great Lakes Review.

Could you quantify the benefit of lower bronze costs you saw in the quarter and if you expect similar type savings in 4Q?

Jason, we typically don't quantify the specific benefit related to those commodity costs, for various reasons -- we'll leave it at that -- but we did see a benefit this quarter and this year to date compared to last year, not only in bronze but other commodities including fuel, for example.

I would remind you, Jason, given where our size is today relative to historical comparisons, bronze is critical but not overwhelmingly controlling of our results.

All right. And just getting back to the food labeling requirements, is your expectation that benefits will start manifesting themselves beginning late in calendar 2016?

I think we'll start to see work trickling in at that point in time. I think 2017 and 2018 will be where we'll see most of that work flow through.

To be truthful, the FLMA did not go as far as we would have hoped, from a provider standpoint. It will require changes to packaging, not as significant that we initially had proposed. But it will require a touch on every single package that's out there.

All right. And if I could just squeeze in one more, it looks like you're definitely going to exceed your initial $3.25 EPS guidance for Fiscal 2016. Just looking at the fourth quarter, would you expect EPS to increase sequentially from the third?

It's difficult to tell at this point in time. We'd rather keep you happy at the end of the quarter. But the fact of the matter is we're doing everything we can in the markets that we operate in. We've seen a light month of July on the death rate side. So, could that come back in the next quarter or two? Sure.

We have a couple of things we're waiting for results on with respect to the fulfillment side that could change a quarter. We've got a few things out there that could make it much better or put us right in line with where we expect to be.

At the end of the day, suffice it to say that the next quarter is not going to make the difference. We think the direction of the whole group is going in the right way.

Thank you.

(Operator Instructions) Gentlemen, allowing a few moments, no further questions coming in.

All right. Thank you, John. Well, we'd like to thank everyone for participating in the call this morning, and we look forward to our fourth quarter earnings release and conference call in November this year. Thank you. Have a great day.

Ladies and gentlemen, this conference is available for replay. It starts today at 11:00 a.m., Eastern Daylight Time; will last until August 12 at midnight. You may access the replay at any time by dialing 320-365-3844 and entering the access code 398561. That number again: 320-365-3844 and the access code 398561.

That does conclude your conference for today. Thank you for your participation. You may now disconnect.