Matthews International Earnings Call INSIGHTS: ERP System Benefits, Looking For Death Rate Stability
On Friday, Matthews International Corporation Class A (NASDAQ:MATW) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.
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ERP System Benefits
Daniel Moore – CJS Securities: Can you perhaps quantify the additional non-cash charges expected in Q4 related to the surge that you described and are those excluded in you updated non-GAAP guidance?
Steven F. Nicola – CFO, Secretary and Treasurer: Dan, yes, those numbers are excluded in terms of our non-GAAP number for the year and we are not in a position to quantify those yet today, we are actually still evaluating the extent of the program and the cost of the program.
Daniel Moore – CJS Securities: With regard to the ERP system, maybe give us little bit more color around the surge, what is your confidence around timing of resolving some of the issues in productivity that you had mentioned Joe?
Joseph C. Bartolacci – CEO: Well, as I said in my comments, the reality is that we are significantly better at satisfying our customer needs than we were before. So we’re improving everyday as we move forward. What we’re doing today and what we realize with our implementation of the ERP is the complexity of our products has caused us to be slower in the implementation of the process as it relates to what we’ve installed. We’re expecting much of the automation that we had anticipated putting into the place over the next 12 to 18 months will be in place by the end of the calendar year and that we’ll begin to see that normalcy return by the end of the first quarter slightly move forward into the second. So, we’re pretty confident what we’re doing. We had this plan as part of where we were going. We did not expect to take this long to become efficient but today it is stable, it is operating effectively. It’s just a lot more expensive to get it through (indiscernible).
Daniel Moore – CJS Securities: Following up the last one I’ll jump back in queue. Maybe remind us some of the benefits and the opportunities that the ERP system enables you to explore once fully implemented?
Joseph C. Bartolacci – CEO: Well frankly Dan one of the key to this whole implementation is to have a better information to be able to augment our processes. We’re very, very, very excited about the opportunities they have presented to us with our e-Services offering. The e-Services offering will basically automate a lot of the design tools and go directly to shop. Much of the cost goes through with producing the product and frankly a lot of the errors and problems that are created through are in the number of hand touched processes we have to go through to get from order to shop. So, we expect there is going to be significant improvement both from the operating efficiency standpoint, but also on the front end as we begin to market through our service, a more elaborate, more effective marker. Unfortunately the burden is right now being borne by our Bronze business. We see this as an opportunity throughout our organization, just the first.
Looking For Death Rate Stability
Clint Fendley – Davenport: I wondered if you had an idea how much the cascaded death rate was down specifically in the quarter.
Joseph C. Bartolacci – CEO: We think it’s going to be the mid-single digits five or so, that’s our estimate at this point in time maybe somewhere between 4.75 and 5.25.
Clint Fendley – Davenport: I wondered you commented in the opening remarks about your sales to independent distributors being down very significantly, I wondered you believe that’s happening.
Joseph C. Bartolacci – CEO: It’s directly related to my comment on aggressive pricing in the marketplace. Essentially as the manufacturer, we are able to respond directly to aggressive pricing in the marketplace and match, independent distributors and we have a fairly significant number of those out there right now, are much more tied to a limited margin. Therefore they are not able to respond as quickly or as effectively in a price sensitive market. We are developing plans as we speak to be able to address that with our distributors and participate in that, and we hope to see the benefit of that going forward. Today we are above 80% direct.
Clint Fendley – Davenport: How do you think that the sale of Aurora will change the competitive dynamic in the industry and the impact specifically on pricing?
Joseph C. Bartolacci – CEO: Aurora has generally been a very good competitor. So, I don’t think it’s going to have a significant impact on pricing. My understanding is that they are actively looking to roll up a lot of the remaining businesses that are out there. We’ve had some information to that effect. So, we’re hoping to see more disciplined brought to the market.
Clint Fendley – Davenport: Just the last question here sort of bigger picture. I know you guys referenced in the release that you believe the business can return to traditional levels of growth after some of the short-term pressures subside. Can you may be help us understand how you are able to get to that growth and obviously, a lot of things have changed in the industries that you serve both with regard to the consumer and then also the competitive dynamic. So, may be just a view to the roadmap of what had been kind of a very consistent level of 10% to 15% earnings growth for the Company and how you might be able to achieve that and if it’s possible within may be two years, I mean what the timeframe might be in order to get back to that?
Joseph C. Bartolacci – CEO: The reality is we need stabilization in death rates. If we can get a stabilization in the death rates, we’re pretty confident we can achieve our standard model for achieving our growth. Historically, we’ve grown mid single-digits, 4% to 7% organically. We added to that with 4% to 5% of acquisition and added our share buyback to get us over that 10% to 12% every year for the last several years. We don’t see that as a change in our model. We continue to have plenty of opportunities both in our strategy of expanding our granite side of our business and continuing to improve on our casketed side of the business. We have great hopes for what we think is going to be a wonderful took with our (e-services) to continue to reduce cost but also to sell-up and there remains plenty of opportunities to acquire, particularly in our European businesses for the graphic side. So, we don’t see a change in that, a lot of these things are outside of our control, we can’t – the currency is going to be what the currency will be, and the economy will be the same. So, we need some stability and that’s what we have lacked for the several years. Also, one thing that we were hoping, frankly, Clint is, we thing that there is a longer term downward trend in our copper costs. We are not certain of that, but every indication is there is enough capacity coming online to take a lot of the pressure off that we are seeing on the copper side. As you have heard from us in the past, we are currently experiencing and we continue to experience despite some of this drop in the metal, we are currently experiencing record metal price at a time when unfortunately due to our own difficulties in implementing the ERP we have not been able to raise our prices until this quarter.
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