Matthews International Corporation
Q4 2015 Earnings Call Transcript

Published:

  • Operator:
    Ladies and gentlemen, thank you for standing by. Welcome to the Matthews International Fourth Quarter Year End Financial Results Call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions-and-answers, and instructions will be given at that time. [Operator Instructions] And as a reminder, this conference is being recorded. I’ll now turn the conference over to Chief Financial Officer, Steve Nicola. Please go ahead.
  • Steve Nicola:
    Thank you, Noah. 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 373117. The replay will be available until 11
  • Joe Bartolacci:
    Good morning. Thank you, Steve. We are very pleased with our results for 2015. During the year, we had both great financial and key strategic accomplishments that we are proud of and which should continue to benefit shareholders for years to come. These accomplishments cover all of our businesses and individually, have positioned us for continued growth. Some of those accomplishments include successful year of integration of our SGK acquisition in which we achieved our synergy targets, the acquisition of Aurora Casket, which completes our 15-year migration to becoming the leader of the Memorialization products industry. The success of our best-of-breed strategy in the warehouse automotive division, the continued successful deployment of game changing technology in our Marking Products division and a significant geographic expansion into developing countries in our SGK Brand Solutions segment. Some of these successes are reflected in the financial results that we have reported today, while others will benefit in the years to come. In the end, we are proud of our accomplishments and the teams that helped us achieved them. Despite significant headwinds, we met our financial target on a full year basis, while positioning ourselves for future growth. Some of these headwinds will continue into next year but other should not. During the past year, we saw greater than expected foreign currency headwinds impact our year-over-year operating results by almost $5 million. In addition, during the year and because of growing success in the significant research and development project that we had very hoped for, we increased our capital expenditure for the research and development by $4.7 million, which further reduced our actual operating results. The sum of these two items would have added $0.20 per share to our reported $3.03, which is a better reflection of the performance of our teams. The best way to describe this year is that our core businesses stepped up and perform well. We also continue to do a great job on the balance sheet. We focus on improving our receivables collection, managing inventories and being proactive in reducing our pension liabilities. These efforts together with the success of our businesses have allowed us to generate record cash flow from operations of almost $140 million and a record EBITDA of $216 million. As you can tell by our announcement, we have used this cash flow wisely by further increasing our dividend by almost 16%, and by reducing our debt balance by almost $90 million on a comparative basis. It is important to note that we did all of this, despite the incremental cost of integrating our two acquisitions. Regarding the individual businesses, this is a good story too. The integration of SGK continued to go well and we have our targets set for fiscal 2016. Similarly, the acquisition of Aurora is also on track with synergies and timelines being clarified as we speak. Aurora, which only added modestly to our 2015 results, should be a fantastic acquisition to us, adding upwards of $40 million of EBITDA when fully integrated but with very little incremental capital expenditure needs. As we've stated for the past several quarters, 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 great results. As discussed above because of this success, we have and we will continue to intentionally increase our R&D spending of this business, as we work on yet another new product which we believe to be a winner. We intend to keep you inform of the amount of these expenditures throughout the year but we will not adjust our earnings. As we look forward to fiscal 2016 and beyond, we remain confident of our ability to achieve the financial targets that we have been communicating. We, however, remain somewhat cautious this year on the timing of some of those synergies, as we enter the most challenging yet most rewarding phase of our integration of SGK. Starting in January, we will begin the rollout of a significant component of our ERP solution, which is a driver of the large portion of the remaining synergies. Similarly with regard to Aurora, as we've communicated in the past because of the potential for these synergies during the early part of integration, we have remained cautious regarding the near-term impact of this acquisition. Also, during 2016, we are also planning to make a -- to make permanent a portion of our bank revolver debt, which will increase our interest expense but will add considerable stability to our capital structure. Finally, we expect another challenging year with respect to foreign currency translation, which will again temper our reported results. Given these challenges, we have set a cautious target for 2016, non-GAAP adjusted EPS of at least $3.25. Let’s open up to questions right now.
  • Steve Nicola:
    Yeah. So at this time, we’d like to open the call to questions. 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 has had an opportunity to do so? Noah.
  • Operator:
    [Operator Instructions] Our first question is from Dan Moore with CJS Securities. Please go ahead.
  • Robert Magic:
    Good morning. This is actually Robert Magic filling in for Dan.
  • Joe Bartolacci:
    Good morning, Robert. What’s your outlook for organic growth in Schawk’s legacy business over the next four to six quarters and given the market has generally been soft do you see that turning at all? And lastly, what are your goals for increasing share beyond just market growth?
  • Joe Bartolacci:
    Well, from an organic growth in SGK, the challenges are the economies in which we operate. In U.S., we see a very soft market, part of that could be because of impending regulation implementation and part of it could just be the economy. So, we’re cautious with respect to our growth but we expect to begin to take some share. We’ve had some good success on a couple of accounts, particularly in the U.K. where we landed some new business and there is other opportunities we’re looking at as we speak. So, we think that over time, our commitments to the growth in that division will be met.
  • Robert Magic:
    Great. And can you update us on the trends in memorialized cremation? And perhaps talk about how attitudes you’re changing amongst the funeral home directors and cemetery operators towards those products?
  • Joe Bartolacci:
    Well, the migration towards cremation continues to grow. The fact of the matter is that we’re starting to see the growth in the total number of deaths in the United States beginning to trend. So, as the total number of debts continued to grow, we expect most if not all of that growth to go to cremation. The change is that we’re starting to finally see more effort on the part of our funeral homes and our cemetery in terms of memorializing those deaths. So, we don’t think that’s a quick change. But we’ve been communicating for a while that we believe casketed, in-ground burial deaths will remain relatively flat in the near-term as deaths grow and end up in cremation. The opportunity lies in memorializing those cremation deaths and we think that will start to turn as well.
  • Operator:
    And next, we go to Jamie Clement with Macquarie. Please go ahead.
  • Jamie Clement:
    Steve, Joe, good morning.
  • Joe Bartolacci:
    Hi, Jamie. Good morning.
  • Jamie Clements:
    Joe and I guess, Steve, maybe both of these are high. I was a little confused in some of the prepared remarks about investments in the Graphics business. Obviously, there is the ERP implementation. But I think you’ve also referred some new product investing that kind of thing. Are those part of the same project, or those two separate things, can you give me a little bit more clarity there?
  • Joe Bartolacci:
    Sure. There’s a couple of different investments going on. The first one is new product development in automations where we said that we incurred somewhere near $4.7 million worth of development costs that we’re not calling out. That is well beyond what we would call normal R&D expense in that division. We think that new product development hasn’t lagged and we’ll continue to spend and continue to inform you and our guidance going forward anticipates a similar level of R&D expense in that division.
  • Jamie Clement:
    Joe, what exactly does that do for customers?
  • Joe Bartolacci:
    I mean, we’re not ready to talk about that thing.
  • Jamie Clement:
    Okay.
  • Joe Bartolacci:
    But we are happy to talk about it very, very clearly in about 18 months.
  • Jamie Clements:
    Got it.
  • Joe Bartolacci:
    But for right now -- but there are some other investments. So, for example, on the SGK Brand Solutions side we did launched two new facilities. We ended up partnership in Nigeria especially tobacco industry, as well as open a new facility outside of Moscow to service that, again, the tobacco industry in that part of the world. Those are areas of the world where tobacco is still very, very prevalent and given a relationship with some of the premier tobacco companies in the world we think that’s the way.
  • Jamie Clements:
    No. Joe, historically, when you all talked about the graphics imaging business and this is before the SGK acquisition? I think you all had over -- over the long period of time you’d said a good long-term margin target for that business was about 15%? Now you’re consolidating Merchandising Solutions with that business, plus you have Schawk, plus you have the SGK synergies, all that kind of stuff? Is 15% the light long-term margin? I mean, long-term, I’m not talking about this year or even next year, but long-term target for that segment or can you even be higher than that?
  • Steve Nicola:
    Well, Jamie, I’ll take the first, I’ll answer the first piece of that. Part of the challenge in near-term is going -- with operating margins are going to be the intangible amortization expense…
  • Jamie Clements:
    Sure.
  • Steve Nicola:
    … the acquisition. But if you look at that business on an EBITDA basis, pre-corporate charge adjusted EBITDA basis, we are actually currently operating in the mid-teens already.
  • Jamie Clements:
    Right. So, I mean, just, not to put words in that, but, Steve, I think, for the quarter you were, I think, shade below 12%, plus you’ve got more synergies coming from SGK and in North American market it isn’t really growing. So, I mean is -- I mean versus where you all are running right now even giving affect to intangible amortization? I mean, is there another 200 or 300, 400 basis points theoretically in three to five years?
  • Steve Nicola:
    We think that’s where it is Jamie.
  • Jamie Clements:
    Okay.
  • Steve Nicola:
    In fact, there is probably $0.02 -- just 2% just in the amortization and another $0.01 or $0.02 out of corporate allocation as we go forward.
  • Jamie Clements:
    Okay.
  • Steve Nicola:
    So mid to high-teens.
  • Jamie Clements:
    Okay. And then the last question, you touched on this briefly, Joe. Pending set of regulations in packaging? Can you give us an update of where you see that process and kind of what your conversations with your customers look like? It sounds like that may kind of be coming a little bit later and maybe some of us would have thought nine to 12 months ago?
  • Joe Bartolacci:
    Yeah. I mean, as you know, we do not control stock.
  • Jamie Clements:
    Sure.
  • Joe Bartolacci:
    Right now we are -- the conversations we’re beginning to have with our clients around this time in United States are that that we expect to start to see some things towards the end of calendar ’16.
  • Jamie Clements:
    Okay.
  • Joe Bartolacci:
    And we’re currently expecting completion to be sometime in 2018.
  • Jamie Clements:
    Okay.
  • Joe Bartolacci:
    About two-year period.
  • Jamie Clements:
    Okay. And then the last question is Aurora had I think a bigger brand nationwide than Milso did some years ago. How are you all planning on specifically working your merchandising display unit at the funeral home level with Aurora now part of the Matthews’ mix? Are those two brands going to be separate or you are going to combine, how is that going to work?
  • Joe Bartolacci:
    You’re very astute there, Jamie, because what we’ve -- for purpose of the market, we try to merge the two brands together and we call ourselves Matthews Aurora funeral products. Aurora had a fantastic brand name recognition. And over the course of the next 24 to 36 month, we’ll be cautious in terms of our integration, making sure we satisfy and retain our customers around the United States and allowing them to get what they’re looking for. So the migration to a single product line will be slow and with the participation and acceptance of our customers while we do that.
  • Jamie Clements:
    Okay. Very good. Thank you all for your time as always.
  • Operator:
    [Operator Instructions] Our next question is from David Stratton with Great Lakes Review. Please go ahead.
  • David Stratton:
    Good morning.
  • Joe Bartolacci:
    Good morning, David.
  • David Stratton:
    Quantify the interest expense that you expect with the permanent portion of your revolving credit line?
  • Joe Bartolacci:
    Well, just to elaborate that a little bit, what we talked about in general is taking our debt structure and moving it towards -- moving it in thirds to where we keep a third in floating interest rates. We keep a third with fixed interest rates through later derivatives like you see on our balance sheet and our footnotes today. And then to move a third of our debt into our more permanent vehicle. And right now we see those interest rates maybe a little higher this week as the market moves but those interest rates in general for us somewhere in the 5.5% to 6% range. So if you compare that to our current floating rate of 2.4% for approximately a third of our debt, you can understand the potential impact.
  • David Stratton:
    Got you. Thank you. And then also just out of curiosity, last time I believe you mentioned that you are seeking ways to recover some of the money stolen? And has there been any progress on that either to insurance or recovering from the individual?
  • Joe Bartolacci:
    We expect to recover all of that money, pretty much all of them over the course of next 12 to 24 months between insurance and from the individual themselves.
  • David Stratton:
    All right. Thank you.
  • Joe Bartolacci:
    Sure.
  • Operator:
    And there are no further questions.
  • Joe Bartolacci:
    All right. Thank you. Well, we want to thank everyone for participating in our call this morning. And we look forward to our first quarter fiscal 2016 earnings release and conference call in January. Have a great day.
  • Operator:
    Ladies and gentlemen, this conference will be available for replay after 11 AM today through midnight on Tuesday, December 1st. You may access the AT&T executive replay system at anytime by dialing area code 320-365-3844 and entering the access code 373117. Those numbers again are 320-365-3844, access code 373117. That does conclude our conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.

Other Matthews International Corporation earnings call transcripts: