Matthews International Corporation
Q3 2016 Earnings Call Transcript

Published: 29 Jul 2016

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Matthews International Third Quarter Financial Results Conference Call. For the conference, all the participant lines are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I'll turn the conference now over to Mr. Steven Nicola, Chief Financial Officer and Secretary. 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 398561. The replay will be available until 11

[Joe Bartolacci:]

Thank you, Steve. Good morning. We're again pleased with our results for the third quarter. During the quarter, we continue to deliver strong synergy capture and good cost containment, which allowed us to exceed market expectations again for this quarter. One thing that we are particularly pleased with is that we reached our goal despite certain market challenges. During the quarter, in our cemetery products division, we saw lower volumes driven by the lower death rates in the previous quarters. As you know, given our market share in this division it is difficult to overcome these short term market downturns. Even with this modest decline, we had solid results in our cemetery products division which continue to have higher year-to-date volume over prior year in both our bronze and our stone product lines, representing good market share gains in that business. Our Aurora acquisition continued to go very well with expected synergies continuing to grow. We believe that we have passed our initial downturn of customer transition thus limiting the anticipated dyssynergies resulting from the acquisition. We remain confident that Aurora will add more than $40 million of EBITDA net of those dyssynergies once it is fully integrated versus the $35 million to $40 million we initially anticipated. What is also important to recall is that this incremental EBITDA will be added with only modest increases in our capital needs, thus further increasing our free cash flows. We think this acquisition will be a tremendous success. Moreover we believe that the benefits of our efforts this year are not yet being fully realized due to the slower death rates. As death rates normalize, we expect to see significant improvement in our results. Our hats go after the combined integration teams for their good work. With regard to our brand business, our SGK integration continues to go well and is approaching the final stage. If you recall, we had significant synergies related to a successful implementation of our ERP solution. I'm happy to report that during the quarter, we successfully launched our ERP in all legacy locations -- SGK locations globally. Like all ERP implementation there is no such thing as an eventless to launch, but this one was as close to perfect as you can get. Again tip my hat to the integration team for those efforts. We still have to implement our ERP solution in our legacy Matthews brand businesses principally in Europe during the coming year, but we remain confident of our ability to complete those implementations as successfully as we have this quarter. As you will know from our non-GAAP reconciliation of earnings, our integration costs have come down significantly this quarter versus prior year. We are well past the midway point from a total integration cost standpoint and substantially complete with spending on SGK. We still have significant acreage in cost related to the Aurora integration yet to be incurred attributable to planned consolidation but most of those costs should be incurred by the end of fiscal 2017. Even with the remaining Aurora integration cost, we expect combined SGK and Aurora integration cost to be substantially lower in 2017 than has be incurred to date. Therefore as we move into fiscal 2018, our GAAP and non-GAAP earnings should be much more aligned and result from stronger cash flows. During the quarter we also repurchased approximately one million shares from the stock family, costing about $50 million. This will benefit shareholders for years to come, especially since we expect to have substantially repaid the entire share repurchase price by the end of this month. There is no better evidence of our ability to generate cash in this event. From a full year basis, we expect fiscal 2016 adjusted operating cash flow to approach $120 million, which at today's stock price would represent a better than 6% cash flow yield. Needless to say, we're pleased with the choices we've made and the efforts of our global teams to execute on our commitment. During the quarter, we also solidified our balance sheet by adding a $250 million term loan to our capital structure, thus making permanent a portion of our long term debt at very attractive rates. We expect to make more of our long term debt permanent in the coming quarters with a goal of bringing our debt covered ratio below three times during the coming year. Meanwhile, our industrial automation group, which is contending with a difficult year-over-year comparable, still continues to deliver solid equipment sales driven by recent product launches, but our fulfillment business began to see a slowing in the automated warehouse market. We expect the coming quarter to continue to be difficult comparison, especially for the fulfillment businesses, but we remain confident that the direction of this segment, particularly as we await some significant new product to launch in the next 24 months. As we look to the balance of 2016, we remain confident of our ability to achieve our operating objectives that we've been communicating including the amount of synergies that we expect to achieve. We remain cautious of our given lower than expected debt rates, sluggish North American brand markets and the downturn in the automated warehouse markets. We remain optimistic however of our ability to capture synergies and to manage through those difficulties. We're pleased with the direction of all of our businesses despite the market challenges and by the end of the year, we will have substantially transformed our cost structure and we expect to see more opportunity to prove that cost structure in the years to come. As debt rates normalize, brand markets begin to grow in the other market in which we operate, we turn to being more robust, we expect to more fully see the benefits of our efforts this year drop to the bottom line. With that, let's open it up to 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 all those who wish to participate in the Q&A session have had an opportunity to do so. John?

[Operator:]

[Operator Instructions] And first we'll go the line of Dan Moore with CJS Securities. Please go ahead.

[Robert Magic:]

Good morning. This is actually Robert Magic filling in for Dan today.

[Joe Bartolacci:]

Good morning, Robert.

[Robert Magic:]

Can you update us on the amount of synergies you realized for both Shark and Aurora in the fiscal third quarter and year-to-date?

[Joe Bartolacci:]

Yes, I would -- well, what we're projecting for the current year is little bit over $30 million aggregate for both, most of that obviously being from Shark with a small portion of that being Aurora.

[Robert Magic:]

Okay. Thank you. And for brand solutions, can you update us on the trends in Europe and if you experience any noticeable changes in spending patterns post Brexit?

[Joe Bartolacci:]

To date, not necessarily. Time will tell. We've had some slowing in our U.K. market as we go through this, but not enough to materially change our results. Most of the projects we're working on have a longer lead time than the last several weeks. So not yet, let's put it that way.

[Robert Magic:]

I appreciate. I'll jump back in the queue.

[Operator:]

And next we have Liam Burke with Wunderlich. Please go ahead.

[Liam Burke:]

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

[Joe Bartolacci:]

Hi Liam.

[Steven Nicola:]

Good morning, Liam.

[Liam Burke:]

Joe, could you give us a sense as to if you're seeing any kind of improvement over time in the North American market. I know there have been some regulatory issues that have been holding back consumer spending, but is it regulatory or is it more the economy that’s holding back that spending?

[Joe Bartolacci:]

No, as a part of the matter the regulatory -- as you all may be aware, the improved modernization -- the Food Labeling Modernization Act has passed in the regulations associated with that have been finalized. We expect implementation to be by 2018 as it currently stands. There is some staggered implementation days based on size. So we should start to see some pick up from that. We believe that we've had some hold back with some of our brands as they get there, but Liam if you look at the P&Ls of our largest CPG accounts that we do, they’ve struggled in their top lines as well. And I think what we're seeing is just containment in their spending on the marketing side especially as it relates to the packaging as we move forward. So I think that it has more to do with the economy and a sluggish consumer then it does with any changes in their desire to spend on packaging long-term. So we think it should be a matter of time. We should see those things return to more robust markets and we're well positioned to take advantage of that.

[Liam Burke:]

Great. And Joe on the fulfillment side, you had lot of interest from some large customers on some of the fulfillment technologies you're rolling out. Is that interest still there or they're waiting for the new product release?

[Joe Bartolacci:]

No question. The new product release is not necessarily in the fulfillment side -- we take a look at some of the automated warehouse literature and statistics out there. It's just a bit of downturn as we go through this. As we approach -- generally as we approach the Christmas season, we'll turn off the spending as it relates to warehouses. They do not want to be interrupting their distribution at the time of a busy season. We expect that to kind of return normalcy through the first and second quarters of 2017, but at the end of the day, right now what we're seeing is a slowing and we have enough on the lead time to see that it most likely will impact our next quarter there. More of a project based business Liam and as a result the projects come and go. The timing of those may impact a quarter or two, but generally the direction of that group continues to be the right one.

[Liam Burke:]

Great. Thanks Joe.

[Operator:]

Next we'll go to Jason Rodgers with Great Lakes Review. Please go ahead.

[Jason Rodgers:]

Good morning, guys.

[Joe Bartolacci:]

Good morning.

[Steven Nicola:]

Good morning, Jason.

[Jason Rodgers:]

Could you quantify the benefit of lower bronze cost you saw on the quarter and if you expect similar type savings in 4Q?

[Joe Bartolacci:]

Yeah, Jason, we typically don’t quantify the specific benefit related to those commodity cost for various reasons. We'll leave it at that, but we did see a benefit this quarter and this year-to-date compared to last year, not only in bronze, but other commodities including fuel for example.

[Steven Nicola:]

I would remind you Jason given what our size is today relative to historical comparisons, bronze is critical but not overwhelming controlling of our results.

[Jason Rodgers:]

All right. And just getting back to the food labeling requirements is your expectation that benefits will start manifesting themselves beginning late in calendar 2016?

[Joe Bartolacci:]

I think we’ll start to see work trickling in at that point in time. I think '17 and '18 will be where we'll see most of that work flow through. To be truthfully, the fruit -- the FLMA did not go as far as we would have hoped from a provider standpoint or where we require changes to packaging not as significant that we initially had proposed, but it will requires a touch on every single packages out there.

[Jason Rodgers:]

Great. And then if I could just squeeze in one more, looks like you're definitely going to exceed your initial 325 EPS guidance for fiscal '16 just looking at the fourth quarter, would you expect EPS to increase sequentially from the third?

[Steven Nicola:]

It’s difficult to tell you at this point in time, we would rather keep you happy at the end of the quarter, but the fact of the matter is we're doing everything we can in the markets that we operate in. We have seen a light month of July on the death rate side. So could that come back in the next quarter or two sure. We have a couple of things we're waiting for our results with respect to the fulfillment side that could change in quarter. We've got a few things out there that could make it much better or put us right in line with where we expect to be. At the end of the day, suffice it to say that the next quarter is not going to make the difference. We think the direction of the whole group is going in the right way.

[Jason Rodgers:]

Yes. Thank you.

[Operator:]

[Operator Instructions] And gentlemen allowing a few moments, there are no further questions coming in.

[Joe Bartolacci:]

All right. Thank you, John. Well, we would like to thank everyone for participating in the call this morning and we look forward to our fourth quarter earnings release and conference call in November this year. Thank you. Have a great day.

[Operator:]

Ladies and gentlemen, this conference is available for replay and it starts today at 11