Matthews International Corporation
Q1 2016 Earnings Call Transcript

Published: 29 Jan 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Matthews International First Quarter Financial Results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call, please press star then zero. As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Mr. Steven Nicola. Please go ahead.

[Steven Nicola:]

Thank you, Stacy. 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 under the access code 3835423. The replay will be available until 11

[Joe Bartolacci:]

Good morning. Thank you, Steve. We’re very pleased with our first quarter results. In most every segment of our business, we met or exceeded our expectations for the quarter. The addition of Aurora, good synergy capture, focused expense management, commodity tailwinds, and good volume in our cemetery products business all contributed to offset higher acquisition-related interest costs, softness in North American brand markets, and significant currency headwinds. With regard to the two significant integration efforts that we have underway, I’m happy to report that we remain on track to achieve our targeted cost synergies. As we have communicated in the past, we had expected to begin the most significant part of our ERP launch in January for our SGK brand segment. Unfortunately due to conditions beyond our control, we were forced to push the launch into April of this year. We expect this change to be a modest deferral of our expectation synergies but not materially impact our [indiscernible] synergies. With regard to Aurora, we are finalizing our integration plans and we are pleased to confirm that we expect to deliver all of the projected benefits of this acquisition without disrupting service to our valued customers. As we have stated, early expected [indiscernible] synergies have impacted the immediate benefits of this acquisition, but we are expecting to fully deliver the anticipated $35 million to $40 million of incremental EBITDA from this transaction. In our automation segment, we continue to see great performance despite increased R&D spending, which reached a record $1.5 million during the quarter and which was over $500,000 more than prior year. We have great hopes for this segment as new products, new customers and new markets continue to open doors for continued growth. From a financial standpoint, we are targeting over $100 million of adjusted free cash flow for the fiscal year and almost $250 million of adjusted EBITDA. Our adjusted free cash flow yield [indiscernible] which we believe represents a significant opportunity. Nevertheless, we will continue our process of being opportunistic with our stock repurchase plan while focusing on reducing our outstanding debt with a targeted reduction of $50 million for fiscal 2016. Clearly, the addition of SGK and Aurora and continued strong performance from our historical businesses has allowed us to materially change the financial picture of the company. As we look to the balance of fiscal 2016, we remain confident of our ability to achieve our operating objectives that we have been communicating, including the amount of synergies that we expect to achieve. We however remain somewhat cautious this year on the timing of those synergies as we enter the most challenging yet most rewarding phase of our integration of SGK. We also remain cautious due to some of the economies in which we operate. As always, we remain proactively taking actions to mitigate the potential effect of these challenges. Also, as we have communicated, during the coming quarter we are planning to make permanent a portion of our bank revolver debt which will increase our total interest expense but will add considerable stability to our overall capital structure. Even with these challenges, due to the confidence that we have in our integration efforts, for now we will maintain our internal financial targets for 2016. Let’s open it up for questions at this time.

[Steven Nicola:]

At this time, we would like to open the call for questions. For those of you who would 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. Stacy?

[Operator:]

[Operator instructions] For our first question, we’ll go to Daniel Moore with CJS. Please go ahead.

[Daniel Moore:]

Good morning, Joe. Good morning, Steve. Thanks for taking the questions.

[Joe Bartolacci:]

Hi Dan.

[Daniel Moore:]

Just first off, the last comment you had there, Joe, obviously you still feel comfortable with the full year, albeit with some caveats. Maybe talk about what’s driving the delay in the ERP implementation and if it’s pushed out to April, is it basically the synergies, the realization of synergies is pushed out by a like amount, about a quarter, or could we see that push a little bit further into the future? As it relates to that, the total cost of implementation, has that increased at all?

[Joe Bartolacci:]

There’s a lot of questions in there. I’ll try to summarize it for you. The deferral on the ERP was caused simply by monsoons hitting our operations in Chennai, India. Chennai is our largest operating center around the world with over 500 employees there, and we were essentially all hands on deck trying to cover the work that that team was unable to perform over a two-week period. So it happened to occur mid-December, which is two weeks or so prior to the launch of ERP, and we pulled the plug on the January start as we brought all the teams together to support the efforts that needed to get done there. We satisfied all the customers, which is the most important part of that message there. The deferral that I mentioned, we think is modest. The team has redirected its efforts during the quarter to try to take advantage of the downtime that we have while we prepare to go live again in April. The incremental cost, as I said, was going to be in the grand scheme of things probably less than half a million dollars. It would have been far more significant if we had made some other choices, but the team has done a great job of redirecting its efforts for the near term. The deferral synergies, I think it’s too early to tell that right now, Dan, because we are still bullish on achieving all those synergies but sitting in the seat that I am, I have to be cautious in saying that time will tell. We’ll be going live in April and we’ll have a better ability to communicate to you shortly thereafter about any impact we see from a timing standpoint on the synergies. Clearly it does not impact the amount of synergies we expect to achieve. Does that answer your questions?

[Daniel Moore:]

It does. Thank you for the detail. Shifting gears a little bit, your industrial segment has always been a pretty good barometer of the overall industrial economy. What are you seeing and hearing from your customers, what are they telling you as it relates to economic conditions, particularly in North America?

[Joe Bartolacci:]

Interestingly enough, Dan, we’ve said that internally. I would tell you that we’re seeing softness, particularly in the North America markets. We see it largely in our ink sales. The ink sales that we have are better than prior years, but given the amount of equipment we’ve sold over the last several years, we would have expected it to be more significant than that. So I would tell you that we’re seeing the beginning of what we saw several years back, a slowing in the economy. We have the good fortune that that team has entered new markets with new products and with new customers, so we may be buffered by the direct impact of the slowness because on an apples-to-apples basis, we’re getting a different mix. But at the end of the day, there’s no question that we’re seeing some softness in that market, particularly in the North American market but also in our Chinese market, by the way.

[Daniel Moore:]

Got it, very helpful. Lastly, I think you touched on it, Joe, but the synergies from Aurora, it doesn’t sound like any material changes to your expectations there. Now that we’ve got another quarter under our belt, talk about is there even maybe a little bit of upside potential, your confidence around that.

[Joe Bartolacci:]

Dan, you know us better than that. We would--we are confident in delivering the $35 million to $40 million in incremental synergies. I would tell you that the disynergies that are coming into line pretty close to where we expected them to be. It’s a highly competitive market right now, and as soon as that settles down, which we believe it will over time, we’ll get a better feel for where we are in that range. My expectation is we always strive to the high end, and I’d like nothing better than to tell you all that we’re going to be above the high end. My team knows that, by the way. I know they’re on the line.

[Daniel Moore:]

All right, appreciate the color.

[Operator:]

Thank you. We’ll go to Liam Burke with Wunderlich. Please go ahead.

[Liam Burke:]

Thank you. Good morning, Joe. Good morning, Steve.

[Joe Bartolacci:]

Hi Liam.

[Liam Burke:]

Joe, could you give us a little more color--I mean, you mentioned on the SGK side of the business that there was softness in both Europe and North America. Obviously there is some macro headwinds there, but could you give us a little more detail on what you’re seeing?

[Joe Bartolacci:]

Well, the comparisons are also muffled, Liam, because they're about, correct me if I’m wrong, Steve, $15 million to $16 million worth of currency changes, so we’re going to get muffled by that, and the sale of a small business would have added another $3 million. So what we’re really seeing is softness in our core accounts. It could be a number of things - it could be economic, it could be just people holding up because of the new labeling regulations that are coming at them, going to full package [indiscernible] one time rather than do it multiple times. In Europe, I think it’s just timing. I think that we’ll see that recover throughout the year. We’re currently not projecting any misses on either of the businesses over the rest of the year, and positively there have been no significant account losses that would impact us. There’s always fluctuations going both ways - we win some, we lose some. At the end of the day, it looks like we’re moving in the right direction, but we’re just not seeing new package, new product innovation as quickly as we would like.

[Steven Nicola:]

Yes Joe, just on those numbers, currency and the divestiture were about $14 million to $15 million of the decline, of course currency being the much larger piece of that.

[Joe Bartolacci:]

Thanks Steve.

[Liam Burke:]

Steve, while you’re there, Joe laid out your free cash flow goal of $100 million this year. Looking, just doing the arithmetic on cash flow from operations less capex, it turned out to be a negative number even though it looked like from the working capital numbers, they looked pretty good. Could you give us a sense on where the recovery will come from through the balance of the year?

[Steven Nicola:]

Yes Liam, and just to clarify what Joe had said, he’s referencing an adjusted free cash flow number versus the actual free cash flow, because a significant portion of what you’re seeing in the first quarter is spending on acquisition integration-related costs, so that’s what’s impacting it. But if you take out--if you adjust our current quarter cash flow for integration costs and the non-GAAP adjustments, then you start to get a picture of how we get to the $100 million for the year.

[Liam Burke:]

Okay, thank you Steve. Thank you, Joe.

[Joe Bartolacci:]

All right, you’re welcome.

[Operator:]

Once again, if you have a question, please press star then one at this time. We’ll go to Scott Blumenthal with Emerald Advisors. Please go ahead.

[Scott Blumenthal:]

Good morning, Joe. Good morning, Steve.

[Joe Bartolacci:]

Hi Scott.

[Scott Blumenthal:]

Steve, could you maybe give us an idea as to what you’re seeing right now in bronze costs and what, if anything, you might have to give up in price on that? Also, can you make a comment about fuel costs regarding the casket segment?

[Steven Nicola:]

Sure, I’ll let Joe address the pricing part of that question, but with respect to costs, Scott, we are seeing lower bronze costs, which is attributable to lower cost of copper, as you know, bronze being a byproduct or the main constituent of bronze being copper. Scrap copper, we’ve started to see the benefit of that in our results, so we have been actively looking to lock in those costs going forward with some purchase commitments through our suppliers. We are seeing some lower steel costs as well. One of the caveats with respect to steel cost is that from the--there is some time between the day we purchase steel and the time it ultimately flows through our income statement, because it has to go through our production facility first and then to the warehouses and then to sale. But all that being said, we’re starting to see that benefit as well. Joe, did you want to touch on the pricing?

[Joe Bartolacci:]

Yes, with regard to pricing, we do our best to try to hold our pricing. There are a lot of times whenever prices of copper or, for that matter, bronze have gone higher and we have been unable to pass those costs on. We think this is relatively short term, so the swings going both ways, I think we’re being prudent to count on it, either giving up more pricing or using this as an opportunity to get more business.

[Scott Blumenthal:]

Okay. I know that in the past, you mentioned that when prices were spiking a couple of years ago, customers had diminished interest in some of the bronze memorialization products. As things come in a little bit and prices moderate, are you seeing a pick-up at all, a little bit more interest in that?

[Joe Bartolacci:]

Well, we saw a good quarter. The volume in the cemetery products, both on stone and the bronze side were pretty good, so perhaps that is occurring out there. We don’t see significant shifts going on right now either way though, Scott. I think that with commodity prices being what they are right now, it’s probably a temporary lull. We’ll take the benefit of that for today and make our plans on what we think what a return price for copper will be.

[Scott Blumenthal:]

Okay, fair enough. Thank you.

[Operator:]

We’ll go to the line of David Stratton with Great Lakes Review. Please go ahead.

[David Stratton:]

Good morning. I was wondering if you could give a little more color around new product innovation and what you have in the pipeline and what we should be looking for as the future quarters unroll.

[Joe Bartolacci:]

Sure. If you’ve listened to us over the last several quarters, we’ve started to call out some significant R&D spending, and particularly in our automations group. We’re not at liberty today to talk too, too much about what it is, but suffice it to say that it’s directly in line with our current lines of business that we operate in. But we are finding alternative uses for some of our products - for example, we do some work in the oil pipeline business for certain process control equipment that’s being used now in other areas, like the supermarket conveyer system that you see out there. So the guys are doing a great job of looking elsewhere to use the exact products that we have in play now. From a new development standpoint, though, we are pretty bullish in our mind with what’s coming out of that group, and I would expect over time to add more pieces to the puzzle from the automation side, the warehouse automation side. As you all know, we have a couple of very good businesses there that have really performed well for us. There are still pieces of the puzzle that need to be added, things like automated sorters and pickers and things of that nature. We’ll be looking at those pieces of the puzzle over the next 24, 36 months, and I wouldn’t be surprised to see those added to the toolkit.

[David Stratton:]

All right, thanks for that color. Appreciate it.

[Operator:]

Thank you. Next we’ll go the line of Jason Rodgers from Great Lakes Review. Please go ahead.

[Jason Rodgers:]

Good morning.

[Joe Bartolacci:]

Good morning, Jason.

[Jason Rodgers:]

Just curious about the bio-cremation product and if that’s seeing any traction.

[Joe Bartolacci:]

Less than we would like. We’ve done a good job of bringing down the cost structure for that, making it a more palatable solution. We have a few facilities that are using it at this point in time. It is not as quick as we would like it to be, but I would tell you that it’s a longer term play as an alternative to incineration. What I think is more interesting out of that group is the amount of just plain old incineration business that’s been available to us as we take basic, simple technology that we use elsewhere and apply it to small site incinerations. That probably has more legs to it in the near term than the bio-cremation.

[Jason Rodgers:]

I might have missed it, but did you talk at all about the death rate for the quarter and what the expectations are for the second half of the year?

[Joe Bartolacci:]

I wish I could tell you. I’d talk to the guy upstairs about what the expectations are, but I think it was modestly flat. Steve, correct me if I’m wrong?

[Steven Nicola:]

No Joe, you’re right. The overall death rates for the quarter, at least based on the data that we look at through the CDC, was flat to slightly up, which would indicate that casket and in-ground burials were down for the quarter.

[Jason Rodgers:]

Thank you.

[Joe Bartolacci:]

We’re not expecting a material change either way over the next couple quarters.

[Operator:]

We’ll go to the next question. We’ll go to Daniel Moore with CJS. Please go ahead.

[Daniel Moore:]

Thank you again. Just two follow-ups. In terms of caskets, any competitive response to the acquisition of Aurora that you’d noted or could share? Second is in terms of memorials, any update on the adoption rates and interest levels in memorialized cremations?

[Joe Bartolacci:]

Well as you recall, we did mention the synergies associated with the early part of the transaction, and that’s what we’re seeing right now. I don’t think it’s beyond our expectations. People will make choices--we’d like to think everybody loves us, but it’s not always the case, and there is an opportunity to switch because of some transactions. We’re doing everything in our power to retain all the customers that came with Aurora, as well as providing minimal disruption for them and promising them that. But some of that is going to happen, so nothing to report that is out of line with what we had built into our models. The other part of your question?

[Daniel Moore:]

Just memorialized cremations, how it’s probably not moving the needle yet, but how that’s being accepted and adopted.

[Joe Bartolacci:]

I would tell you that it’s not moving the needle yet, but I would tell you that there’s ever more conversation around it, people realizing that it’s something that the consumer wants and as a result you have to build inventory in the market. It’s a little different than--part of the issue is really getting to the point where people have to recognize on the cemetery side that you have to market this. It’s not common practice in the United States, but as those folks start to market it and realize there is opportunities to make some money in that, we think that’s a trend that will continue down the line.

[Daniel Moore:]

Very good, thank you.

[Operator:]

Once again, if you have a question, please press star then one at this time. At this time, there are no questions in queue. Please continue.

[Steven Nicola:]

All right, thank you, Stacy. We’d like to thank everyone for their participation in our call this morning, and we look forward to our next earnings release and conference call for our second fiscal quarter in April. Have a great day.

[Operator:]

Thank you. Ladies and gentlemen, this conference will be available for replay after 11