Matthews International Corp (MATW) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the fourth quarter and year-end 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, Chief Financial Officer, Steve Nicola.

Please go ahead.

Thank you, Terry.

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 1 hour and will be available for replay later this morning.

To access the replay, dial 1 (320) 365-3844 and enter the access code 432867.

The replay will be available until 11:59 p.m.

December 1, 2017.

We have posted on our website, which is www.matw.com, the financial -- the fiscal year-end 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.

Joe will then provide general comments on our operations.

Following that, we will open the discussion for questions.

For the fiscal year ended September 30, 2017, the company reported earnings of $2.28 per share compared to $2.03 per share a year ago.

On a non-GAAP adjusted basis, fiscal year 2017 earnings per share were $3.60 compared to $3.38 per share a year ago.

In addition, the company reported record operating cash flow in fiscal 2017.

Our operating cash flow for the year ended September 30, 2017, was $149.3 million compared to $140.3 million last year, representing an increase of $9 million.

In summary, the significant factors in the year-over-year improvement in earnings per share included: higher sales of cemetery memorials and cremation equipment; sales growth in our U.K. and Asia Pacific brand markets; higher marking product sales for our Industrial Technologies segment; continued synergy realization from acquisition -- acquisitions; the benefits of ongoing productivity initiatives; and a lower consolidated effective income tax rate.

Fiscal 2017 earnings also reflected a significant increase in stock compensation expense.

As we noted in the first quarter, 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 fiscal 2017 compared to last year.

In addition, fiscal 2017 costs for the product development project in our Industrial Technologies segment were approximately $0.05 per share higher than last year.

Also, changes in foreign currency rates unfavorably impacted fiscal 2017 earnings per share by $0.02 compared to last year.

As a result, when adjusted for the impacts of the accelerated stock compensation expense, increased product development project costs and unfavorable currency changes, our fiscal 2017 non-GAAP earnings per share increased approximately 11%.

Adjusted consolidated -- consolidated adjusted EBITDA for the year ended September 30, 2017, was $239 million or 15.7% of consolidated sales.

For the quarter ended September 30, 2017, the company reported earnings of $0.60 per share compared to $0.74 per share a year ago.

On a non-GAAP adjusted basis, earnings per share for the fiscal 2017 fourth quarter were $1.06 compared to $1.08 a year ago.

In addition, the company recorded an additional $0.04 per share toward its year-to-date earnings per share related to an income tax benefit on equity compensation expense.

Due to the nature of this benefit, accounting rules provide that the impact is only reflected in year-to-date earnings, but not the fourth quarter.

Consistent with the results for the full fiscal year, the significant factors in the year-over-year improvement in earnings per share for the quarter included increased sales of cemetery memorials and cremation equipment; higher sales in our Asia Pacific brand markets; higher marking product sales for our Industrial Technologies segment; continued synergy realization from acquisitions; the benefits of ongoing productivity initiatives; and the lower consolidated effective income tax rate.

In addition, the Industrial Technologies segment reported an increase in fulfillment sales during the fiscal 2017 fourth quarter.

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.

A significant portion of the non-GAAP adjustments continues to include costs and other charges in connection with the integrations of acquisitions, including our ERP integration and implementation.

In addition, acquisition-related costs included charges incurred in connection with our recent acquisitions, including related asset step-up expense.

Other non-GAAP adjustments for the current year included costs related to cost reduction initiatives in several of the company's businesses and loss recoveries net of cost.

The loss recoveries relate to the previously disclosed theft of funds that was identified 2 years ago.

Consolidated sales for the quarter ended September 30, 2017, were $396.1 million compared to $377 million a year ago, representing an increase of $19.1 million or 5.1%.

The improvement reflected an increase in sales of cemetery memorials and cremation equipment, higher sales of marking products and fulfillment systems for the Industrial Technologies segment and the benefit of recent acquisitions.

The company's consolidated sales for the year ended September 30, 2017, were $1.52 billion compared to $1.48 billion a year ago.

The growth in consolidated sales for the current fiscal year resulted primarily from an increase in sales of cemetery memorial products and cremation equipment, higher sales in the U.K. and Asia Pacific brand markets, an increase in sales of marking products and the benefit of recent acquisitions.

Changes in foreign currency exchange rates had an unfavorable impact of $12.8 million on the company's current fiscal year consolidated sales compared to last year.

Sales for the SGK Brand Solutions segment were $203.7 million for the current quarter compared to $193.7 million for the same quarter a year ago.

Sales growth in its Asia Pacific market and the impact of recent acquisitions were partially offset by lower brand sales in North America and Europe.

Sales for the SGK Brand Solutions segment for the fiscal year ended September 30, 2017, were $770.2 million compared to $756 million a year ago.

Sales growth in its U.K. and Asia Pacific markets and the impact of recent acquisitions were partially offset by lower brand sales in North America and Europe.

Currency exchange rate changes had an unfavorable impact of $12.1 million on the segment sales for the current year compared to last year.

The SGK Brand Solutions segment reported operating profit of $5 million for the current quarter compared to $16.8 million for the same quarter a year ago.

Charges related primarily to cost reduction initiatives, acquisitions and integration activity were $11.8 million for the current quarter compared to $6.3 million last year.

For the year ended September 30, 2017, the SGK Brand Solutions segment reported operating profit of $24.9 million compared to $42.9 million last year.

Charges related primarily to cost reduction initiatives and recent acquisitions, including asset step-up expense and acquisition integration activity, were $29.7 million for the current year compared to $25 million last year.

In addition, currency exchange rate changes had an unfavorable impact of $1.3 million on the segment's fiscal 2017 operating profit compared to last fiscal year.

The Memorialization segment sales for the fiscal 2017 fourth quarter were $152.3 million compared to $152.3 million for the same quarter a year ago.

This segment reported higher sales of cemetery memorial products and cremation equipment in the current quarter, which were offset by lower casket sales, reflecting an estimated decline in U.S. casketed deaths.

For the year ended September 30, 2017, Memorialization segment sales were $615.9 million compared to $610.1 million last year.

Operating profit for the Memorialization segment for the fiscal 2017 fourth quarter was $19.9 million compared to $20.2 million for the same quarter a year ago.

The results for the current quarter reflected the benefits of higher cemetery memorial and cremation equipment sales, acquisition synergies and ongoing productivity initiatives, which were offset by lower casket sales and the impact of higher commodity costs.

Operating profit for the Memorialization segment for the year ended September 30, 2017, was $80.7 million compared to $68.3 million last year.

The increase reflected the impact of higher sales and the benefits of acquisition synergies and ongoing productivity initiatives.

Charges primarily in connection with the Aurora acquisition integration and ERP integration and implementation were $7.8 million for the current year compared to $10.4 million last year.

The prior year also included the impact of inventory step-up expense.

The Industrial Technologies segment reported sales of $40.1 million for the quarter ended September 30, 2017, compared to $31 million for the same quarter last year.

The current quarter reflected higher sales of marking products and fulfillment systems and the benefit of recent acquisitions.

For the year ended September 30, 2017, the Industrial Technologies segment reported sales of $129.5 million compared to $114.3 million last year.

The Industrial Technologies segment reported operating profit of $5.1 million for the current quarter compared to $2.7 million for the same quarter last year, reflecting the benefit of higher sales.

The segment's operating profit for the year ended September 30, 2017, was $7 million compared to $7.7 million last year.

The benefit of higher sales were offset by an increase of approximately $2 million in costs related to the segment's product development project.

In addition, the segment incurred acquisition-related charges of $945,000 for the year ended September 30, 2017, compared to $632,000 a year ago.

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 September 30, 2017, was 38.8% of sales compared to 38.9% a year ago.

Gross margin for the year ended September 30, 2017, was 37.2% of sales compared to 38 -- 37.6% a year ago, primarily reflecting the decline in U.S. and European brand market sales.

Selling and administrative expense for the current quarter was 31.2% of sales compared to 28.4% for the same quarter last year.

The increase for the quarter primarily reflected higher intangible amortization expense and charges related to cost reduction initiatives in several of our businesses.

Selling and administrative expense for the year ended September 30, 2017, was 29.7% of sales compared to 29.6% last year.

Investment income for the fiscal 2017 fourth quarter was $920,000 compared to $601,000 a year ago.

Investment income for the fiscal year ended September 30, 2017, was $2.5 million compared to $2.1 million a year ago.

Investment income reflects investment performance on assets held in trust for certain of the company's benefit plans.

Interest expense for the current quarter was $6.6 million compared to $6.2 million for the same quarter last year.

Interest expense for the year ended September 30, 2017, was $26.4 million compared to $24.3 million last year.

The increase resulted primarily from higher-average interest rates this year and additional borrowings as a result of the company's recent acquisitions.

Other income net for the fiscal 2017 fourth quarter was $360,000 compared to a net expense of $692,000 a year ago.

For the year ended September 30, 2017, other income net was $7.6 million compared to a net deduction of $1.3 million last year.

Other income for the current fiscal year included loss recoveries net of costs of $10.7 million.

Other income and deductions generally include, among other items, bank fees and the impact of currency gains or losses on certain intercompany debt.

The company's consolidated effective income tax rate for the year ended September 30, 2017, was 23.2% of pretax income.

This rate reflects the benefits of organization structuring, primarily in connection with the integration of recent acquisitions and certain favorable tax benefits and utilization of certain tax attributes specific to the current year.

The company's consolidated effective tax rate was 30.5% for the fiscal year ended September 30, 2016.

With respect to some of our balance sheet data, at September 30, 2017, the company's consolidated cash was $57.5 million compared to $55.7 million at September 30, 2016.

Accounts receivable at the end of the current fiscal year were $320 million compared to $295 million at September 30, 2016.

Consolidated inventories at September 30, 2017, were $171 million compared to $162 million at September 30, 2016.

The increases in accounts receivable and inventories primarily related to the impact of acquisitions completed during the current fiscal year.

Long-term debt at the end of the current fiscal year, including the current portion, approximated $911 million compared to $873 million at September 30, 2016.

The increase primarily resulted from additional borrowings for the company's recent acquisitions.

Excluding the cash used for acquisitions completed during the current fiscal year, repayments on the company's debt were approximately $70 million net.

Outstanding borrowings under the company's domestic credit facility at September 30, 2017, were approximately $758 million, with remaining borrowing capacity of approximately $392 million subject to the company's net leverage ratio.

This facility matures 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 GBP 8.6 million with respect to a performance guarantee 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 honored this court order and remitted -- the customer has not yet honored this court order and remitted the funds.

The company continues to monitor the customer's noncompliance with the court in our assessment of collectability related to this matter.

Accordingly, it is possible that this matter could have an unfavorable impact on the company's future results of operations.

The company had 32.1 million shares outstanding at September 30, 2017.

For fiscal 2017, the company purchased approximately 212,000 shares under its share repurchase program at a cost of $14 million.

At September 30, 2017, approximately 1.8 million shares remained under the current share repurchase authorization.

Depreciation and amortization expense for the fiscal 2017 year was $68 million compared to $65 million a year ago.

Capital expenditures for the year ended September 30, 2017, were $44.9 million compared to $41.7 million a year ago.

Finally, the board yesterday declared a dividend of $0.19 per share on the company's common stock, representing an increase of 11.8%.

The dividend is payable December 11, 2017, to stockholders of record November 27, 2017.

This concludes the financial review, and Joe will now comment on the company's operations.

Thank you, Steve.

Good morning.

Fiscal year 2017 was another good year for the businesses.

During the year, we had record sales as a whole and in several of our segments, despite challenging environments in the markets we serve and continued negative currency translation.

Over the last 3 years, it is important to note that our reported revenues and consolidated EBITDA have been negatively impacted by foreign currency translation by over $100 million and $20 million, respectively.

When you consider this impact, you understand why we believe that we continue to execute well on all of our many initiatives and are proud of our achievements.

In addition, as we look at our current year results and consider the impact of accelerated stock compensation expense of $0.07 and increased R&D spending of $0.05, we view our EPS as having grown over 10% over prior year, a very good result.

In our Memorialization segment, despite a lower-than-expected death rate, we delivered very strong operating results, driven by good sales in our cemetery products, strong performance in our cremation products group and good synergy capture in our Funeral Home Products business.

In our cremation products group, we've extended our product offering to include small municipal waste incinerators, the sale of which helped to drive good results for the year.

In addition, we continue to benefit from synergy capture in Funeral Home Products, where we are successfully integrating Aurora and still have almost $10 million of synergies yet to be realized.

In our brand segment, recent acquisitions helped us exceed our prior year revenues and offset a $12 million revenue impact due to currency translation.

During the year, we saw strong performance from our U.K. and APAC regions, where we have expanded our product and service offerings, but we faced difficult comparisons in Europe, where slowness in our tobacco business was driven by tobacco company print retenderings and high volumes in the year before.

In North America, the consumer packaged good market continue to be sluggish, as many of our clients struggle to find their top line growth.

However, recent acquisitions make us comfortable with the direction of this portion of our business despite those market challenges.

Our Industrial Technologies segment had a very strong quarter, with record sales and operating profits.

Recent acquisitions contributed nicely to our results with strong underlying performance in our updated marking products line, good ink revenue and recovery in process control equipment sales contributing nicely to the great performance as well.

As I've said several times before, we remain very optimistic about this group as we have invested significantly over the past several years in new product development and strategies to serve e-commerce warehouse operations.

Despite a very good year for this group wherein they achieved record sales of almost $130 million, we are expecting this group to have another double-digit growth year in 2018, and that's before we have the benefit of the newest product that we are -- anxiously await.

We expect to launch the new product in the latter part of 2018 and the revenues from which should begin to mitigate the development costs incurred, improve our overall operating performance.

I'll remind you that this group is incurring R&D expense of about $7 million in 2017, which has depressed their operating results.

But when this is added to their reported earnings, this business is generating very good operating margins.

Regarding our acquisitions.

We are concluding the initiatives on SGK and expect a substantial reduction in integration expenses.

We are pleased with our efforts in capturing project and synergies in SGK and still see opportunity to materially improve our cost structure to fully capitalize on our ERP investment, those opportunities we realize as part of our continual effort to improve our businesses in the coming years.

With regard to Aurora, we expect to achieve upwards of $10 million of additional synergies over the next 18 months as we complete this successful integration.

Several recent acquisitions, including Ungricht and Equator, continue to perform well and should add nicely to fiscal 2018.

In general, we're pleased with our acquisition efforts and expect to see further benefit from those companies acquired year-to-date.

Looking at 2018, we are confident in our ability to achieve our goals, but we are faced with several unknowns.

First, we are exploring the possibility of solidifying our balance sheet by issuing permanent debt, which more likely than not will increase our interest cost.

Although we are unsure of the near-term impact of this action, we are certain that this is the right thing to do for our business long term.

Second, recent efforts in restructuring business to capture tax savings, which benefited our 2017 results, may be impacted by efforts in Washington to restructure the U.S. corporate tax rates.

Although we will be more likely than not to be better off next year because of our efforts or because of the tax policy changes, it is difficult for us to quantify this change at this time.

Third, as I stated above, currency has been a significant headwind for the past 3 years.

Our current estimates are that those headwinds should abate, but that also is uncertain.

And finally, our results in 2017 were materially impacted by lower death rates and increased commodity prices.

Although we are never certain of death rates, we are expecting commodities to continue to rise.

Nonetheless, we remain confident of our long-term ability to create value and the opportunities before us.

Therefore, we expect to deliver 2018 EPS growth which is consistent with our 2017 results.

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

(Operator Instructions) We'll go to the line of Daniel Moore with CJS Securities.

Wanted to kick off and talk about Brand Solutions a little bit.

Revenues up 5%.

What did that look like on an organic basis?

And margins, obviously, on an adjusted basis declined a little bit year-over-year.

Maybe talk about some of the -- either mix or input costs, some of the drivers there?

And a quick follow-up or 2.

Okay.

We'll try to get all those bits and pieces put together for you, Dan.

Good morning anyway.

The organic businesses as a whole declined modestly.

Most of that decline was in North America and in Europe.

We talked about the European decline.

That has largely to do with the decline in tobacco business over there.

Tobacco was a very good business for us from a margin standpoint.

That is impacting some of the margins you're seeing in the reported earnings.

We expect that to be just a cyclical thing, as they've gone out to retendering.

Our largest account over there is Philip Morris.

They went out to retendering of all their print.

And as they did that, they put projects on hold.

We expect to see that return to somewhat normal over the course of the next 12 months.

That retendering is complete and we're starting to see activity on that.

In particular, what we're seeing on the tobacco side of the business is an increase in many of you know these HeatSticks, which -- HeatSticks are basically the electronic cigarettes offered by the tobacco companies.

That is increasing for us as well.

We feel pretty good about the long term of our tobacco business, both in Europe and around the world.

In North America, we're continuing to feel the same thing everybody else is feeling.

We're seeing some declines in our revenues, some pricing pressure on our contracts.

But in general, we're still seeing pretty good volumes that are coming through that allow us to support them.

We have had some recent wins we think that will help offset some of those declines.

But what we're really seeing is what we're seeing out in the U.K. and in APAC, where we've expanded our product offering into more of the brand execution.

So going beyond the pack, if you take a look at some of the things we do, some of the clients in the U.K. and in Asia, where we're doing much broader service offerings, what you're really seeing is the decoupling of the agency work and in the agencies where typically you do the creative or you do the strategic analysis and then they would be allowed to do the execution.

Brands around the world are separating those functions, allowing the large agencies to do the creative and do the strategic type of things, but at the same time allowing people like us that are more attune to operational, executional type things to execute their marketing efforts anywhere they need them.

So we think that's our direction of our business, and we think that will get better over time.

Got it.

Very, very helpful.

I appreciate that color.

And then on a -- from an FX perspective, Steve, if we stayed generally around where we are now, what would the impact look like in fiscal '18 on revenue and EBITDA?

If we stay where we are, Dan -- now, Dan, actually I expect -- I don't expect much of an impact relative to what we reported in 2017, plus or minus.

Got it.

And then just wanted to clarify, Joe, your comments on 2018 EPS growth consistent.

So similar EPS growth to fiscal '17 even though through the headwinds you feel comfortable with that.

I just want to make sure I heard that correctly.

Sure.

You did hear that correctly, Dan.

The unknowns are a little bit bigger this year, given -- I mean, I anticipate -- we anticipate going out and making some debt permanent.

We've been talking to folks for several years of the interest rate environments and so forth.

So we're going to make that permanent.

How that impacts is going to depend on what that actual rate may be and when that occurs.

So we don't know that yet.

But we do think that should be a good thing from a debtor -- from an equity holder standpoint as well making our balance sheet more permanent.

Secondly, there are a couple of items that are still a little bit troubling out there.

I mentioned to you about our tax structure and the benefits that we're seeing from those efforts internally.

The team has done a great job of putting us in the position to significantly lower our tax rate going forward.

We think it's only going to get better, if Washington does what they're going to do, but we don't know that for sure and what impact that has on what we've already done from a structure standpoint to be able to take advantage of that.

And the last one, obviously, commodities and death rates are things that are, I would say, they are impactful on the margins, given our scale today, but those margins are greatly profitable on the fringes.

We had $7 million worth of commodity cost increases in our Memorialization business this year.

And to deliver the kind of results that team has done despite that is pretty admirable.

And we're hoping that death rates will work towards our benefit.

They did not this year.

But if they do, we'll be better off.

If they don't, we're expecting to see higher commodity rates.

We're already seeing them.

So those are the pluses and minuses.

Got it.

Perfect.

And lastly, just housekeeping, Steve.

Tax rate for next year, obviously, not assuming any changes in policy at this stage, what should we be thinking about?

Approximately 30%, Dan.

It's hard to predict the benefits of some of the attributes that were specific to this year.

But I think the one thing I can report is that several years ago, we were -- if you recall, we were in the mid to higher 30%s with respect to a consolidated effective tax rate.

And the structuring that we've done, particularly post the acquisition of SGK and some of the geographic footprint, the consolidated geographic footprint where we've been structured or been able to structure to date, has taken us down to approximately that 30% run rate.

Next we'll go to line of Liam Burke with B. Riley FBR.

Joe, you talked about in your prepared statements how the acquisitions in SGK Brands or the recent acquisitions in the SGK Brands are helping you offset the weakness in North America.

How is that happening?

Well, let me (inaudible), one in particular.

We've mentioned Equator in the past.

And Equator was an acquisition occurred midyear.

We see nothing but growth from them.

But one of the reasons we've seen the kind of growth we've had from those folks is it's a different business model that we currently operate.

It's an all-under-one-roof model, where creation all the way through execution all the way down to the photography is all done under one roof allowing for speed to market.

They cut the time down for a product to go from creation to the shelf significantly, allows for a lot more flexibility and speed.

And that's been very, very beneficial.

We do think that's the future for a lot of our brands, not all of them, but a lot of our brands as they start looking at ways to accelerate change in an environment where they're trying to respond to changing consumer demands pretty quickly.

On the other side of the table, it was Ungricht.

Ungricht, as you all know, we are fairly significant -- we are the largest provider of gravure cylinder businesses in the European markets, and we're looking to expand that opportunity.

Ungricht takes us one step further into cylindrical processes.

What does that mean -- it's not necessarily for gravure printing purposes.

It's everything around gravure printing purposes for packaging.

So we now are the #1 provider of digital images and cylinders necessary to produce laminate flooring, wallpapers, textures on synthetic substrates like the vinyls that sit in your car.

All those are produced with cylinders that started off as cylinders for packaging.

At the end of the day it's gravure.

With that acquisition, we're expanding into very similar fields, just extending the use of our products.

And Joe, it's been a year since we've seen the CPGs talking about paring back SKUs.

And obviously, there's a derivative effect on your business.

Where are we in this whole process?

I mean are we continuing to see the pare back of SKUs?

Is there any bottoming?

Or what are you hearing from your customers?

Well, I mean, I guess, the loudest part of this is that Nelson Peltz is trying to get onto Procter & Gamble's board who suggested that the global strategy is probably not the right strategy.

In this world, you need more SKUs.

You need more localized SKUs.

You need to respond to the local consumer a lot faster.

That's music to our ears.

I mean that's -- it really depends on what you believe.

I think there's fair amount of confusion about what needs to be done right now.

But the reality is, I would say, that there's -- it's different opinion with each customer that we have.

There's a lot of perspectives out there.

We've listened to a lot of folks speak about it.

And as the CPGs, we believe, start to realize that brand is important and that brand will continue to be important in whatever field they may be, I think that the recovery in marketing spend as it relates to this will continue.

Next we'll go to the line of Scott Blumenthal with Emerald Advisers.

Joe, I think this was the largest sales quarter in corporate history.

Is that right?

You got it, Scott.

You've been there long enough.

Well, congratulations on that and also on the great quarter in Industrial Technologies.

Can you talk a little bit about your new ink and marking offerings and how that's driving sales?

And then maybe give us a little bit more color on your product development efforts there?

Sure.

Well, I mean, as you all should be aware, we've done a number of acquisitions over the last 5 years to position us in the e-commerce warehouse control software system.

So basically, when you look at some of the things that brands and/or retailers are delivering to your doorstep, many of those customers are delivering it via our warehouse control software systems and the picking solutions that we have.

That business continues to grow for us and is very consistent with what you're seeing in the overall space for warehouse -- e-commerce.

We continue to invest in that.

We expect that over time we might look at other acquisitions to add to that.

But we're seeing very good growth in that part of our business and proud of that team and what they're doing.

The -- I would remind you if we recall back about 2 quarters, we talked about a deferral of a $7 million project in that part of our business.

That has yet to be incurred.

We expect to have that revenue come through our second quarter results.

So the delivery of results you see in this group is despite that $7 million deferral, which we have not lost the account.

On the -- what I call the updated marking products line of products, they have been working for the last 5, 6 years on developing new solutions and better solutions, particularly on the controller side of the business, that offer updated and greater capabilities to control product line marking in a number of situations.

That product line, as you might expect, sells at a higher price point, has more applicability outside of our traditional customer base.

And so we are picking up modest share, but we're also replacing existing product that we had out there with existing accounts at a higher price point.

We think that trend will continue as long as the economies we serve remain robust.

And as I've said before, this business is doing well.

The product development we've been referencing and the $7 million we spent in 2017 is coming to fruition.

We are going to be here in beta testing here shortly.

I am taking my full board to see the product in its operational state in February.

So we're expecting to be rolling that out by the end of calendar '18, probably somewhere in the latter part of third quarter, beginning of fourth quarter, start to get some revenues.

That will mitigate some of that expense that we're feeling and improve the results.

It is proving to be everything that we expect it to be.

So we're right on line in terms of timing as well as capabilities and costs.

Okay.

That's great to hear.

And can you comment about the current status of the, I guess, domestic U.S. food labeling, I guess, legislation because we've been kind of sitting around here for a little while waiting for some of that to be finalized.

And I know that that's had a little bit of an impact or maybe even a meaningful impact on your domestic Brand Solutions business, particularly in the packaging space?

Well, we are -- I mean, as many may know, it's been deferred.

It's now looking like a 2022 implementation.

Some of our brands, some of our food product companies are moving forward with adapting it as quickly as possible despite that but I would not say it was the same expected push that we were going to feel over the course of the next 12 to 24 months.

The regulations have not changed.

Implementation dates have changed.

I know several of our accounts have struggled with the reformulation of their product to be able to comply with what is being disclosed.

That effort is still going on.

So we're not expecting material change in our North American food clients as a result of this or as a result of the deferral.

Okay.

And I guess one last one, if I may, on your comments on the municipal waste incineration business.

I think that the issue that Steve discussed during his comments has to do with a municipal waste incinerator that was, I guess, there is a dispute related to that from a few years ago.

I'm not trying to imply that that's going to be the case here.

No.

But can you talk a little bit about maybe what you see as the potential for that business?

And what (inaudible) your cremation business does that represent now?

So if you think about what a cremator does, and it's pretty obvious by its description, it burns things.

So what we have done is extended that capability into a larger scale from an efficiency standpoint and started to service a small municipal waste.

In the U.K. today, where they -- where the principal part of this work is being derived right now but we think it has applications elsewhere in the world, the U.K. is moving to a waste-to-energy effort, trying to stop shipping their trash by barge to elsewhere in Europe.

That's going to be burned, and it is being burned locally by these small municipalities, generating electricity and selling it back.

We are working right now, the one we've referred to here is the Isle of Jersey.

We're doing some work there right now on a particular incinerator.

I'd say it will be delivered.

We recognize that because it's a larger scale project.

Some of the revenue and profits impacted our cremation equipment business this year.

We expect it to continue to be.

We have $25 million to $30 million worth of bids out there.

It's really going to depend on the timing of when some of these projects can get financed.

Right now, we are -- we have some competition but not significant.

These are -- because these are smaller.

There's some very large municipal waste incinerator companies out there that are significantly larger incineration equipment providers.

Ours are much more tailored to that local community that's going to do that.

And right now, there seems to be an initiative in the U.K. to push that along.

Next we'll go to line of Jamie Clement with Macquarie.

Joe, could you just give us your thoughts on the M&A landscape, your guys' M&A pipeline?

And also as we look out over the next 12 to 18 months, what would be your appetite potentially in doing a larger deal?

So the pipeline's rich, let's put it that way.

I would say that we have opportunities in each one of the businesses and they are at various states of activity.

What we choose to do and what we want to do might be 2 different things.

At the same time, we're very cautious on the allocation of our capital in this environment right now.

We are -- as we look to [permatize] some of our debt, we want to make sure that we do what's in the right interest of the company, both short term and long term.

So our appetite for larger deals is always going to be there.

It will probably be done more likely than not with some equity and may not be as accretive as we would like it to be, but it's right from the capital structure standpoint.

So I would tell you, Jamie, that we don't lack for opportunities to acquire.

It's more about the proper allocation of capital at this time.

And also I would imagine, when the seller decides they want to sell, right?

Yes, that's always the case, right.

But that's the benefit of having multiple businesses out there.

Somebody might not want to sell in one business might have somebody that does in another, and that's been beneficial to us.

As you look at the rough revenue breakdown of Matthews right now, if you look at Memorialization, if you look at brand and you look at the industrials group, as you look out 5 to 10 years, is there any reason why you wouldn't consider being -- getting a lot bigger in industrials, given the positive momentum in the business and talk about e-commerce and that sort of thing?

We expect to get bigger.

I mean, our internal group has fairly lofty targets for themselves both -- and to be honest with you, a lot of it is coming through organic growth and opportunities that we create from investments we made.

But there are also existing significant sales -- I mean, acquisition opportunities.

We've got an internal target to get this to $300 million over the next 5 years.

It's at $140 million -- $130 million or so this year.

We expect that to grow double digit this coming year as well, and I would tell you that our internal plans would replicate that for several years to come.

So we'd like to get this business more balanced relative to the rest of the group.

Next we'll go to line of David Stratton with Great Lakes Review.

I think you touched on commodity costs a little bit.

Can you give us any insight into how much you might have locked in already moving forward and the cadence you expect commodity cost to hit throughout the year?

Thanks, Dave.

Yes, the -- with respect to bronze, we're generally out several months.

And so that continues to be the case.

With respect to steel, that's a little bit of a different commodity and a different purchasing cadence.

So we've already experienced the higher cost.

We do expect, particularly on the steel side, a little bit of increase in those costs to continue.

But one of the things you have to remember is the inventory cycle when it comes to caskets because the steel costs that we purchase today become part of our inventory that become -- that are shipped to our distribution centers before they ultimately become sales to customers and recognized.

So there is a period of months that occurs before the actual purchase and reflection in our cost of sales.

Got you.

And then secondly, how are the R&D costs looking to shape up throughout the year?

With these disruptive products that you talked about for several quarters now, is that going to -- are R&D costs going to fall off as that rolls out?

Or will they continue to be driven higher?

And at what time do you think this will effectively hit?

Well, David, you're absolutely right on your first suggestion.

The R&D costs themselves, when you say are they going to fall off, actually, those R&D costs, they'll continue into this year as we continue to develop the product.

But as that -- as we take that product to market and it becomes commercialized and we start to recognize -- we start to ship and we start to recognize revenue, then those R&D costs actually become part of the cost of sales because we're recognizing revenue with respect to those costs.

So those will transition.

Any costs related to that project will transition to cost of sales and we'll be recognizing revenues, and we'll see obviously profitability on that product.

So the net impact of those costs, as we're feeling it today, will actually decline.

And would you expect a similar level of costs as we're seeing in 2017 or fiscal '17?

R&D costs, yes.

We actually expect a similar level of R&D costs into '18.

But as we approach the end of '18 and we reach our targeted commercial launches -- launch dates, then, again, that's when the transition starts to happen.

And at this time, I'm showing no other questions in the queue.

Okay, Terry.

Thank you.

Well, we appreciate the participation in our fourth quarter earnings release and conference call here this morning, and we look forward to our first quarter fiscal 2018 conference call in January 2018.

Thank you, and have a good day.

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