Welcome to Matthews International Corporation Fourth Quarter and Year-end Fiscal 2020 Financial Results. At this time, I'll turn the conference over to Bill Wilson, Senior Director of Corporate Development. Mr. Wilson, you may begin.

Thank you, Rob. Good morning, everyone, and welcome to the Matthews International Fourth Quarter and Fiscal Year-end 2020 Conference Call. This is Bill Wilson, Senior Director of Corporate Development. With us today are Joe Bartolacci, President and Chief Executive Officer; and Steve Nicola, our Chief Financial Officer.

Thank you, Bill, and good morning. Please turn to Slide 4. There are several key items that I want to highlight from our earnings announcement yesterday regarding our consolidated financial results for the fiscal 2020 fourth quarter and fiscal year. First, the company, again, reported strong operating cash flow as we continued to emphasize cash generation in this challenging environment. For fiscal 2020, the company set a new record for cash flow from operations of over $180 million. Second, the company, again, reduced its outstanding debt and leverage ratio during the recent quarter. For fiscal 2020, we reduced our outstanding debt by $106 million and our net leverage ratio to below 4, specifically 3.9 at September 30, 2020. Third, we reported growth in consolidated sales, adjusted EBITDA and adjusted earnings per share for the fiscal 2020 fourth quarter compared to the same quarter last year. With respect to COVID-19, all segments continued to experience some level of varying commercial impacts from COVID-19 during the fourth quarter. These impacts still remain difficult to quantify, and as the pandemic has continued into the December quarter, we expect ongoing impacts into our 2021 fiscal year. On a GAAP basis, the company reported earnings per share of $0.24 for the current quarter compared to a loss of $2.28 per share last year. The fourth quarter last year included a goodwill write-down of $77.6 million or $2.42 per share. Also, earnings per share on a GAAP basis for both quarters included the impact of the acceleration of the amortization of certain discontinued trade names in the SGK Brand Solutions segment.

Thank you, Steve. Good morning. Again, this quarter, we are very pleased with our results, particularly given the ongoing circumstances in which we operated. Once again, we demonstrated the resiliency of our portfolio of businesses as our Memorialization business delivered very strong results, while all but one of the remaining significant businesses delivered remarkably stable results. We truly believe the resiliency of our various businesses is the most underappreciated facet of our company.

And our first question is from the line of Daniel Moore with CJS Securities.

I wanted to start with Memorialization. We had very strong results in the quarter. I'm interested in how you expect those to continue and your thoughts on how fiscal Q1 will shape up compared to the quarter that you just reported.

We are seeing performance that is relatively consistent with last quarter as we move into the first quarter of 2021 for this business and others. Our various businesses operate in essential areas for many of our clients, which helps them achieve their goals, such as packaging and industrial automation. However, our Memorialization business is linked to death rates, which remain elevated at this time.

Very helpful. Regarding the second quarter, the delays in memorials or markers made of bronze and granite are obviously due to stay-at-home orders. Do we expect this opportunity to continue to grow the longer these delays persist? Will this affect the chances of families returning to purchase markers? I'm not sure if there are historical examples to reference, but I would appreciate any insights on this.

The last time we experienced a similar situation was during the 2008-2009 financial crisis, and memorials did eventually return. I want to caution everyone that this resurgence doesn't happen immediately, either in the next quarter or within the next 12 months. We observed orders coming in over the following 24 to 36 months, primarily earlier in that timeframe rather than later. Ultimately, those sites typically get marked. Currently, we are functioning at levels that align with the normal rates of deaths, which suggests that, given the hundreds of thousands of individuals who may have passed away, there should be a push for memorialization. However, I can't specify when that will occur.

Understood. Okay. And maybe one more, and I'll hand it over. But Brand Solutions, maybe just talk about the conversations what they're like now with larger CPGs? Are folks starting to look at new product upgrades, new versions, designs for '21? Or has it been kind of largely the status, the same level of activity that we've seen for the last, say, 12 months?

If you examine the details of that segment, we divide it into what we refer to as our core business and then analyze it further, including surfaces, cylinders, and engineering. In the core business, we had relatively strong results last quarter and decent results the previous quarter as well, despite facing really challenging conditions in the retail segment, whether related to our private label work for grocery stores or our in-store displays through our merchandising business. Those two areas have struggled. Overall, we are quite satisfied with the performance of the core business. Of course, we would prefer it to be exceptionally robust, but it hasn't fallen short of expectations. We have consistently stated that packaging plays a crucial role in such environments. Often, you witness an increase in packaging efforts aimed at attracting and encouraging consumers to spend and revise purchasing behaviors. We observed this trend during this event as well. We believe there is a substantial amount of pent-up demand within the retail sector as a whole. To give you perspective, we do not think we have made any significant retail investments in-store since before Christmas of 2019. As the pandemic eventually subsides and stores begin to reopen in approximately 6 to 9 months, we anticipate being over 20 months without any retail investment. Consequently, we expect a considerable buildup of pent-up demand during that period. Additionally, we were aware of contracts in place at the onset of the pandemic that were subsequently canceled, which were significant. We believe that those will return eventually. In the meantime, we anticipate our core packaging business will remain relatively stable during this time, with possible increases from some wins we have achieved, though we will have to see how that develops. We do not have much visibility for the next 12 months to indicate that we will see a lot of new packaging, as that is just the nature of the business.

The next question comes from the line of Liam Burke with B. Riley.

Joe, could you sort of parse the CPG business, U.S. versus Europe? I imagine Europe with all of the shutdowns and whatnot, have been a little more challenging on that side? And I wanted to get a sense after that, how COVID has influenced the U.S. CPG business? Or they continue to invest on through?

It's a great question. We can look at this from different angles, starting with geography. In North America, we performed better this year compared to last year, thanks to several clients. Although many of our clients are significantly down, particularly in sectors like beverages, which are often tied to restaurants and events, we've seen some of our largest clients reduce their spending considerably. They are focused on cost containment. Conversely, in the cereal and breakfast food sectors, there has been a surge in new products aimed at meeting the demand from consumers who are staying home. In Europe, the shutdowns have had a greater impact, resulting in reduced consumer spending in a market that typically has more people staying at home than in North America. However, we anticipate a reversal, as this situation isn't permanent. Overall, our APAC business remained stable and has performed well under these tough circumstances, which may have been misinterpreted by the market. We're not primarily in the printing business or at the high end of the design spectrum, though we do have some businesses in those areas that are facing challenges, such as our work with Air France, whose spending has significantly decreased. Overall, our core packaging business has done very well in these difficult times.

Great. And on the cremation front, do you have any incineration included in that backlog number?

Yes. Yes, we do. In fact, projects that we expected to occur in 2020 were postponed, as you might expect, because of the environment. A lot of that work is done in the U.K. You all know as well as we do what's happening in the U.K. with various shutdowns, and probably the epicenter of what's going on in Europe today. But those incineration projects remain in discussion. I would tell you they probably have ramped up a little bit as people have accepted that this is more part of their normal working environment right now; we can't wait. We expect today is a big word when we can't control, expect but not control those projects to be done this year, at least substantially completed this year.

Okay. And just a quick clarification, Joe. Even in your prepared comments, you said relative on the 2021, I know you're not giving guidance, but you're just sort of giving us a directional sense. Relatively steady year-over-year over 2020, is that on a revenue or on an EBITDA basis?

I mean, we speak on the EBITDA basis, but we would expect our revenue not to be materially off. And we give that guidance knowing that we have the opportunity for more, but really can't control whether we can deliver more.

Our next question is from the line of Scott Blumenthal with Emerald Advisers.

Steve, this one's for you. Terrific gross margin performance year-over-year, great work there on the working capital. I think you had a $60 million swing or something there. Any other opportunities in order to pull a little bit more cash out of there? And let's start with that one.

Yes, Scott, we are continuously working on that. We see opportunities ahead. There are a couple of points to consider. First, reflecting on the current environment and the advancements we've made in working capital, we've certainly set a high bar for next year. However, if you remember, a few years back when we rolled out our ERP, we mentioned the chance to enhance our systems once we were on a unified global ERP. We are currently in the process of doing that. Some of this is part of the cost initiative we discussed earlier. One goal of this effort is to achieve further improvements in working capital. I expect more progress ahead, but I would caution against being overly optimistic about reaching the same level or doing so as quickly as we did in fiscal '20.

Have you enunciated a working capital to sales target at all?

No, we have not.

Okay. All right. And Joe, you mentioned that the backlog is the largest ever backlog in the history of Matthews. I suspect that some of that has to do with the fact that you weren't able to get onto customer sites for certain projects in cremation and in industrial. I know that you don't give a backlog number, but can you kind of size that up compared to where we were at this time? Is it 25% higher? Is it 50% higher? Maybe just give us kind of a gauge there.

Yes, it's challenging. In our Memorialization segment, aside from our cremation equipment business, we don't have any backlog lasting more than four weeks. That's not where the backlog is. The cremation sector is probably seeing a 5% to 10% increase in revenue compared to last year at this time, though I can't provide a specific figure. You're correct that on the warehouse side, we're 20% to 25% up from where we were because we couldn't process orders and new orders kept coming in. However, I want to caution you. For instance, a recent win from a U.S. client operating in Canada adds to that portfolio, but I can't currently access Canada to do the work. So, we remain cautious about the upcoming year since we're uncertain about when and how we can get there. Additionally, we discussed our surfaces, cylinders, and engineering divisions. Our engineering business, which includes our energy storage function, has essentially tripled its backlog. I won't disclose specific dollar amounts, but it's a significant figure that we're proud of, and we expect it to be a major contributor that we'll talk about throughout the year. Yet, the delivery of those orders is beyond our control. We anticipate they will be delivered within 2021, but we can't control the situation.

Sure. Will either of you be able to venture a guess as to how much of an impact you feel you had on Q4 sales, just by the fact that you weren't able to get onto customer sites for any number of reasons?

Our expectations for our industrial automation business were that they would show a better year-over-year result. However, they were down by $1 million. While it could have been lower, the situation is not as drastic as a $50 million drop, so I don't want to give a misleading impression. We did anticipate better year-over-year results, but instead, we experienced a modest decline. Ideally, we would have been closer to flat year-over-year.

Next question comes from the line of Bruce Geller with Geller Ventures.

I admire the company's resilience through a very difficult period here.

So do we.

As a shareholder, I appreciate that. In both this call and the last, you mentioned an energy storage component related to your engineering business. Could you please clarify what that entails? What is the current backlog size? How significant is this business for you at the moment? What is the potential opportunity? Additionally, how does this business fit within the segment known as Brand Solutions?

Innovation is key to our strategy. Let me address your questions. Our engineering division primarily focuses on purpose-built equipment. Historically, we've manufactured equipment that uses our technology to create cylindrical solutions. For example, in our gravure cylinder business in Germany, we produce printing cylinders for packages, wallpaper, and similar products. This printing technology enables us to manufacture solutions used in various industries including tissues, nonwovens, paper towels, and feminine hygiene products, particularly those produced in a roller format. The energy storage initiative we've mentioned is the result of several years of effort and investment to determine how we can apply our cylindrical solutions and custom-built equipment to processes like calendaring lithium and producing embossed plates for fuel cells. Essentially, we leverage technologies similar to those used in printing, but on a much more sophisticated level, to convert raw lithium into sheets necessary for lithium-ion batteries or embossed plates for fuel cells. Currently, this market remains relatively small within our overall business portfolio. However, we are committed to it and continue investing, as we hold valuable intellectual property in this area that we take great pride in protecting. We see potential for this segment to become a significant contributor over the next few years or even within this year. Does that address your question?

So how large is that business today, roughly on an annualized run rate?

We probably did $40 million or $50 million this year. Go ahead.

How many customers does that represent? Is it one major customer while you're seeking additional ones, or are you currently engaged with multiple customers in that industry? I'm curious about the level of diversification in this business.

Much of what we've been operating in has been in pilot lines of testing. So we have done work for a lot of different players in the industry whether they test out their formulations to try to determine how to produce the batteries, and principally in the auto industry right now, but obviously has application elsewhere. And we've talked to and sold to a lot of different players. Smaller pieces of equipment than what we are talking about, which is of the production size scale.

So with this being a $40 million to $50 million business today, with the projected growth in the industry. I'm sure you're reluctant to throw numbers out, but is this something that could be multiples of the current size that it is today based on their projected growth in the industry and your position within it?

As you all know, we are in the early stages of energy development. We believe we have a solution, and we think it's a strong one. Is it the only solution? We aren’t fully aware of everything available in the market, and there could be many alternatives. We hope there are multiple options like ours, but we also recognize that there may be other solutions that could deliver what we currently offer. It's a challenging question for us given our position. However, I can tell you that we have worked in this area on a smaller scale for nearly a decade.

That's great. And then I guess, to my initial question, how does it fit in the segment even? I mean, should you guys have an engineering segment to highlight this business?

In its current size, we have not, but we clearly have those kinds of discussions. If it grows, we will start to reposition it into our Industrial Technologies segment and highlight it.

Yes. Bruce, it's really the evolution because right now, it's evolved out of the cylinders business, which supports our Brand Business in Europe today.

Your next question is from the line of Daniel Moore with CJS Securities.

I wanted to discuss the balance between additional cost containment initiatives and some temporary expense reductions that could return in fiscal '21, as well as the overall impact of those changes.

We have made substantial progress in our German and U.S. markets to achieve cost benefits through SAP. We're about one-third of the way there, with a significant amount of work still ahead in the next 12 to 24 months that will lead to continued improvements. Our investment in SAP is expected to yield considerable results. The timeline for returning to what I would consider normalized expenses is uncertain. Currently, our staff is working from home, and we are minimizing travel where possible, although some operations necessitate it, like servicing equipment in Florida or installations. Therefore, we are primarily focusing on cost containment in sales-related travel and entertainment. This could lead to more lasting changes in our overall cost structure moving forward, but it's challenging to predict specifics in this difficult environment.

Okay. Steve, can you clarify the cash flow situation? What are the anticipated capital expenditures for fiscal '21? It seems like you mentioned there could be some additional benefits from working capital, but I thought it might be a challenge this year considering how strict you’ve been. Did I understand correctly that you’re expecting to see a bit more advantage this year?

I believe we have a long-term advantage in working capital from our current initiatives. You're correct, Dan. We will make efforts to maintain our working capital on a year-over-year basis. For modeling purposes, that would be my suggestion. Regarding capital expenditures, considering the current environment, we will continue to be cautious from a cash flow standpoint. Typically, in a normal year, our spending might be in the mid-$40 million range. However, I expect it to be slightly lower than that but a bit higher than our spending this year, which was around $33 million to $34 million.

Perfect. Lastly, can you provide an update on your spending for buybacks? I know you've maintained that the shares are undervalued. How are you planning to balance debt reduction with additional buybacks as we move into fiscal '21?

Well, Dan, I would say that we have shown our ability to generate cash and position ourselves well in a challenging environment over the past year. If our stock were trading at $17 or $18, which it did not too long ago, we would definitely use the cash we generate to buy back our shares. Moving forward, I believe we have the flexibility to take the necessary actions. If we consider share buybacks to be an important part of our cash flow strategy and feel that the stock price does not accurately reflect our value, we will proceed with that. We will find the right balance between these priorities.

Our next question is from the line of David Niewood with Phoenix Insurance Company.

Phoenix is a relatively new shareholder, and we appreciate the strong overall performance during a challenging time. I would like to follow up on the energy storage topic that was mentioned earlier. It has been reported in the industry press that Saueressig is collaborating with Tesla on their dry battery electrode technology. Considering the figures discussed regarding your business, I am curious if the $40 million to $50 million primarily comes from one customer, and whether this relationship is exclusive. Tesla has indicated a need for dry battery electrodes that could increase significantly, from tens of gigawatts to as much as 3 terawatt hours, which could imply a substantial potential for business growth. Is it accurate to think about it this way? Is there exclusivity in this arrangement, or can you also sell to the wider industry?

First, we won't discuss our individual customers. I can't confirm or deny any specifics about them. I want to emphasize that we do not have exclusivity with any of them currently in this sector. We are offering solutions to various companies. You are correct that the market potential could be immense. We believe we have exceptional intellectual property, which we've mentioned before. However, I cannot speculate on what other options are available. I do not claim to be the only possible solution for them. Our team is outstanding, we possess valuable intellectual property, and it is proving its worth.

The next question is from the line of Austin Nelson with AIG.

I wanted to revisit the backlog questions, particularly regarding Memorialization. The results weren't surprising to me. It was impressive that you managed to meet the demand. However, considering the inability to place memorials that could have been bought last quarter, along with the reopening and ongoing demand for caskets, my question is whether you have an idea of the number of caskets sold and the growth there, as well as the cremation aspect, compared to what transpired on the memorial side. What is the pent-up demand for delivering memorials? Additionally, your publicly traded customers have reported strong pre-need sales in the last quarter. Are you experiencing that same trend in pre-need sales within your Memorialization business? Beyond the perceived backlog, do you actually have growth in what will eventually be booked but will go into the trust?

You clearly understand the market. As you've noted, our large publicly traded clients have made a significant number of pre-need sales, but those don’t convert to orders for us until they are collected and paid. Therefore, our orders related to pre-need memorials have been quite low, lagging behind our usual levels. We expect that to change over time, although it’s out of our control. Regarding casket volume, we sold approximately 40,000 more caskets compared to the previous year. This can be roughly associated with 40% of those translating into markers, with 30% in markers and 70% in stone. While we have a solid share in the stone market, our share in the bronze market is stronger. For the anticipated 20,000 bronze markers, we hold about 65% of that, so we estimate around 15,000 to 20,000 markers are still pending. This represents a potential improvement of 10% to 15% in terms of units. Additionally, we generate around $100 million in the cremation sector, with approximately $50 million from equipment and services and another $50 million from urns, memorials, niches, and other solutions. We expect to see some influence from that as time progresses.

That's very helpful. I have one more question regarding Brand Solutions. The performance was much better than I had anticipated, so congratulations on that. I understand that the core packaging business is doing well. If we look at the results, the large consumer packaged goods companies that are your customers are starting to grow again, possibly benefiting from pandemic-related changes. Regarding the retail demand, can you break it down for me? I always considered it in terms of end caps and similar strategies. To some degree, you might have missed sales due to weekly promotions, but is it primarily that there are no end caps right now as they are focused on stocking up on inventory, reducing the need for promotions? Once we return to normalization, will you see a shift? I'm sorry, please continue.

It's a good question, but we don't focus on end caps. We specialize in in-store functions, such as refurbishing marketing displays for major television electronics suppliers. These projects, which can range from $10 million to $15 million nationally, involve everything from materials like brass and glass to graphics. We also work in industries like fast food, where we’ve partnered with large national chains. We help revitalize in-store areas that haven't seen much foot traffic, which means they haven't spent extensively yet. While we might not repeat the exact same programs, there is a strong desire to update in-store displays. This pent-up demand is significant, although I can't provide a specific number. Our conversations with our existing clients indicate that when these stores reopen, there will be nearly two years' worth of delayed investments that will come all at once. Given the pandemic situation and the potential efficacy of vaccines, we could see this happening just before the Christmas season, which is typically our busiest time. Therefore, we are optimistic, especially if we can navigate the next six to nine months successfully.

Yes. That sounds very helpful. That makes a lot of sense. There are essentially big capital projects that have been...

At this time, we've reached the end of the question-and-answer session. Bill, we have no additional questions at this time.

Thank you, Rob, and thank you for joining us today and for your interest in Matthews. We plan to file our 10-K later today. And again, as a reminder, for additional information about the company and our financial results, please contact me or visit our website. Enjoy the rest of your day. Thank you.

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