Matthews International Corporation
Q3 2015 Earnings Call Transcript

Published: 31 Jul 2015

[Operator:]

Welcome to the Matthews International third quarter financial results conference call. [Operator Instructions] I would now like to turn the conference over to your host Steve Nicola, Chief Financial Officer. Sir, you may begin.

[Steven Nicola:]

Thank you, Dorinda. 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 363844. The replay will be available until 11

[Joseph Bartolacci:]

Thank you, Steve. Good morning. We are very pleased with our results for the third quarter of 2015. During the quarter, we faced difficult comparisons to prior year, due to large non-recurring projects that were completed in the third quarter of 2014, in both our incineration business and our merchandising business. We also have strong headwinds caused by a negative currency translation, and we intentionally increased our research and development spending. The sum of these items created a $0.22 per share hurdle for our businesses to overcome, when we compare our performance to prior year. Nevertheless, our core businesses performed well and the addition of SGK allowed us to achieve our goals and position us to meet our full year expectations. We also continue to do a great job on the balance sheet, reducing debt, collecting receivables, managing inventories and being proactive in reducing our pension liabilities, all are evidence of the efforts of our management team and our focus on good practices. During the quarter, we generated cash flow from operations of almost $15 million, which is the result of those efforts. Regarding the individual businesses, there is a lot of good things to talk about. The integration of SGK continues to go well and we will achieve our first year synergy targets. We also have accretive path to achieve our expected synergies for 2016. This team has done an excellent job of bringing two cultures together from two successful businesses, and we expect this combined business to be well-positioned as the market leader. As Steve noted earlier, we continue to see strong demand in our industrials group, which is the result of multi-year, multi-million dollar investments, which are now yielding results. We have intentionally increased our R&D spending in this business throughout the year and especially in the past quarter, as we work on yet another new product, which we believe to be a winner. Given our confidence, we will maintain higher level of R&D spending for the next year or two, but we will identify for you, so you can get a clear picture of the performance of the business. In our Memorialization business, we are now seeing the benefits of our prior investments with record on-time deliveries and customer satisfaction. This team has done a fine job of not only returning the business to normalcy after the challenges caused by our ERP installation, but also materially improving the business as well. As you are aware, we announced the acquisition of Aurora Casket earlier this quarter. We remain very encouraged by our continued integration planning, which has solidified our expected synergies and by the further response that we have received from the market. We expect to close on this transaction during the fourth quarter and begin the process of integration immediately thereafter. With respect to the fact that we discovered during the quarter, there is very little we can talk about at this time, because there is an ongoing criminal investigation. You should know, however, that we have taken the necessary action to correct the situation entirely. Moreover, it is important to note that this has not impacted any prior year operating performance or cash flows of our businesses and we are taking all the necessary actions to recover the losses as quickly as possible. At this time, 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 all those who wish to participate in the Q&A session has had an opportunity to do so. Dorinda?

[Operator:]

[Operator Instructions] Our first question comes from Dan Moore from CJS Securities.

[Bob Labick:]

It's actually Bob Labick backing up Dan Moore this morning. I wanted to start off, I guess, first question just on, kind of the M&A things that you just touched on. You highlighted you're on track with the Schawk integration. I was hoping you could just expand a little more and tell us what steps are necessary this year and next year to reach those synergies? And how confident you are that you have those in place or what else has to happen for you to reach all of those synergies

[Joseph Bartolacci:]

For 2015, we have already taken the actions that will yield the results that we expect. We're pretty much in line with everything we had communicated and everything we had expected. For 2016, we are, I just returned yesterday, in fact last night from Europe where we had a kick off meeting with a lot of our team over there with regard to the ERP installation. As we've said in the past, a large part of the synergy that we expect to achieve is derived from the installation of a common ERP system, which we call Core. The Core team met in Europe in the last several days. We were reviewing the final provisions of installation and the implementation. We expect to go live with that beginning in October. And we will carry that out over the next 18 to 24 months from there. That will drive the largest part of our synergy goals. Today, we remain very confident. I can tell you, having seeing what I saw yesterday and on day before, I remain pretty confident as well. So the synergy line items are very clearly. The actions necessary to take them, to achieve those results are also well-defined. We need to get the implementation going to get there.

[Bob Labick:]

And then sticking with the kind of M&A you mentioned you're on track for the closing of Aurora. Could you remind us of the remaining hurdles to close? And then, I don't know if you can talk about this or not yet, so I apologize, but if you can the process and timing for integration on that, assuming it does move forward?

[Joseph Bartolacci:]

The issues with respect to Aurora are solely in the hands of the FTC. I mean, that is the only hurdle for us to overcome to closing. We expect based on customers' feedback and the support we're receiving and the general conversations we're having with the FTC, that we would be able to close that this quarter, although there are never any promises. We're pretty confident at this point in time that it is going to occur this quarter. When it occurs in the quarter, I can't tell you. But we have plans in place already that, from day one through day 365, that we'll begin that integration and we're ready to kick it off. That team, as you might not be aware, the way we are organizing as an entity, this is a separate team that runs this portion of the business, so there is very little overlap other than here at the senior levels with regard to that integration.

[Operator:]

Our next question comes from Liam Burke from Wunderlich.

[Liam Burke:]

Joe, the margins on industrials stepped up pretty nicely year-over-year for the quarter, even with the additional R&D expenditure. Is there one-time product mix in there or is this a trend that we can continue to see here?

[Joseph Bartolacci:]

Clearly, we're seeing improvements in that business and it is both product economic and acquisition. The reality is that that business today is kicking on all cylinders and it's going to create difficult challenge for the next year to fill that void that we created. But the fulfillments business, which has been a wonderful addition to our businesses, has significantly added to the margin percentages of the business. But even, what I would call our core business with the investments we made with new products like, that we call, for example, [ph] Imperia is out in the marketplace getting rave reviews, but the economics of where we operate are also helping us. We are selling a lot of ink and when we sell a lot of ink we make good money, so all the pieces in the puzzle right now are pointing in the right direction.

[Liam Burke:]

First, for the quarter and for the first nine months of the year, you had very, very strong free cash flow, approximating free cash flow per share, approximating your adjusted EPS numbers. Is that a trend that we can count on when we look at the balance of the year?

[Joseph Bartolacci:]

Yes, that's what we've been trying to communicate, Liam. We generate a lot of cash, almost $50 million of operating cash flow this quarter alone. We think that that's a part of the story that we will continue to emphasize and we think it's a reliable number.

[Operator:]

Our next question comes from Jason Rodgers from Great Lakes Review.

[Jason Rodgers:]

The $3 EPS target that you talked about earlier in the year, is that still a good figure to use?

[Joseph Bartolacci:]

That's what we're holding to right now, Jason. Right now we have every expectation that's our target.

[Jason Rodgers:]

And can you talk a little bit about the CPG companies, the latest as far as their spending levels and outlook.

[Joseph Bartolacci:]

I think it's going to be more CPG specific, but as you all have been reading and seeing in newspapers that we read as well, we see it on the customer side and clients. There's a little bit of turmoil with brands being sold at some of our larger accounts, entire entities being merged or acquired by private equity, we're going through a transitional period in some of those accounts. The good news is what we've said all along, the team has done a wonderful job of retaining every single significant account that we really wanted to retain. And to the extent that they spend, we will get it. But we continue to look forward to the FLMA, Federal Label Modernization Act, and its implementation some time right now in 2017, is their expected date, that can get pushed and that could be causing some holdback as well.

[Jason Rodgers:]

And if you've said this, I apologize, but did you give a current outlook for your capital spending for fiscal '15?

[Steven Nicola:]

No. We didn't give that before, Jason. But right now, we're anticipating that's going to be somewhere in the $35 million to $40 million range. We think that's our ongoing maintenance cap.

[Operator:]

Our next question comes from Dan Moore from CJS Securities.

[Bob Labick:]

It's Bob again. Just wanted to follow-up on your last comment there as well in terms of the food labeling requirements changing in fiscal '17. Could you just talk us through the impact there? Is there maybe, as you were just saying, a potential low? And then when would you expect to see the benefits from that change and how should we think about that?

[Joseph Bartolacci:]

Again, this is one of the events we don't control, so it's really going to depend on the effective date of the implementation. We do a lot of work in the food business, and so that's currently drafted and designed. The regulations would impact the nutritional aspects and the disclosure on nutrition for every single food product on the grocery store shelf. It's more anecdotal than fact, but every single package will have to be modified. So it only stands the reason that they're going to modify it significantly other than tweaks and turns. They're going to wait until they have that implementation, due the entire innovative packaging at that time. Again, this is just anecdotal. We don't have any hard and fast evidence to that fact, but it makes sense. I also think that the, what I would call turmoil in the product lines, what's going to be retained, what are we going to invest in, you see it in some of the largest CPGs, that's also impacting their marketing spend with respect to the packaging as well.

[Steven Nicola:]

And let me clear a comment on Jason's question before about capital expenditures. That was maintenance capital expenditure for the current year. Total capital expenditures ratio should be approaching $45 million.

[Operator:]

I'm showing no questions at this time, sir. End of Q&A

[Steven Nicola:]

All right, well, if there are no further questions we appreciate everyone's participation in the call this morning and we look forward to our fourth quarter earnings release and conference call in November. Thank you and have a great day.

[Operator:]

Ladies and gentlemen, this conference will be available for replay after 11 AM today through August 14, 2015. You may access the AT&T replay system by dialing 1800-475-6701 and entering the access code 363844. International participants may dial 320-365-3844 and the access code 363844. This does conclude today's conference. Thank you for using AT&T teleconference. You all may disconnect.