Earnings Call Transcript - MATW Q4 2023

Operator, Operator

Greetings. Welcome to Matthews International's Fourth Quarter and Year-End Fiscal 2023 Financial Results Call. Please note, this conference is being recorded. I will now turn the conference over to Steven Nicola, CFO. Thank you. You may begin.

Steven Nicola, CFO

Thank you, Sherry. Good morning. I'm Steve Nicola, Chief Financial Officer of Matthews. And with me on the call this morning is Joe Bartolacci, our company's President and CEO. For your reference in today's call, our earnings release has been posted to the Investors section of our website, www.matw.com, along with the presentation. Before we start, please note that any forward-looking statements in connection with this discussion are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Factors that could cause the company's results to differ from those discussed today are set forth in the company's annual report on Form 10-K and other periodic filings with the SEC. In addition, we will be discussing non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics. In connection with any forward-looking statements and non-GAAP financial information, please read the disclaimer included in today's presentation materials located on our website. Now I will turn the call over to Joe.

Joseph Bartolacci, President and CEO

Thank you, Steve. Good morning. We are pleased with our results this quarter, reporting higher consolidated sales and improved adjusted EBITDA across all business segments. Our Industrial Technologies business achieved strong revenue growth in the fourth quarter, particularly due to the continued interest in our Energy Solutions business, surpassing our $500 million revenue target for the year. For fiscal '23, Industrial Technologies revenue increased by over 50% from last year’s $335 million. Our Memorialization business maintained stable revenues for the full year despite a decline in death rates, with an 8% adjusted EBITDA increase driven by productivity improvements and better price realization. At SGK, cost reduction measures led to higher adjusted EBITDA and improved margins, despite ongoing challenges in the European market. We exceeded our targets, reduced our net leverage ratio, and decreased our total debt by year-end. We anticipate further debt reduction as we convert working capital from our expanding Industrial Technologies segment to cash. Consolidated sales grew by 6.7%, and adjusted EBITDA increased by 7% for fiscal 2023, which is commendable given the uncertain global market conditions. We are well-positioned to continue growing sales and adjusted EBITDA into fiscal 2024, especially in our Industrial Technologies segment. On a constant currency basis, our sales were up 8%, and our EBITDA increased by 9%, showing strong performance in this difficult environment. Now, looking at the individual segments, Industrial Technologies saw strong growth, mainly from our energy storage solutions. The year-over-year improvements included benefits from our acquisitions of OLBRICH and R+S Automotive, which enhanced our capacity to meet the rising demand for energy solutions. We discussed initiatives for OLBRICH and R+S during our last call, and the positive outcomes are reflected in our strong fourth-quarter results. We are engaging with several OEMs and battery manufacturers for our energy solutions and expect to finalize significant orders in 2024. We still have around 50% of the $200 million in energy orders announced in January to fulfill in 2024 due to customer-delayed deliveries. We will keep you updated on any significant new orders as they come in. Our backlogs in engineering and OLBRICH increased by $190 million at year-end, including an $80 million rise in our energy business. Regarding product identification and warehouse automation, our Product Identification business provides advanced marketing and printing technologies, consumables, and software for industrial applications. We identified an opportunity to replace existing continuous inkjet technology with a new, more efficient solution that is maintenance-free and significantly reduces ownership costs. This product is designed to meet the growing need for 2D codes, which are expected to take precedence over barcodes in specific applications. We plan to launch this product between late 2024 and early 2025. In warehouse automation, we secured our first European project and our first factory automation order, with deliveries expected in fiscal 2024. We're eager to expand our market reach both by industry and geography. Supported by the growth of our Industrial Technologies segment, we are exploring acquisitions to enhance our product offerings. Our Memorialization segment has reached a new level post-pandemic, with stable revenues and an adjusted EBITDA that surpassed pre-pandemic figures by $30 million, due to the growth in our cremation products, market share gains, productivity enhancements, acquisitions, and pricing strategies. Moving to SGK, this segment is facing challenges due to the European market and unfavorable currency changes. However, we observed performance improvements in the second half of fiscal 2023 and the benefits from cost-cutting measures implemented recently. We are launching a significant cost-reduction initiative in Europe, which includes price adjustments and closure of some sites to tackle the impact of the ongoing conflict in Ukraine. As we look ahead, we are optimistic about long-term opportunities for all our businesses, especially the Industrial Technologies segment, which we believe will drive growth in sales and adjusted EBITDA. We met our targets for the year and are positioned well for a solid start in fiscal '24, particularly with robust backlogs. However, as I noted previously, the variable nature of project-related work in Industrial Technologies makes it challenging to predict timing on growth, especially quarterly. Therefore, we will not provide specific fiscal '24 earnings guidance at this time, but we expect our results to surpass those of fiscal 2023. We will provide updated guidance as we gain clarity on order timings. Concerning capital allocation, we anticipate strong operating cash flow in fiscal 2024, and continued debt reduction is a long-term goal. We also plan to explore acquisitions to support growth, especially in our Industrial Technologies segment. In closing, we look forward to another successful year in 2024, advancing the transformation of our Industrial Technologies segment to become a more significant contributor to our overall results. Now, I will turn it over to Steve for a detailed discussion of the financial results for the quarter and the fiscal year.

Steven Nicola, CFO

Thank you, Joe. I'll begin with Slide 7. Consolidated sales for the fiscal 2023 fourth quarter were $480 million compared to $457 million a year ago, representing an increase of $23 million or 5%. The increase primarily reflected higher sales for the Industrial Technologies segment. The Industrial Technologies segment reported a sales increase of $36 million or 34% compared to a year ago, primarily reflecting higher engineering energy storage sales and the impact of the acquisitions of OLBRICH GMBH and R+S Automotive GMBH in August last year. Memorialization segment sales were $204.9 million for the current quarter, which was relatively consistent compared with $206.3 million a year ago, and sales for the SGK Brand Solutions segment were $11.5 million lower than a year ago. On a consolidated basis, changes in currency rates had a favorable impact of $5 million on current quarter sales compared to a year ago. On a GAAP basis, the company's net income was $17.7 million or $0.56 per share for the current quarter compared to a loss of $81 million or $2.63 per share for the same quarter last year. The prior year loss on a GAAP basis reflected a goodwill impairment charge related to the SGK Brand Solutions segment. On a non-GAAP basis, consolidated adjusted EBITDA, which represents net income before interest expense, income taxes, depreciation and amortization and other adjustments for the fiscal 2023 fourth quarter was $61.9 million, compared to $55.9 million a year ago, representing an increase of $6 million or 10.7%. The increase reflected higher adjusted EBITDA for all 3 of the company's reporting segments. Changes in currency rates had a favorable impact of approximately $422,000 on current quarter consolidated adjusted EBITDA compared to a year ago. Adjusted earnings per share for the current quarter was $0.96 compared to $0.82 for the same quarter a year ago, representing an increase of $0.14 or 17.1%. The increase primarily reflected higher adjusted EBITDA for each of our business segments and a lower income tax expense impact for the current quarter, offset partially by higher interest expense. Please see the reconciliations of adjusted EBITDA, non-GAAP adjusted earnings per share and constant currency sales and adjusted EBITDA provided in our earnings release. Please turn to Slide 8 to begin a review of our segment results. Sales for the Industrial Technologies segment for the fiscal 2023 fourth quarter were $140.6 million compared to $104.6 million a year ago, representing an increase of $36 million or 34%. Recent acquisitions, primarily OLBRICH and R+S Automotive contributed $14.8 million to the current quarter growth. The Engineering business reported higher sales for the current quarter compared to a year ago, primarily reflecting continued growth in our energy storage solutions business. Our Product Identification business also reported higher sales for the current quarter compared to last year, which was offset by lower sales for the Warehouse Automation business. For the year, sales for the Industrial Technologies segment were $505.8 million, exceeding the $500 million target we set at the beginning of the fiscal year, and $170.2 million or over 50% higher than last year. Adjusted EBITDA for the Industrial Technologies segment for the current quarter was $23.5 million compared to $23.4 million a year ago. The increase primarily reflected the benefit of the segment's sales growth for the current quarter, offset partially by the unfavorable impact of recent acquisitions. As we previously indicated, these acquisitions were not expected to contribute to adjusted EBITDA immediately, but the results are expected to improve with our integration actions. We are already starting to realize the benefits of these actions. Please turn to Slide 9. Sales for the Memorialization segment for the fiscal 2023 fourth quarter were $204.9 million compared to $206.3 million for the same quarter a year ago. The recent quarter primarily reflected the benefits of improved pricing and the acquisition of Eagle Granite Company in February 2023, which were offset by lower unit sales of caskets and memorials reflecting lower COVID-related deaths. Memorialization segment adjusted EBITDA for the current quarter was $36.9 million compared to $33.4 million for the fourth fiscal quarter last year. The increase primarily resulted from improved pricing and benefits from operational cost savings initiatives. These increases were partially offset by the impact of lower casket and memorial sales volumes and increased labor costs. Please turn to Slide 10. The SGK Brand Solutions segment reported sales of $134.7 million for the fiscal 2023 fourth quarter compared to $146.3 million a year ago. The decrease primarily reflected lower sales in the segment's European and U.S. markets, including a decline in retail base sales and the impact of several site closures. Changes in currency rates had a favorable impact of $1.8 million on current quarter sales compared to a year ago. Adjusted EBITDA for the SGK Brand Solutions segment was $17.5 million for the recent quarter compared to $16.7 million a year ago. Despite lower sales, adjusted EBITDA for the segment increased for the current quarter, primarily reflecting improvements in the ability to pass along cost increases and the benefits from the segment's recent cost reduction actions. Changes in currency rates had an unfavorable impact of $235,000 on adjusted EBITDA compared to a year ago. Please turn to Slide 11. For the year ended September 30, 2023, operating cash flow was $79.5 million compared to $126.9 million a year ago. The reduction from last year primarily resulted from an increase in working capital during fiscal 2023. Working capital in our energy storage solutions business was higher than a year ago, reflecting the significant growth in this business. Granted inventories also increased for the year, reflecting higher sales and increased costs. Operating cash flow for the 2023 and 2022 fiscal years reflected final payouts for the settlement of the company's U.S. retirement plan obligations. The final payouts for settlement of the supplemental plans totaled $24.2 million in the fiscal 2023 first quarter. Final payouts for settlement of the company's principal U.S. pension plan totaled $35.7 million in the first fiscal quarter last year. Outstanding debt was $790 million at September 30, 2023, compared to $799 million at the end of fiscal 2022. At September 30, 2023, the company's leverage ratio based on net debt, which represents outstanding debtless cash and trailing 12 months adjusted EBITDA was 3.31, representing a reduction from 3.35 at June 30, 2023, and 3.5 at September 30, 2022. Approximately 30.5 million shares were outstanding as of September 30, 2023. During the fiscal 2023 fourth quarter, the company purchased approximately 1,100 shares, which were in connection with withholding tax obligations on equity compensation. At September 30, 2023, the company had remaining authorization of approximately 1.2 million shares under its repurchase program. Finally, the board this week increased the quarterly dividend to $0.24 per share on the company's common stock, representing the 30th consecutive annual dividend increase since becoming a publicly traded company. The dividend is payable on December 11, 2023, to stockholders of record on November 27, 2023. This concludes the financial review, and we will now open the call to questions.

Operator, Operator

Our first question is from Daniel Moore with CJS Securities.

Daniel Moore, Analyst

I will start with energy storage. Obviously, the big influx of orders last fiscal Q1 and appreciate the color, Joe. Just talk about the pipeline, what it looks like, and what your expectations for order intake would look like over the next maybe 4 quarters? I know that getting the exact timing is difficult, but what are you hearing from both your bigger customers and newer opportunities?

Joseph Bartolacci, President and CEO

Our largest customer has encountered some delays, which is more on their side than ours. The increase in working capital on our balance sheet reflects this. The key concern is the timing of delivery and achieving the milestones necessary to reduce that capital while they are prepared for the equipment. We are aware of other projects they are involved in and understand they are significantly behind schedule in those areas. We expect to receive updates throughout this year. Other customers, however, are progressing. As I mentioned earlier, our other clients are likely 2 to 3 years behind our largest customer. This year, we anticipate the first orders for production equipment, with at least 2 or 3 significant customers currently in discussions about specifications for those pieces. However, these won't be large multi-hundred million dollar orders right now. Instead, we expect orders in the range of $25 million to $50 million, which we will announce as they materialize. We're also engaged in some interesting joint development projects with U.S. manufacturers, and I anticipate announcements in the coming months, but currently, the timing is our main challenge.

Daniel Moore, Analyst

Really helpful, Joe. I'm bouncing around a little bit here, but in Memorialization, you had the initial bump in casket sales from the pandemic, followed by a delayed bump in memorials. Have we now essentially fully passed those more difficult comps? And what should sort of the organic rate look like in your mind over the next 3 to 5 years?

Joseph Bartolacci, President and CEO

I want to emphasize that the team has performed exceptionally well in Memorialization, and the rates of casketed deaths have significantly decreased from the peak levels. Although we experienced some atypical months during that time, we are largely back on track. Looking ahead, the key aspects of our Memorialization performance include gaining market share, increasing prices, and enhancing productivity. Additionally, we've made several smaller acquisitions that have greatly contributed to the overall business, and we have strategies in place to further build on this momentum. While I don't anticipate this business growing at double-digit rates for both top and bottom lines in the future, I do expect modest growth over the next five years.

Daniel Moore, Analyst

One more question, and I'll return to cash flow and capital allocation. Steve, what are we anticipating for CapEx next year? If I missed it, I apologize. How much do you expect we can free up from working capital? And Joe, I've heard you mention acquisitions a few times. Can you discuss your priorities between deleveraging and M&A, and what size of acquisitions we might be considering?

Steven Nicola, CFO

Yes. Dan, to answer the first part of your question, we ended the year with just over $50 million in capital expenditures. I anticipate that this amount will be slightly higher next year due to investments we're making in our Industrial Technology segment. Regarding working capital, while Joe mentioned that we are expecting strong cash flow next year, a significant part of that will come from the working capital reduction that we needed to build this year. I expect to see some realization of that in fiscal 2024, but I should note that the timing could be variable due to the nature of our projects.

Joseph Bartolacci, President and CEO

Yes, Dan, I'll address the second part of your question. Regarding acquisitions, I've been consistent about a few points. Let me break it down by segment. We plan to undertake a few initiatives in our Memorialization business, which are relatively small yet have the potential for significant impacts on our bottom line. We are leveraging our platform, sales team, and distribution centers across the United States, as we have a presence in cemeteries and funeral homes throughout the country. Therefore, we will continue to expand that, although these initiatives are relatively small. What's important to highlight is our new focus on growing our Industrial Technologies segment overall. We have been working on a few aspects in that segment. I am not ready to discuss those today, but these are not insignificant acquisitions. One important factor is that we anticipate a notable change in working capital this year based on our projections for collections. The timing of that is somewhat out of our control because it depends on the ability to accept delivery. For those who are listening, it's important to note that revenue recognition does not align with the timing of collections and billings. Revenue recognition occurs as work is completed, while billings and collections depend on the milestones defined in contracts, which are usually tied to delivery schedules. We are aware of this upcoming revenue and anticipate it will be a substantial contributor overall. We will also be focusing on paying down debt while pursuing acquisitions. We are actively working on several initiatives and hope that some will come to fruition, but I am not prepared to elaborate on them at this moment.

Operator, Operator

Our next question is from Liam Burke with B. Riley Securities.

Liam Burke, Analyst

Joe, on Industrial Technologies, specifically energy, you talked about $190 million in backlog, that's for energy...

Joseph Bartolacci, President and CEO

No, hold on, Liam. Just to be clear, that $190 million increase over prior year between OLBRICH and energy, of which $80 million of that was energy.

Liam Burke, Analyst

Okay. What is the cadence on shorter cycle orders? Are you having a lot of activity on research-level types of systems?

Joseph Bartolacci, President and CEO

We're receiving orders every day. I mean, some smaller, some larger, but not to this materiality that we would call them out. But as evidenced by the fact that our overall backlog between OLBRICH and energy, which is blended because of how they're managed, is about over $330 million today. We're getting orders all the time. So it's just we called out the magnitude of the $200 million order in early calendar '23 because of its magnitude, but we continue to receive orders as we speak.

Liam Burke, Analyst

Great. And on the Memorialization, you have the readjustment of mortality rates. How did cremation do during the quarter?

Joseph Bartolacci, President and CEO

Our business or cremation rates?

Liam Burke, Analyst

No, the business.

Joseph Bartolacci, President and CEO

The business did fine. We had some early challenges that we set over in the U.K., principally on some of these incineration works. But we are in the midst of landing 1 to 2 more decent-sized incineration projects here in the U.K., which should add nicely to the performance for the overall group starting here, I would say, second half of our fiscal '24.

Operator, Operator

Our next question is from Justin Bergner with Gabelli Funds.

Justin Bergner, Analyst

I guess, could you talk a bit about Warehouse Automation, how that performed in the fourth quarter, and how you see that performing over the course of fiscal year 2024?

Joseph Bartolacci, President and CEO

Warehouse Automation had a decent quarter in the fourth quarter. I wouldn’t describe it as a strong quarter, but the revenue mix was quite positive. The fourth quarter included a significant amount of pure software, which typically has better margins than some of the hardware we offer alongside it. Overall, I would say it wrapped up the quarter and the year on a good note. As we’ve mentioned over the past 3 to 6 months, we have observed a slowdown, which isn’t unique to us but is seen across the industry. We will have more clarity on how that business will conclude the year likely after the holidays. Currently, many customers are adopting a wait-and-see approach regarding Christmas sales. We are involved in quoting and other activities, but finalizing orders is cautious at the moment, reflecting the current economic sensitivities.

Justin Bergner, Analyst

Okay. That's helpful. Switching to the M&A, I didn't catch how you view the size of potential acquisitions in the Industrial Technology sector. What would you say differentiates between nice-to-have and need-to-have assets, considering the company's healthy financial leverage ratio and the current high-interest rate environment?

Joseph Bartolacci, President and CEO

So I'll give you some examples of what we're looking at and how we're looking at it. We know that our software business is the linchpin to the automated warehouse. And there's a lot of activity in the marketplace today to be able to expand that portfolio. One of the things we're looking at, for example, is system integrators that allow us to integrate directly into the WMS or the ERP systems. These are businesses that allow us more access to markets that we're currently not performing, so bringing us along. Secondly, as a practical matter, everything is nice to have. I mean, we have a complete portfolio. But we would love to have more presence in Europe, frankly. And there are some small opportunities over there that allow us to expand what we do in the warehouse side in Europe. When it comes to energy, I would say there's nothing that's necessarily a must-have. There's a lot of nice-to-have, but they are extremely complementary as we move forward. So we will be very, very sensitive to our leverage ratio, but given the kind of cash flow that we expect over the course of the year, we should be able to do both.

Operator, Operator

Our next question is a follow-up from Daniel Moore with CJS Securities.

Daniel Moore, Analyst

Yes. I just wanted to drill down a little bit more. Joe, you mentioned the printhead solution, maybe more today than over the last few quarters. So what's changed? Remind us where we are? Is it still beta customers pulling, you're seeing more demand customers pulling, or is it your capabilities? What's getting you more excited right now?

Joseph Bartolacci, President and CEO

The most exciting part is that we are continuing to refine both the economic model and customer desires through discussions. When we opened the door for our customers to see what's coming, their excitement has fueled our enthusiasm. In terms of timing, we are right on track for the end of this fiscal year, which aligns with the end of the calendar year. While we cannot completely control the timing, we are very optimistic about this. Additionally, we've hired a few new people and engaged in discussions about what we call alternative uses. We believe we have something unique. When I mention alternative uses, I’m not implying we will venture into totally unrelated areas, as we already have a diverse range of businesses in our portfolio. However, we clearly have the opportunity to license or produce and sell the chip for alternative uses, which we believe will provide significant long-term monetization potential for what we consider a very unique solution.

Daniel Moore, Analyst

Okay. And last, again, when you talk about M&A on the software side, are these kind of $20 million to $50 million deals, or could it be something more like up into the $100 million? Because those obviously can be very powerful, but also tend to be dilutive relative to your current margin structure?

Joseph Bartolacci, President and CEO

Yes, from a margin perspective, it has been rising towards $100 million due to solid margins. Therefore, I am not overly worried about the margins. However, we remain conscious of our debt ratio, so our ability to scale will depend on our cash flows. We aim to bring our ratio below 3 and will maintain that focus. We are aware of several opportunities and will make prudent decisions. Some deals are in the $20 million range, while others are closer to $70 or $80 million. Our priority is to enhance the significance of our Industrial Technologies segment within our overall portfolio.

Operator, Operator

There are no more questions at this time. I would like to turn the conference back over for closing comments.

Steven Nicola, CFO

All right. Thank you, Sherry, and thank you all for joining us today and your interest in Matthews. Just a reminder for additional information about the company and our financial results, you can feel free to contact me or visit our website. Enjoy the rest of your day.

Operator, Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.