Matthews International Corporation
Q2 2017 Earnings Call Transcript

Published: 28 Apr 2017

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-mode. Later, we will conduct a question-and answer-session and instructions will be given at that time [Operator Instructions]. Also as a reminder, today's teleconference is being recorded. At this time, I would like to turn the conference over to your host Chief Financial Officer, Mr. Steve Nicola. Please go ahead sir.

[Steve Nicola:]

Thank you, Tony. 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 421642. The replay will be available until 11

[Joe Bartolacci:]

Thank you, Steve. Good morning. Our second quarter was another good quarter for our businesses. Strong performance from our memorialization segment where each of businesses delivered revenue and operating profit improvement, good synergy capture in peer home products and continued revenue improvement from SGK in the U.K and Asia and our merchandizing division help offset slowness in other parts of our business. During the quarter, we continue to deliver strong synergy capture and improved our cost structure in many of our businesses further positioning us to meet our expectation. Our automations business struggled to delivers expectations largely due to the deferral of a large project that we had anticipated with end of the quarter and the segment. But the other portion of the businesses contributed nicely to offset that challenge. Regarding our two acquisition we are approaching the end of our initiatives on SGK and we expect integration expense to be substantially complete in the next quarter or two. Aurora on the other hand is expected to continue to incur integration cost through early 2018. Both integrations continues to go well, on-track both in terms of integration cost and synergies and we expect the remaining synergies to be in the range of $15 million to $20 million. With regard to our brand business, we are in the process of implementing our final phase of the ERP solution, which continues to go well and is expected a little over the remaining piece of our synergy estimates. Our North American business has finally starting to see some ordering of new labeling requirement projects of packaging innovation has been wide and marketing dollars remains constrain by zero based budgeting focus in our clients, which has dampened our North American revenue. We expect this trend to challenge our traditional packaging business in the near-term as our clients look for ways to meet changing consumer demand, but should be mitigated by the labeling requirement going forward. More over we continue to expand our product and service offering by adding marketing communications, design adaptation and internet marketing solutions to the SGK portfolio, where you have seen growth in some of our markets. Also during the quarter, we acquired several small businesses, each of which should have a positive upside to our business. Although each is small relative to our overall business we expect these acquisitions to be very positive to our overall strategies in the longer term. As we look at our businesses we continue to see strong cash flow performance with depreciation and amortization exceeding our capital expenditures by almost $20 million on a year-to-date basis. Similarly our EBITDA margins in each of our segments on a pre-corporate allocation basis continue to be in the mid to high teens or better, showing the strength of our operating performance throughout the businesses. We believe we see a path to continue to improve those margins and advance our business as our ERP implementation is completed. As mentioned above, our industrial technologies business had a difficult quarter but saw strong equipment and ink sales reflecting the innovation and product developments to the past of this business. The overall performance of the group as discussed above was challenged by a $7.5 million project in our automation division, which is deferred and $1.6 million of R&D spending for a new product which we can and need to have great promise. The new development remains on-track both in terms of timing and total investment which we expect to be around $7 million this year. We expect to have the new product in the market by 2018 and should see, begin to see the benefits of that in early 2018 and 2019. Looking at the balance of 2017, we remain confident of our ability to achieve our goals to deliver our non-GAAP EPS in line with our expectations. We remain cautious however given the uncertainty around death rate which have been sharply of late and continues sluggishly in North America and European brand market. Nonetheless we remain pleased with the direction of all of our businesses as the investment, and the investments that we have made. With that, let's open it up to questions.

[Steve 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 all those who wish to participate in the Q&A session have had an opportunity to do so. Tony.

[Operator:]

Thank you very much, [Operator Instructions] Our first question will come from Dan Moore with CJS, please go ahead.

[Chris Moore:]

Hey good morning, it's actually Chris Moore for Dan. The memorialization revenue was up across the board, can you give us a sense of the relative organic growth rates, for memorials versus caskets.

[Joe Bartolacci:]

Sure, we also have the environmental businesses, those are cremation equipment principally and that had a very strong quarter as well. So we are seeing better backlog ordering in that business and continue to see strength in both North America and elsewhere in the world. When it comes to the memorialization business on the cemetery product side, we had good revenue on that business largely driven by some COP which is certified ownership program on pre-need basis on some of our larger accounts. As well on the funeral home side, you heard me mention some choppiness in the death rate. We saw a very, very strong month of March and slower months ended January and February. So there is still some choppiness in there, I would tell you that the relative growth in the two businesses was about the same. Some price and some organic, but at the end of the day we were real pleased with the direction on that business.

[Chris Moore:]

Got you, and just one more before I get back. How much of an impact did rising copper prices have on margins in memorialization?

[Steve Nicola:]

For this quarter just because of our purchasing patterns and the fact that we were bought out to some degree really didn't have a significant impact this quarter.

[Chris Moore:]

Terrific, I'll jump back in line. Thanks guys.

[Operator:]

Thank you, the next question will come from Liam Burke with Wunderlich, please go ahead.

[Liam Burke:]

Yes good morning Joe, good morning Steve.

[Joe Bartolacci:]

Hi Liam.

[Steve Nicola:]

Morning Liam.

[Liam Burke:]

Joe when you are looking at expense -- synergy expense realization on the SGK side of the business, I know you have an objective for 2017, looking at the first half of the year, how much has been realized or were you looking at something that's more backend loaded.

[Joe Bartolacci:]

For the year alone we probably have realized on a year over year basis somewhere around $5 million in the first half of the year relative to the prior year another $5 million or so coming out of the balance of the year, on a year-over-year basis. We don't have a lot left in that tank as it relates to synergies to be driven from SGK. We are pretty much in line with what we had expected coming up, I would say by the end of 2018 we will have realized everything.

[Liam Burke:]

Okay, great and just quickly staying with SGK, there has been an articles discussing the CPGs revenue are down about 3.5% first quarter, I mean obviously when you are managing the business you have got the Fair Labeling Marketing Act coming to help partially offset that. But do you have to manage business any different than you first anticipated?

[Joe Bartolacci:]

Oh absolutely, there was a recent article in the paper that talked about the impact of certain CPGs I mean for better or worse, we do work with all of those with our clients. And we are seeing revenue challenge in each of them, nothing that we have done just less marketing dollars and innovation being spent. As a result of that what has traditionally been a more reprographic service function, you saw us pull couple of small acquisition one that which we are very, very positive about that would take us further into the adaptive art meaning going upstream not to the initial creation to the package as much, but further into the adapt creation and more importantly going into the private label sectors especially as it relates to retailers specifically. So we are managing to move the business in other directions all in the digital content management side. But at the end of the day, we are going to have to expand our product and services to continue to grow that business.

[Liam Burke:]

Great. Thank you Joe.

[Operator:]

[Operator Instructions] Next in queue is Scott Blumenthal with Emerald Advisors. Please go ahead.

[Scott Blumenthal:]

Good morning Joe, good morning Steve. Joe it looks like the next couple of quarters are setting up to be pretty nice for the business overall. Since 60% of the business is now kind of project based SGK and your industrial technologies business. Maybe you can give us some insight into the outlook with for each one of those? Particularly on the SGK side as it refers to what you talked about with the Food Labeling Act coming through.

[Joe Bartolacci:]

There I can give you a perspective one of our recent acquisitions a little Company by the name of Equator which has been great add is a business who does principally work through private label for retailers around the world. Names that you would be recognizing is walk down the street very clearly here and in Europe. All the services that they perform for those retailers who require FDA labeling in North America, so as it relate to that business sometime over the next 18 months we expect that business to do substantially better than it already has prior of the acquisition. I would tell you FDA labeling requirements right now are expected to be implement about the end of July of 2018, unless we see some deferrals on that there is a lot of work yet to come. We probably do about 15% to 20% of our business at least, in the food business in North America. So we would expect to see volumes start to grow as we go forward in the next 18 months or so. A couple of that we are seeing less new packaging innovation in general as those CPGs start looking for ways to address the change in consumer demand, reformulating product, repackaging product will be something that I think we will come back to this business overtime. But as we go through this turbulent time of addressing consumer demand we are going to see a little bit challenges on the marketing side.

[Scott Blumenthal:]

And with regard to industrial technology, maybe some inside into what your outlook is there, obviously you mentioned you had the fulfillment project that got pushed out a little bit. Should we expect some of that in the current quarter of Q3, and maybe the outlook for that business maybe you can at least give us some comparison to maybe where we were last year with regard to project pipeline and those type of things?

[Joe Bartolacci:]

We are real comfortable with the space in which we operate of the automation side, it’s the fulfillment side of the business where we had the challenge from the revenue standpoint and really focuses on e-commerce which all of us would agree is where we need to be focusing on as we move into that part of the business. Unfortunately, those projects are bigger and just case $7.5 million project on a business that might do $30 million to $40 million worth of revenue and in annual basis will be impact it in any given quarter. Our backlog today would tell us that that particular project is not going to hit until later part of the fourth maybe into the first quarter of 2018 they pushed it out, but nevertheless we continue to sell. I would tell you relative to prior year we are tight, but we expect that team and we will continue to move forward, a couple of nice little additions to the business will continue to grow with the offerings. So we are comfortable that we are in the right space and that will meet our year pretty close to it next year in that business.

[Scott Blumenthal:]

Okay, super. Thank you. I'll get back into queue.

[Operator:]

Thank you. [Operator Instructions] And a follow up from Scott Blumenthal. Please go ahead.

[Scott Blumenthal:]

Joe or Steve are you feeling any impacts at this point rising commodity cost particularly steel and the cascade business or maybe your industrial technologies business. And then maybe some talk about some discussion on what is going on in the bronze side of the business too.

[Joe Bartolacci:]

So we are feeling the impact particularly on the steel side. As you might expect as we have grown our funeral home products business, we sell a lot more steel than we do bronze, and steel has grown significantly in its grown to our P&L at this point in time. So the results you are seeing are being impacted by that, we have been successful in both reducing our cost and trying pass through those cost through our customers and got a little of extra volume as well. That's a positive note. On the memorialization side, we have mentioned in the past that we were going after and recovering some of the past customers we had lost in cemetery product side and we are seeing the benefit of that, we are seeing a more aggressive stance from some of our larger accounts as they focus more on pre-need sales. Those pre-need sales ultimately end up in early order of markers for us. And frankly our stone business, as we told you in the past albeit small at this point in time has significantly improved year-over-year on the year-to-date basis and we think that continues to be an opportunity for us to grow. We don’t call that out separately, part of cemetery products, but we are seeing good, good performance in all of those segment and environmental as well.

[Scott Blumenthal:]

I know that years ago when Matthews was the little of bit of a different business, we started to experience some price sensitivity particularly as related to bronze memorials, are you seeing your customer as price sensitive these days or is some of that elevating and may be getting that business back to the type of growth rates that we had seen may be a decade ago.

[Joe Bartolacci:]

So what we are seeing Scott, a decade ago when I took over the seat where copper was about £0.75 to £0.80 today almost $3.1, $2.83. What you saw in the early part of that decade was rapid increases in copper prices, we are not seeing that kind of rapid increase, and therefore we are not having to pass that kind of pricing through to try to recover. Secondly, I would tell you that business has done a great job of becoming far more efficient in their delivery of product and servicing. We are having to respond in different way that we did in the past and it’s a different business today that it was in the past. Regarding growth it's a different world than 10 years ago, cremation rates are substantially higher than they were back then, I would tell you that we continue to hold firm on our customer base and we will see whether or not our response which is to add the stone part of the business is able to offset any kind of fluctuation either way. So far that business has been a nice add for us despite some early challenges.

[Scott Blumenthal:]

Okay, great. Congratulation on a very nice quarter. Thank you.

[Joe Bartolacci:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] And next in queue is David Stratton with Great Lakes Review. Please go ahead.

[David Stratton:]

Good morning and thank you for taking the question. I just wanted to kind of piggy back on Scott's question and when we look at price increases in pass through, what is your lag time approximately is that something that can be realized immediately or does it take a while for that to kind peculate to the system.

[Steve Nicola:]

We generally raise our prices , unlike in the past, we have learned our lesson by alienating a few customers early on, we go out with price increases once a year, generally our round beginning of either the fiscal or the calendar year. So what you are seeing right now is the impact of the commodity increases and the benefit of the price increases that we made at the early part of the year.

[David Stratton:]

Okay and then actually duck tails into my follow up and what does the comparative landscape look like in regard to price increases, are you seeing everybody in the industry trying to make those moves upward or is anybody holding back trying to gain share.

[Joe Bartolacci:]

We are pretty much all on the same platform at this point in time there, the markets have gotten a little tighter in terms of suppliers, there is plenty of capacity in the marketplace, but price competition is always going to be a factor, but I would tell it's not as aggressive as it might have been 10 years ago.

[David Stratton:]

Alright. Thank you.

[Operator:]

Thank you. At this time, I'll turn the conference back over to our presenters for any closing comments.

[Steve Nicola:]

Alright Tony, thank you. Well we would like to thank everyone for participating in our call this morning. And we look forward to our third quarter earnings release and conference call in July. Thank you and have a great day.

[Operator:]

Thank you ladies and gentlemen; this conference will be available for replay after 11