Matthews International Corporation
Q1 2017 Earnings Call Transcript

Published: 27 Jan 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Matthews International First Quarter Financial Results. For the conference, all the participants are in a listen-mode. There will be an opportunity for your questions, instructions will be given at that time [Operator Instructions]. As a reminder, today's conference call is being recorded. I’ll turn the conference now over to your Chief Financial Officer, Mr. Steven Nicola. Please go ahead sir.

[Steven Nicola:]

Thank you, John. Good morning. I’m Steven 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

[Joe Bartolacci:]

Thank you, Steve. Good morning everybody. Our first quarter results are pretty much in line with our expectations. Our integration teams continue 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 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 memorial merchandizing businesses and our UK and Asia-Pacific brand groups helped to offset continued sluggish revenues in North America packaging. New customers in several geographies including North America, our First Federal Labeling Act related project and the recent $20 million word [ph] for a significant merchandizing 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 delivered 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 the offset a lower Casket 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 a strong sales backlog growth during the quarter and recent large European incineration project, which has increased our expectations for a good year in this group as well. Our industrial segment continued 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 of 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 continue 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.

[Steven Nicola:]

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

[Operator:]

[Operator Instruction] And first on line Daniel Moore with CJS Securities. Please go ahead.

[Daniel Moore:]

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

[Joe Bartolacci:]

Well Dan, as we look at what we are 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 commodities 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 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.

[Daniel Moore:]

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

[Joe Bartolacci:]

Well, as we have seen in the past, casketed death continues to be down, but that is a very cyclical event. We expect the death rate to increase over the course of time, is it this quarter or next, I can't tell you that. I would expect that some of those sales gains that we've seen over the course of this quarter will taper off and be stabilized, but at the end I think we'll be a relatively low single digit topline growth in that business has been moved forward and probably improving bottom line.

[Daniel Moore:]

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

[Joe Bartolacci:]

Why did I expect you to ask that question? So, what we have seen and this is interesting, congress would tell you 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 and the higher ends are still produced in North America. So, in 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 lowered corporate tax rates. So, we might see some margins shifts, but at the end of the day we don't. We are today optimistic that we will not be significantly impacted by that. But time will tell.

[Daniel Moore:]

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

[Operator:]

Next, we will go to Liam Burke with Wunderlich. Please go ahead.

[Liam Burke:]

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 bump or do you see a stabilizing of the North American business?

[Joe Bartolacci:]

Well Liam, to give you a how recent this was, we got an email on Tuesday, so that’s how recent we [Multiple Speakers]. Funny mail with 4,000 or 5,000 SKUs does not create a trend, but we expect that trend to come before the next 18 months pass. And now everything is up for play with the new President, you can deferral 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.

[Liam Burke:]

Great. Fair enough. On the industrial technology 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 perhaps say a year ago?

[Joe Bartolacci:]

Yeah. We’re 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. I mean the projects are multimillion dollar projects that come and go, and you have to continue to win them and they’ve done a good job there. 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 and add to that group, moving us into more e-commerce solutions gives us great hope. So, we’re very, very bullish.

[Liam Burke:]

Great. Thanks Joe. And Steve very quickly on the tax rate. Do you anticipate paying a similar level it was a year ago?

[Steven Nicola:]

Our expectation and we had what they called discrete items to the quarter, outside of those our estimate is 31% for the year.

[Liam Burke:]

Great. Thank you.

[Operator:]

[Operator Instruction] And we do have a follow up from Daniel Moore. Please go ahead.

[Daniel Moore:]

Thank you. Appreciate it. Obviously early days, but what are you seeing with Ungricht now that we’ve closed?

[Joe Bartolacci:]

Well, we’re very, very early couple of weeks into it. But what we is, we're 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 [indiscernible] is a leading provider of surfaces technology. So things like synthetic leathers and synthetic woods and more technical role is for embossing and wallpaper. We see an opportunity to continue to expand that market beyond just the cylinder and we think that this is -- Ungricht was the lynch pin 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 business -- that portion of the business overtime could grow more than double that.

[Daniel Moore:]

Excellent. Then maybe just another minute or two, Joe and I'll piggyback on Liam's question. Warehouse automation, without asking you to unveil the new products ahead of time, what are the functionalities that you are 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?

[Joe Bartolacci:]

It’s the same player we’ve competed with all along, and number one player in that market space is Dinar and the product we are developing would compete in that space directly. I mean faster, cheaper, better is the best way to describe what the product we’re expecting out of that group. And we think it's -- 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 spend on that development, which impinges [ph] our earnings to $0.12 per share. That should yield much more than over the course of the time as we roll our product out some time in '18.

[Daniel Moore:]

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

[Joe Bartolacci:]

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 onto the next product or adaptations of that product into other areas. But at the end of the day we do not -- we don’t consider $6 million annually in that division to be a recurring spend long-term.

[Daniel Moore:]

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

[Joe Bartolacci:]

Well, so that division has a couple of things [indiscernible]. So what we’re really talking about is our marking products, and additional product in our traditional business. We will continue to acquire smaller-big pieces of a puzzle, as we talked about on the automation side, some of you may have seen a notice that came out about a Company by the name of Guidance very, very, very small company. But in terms a technology that was linked to our e-commerce solutions that we are building, so we think that over the course of the time you'll see more of those smaller deals where we see adding one and one, and creating a much bigger project, maybe 3, 4, 5 times the size of what we had.

[Daniel Moore:]

Got it. Helpful again. Thank you.

[Operator:]

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

[Steven Nicola:]

Thank you, John. 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.

[Operator:]

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