Earnings Call Transcript - MATW Q2 2025

Operator, Operator

Greetings, and welcome to the Matthews International Second Quarter Fiscal 2025 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. It is now my pleasure to introduce Steven Nicola, Chief Financial Officer. Please go ahead.

Steven Nicola, CFO

All right. Good morning. Thank you, Paul. I'm Steve Nicola, Chief Financial Officer of Matthews. And with me today is Joe Bartolacci, our company's President and Chief Executive Officer. Before we start, I would like to remind you that our earnings release was posted on the company's website in the Investors section last night. The presentation for our call can also be accessed in the Investors section of the website under Presentations. 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.

Joe Bartolacci, CEO

Thank you, Steve. Good morning. I want to start today's call by updating you on our Energy Solutions business and the recent developments affecting its growth. We have recently confirmed our ability to market, offer, and sell dry battery electrode technology solutions to third parties. During our dispute over ownership rights with Tesla, we approached our promotional efforts cautiously. However, we now have clear rights to sell DBE solutions and have developed a valuable portfolio of intellectual property related to dry battery electrode offerings. I'm pleased to report that since we resumed business in mid-February, following clarification on our ownership rights, we've engaged with several battery manufacturers and auto OEMs, issuing quotes exceeding $100 million. These opportunities include a mix of our proprietary equipment used in the electrode production process. Mass production lines make up most of our pipeline, with interest from major regions for EV battery production, including South Korea, Europe, and North America. This confirms significant demand for our innovative engineering solutions, which enhance the cost-efficient production of EV batteries and create opportunities for Matthews. However, it's essential to note that the sales lead time in this industry is lengthy, and investments in new gigafactories require comprehensive planning. To expand market opportunities, we are developing solutions that will allow existing facilities to retrofit their current processes with our dry battery electrode technology. This approach may lead to substantial opportunities beyond just new gigafactories. Regarding SGK, we announced earlier this month that we have secured all regulatory approvals and expect to finalize the transaction shortly. We will receive $350 million in total consideration upfront, which includes $250 million in cash, $50 million in retained receivables to pay down our securitization, and a $50 million preferred instrument we aim to convert to cash within 12 to 18 months. The cash will primarily be used to reduce debt. We are also progressing with the divestiture of our remaining German SGK assets not merged with SGS, which we expect to close before the fiscal year ends. Together with the initial consideration for SGK, we anticipate total consideration from the sale of our Brand Solutions segment to reach nearly $400 million. Additionally, we received a 40% interest in the SGK SGS entity, projected to start with around $900 million in revenue and roughly $100 million of EBITDA, along with $300 million in bank debt. We believe we can achieve over $50 million in synergies post-integration, at which point we plan to exit our ownership. During the quarter, our warehouse automation business entered into a partnership with Teradyne Incorporated to market autonomous robotic solutions for next-generation warehouse automation. This collaboration positions us to offer robotic picking solutions controlled by our recognized warehouse execution software, enhancing cost and efficiency for new and existing warehouses while solidifying our software's market leadership. In terms of our second-quarter results, consolidated sales were generally in line with expectations but lower year-over-year, largely due to challenges in our Energy Solutions business. We reported $428 million in consolidated sales in the fiscal 2025 second quarter versus $471 million in the second quarter of 2024. Adjusted EBITDA for the second quarter of 2025 was higher than expected, benefiting from our recent cost reduction efforts, totaling $51.4 million compared to $56.8 million in the same quarter last year. SGK had a strong quarter, marking its best sales quarter since the fourth quarter of fiscal 2022, driven primarily by new account growth in the Americas and benefiting from price realization. We believe this business is well positioned for enhanced performance once combined with SGS, leveraging their complementary assets and anticipated synergies. Integrating their Flexo platforms will enable the new entity to maximize scale and growth opportunities. The combined creative business focusing on packaging and marketing is expected to generate around $200 million in revenue, making it a strong competitor in the industry. Regarding Industrial Technologies, we still have a backlog of approximately $70 million in equipment and are exploring opportunities related to solid-state battery development and energy grid storage. This grid storage area shows significant market potential alongside the electric vehicle market. In warehouse automation, sales were down year-over-year due to slow market recovery. However, we noticed strong order intake that indicates a market turn, with healthy backlogs helped by record orders from leading brands. Product identification results were flat year-over-year, and we are on track for a new product launch this summer. Memorialization revenues decreased by 7% compared to last year, mainly due to volume declines in our bronze and granite businesses, driven by lower casketed deaths and the closure of our UK cremation facility earlier this year. Although we benefited from pricing actions, it was not sufficient to offset these declines. Our debt position rose slightly during the quarter, but as mentioned earlier, we plan to use proceeds from the SGK transaction to pay down our revolver. With our shares currently trading at lower levels, we will also consider using part of the proceeds for stock repurchase. Our bonds are not callable until September, at which point we will assess whether to address them based on market conditions. We believe we have implemented measures to manage the impact of tariffs, anticipating minimal effects on our fiscal 2025 results. As we look forward, we expect stable results from our Memorialization business and see potential improvement in our Warehouse Automation segment in the second half of the year. Our cost reduction initiatives are on track to exceed our initial $50 million savings projection. With the SGK transaction nearing completion, we have updated our adjusted EBITDA guidance to at least $190 million, which aligns with our original guidance of $205 million excluding the sale of SGK. Finally, our strategic initiatives are ongoing, as we believe the company's intrinsic value is significantly greater than its current stock price. We aim to unlock shareholder value through these efforts, even though current market challenges have made this more difficult. We remain committed to highlighting our businesses' fair value, and we are confident in our approach. Now, I'll turn it over to Steve to discuss the financials for the quarter.

Steven Nicola, CFO

Thank you, Joe. For the financial review, let's begin with Slide 7. For the fiscal 2025 second quarter, the company reported a net loss of $8.9 million or $0.29 per share compared to net income of $9 million or $0.29 per share a year ago. On a non-GAAP adjusted basis, net income attributable to the company for the current quarter was $10.5 million or $0.34 per share compared to $21.8 million or $0.69 per share last year. The decline primarily reflected the impact of lower adjusted EBITDA, which I will discuss in a few minutes, higher interest expense for the current quarter and an unfavorable tax impact from losses in our German operations. Consolidated sales for the fiscal 2025 second quarter were $427.6 million compared to $471.2 million a year ago. The decline primarily reflected lower sales for the Industrial Technology segment, mainly reflecting lower engineering sales. Additionally, sales for the Memorialization segment declined compared to the year ago primarily due to lower unit volumes. Estimated U.S. casketed deaths declined from the same quarter a year ago. Sales for the SGK Brand Solutions segment were modestly higher than the second quarter last year, primarily reflecting increases in the U.S. and Asia-Pacific markets. Consolidated adjusted EBITDA for the fiscal 2025 second quarter was $51.4 million compared to $56.8 million a year ago. The decrease primarily reflected declines in the Industrial Technologies and Memorialization segments. Adjusted EBITDA for the SGK Brand Solutions segment increased modestly compared to last year. 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 second quarter were $205.6 million compared to $222.2 million for the same quarter a year ago. Sales volumes for bronze and granite cemetery memorials and caskets were lower for the quarter compared to last year, primarily resulting from lower U.S. casketed deaths. Cremation equipment sales were also lower for the quarter. In addition, the recent disposal of our unprofitable cremation and incineration equipment operations in Europe unfavorably impacted sales for the current quarter. These declines were partially offset by improved price realization. Changes in foreign currency rates had an unfavorable impact of $422,000 on the segment's current quarter sales compared to a year ago. Memorialization segment adjusted EBITDA for the current quarter was $45 million compared to $46.6 million for the same quarter last year. The decrease primarily resulted from the impact of lower sales and increases in material and labor-related costs. These increases were partially offset by the favorable impacts of improved pricing, benefits from cost savings initiatives and the disposal of the European operations, which were generating operating losses. Please move to Slide 9. Sales for the Industrial Technology segment for the fiscal 2025 second quarter were $80.8 million compared to $116.1 million a year ago. The decline mainly resulted from lower sales for the segment's engineering business, principally Energy storage Solutions sales. Warehouse automation sales were also lower for the quarter. In addition, the shutdown of our unprofitable R+S Automotive business which was acquired in connection with the Olbrich acquisition in 2022 contributed to the segment's year-over-year sales decline. Changes in currency rates had an unfavorable impact of $1.5 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 $6 million compared to $10 million for the same quarter a year ago. The decrease primarily resulted from the segment's sales decline, offset partially by the benefits of recent cost reduction actions. Please move to Slide 10. Sales for the SGK Brand Solutions segment increased to $141.2 million for the quarter ended March 31, 2025, compared to $132.9 million a year ago. The increase primarily reflected higher merchandising sales and increases in the U.S. and Asia-Pacific brand markets. European packaging cylinders and brand sales declined from a year ago. Currency rates had an unfavorable impact of $2.5 million on the segment's current quarter sales compared to a year ago. Adjusted EBITDA for the SGK Brand Solutions segment was $15.6 million for the current quarter compared to $15.4 million a year ago. The increase primarily reflected the benefits of higher sales, improved pricing and the segment's recent cost reduction actions, offset partially by the impacts of higher labor-related costs. Please move to Slide 10. Cash flow provided by operating activities for the fiscal 2025 second quarter was $6.3 million compared to $57.1 million a year ago. Costs in connection with the SGK transaction, the contested proxy and our restructuring actions were significant contributors to the decrease from a year ago. On a year-to-date basis, cash utilized in operating activities was $18.7 million for the current year compared with cash provided by operating activities of $29.8 million last year. In addition to the current quarter items, the year-to-date change also reflected payments in connection with litigation costs. Outstanding debt was $822 million at March 31, 2025 compared to $809 million at December 31, 2024. The company's net debt, which represents outstanding debt less cash was $782 million at the end of the current quarter compared to $776 million at December 31, 2024. Upon the closing of the SGK transaction, we expect a significant reduction in debt. For the fiscal 2025 second quarter, the company purchased approximately 5,900 shares under its stock repurchase program. These purchases were related to withholding taxes on equity compensation vesting as we primarily remained focused on debt. However, as we previously indicated, with the stock price at its current levels, we intend to use some of the SGK proceeds for stock repurchases. As we previously disclosed, we recently initiated cost reduction programs that span several of our business units and corporate functions. These programs are expected to result in annual consolidated savings of up to $50 million, and we currently remain on track to achieve and potentially exceed this target. The most significant portions of the estimated savings will come from our engineering and tooling operations in Europe and our general and administrative costs. With respect to our fiscal 2025 earnings expectations, we previously projected adjusted EBITDA of at least $205 million for fiscal 2025, which contemplated the SGK Brand Solutions segment and our consolidated results for the full year. Based on an SGK transaction closing date in early May, our pro forma consolidated adjusted EBITDA projection for fiscal 2025 has been updated to at least $190 million. This projection is subject to adjustment based on the actual closing date. This projection replaces the full results of SGK for the remaining five months of fiscal 2025 with a pro forma projection for our 40% interest in the new entity. The updated amount maintains our original projection of $205 million for the year, modified only for the pro forma impact of the SGK transaction. Please note that as a result of the integration process of the new entity and transition to its own standalone reporting systems, we plan to report our 40% interest in the earnings of the new entity on a one-quarter lag. As a result, our actual reported adjusted EBITDA will differ from pro forma results during this period. Finally, the Board declared yesterday a quarterly dividend of $0.25 per share on the company's common stock. The dividend is payable May 26, 2025, to stockholders of record May 12, 2025. This concludes the financial review, and we will now open the call for questions.

Operator, Operator

Thank you. We'll now be conducting a question-and-answer session. Our first question is from Daniel Moore with CJS Securities.

Daniel Moore, Analyst

Thank you. Good morning, Joe. Good morning, Steve. Start with energy storage. How does the $100 million plus in customer quotes since early February compare to where we were this time for the same period last year? And you touched on it in the prepared remarks, but where are you seeing the most renewed interest? I assume that's all outside of Tesla, but by geography and end market, where you're seeing customers come back to you?

Joe Bartolacci, CEO

A lot of questions in there, Dan. Good morning. So let me kind of parse through, and if I missed something, please re-ask. So as it relates to a year ago, you noticed in my comments that we were relatively out of the market from a marketing standpoint a year ago. So I would tell you that the $100 million plus of quotes that we have out today is dramatically higher than the same period last year. There was no time other than when we were dealing with Tesla where we had quotes of that significance. So this is all super good news for us and frankly shows the interest in our solution. Secondly, where is it coming from? We're not giving names, but you can pick the geographies. It's South Korea, which is a large part of it. I mean, the battery operators in that part of the world are extremely interested in this solution. We have several OEMs in North America and in Europe also talking to us. But we also have a growing interest in what we call the grid storage side of this business as people are starting to look for expansions into other areas for the use of electric storage devices. What is important to understand and we have been trying to emphasize this over the last several quarters, this particular solution, which is dry battery, is applicable to all forms of battery storage. Whether it's a cell phone that you're holding in your hand or whether it's a flashlight or an automobile or an energy storage device, it's applicable to all those technologies. So we're only scratching the surface of where this opportunity can go.

Daniel Moore, Analyst

All right. That does cover a lot of those. Thank you. Memorializations, just maybe talk about the cadence of year-over-year, the declines over the past couple of months and what are your expectations for organic growth overall for the segment fiscal Q3 and the balance of the year?

Steven Nicola, CFO

Dan, I'll start with that and I'll let Joe finish the question. But one of the other factors in the year-over-year comparability was we did have another quarter where we were weak, as the comparable last year included higher than normal granite related sales a year ago in this past quarter, we were still working off significant backlogs from the pandemic. So that was one other comparable that contributed to the reported decline year-over-year.

Joe Bartolacci, CEO

I would say that we observed some normalization compared to previous years. Last year, we experienced higher death rates than anticipated, and it seems that we're seeing a bit of that pullback this quarter.

Daniel Moore, Analyst

Okay. One more and I'll jump back in queue. Just remind me, Steve, the cost reduction actions, $50 million and I think teetering could be a little higher. Just remind us how much is in the fiscal '25 guide and what would be left sort of for incremental benefit to '26?

Steven Nicola, CFO

Right now, it's running about $20 million this year, $30 million next year.

Operator, Operator

Our next question is from Colin Rusch with Oppenheimer.

Colin Rusch, Analyst

Thanks so much, guys. With the customer engagement on the battery side, can you talk about the maturity of the testing process and evaluation from those customers as well as their interest and potential for you guys to aggregate a turnkey line for any of these folks, particularly in North America?

Joe Bartolacci, CEO

Good morning, Colin. As I mentioned earlier, most of the volumes from the quotes exceeding $100 million are related to mass production. These clients are well past the testing phase and are now developing specifications for their mass production lines. This is different from others we've collaborated with in previous years who spent several years before placing significant orders. These clients have been engaged with our test equipment for some time. The machinery we are discussing is what they refer to as their mother equipment, which serves as the prototype for their expected production machines. The initial unit will be somewhat flexible regarding its final form, and they will adjust it significantly as they observe its performance before placing larger orders. What was the other part of your question, Colin? I lost track of that.

Colin Rusch, Analyst

What about turnkey, your ability to offer turnkey solutions.

Joe Bartolacci, CEO

Yeah. So starting here, we expect it by September. We've talked about this before with the Street that we expect to have a machine here, September, October-ish that we will allow some of our customers to come in and operate on a production level piece of equipment rather than having to design from scratch what they're looking for. We will have a production level piece of equipment, including material handling on the front end side of it that right now is not our proprietary solution. We've got a couple of partners we're bringing in to work with that. So the intent is to allow large battery manufacturers and other OEMs to come in with their materials, run through the process on our equipment at production rates and see what that looks like and tweak their final specs to that.

Colin Rusch, Analyst

That's super helpful. And then just shifting gears to warehouse automation, given what we're seeing in terms of deteriorating labor productivity in warehouses, some of the slowdown in overall build out, but then a lot of work being focused on optimizing throughput on these facilities. Can you talk a little bit about your strategy around evolving that part of the business? Obviously, you've got a nice set of customer engagements, but supplementing that with technology from other folks and being able to aggregate more robust solutions seems like an area where you could start accelerating growth. Just want to get a sense of your overall thought process on how much more you augment the offering and how you see that opportunity emerging over the next several years?

Joe Bartolacci, CEO

Sure. I mean, you heard me on my comments talk about our partnership with Teradyne. Teradyne is the owner of MiR Robotics. MiR is a leading provider of robotics into a lot of industries, from autos and other associates. This is an area they do not sell into at all right now. We've got a couple of other partnerships as well. We seem to be quite the belle of the ball. We've been uniquely positioned because we don't have reliance on hardware. In other words, we don't sell conveyors and heavy sorters and all the heavy equipment associated with warehouses. So our ability to come in and offer robotic solutions is unique, and our ability to go back to our existing customers and augment their productivity with our partnership with Teradyne is a significant opportunity in our view. We will continue to expand those relationships. We don't have any great intention of acquiring any kind of robotics associations with this, but there are small investments we'll make to the portfolio to allow us to be a unique provider in the space. Remember, we sell warehouse execution software, which runs the inside of a warehouse. We're now going to run the robotics that we've talked about. And now we have a partnership with one of the leaders in the space. So that's where we're going.

Colin Rusch, Analyst

Thank you so much, guys.

Operator, Operator

Our next question is from Justin Bergner with Gabelli Funds.

Justin Bergner, Analyst

Good morning, Joe. Good morning, Steve.

Joe Bartolacci, CEO

Hi, Justin.

Justin Bergner, Analyst

Lots of moving parts, mostly good. So I had a few questions, just some kind of quick cleanup questions. The cost out, the $50 million cost out, is any of that tied to SGK?

Joe Bartolacci, CEO

No. To be perfectly frank, it is associated with the downsizing of the volumes related to our energy business in Europe and at corporate.

Justin Bergner, Analyst

Okay. Got you. And then the SGK accounting post-close, you'll be including their equity income on a one-quarter lag in your EBITDA or 40%, I don't know.

Steven Nicola, CFO

No, Justin. On a GAAP basis, we will include the equity income, which is our portion of their net income, in our GAAP net income as a single line item on our income statement. For the adjusted EBITDA amount, we will incorporate their actual adjusted EBITDA with a one-quarter lag and also provide a pro forma for that lag. Therefore, we will present our pro forma full period results.

Joe Bartolacci, CEO

We want to emphasize that they are currently integrating with our systems. We do not anticipate this being a long-term issue. However, during their transition, we expect some disruptions in our reporting. Hopefully, this will only last for several quarters before we move to real-time reporting.

Justin Bergner, Analyst

Got you. That makes sense. So you're going to actually be showing an estimate for the current quarter EBITDA in the pro forma and then the actual GAAP accounting is a one-quarter lag just to make sure that it's correct given the changes taking place within the joint venture?

Joe Bartolacci, CEO

That's correct.

Justin Bergner, Analyst

Okay. Thank you. In terms of the share repurchase, I mean, your current authorization is fairly modest. Would you then be considering, once SGK closes, changing or expanding the share repurchase authorization?

Joe Bartolacci, CEO

You're anticipating what's coming. So, yes.

Justin Bergner, Analyst

Okay. Got you. And then more substantive questions. So this retrofit opportunity, just can you provide a little bit more color as to how it would work to retrofit wet?

Joe Bartolacci, CEO

Sure. Essentially, the process for building a battery is multiple steps. One of the steps is the electrode production itself. The electrode production right now in the wet process utilizes what we've described for a long time, a slurry containment system. You create the slurry, you coat it, you bake it off over a 100-meter oven and then you wind it and you continue the rest of the process. Our equipment comes in and takes up a fraction of that space and generates far more batteries, a far more electrode than you can with a wet production cycle right now. So the opportunity is, and we've got a cost justified for those customers as they're looking at it, we'll deliver that turnkey solution and drop it into your facility. You can run it simultaneous with or eliminate all your wet processes and all the solvent handling portions in that business, but nothing else in your factory needs to change.

Justin Bergner, Analyst

Okay. And would you expect a similar size and price tag as a mass production system, or would this be a smaller version?

Joe Bartolacci, CEO

Okay. This is a mass production. So this is mass production. It's just the elimination of their mass production of wet electrode for our mass production of dry.

Justin Bergner, Analyst

Okay. So what's different versus a new battery factory, for example?

Joe Bartolacci, CEO

In a retrofit, if you were to produce the amount of electrode necessary, a gigafactory today could potentially triple the amount of electrode produced in that same space by replacing our equipment. The key change is the efficiencies gained from using dry battery electrode.

Justin Bergner, Analyst

Okay. But what would you be supplying that's different in a retrofit situation versus new factory situation?

Joe Bartolacci, CEO

Now I understand. Nothing. It's the same equipment we would sell to others, but what we'd have to sell is that as part of the strategy of developing our own solution turnkey that allows customers to come in. They won't have to go through the process of having to develop their specs and ultimately testing. Our expectation is once they're able to run at speed, they can order it from our machine directly into their plant.

Justin Bergner, Analyst

Okay. That makes sense. And then lastly, the grid storage opportunity, I mean, I understand how that could be attractive, but help me understand the business case for dry versus wet or whatever you'd be replacing there versus the business case in the EV world. It just doesn't jump out as much.

Joe Bartolacci, CEO

It's exactly the same. Wet is a much less efficient process. Secondly, when you talk about grid storage, you could be talking about different thicknesses of the actual electrode itself. You can get a thicker electrode using dry electrode than you can with wet. So the chemistries that you use in grid storage are different than that of EV batteries. And as a result, what you end up with is a better solution that's less expensive for grid storage than current technology. So the dynamics, the value propositions are exactly the same for EV and grid. The difference is frankly, the opportunity for EV could probably be larger if the world went EV, but still it's an addition to what we're doing right now. So we think it's a market expansion.

Justin Bergner, Analyst

Got you. All right. Thank you for taking all my questions.

Joe Bartolacci, CEO

Sure.

Operator, Operator

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Steven Nicola for closing remarks.

Steven Nicola, CFO

All right. Thank you, Paul, and we'd like to thank everyone for participating in our call this morning, and we look forward to our next call in July following the third quarter fiscal earnings. Have a great day.

Operator, Operator

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