Earnings Call
Matthews International Corp (MATW)
Earnings Call Transcript - MATW Q3 2021
Operator, Operator
Greetings, and welcome to the Matthews International Corporation's Third Quarter Fiscal 2021 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Bill Wilson, Senior Director of Finance, Corporate Development. Please go ahead.
Bill Wilson, Senior Director of Corporate Development
Hi, thank you, Brock, and good morning, everyone and welcome to the Matthews International third quarter fiscal year 2021 earnings 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.
Steve Nicola, Chief Financial Officer
Thank you, Bill. Good morning. I'll start with slide 4. As provided in our earnings release yesterday, the company reported consolidated sales of $428.4 million and net income on a GAAP basis of $3.4 million or $0.10 per share for the quarter ended June 30, 2021, compared to sales of $359.4 million and net income on a GAAP basis of $2.3 million or $0.07 per share last year. On a year-to-date basis, the company reported consolidated sales of $1.23 billion and net income on a GAAP basis of $6.6 million or $0.21 per share as of June 30, 2021, compared to sales of $1.1 billion and a GAAP net loss of $94.6 million or $3.04 per share last year. The GAAP net loss a year ago primarily reflected the impact of a goodwill write-down. The key financial highlights for the fiscal 2021 third quarter included, first, the company's consolidated sales of $428.4 million established another new quarterly record for the company and represented an increase of $69 million or 19.2% compared to a year ago. Second, consolidated adjusted EBITDA for the quarter ended June 30, 2021 was $60.0 million compared to $49.4 million last year, representing a year-over-year increase of 21.5%. Third, adjusted earnings per share for the fiscal 2021 third quarter was $0.91 per share compared with $0.80 for the fiscal 2020 third quarter, representing growth of approximately 14%. Lastly, during the recent quarter, the company again reduced its net debt leverage ratio. At June 30, 2021, our net debt leverage ratio measured based on net debt relative to the last 12 months adjusted EBITDA declined to 3.1 from 3.2 at March 31, 2021 and 3.9 at September 30, 2020.
Joe Bartolacci, President and Chief Executive Officer
Thank you, Steve. Good morning. As you might expect, we are very pleased with our record-setting results for the quarter. Each of our segments delivered revenue growth during the quarter and our consolidated adjusted EBITDA grew significantly as well. Our Memorialization segment continued to deliver strong results. However, this quarter, as expected, the performance was driven by our Cemetery Products business while our Funeral Home Products business began to see the normalization of the death rate resulting from the vaccine implementation in North America.
Operator, Operator
Thank you. At this time, we'll be conducting a question-and-answer session. Our first question today is from Daniel Moore of CJS Securities. Please proceed with your question.
Daniel Moore, Analyst
Thank you. Good morning, Joe. Good morning, Steve. Thanks for taking questions.
Joe Bartolacci, President and Chief Executive Officer
Good morning.
Steve Nicola, Chief Financial Officer
Good morning, Daniel.
Daniel Moore, Analyst
Start with warehouse automation. Are you now largely back in your customers' facilities? And should we expect similar revenue in Q4 versus Q3? Just trying to see how much more business we can squeeze in before you get kicked out for the holidays.
Joe Bartolacci, President and Chief Executive Officer
So we are not back in all of our facilities and it has less to do with the pandemic than with our customers' ability to get hardware into their facilities. They're experiencing delays with conveyor systems and parts and components affecting their warehouses. Despite that, though, the revenues that we saw this quarter should be stronger next quarter, and our forecast reflects what we're seeing. We also expect to leave the year with very strong backlogs given the current trends.
Daniel Moore, Analyst
Helpful. Energy storage is closing in on $50 million of revenue I believe you said. What's the potential size of the opportunity over the next three to five years? And maybe a little more detail around the hydrogen fuel cell that you're positioning and where you hope to be.
Joe Bartolacci, President and Chief Executive Officer
So as it relates to what we project for next year, we're expecting another significant increase year-over-year based on our backlogs. We have strong backlogs and we don't even have all the orders we expect in-house yet. So we're feeling comfortable that next year we're going to see another significant increase. How big that could be is really not determined by us. We have the orders in house, but we are a component of an overall facility and the timing of those deliveries will reflect when we can recognize revenues. When it comes to hydrogen, again we are in the rotary processing business. We take material and process it through large cylinders that are hyper-pressurized, hyper-controlled, and precision milled and manufactured and driven by sophisticated PLCs. This is a very complex business, but we believe we can expand our footprint and knowledge base into the fuel cell side of business. We made a small acquisition earlier in the year that you saw. They bring know-how to the business. We bring our capability from the engineering side to manufacture production-rate equipment. Our expectation, unlike in the lithium business, is not only to provide equipment to our customers that may want it, but we intend to deliver fuel cells if we can as our own product.
Daniel Moore, Analyst
Helpful. Maybe one more if I could. A lot of comments and just trying to triangulate them all, sort of beyond let's say the next quarter. You said you expect positive momentum across some of the businesses to mitigate some of the unfavorable impacts of lower caskets and margins. Overall, should we think about EBITDA being maybe net slightly lower for a few quarters on a year-over-year basis? Do you think you can offset it and grow a little bit? Just any -- just how we should be interpreting those would be greatly helpful.
Joe Bartolacci, President and Chief Executive Officer
So – I mean, clearly we, like all the other companies in the world, are feeling the inflationary pressures. Many of which we're starting to see subside, but many have not started to subside. Given how they flow through our inventories, it could take a quarter or two or three while we navigate that. We're not prepared today to tell you how that's going to impact us because we do have strength in a lot of our other businesses. More importantly, given where our net leverage ratio has gotten to, we now have flexibility that we can pursue different opportunities. There are a few acquisitions out there we'd like to explore. There are other opportunities to continue to improve our business and invest. Or as I said, at these prices, we intend to be aggressive with our share buyback program. So many pieces of the puzzle at this point will allow us to deliver value to the shareholders.
Daniel Moore, Analyst
All right. You stole my last one as well. So I'll jump back in the queue with any follow-ups. Thanks.
Operator, Operator
The next question is from Liam Burke of B. Riley. Please proceed with your question.
Liam Burke, Analyst
Thank you. Good morning, Joe. Good morning, Steve.
Joe Bartolacci, President and Chief Executive Officer
Good morning, Liam.
Steve Nicola, Chief Financial Officer
Good morning, Liam.
Liam Burke, Analyst
Joe, you had a nice contribution from cremation and incineration. Was that the major driver of the revenue growth out of memorialization? And what do the backlog numbers look like with the deliveries in the third quarter?
Joe Bartolacci, President and Chief Executive Officer
You're right. We had modest growth. It's nice growth for that business in and of itself, but the value being delivered was primarily from our cemetery products side of the business. We also saw a good mix of products coming through on our funeral home products side. So, as a result, the real drivers were first cemetery products; secondary mix on the funeral home products; and third, our cremation business.
Liam Burke, Analyst
And the backlog on the cremation systems, is that still strong?
Joe Bartolacci, President and Chief Executive Officer
We're out 15 months -- 16 months.
Liam Burke, Analyst
Okay. Great. Thank you. And then I'm looking at retail. Are you anticipating in-store display? Are you anticipating any kind of step-up, sort of modestly higher year-over-year revenue? Would you expect that revenue growth to accelerate going into the holiday season or the back-to-school season?
Joe Bartolacci, President and Chief Executive Officer
Interestingly enough, Liam, I would say that we would have hoped to, but we're seeing reasonable, but not what I would call normalized spending in retail just yet. We're not disappointed with how our businesses are operating. They are better than they have been, but not at what I would expect a normal Christmas season and back-to-school season to be for in-store displays. That's pretty much the story with all of our retail side of the business, whether it be private label packaging, point of sale display work, or marketing branding things of that nature that are more retail-oriented. They're still behind, which further supports the strength we had from SGK due to the performance we have in what we call our core business, which is packaging for consumer packaged goods.
Liam Burke, Analyst
Okay. Super. And just one more quick one. You mentioned higher development costs in industrial. Is that the printer development cost?
Joe Bartolacci, President and Chief Executive Officer
Yes, it is, Liam. That is our print head that is now out in beta testing at several sites. Suffice it to say that we're extremely satisfied with its performance, confirming its value proposition that we've all talked about for a long time. We are in the midst of moving that production from more of a university setting to a professional silicon chip fabrication lab. That process will take a bit of time and a little bit of expense as we go through, but we've confirmed the size and the value proposition. It's now getting it to production.
Liam Burke, Analyst
Great. Thank you, Joe.
Joe Bartolacci, President and Chief Executive Officer
Yes.
Operator, Operator
The next question is from David Niewood of Phoenix. Please proceed with your question. Sir, your line is open.
David Niewood, Analyst
Hi. Sorry, I was on mute. Hi, Steve. Hi, Joe, and hi, Bill.
Joe Bartolacci, President and Chief Executive Officer
Good morning.
David Niewood, Analyst
Since your last quarterly conference call, there's been a lot of industry press related to your energy storage business. Much of the industry press indicates that you are very much connected to what's known as the 4680 cylindrical lithium-ion dry electrode battery process. Since in that news flow, it seems that there are several large battery companies evaluating the 4680. My question is, do you know of any 4680 processes or future players who are not doing this dry battery electrode? And if they are doing it as dry battery electrode, is it reasonable to assume that you're speaking to all of them? That's my first question. And then I have a follow-up.
Joe Bartolacci, President and Chief Executive Officer
Okay. So your first question, David. Interestingly enough, we've talked about this in the past. We are cylindrical rotary processing equipment manufacturers with specialty knowledge in dry cell lithium processing with some patents around it and other IP that we've developed. We've had years of experience in this space. We also operate in the wet cell process, but to a lower extent. Our unique selling proposition into the wet cell process is not necessarily unique, unlike in our dry cell world where we are unique. But at the same time, we're being contacted by both wet and dry cell developers. Suffice it to say that, at least when it comes to the Western European world, we are talking to just about everybody.
David Niewood, Analyst
Okay. Without naming names or customers, the commercialization of the 4680 cell -- dry cell lithium-ion battery, there is a large player out there who says that they are not quite there yet but are very close, and it has to do with the cylindrical performance of those large cylinders. In your mind, how solvable is that final hurdle to commercialization?
Joe Bartolacci, President and Chief Executive Officer
Look, at this point David, we're not in a position to speak to it because there are a lot of components associated with not only our processes but also the formulation of the lithium mix and the feeding of that mix through our process. So I can't tell you -- what we control is solvable. I can't tell you about everything else.
David Niewood, Analyst
I appreciate that and understand that I got in the weeds for these questions, but I appreciate the answers very much and I wish you guys continued success.
Joe Bartolacci, President and Chief Executive Officer
Thank you.
Operator, Operator
The next question is from Scott Blumenthal of Emerald Advisers. Please proceed with your question.
Scott Blumenthal, Analyst
Good morning, Joe, Steve. Bill.
Joe Bartolacci, President and Chief Executive Officer
Good morning, Scott.
Steve Nicola, Chief Financial Officer
Good morning, Scott.
Scott Blumenthal, Analyst
Joe, there's a natural ratio between cremation caskets and memorialization. Over the past year, memorialization lagged. I know in your comments you mentioned that you thought you might be caught up by maybe by the end of the year here. However, it would seem to me that essentially a year of depressed memorialization sales, you're going to catch up in maybe a quarter, 1.5 quarters, or two quarters. Do you really think that by the end of the year memorialization will catch up?
Joe Bartolacci, President and Chief Executive Officer
No. My comments, Scott, were that we have strong backlogs and we expect at least another strong quarter. So it's difficult to tell. I would tell you there is a normal ramp to memorialization, and then there'll be a tapering off of volumes. I expect that to continue throughout much of 2022, but how much we achieve will depend on many factors. Our current forecast reflects our expectations today. Could it be more or could it be less? Sure. We do have strong backlogs at this point.
Scott Blumenthal, Analyst
Understood. So you were just providing us with what you think is going to happen for the rest of the year and not making any commentary on next year.
Joe Bartolacci, President and Chief Executive Officer
Absolutely not.
Scott Blumenthal, Analyst
Okay. I really appreciate that. Okay. Also, can you talk about incineration and cremation equipment, which would seem to me that the demand would be strong worldwide considering what we've seen happening in certain places. I know you've had some business wins outside of the US and Europe. Have you been able to expand the cremation incineration opportunity? And what do you believe that the total addressable market is there?
Joe Bartolacci, President and Chief Executive Officer
The market continues to grow as you might expect. We are the leading provider of human cremation equipment in the world. We sell more equipment than anybody else by a wide margin. As a result, our reach continues to expand. However, I will tell you that outside of the United States, most of the sales are made to municipalities. As those municipalities have been constrained by the impact of COVID, you would expect those sales to emerge over time. Our backlog includes a lot of products in Latin and South America, Australia, and we have significant backlog in both Eastern and Western Europe. We are pretty confident that this will be a strong long-term consistent segment that continues to deliver value to the business.
Scott Blumenthal, Analyst
Okay. I know that you haven't given backlog numbers historically. Can you give us an idea perhaps, Joe, about the metrics over the last couple of quarters?
Joe Bartolacci, President and Chief Executive Officer
As I mentioned earlier, our backlog is almost 15 to 16 months. The issue is generally not whether we've got product to sell. It's more a question of whether a client is ready to accept the product. These are pieces of equipment that go into other facilities, requiring construction, permitting, and all the associated factors.
Scott Blumenthal, Analyst
Sure. Sure. And can I safely assume then, Joe, that backlog has expanded this past quarter?
Joe Bartolacci, President and Chief Executive Officer
Yes, the backlog has expanded modestly throughout this period. But yes, the answer is yes.
Scott Blumenthal, Analyst
Okay.
Joe Bartolacci, President and Chief Executive Officer
I think one of the insights gained during this pandemic has been the deferred maintenance many of these facilities had. As long as they were operating, they never really did all the maintenance they should have. Those challenges became evident as much of their equipment struggled to operate effectively during the pandemic. We believe there's a good service opportunity emerging in the coming period.
Scott Blumenthal, Analyst
Super. That's great to know. Now if I might ask one about packaging. We've observed inflation. You're seeing it in raw materials. Of course, consumers see that in the grocery store. We've seen inflation encourage consumer product packaging companies to downsize some of the packages. You've seen some companies change their products, not increasing prices but downsizing sizes and maintaining the same price. Are you seeing these trends, and are they accelerating? If so, that must be keeping your team quite busy.
Joe Bartolacci, President and Chief Executive Officer
That's part of the reason you're seeing our numbers, Scott. In our packaging business, we do not have significant inflationary pressures. It's principally a service line for us. We have some wage pressures, but nothing material. The volumes we are seeing are very high at this time. We also picked up new business during the pandemic due to our strong performance. Overall, we’re very pleased with it, and the business will adapt to this cycle as many of these consumer packaged goods look to repackage into smaller sizes or new and improved versions.
Scott Blumenthal, Analyst
Great. Right. And maybe as a last point, the market opportunity for the print head, not just new sales, but also replacement opportunities as well?
Joe Bartolacci, President and Chief Executive Officer
No question. There is an anticipated life based on the number of prints consumed by the printer or produced by the printer, and then there's a replaceable print head, unlike what has historically been out there, repair, and maintenance service.
Scott Blumenthal, Analyst
So then we can safely assume that any existing Matthews-installed printer is a candidate for an upgrade?
Joe Bartolacci, President and Chief Executive Officer
Every printer in our competitive space is a potential upgrade opportunity for us. We consider this a significant market opportunity. It may not be realized today or tomorrow, as this is a technology shift. However, we believe we can transform a great performing small business in our portfolio and extend its contribution to our overall portfolio over time.
Scott Blumenthal, Analyst
Got it. Thank you.
Joe Bartolacci, President and Chief Executive Officer
Okay. Thank you.
Operator, Operator
The next question is from Chris McGinnis of Sidoti & Company. Please proceed with your question.
Chris McGinnis, Analyst
Yeah. Good morning. Thanks for taking my question.
Joe Bartolacci, President and Chief Executive Officer
Good morning, Chris.
Chris McGinnis, Analyst
Can you just -- for us it seems like there may be a little bit of a change in the cemetery markets or just around memorialization. Have you seen that? Is that maybe changing as people coming out of the pandemic are recognizing and celebrating life a little bit differently? Have you seen anything change? Thanks.
Joe Bartolacci, President and Chief Executive Officer
We have not seen much of a significant change. In fact, if you look at some of the larger competitors -- customers of ours have reported very significant pre-need sales of cemetery properties. So in our world, we're seeing revenue flows consistent with what we might expect to be memorialized from the recent death rate.
Chris McGinnis, Analyst
Yeah. Okay. Thanks. And then just one other question, just around the EV and the demand that you're seeing and thinking about. Can you just talk about any capital needs to support that demand?
Joe Bartolacci, President and Chief Executive Officer
I would say that the capital needs are light. There may be some acquisition candidates we'll need to pull into the fray. But at the end of the day, it is not a big CapEx function. It’s not to say that we're not going to spend money. We are going to absolutely spend money. But not to the degree that you might expect to grow to a $100 million business in the near term.
Chris McGinnis, Analyst
Great. Thanks for taking questions and good luck in Q4.
Joe Bartolacci, President and Chief Executive Officer
Thank you.
Steve Nicola, Chief Financial Officer
Thank you.
Operator, Operator
There are no additional questions at this time. I'd like to turn the call back to Bill Wilson for closing remarks.
Bill Wilson, Senior Director of Corporate Development
Thank you, Brock, and thank you for joining us today and your interest in Matthews. For additional information about the company and our financial results, please contact me or visit our website. Thank you and enjoy the rest of your day.
Operator, Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.