Matthews International Corp (MATW) 2018 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 Conference Call.

(Operator Instructions) As a reminder, today's call is being recorded.

I'll now turn the conference over to 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.

We have 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.

Today's call will be available for replay later this morning.

To access the replay, dial 1 (320) 365-3844 and enter the access code 442278.

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

February 9, 2018.

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.

For the quarter ended December 31, 2017, the company reported earnings of $1.10 per share compared to $0.32 per share a year ago.

The increase primarily reflected the following: acquisition synergy realization; lower acquisition-related costs compared to a year ago; benefits from recent U.S. tax legislation; higher sales in several of our businesses, including marking products and cremation equipment and an increase in U.K. and Asia Pacific brand sales; the impact of recent acquisitions and favorable changes in currency rates.

On a non-GAAP adjusted basis, earnings per share for the fiscal 2018 first quarter were $0.64 per share compared to $0.66 per share a year ago.

The significant factors in the year-over-year change in non-GAAP earnings per share included acquisition synergy realizations; higher sales of marking products, cremation equipment and an increase in U.K. and Asia Pacific brand sales; the impact of recent acquisitions; lower income taxes as a result of the favorable impact of the international structuring and a reduction in U.S. Federal income tax rates; and continued slow brand market conditions in the U.S. and Europe; and lower sales of caskets and memorials, reflecting an estimated decline in U.S. casketed deaths.

A reconciliation of non-GAAP earnings per share and adjusted EBITDA were provided in our press release yesterday, which has been posted through our website.

Non-GAAP adjustments for the first quarters of fiscal 2018 and fiscal 2017 primarily included acquisition-related costs, intangible amortization expense and the non-service portion of pension and postretirement benefits expense.

The fiscal 2018 non-GAAP adjustment for income tax regulation changes consisted of an estimated favorable tax benefit of approximately $38 million for the reduction in the company's net deferred tax liability, principally reflecting lower U.S. Federal tax rates, offset partially by an estimated repatriation transition tax charge of approximately $13.5 million.

Consolidated sales for the quarter ended December 31, 2017, were $369.5 million compared to $349 million for the same quarter a year ago.

The increase principally reflected the higher sales of marking products in our Industrial Technologies segment and cremation equipment and related products, our sales in the U.K. and Asia Pacific brand markets, benefits from recently completed acquisitions and the favorable impact of changes in foreign currencies against the U.S. dollar.

Changes in foreign currency rates were estimated to have a favorable impact of $7.4 million on fiscal 2018 first quarter consolidated sales compared to a year ago.

These increases were partially offset by the impact of slower brand market conditions in North America and Europe and lower sales volumes of memorials and caskets.

Consolidated operating profit for the quarter ended December 31, 2017, was $17.9 million compared to $19.1 million for the same quarter last year.

The decrease primarily reflected higher intangible amortization expense in connection with recent acquisitions, the impact of lower sales in the North America and Europe brand markets and a decline in memorial and casket sales volumes.

These items were partially offset by the impact of acquisition synergy realization and the reduction in acquisition-related charges.

In the SGK Brand Solutions segment, sales for the first 3 months of fiscal 2018 were $191.8 million compared to $175.8 million a year ago.

The increase reflected sales growth in the U.K. and Asia Pacific markets, benefits from recently completed acquisitions and the favorable impact of changes in foreign currency values against the U.S. dollar.

These increases were partially offset by slower market conditions in the U.S. and Europe.

Operating profit for the SGK Brand Solutions segment for the first quarter of fiscal 2018 was $3.2 million compared to $4.2 million for the same period a year ago.

The decrease in segment operating profit reflected lower sales, excluding the impact of acquisitions and an increase of approximately $1.5 million in intangible amortization related to recently completed acquisitions.

These decreases were partially offset by the favorable impact of changes in foreign currencies against the U.S. dollar of approximately $560,000.

Additionally, fiscal 2018 operating profit for the SGK Brand Solutions segment included acquisition integration costs and other charges totaling $3.8 million compared to $6.2 million in fiscal 2017.

Memorialization segment sales for the first 3 months of fiscal 2018 were $144.9 million compared to $145.6 million a year ago.

The sales decrease reflected lower sales volumes of memorials and caskets, partially offset by an increase in sales of cremation equipment and related products and the benefits of recently completed acquisitions.

Memorialization segment operating profit for the fiscal 2018 first quarter was $14.5 million compared to $14.4 million for the same quarter last year.

The increase in the segment's operating profit reflected the benefit of acquisition synergies and other productivity initiatives and higher cremation equipment sales, which were partially offset by the impact of lower memorial and casket sales volume.

Fiscal 2018 operating profit for the Memorialization segment also included acquisition integration costs and other charges totaling $807,000 compared to $2.1 million in fiscal 2017.

Industrial Technologies segment sales were $32.8 million for the first 3 months of fiscal 2018 compared to $27.6 million a year ago.

The increase primarily reflected higher sales of marking products, the benefits from recently completed acquisitions and the favorable impact of changes in foreign currency values.

Operating profit for the Industrial Technologies segment for the 3 months ended December 31, 2017, was $318,000 compared to $506,000 for the same period a year ago.

The benefit of higher sales were offset by an increase in intangible amortization related to recently completed acquisitions and investments in the segment's product development project.

A summary of operating results by segment, including non-GAAP adjustments for the quarter, are posted on our website for your reference.

Gross profit for the fiscal 2018 first quarter was $130.7 million compared to $127.3 million for the same quarter last year.

The increase in gross profit primarily reflected the impact of higher consolidated sales and the realization of acquisition synergies and other productivity initiatives.

These increases were partially offset by lower sales, excluding acquisitions in the North America and Europe brand market.

Consolidated gross profit as a percent of sales was 35.4% for the fiscal 2018 first quarter compared to 36.5% a year ago.

Consolidated selling and administrative expenses as a percent of sales were 30.5% for the 3 months ended December 31, 2017, compared to 31% for the same quarter last year.

The improvement primarily reflected the benefits of cost reduction initiatives, including acquisition integration synergies and lower acquisition-related charges.

Investment income was $467,000 for the 3 months ended December 31, 2017, compared to $337,000 a year ago, principally reflecting the return on investments held in trust for certain of the company's benefit plans.

Interest expense for the fiscal 2018 first quarter was $7.8 million compared to $6.1 million for the first quarter last year.

The increase reflected higher averaging -- higher average borrowing levels primarily related to the acquisition and higher average interest rates in the quarter, partially reflecting the company's recent bond offering.

During the quarter, the company completed a $300 million 8-year bond offering at a fixed interest rate of 5.25%.

Proceeds from the offering were used mainly to repay outstanding borrowings under the company's domestic credit facility.

At December 31, 2017, outstanding borrowings under the domestic credit facility were $565 million.

Additionally, during the quarter, the credit facility was amended to increase certain leverage ratio covenants.

The facility matures in April 2021.

Long term debt at the end of the current quarter approximated $1 billion compared to $911 million at September 30, 2017.

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

Other income and deductions net for the fiscal 2018 first quarter was a net expense of $659,000 compared to net expense of $555,000 a year ago.

Other income and deductions generally include, among other items, bank-related fees and the impact of currency gains or losses on certain intercompany debt in foreign denominated cash balances.

The company's consolidated income taxes for the 3 months ended December 31, 2017, represented a benefit of $25.2 million compared to expense of $2.5 million for the same period last year.

As noted earlier, the income tax provision for the current quarter includes an estimated favorable tax benefit of approximately $38 million for the reduction in the company's net deferred tax liability, principally reflecting lower U.S. Federal tax rates, offset partially by an estimated repatriation transition tax charge of approximately $13.5 million as a result of the recently enacted U.S. tax legislation.

The current quarter also reflected the impact of the realization of certain tax credits in connection with the company's recent international structuring and a lower blended U.S. Federal income tax rate on current income.

Preliminary balance sheet and cash flow statement data is posted on our website for your reference.

For the fiscal 2018 first quarter, the company purchased approximately 76,000 shares under its share repurchase program at a cost of $4.4 million.

At December 31, 2017, approximately 1.7 million shares remained under the current share repurchase authorization.

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 the performance guarantee on a project 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 will be -- 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 on -- following a trial on the merits.

However, as the customer as not honored this court order and remitted the funds, the company continues to monitor the company's -- the customer's noncompliance with the court order and our assessment of collectibility related to this matter.

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

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

The dividend is payable February 19, 2018, to stockholders of record February 5, 2018.

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

Thank you, Steve.

Good morning.

Our first quarter results were modestly ahead of our expectations.

Continued strong results in our Industrial Technologies group, strong performance in our SGK Brand business from the U.K. and Asia markets, improved results out of our cremation equipment business and continued synergy capture from several acquisitions, all helped to offset lower volumes in our casket and cemetery business and slow market conditions in our North American and EU brand business.

Having said that, however, during the quarter, we saw a significant improvement in our business.

We got clarity of our ongoing interest cost as a result of the -- of our bond offering.

We saw a return of strong tobacco orders in our EU brand business as well as significant increases in orders for our engineering business where we design and build web-based solutions utilizing our technical cylinders and rollers.

We also saw increased order activity in our Industrial Technologies business for both printing equipment and warehouse automation software solutions.

As you may be aware, our recent acquisition of Compass Engineering, a leading provider of automated warehouse software to the logistics industry, is a significant addition to our strategy of becoming an integrated provider of technology to the e-commerce industry offering integrated printing solutions with software and picking technology.

In our Memorialization segment, a severe flu season is causing increased demand of our funeral home products, at least in this early part of the second quarter.

The severe weather, however, is impacting our memorial sales due to the inability to set markers or stone in the cold weather.

We expected only -- that to only be a delay and to recover those sales later in the year.

In our brand business, recent wins in North America and the U.K. and cost initiatives look promising for a better year in this business as well.

All in all, we are pleased with the direction of our businesses and feel confident of delivering a strong full year result.

On a full-year basis, we expect to deliver a significant improvement in our adjusted EBITDA and another strong year of cash flow from operations and free cash flow approaching $4 per share.

All this should result in an increase in our non-GAAP earnings per share of at least 10%.

Again, I remind you that the results and guidance we are providing today include an estimated $7 million of research and developments spending on our new product for our marking products division.

We are on track for early to third quarter beta testing and expect to have a commercialized product by the end of the calendar year.

We remain excited by the opportunities that are created by our new product and are confident of the value proposition that it creates for our customers.

Regarding our acquisitions, the integration costs that we will incur this year are declining as we move into the final year of our significant integrations.

Although several smaller acquisitions will not be complete, the significant expenditures should end this year.

The investments we made during these integrations, particularly in our ERP system, are expected to drive down costs and lessen the cost to achieve benefits from future acquisitions.

Regarding new Federal tax law, we estimate that the benefit derived from the lower U.S. income tax rate generally offset increased interest expense resulting from our recent bond offering will have a significant reduction to our deferred tax liability by $38 million.

With that, I'd like to open it up for questions.

For those of you who will be asking questions, we request that you limit them to 1 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) And first, to the line of a Daniel Moore with CJS Securities.

I was hoping Joe might spend a minute or 2 elaborating on Compass Engineering, what they bring to the table for you more generally, and then just granularly, their revenue contribution for the quarter, if any, and your expectations for fiscal '18.

So let's start -- that sounds like a multipart question, so let's start with that, what it brings to us.

Recently, in the last several 4 or 5 years, we've acquired a company by the name of Pyramid Controls, which is part of the integrated solution that we're trying to provide.

Pyramid focused on warehouse control software system principally for retailers and brands.

What Compass brings to us is the same type of warehouse control automation, but for the logistic companies with major transportation companies and delivery companies across the United States.

Our expectation is, over time, to strategically bring this 2 businesses together to provide a solution that goes end-to-end from a retailer's website all the way to your doorstep on 1 single platform.

Couple that with the technologies that we've added on the printing side and the new product we have coming out, and the expectation is to add additional technologies into the automated warehouse.

We have a compelling solution that we think we're going to bring about, and Compass is a big part of that.

On a practical matter, one of those things that you'll see in our P&L as we move forward is Compass, being a low-asset-based company, brought to us a significant addition to our intangible assets.

This year, we're going to start to push close to $30 million a year in intangible amortization as a result of recent acquisitions, one of them being -- and Compass, which is a significant contributor of that.

We expect Compass this year to push an additional couple $3 million at least of EBITDA to our P&L from where we started off.

So that's -- I think I've answered all your questions at this point, Dan.

If there's more, let me know.

No, that's great.

Very good.

And then I have the second was just -- any update?

You gave some color but on the beta test as the new print solution, any additional color you would be willing to give in terms of market opportunity as well?

Well, we are getting our Board of Directors out to see the operation, that's how excited we are.

We're going to have the sample test provided to our first beta group, which will be our Board of Directors here in February.

So we're pretty confident where that's coming out.

We're looking forward to what it can do.

The value propositions to -- for our customers with -- and what we think is the most compelling part of the story around that product, and the ability to eliminate a large part of the downtime associated with repair and maintenance on the product is the value proposition itself.

We expect that we'll be in the market by the end of the calendar year.

You know what product development is like right now.

We are bullish on that time line.

Our expectation is that it will be there, and we'll start to see revenue offsetting some of that development costs early calendar year 2019.

Next, we'll go to a Jamie Clements (sic) [Clement] with Macquarie.

I know it's a sensitive subject, but with respect to all of the news about the very, very severe flu season that we started to get the last, I don't know, 3, 4, 5 weeks, something like that.

Had you been seeing an uptick in your Memorialization business over the last month or so?

Good question, Jamie.

(inaudible) It's one of the many factors that are causing us to increase our guidance for the year.

We're seeing it on the Funeral Home side today.

We expect that to translate to the memorial side.

But as I said in my comments, that flu season comes with severely cold weather.

We've also seen a modest downtick in our cemetery products, setting of stone and bronze, excuse me, is difficult in that cold weather.

We expect that to be a multiquarter uptick for us, to be honest.

Refresh my memory, please, would -- you would -- so -- and I think you were maybe just saying this, but would you expect to see more of a maybe a rebound in casket sales in the March quarter, and then when the ground thaws and that kind of change, you'd expect to see follow through more on the memorial side in the June quarter?

Is that right?

Thanks for making my job easy, Jamie.

That's exactly right.

And our next question is from a Liam Burke with B. Riley FBR.

Joe, you talked about some awards in the North American market in SGK.

Can you just give us a little more detail on that?

And will that help you offset the trend in the CPGs pulling back on SKUs?

Well, we have had a couple of recent awards.

We don't want to call out names, and we're not going to get into the business of calling out wins and losses.

That's -- This is a business where there is always ups and downs with respect to wins and losses with customers.

Not significant numbers.

We have -- are fortunate that we've been able to land a couple of very significant new accounts that are -- or that one do not contribute anything into the first quarter and one that is only ramping up into a -- it'll be a multiyear ramp up for us.

They are significant accounts and will be beneficial to us.

They are in spaces like retail where a lot of the product label work is moving and in pharmaceuticals, which is a little bit off the CPG side of the business, so they -- we think is a good balance for where we can spread our risks.

Terrific.

Steve, based on the fact sheet you put out this morning, I took the operating income and just netted out your CapEx, you're cash flow negative.

Is it timing of working capital?

Or do -- you obviously expect to generate $4 in free cash for the year, but was there anything in the quarter?

Or is it just timing?

It's -- Liam, it's generally timing.

But our fiscal first quarter, just from a seasonality standpoint, tends to be the slowest from a cash flow perspective.

So no.

What we -- with respect to Joe's remarks on projections for the year, we expect that we'll achieve those cash flows over the next 3 quarters.

(Operator Instructions)

Okay, John.

Well, that seems to be the end of our session this morning.

We appreciate everyone participating in the call, and we look forward to our call after our second quarter earnings release.

Thank you.

And ladies and gentlemen, that does conclude your conference.

You may now disconnect.