Earnings Call Transcript - MATW Q3 2025

Operator, Operator

Good day, everyone, and welcome to today's Matthews International Third Quarter Fiscal 2025 Financial Results. Please note, this call may be recorded. It is now my pleasure to turn the conference over to CFO, Steve Nicola. Please go ahead.

Steven F. Nicola, CFO

Thank you, Stephanie, and good morning. I'm Steve Nicola, Chief Financial Officer of Matthews. With me today are Joe Bartolacci, our President and Chief Executive Officer, and Dan Stopar, our Senior Vice President, Operations Controller and Head of Global Business Services. Before we begin, I want to remind you that our earnings release is available on the company's website, www.matw.com, in the Investors section. You can also access the presentation for our call in the same section under Presentations. Any forward-looking statements made during this discussion are pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The factors that could cause the company’s results to differ from those discussed today are outlined in our annual report on Form 10-K and other public filings with the SEC. Additionally, we will discuss non-GAAP financial metrics, and we encourage you to review our disclosures and reconciliation tables carefully as you consider these metrics. For any forward-looking statements and non-GAAP financial information, please refer to the disclaimer in today’s presentation materials on our website. I will now turn the call over to Joe.

Joseph C. Bartolacci, CEO

Thank you, Steve. Good morning, everyone, and thanks for joining us to discuss the financial results for the fiscal 2025 third quarter. We're pleased with our results this quarter, which saw initial benefits from our value creation plan that was implemented late last year, including a gain from the divestiture of SGK, now known as Propelis Group, of which we own 40%, consolidated savings from a cost reduction program initiated last year, lower corporate and nonoperating costs, and improved EBITDA performance year-over-year in our Memorialization and Industrial Technologies business segments. Consolidated sales were $349 million in the third quarter of fiscal 2025 compared to $428 million in the same period last year. The decline in revenue was mainly due to the divestiture of SGK in May of this year, resulting in only one full month of contribution from SGK. When excluding adjusted EBITDA from the divested SGK business in both quarters, we observed a year-over-year increase of 37%. Steve will provide more details on Propelis, but I want to note that the integration of SGS and SGK is progressing well and according to plan. As mentioned in our previous call, Propelis is projecting an initial annual adjusted EBITDA of about $100 million and has begun the process of capturing synergies. The management team anticipates achieving a run rate of $10 million in synergies by year-end and $40 million by the end of calendar 2026. Furthermore, they have identified $60 million in total synergies, surpassing initial expectations. Overall, we expect this transaction to generate substantial value moving forward. Early feedback from the market has been positive, confirmed by new business acquisitions that neither company had before the merger. We will continue to keep you updated on Propelis' performance each quarter. As I mentioned earlier, since the third quarter of last year and the divestiture of SGK, along with an ongoing strategic alternatives review, we have implemented a value creation plan aimed at simplifying our corporate structure, reducing costs, and expanding our focus on higher growth and higher-margin businesses. While we are starting to see positive effects from reduced corporate costs, more improvements are expected as our transition services agreement with Propelis wraps up by the end of fiscal 2026. Additionally, we anticipate finalizing the sale of the remaining SGK assets in Germany, further streamlining our structure. These steps will help lower our overall debt levels and support ongoing growth in our Industrial Technologies segment, anchored by the stability of our Memorialization segment. Regarding the strategic alternatives review, we are pleased with its progress and have identified several opportunities to present to the Board for consideration. We plan to wrap up the process and share our conclusions around the time of our earnings release in November. Memorialization remains a cornerstone of our portfolio, securing leading positions in its markets. This segment's financial stability allows for steady investment in innovation across the portfolio. Memorialization achieved a modest revenue increase and strong margins in the third quarter of fiscal 2025, driven by the Dodge acquisition and the divestiture of our European cremation business last year. Inflationary pricing positively impacted the quarter, offsetting a slight decline in volumes, particularly related to our granite business, which is largely due to the depletion of backlogs from the COVID period, resulting in a negative year-over-year comparison of about $3 million. We expect this segment to stabilize in terms of revenue and pricing for the rest of the year. On the topic of tariffs, we believe Memorialization is the most vulnerable segment. Although the team has successfully identified alternative sourcing for affected products, the tariffs are still raising the costs of domestically produced materials as suppliers adjust their prices. We have generally been able to pass these costs onto our customers and do not foresee a significant impact on our results for the remainder of the year. Concerning the Dodge acquisition, which closed in May, we are optimistic about its long-term prospects and its fit within our Memorialization product portfolio. Adding the leading supplier of fluids for funeral directors complements our offerings and presents both cost and revenue synergies as we expand our product range to more clients. The transition has been smooth, and synergies are being captured quickly, with high expectations for EBITDA improvement. This acquisition is accretive, and we anticipate adding around $12 million annually to our EBITDA as we incorporate this business into our operations. Given our investment of $57 million for the acquisition, the return potential is clear. Our Industrial Technologies segment reported lower revenues in the third quarter, primarily affected by engineering challenges and our ongoing dispute with Tesla, which I'll explain shortly. However, other parts of this segment have seen year-over-year growth. We are particularly pleased with the performance of our warehouse automation business, which continues to show positive order trends, bolstered by a resurgence in market conditions. Order rates and sizes are increasing, with ongoing orders from Lands' End and other top retailers leading to a significant backlog. We typically see high order activity at this time as companies gear up for the peak season from October to December. We believe we will head into fiscal 2026 with very strong backlogs. In the previous year, we noted signs of recovery in the warehouse sector. Following some periods of slowdown marked by supply chain adjustments and reduced capital investments, this recovery is being driven by renewed interest in AI-driven automation, predictive analytics, and autonomous robotics. Major retailers are reinvesting in their warehousing infrastructure, reflecting positive growth forecasts for global e-commerce. Interactive Analytics estimates that U.S. e-commerce will grow by 10% in 2025, reaching $1.4 trillion up from 2024 and projected to rise to $2.5 trillion by 2030. Continued mobile adoption, supply chain innovations, and AI-driven user experiences are expected to significantly contribute to this growth. Additionally, legislative changes allowing for faster depreciation of capital investments will further promote automation initiatives throughout the value chain. We are well-positioned to capitalize on these opportunities. Committing to innovation has been a crucial aspect of our value creation strategy, and we are pleased to report progress in our product identification business, the oldest part of our company. We plan to introduce our new printhead chip product, Axiom, this fall, targeting the U.S. and EMEA markets. Axiom includes a patented silicon-based print engine and disposable printhead technology, offering customers about 30% lower total ownership costs along with various environmental advantages. We have identified a total addressable market of around $2 billion focusing on fast-moving consumer goods, where Axiom will be ideally suited. Axiom is strategically positioned to benefit from the Sunrise 2027 initiative, which aims to transition from traditional 1D barcodes to more advanced 2D barcodes by the end of 2027. This change is driven by the need for greater traceability, data capacity, and enhanced customer interaction as supply chains become more complex. A standard barcode contains approximately 20 characters, while 2D barcodes can hold thousands, allowing for detailed product information such as expiration dates and batch numbers, which are vital for compliance and traceability. Axiom's advantage lies in its ability to print both regular and 2D barcodes at production speeds. Furthermore, its disposable printhead technology prevents production line downtime for maintenance, as replacing the printhead can be done in minutes. Additionally, the design requires Matthews ink, providing us an attractive margin opportunity. Both features of Axiom create high-margin recurring revenue streams as we roll out more products. We will continue to provide updates on our progress as we approach the product launch. Now, let’s discuss engineering, the final component of our Industrial Technologies business. Over the past year and a half, our expertise in using our industry-leading calendering process for dry battery electrodes (DBE) has faced challenges from Tesla. As mentioned previously, we possess a valuable portfolio of intellectual property and expertise related to DBE. In February, we received a favorable ruling from an arbitrator that confirmed our rights in this area. Tesla has recently attempted to contest this ruling in the U.S. District Court for the Northern District of California. It’s important to highlight that this motion indicates the value of our technology and reinforces the validity of the arbitrator's decision, which is unlikely to be overturned. Tesla's actions suggest they are seeking to challenge the ruling because it acknowledges that Matthews owns the core proprietary intellectual property related to its advanced rotary processing and calendaring technology. Matthews has been a pioneer in this field for over two decades, having earlier made strategic investments in this technology for its packaging business. Recognizing the unique capabilities of our calendaring systems, we expanded their applications to include DBE production. Our established reputation in this realm has attracted interest from global battery manufacturers, electric vehicle makers, and firms exploring solid-state battery technologies. Tesla’s ongoing baseless lawsuits serve to highlight the strength of Matthews' proprietary technology. Market demand for our solutions is growing as we see an increasing number of opportunities in the U.S., driven by localizing supply chains and producing battery components. Our current pipeline includes more than $150 million in quotes, with a recent conversion to our first production line order from a solid-state battery manufacturer. Additionally, we are on track to secure a significant order for a battery separator coating line, a key element of our overall energy business. This coating line operates at nearly double the speed of competing lines, enhancing productivity in the highly competitive battery market. While others are trying to break into the DBE calendering space, Matthews' leading technology and fastest production lines, supported by our patents on critical parts of the technology, ensure we maintain our competitive edge. We will remain dedicated to innovation and sustaining our leadership in this important market. Regarding our balance sheet, our debt position improved during the quarter, driven by applying proceeds from the SGK transaction to our revolver. We anticipate our debt position will reduce further by 2025. As we assess our full-year results, considering our 40% stake in Propelis, we expect our adjusted EBITDA guidance to stay at least $190 million. It's also important to note that we will have lost 60% of the earnings from SGK over the last five months.

Steven F. Nicola, CFO

Thank you, Joe. Before starting the financial review, let's discuss the financial reporting with respect to SGK. As you're aware, the divestiture of SGK closed on May 1, 2025, and as such, our consolidated financial information reflects the financial results of the SGK business through the closing date. As part of this transaction, the company received a 40% ownership interest in the newly formed entity, Propelis Group. Please note that as a result of the integration process of Propelis and transition to its own stand-alone reporting systems, our 40% portion of the financial results of Propelis will be reported on a one-quarter lag. As a result, except as otherwise noted, the consolidated financial information presented in the earnings release yesterday and discussed today does not include our 40% interest in the financial results of Propelis for the 2 months ended June 30, 2025. Similarly, our quarterly report on Form 10-Q will not reflect the results of Propelis. Now let's begin the financial review with Slide 7. For the fiscal 2025 third quarter, the company reported net income of $15.4 million or $0.49 per share compared to net income of $1.8 million or $0.06 per share a year ago. The increase primarily reflected a gain on the divestiture of the SGK business, which was partially offset by higher income taxes and interest expense. The increase in income tax expense primarily reflected the impact of favorable tax benefits discrete to last year that did not repeat in the current year. Consolidated sales for the fiscal 2025 third quarter were $349 million compared to $428 million a year ago. The decrease primarily reflected the divestiture of SGK on May 1, 2025. The consolidated sales impact of the SGK divestiture was $80.2 million for the current quarter. Sales for the Industrial Technologies segment were lower for the quarter, offset partially by higher sales for the Memorialization segment. SGK also reported sales growth for the current quarter prior to its divestiture. Consolidated adjusted EBITDA for the fiscal 2025 third quarter was $44.6 million compared to $44.7 million a year ago. Despite the divestiture of SGK, consolidated adjusted EBITDA remained relatively steady year-over-year as a result of increases in the Industrial Technologies and Memorialization segment and lower corporate and other nonoperating costs. On a non-GAAP adjusted basis, net income attributable to the company for the current quarter was $9.2 million or $0.28 per share compared to $17.3 million or $0.56 per share last year. The decline primarily reflected the impact of higher interest expense and income taxes for the current quarter as adjusted EBITDA was relatively consistent. With respect to Propelis, based on preliminary financial projections that they provided to us, their current estimate of adjusted EBITDA for May and June 2025 was $16.8 million. Please note that these projections are unaudited and subject to review and, as a result, may change. Our 40% portion of this amount would be $6.7 million. Accordingly, with the addition of our 40% interest in Propelis, the company's pro forma consolidated adjusted EBITDA for the fiscal 2025 third quarter would be $51.3 million compared to $44.7 million a year ago, representing an increase of 14.6%. Please see the reconciliations of adjusted EBITDA and non-GAAP adjusted earnings per share provided in our earnings release. Please move to Slide 8 to review our segment results. Sales for the Memorialization segment for the fiscal 2025 third quarter were $203.7 million compared to $202.7 million for the same quarter a year ago. Acquisitions, primarily The Dodge Company, contributed sales of approximately $6 million to the current quarter, which were offset partially by the disposition of the European cremation equipment business. Sales volumes for cemetery memorials and caskets declined for the quarter compared to last year, primarily resulting from lower U.S. casketed deaths, offset partially by inflationary price realization and higher mausoleum sales. Additionally, granite memorial sales a year ago had the favorable impact from working down backlog that accumulated during the pandemic. Cremation equipment sales also declined from a year ago. Memorialization segment adjusted EBITDA for the current quarter was $42.8 million compared to $38.7 million for the same quarter last year. The increase primarily resulted from the benefits of cost savings initiatives and price realization, offset partially by the impact of lower sales volumes and higher material costs. Acquisitions and the disposition of the unprofitable European cremation equipment business also contributed to the increase in the segment's adjusted EBITDA. Please move to Slide 9. Sales for the Industrial Technologies segment for the fiscal 2025 third quarter were $87.9 million compared to $91.7 million a year ago. The decline mainly resulted from lower sales for the segment's engineering business, offset partially by higher sales for the warehouse automation business. Lower engineering sales reflected declines for both the energy and coating and converting businesses. Order rates for warehouse automation improved during the quarter, reflecting continued recovery in this market. Sales for the Product Identification business were relatively unchanged compared to the same quarter a year ago. In addition, the shutdown of the R+S Automotive business, which was part of the OLBRICH acquisition in 2022, contributed to the segment's year-over-year sales decline. Changes in foreign currency rates had a favorable impact of $2.9 million on the segment's current quarter sales compared to a year ago. Adjusted EBITDA for the Industrial Technologies segment for the current quarter was $9 million compared to $4.2 million for the same quarter a year ago. The increase primarily reflected the benefits from the segment's cost reduction actions, which were initiated in our fiscal 2024 fourth quarter. Additionally, the segment's adjusted EBITDA benefited from higher warehouse automation sales. Please move to Slide 10. Sales for the Brand Solutions segment were $57.7 million for the quarter ended June 30, 2025, compared to $133.4 million a year ago. The decrease resulted from the divestiture of the SGK business, which excluded the European packaging business on May 1, 2025. The consolidated sales impact of the SGK divestiture was $80.2 million for the current quarter. Prior to the divestiture, sales were higher than a year ago, principally reflecting a combination of organic growth and favorable currency impacts. Adjusted EBITDA for the SGK Brand Solutions segment was $5 million for the current quarter compared to $16.1 million a year ago. Excluding the impact of the divestiture, adjusted EBITDA was relatively consistent with last year. Please move to Slide 11. Cash flow used in operating activities for the fiscal 2025 third quarter was $15.2 million compared to cash provided by operating activities of $13.5 million a year ago. Costs in connection with the SGK transaction and our restructuring actions were significant factors in the change from a year ago. Additionally, legal costs and working capital impacts from the ongoing dispute with Tesla unfavorably impacted operating cash flow. Year-to-date, cash used in operating activities was $33.9 million for the current year compared with cash provided by operating activities of $43.3 million last year. Outstanding debt was $702 million at June 30, 2025, representing a reduction of $120 million during the current quarter. The reduction reflected net proceeds from the SGK divestiture, offset partially by the acquisition of The Dodge Company, settlement of currency hedges in connection with SGK-related assets and transaction-related costs. Based on our current operating cash flow projections and the potential sale of our European packaging business, we expect further debt reduction in the fiscal 2025 fourth quarter. For the fiscal 2025 third quarter, the company purchased approximately 386,000 shares under its stock repurchase program at an average cost of $19.96 per share. Year-to-date repurchases totaled approximately 562,000 shares. As I referenced earlier, we initiated cost reduction programs in the fourth quarter last year that spanned several of our business units and corporate functions. We initially projected annual consolidated savings from these programs to be up to $50 million. We are currently on track to exceed this projection. The most significant portions of the savings are targeted from our engineering and tooling operations in Europe and our general and administrative costs. As I noted earlier, we have begun to realize these savings as indicated through the improved adjusted EBITDA margins for our Industrial Technologies segment and lower corporate and other nonoperating costs. Current quarter adjusted EBITDA margin for the Industrial Technologies segment was 10.3% compared to 4.6% a year ago, and our corporate and other nonoperating costs declined 13.6%. Lastly, based on our results through June 30, 2025, and our fourth quarter projections, we are maintaining our previous earnings guidance of adjusted EBITDA of at least $190 million for fiscal 2025, which includes our estimated 40% share of Propelis adjusted EBITDA from May 1, 2025, through September 30, 2025. Please note that this projection maintains our original guidance as provided in November 2024, adjusted only for the SGK divestiture and 40% interest in Propelis. Finally, the Board declared last week a quarterly dividend of $0.25 per share on the company's common stock. The dividend is payable August 25, 2025 to stockholders of record August 11, 2025. This concludes the financial review, and we will now open the call to any questions. Stephanie?

Operator, Operator

Operator Instructions. And our first question will come from Dan Moore with CJS Securities.

Peter Lucas, Analyst

It's Pete Lucas for Dan. Starting with the Dodge Company, I think you had said sales of $6 million and a goal of $12 million EBITDA. What was the EBITDA contribution this quarter? And what are you looking for in terms of sales and EBITDA in Q4?

Steven F. Nicola, CFO

Okay, Peter. So with respect to the Dodge Company acquisition, for this quarter, the EBITDA contribution was approximately $1 million on the $6 million sales number. If you recall, when we announced the acquisition, we had talked about the current run rate for the Dodge Company being in the $6 million range. So it was pretty much consistent with that estimate. And right now, similar run rate into the fourth quarter.

Peter Lucas, Analyst

Helpful. And then on the industrial side, performed well. Revenue is still down a bit, but closer to flat year-over-year. What was energy storage-related revenue for the quarter? And what was it in fiscal Q3 last year? Same question for warehouse automation. Really just trying to see where did you see declines? And what are the key areas where you can offset those declines with growth?

Steven F. Nicola, CFO

So Peter, without sharing specific numbers, our sales in the energy business and the overall engineering sector have decreased compared to last year. As I mentioned earlier, this is connected to the ongoing challenges that Joe outlined previously, as well as what we discussed in the press release. However, those declines were somewhat offset by substantial improvements in our warehouse automation business.

Operator, Operator

Our next question will come from Colin Rusch with Oppenheimer.

Colin William Rusch, Analyst

The new printhead business and the warehouse automation business. It seems like both are really focused on velocity of goods through warehouses and production facilities. I just want to understand how much synergy you guys see over the next, call it, 3 to 5 years.

Steven F. Nicola, CFO

Colin, hold on just a second. I don't think we caught the early part of that question.

Colin William Rusch, Analyst

Yes. I would like to hear about the synergies you are observing between the new printhead business and the warehouse automation business. Both seem to prioritize enhancing speed and accuracy in both warehouses and manufacturing. I want to understand how much you believe these two areas will support each other over the next three to five years.

Joseph C. Bartolacci, CEO

Another good question. So one of the things that we're really focused on, obviously, we're laser-focused on getting our debt positions reduced. So that will be our primary focus. However, there are other ways to participate in the start-up situations. And one of the most particular ones that we're interested in is embedding our software into driving the automated warehouse and the autonomous robots that are associated with that. Last quarter, we announced a partnership with the Teradyne folks embedding our software into managing the robots. We have several other start-up kind of situations like that, where our software is being embedded into the hardware to be able to drive that. So although we may not be looking necessarily for any significant investment in acquisitions in these start-up spaces, we are playing in a different way because at the end of the day, software drives a robot.

Operator, Operator

We'll take our next question from Liam Burke with B. Riley Securities.

Liam Dalton Burke, Analyst

Joe, Tesla remains very focused on the battery technology, particularly the dry battery electrode, as a key component of their strategy. However, are you noticing any shift in urgency to advance the competing DBE platform for battery processing?

Joseph C. Bartolacci, CEO

We are seeing, obviously, there are participants around the world that are trying to develop solutions and no one has yet to develop a competitive solution as of yet. So right now, I would say there is a drive by many in the industry to reduce their costs. There are improvements in the wet process that are going on as well. Ultimately, we believe, and I think some of the largest players believe that dry is the next stage of further cost reductions. So I think although the market has slowed, I would say, for EV and demand, the desire to continue to lower the cost hasn't changed, Liam. So we think this is still an opportunity for years to come.

Liam Dalton Burke, Analyst

Super. And I'm sure I heard this right, but you said you did land a production size systems order on the DBE process.

Joseph C. Bartolacci, CEO

We landed a smaller one for a solid-state player. Yes, we have. And we also are in the midst of proving out our coating line system, which is another piece of equipment that is highly specialized into what's called battery separator coatings that goes between the anode and cathodes. Our machine operates at twice the speed of current competitors. So as we demonstrate that in the marketplace, we think more and more will come our way.

Liam Dalton Burke, Analyst

Okay. And then just very quickly, on the legacy product identification business, is it just a quarterly lag? Or is there anything else going on there?

Joseph C. Bartolacci, CEO

We had a pretty good quarter in product identification. I wouldn't say that there was anything significant there. We're ramping up as we speak with the launch of our Axiom product. So we'll have some costs associated with that as we move into next quarter. But product identification continues to move forward. And I would say that we've had some challenges, frankly, as tariffs have forced us to source elsewhere as well as some supplier issues that have slowed us down with the launch of other solutions that we put out in the marketplace. But I think that's just a temporary little glitch that we move forward. The product identification business is well positioned to have a pretty strong year.

Operator, Operator

We'll take our next question from Justin Bergner with Gabelli Funds.