Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Matthews International Second Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference call over to your host, Chief Financial Officer, Steve Nicola. Please go ahead.

Thank you, Allan. Good morning. I'm Steve Nicola. Also on the call, with me, this morning is Joe Bartolacci, our company's President and CEO. Today's call has been scheduled for 1 hour, and we will be available for replay later this morning. To access the replay, dial 1 (320) 365-3844, and enter the access code 324027. The replay will be available until 11:59 p.m., May 6, 2014. We have posted on our website, which is www.matw.com, the second 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've 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…

Thank you, Steve. Good morning. Our second quarter results were in line with our expectations. Revenue challenges in our Cemetery Products and our Funeral Home Products division from a slower casketed death rate were offset by good margin expansion from our recent strategic initiatives. We are pleased with how these initiatives have taken hold and expect to see continued margin improvement over the coming quarters. Our Cremation Division continue to struggle with getting orders released to production, while our backlog in this division continued to be strong. Our recent investments in new incineration technology has opened the door to new possibilities, and has resulted in a $15 million incineration product in Saudi Arabia, which is scheduled to be delivered in the fourth quarter. We have several other projects in the works in this new area of our business, which we hope to also have some benefit from over the coming quarters. Our Packaging Graphics business saw increased reaping activity in our European businesses, which is expected to have a strong second half of the year, particularly from our tobacco customers. Similarly, our Marking and Fulfillment business saw very strong equipment orders and improving both quarters, which has historically indicated an uptick in an overall economic activity. Our Fulfillment businesses, which are project-based, had a slow quarter as a result of old projects coming to completion and new projects waiting to be begun. Recent wins in the Fulfillment business and expected continued strong equipment and ink sales gives us comfort for a very successful year in this division, as well. Our Merchandising business had a slow quarter, but we expect to have a very significant second half of the year with very large projects expected to be delivered before September 30. All in all, we are confident with our full year forecast, but we are cautious as usual. We have become more dependent on large projects, the timing of which, are not always in our control. Our near-term vision is good, and our ability to deliver on-time and profitably is also good, but shifts in the project delivery dates could impact the timing of our results. With regard to our recently announced acquisition of Schawk, our timing is progressing as planned. We recently received all the necessary antitrust approvals, and we expect the Schawk team to soon file their proxy with the SEC for their review. We are beginning in-depth integration planning today, and we are currently expecting to close on the transaction in the fourth quarter. With that, I'd like to open it up to questions.

[Operator Instructions] Allan?

[Operator Instructions] Our first question comes from the line of Daniel Moore with CJS Securities.

Can you elaborate a little bit on the strength you're seeing in order activity and backlog in Brand Solutions? You mentioned some pickup at equipment sales and Marking and improved ink sales. Are you seeing better capital spends? And outside of tobacco, what verticals are you seeing strength in that gives you confidence about the second half of the year?

That's a pretty complex question, but let me give you bits and pieces of that. The reality is, we've always said, we've said this to the market in the past. We saw the coming recession of both in '08 and the early 2000s from our Marking and Fulfillment business. And we're seeing the uptick coming out of it, as well. We think we're going to have pretty strong equipment sales for the full year. We had a very strong equipment sale for the first 6 months. And I would tell you that order activity on the Fulfillment side is also pretty good. So what we're seeing there and we expect to continue, based on the backlogs we have, is a strong -- I would call small capital market continuation of economy, as we expect. So that's good. On the European brand side, we did talk about our Graphics business, there's a couple of things that are going on over there. We mentioned in the past that there was a new regulations coming out in Europe that has some -- they are giving some of the players some time to get up to speed with the new labeling requirements. Very similar to our FDA requirements here. That, in of itself, it was picking up some activity. And we think that we're getting the briefings now that give us comfort at that looks like it's starting to turn. Tobacco is as expected. I think, Tobacco -- or the timing of some of the tobacco projects we had really is what did not give us a strong quarter in Graphics that we wanted, but I think that, based on what we see right now, tobacco will be very strong for the second half. But that is the result largely of some efforts --…

I appreciate it. And a follow-up, shifting over to the Memorialization side of business, how far down do -- did you see casketed deaths in the quarter. What are you seeing so far in April? And in memorials, do you expect cost of year-over-year growth, going forward, after you've -- given some potential pent-up demand after a really brutal winter?

Go ahead Steve.

Well, yes, just, I'll take the first part of that, Dan. We actually don't have an aggregate number that we're comfortable with because we're in various regions of the country, and it did vary by region. But needless to say, overall, I'm sure you folks see the same CDC data. It was down year-over-year.

Yes, and with regard to the backlog, it was a difficult winter. You don't place a lot of our Cemetery products during the winter months, especially when you have long cold one. But, I mean, the backlogs we're seeing are not tremendously, significantly higher than we would thought they would be. That could be timing. So at this point in time, we don't have that kind of visibility to tell you what the full year would look like, but we're not expecting any surprises.

We'll next go to the line of Liam Burke with Janney Capital Markets.

Joe, you talked about visibility in backlog in the second half on the Cremation side, and then you highlighted the Saudi Arabian order. In terms of the rest of the market, Europe and North America, how does the backlog look there on the Cremation?

We're starting to see more activity, but again, when I said we released to production, that's what I was referring to. Our U.S. business generally runs about a year's worth of backlog, and we're probably a little higher on that right now, just a little bit. And getting those orders released to production is not in our control. I mean, the operators need to have that ready, the facility ready, and all the regulatory permits available for them to do that. In Europe, I can tell you that it is still slow. We're not seeing a major pickup. Having said that, we don't expect Europe to be a drag on us, which it has been over the last couple of years.

Okay, great. And then on the Marking and Fulfillment, you talked about ERP orders being well, completing some and then pent-up for the second half of the year. How do they look on a year-over-year basis? I mean, are you seeing some new introduction as you have the combined warehouse management solution?

Yes. When you're saying ERP, you're referring to our warehouse control systems and the fulfillment side of the Marking and Fulfillment business. Our -- we expect our full -- sales rate to be in excess of that. Now the timing of -- [indiscernible] started the war in the end, some of that timing is not in our control. We have commitments in orders in-house, but whether folks are willing to take that is not necessarily in our control. The one thing that is different about that side of the business and this is -- as we approach the Christmas season, we expect that to slowdown, so that if we can't get orders installed, systems installed before the fourth quarter, we won't get it installed till the beginning of the year. So that's just the nature that, I mean, retailers do not -- or companies do not want us in their warehouses around Christmas time.

We have a question queued from the line of Clint Fendley with Newbridge Group.

Question on the new incinerator technology that you guys were talking about. You seem pretty bullish on this segment, going forward. I'm just wondering, will that materially change the investment that would be required for most of the funeral homes that don't currently own the equipment that might be considering an investment?

Clint, this is -- when we call it incineration, this is more industrial. So these are -- what we're talking about is anything from very small, portable incinerators for campsites for oil well drilling and shale gas drilling where you can't take -- it's too expensive to take the waste out and you burn it on site to huge $15 million projects like we're doing in Saudi Arabia today, the municipal waste disposal for a limited use. So no, this does not impact that side of the business from the funeral homes side, it just gives us a new avenue of revenue with similar technology, which is combustion.

Yes. And Clint, just to add to that, a little over year ago, maybe 2 years ago now, we purchased a small company in the U.K. In addition to the existing small company that we had, maybe 3 or 4 years ago, that not only did they have the technology for cremation equipment, but also waste incineration equipment, and this is where we've gotten the order in Saudi Arabia for the second half of the year.

And we're -- and as I said in my comments, they're still -- there's a lot of bids out there that could be significant impact. We're just not ready to call them wins yet.

Got it. That's an exciting development. So do we -- do you guys anticipate that the Saudi Arabia project will be completed by the end of the year, then?

Money is in hand, and it's our job to get it there. So we've got a pretty substantial deposit already, and the commitment is to get it there by September 30. So yes, we do.

One last question. I just wondered, you mentioned that the stock repurchases were curtailed and that did impact the quarter some. I'm wondering how active you guys are planning on being with your repurchases between now and the closing on Schawk?

It will still be limited between now and the closing but post-closing, we'll resume normal activity.

Yes, most of that has been through the advice of counsel that has limited us.

And we have a question from the line of Jamie Clement with Sidoti.

Joe, if you look at what was the Marking products business and is now the Marking and Fulfillment Systems business, particularly in light of the acquisition of Pyramid. What do you think, longer-term, the operating profit margin of that business should be? When you factor in the warehouse systems and those kinds of things and obviously, there's going to be some lumpiness to those order deliveries over time. But how do you think about profitability in that segment? And obviously, we know the ink and the consumables were high-margin pieces of business, but obviously, not necessarily high revenue dollar pieces of business, as for example, the warehouse business would be.

Yes, I mean, Jamie, our expectations and what we've seen out of those businesses early is consistent with our traditional margins in that business. We've always operated somewhere in the 15% to 17% range, and, we think, that is where our target is. Frankly, one of the areas, when we take a look at some of the pension cost, is being allocated there. We see that as a nice adjustment to getting there. Some of the strategic initiatives are just starting to take hold there. So, I think, 15% to 17% is a good number to count on long-term. But you are right, it is going to be lumpy though.

Yes. Okay. And then just a follow-up on the Cemetery Products side. With respect to winter weather, obviously, it's all -- I mean, it's a pain in the neck to be putting memorials into frozen ground. So how much business do you think may have been deferred into the June quarter from the March quarter, I mean, historically, the June quarter in the Bronze business before some of the acquisitions, it was obviously weighted towards the June quarter. So there was a natural delay in the business. But in this particular year, with the weather, I mean, should we -- I couldn't quite reconcile your comments. But should we see a little bit -- should we see less of a decrease than we saw in the second quarter here when we look at the third quarter?

We're actually projecting pretty good stability in that business, going forward, Jamie. Your comments are right. We would expect to see more coming out of the second half, and we'll see. We don't have that kind of visibility right now to be able to commit it, but you're right. We know that the weather has deferred that. I just came back from a trade show where I spoke with a lot of customers, small and large, who are feeling the same impact. So I would not be surprised to see a more normalized rate going for the next couple of quarters.

Okay. And last question, Steve. Just sort of a follow-up to Clint's question. On the share repurchase, what was the weighted average diluted share count for the quarters? Do you by any chance have that off the top of your head or in front of you?

Hold on just a second, but I believe, it was -- when you think about the effective weighted average, because we've got -- because of the way the earnings per share is calculated under the accounting rules, it gets a little bit complicated. But I would tell you the effective weighted average is about 27.5 million shares outstanding. Is the number that we used [indiscernible] 27.5.

We have a question in queue from the line of Scott Blumenthal with Emerald Advisors.

Joe, with regard to the industrial incineration opportunity, could you maybe characterize the overall opportunity, and give us an idea as to what you're currently looking at? I would imagine that if you're in the Cremation business and you're only dealing with funerals, that's a much, much, much smaller overall opportunity than if you're getting into industrial and municipal waste incineration.

We think there's good leg room in there Scott, to be honest, and we're just getting started. One of the reasons that we are having this success, I mean, the investment we made was around $1 million. So it was a not a significant investment, but the technology was good, and the business was challenged by not having the capital resources to take on a project of the size that we're looking at. So the market has been there, it's just not -- this particular company has not had the scale to participate in that. But the projects we're seeing are in the million of dollars per, and we're just starting to get some notoriety in this industry. The Middle East is a strong market for this because of the waste that's going on in campsites for drilling and so forth. And we think there's an uptick opportunity there. We've got a wonderful project we've been bidding on for a while in China and we think that, that could be significant, as well. So I would tell you it is more in the, for lack of a better term, underdeveloped markets and we're just getting started.

Does this double, triple, quadruple the overall opportunity for this segment?

If I had that kind of vision, I'd be great. Let’s put it this way, it gives us a lot more opportunity than we had. And what I would tell you in the Cremation business, which is a relatively stable business, this is a little extra cream on the top that we're really counting on.

And would you expect the margins for such a thing to be similar to the -- to selling Cremation equipment?

Right in line.

Okay. And If I might ask one more of Steve. In the press release, you talked about reaffirming the guidance, a strong order backlog. And then some of your comments and Joe's comments talked about backlog in Cremation, backlog in fulfillment being subjected to backlog and then also Merchandising. At some point, you think that you might be able to give us a -- some backlog numbers because if you add Cremation, fulfillment, Merchandising, then you're almost getting to the scale of the amount of business that you do in Cemetery Products becomes a meaningful number to kind of get our arms around and understand. So do you think you might be able in some -- at some point in the future to talk about backlog or at least backlog currently relative to last year?

Yes, Scott, I think that gets a little bit difficult because of the lumpiness of this business and what Joe said before, the timing of these projects. Because we know orders that we have in house, and we know the contemplated timing. But sometimes, and I would say not infrequently, that timing can be challenged, can be pushed out. So that's -- that would make us hesitate in providing any type of backlog and trying to identify and quantify backlog for future quarters.

We'll move now to the line of Jason Rodgers with Great Lakes Review.

Do you have the FX impact on sales and operating income for the quarter?

I believe, for the year -- year-to-date, the impact on sales was $4 million. For the quarter, I don't have that number handy. But I believe it was relatively small.

We have a question in queue from the line of Adam Hamill with Gates Capital Management.

I'm just kind of bridge the gap between year-to-date EPS down about 6%. You said third quarter, you expect to be flat, and then for the year, the midpoint in your guidance is up about 7%. I mean, is that all Cremation and Marking and Fulfillment or are there some other benefits in the fourth quarter?

Yes, Adam, we didn't -- I don't think, we said that the third quarter was going to be flat. In fact, we expect our third and fourth quarters to be up over last year.

Okay, and I guess...

And again, maybe what you're referring to is when we came out of our conference call in January, we had expected this quarter, that we just finished, to be relatively flat, which it turns out, we were relatively flat with a year ago. But we do expect our third and fourth quarters to be better than a year ago, on an adjusted basis.

Yes. In the press release, it says, you anticipate relatively flat operating performance for the current quarter. Is that just for the Cemetery business?

Adam, we -- let's take this -- how about if we take this online because I'm not seeing where you're referring to.

Okay. And have you -- where are you in discussions on upsizing your revolver for the acquisition? Is there any terms for what that interest expense might be at?

Yes. We actually have a commitment letter from our lead bank to upsize the revolver to approximately $850 million in order to facilitate financing the Schawk acquisition.

And would the interest expense be similar or is it...

Well, the interest cost will increase as our leverage ratio increases. Typical with these revolvers, there's a grid in which the interest rate spread is based on leverage rate, the company's leverage ratio. The base rate will still be based on LIBOR, which wouldn't change based on the amount of borrowings, but the spread between -- or the spread that we have to pay based on leverage ratio will certainly increase a little bit.

[Operator Instructions] We have a follow-up question from the line of Daniel Moore with CJS Securities.

Obviously, you're starting to see some nice benefit from cost savings and reduction initiatives. Can you give us a little bit of an update how much incremental benefit is still possible beyond what we saw in the numbers for fiscal Q2?

I can't give you a quantified number, but let's put it this way. Some of our strategic sourcing initiatives are only starting today as contracts, have just come to fruition. Other ones that we sourced them last year, contracts are being completed and signed. Old ones rolled off and now we're on to new ones. So if we think there's still more runway to go. I can't give you a number, especially when you start speaking about lean. Lean is a culture. We just -- we've set some targets for ourselves. We are not at those targets. So we think every year, we're going to see modest, but continued improvement.

Okay. So no big step function beyond this, but continued steady improvement from here.

Right, right.

And then, Steve, CapEx is about $10 million for the first half. Do you still expect $10 million, $30 million this year given the pending Schawk acquisition?

Actually, at this point, I would expect that to be lower than the $30 million, Dan. So I would -- I'd be in the $25 million range for your modeling.

Perfect. And then not to beat a dead horse, but lastly, as I think about Q3 and Q4, obviously, with regard to the backlog in some of the segments and big orders coming through in Q4. Expect to see some growth, but it's fair to say, we'd see faster year-over-year growth in Q4?

No.

Not necessarily.

No, we mean, some of the projects are pent-up for the last couple of quarters, frankly, and we've got a very, very significant project that's going to be delivered by March -- by June 30.

June 30.

And we have no further questions in queue at this time.

All right, thank you, Allan. Well, we'd like to thank everyone for participating in our conference call this morning. And we look forward to our third quarter earnings release and conference call in July. Thank you, and have a great day.

Ladies and gentlemen, your conference will be available for replay beginning at 11:00 a.m. today, April 22, 2014, and running until May 6, 2014 at 11:59 p.m. To access the AT&T Executive Playback Service during that time, please dial area code (320) 365-3844 and enter the access code 324027. That does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.