Matthews International Corp (MATW) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Matthews International First Quarter Financial Results. For the conference, all participant lines are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. (Operator Instructions) As a reminder, today's call is being recorded.

I'll turn the conference now over to the Chief Financial Officer, Mr. Steve Nicola. 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 414930. The replay will be available until 11:59 PM February 10, 2017.

We posted on our website, which is www.matw.com, the first quarter earnings release and financial information we will discuss this morning. The earnings release can be found on our homepage. For the quarterly financial data, on the top of our homepage under the Investor tab, click on Investor News, then 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 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.

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, 2016, the Company reported earnings of $0.28 per share, compared to $0.14 per share a year ago. On a non-GAAP adjusted basis, earnings per share for the fiscal 2017 first quarter were $0.62, compared to $0.60 a year ago. The significant factors in the year-over-year improvement in earnings per share included the impact of higher sales of cemetery memorial products, sales growth in our UK and Asia Pacific brand markets, continued synergy realization from the SGK and Aurora acquisitions, the benefits of ongoing productivity initiatives, an increase in merchandising display projects, and a reduction in acquisition integration costs, which affected GAAP earnings only.

Current quarter earnings also reflected a significant increase in stock compensation expense. As several members of management reach retirement eligible status, the accounting rules require accelerated expense recognition of awards versus an amortization over the stipulated vesting period. This change had an unfavorable impact of $0.07 on the fiscal 2017 first quarter compared to a year ago.

Consolidated adjusted EBITDA for the quarter ended December 31, 2016 was $50.6 million, compared to $47 million a year ago, representing an increase of 7.8%. A reconciliation of non-GAAP earnings per share and adjusted EBITDA were provided in our press release yesterday, which has been posted to our website. As we anticipated, a significant portion of the non-GAAP adjustments included costs and other charges in connection with the integrations of the acquisitions of SGK and Aurora, including our ERP integration and implementation. In addition, acquisition-related costs included charges incurred related to our recent acquisitions, primarily A. + E. Ungricht GmbH in our SGK Brand Solutions segment.

Consolidated sales for the quarter ended December 31, 2016 were $349 million, compared to [$345 million] a year ago, representing a decrease of $5.2 million. The unfavorable impact on consolidated sales from changes in currency exchange rate was $5.2 million. Compared to the same quarter last year, current quarter sales were higher for cemetery memorial products, merchandising projects, and in the UK and Asia Pacific brand markets. These increases were offset by lower casket sales due primarily to an estimated decline in US casketed deaths during the quarter, continued slow brand market conditions in North America and a decrease in fulfillment systems sales.

Sales for the SGK Brand Solutions segment were $175.8 million for the current quarter, compared to $178.3 million for the same quarter a year ago, representing a decrease of $2.5 million. Currency exchange rate changes had an unfavorable impact of $4.8 million on the segment sales for the quarter compared to a year ago. Excluding the currency impact, the segment sales were higher than the same quarter a year ago. Merchandising display project sales increased for the current quarter. In addition, the segment reported sales growth in its UK and Asia Pacific markets. These increases were partially offset by lower sales in North America due to continued slow brand market conditions. The SGK Brand Solutions segment reported operating profit of $4.2 million for the current quarter, compared to $2.8 million for the same quarter a year ago. Charges primarily related to the acquisitions and acquisition integration activity were $6.2 million for the current quarter, compared to $7.3 million last year. The quarter-over-quarter increase in operating profit, excluding these charges, primarily related to the realization of acquisition synergies and other cost reductions.

Memorialization segment sales for the fiscal 2017 first quarter were $145.6 million, compared to $147.6 million for the same quarter a year ago. The segment reported higher sales of cemetery memorial products, primarily as a result of an increase in pre-need sales. This increase was offset by lower casket sales reflecting an estimated decline in US casketed deaths during the quarter. Operating profit for the Memorialization segment for the fiscal 2017 first quarter was $14.4 million, compared to $7.7 million for the same quarter a year ago. The increase reflected the impact of higher cemetery memorial products sales and the benefits of acquisition synergies and ongoing productivity initiatives. In addition, charges primarily in connection with the Aurora acquisition integration were $2.1 million for the current quarter, compared to $7.2 million last year. The amount for the prior quarter also included inventory step-up expense.

The Industrial Technologies segment reported sales of $27.6 million for the quarter ended December 31, 2016, compared to $28.3 million for the same quarter last year. The segment reported higher sales of marking products compared to a year ago, which was offset by lower sales of fulfillment systems, generally reflecting slower market conditions. Operating profit for the Industrial Technologies segment was $506,000 for the current quarter, compared to $1.6 million for the same quarter last year, primarily reflecting the sales change. In addition, the segment incurred charges of $301,000 in connection with the Company's ERP integration and implementation resulting from the recent acquisitions.

Our fiscal 2017 first quarter consolidated adjusted EBITDA as a percent of sales was 14.5%, compared to 13.3% a year ago. The adjusted EBITDA margin improvements primarily reflected the impact of acquisition synergies and other cost reduction initiatives. A summary of operating results by segment including non-GAAP adjustments for the quarter are posted on our website for your reference.

Gross margin for the quarter ended December 31, 2016 was 36.5% of sales, compared to 35.7% a year ago. The benefits of productivity improvements and other cost reduction initiatives contributed to the year-over-year improvement in gross margin percentage. In addition, the first quarter last year included inventory step-up expense in connection with the Aurora acquisition.

Selling and administrative expense for the current quarter was 31% of sales, compared to 32.3% for the same quarter last year. The decline primarily resulted from synergy realization and a reduction in acquisition integration costs. Investment income for the fiscal 2017 first quarter was $337,000, compared to $701,000 a year ago. The year-over-year change represents investment performance on assets held in trust for certain of the Company's benefit plans. Interest expense for the current quarter was $6.1 million, compared to $5.8 million for the same quarter last year. The increase resulted primarily from higher average interest rates this quarter. Other deductions net for the fiscal 2017 first quarter were $555,000, compared to $874,000 a year ago. Other income and deductions generally include, among other items, banking-related fees and the impact of currency gains or losses on certain inter-company debt.

The Company's effective income tax rate for the quarter ended December 31, 2016 was 29.3% of pre-tax income. This rate reflects certain favorable tax benefits and utilization of certain tax attributes specific to the current period. The effective tax rate was 30.5% for the fiscal year ended September 30, 2016. At December 31, 2016, the Company's consolidated cash was $106.4 million, compared to $55.7 million at September 30, 2016. The increase primarily resulted from additional borrowings in anticipation of the January 3, 2017 closing of the Ungricht acquisition.

Accounts receivable at the end of the current quarter was approximately $286 million, compared to $295 million at September 30, 2016. Consolidated inventories at December 31, 2016 were $166 million, compared to $162 million at September 30, 2016. Long-term debt at the end of the current quarter, including the current portion, approximated $938 million, compared to $873 million at September 30, 2016. As I just mentioned, the increase during the quarter primarily resulted from additional borrowings in anticipation of the January 3, 2017 closing of the Ungricht acquisition.

Outstanding borrowings on the Company's domestic credit facility at December 31, 2016 were approximately $878 million. Total borrowing capacity on this facility was increased to $1.15 billion in fiscal 2016, $250 million dollars of which was in the form of an amortizing term loan. This facility has a maturity date in 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 January 14, 2016, the court ruled completely in favor of Matthews, following a trial on the merits. However, the customer has not yet honored this court order and remitted the funds. It is possible the resolution of this matter could have an unfavorable impact on Mathews' results of operations.

The Company had approximately [32,252,000] shares outstanding at December 31, 2016. During the quarter, the Company purchased approximately 95,000 shares under its share repurchase program at a cost of $6.5 million. At December 31, 2016, approximately 1.9 million shares remained under the current share repurchase authorization.

Depreciation and amortization expense for the current quarter was $15.2 million, compared to $15.7 million a year ago. Capital expenditures for the quarter ended December 31, 2016 were $5.1 million, compared to $14.2 million a year ago.

Finally, the Board yesterday declared a dividend of $0.17 per share on the Company's common stock. The dividend is payable February 20, 2017 to stockholders of record February 6, 2017.

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

Thank you, Steve. Good morning, everybody. Our first quarter results were pretty much in line with our expectations. Our integration teams continued to work hard on our two acquisitions and delivered solid execution, which helped us achieve very good results. When we look at our operating performance for the quarter, we see a business that's delivered almost 15% year-over-year non-GAAP earnings per share growth, when we exclude the negative impact of the accelerated accounting expense for equity compensation, which had no cash impact on our earnings, and was only triggered because members of the team have become retirement eligible.

Moreover, when you realize that total equity compensation expense, without considering the accelerated accounting treatment, only increased $300,000 over prior year and that currency had a negative impact on our earnings of $0.01, you more fully understand that our comparable earnings for the first quarter of 2017 was $0.70, compared to $0.60 for the same period last year.

With regard to our SGK Brand Solutions segment, strong performance from our merchandizing businesses and our UK and Asia Pacific brand groups helped offset continued sluggish revenues in North American packaging. New customers in several geographies, including North America, our first Federal Labeling Act related project, and a recent $20 million award for a significant merchandising client bodes well for the rest of this year for the segment. Moreover, a couple of smaller tuck-in acquisitions that we completed earlier this month should help us deliver another strong year for this group. We've entered the final phase of our SGK related ERP implementation, and I'm pleased to say that for the most part, it is expected to end this year on time and reasonably within budget. This is a great success and I complement the IT team for their considerable efforts.

Our Memorialization business saw strong results from our cemetery products group, which helped offset a lower casketed death rate during the quarter. Our granite business continued to see good revenue and profit resulting from market share gains and operating improvements, while our cremation division saw strong sales backlog growth during the quarter and a recent large European incineration project, which has increased our expectation for a good year in this group as well.

Our Industrial segment continues to perform well with very good marking equipment and ink sales, but saw difficult comparables for our warehouse automation businesses. First quarter 2016 was a very strong quarter for that segment, but the comparables will be more aligned in the quarters to come. We continue to expect good things from this business going forward as we ramp up research and development in this division to $6 million during 2017. We are approaching the launch of what we believe to be a significant new product in this division, which continues to innovate.

As we look forward, we do see challenges however. Commodities are rising, the dollar continues to strengthen, our research and development spending is growing, and political uncertainties in several of the economies in which we operate, all of which will have impact on our business. Notwithstanding all of that, we remain confident of delivering another strong performance and expect to grow our earnings per share by high-single digits over prior year.

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. John?

(Operator Instructions) Daniel Moore, CJS Securities.

Maybe a quick question on the memorial side of the business. Nice quarter from a gross margin perspective, mix probably helped a little bit. Talk about the impact you're -- feeling from rising commodities, copper prices specifically, and what your expectations are for the margin outlook as we move forward here.

Well. Dan, as we look at what we're doing in that division, we still have a lot of integration synergies to be achieved through the Aurora integration. So we expect the margins to continue to improve over the course of the year and into next year. The commodity side of it, however, is we're starting to feel the effect of steel today. That will probably get more significant over the course of the year. And with copper and the bronze side of the business, we're okay for another quarter or so, and then we'll start to feel that as well. In the end, I think the outlook will remain relatively stable because of the synergies that we have coming out of Aurora yet.

Very helpful. And memorial is up a little bit, but with casketed deaths still down, what is your sort of growth expectation going forward?

Well, as we've seen in the past, casketed deaths continue to be down, but that is a very cyclical event. We expect the death rate to increase over the course of time either this quarter or next, I can't tell you that. I would expect that some of the sales gains that we've seen over the course of this quarter will taper off and be stabilized. But at the end, I think, will be a relatively low-single digit top line growth in that business as we move forward and probably improving bottom line.

Okay. And lastly, you mentioned one of the other potential headwinds, I guess. What percentage of your caskets, at this stage, is manufactured in Mexico? What impact might you expect and maybe any other impacts from border tax across the businesses?

Well, I didn't expect you will ask that question. So, I mean what we have seen, and this is interesting, economists were telling that this is what we should expect. We do a fairly significant amount of our metal caskets coming out of Mexico today, all the woods are produced in North America. And of the metal caskets, it's usually the lower-end caskets that's being produced there, higher-ends are still produced in North America. So the proportionate dollar value of what we sell coming out of Mexico versus North America is not as much as the volume that comes out of Mexico.

All that being said, what we're seeing is a decline in the Mexican peso that will largely -- we believe, largely offset a lot of that of the tariff depending on what the amount may be on that tariff. And more importantly, we would all benefit from a lower corporate tax rate. So we might see some margin shifts. But at the end of the day, we don't -- we're, today, optimistic that we will not be significantly impacted by that, but time will tell.

Very helpful. Again, congrats on the execution integration and I'll jump back in queue.

Liam Burke, Wunderlich.

Joe, you mentioned that you're getting some [trickle-in] orders on the Fair Packaging and Labeling Act. Is this a one-off or is there momentum built behind this? And is this sort of a one-off pump, or do you see stabilizing of the North American business?

Well, Liam. I mean, to give you how recent this was, we got an email on Tuesday. So, that's how (inaudible). One email with over 4,000, 5,000 SKUs does not create a trend, but we expect that trend to come before the next 18 months past. And now everything is up for play with the new President, you can defer those regulations, you can defer implementation. I don't know where that plays. But right now, we've got our first project, it's a positive project. We expect to see more. It's pretty early yet, though.

Okay, fair enough. On the Industrial Technologies side of the business, the fulfillment side looked like it had tremendous promise, we'll say, about a year, 18 months ago. Does that business still have the potential you discussed may or may not say a year ago?

Yes. We are very bullish with regard to that group. First, we have a great team out there and we are very, very encouraged by the things that they're doing. It's a little lumpier business as you might expect. So I mean the projects are multi-million dollar projects that come and go and you have to continue to win them and they've done a good job. So you're going to see quarters up and quarters down, but the direction of that group as well as other pieces of the puzzle we want to continue to acquire, add to that group, moving us into more e-commerce solutions gives us great hope. So we're very, very bullish.

Great. Thanks, Joe. And Steve, very quickly on the tax rate, do you anticipate it being at a similar level it was a year ago?

Our expectation -- we had, what they call, discrete items to the quarter. Outside of those, our estimate is 31% for the year.

(Operator Instructions) Daniel Moore.

Obviously early days, but what are you seeing with Ungricht now that we've closed?

Well, we're very -- we're early couple weeks into it though, but what we see is we kind of are looking at our business a little differently in that side of the group, as we start to segregate out from packaging and moving into what we call surfaces. Ungricht, together with Saueressig, is a leading provider of surfaces technology. So things like synthetic leathers and synthetic woods and more technical rollers for embossing and wallpaper. We see an opportunity to continue to expand that market beyond just the cylinder and we think that Ungricht is a lynchpin to be able to allow us to do that. That group today is probably somewhere around $70 million to $75 million of our business. We think that portion of the business over time could grow more than double that.

Excellent. And maybe just another minute or two, Joe, and I'll piggyback on Liam's question. Warehouse automation, without asking you to unveil the new product ahead of time, what are the functionalities that you're looking to develop, and maybe just remind us of the playing field, who are sort of -- if there are bigger players or emerging players, who are you competing with in that space?

Maybe it's the same players we've competed with all along, and Number 1 player in that market space is Danaher, and the product we are developing would compete in that space directly. I mean, faster, cheaper, better is the best way to describe the product we're expecting out of that group. And we think it will end up being a leading product in the industry as it comes out. We're spending a lot of money and we want to make sure you all are aware of that, because this year there will be $6 million spent on that development, which impinges on our earnings to $0.12 per share. That should yield much more than that over the course of time as we roll that product out sometime in 2018.

And that level of spend we expect to maintain that for the next couple of years, grow it, or is that sort of a one-time this year?

I mean, that level of spend would probably occur again next year as we kind of go through launch and then the decision will be made as to whether we move on to the next product or adaptations of that product into other areas. But at the end of the day, we don't consider $6 million annually in that division to be a recurring spend long-term.

Okay. And lastly, still looking to buy your way in, or is it largely the internal R&D at this stage or both?

Well, so that division has a couple of things going on. So what we're really talking about is our marking products, an additional product in our traditional business. We will continue to acquire small and big pieces of a puzzle, as we talked about on the automation side. Some of you may have seen on those that came out [about a company by their own] guidance, very, very, very small company but has a technology that was linked to our e-commerce solutions that we're building. So we think that, over the course of the time, you'll see more of those smaller deals where we see adding one, one and creating a much bigger project, maybe three, four, five times the size of what we had.

And with no further questions, Mr. Nicola, I'll turn it back to you.

Thank you, John. Well, we would like to thank everyone for participating in our call this morning. And we look forward to our call in April for our second quarter earnings release. Thank you, and have a good day.

Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect.