Matthews International Corporation
Q2 2015 Earnings Call Transcript

Published: 1 May 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Matthews International Second Quarter Financial Results. 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. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host Mr. Steve Nicola, Chief Financial Officer. Please go ahead.

[Steve Nicola:]

Thank you, Tony. Good morning. I'm Steve Nicola. Also on the call with me today 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 357906. The replay will be available until 11

[Joe Bartolacci:]

Thank you, Steve. Good morning everybody. During the second quarter most of our businesses met or exceeded our expectations. Solid execution was helped by market dynamics, allowed us to achieve result that exceeded market expectations. Now, let's talk about the businesses. With regard to SGK brand solution segment, strong performance from our European businesses and our retail division helped offset sluggish revenues in North American packaging where several large clients have been slow to launch packaging innovation. Our European businesses are benefitting from increasing volumes driven by new food labeling requirements similar to those soon to be required in the United States. During the quarter we continued to make meaningful progress with our integration efforts particularly on the RP solution front. As we’ve communicated in the past we expect to achieve significant synergies upon completing the integration of SGK and much to those synergies is ERP dependent. We expect to begin the roll out of our ERP solution during the last quarter of 2015 and it will take 18 months to complete. In the mean time the commercial team is continuing discussion with clients regarding our combined services. The sales lead time is long and current discussions are leading the modest wind, but the prospects are looking promising. Our memorial Memorialization business benefited from a higher casketed death rate during the quarter. The benefit was largely felt in our casket sales, in our funeral home products division which executed well both on a drop through basis and in asset utilization basis. The cemetery products divisions should see improved volumes during the coming quarters as markets were up in order relative. Our brands business showed good revenue and profit growth resulting from market share gains, but the benefit was somewhat offset by challenges with certain mausoleum projects. Our cremation divisions have strong sales backlog growth during the quarter which has increased our expectation for a strong second half of the year. But the current quarter was challenged by large incineration equipments due which we expect will not significantly impact in balance of the year. All-in-all this segment is delivering solid results and good cash flow which is at the core of our performance. Our industrial segment continues to perform well with very good marketing equipment and in ink sales and excellent performance from our ware house automation businesses. As I said in the past we expect good things from this business going forward and in fact has ramped up research and development in this division to $1.3 million during the first 6 months in 2015. The team is working on some very promising new products which we hope will continue the growth this segment has seen. We expect to further accelerate our R&D spend in this business over the coming 12 to 24 months as we expect to bring the new products in market as quickly as possible. Internally as we review our performance for the quarter and year-to-date you see market improvement in all of our businesses. Even without the modest tailwinds of lower commodities, on an apple-to-apple basis our business performed well materially better than our reported results. When you consider the negative operating profit impact of foreign currency exchange, the incremental R&D in our industrial segment and several other miscellaneous non-performance related items, we internally see results from our core operations. They are better than 20% higher than prior year for the quarter and over 30% higher year-to-date. More or over as you will see we’ve very strong cash generation for the quarter and year-to-date which has a lot us to reduce our gross long term debt by $78 million since closing on SGK, when you exclude the $13 million extra deposit, we made pending a resolution of a dispute. We believe this to be strong performance by any standard. As we look forward to the balance of the year. Our forecast continues to target $3 per share on non-GAAP EPS. But we remain cautious around several unknown. Currency will remain a challenge versus prior year and budgeting, but we are unsure to what extent. We also remain unsure of how the higher casketed death rate, we saw during the quarter will impact our volumes during the third and fourth quarter. And finally we still remain cautious regarding the timing of certain project expected to be released and our SGK brand solutions and warehouse automation business. With that let’s open it up to questions. For those of you who will be asking questions we’re request if you limit them to one question and a follow up question until all those who wish to participate has had an opportunity to do so. Tony?

[Operator:]

Thank you. [Operator Instructions]. We do have a question from the line of Daniel Moore with CJS Securities. Please go ahead.

[Daniel Moore:]

Joe, I appreciate the color particularly around the brand solutions. Can you give us a sense of when you back out FX what the organic growth in both U.S. and in Europe look like either a quarter or a year-to-date basis?

[Joe Bartolacci:]

I can tell you that the European business is frankly we're seeing pretty good growth year-over-year. Especially in our roto-gravure business where we’ve seen I would say mid single digit kind of top line growth and maybe a little better on the bottom line as a result. The North American business we’ve seen great improvement and this is more operating improvements as well as new client wins on the retail divisions of SGK. The North American -- and that kind of improvement is hard to discern because of the allocation of cost and so forth but top-line I would tell you it’s probably mid-single-digit again, but we’ve significantly improved the bottom line through some operating performance. North American packaging which is the breath of our profitability is sluggish slightly and as you all know one of our larger clients are dealing with SKU rationalization trying to decide what they’re going to own and what they’re not going to own. And I think both that and some of the FDA labeling requirements are pending. That’s put a little bit of a hold on some of the new product launches.

[Daniel Moore:]

In North America specifically, obviously you’ll probably cycle against some easier comps and then you have, as you mentioned the labeling requirements, when do you expect to start to see a benefit from the labeling requirements? And when might we see a little bit of returns to a more normal organic growth or is visibility just tough for the next couple of quarters?

[Joe Bartolacci:]

The visibility is a little bit tough, but I would tell you we expect to probably see - to put it in perspective the labeling act of Europe was implemented several years ago and we’re now starting to see a benefit. Now it’s a much smaller impact in the U.S. aspect of that but so we’re seeing good implementation benefits of that, but not quick, is the best way to put that. I mean it’s been several years in place in Europe and it’s taken this long to start to see that. I would expect to start to see something towards the latter part of 2016 and it probably times well with where we expect to be on our ERP implementation as well.

[Daniel Moore:]

Got it. And then industrial, obviously that business saw a nice uptick and it’s been an area of focus. Does that reflect increased traction in larger bundled solution sales of warehouse management systems that you’re sort of targeting or is this simply improved organic growth in the various components right now?

[Joe Bartolacci:]

All of the above; that team has done a great job. We have some new product that hit the market a little while ago. That is now starting to gain traction, no reason to give you brand names because you’re not going to recognize them, but the team has been very innovative in meeting market demand where our competitors are not. On the warehouse automation side, as we said, we think we bought premier players and those premier players aggregated together are getting great wins, so we’re very pleased with their group right now.

[Daniel Moore:]

And just the restructuring charges and non-recurring charges, obviously not a surprise at all. When would we expect those to dissipate? Do we have another quarter or two or might some of those, given two to three year plan sort of spill over into ’16?

[Steve Nicola:]

Yes, Dan, I’ll take that one. I think that’s going to certainly spill into 2016. We continue to validate the estimates that we made on synergies and we really see some nice opportunity but it’s going to take time. We said before ERP implementation is a big part of that and that takes time. So we’ll certainly see some of this into fiscal 2016.

[Daniel Moore:]

And lastly just wanted to clarify you mentioned obviously various economic macro factors, two specifically the copper and fuel, I’m assuming fuel is more of a benefit on a year-over-year basis and just remind us where we are with copper?

[Steve Nicola:]

Yes, fuel, has been a little bit of a benefit on a year-over-year basis compared to a year ago and we have seen some benefit in copper price and prices of copper as it relates to our bronze product and but that benefit we haven’t seen just yet but we’re starting to see -- we should start to see a little bit of that toward the end of our third quarter and into the fourth quarter, but I’d also caution that we’ve also seen that stabilize and actually gravitate slightly upward too.

[Daniel Moore:]

And are you seeing marker sales tick up now that we’re thawing out here in the Northeast or is it too early to tell?

[Steve Nicola:]

We’re starting to see a seasonal improvement.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Liam Burke with Wunderlich. Please go ahead.

[Liam Burke:]

Joe, we’ve been talking a lot about expense synergies here; now that you’ve had SGK or Schawk under management here, can you sort of give us some sense as to the potential revenue synergies that you’ve identified?

[Joe Bartolacci:]

Liam, it’s hard to quantify revenue synergies; we did the deal based on the cost synergies, a justification is there, but you heard in my comments we’re starting to have conversations. These are long lead times, it’s not like they don’t have suppliers already. But let’s suffice it to say that everybody we’ve spoken to have commented positively about the combined offering that is not available anywhere else. Now, there is still a wait and see attitude, it’s early into the integration, ERPs are a big part of it, they hear it, we hear it, we see it. So, we think longer term that the revenue synergies will be there, tough to quantify them. We have the number position with lot of these clients especially when we combine them, the real opportunity is how do we expand that around the globe where we weren’t before.

[Liam Burke:]

And, on granite you mentioned taking share. Have you expanded your footprint there or you just going deeper in your current markets?

[Joe Bartolacci:]

We’ve gone deeper into our current markets particularly with our larger clients. We won some contracts that have been up a [bit] [ph]. Oftentimes you see granite suppliers that have been contracted up over a period of time, and what we believe to be the case is it is true this is a highly fragmented market and the ability to aggregate this into a more organized structure on the national basis overtime and with prudence we think we can offer a solution that doesn’t exist out there.

[Operator:]

Thank you. There are no questions in the queue at this time. Please continue.

[Joe Bartolacci:]

Alright, well we’ll like to thanks all for participating in the call this morning and look forward to our third quarter earnings release and conference call in late July. Thank you and have a good day.

[Operator:]

Thank you. Ladies and gentlemen, this conference will be available for replay after 11 AM Eastern today. You may access the AT&T teleconference replay system at any time by dialing 320-365-3844 and entering the access code 357906. That does conclude our conference for today. We thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.