Greetings and welcome to the Matthews International Corporation Third Quarter Fiscal 2018 Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Karen Howard Investor Relations for Matthews International Corporation. Please go ahead, Karen.

Thank you, Kevin, and good morning, everyone. Thank you for joining us to discuss the Matthews International Fiscal 2018 third quarter and year-to-date results. We certainly appreciate your time today. You should have a copy of the news release that crossed the wire yesterday afternoon detailing Matthews' results. We also have slides associated with the commentary that we're providing here today. If you don't have the release to the slides, you can find them on the company's website at www.matw.com on the Investor Overview page. We also have provided additional preliminary financial information on the Investor Financial Report page. On the call with me today are: Joe Bartolacci, our President and Chief Executive Officer; and Steve Nicola, our Chief Financial Officer. Steve will review the financial results for the quarter and year-to-date period, and Joe will review the business progress as well as our outlook. We will then open the lines for Q&A. But before we do, I would like to highlight our safe harbor statements, which is on Slide 2 of our presentation as well as within our release. As you are aware, we may make some forward-looking statements during this discussion as well as during the Q&A. These statements apply to future events and are subject to risks and uncertainties as well as other factors, which could cause actual results to differ materially from what is stated on this call. These risks and uncertainties and other factors are provided in the earnings release and in the slide deck as well as with other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at www.sec.gov. I also want to point out that during today's call, we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of comparable GAAP to non-GAAP measures in the tables accompanying today's earnings release. And with that, it is my pleasure to turn the call over to Steve to begin. Please, go ahead, Steve.

Thank you, Karen, and good morning. I am going to start on Slide 4. So beginning with our results on a GAAP basis, the year-over-year change in earnings per share was impacted by higher intangible amortization expense in the current quarter related to recent acquisitions. In addition, last year’s third quarter earnings included loss recoveries which were recorded another income. On a non-GAAP adjusted basis, I am pleased to report that earnings per share for the fiscal 2018 third quarter grew 10.5% over the prior year third quarter. This increase was primarily driven by the following factors. First, higher sales in all three business segments; second, the incremental impact of acquisitions completed during the last 12-months; third, acquisition synergies principally related to the Aurora acquisition; fourth, benefits from recent U.S. tax legislation; and finally, the impact of favorable changes in currency rates. Reconciliations of non-GAAP earnings and adjusted EBITDA are provided in our press release and the slides which are circulated yesterday and they’re also available on our website. The fiscal 2018 third quarter and year-to-date non-GAAP adjustments primarily included acquisition integration related cost such as our ERP integration and non-cash intangible amortization expense. On a year-to-date basis, the one-time impacts from U.S. Federal Income Tax Law changes were also a non-GAAP adjustment. The non-GAAP adjustments for tax law changes primarily included the impact of implementing the U.S. Tax Cuts and Jobs Act on the company's deferred tax balances and foreign tax credits and the estimated repatriation transition tax. Please turn to Slide 5. Consolidated sales for the quarter ended June 30, 2018, were up $5.6% compared to the same quarter a year ago. The company reported higher sales in all three of its business segments, which I will review in a few moments. On a consolidated basis, the increase…

Thank you, Steve. Good morning. Please turn to Slide 15, where I'll start with an update on our business highlights and the market climate. First of all let me say that we are pleased with the results for the quarter, which were ahead of our internal expectations. I’m proud of our team for achieving a new quarterly record for non-GAAP and also for setting new third quarter records for both sales and adjusted EBITDA. We continue to make good progress on the execution of our growth strategy of differentiating Matthews as a global company servicing the consumer products, moralization and industrial markets focused on driving shareholder value. Within our SGK Brand Solutions segment, our pipeline of wins and proposals continues to be robust and growing resulting from a stronger economic, a confidence from our customers and good sales discipline within our team. We have positioned ourselves well to support both global brand update as well as a growing private label market. We're seeing strong performance from our services and engineering businesses in Europe as well the recently acquired Ungricht business, both of which are expected to perform well through the latter half of fiscal 2018 and beyond as w continue to from the operational synergies that we expected. While businesses support the EMEA, tobacco industry slowed during the quarter. It is expected to pick up during our September quarter. Recent new client wins that we mentioned during our last quarterly earnings teleconference have started to roll in. We expect that the revenue from these projects will help to offset and outpace some of the lumpiness we have realized in this segment. As soon as our historic clients remain – as some of our historic clients remain challenged, we are winning new work as clients understand and appreciate the differentiated value…

Thank you. We’d now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Liam Burke from B. Riley FBR. Your line is now live.

Thank you. Good morning, Joe. Good morning, Steve.

Good morning, Liam.

Good morning.

Joe, if I adjust in North American revenues for the merchandising project delivered a year ago, when I am looking at North American organic growth, looking at how the CPGs are pulling back on SKUs? What – I mean after peeling over the bag, what is the growth profile look like in North American on SGK?

Well, as you look at SGK particularly in North America, the quarter was relatively flat when you exclude that merchandising solutions project we talked about. That for us is a very positive turn. It's relatively stable for the quarter. We're starting to see better investment from our clients. We expect fourth quarter to be a very strong quarter for us as we start to ramp up some of those wins that we talked about.

Okay. If when you’re looking at contact ramp in America, how about others world, Asia Pacific and Europe, particularly tobacco on Europe?

So as we look at our business, let me kind of break it out for you. This is about 8 – let’s use $800 million as the number for our revenue out there, about $100 million plus or minus is our merchandising. About $350 million of that is North America. A little less than $300 million of that – a little more than $300 million of that is in U.K., Europe and a little less than $50 million is within our APAC regions. We've seen good growth out of the other two regions as we continue to expand our market shares in those areas. So I would tell you that we're pretty pleased with the results particularly outside the United States. Tobacco was low this quarter. There’s no question about that, but despite that they delivered good results. We’re expecting a good quarter from them in the fourth quarter.

Great. Thank you, Joe.

Sure.

Thank you. Our next question is coming from Dan Moore from CJS Securities. Your line is now live.

Good morning. Thanks for taking the questions. Great color on the acquisitions that was very helpful of review, I think. Let me dig into industrial technologies, run rate approaching $200 million of revenue, obviously becoming a bigger contributor. Can you kind of bucket that just as you just did with the brand solutions business, bucket it in terms of marking products versus warehouse solutions versus other? And what am I missing? And maybe talk about the relative growth rates and margin profiles of each to the extent possibility.

Sure. Well, first, let me kind of call out the success of that team. We've been talking about them for several years and they are delivering exactly what we've expected them to deliver. Let me kind of break it out into buckets for you and I’m going to ask Steve just to correct me as I'm walking through this. When we look at our OEM solutions, it's the smallest part of our business at this point in time and it is about $5 million to $7 million. It is a nicely profitable business with a limited market share – limited market for us to participate in. Where we – where the rest of the business, we use 100 – what we project this year to be about $160 million worth of annualized revenue for this year. I would tell you that about $80 million of that is going to be what we call our traditional marking products for those you that have been shareholders for a long, long time. It's really product identification and that's the industrial printers that put a mark on a product coming down in a production line at high speeds. That business is a good business for us. It is our historic business that we've always operated in and margins in that business is in the high teens. The balance is roughly $170 million to $180 million is our automate – our warehouse control systems business particularly with the acquisition of Compass being there and that's approaching 20% margins. What is – what you're seeing in the business is what I would call the final throes of the R&D development cost. We expect to incur $7.5 million or so this year in R&D development for this new product and we look at this business X that that spend because we do not view it as a long-term level of spending and I would tell you that without that this business as a whole is a mid to high teens EBITDA margin business for us.

And obviously expect faster growth rate as it relates to those warehouse control system going forward.

We would hope. I mean you understand the market that we're in. I mean we're fortunate to be in a market that continues to expand. We have some very, very good new account wins, but the one thing that is positive despite what we think is a very, very strong backlog in that group and some very good successes. We’re at the whim of some of our customers there. For example, as you might expect, we won't be in anybody's warehouse during the Christmas period. So starting at the end of September, generally we’re kicked out. So it goes to radio silence there a little bit more and the opportunity to postpone it is really in the control of our customers. Generally, we've not lost any projects. They tend to be deferred as they moved from period to period and that will create some lumpiness in that market for us.

Got it. I appreciate it. One quick follow up. Maybe just remind us just as the amount of cost synergies still to come from Aurora and in total from already more recent acquisitions still ahead for fiscal 2019 and maybe into 2020.

Dan, this is Steve. I think from Aurora we still probably have synergies remaining in the $3 million to $5 million range and then they are potentially up to $10 million in total from all acquisitions.

Perfect, thank you.

Thank you. Our next question is coming from Jason Rodgers from Great Lakes Review. Your line is now live.

Yeah, Joe, I think you mentioned that SGK was flat in the quarter to take out that merchandising solution project…

North America…

North America…

North America, Jason.

Okay.

That was all North America.

So just there – could you quantify the start-up costs for those account wins in order to…

It’s difficult to quantify because we – I mean they’re people cost and they start to work early on. And as we go through, some cost get hung up and whip, some cost do not get hung up and whip. All I can tell you is that in particular many of these significant wins have been – has been in the Equator business and they are not contributing what we expect them to for the first nine months. We expect that to change in the fourth quarter. I mean it's very simple to kind of get to our expectations. If you look at our performance in the first three quarters and we're telling you that we're going to have plus 10% for the full year basis. We're expecting a very strong fourth quarter and a lot of that is coming from the ramp up on that side.

And I am sorry, what’s the plus 10% figure?

Year-over-year EPS improvement.

Okay. And then in the industrial segment, do you have a figure for the organic growth?

Steve, you may have that. We're flipping through a few pages as our business has become more complex.

Yeah, Jason – you’re…

Sure, what you’re looking through?

Jason, more than half of our sales growth for the quarter was organic.

Right. And then…

So it's not like about 20%.

What was the impact of commodity cost in the quarter? And are you increasing prices to help offset that? And then the outlook for the price cost dynamic going forward?

Yes, Jason, just for a multiple reasons, we don't. We try to stay away from talking about actual commodity cost, but suffice it to say I think we know more steel has gone over the last twelve months especially and copper year-over-year although recently copper has softened a little bit. But the ability to mitigate those potentially comes from the annual price adjustments that we do that typically happen in the fourth quarter. It's the October and January timeframes.

All right. I could just leave one more in here. Looking at the M&A environment, just what opportunities you’re seeing across the segment? And specifically in industrial, it looks like the opportunities are expanding there. Do you see any holes you need to fill in that business with the expanded market opportunities? Or you satisfied with your current offering?

Well, if you look at – let's talk specifically about industrial. We've got it – its two sided story in that side of the business. When it comes to our traditional product identification business, I would tell you that we're really relying on the organic growth that comes from our new product as we roll that into the future quarters and years as we move forward. On the automation side, which is more the warehouse control business, I would tell you that there's always bits and pieces we would like to add some small, some relatively large. If this is a story of the cobbling together of a great strategic plan that all these bits and pieces lead to a bigger story. As you heard in my comments, we took our first step into what I would call the general contractor stage where we are specifying the entire warehouse rather than just the warehouse control software solutions that are associated with that. If that bodes well, we expect it to be very successful. We have more projects behind it and we may need more capacity to be able to fulfill.

All right, thanks for taking all the questions.

You're welcome.

Thank you. Our next question today is coming from Scott Blumenthal from Emerald Advisors. Your line is now live.

Good morning, Joe. Good morning, Steve. Good morning, Karen.

Thank you, Scott.

Playing smart, Scott.

Hey, lots of really good information on the call. Thank you. Joe, can you talk obviously the growth engine here looks like a switch to industrial technologies? It sounds like you’re going to be kind of in the industrial engineering business with this new opportunity that you have. Can you talk about staffing and your ability to attract talent to that business?

Yeah, it’s always going to be a challenge, Scott. I mean we range from mechanical engineers to software engineers throughout the business. The locus of that business is shifted to some extent particularly comes to warehouse automation side of the business to more in the Cincinnati area and off to Portland where we are more attuned with that type of talent that we need. So far I mean talent was always an issue, but we pay competitive rates and we have a good culture in that group to continue to be able to fulfill that.

Okay, thank you. And you alluded to your OEM solutions business. Can you maybe give us a little bit of detail as to what that actually is? And you said you're working on a new product although you really didn't specify exactly what that is. I understand there may be some competitive reasons not to do so, but maybe give us a little bit more of that and I did as to what that might be.

OEM is a small business that principally focuses in to the fracking business as it relates to oil production. So I would not tell you that there is a lot of – we have a wonderful client there. We're very much dependent on their needs and demands, but we don't see great expansion possibilities. The new product we're talking about is in our product identification and we've been talking about it for a while. We think that is disruptive. We don't expect it to disrupt it over the market overnight, but we are very, very confident of where we were going with this new product and our early results in beta give us the confidence that we'll be out in the January period or it’s January-February period with the product for the first time. We'll be able to spot – speak more specifically about at that point in time, but I would tell you that we are tackling some of the challenges that have kept us from being a more competitive player in that space.

All right, fair enough. You did mention that this is approaching a $160 million, $170 million annual business. I suspect that the total addressable market in this segment is pretty darn large particularly if we're looking at a worldwide customer base. You have any idea or can you give us any idea as to what you guys believe that might be?

So we think that what we believe that the product identification market is probably closer to $1.5 billion to $2 billion broken up into three portions, one is the product itself the printers, two is the consumables including ink and three is service and repairs. And we think those are the three elements of that business that we – we’ll be attacking each one of those with its own solution. Then the warehouse automation is significant on a global basis. We don't have a number, but suffice it to say today we are only a North American provider. There are both organic and acquisition opportunities outside the United States that we think will be an opportunity to continue to grow that portion of the business. It's a big market, Scott. I don't have that number for you. It would back – and we could probably get it for you though.

Okay. Thank you. And Joe, you have a new, a new printer – a new high-speed printing product. I don’t know what we call that, but was that a meaningful contributor to the segment this quarter?

The new printer was actually detractor. That's the R&D spend we're talking about, Scott. We're spending – we’ll spend about $7.5 billion this year that's running through our P&L on that. So if I mean – we're going to always have some R&D as we continue to expand the opportunities presented by this new product, but it won't be anywhere near $7.5 million going forward as we continue to launch and get the revenues associated with that. So I would tell you that this quarter no revenues derived from that. We're expecting future quarters starting in mid 2019 really of any significance to be benefiting from that.

Okay, super. And last one if I may can you give us an update if there is any movement or any news on some of the SAFLA or FMLA stuff that we’ve been waiting for?

We still have a – we now have a date. It's early 2021. We're starting to see some of that come through. It was – we'll see as it gets closer to that date that whether we have a big, big push or this is a slow ramp to that date. What we have been seeing is as new products were being launched through the marketing process is that as all these CPGs go through. There are process and new products and new solutions. We're seeing the FMLA being complied with during that process rather than the big push that we were expecting earlier on. But the good news, Scott, as we’ve heard from multiple sources that a lot of these CPGs have come to the realization, they have to invest for growth, they're not going to be able to save themselves to success and we hope to be able to see that throughout.

So, we’re starting to see some of that come through and you expect it to slowly ramp until – through 2021 when the requirements are implemented.

We would expect that. But we don't control it. That's a reasonable expectation versus what we've seen for the last several years in North America.

Okay, well that's better than nothing I guess.

Still makes a lot of money Scott.

Sure, it does. Thank you, Joe. Thanks, Steve. Thanks, Karen.

Thanks, Scott.

Thank you.

Thank you. Our next question today is coming from Kincade Webster from Solas Capital Management. Your line is now live.

All right, thank you for taking my questions. My first one is kind of following up on some of the segmentation you guys did and actually say. How big is I guess Europe – sorry U.K. in the context of your European sales?

U.K. is about a $125 million and mainland Europe about $200 million.

Okay, great. Thank you. That’s very helpful. And I know you guys had some back and forth with the SEC earlier this year in February. Is that all finished? Or I guess what would be the status of that?

No, that’s really – that’s not the case. The SEC sends comment letters on a routine basis once every three or four years. We received a routine comment letter with some questions. We entered those questions and there were no issues. It's done.

Okay, so that’s all set.

It was. It was. Like I said it was fairly routine – actually it was fully routine. We had no issues whatsoever, so just questions that we answered and apparently answered to their satisfaction.

All right, great. Thank you very much. That's all I had. Good luck.

Thank you.

Thank you.

Thank you. We reached end of our question-and-answer session. I’d like to turn the floor back over to management for any further closing comment.

All right, well, thank you, Kevin. We appreciate everyone's participation this morning and we look forward to our next call in November with our fourth quarter announcement. Thank you. Have a good day and a good weekend.

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.