Matthews International Corporation (MATW) Q4 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter and Year-End Financial Results Conference Call. At this time, all participant lines are in a listen-mode. Later will be conduct a question-and-answer session and instructions will be given at that time. [Operator instructions] As a reminder, today's call is being recorded. I'd now like to turn the conference over to your host Chief Financial Officer Steve Nicola. Please go ahead, sir.

Thank you, Terry. 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 422867. The replay will be available until 11:59 PM, December 1, 2017. We have posted on our website, which is www.matw.com, the fiscal year-end earnings release and financial information we will discuss this morning. The earnings release can be found on our home page for the quarterly financial data, on the top of our home page under the Investor tab, click on Investor News, then click on Financial Reports to access the information under the section Matthews International Quarterly Reports. Before beginning this discussion, at the advice of legal counsel, I have been advised to read the following disclaimer as it relates 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. To begin the conference, I'll review the financial results, Joe will then provide general comments on our operations. Following that, we will open the discussion for questions. For the fiscal year-ended September 30, 2017 the company reported earnings of $2.28 per share compared to $2.03 per share a year ago. On a non-GAAP adjusted basis, fiscal year 2017 earnings per share was $3.60 compared to $3.38 per share a year ago. In addition, the company reported a record operating cash flow in fiscal 2017. Our operating cash flow for the year ended September 30 2017 was $149.3 million compared to $140.3 million last year representing an increase of $9 million. In summary, the significant factors and the year-over-year improvement in earnings per share included higher sales of cemetery memorials and cremation equipment, sales growth in our U.K. and Asia Pacific brand markets, higher marking product sales for our industrial technology segment, continued synergy realization from acquisitions, the benefits of ongoing productivity initiatives and a lower consolidated effective income tax rate. Fiscal 2017 earnings also reflected a significant increase in stock compensation expense. As we noted in the first quarter as several members of management reach retirement eligible status, the accounting rules to require accelerated expense recognition of awards versus an amortization over the speculating investing period. This change had an unfavorable impact of $0.07 on fiscal 2017 compared to last year. In addition, fiscal 2017 cost for the product development project in our industrial technology segment were approximately $0.05 per share higher than last year. Also, changes in foreign currency rates unfavorably impacted fiscal 2017 earnings per share by $0.02 compared to last year. As a result, when adjusted for the impacts of the accelerated stock compensation expense increased product development project cost and unfavorable currency changes, our fiscal 2017, non-GAAP earnings per share increased approximately 11%. Consolidated adjusted EBITDA for the year end September 30, 2017, was $239 million or 15.7% of consolidated sales. For the quarter ended September 30, 2017, the company reported earnings of $0.60 per share compared to $0.74 per share a year ago. On a non-GAAP adjusted basis, earnings per share for the fiscal 2017, fourth quarter were $1.06 compared to a $1.08 a year ago. In addition, the company recorded an additional $0.04 per share towards it’s year-to-date earnings per share related to an income tax benefit on equity compensation expense. Due to the nature of this benefit, accounting rules provide that the impact is only reflected in year-to-date earnings but not the fourth quarter. Consistent with the results for the full fiscal year, the significant factors in the year-over-year improvement in earnings per share for the quarter included increased sales of cemetery memorials and cremation equipment, higher sales in our Asia Pacific brand markets, higher marketing product sales for our industrial technology segment, continued synergy realization from acquisitions the benefits of ongoing productivity initiatives and a lower consolidated effective income tax rate. In addition, the industrial technology segment reported an increase in fulfilment sales during the fiscal 2017, fourth quarter. A reconciliation of non-GAAP earnings per share and adjusted EBITDA were provided in our press release yesterday which has been posted to our website. A significant portion of the non-GAAP adjustments continues to include cost and other charges in connection with the integrations of acquisitions including our ERP integration and implementation. In addition, acquisition related costs and included charges in connection with our recent acquisitions including related assets step up expense. Other non-GAAP adjustments for the current year included cost related to cost reduction initiatives in several of the company’s businesses and loss recoveries net of cost. The loss recoveries relate to the previously disclosed theft of funds that was identified two years ago. Consolidated sales for the quarter ended September 30, 2017, were $396.1 million compared to $377 million a year ago, representing an increase of $19.1 million or 5.1%. The improvement is reflected an increase in sales of cemetery memorials and cremation equipment, higher sales of marketing products and fulfilment systems for the industrial technology segment and the benefit of recent acquisitions. The company’s consolidated sales for the year ended September 30, 2017, were $1.52 billion compared to $1.48 billion a year ago. The growth in consolidated sales for the current fiscal year resulted primarily from an increase in sales of cemetery memorials products and cremation equipment, higher sales in the UK and Asia Pacific brand markets and increase in sales of marketing products and the benefit of recent acquisitions. Changes in the foreign currency exchange rates had an unfavorable impact of $12.8 million on the company’s current fiscal year, consolidated sales compared to last year. Sales for the SGK Brand Solutions segment were $203.7 million for the current quarter compared to $193.7 million for the same quarter a year ago. Sales growth in its Asia Pacific market and the impact of recent acquisitions were partially offset by lower brand sales of North America and Europe. Sales for the SGK Brand Solutions segment for the fiscal year ended September 30, 2017 were $770.2 million compared to $756 million a year ago. Sales growth in its UK in Asia Pacific markets and the impact of recent acquisitions were partially offset by lower brand sales in North America and Europe. Currency exchange rate changes had an unfavorable impact of $12.1 million on the segment sales for the current year compared to last year. The SGK Brand Solutions segment reported operating profit of $5 million for the current quarter compared to $16.8 million for the same quarter a year ago. Charges related primarily to cost reduction initiatives, acquisitions and integration activity were $11.8 million for the current quarter compared to $6.3 million last year. For the year ended September 30, 2017 the SGK brand solutions segment reported operating profit of $24.9 million compared to $42.9 million last year. Charges related primarily to cost reduction initiatives, recent acquisitions including assets step up expense and acquisition integration activity were $29.7 million for the current year compared to $25 million last year. In addition, currency exchange rate changes had an unfavorable impact of $1.3 million on the segment’s fiscal 2017 operating profit compared to last fiscal year. The memorialization segment sales for the fiscal 2017 fourth quarter were $152.3 million compared to $152.3 million for the same quarter a year ago. The segment reported higher sales of cemetery memorial product and cremation equipment in the current quarter which were offset by lower casket sales reflecting an estimated decline in US casket [at desk]. For the year ended September 30, 2017 memorialization segments sales were $615.9 million compared to $610.1 million last year. Operating profit for the memorialization segment for the fiscal 2017 fourth quarter was $19.9 million compared to $20.2 million for the same quarter a year ago. The results for the current quarter reflected the benefits of higher cemetery memorial and cremation equipment sales, acquisition synergies and ongoing productivity initiatives which were offset by lower gasket sales and the impact of higher commodity cost. Operating profit for the memorialization segment for the year ended September 30, 2017 was $80.7 million compared to $68.3 million last year. The increase reflected the impact of higher sales and the benefits of acquisition synergies and ongoing productivity initiatives. Charges primarily in connection with the Aurora acquisition integration and the ERP integration and implementation were $7.8 million for the current year compared to $10.4 million last year. The prior year also included the impact of inventory step up expense. The industrial technology segment reported sales of $40.1 million for the quarter ended September 30, 2017 compared to $31 million for the same quarter last year. The current quarter reflected higher sales of marketing products and fulfillment systems and the benefit of recent acquisitions. For the year ended September 30, 2017 the industrial technology segment reported sales of $129.5 million compared to $114.3 million last year. The industrial technology segment reported operating profit of $5.1 million for the current quarter compared to $2.7 million for the same quarter last year reflecting the benefit of higher sales. The segment’s operating profit for the year ended September 30, 2017 was $7 million compared to $7.7 million last year. The benefits of higher sales were offset by an increase of approximately $2 million in cost related to the segment’s product development project. In addition, the segment incurred acquisition related charges of $945,000 million for the year ended September 30, 2017 compared to $632,000 a year ago. A summary of operating results by segment including non-GAAP adjustments for the quarter are posted on our website for your reference. Gross margin for the quarter ended September 30, 2017 was 38.8% of sales compared to 38.9% a year ago. Gross margin for the year ended September 30, 2017, was 37.2% of sales compared to 37.6% a year ago primarily reflecting the decline in US and European brand market sales. Selling and administrative expense for the current quarter was 31.2% of sales compared to 28.4% for the same quarter last year. The increase for the quarter primarily reflected higher intangible and amortization expense and charges related to cost reduction initiatives in several of our businesses. Selling and administrative expense for the year ended September 30, 2017 was 29.7% of sales compared to 29.6% last year. Investment income for the fiscal 2017 fourth quarter was $920,000 compared to $601,000 a year ago. Investment income for the fiscal year ended September 30, 2017 was $2.5 million compared to $2.1 million a year ago. Investment income reflects investments performance on asset sale and trust for certain of the company’s benefit plan. Interest expense for the current quarter were $6.6 million compared to $6.2 million for the same quarter last year. Interest expense for the year ended September 30, 2017, was $26.4 million compared to $24.3 million last year. The increase resulted primarily from higher average interest rates this year and the additional borrowings as a result of the company’s recent acquisitions. Other income net for the fiscal 2017 fourth quarter was $360,000 compared to a net expense of $692,000 a year ago. For the year ended September 30, 2017, other income net was $7.6 million compared to a net deduction of $1.3 million last year. Other income for the current fiscal year included the loss recoveries net of cost of $10.7 million. Other income in deduction in generally include among other items bank fees and the impact of the currency gains or losses on certain intercompany debt. The company’s consolidated effective income tax rate for the year-ended September 30, 2017, was 23.2% of pre-tax income. This rate reflects the benefits of organization structuring primarily in connection with the integration of recent acquisitions and certain favorable tax benefits and utilization of certain tax attributes specific to the current year. The company’s consolidated effective tax rate was 30.5% for the fiscal year ended September 30, 2016. With respect to some of our balance sheet data at September 30, 2017, the company’s consolidated cash was $57.5 million compared to $55.7 million at September 30, 2016. Accounts receivable at the end of the current fiscal year were $320 million compared to $295 million at September 30, 2016. Consolidated inventories at September 30, 2017, were $181 million compared to $162 million at September 30, 2016. The increases in accounts receivable and inventories primarily related to the impact of acquisitions completed during the current fiscal year. Long-term debt at the end of the current fiscal year including the current portion approximated $911 million compared to $873 million at September 30, 2016. The increase primarily resulted from additional borrowings for the company’s recent acquisitions. Excluding the cash used for acquisitions completed during the current fiscal year, repayments on the company’s debt were approximately $70 million net. Outstanding borrowings under the company’s domestic credit facility at September 30, 2017 were approximately $758 million with the remaining borrowing capacity of approximately $392 million subject to the company’s net leverage ratio. This facility matures in April 2021. Additionally, as we’ve previously disclosed we received a claim in September 2014 seeking the drop on a Letter of Credit issued by the company of £8.6 million with respect to a performance guarantee on our project for a customer in Saudi Arabia. We assess the customers claim to be without merit and accordingly initiated an action with the court. Pursuant to this acquisition a court order was issued in January 2015 requiring that upon receipt by the customer, the funds were to be remitted by the customer to the court pending resolution of the dispute between the parties. As a result, the company made payment on [withdrawal] to the financial institution for the Letter of Credit and the funds were ultimately received by the customer. The customer did not remit the funds to the court as ordered. On June 14, 2016 the court ruled completely in favor of Matthews following a trial on the merits. However, the customer has not yet honored this quarter order and remitted the funds. The company continues to monitor the customer's non-compliance with the court in our assessment of collectability related to this matter. Accordingly, it is possible that this matter could have an unfavorable impact on the company’ future results of operations. The company had 32.1 million shares outstanding at September 30, 2017. For fiscal 2017, the company purchased approximately 212,000 shares under its share repurchase program at a cost of $14 million. At September 30, 2017 approximately 1.8 million shares remained under the current share repurchase authorization. Depreciation and amortization expense for the fiscal 2017 year was $68 million compared to $65 million a year ago. Capital expenditures for the year ended September 30 2017 were $44.9 million compared to $41.7 million a year ago. Finally, the Board yesterday declared a dividend of $0.19 per share on the company’s common stock representing an increase of 11.8%. The dividend is payable, December 11 2017 the stock holders of record November 27, 2017. This concludes the financial review and Joe will now comment on the company’s operations.

Thank you, Steve. Good morning. Fiscal year 2017 was another good year for the business. During the year, we had record sales as a whole and in several of our segments despite challenging environments in the markets we serve and continued negative currency translation. Over the last three years, it is important to note that our reported revenues in consolidated EBTIDA have been negatively impacted by foreign currency translation by over $100 million and $20 million respectively. When you consider this impact, you understand why we believe that we continue to execute well on all of our many initiatives and are proud of our achievements. In addition, as we look at our current year results and consider the impact of accelerating stock compensation expense of $0.07 and increased R&D spending of $0.05, we view our EPS as having grown over 10% over prior year, a very good result. In our memorialization segment, despite a lower than expected debt rate we delivered very strong operating results driven by good sales in our cemetery products, strong performance in our cremation products group and good synergy capture in our funeral home products business. In our cremation products group, we’ve expanded our product offering to include small municipal waste incinerators the sale of which helped to drive good results for the year. In addition, we continue to benefit from synergy capture in funeral home products where we are successfully integrating Aurora and still have almost $10 million of synergies yet to be realized. In our brand segment, recent acquisitions helped us exceed our prior year revenues and offset a $12 million revenue impact due to currency translation. During the year, we saw strong performance from our UK and APAC regions where we have expanded our products and service offerings but we faced difficult comparisons in Europe where slowness in our tobacco business was driven by tobacco company print retenderings and high volumes in the year before. In North America, the consumer package goods market continues to be sluggish as many of our clients struggle to find their topline growth. However recent acquisitions make us comfortable with the direction of this portion of our business despite those market challenges. Our industrial technology segment had a very strong quarter with record sales and operating profits. Recent acquisitions contributed nicely to our results, with strong underlying performance in our updated marketing products line, good ink revenue and recovery in process equipment sales contributed nicely to the great performance as well. As I’ve said in several times before, we remain very optimistic about this group as we have invested significantly over the past several years in new product development and strategies to serve e-commerce warehouse operations. Despite a very good year for this group, we achieved record sales of almost $130 million, we are expecting this group to have another double-digit growth year in 2018 and that is before we have the benefit of the newest product that we anxiously await. We expect to launch the new product in the latter part of 2018 and the revenues from which should begin to mitigate and development cost incurred to improve our overall operating performance. I'll remind you that this group is incurring R&D expense of about $7 million in 2017 which had depressed their operating results. And when this is added to their reported earnings, this business is generating very good operating margins. Regarding our acquisitions, we are concluding the initiatives on SGK and expect the substantial reduction in integration expenses. We are pleased with our efforts in capturing project and synergies in SGK and still see opportunity to materially improve our cost structure and fully capitalize on our ERP investment. Those opportunities we realize as part of our continued effort to improve our businesses in the coming years. With regard to Aurora, we expect to achieve upwards of $10 million of additional synergies over the next 18 months as we complete this successful integration. Several recent acquisitions including Ongurt and Equator continue to perform well, and should add nicely to fiscal 2018. In general, we are pleased with our acquisition efforts and expect to see further benefit from those companies during acquired year-to-date. Looking at 2018, we are confident with our ability to achieve our goals, but we are faced with several unknowns. First, we are exploring the possibility of solidifying our balance sheet by issuing permanent debt which more likely than not will increase our interest cost. Although, we are unsure the near-term impact of this action, we are certain that this is the right thing to do for our business long-term. Second, recent efforts in restructuring business to capture tax savings which benefited our 2017 results may be impacted by efforts in Washington to restructure the US Corporate tax rates. Although, we will be more likely than not to be better off next year because of our efforts or because of the tax policy changes is difficult for us to quantify this change at this time. Third, as I stated above, currency has been significant headwinds for the past three years, our current estimates are that those headwinds should abate, but that also is uncertain. And finally, our results in 2017 were materially impacted by lower debt rate and increased commodity prices. Although, we are never certain of debt rates, we are expecting commodities to continue to rise. Nonetheless, we remain confident of our long-term ability to create value and the opportunities before us, therefore we expect to deliver 2018 EPS growth which is consistent with our 2017 results. With that let’s open it up for questions.

Thank you. [Operator Instructions] We’ll go to line of Daniel Moore with CJS Securities. Please go ahead.

I wanted to kick off, talk about brand solutions a little bit, revenues were up 5%. What did that look like on an organic basis and margins obviously on an adjusted basis declined a little bit year-over-year. Maybe talk about some of the either mix or input cost, some of the drivers there and a quick follow up or two.

Okay. We’ll try to get all bits and pieces. Good morning. The organic businesses as a whole decline modestly, most of that decline was in North America and in Europe. We talked about the European decline that has largely to do with the decline in tobacco business over there. Tobacco is a very good business for us from a margin standpoint that is impacting some of the margins you’re seeing in the reported earnings. We expect that to be just a cyclical thing as they’ve gone up to retendering. Our largest account over there is [Philip Moore’s], they went out to retendering of all their print and as they did that they put projects on hold. We expect to see that return to somewhat normal over the course of the next 12 months that retendering is complete. And we’re starting to see activity on that. In particular what we’re seeing on the tobacco side of the business is an increase in many of you know these heat sticks which, heat sticks are basically the electronic cigarettes offered by the tobacco companies that is increasing for us as well. We feel pretty good about the long-term of our tobacco business both in Europe and around the world. In North America, we’re continuing to feel the same thing everybody is else is feeling, we’re seeing some declines in our revenues, some pricing pressure on our contracts but in general we’re still seeing pretty good volumes that are coming through that allow us to be supportive. We have had some recent wins, we think that will help offset some of those declines but what we’re really seeing is what we’re seeing out in the UK and in APAC where we’ve expanded our product offering into more of the brand execution, so going beyond the pack if you take a look at some of the things we do, some of the clients in the UK and in Asia where we’re doing much broader service offerings. What you’re really seeing is the decoupling of the agency work and in the agencies where typically you do creative or you do the strategic analysis and then they would be allowed to do the execution. Brands around the world are separating those functions, allowing the large agencies to do the creative and do the strategic type things. But at the same time allowing people like us that are more tuned to operational executional type things to execute their marketing efforts anywhere they need them. So, we think that’s our direction of our business and we think that will get better over time.

Got it. Very, very helpful, appreciate that color. And then from an FX perspective Steve if we stayed generally around where we are now, what would the impact look like in fiscal ’18 on revenue and EBITDA?

If we stay at where we are I don’t expect much of an impact relative to what we reported in 2017 plus or minus.

Got it and then just wanted to clarify Joe your comments on 2018 EPS growth consistent so similar EPS growth to fiscal ’17 even though through the headwinds you feel comfortable with that, I just want to make sure they correct.

Sure. You did hear that correctly Dan. The unknowns are a little bit bigger this year but given -- we anticipate going out and making some debt permanent, we’ve been talking to folks for several years of the interest rate environments and so forth. So, we’re going to make that how that permanent how that impacts is going to depend on what that actual rate maybe and when it occurs. So, we don’t know that yet, but we do think that should be a good thing from an equity holders' standpoint as well making our balance sheet more permanent. Secondly, the couple of items that are still little bit troubling out there, I mentioned to you about our tax structure and the benefits that we are seeing from those efforts internally. The team has done a great job of putting us in a position to significantly lower our tax rate going forward. We think it's only going to get better if Washington does what they’re going to do but we don’t know that for sure. And what impact that has on what we’ve already done from a structure standpoint to be able to take advantage of that. And the last one obviously commodities and debt rates are things that are I would say they are impactful on the margin given our scale today but those margins are greatly profitable on the fringes. We had $7 million worth of commodity cost increases in the memorialization business this year and deliver the kind of results that team has done despite that is pretty admirable and we’re hoping that debt rates will work towards our benefit, they did not this year but they do will be better off, if they don’t, we’re expecting to see higher commodity rates we’re already seeing them. So those are the pluses and minuses.

Got it, perfect. And lastly just housekeeping Steve, tax rate for next year obviously not assuming any changes in policy at this stage. What should we be thinking about?

Approximately 30% Dan, it's hard to predict the benefits of some of the attributes that were specific to this year but look I think the one thing I can report is that several years ago if you recall we were in the mid to higher 30s with respect to our consolidated effective tax rate and the structuring that we’ve done particularly post the acquisition of SGK and some of the consolidated geographic footprint where we’ve been structured or been able to structure to date has taken us down to approximately that 30% run rate.

Next, we’ll go to the line of Liam Burke with B. Riley FBR. Please go ahead.

Joe, you talked about in your prepared statements, how the acquisitions in SGK brands are the recent acquisitions in the SGK brands are helping you offset the weakness in North America. How is that happening?

Well, let me kind of give you a feel. One in particular, we’ve mentioned Equator in the past, and Equator was an acquisition that occurred midyear. We’ve seen nothing but growth from them, but one of the reason we’re seen the kind of growth we’ve had from those folks, it’s a different business model that we currently operate, it’s in all under one roof model where creation all the way through execution, all the way down to the photographies, all done under one roof, allowing for speed the market, they cut the time down or a product to go from creation to the shelf significantly, allows for a lot more flexibility and speed and that’s been very, very beneficial. We do think that’s the future for a lot of our brands, not all of them but a lot of our brands as they start looking at ways to accelerate change in an environment where they’re trying to respond to changing consumer demands pretty quickly. On the other side of the table, was Ongurt, as you all know we are fairly significant with the largest provider if you are selling businesses in the European markets and we’re looking to expand that opportunity. Ongurt takes us one step further into cylindrical processes. What does that mean, is not necessarily for printing purposes, it’s everything around review your printing purposes for packages. So, we now are the number one provider of digital images and cylinders necessary to produce a laminate flooring, wallpapers, textures on synthetic substrates like the vinyls sitting in your car, all those are produced with cylinders that was started off as cylinders for packaging at the end of [indiscernible] with that acquisition, we’re expanding in the very similar field just extending the use of our products.

And Joe, it’s been a year since we’ve seen the CPGs talking about pairing back SKUs and obviously there is a derivative effect on your business. Where are we in this whole process? I mean are we continuing to see the pair back of SKUs, is there any bottoming or what are you hearing from your customers?

Well, I mean I guess the loudest part of the [indiscernible] is trying to get on Procter & Gamble’s board who suggests that the global strategy is probably not the right strategy. In this world you need more SKUs, you need more localized SKUs, you need to response to local consumer a lot faster. That’s music to our areas, it really depends on you to believe I think there is fair amount of confusion about what needs to be done right now, but the reality is, I would say that there is different opinion with each of customer that we have. There is lot of perspectives out there, we’ve listened to a lot of folks speak about it and as the CPGs we believe start to realize the brand is important and that brand will continue to be important in the whatever field they may be. I think that the recovery in marketing spend as it relates to this will continue.

And next we’ll go to the line of Scott Blumenthal with Emerald Advisors. Please go ahead.

Joe, I think this was the largest sales quarter in corporate history. Is that right?

You got it Scott, you’ve been there long enough.

Well congratulations on that and also on the great quarter in industrial technologies. Can you talk a little bit about your new ink and marking offerings and how that’s driving sales? And then maybe give us a little bit more color on your product development efforts there.

Sure. I mean as you all should be aware. We’ve done a number of acquisitions over the last five years to position us in the e-commerce warehouse control software system. So, basically when you look at some of the things that brands and/or retailers are delivering to your door step many of those customers are delivering via our warehouse control software systems and the picking solutions that we have. That business continues to grow for us and is very consistent with what you’re seeing in the overall space where warehouse -- e-commerce we continue to invest in that. We expect it overtime, we might look at other acquisitions to add to that but we’re seeing very good growth in that part of our business and proud of that team and what they’re doing. I would remind you if we recall back about two quarters we talked about a deferral of a $7 million project in that part of our business that has yet to be incurred. We expect to have that revenue come through our second quarter results, so the delivery of results that you see in this group is despite that $7 million deferral which we have not lost the account. On the tradition, what I call the updated marketing products line of products and they have been working for the last five, six years on developing new solutions and better solutions particularly on the controller side of the business that offer updated and greater capabilities to control product line marking in a number of situations. That product line as you might expect sells at a higher price point, has more operability outside of our traditional customer base and so we are picking up modest share but we’re also replacing the existing products that we add out there with the existing accounts at a higher price point. We think that trend will continue as long as the economies we serve remain robust and as I’ve said before this business is doing well. The product development we’ve been referencing in the $7 million we spent in 2017 is coming to fruition. We are going to be here in beta testing here shortly, I am taking my full board to see the product and its operational state in February. So, we’re expecting to be rolling that out by the end of calendar ;18 probably somewhere in the latter part of the third quarter beginning of fourth quarter start to get some revenues that will mitigate some of that expense that we’re fueling and improve the results. It is proving to be everything that we expected to be, so we’re right on line in terms of timing as well as capabilities and costs.

Okay, that’s great to hear. And can you comment about the current status of the I guess domestic US food labeling. I guess legislation because you know we’ve been kind of sitting around here for a little while waiting for some of that to be finalized and I know that, that’s had a little bit of an impact or maybe even a meaningful impact on your domestic rand solutions of business particularly in the packaging space.

Well as many of you may know it's been deferred. It’s now looking like a 2022 implementation. Some of our brands, some of our food product companies are moving forward with adapting what is possible despite that but I would not say it was the same expected push that we are going to feel over the course of the next 12 to 24 months. The regulations have not changed, implementation date have changed. I know several of our accounts have struggled with the reformulation of the product to be able to comply with what is being disclosed. That effort is still going on. So, we’re not expecting material change in our North America food clients as a result of this or as a result of the deferral.

Okay, and I guess one last one if I may on your comments on the municipal waste incineration business, I think that the issue that Steve discussed during his comments had to do with a municipal waste incinerator that I guess there is a dispute related to that from a few years ago. I’m not trying to imply that, that’s going to be the case here. But can you talk a little bit about maybe what you see as the potential for that business and what should your cremation business -- does that represent now?

So, if you think about what a cremator does and it's pretty obvious by its description it burns things. So, what is extended that capability into the largest scale from an efficiency standpoint and started to service small municipal waste. In the UK today where the principle part of this work is being derived right now but we think it has applications elsewhere in the world, the UK is moving to a waste to energy effort trying to stop shipping their trash by barge to elsewhere in Europe, that’s going to be burned and it is being burned locally by the small municipals -- municipalities generating the electricity and selling it back. We are working now the one we refer to here is Isle of Jersey, we’re doing some work there right now on a particular incinerator. I’d say it will be delivered we recognize that because it’s a larger scale project, some of the revenue and profits impacted our cremation equipment business this year. We expect it to continue to be, we have $25 million to $30 million worth of bids out there, it’s really going to depend on the timing when some of these projects can get financed. Right now, we have some competition but not significant, because these are smaller, there is some very large municipal ways incinerator companies out there that are significantly larger incineration equipment providers. Ours are much more tailored to that local community is going to do that and right now there seems to be an initiative in the UK to push that along.

Next, we’ll go to line of Jamie Clement with Macquarie. Please go ahead.

Joe, could you just give us your thoughts on the M&A landscape, your guys' M&A pipeline and also as we look at over the next 12 months to 18 months, what would be your appetite potentially in doing the larger deals?

Yeah. So, the pipeline is rich, let’s put it that way, I would say that we have opportunities in each one of the businesses and there are at various states of activity. What we choose to do and what we want to do might be two different things. At the same time, we are very cautious on the allocation of our capital in this environment right now and we are as we look to permitize some of our debt we want to make sure that we do what’s in the right interest of the company both short-term and long-term. So, our appetite for larger deals is always going to be there, probably be done more likely than not with some equity and it may not be as accretive as we would like it to be, but it’s right from the capital structure standpoint. So, I would tell you Jamie that we don’t lack for opportunities to acquire, it’s more about the proper allocation to capital at this time.

And I also I would imagine that wouldn’t accelerate if they want to sell, right?

That’s always the case right. But that’s the benefit of having multiple businesses out there, some it might not want to sell in one business, it might have somebody that does in another and that’s been beneficial to us.

As you look at the rough revenue breakdown of that right now, if you look at memorials, if you look at brand and you look at the industrials group. As you look out five years to 10 years is there any reason why you wouldn’t consider getting a lot bigger in industrials given the positive momentum in the business and talk about e-commerce that sort of thing?

We expect to get bigger. Our internal group has fairly a lot to target for themselves, and to be honest with you a lot of it’s coming through organic growth and opportunities that we create from investments we’ve made, but they are also existing significant sales -- acquisition opportunities. We’ve got an internal target to get this to $300 million over the next five years it’s $140 million -- $130 million or so. This year, we expect that to grow double-digit this coming year as well and I would tell you that our internal plans would replicate that for several years to come. So, we’d like to get this business more balanced relative to the rest of the group.

Next, we’ll go to line of David Stratton with Great Lakes Review. Please go ahead.

Good morning. Thank you for taking the questions. I think you touched on commodity cost a little bit. Can you give us any insight into how much you might have locked in already moving forward and the cadence you expect commodity cost to hit throughout the year?

Thanks, Dave. Yes, with respect to bronze we’re generally out several months. And so that continues to be the case, with respect to steel, that’s a little bit of the different commodity and a different purchasing cadence. So, we’ve already experienced the higher cost, we do expect particularly on the steel side a little bit of increase in those cost to continue, but one of the things you have to remember is the inventory cycle when it comes to caskets, because the steel cost that we purchased today become part of our inventory that are shipped to our distribution centers before they ultimately become sales to customers and recognized. So, there is a period of months that occurs before the actual process in reflection in our cost of sales.

Got you and then secondly how are the R&D cost looking to shape up through the year, with this disruptive product that you talked about for some of the quarters now, is that going to -- are R&D cost going to fall off as that rolls out or will they continue to be driven higher and at what time do you think this will effectively hit?

Well David you’ve absolutely right on your first suggestion. The R&D cost themselves when you say they’re going to fall off, actually those R&D cost they’ll continue into this year as we continue to develop the product but as we take that product to market and it becomes commercialized then we start to recognize, we start to ship and we start to recognize revenue then those R&D cost actually become part of the cost to sales because we’re recognizing revenue with respect to those cost. So those will transition any cost related to that project will transition to cost to sales and will be recognizing revenues and we’ll see obviously profitability on that product. So, the net impact of those costs is we’re feeling today will actually decline.

Do you expect similar level of costs as we’ve seen in 2017 or fiscal ’17?

R&D cost yes, we actually expect a similar level of R&D cost into ’18 by the as we approach the end of ’18 and we reach our targeted commercial launch states then again that’s when the transition starts to happen.

And at this time, I’m showing no other questions in the queue.

Okay, Terry thank you. Well we appreciate the participation in our fourth quarter earnings release and conference call here this morning and we look forward to our first quarter fiscal 2018 conference call in January 2018. Thank you and have a good day.