Greetings, and welcome to Matthews International Corporation First Quarter Fiscal 2019 Financial Results. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Karen Howard, Investor Relations for Matthews. Thank you. You may begin.

Thank you, Sherry, and good morning, everyone. Thank you for joining us to discuss the Matthews International Fiscal 2019 First Quarter Results for the period ended December 31, 2018. We certainly appreciate your time today. You should have a copy of the news release across 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 or the slides, you can find them on the company's website at www.matw.com on the Investor Overview 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 Joe will review the business progress as well as our outlook for the remainder of fiscal 2019. We will then open the lines for Q&A. But before we do, I would like to highlight our safe harbor statement, 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've provided reconciliations of comparable GAAP to non-GAAP measures in the tables accompanying today's earnings release. And with that, it's my pleasure to turn the call over to Steve to begin. Please go ahead, Steve.

Thank you, Karen, and good morning. Please turn to Slide 4. Beginning with our first quarter results on a GAAP basis, the year-over-year change in our earnings per share primarily reflected the following factors: first, the significant income tax benefit recorded in the first quarter last year from the U.S. Tax Cuts and Jobs Act. The new law had the immediate impact of a significant reduction in the company's deferred tax balances, net of an estimated repatriation transition tax. This one-time net tax benefit of $0.76 per share was excluded for purposes of our non-GAAP earnings presentation. Second, during the recent quarter, we recorded a pretax loss of $4.5 million or $0.10 per share on the sale of a controlling interest in the pet cremation business. Third, as a result of our $300 million bond offering in the first quarter a year ago, our average interest rate was higher in the current quarter and the primary reason for an increase of $2.5 million or $0.06 per share in the company's interest expense; and fourth, due to challenging equity market conditions in the recent quarter, as evidenced by the declines in the S&P 500 and Mid-Cap stock indexes, a net investment loss of $1.4 million was reported for the current quarter compared to income of $467,000 a year ago, principally related to investments held in trust for certain of the company's benefit plan. This change represented approximately $0.04 per share. Last, we had some discrete items that favorably impacted tax expense last year. As a result, the effective tax rate in fiscal 2019 will be higher. This had about a $0.05 impact on the first quarter comparison. On a non-GAAP adjusted basis, earnings per share for the fiscal 2019 first quarter was $0.50 compared to $0.64 a year ago. As our…

Thank you, Steve. Good morning. Our first quarter of 2019 was slow as expected. Despite the slow ramp of new account wins, a seasonally low market in many of our businesses given the Christmas holiday and the loss on account in our SGK Brand business, I'm pleased with our operational performance of delivering steady EBITDA on a year-over-year basis. During the quarter, we continue to make good progress in several of our strategies. This includes the continued execution of synergies from past acquisitions as well as the addition of a small business called Frost Converting Systems, which we announced last quarter. Frost gives us a foothold in the North American market for our gravure packaging service and our services in engineering businesses. We also continued several significant successful warehouse automation projects and added more to the pipeline as this will continue to position itself as one of the leading providers of warehouse control software to a hot e-commerce market. In addition, we entered the final stage of our ERP implementation in the EU, which should allow us to now initiate a shared service model further reducing our G&A cost around the world. All these strategies were the results of years of planning and efforts that position our business to deliver our products and services more effectively and to deliver shareholder value over time. As we look at our businesses, we recognize that some of the markets that we serve are changing and accordingly we have changed as well. Some of those changes include creatively and effectively managing our SGK Brand Solutions and our Memorialization businesses, where we expect modest growth and active cost management, while continuing to generate very strong cash flow, which we're investing in more automation and technology to further accelerate our service and reduce our cost to…

[Operator Instructions]. Our first question is from Daniel Moore with CJS Securities.

To start with the Memorials business, which was, I'd say, a modest positive surprise, generated positive organic growth in a kind of a tough period. Wondering if you saw share gains in that business. And just a bit more color in terms of volumes versus ASPs in both caskets and the Memorial side?

Sure. So when we talk about our businesses, we look at it with the reality of the lens we have. The fact of the matter is, on the Memorialization side, particularly the bronze business, we have gained some modest share. We recognized, however, that we're sitting at somewhere over 60% of the market, so modest could be a couple of percentage points at most. So there's not a lot of gain, but we did see more volume coming through there from new accounts. Second, on the funeral home side, a lot of the, what I would say, the growth that we've seen is really dependent on demographics of the markets that we serve. Our market share strength happens to be in the northeastern part of the United States and the central part. When you look at how the cremation trend impact that part of the market relative to a place say like Florida or California or Seattle or Portland, if death rates remain consistent just by their nature, you're going to have more burials in that part of the country than you would elsewhere as a percent. So we also have another part of that business, which we sell some product to distributors. Those distributors also order some things from us that would -- might have been a little higher than last year. I wouldn't say it's market share as much as the demographics of our particular portfolio.

Helpful. Got it. And shifting gears to -- at the Brand Solutions side. When do we get -- when would you expect to get some of those orders back that were shifted out. Do you expect that in Q2? Or is visibility not quite that clear and when do you think we get back to at least flat, if not positive organic growth?

Well, I'll give you an example. We have -- if not our largest, one of our largest account did very little work because of internal issues they had on their side of the business this past quarter. We have been briefed on some fairly significant new work coming from them that would have been part of Q1 that was not there. When they release that to production is really not in our control, they brief us early to let us know as we prepare for work to come. We would see it through the balance of the next 3 quarters, I would say. And I would expect that to fall through to our bottom line as well. The other thing I would tell you that you need to be sensitive to, we've -- we talked about this in the past, this particular segment has the largest percentage of foreign currency impact, I think, Steve -- somewhere $4 million to $5 million of revenue being impacted. Most of that, if not all, most of that is sitting on the SGK side so you have to consider that when you look at the top line.

Indeed. Understood. And then lastly, you mentioned one client brought some business in-house in the Brand Solutions. If you don't want to mention who, maybe just a little bit more color in -- to give us comfort that it's not a trend and what kind of impact do we expect for revenue for fiscal '19 versus '18?

Yes. So, I mean, obviously, we're not going to talk about our clients, but I can tell you what we do and what this particular client chose to do. So in this world of e-commerce, one of the things that we do is we run a photo studio in multiple parts of the world. Photo studios are used to shoot everything from a package to footwear to whatever your product maybe that ultimately gets turned into digital retouching in our Asian operations and then comes back and ends up on a website and ends up on -- in print, ends up in some kind of form of advertising, whatever it may be, this particular client chose to because of their own creative needs or desires brought a new guy in and the new guy decided he was more creative than we were and decided he wanted to set up his own photo studio to do that and brought that photo studio in. That is not a trend. We -- I wouldn't tell you that this is a huge part of our business. I mean, it's -- that was expected to be $25 million to $30 million after this account has left, but at the end of the day this is not what you all think we do for our day-to-day business in terms of packaging. It's an extension of our value that we offer to brands when it comes to commercializing their package, their products whatever it may be. I don't hear a lot of companies deciding to add photo studios to be able to shoot their own photos.

Our next question is from Jason Rodgers with Great Lakes Review.

The slowdown in the marking products area, is that in your mind purely economic related? Or were there any competitive changes?

No. I mean, it is 100% economic related. I mean, the products and the consumables that we sell that are the most sensitive largely have to do with industrial type marking equipment. This is not the consumable products that you would see on the bottom of a can of beer or on a fruit product coming down the line. So it has always been the canary in a coalmine for us, every recession has been led by us seeing this 6 or 7 months in advance and we're seeing it, there's just no question. Those order rates there have been materially below our expectations from a budget standpoint and materially below prior year. Now we've made that up elsewhere. So it's not as if I'm calling you down, I'm just giving you a warning. Some of you on the line have been around and asked those questions in past and have seen that. So this is our traditional marking products. So no new competitor coming into space, no production flaws on our side, nothing of that nature, purely economic.

All right. And for the Industrial growth for the quarter, do you have what the organic component of that was?

Yes. So the pieces to the Industrial Technologies segment would have included a portion of Compass, and again, these are estimates because I'd said before, as we integrate it gets a little bit challenging to pull the pieces back apart. But Compass, we purchased a year ago, they do about $20 million to $25 million annually. We had them for a couple of months, this being the slowest quarter, so that wasn't added to the quarter on the acquisition side. We did have a little bit of currency headwind. So that would leave you with a rough estimate on the organic side of around 2%-ish.

And that's coupled with a decline in some of the other -- in our traditional product.

All right. And then shifting to commodity costs. Still expecting headwinds there, but just wondering how you think that plays out for the remainder of fiscal '19, when you might see those potentially level off?

We have baked that kind of an assumption into our guidance given what we believe that cost to be today. Could it materially change over the next 2, 3, 4 months? Unfortunately, when it comes to steel, even if it were to change dramatically tomorrow, we wouldn't see it flowing through our P&L for about 4 or 5 months. If it were bronze, we're typically bought out over a period of time. So you're also not going to see that real quickly. The one that could have change is one way more dramatically than other -- and probably one that we were not as -- spending has been as significant as it is today is freight. Freight has been a significant headwind that is more than we have historically seen in any of our businesses. So our guidance today incorporates what we believe it to be. Could that change? Your bet is as good as ours.

Then finally, do you have the current net debt to EBITDA? And when do you think you may reach that 3x target?

Well, right now, we were at 3.6x at the end of September. Just -- again, just the slowness of the quarter you see it in the -- you see it typically seasonally for us. So we actually had a net increase in debt instead of a net decline in debt. So at the end of December that net debt number was 3.7x. So not much different than the end of the year. And we're still targeting to over the year, particularly as we get into the strong cash flow months, to again emphasize delevering and see that number decline, not only the net debt number, but the growth in EBITDA. And so if -- depending on our projections, you'd start to see us approaching that 3 next fiscal year.

[Operator Instructions]. Our next question is from Liam Burke with B. Riley FBR.

Joe, you talked about the North American CPGs slowly coming back to discuss possibly working more on the packaging front. With SKUs still sort of being down, what's bringing them back to the table? And what's driving their interest in renewing the ad spend in that area?

We've mentioned this in the past. There was a conference about a year ago called the CAGNY conference where if you listened to the CPG, CEOs and CMOs, they had talked about the need to reinvest in their brands in general. That this malaise that they were feeling on their top line really was driven by a failure to kind of differentiated products in the marketplace. What we're really starting to hear about and see is that segmentation of the market with different products, maybe different sizes, different shapes whatever it may be, different flavors, but ultimately the SKU proliferation, which is what drives a lot of our business. That shift doesn't turn overnight. We heard about this last March at -- from the CAGNY presentation. We're starting to hear about it more fully in our workforce as our customer service reps feed that information up. Now turning that into revenue on our side is always a longer period of time. But I think the way forward that we're going to see is more segmentation in markets rather than less.

Okay. And on the Industrial business, if I presume there's R&D spending in that EBITDA margin you mentioned the consumables, lower contribution would effect product mix, but if I look at the current EBITDA margin, how would you see the trends adjusting for quarter-to-quarter variability on product mix and R&D? How are you looking at the trends over time? You'd seen a nice step up in profitability, and now call it flat adjusted flat year-over-year?

Yes. So with respect to the margins in Industrial Technologies a couple of things to think about. One, the first fiscal quarter just because of the nature of the business, particularly on the e-commerce side does tend to be the slowest. But as Joe mentioned in his remarks, the backlog, the order rates in those businesses -- or that part of the business continues to remain solid. We do have good margins on the product -- what we're calling the product identification side, those traditional marking products and inks particularly with the inks. So we're paying attention as we should to the slowdown in those sales rates. But having said all that, the one factor that should continue to contribute to growing margins or will contribute, I should say, to growing margins, particularly as we get later in this year or exit the this year or in the next year is, as we start to commercialize that new product and that product development spend now starts to transition to a lot of that to cost of the sales with revenue associated with it, that's when you'll start to see the margins improve from the rates they are today, the 10-plus percent this quarter, especially.

Great. And just real quickly, how are pre-need sales this quarter in memorialization?

Not high. It's not a significant contributor. I would say consistent with where we've seen, but not -- it is not the reason why we grew.

Our next question is from Daniel Moore with CJS Securities.

Given, Joe, the slowdown that you're seeing in marking products and you are -- you just alluded to Steve, that they've been, obviously -- have traditionally been higher margin, just -- you see you're making it up in other places. Just trying to get a little better handle on what those other places might be. Obviously, Memorial is a little bit better, but just kind of confidence in sticking with the guide. It's still early in the year, obviously, but where might you make it up and what levers you have to pull up, the cost side or otherwise to just give you that confidence?

Well, I'll give you a simple one here and give you some confidence on it. As you all know, the consumables part of our business is a very good business for us. We have, as I said in my comments, landed a new account we expect to start here, if it hasn't already started today, within the next 30 days, which is a large consumable -- consumer of our inks, that will help us mitigate the decline on the product identification side. The other thing is as we look at our backlog on the warehouse automation side, those -- they are not as good as the consumable margins, but clearly good margins on that side as well. So that's just within the Industrial Technologies side of the business. That cremator market I mentioned to you in the project that we talked about, we expected a large part of that to fall into this first quarter, $4.5 million, no fault of our own, we expect that to hit the balance of the year. So we're comfortable at this point in time. Now these things we don't control. And those are the things that like being deferred or pushed up, projects canceled, whatever it may be, but this is the backlog we're sitting on today. These are the things we know of today and that's our guidance.

Perfect. Appreciate it. Lastly for me is, one of the [indiscernible] complaints on the part of some investors is the gap between -- kind of gap in nonrecurring and the size and frequency of adjustments that ERP, obviously, the loss on the sale sort of out of your control, but ERP integration, when should we expect those to start to wind down and that gap to close?

Yes. My comment, Dan, was that we entered our final phase in the EU. This was our historical businesses over there. They go live here in the next couple of months. We expect that to be substantially completed by the beginning of our fourth quarter and that is the implementation. So to clarify, I've had some conversations with several investors in the past, how -- why ERP should be -- why it should not be called -- these are implementation costs, these are not the running costs associated with ERP. So if you have any knowledge of this area, the cost of putting in a system runs into millions. This is the last piece of it. It is the piece that we expect to go probably the smoothest since they already had their own modest ERP in place over there. And our team is pretty confident this will be done by the end of the -- by the third quarter or beginning of the fourth.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Karen for closing comments.

Thank you, Sherry. We appreciate everyone's participation this morning. As always, thank you for your interest in Matthews. We look forward to updating you on our second quarter fiscal 2019 results in May. Thanks, again, and have a great day.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.