Steven Nicola - Chief Financial Officer, Treasurer and Secretary Joseph Bartolacci - President, Chief Executive Officer and Director.

Bob Labick - CJS Securities Liam Burke - Wunderlich Jason Rodgers - Great Lakes Review.

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..

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 11:59 PM, August 14, 2015. We have posted on our website, which is www.matw.com, the third quarter earnings release and financial information we will discuss this morning. On the top of our homepage, under the Investor tab, click on Investor News to access the earnings release.

For the quarterly financial data, click on Financial Reports to access the information under the section, Matthews International Quarterly Reports. The documents are presented in a PDF file format.

Before beginning the discussion, at the advice of legal counsel, I have been advised to read the following disclaimer as it pertains to forward-looking statements. Any forward-looking statements in connection with this discussion are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve known and unknown risks and uncertainties that may cause the company's actual results in future periods to be materially different from management's expectations.

Although the company believes that the expectations reflected in such forward-looking statements are reasonable no assurance can be given that such expectations will prove correct.

Factors that could cause the company's results to differ from those discussed today are set forth in the company's Annual Report on Form 10-K and other periodic filings with the SEC.

In addition, please note that the balance sheet, income statement and cash flow information provided today are preliminary data, since our quarterly report on Form 10-Q for the quarter ended June 30, 2015, is not due to be filed with the SEC until August 10, 2015. To begin the conference, I'll review the financial results for the quarter.

Joe will then provide general comments on our operations. Following that, we will open the discussion for questions. For the quarter ended June 30, 2015, the company reported earnings of $0.70 per share compared to $0.69 per share a year ago.

On a non-GAAP basis, the company's adjusted earnings per share were $0.88 for the current quarter compared to $0.88 a year ago. The net amount of these non-GAAP adjustments was $0.18 per share for the fiscal 2015 third quarter and $0.19 for the same quarter a year ago.

As we anticipated a significant portion of the 2015 non-GAAP adjustments included cost and other charges in connection with the integration of Schawk, Inc. or SGK. In our earnings release yesterday, we included a reconciliation between GAAP and non-GAAP earnings per share.

The other non-GAAP adjustments in our fiscal 2015 third quarter earnings included cost in connection with the pending acquisition of Aurora Casket Company and a gain on the buyout of an installment payment obligation related to a previous settlement of an SGK pension obligation.

In addition, third quarter non-GAAP adjustments included a loss related to a theft of funds identified during the quarter.

In our year-to-date earnings for fiscal 2015, we have three additional non-GAAP adjustments, which included charges related to our ongoing cost reduction initiatives, the first quarter litigation settlement net of costs and the write-off of certain trade names in the second fiscal quarter.

Consolidated sales for the fiscal 2015 third quarter were $365 million compared to $280 million for the same quarter a year ago. The acquisition of SGK contributed $105 million to the company's sales increase. Changes in foreign currency rates unfavorably impacted sales by $17 million compared to a year ago.

In addition, the third quarter last year included the benefit of a significant merchandising display project and a waste incineration project. Consolidated sales for the nine months ended June 30, 2015, were $1.1 billion compared to $757 million for the same period last year. Year-to-date SGK sales were $311 million.

Currency changes unfavorably impacted sales by $39 million on a year-to-date basis. Consolidated operating profit on a GAAP basis for the quarter ended June 30, 2015, was $27.4 million compared to $31.8 million a year ago, reflecting the impact of acquisition related and other charges.

These charges totaled $13.8 million in the current quarter compared to $5.5 million a year ago. In addition, year-over-year comparability was impacted by a significant increase in intangible amortization, resulting from the acquisition. Intangible amortization was $4.7 million for the current quarter compared to approximately $900,000 a year ago.

Year-to-date operating profit for the current period was $72.3 million compared to $67.1 million last year. Acquisition related and other charges totaled $25.4 million in the current year compared to $14.1 million last year. Intangible amortization was $13.9 million for the current year compared to $3.3 million a year ago.

Consolidated adjusted EBITDA for the quarter ended June 30, 2015, was $59 million compared to $48.7 million a year ago, representing an increase of $10.3 million or 21%. Year-to-date consolidated adjusted EBITDA as of June 30, 2015, was $154 million compared to $117 million a year ago, representing an increase of $37 million or 32%.

The quarter and year-to-date increases resulted primarily from higher adjusted operating profit and the SGK acquisition. A reconciliation of adjusted EBITDA is provided in the quarterly financial data posted to our website.

Beginning this fiscal year, the company realigned its operations in the three reporting segments, SGK Brand Solutions, Memorialization and Industrial. The SGK Brand Solutions segment is comprised of the graphics imaging business, including SGK and the merchandising solutions operations.

The Memorialization segment is comprised of the company's cemetery products, funeral home products and cremation operations. The Industrial segment is comprised of the company's marking and automation products and fulfillment systems.

Sales for the SGK Brand Solutions segment increased to $205 million for the current quarter compared to $116 million for the same period a year ago, primarily resulting from the incremental sales related to the acquisition of SGK. In addition, the segment reported sales growth in its European markets.

Changes in foreign currency rates had an unfavorable impact of approximately $13 million on the segment's current quarter sales compared to a year ago. The segment's year-to-date sales were $598 million compared to $306 million for the same period last year.

The SGK Brand Solutions segment reported operating profit of $5.3 million for the current quarter compared to operating profit of $6.6 million for the same period a year ago.

Excluding charges related to the acquisition integration and cost structure initiatives from both periods, the segment reported operating profit of $17.8 million compared to $10.7 million last year. The year-over-year increase primarily relates to the SGK acquisition and sales growth.

In addition, the prior quarter included the benefit of a significant merchandising display project. Year-to-date the segment's operating profit, excluding charges related to the acquisition integration and cost structure initiatives, was $37.8 million compared to $8.2 million last year.

Operating profit for this segment also reflects intangible amortization expense of $4.1 million for the current quarter compared to approximately $200,000 for the same quarter last year. Year-to-date this intangible amortization expense was $12 million in the current period compared to $1 million last year.

The significant increases resulted from the incremental amortization in connection with SGK acquisition. Memorialization segment sales for the fiscal 2015 third quarter were $126 million compared to $138 million for the same quarter a year ago. The third quarter last year included the benefit of a significant waste incineration project.

Changes in foreign currency rates had an unfavorable impact of $3 million on the segment sales. The segment reported higher sales of memorial products during the current quarter. In addition, sales of cremation equipment in North America increased in the recent quarter. However, European equipment sales remained slow.

Year-to-date sales for the Memorialization segment were $372 million at June 30, 2015, compared to $381 million for the same period a year ago. Operating profit for the Memorialization segment for the fiscal 2015 third quarter was $17.7 million compared to $22.4 million for the same quarter a year ago.

The third quarter last year included the benefit of a significant waste incineration project. The current quarter benefited from higher sales of memorial products and improvements from the segment's recent cost structure initiatives.

Year-to-date operating profit for the Memorialization segment as of June 30, 2015, was $57 million compared to $52 million for the same period last year. The increase primarily reflected higher year-to-date sales of memorials and casket and a benefit of a gain from a litigation settlement recorded in the company's fiscal 2015 first quarter.

The industrial segment reported sales of $34.1 million for the quarter ended June 30, 2015, compared to $25.7 million for the same quarter last year. The segment reported year-to-date sales of $88 million at June 30, 2015, compared to $70.1 million for the same period last year.

The increase has primarily resulted from higher sales of warehouse control systems and increased unit volume of marking products and related inks. Operating profit for the industrial segment was $4.4 million for the current quarter compared to $2.8 million for the same period last year.

The segment's operating profit for the nine months ended June 30, 2015, was $9.4 million compared to approximately $5.8 million a year ago. The operating profit improvement resulted primarily from the benefit of the segment's sales growth.

In addition, cost related to the segment's research and development projects increased approximately $800,000 and $1.3 million respectively for the current quarter and year-to-date periods over the same period last year.

A summary of sales and operating profit by segment including non-GAAP adjustments for the quarter and fiscal year-to-date periods are posted on our website for your reference. Our fiscal 2015 third quarter consolidated operating margin was 7.5% of sales compared to 11.4% a year ago.

On an adjusted basis our operating margin was 11.3% for the current quarter compared to 13.3% last year. Our consolidated operating margin for the nine months ended June 30, 2015, was 6.8% of sales compared to 8.9% a year ago. On an adjusted basis our operating margin was 9.2% for the current period compared to 10.7% last year.

The operating margin declines primarily reflected the impact of incremental intangible amortization expense from the SGK acquisition. The company's consolidated adjusted EBITDA was 16.2% of sales for the fiscal 2015 third quarter and 14.6% year-to-date.

Gross margin for the quarter ended June 30, 2015, was 37.1% of sales, which was relatively consistent with a year ago. Gross margin for the nine months ended June 30, 2015, was 36.7% of sales compared to 36.4% a year ago. Selling and administrative expense for the current quarter was 29.6% of sales compared to 25.9% for the same quarter last year.

The increase primarily resulted from the impact of acquisition-related cost and incremental intangible amortization expense. Year-to-date selling and administrative expense for the current period was 29.8% of sales compared to 27.6% for the same period last year.

Investment income for the fiscal 2015 third quarter was $58,000 compared to $456,000 a year ago. Year-to-date investment income was $1 million for the current period compared to $1.7 million last year. The year-over-year changes primarily reflected investment performance on assets held in trust for certain of the company's benefit plans.

Interest expense for the current quarter was $4.8 million compared to $2.8 million for the same period last year. Interest expense for the nine months ended June 30, 2015, was $15.1 million compared to $8.2 million a year ago. The increases resulted from additional borrowing in connection with the SGK acquisition.

Other income deductions net for the fiscal 2015 third quarter represented an addition to pre-tax income of $9.8 million compared to a deduction of $899,000 a year ago.

Other income deductions net for the first nine months of the current fiscal year represented an addition to pre-tax income of $6.4 million compared to a deduction of $2.8 million a year ago.

The income for the current period resulted from a pre-tax gain on the buyout of an installment payment obligation in connection with the previous element of an SGK pension obligation. Other deductions also included the respective period portions of the theft loss.

Other income and deduction is generally included among other items, banking-related fees and the impact of currency gains or losses on certain intercompany debt. Net income from non-controlling interests for the current quarter resulted in the deduction from income of $74,000 compared to $376,000 a year ago.

Year-to-date net income for non-controlling interest for the current year resulted in additional income of $189,000 compared to a deduction of $286,000 last year. The year-over-year changes primarily reflect the minority interest portion of losses for our European cremation operations.

The company's effective income tax rate for the nine months ended June 30, 2015, was 28.3% of pre-tax income. The effective tax rate was 34.5% for the fiscal year ended September 30, 2014.

The effective rate for the fiscal 2015 year-to-date period included the benefit of the utilization of certain tax attributes resulting from organizational restructuring during the fiscal 2015 first quarter and favorable adjustments in the third quarter with the corporate income tax return filings.

Excluding these benefits, the company is currently estimating an effective tax rate for fiscal 2015 of 32%. The effective tax rate last year reflected the unfavorable impact of non-deductible acquisition-related cost. At June 30, 2015, the company's consolidated cash was $70 million compared to $63 million at September 30, 2014.

Accounts receivable at the end of the current quarter totaled $268 million compared to $283 million at the end of fiscal 2014. Consolidated inventories at June 30, 2015, were $143 million compared to $153 million at September 30, 2014.

Long-term debt at the end of the current quarter, including the current portion, was $688 million compared to $729 million at September 30, 2014. The reduction resulted primarily from repayments on the company's domestic revolving credit facility.

At June 30, 2015, $655 million of the outstanding debt balance represented borrowings under our domestic revolving credit facility at an average interest rate of around 2.5%. Last year the borrowing capacity of this facility was increased to $900 million with a maturity date of July 2018 to accommodate the SGK acquisition.

Additionally, as we previously disclosed, we received a claim from a customer and funded a draw on a letter of credit in an amount of $13 million.

The company has assessed the customer's claim to be without merit, and as such pursuant to an action initiated by the company, a court order has been issued requiring these funds to ultimately be deposited with the court until the matter is resolved. The company had approximately 33 million shares outstanding at June 30, 2015.

During the fiscal 2015, the company has purchased approximately 213,000 shares under its share repurchase program at a cost of approximately $10 million. At the end of the current quarter approximately 753,000 shares remained under the current share repurchase authorization.

Depreciation and amortization expense for the quarter and nine months ended June 30, 2015, was $15.2 million and $47.1 million respectively compared to $9.1 million and $28 million respectively a year ago. The increases resulted primarily from the acquisition of SGK and the related intangible amortization.

Capital expenditures for the quarter and nine months ended June 30, 2015, were $15.1 million and $34.7 million respectively compared to $8.9 million and $18.8 million respectively a year ago.

The increases primarily resulted from the SGK acquisition and integration, capital expenditures by our Revere operations in Europe and purchases of casket delivery vehicles. During the recent quarter, we identified a theft of funds from the company by an employee that occurred over a multi-year period through May 2015.

The cumulative amount of the loss has been determined to be approximately $14.8 million. The amount of loss in any prior period was not material to any prior period financial statements.

However, because of the significance of the cumulative out-of-period adjustment to the fiscal 2015 third quarter, the prior period financial information has been revised. The company expects to recover the loss, primarily through insurance and recovery of assets and is working with law enforcement agencies.

The company's Board of Directors, through its Audit Committee, immediately initiated an independent investigation of this matter and has retained independent legal counsel and accounting support to assist with the investigation. No members of management have been identified as participants to this incident.

This matter has been determined to constitute a material weakness in internal control, as defined under Rule 12b-2 of the Securities Exchange Act of 1934, as amended. In response to this assessment, the company has taken immediate action and implemented changes to the design of the controls.

As reported in our press release yesterday, consolidated earnings for fiscal 2015 third quarter were in line with our expectations and we are still on track toward our target for the fiscal year. The SGK integration continues to progress well, and we remained confident of our synergy objectives.

The cost associated with this integration will also impact our results for the fiscal 2015 fourth quarter and if consistent with our practice, we will identify these costs. In addition, in June we signed an agreement for the acquisition of Aurora Casket Company.

The transaction, which is subject to regulatory approval, is expected to close this quarter. Finally, the Board last week declared a dividend of $0.13 per share on the company's common stock. The dividend is payable August 17, 2015, to stockholders of record August 3, 2015. This concludes the financial review.

And Joe will now comment on our operations..

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..

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

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.

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..

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?.

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..

Our next question comes from Liam Burke from Wunderlich..

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?.

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..

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?.

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..

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

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

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

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

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..

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

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..

Our next question comes from Dan Moore from CJS Securities..

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?.

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..

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..

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

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..

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..