Ladies and gentlemen, thank you for standing by. Welcome to the Matthews International Third Quarter Results Conference. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's conference, Mr. Steve Nicola. Please go ahead.

Thank you, Earl. Good morning. I'm Steve Nicola. On the call with me today is Joe Bartolacci, President and CEO of Matthews. Today's conference call has been scheduled for 1 hour, and will be available for replay at approximately noon today. To access the replay, please dial 1 (320) 365-3844 and enter the access code 253400. The replay will be available until 11:59 p.m., August 3, 2012. 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 period…

Thank you, Steve. Good morning. Our fourth (sic) [third] quarter results were a disappointment for us. As many of you are aware, we are not accustomed to not meeting our expectations, and we take those commitments seriously. Unfortunately, throughout the quarter, certain events that we had expected to occur did not, while certain events that we did not expect to occur, did. Let me summarize our results for you. First, we continue to struggle with our ERP implementation in the Cemetery Products division. We had anticipated better throughput in our plants and improved efficiency in our front-end processes. But unfortunately, neither result has been achieved yet. We have significantly improved customer satisfaction, particularly with our more standard products, but we continue to incur higher labor costs and other inefficiencies in our front-end order entry area, which has caused us to be inefficient throughout the plants. We initiated a surge effort in this division, which essentially accelerates many of the process improvements that we had anticipated would occur over the next 12 to 18 months. The surge is expected to bring this business back to normal more quickly and move us materially past our service levels and efficiencies, which we had prior to the ERP implementation. We anticipate another quarter of one-time cost associated with this surge and expect the business to return to normal during the first part of fiscal 2013. Second, during our last quarterly call, we indicated that business in Europe was beginning to slow, consistent with the overall economic turmoil in Europe. We had experienced a decline in volume in our European businesses prior to this quarter, which, prior to this quarter, has been relatively stable. Slower order volumes at all of our Graphics businesses have impacted our results beyond our expectations. We do not believe that…

[Operator Instructions] Our first question comes from Daniel Moore.

Can you perhaps quantify the additional noncash charges expected in Q4 related to the surge, as you described? And are those excluded in your non-GAAP -- updated non-GAAP guidance?

Dan, yes. Those numbers are excluded in terms of our non-GAAP number for the year, and we're not in a position to quantify those yet today. We're actually still evaluating the extent of the program and the cost of the program.

Okay. And with regard to the ERP system, I guess, what is your -- maybe give us a little bit more color around the surge. What is your confidence around timing of resolving some of the issues and productivity that you had mentioned, Joe?

Well, as I said in my comments, the reality is that we are satisfying -- that we're 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 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 install. We're expecting that much of the automation that we had anticipated putting into place over the next 12 to 18 months will be in place by the end of the fiscal -- by the end of the calendar year, excuse me. And that we'll begin to see that normalcy return by the end of the first quarter starting to move forward into the second. So we're pretty confident in what we're doing. We had this planned as part of where we were going. We did not expect it would 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 today than we had anticipated.

And then following up, I'll ask once more and then 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.

Well, frankly, Dan, one of the keys to this whole implementation is to have better information to be able to automate our processes. We are very, very, very excited about the opportunity that's 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 costs associated with producing a product, and frankly, a lot of the errors and problems that are created through are due to the number of hand-touched processes we have to go through to get from order to shop. So we expect it's going to be significant improvement, both from the operating efficiency standpoint, but also on the front-end, as we begin to market through our e-services in more elaborate, more effective marker. And by the way, unfortunately, the burden is right now being borne by our Bronze business. We see this as an opportunity throughout the organization. It's just the first.

Our next question comes from Clint Fendley from Davenport.

I wondered if you had an idea how much of the casketed death rate was down, specifically in the quarter.

We've said it's going to be the mid single digits, 5 or so. That's our estimate at this point in time, maybe somewhere between 4.75 and 5.25.

Okay. And I wondered, you commented in the opening remarks about the -- your sales to independent distributors being down very significantly. I wondered why you believe that's happening.

It's directly related to my comment on aggressive pricing in the marketplace. I think, essentially, as the manufacturer, we're 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're not able to respond as quickly or as effectively in a price-sensitive market. We're developing plans, as we speak, to be able to address that with our distributors and participate in that. And we'd hope to see the benefit of that going forward. Today, Dan (sic) [Clint], we're about 80% direct.

80% direct, okay. And how do you think the sale of Aurora will change the competitive dynamic in the industry and the impact on -- specifically on pricing?

The impact on pricing, Aurora has generally been a very good competitor. So I don't think it's going to have 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 discipline brought to the market.

Okay. And just 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 these short-term pressures subside. Can you maybe 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 dynamics. So maybe 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 maybe 2 years -- I mean, what the timeframe might be in order to get back to that?

Clint, the reality is that we need a stabilization in the 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 acquisitions and added our share buyback to get us over the 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 Casket side of the business. We have great hopes for what we think is going to be a wonderful tool with our e-services to continue to reduce costs, but also to sell up. And there remains plenty of opportunities to acquire, particularly in our European businesses for the Graphics 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've lacked for the last several years to be able to do that. Also, one thing that we were hoping frankly, Clint, is we think that there's a longer term downward trend in our copper costs. We're not certain of that, but every indication is there's enough capacity coming online to take a lot of the pressure off that we're seeing on the copper side. As you heard from us in the past, we are currently experiencing, and we continue to experience, despite some drop in the metal, we are currently experiencing record metal prices. 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.

Our next question comes from Liam Burke from Janney Capital Markets.

Either Joe or Steve, your Casket business, you had mentioned that as you shifted -- you integrated acquisitions, you had to carry double the inventory. Have you been able to work out that -- work down that excess inventory on the Casket side?

Yes, Liam, we've taken about $5 million out so far. Our target is about $15 million over the course of the next several years. And this ERP implementation, frankly, will be a substantial part of the improving that for us. But we expect to drop assets out, particularly on the inventory side.

Okay. And you had, on Caskets still or Funeral Home Products, I guess, you had a positive operating margin year-over-year on lower sales levels. You've talked about productivity initiatives. Do you see that trend continuing?

As we've always said, we believe that we can get this business to the mid-teens, as an operating profit. Unfortunately, had we not had some of the pricing and volume issues, we'll be further along that path today. But our expectations, Liam, have not changed.

Okay. And on the Cremation business, you saw system sales up. Are a lot of them in Europe, especially the new filtration or are they the typical old systems?

Unfortunately, Liam, I mean, I guess, fortunately, because the currency has gone the other way. But unfortunately for us, most of the growth has been in the U.S. Our team in the United States added some wonderful new products. And I mean to the extent you can find cremators exciting, they're exciting products. And we think that it will change our business going forward, including the model which we operate.

Okay. And just sticking on Cremation, I know this is a long cycle for you and a long-term project. But are you seeing any positive signs on memorialization of cremation? I know only a small percentage of cremations are actually memorialized. How are you seeing any potential in some of these Funeral Home programs that you've mentioned before?

Well, I can tell you that some of our larger customers, as I may have said possibly in the past, have now committed significant dollars to building capacity. I mean, one of the first things that have to happen is you have to have an offering at the cemetery to be able to put that. So we know that Stewart, for example, has done a fine job with a couple of properties that we helped them design. One particular I visited just a couple of weeks ago, which is far and beyond the kind of thing that we need to be seeing more in the United States. As they -- as the larger competitors or larger customers see success, we think that trend will continue.

And lastly, our last question comes from Greg Halter from Great Lakes review.

I just wanted to get a couple numbers straight first. Steve, I think you said the average share count was around 28 million for the quarter?

That was a -- 28 million is the end -- is the ending balance of shares outstanding, Greg. I think this is the way I look at it. The average share number -- diluted share amount for the quarter was about 28.2 million, though, we need to take into account the dilution and the way the new accounting rules work on earnings per share.

Okay. And also relative to the euro impact for the quarter, can you provide that on the sales operating income and EPS, or reiterate what you said, I think?

Yes. On the sales side for the quarter, it was $8.5 million. And for the operating profit side, I believe it was about $1 million.

I think you said $0.03 unfavorable EPS?

Yes, I'm sorry. Earnings per share impact was $0.03 unfavorable for the quarter and $0.04 unfavorable impact year-to-date.

Okay. And can you speak to the Granite side, how that's doing since you've made some acquisitions in that area?

Our recent addition of Everlasting in the South has proven to be a nice little addition for us. It's both a model change, as well as a geographic change for us. Their model is much more inside sales and strong telephonic support, and we're coupling that with our sales force in the Northeast and the Southeastern part of the United States because they are located within the Georgia area. We see that it's going well so far, although it's very, very, very early.

Okay. And would you expect to expand that model throughout the country as you grow that piece of the business?

We not only expect to expand the model, we think it's going to be a significant beneficiary of our e-services offering. There is nobody of any scale out there that are able to do what we're doing on the e-services side, especially on the stone, so we're expecting this to be a benefit.

Okay. And can you speak to order trends in the businesses where orders are important, maybe Graphics or Marketing Products and so forth?

I can tell you that in our -- interestingly enough, in our Graphics businesses, as we've said, we are predominantly a European business. We've seen a slowing, and that slowing has not changed at this point, and in the end of fourth quarter. On our Marketing Products businesses, I would tell you that we had one of our strongest quarters from an equipment sales side largely driven by new products and new things that we have developed, and not necessarily driven by the market. And why I say that is we have still not seen a return to normalcy on the Inc. side, which is an indicator of production. So that business has done a fine job of positioning itself in a difficult market for new markets to deal with new products and new opportunities. When we see a return to somewhat more normal construction in our traditional businesses, we expect significant improvement there.

Okay. And relative to the ERP system implementation, what is left to go on to that system?

What's left to go? This is it, for all practical purposes. Maybe the irony of it for us is, as you all know, we have many businesses. We've saved Bronze for last, and that had -- we rarely talked about our ERP implementation over the last 4 implementations we did. Unfortunately, our most important and most difficult one to install had the challenges that we're faced with, largely driven by the complexity of the business. And we produced 3 400,000 one item -- one-off pieces. And that's the challenge, and that has really slowed the implementation down for us from an efficiency standpoint.

And relative to the share repurchase, you've indicated there on the call earlier, that you expect, with your strong good cash flow generation, to be more active in the share repurchase. Is there a level, and I presume you may put some debt on as well or maybe not, but what kind of level of debt to capital you go to?

Greg, I think when we talked about being more aggressive, I think at the present time, our expectation is just to remain in the opportunistic mode that we've been in. Certainly, it will be based on price. Our good cash flow, that's continued and how we use that cash flow. So we really haven't thought of it in terms of where we would take our debt-to-equity ratios. It's really just going to take a more, call it, aggressive approach or a proactive approach as we see opportunities here in the next quarter or so.

All right, and one last one for you, again relative to the ERP system, we're going back to that. What level of confidence can us as analysts, investors, take away that you've made the progress that you're seeing and you expect to see the benefits now?

As we said earlier, we're not expecting great change in the fourth quarter here. So you will have an indication of that before we start to give guidance for 2013. But I can tell you that we have all hands on deck, and that we believe we've identified what changes need to be made. And we expect that by the time its made for our next quarter, you will have a very clear understanding on where we are.

And we have one final question that just popped up from Daniel Moore.

Just as far as Europe is concerned, if you look at the last few months, sequentially, are things getting worse with regards to the Graphics Imaging business, backing out currency, just the fundamentals, or is it sort of bouncing along the bottom?

We've been bouncing along the bottom for the last, I would say, 2 to 3 months. As we said, we saw a decline in the final part of the last quarter. That has pretty much levelized.

Okay. And then, lastly, is there anything mechanically keeping you from being in the market today or in a very short timeframe as far as share repurchases?

Not that I'm aware of. But Steve may know otherwise. I'm not -- I don't because I think mechanically.

And I'm not showing anybody else in the queue, sir.

All right, thank you, Earl. Well, we like to thank everyone for participating in the call this morning, and we look forward to our fourth quarter earnings release and conference call, which will be in November 2012. Thank you, and have a good day.

Ladies and gentlemen, this conference will be available for replay from 11:00 a.m. today through August 3, 11:59 p.m. You may access the AT&T Teleconference replay system at anytime by dialing and entering the access code 253400, and dial (320) 365-3844. That concludes our conference for today. Thank you for participating and using AT&T Executive Teleconference. You may now disconnect.