Earnings Call Transcript - MATW Q2 2024

Operator, Operator

Greetings, and welcome to the Matthews International Second Quarter Fiscal 2024 Financial Results Conference Call. As a reminder, this conference is being recorded.

William Wilson, Senior Director of Corporate Development

Thank you, Christine. Good morning, everyone, and welcome to the Matthews International Second Quarter Fiscal Year 2024 Conference Call. This is Bill Wilson, Senior Director of Corporate Development. With me today are Joe Bartolacci, President and Chief Executive Officer; and Steve Nicola, our Chief Financial Officer. Before we start, I'd like to remind you that our earnings release was posted on our website, www.matw.com, in the Investors section last night. The presentation for our call can also be accessed in the Investors section of the website. 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. And now I'll turn the call over to Joe.

Joseph Bartolacci, CEO

Thank you, Bill. Good morning. We are generally pleased with our fiscal '24 second quarter results given the transitory challenges that we faced in several of our businesses. Sales and adjusted EBITDA were relatively consistent, declining only slightly during the quarter due to macro trends impacting several of our businesses, while other businesses performed very well. Memorialization continues to maintain strong sales and EBITDA post-COVID, while SGK's digital initiatives and restructuring efforts are showing promise. As for our Industrial Technologies segment, energy solutions sales were higher, but we continue to see delays in customer installations. Additionally, the warehouse automation business reported lower sales, consistent with the overall market, which has seen a moderation in new warehouse development recently. Despite these near-term events, however, we see both businesses continuing to offer strong long-term growth opportunities. Sales for the Memorialization business remained relatively consistent with the prior year despite lower death rates. We're pleased with the trends in this business as the segment continues to outperform with sales and adjusted EBITDA run rates significantly exceeding pre-COVID levels. In addition, I'm pleased to add that we recently won another significant cemetery account, which we hope will afford us continued opportunity for growth as we offer our extensive portfolio of solutions. We continue to be encouraged by the performance of SGK as the segment reported sales growth in the second quarter despite continued challenges in the European market. Thanks to pricing and cost actions taken over the past 12 months, we also saw a significant increase in the segment's adjusted EBITDA and margin improvement. The team at SGK continue to outperform and win new accounts despite the challenges they have faced over the last year. They also continue to execute on the e-commerce digital initiative we mentioned last quarter. We expect this program to hit the $40 million sales target we set for the current year as our clients look for ways to consolidate their e-marketing spend more efficiently. With respect to our Industrial Technologies segment, total sales were lower for the quarter, primarily driven by market conditions that impacted our warehouse automation business, but offset by higher energy storage sales. As I mentioned on our earlier calls, we and other industry peers experienced a pullback dating back to the middle of last year as customers evaluated the prevailing economic conditions, highlighted by continued high interest rates and concerns about consumer confidence. We still see some softness in larger warehouse projects, but continue to be brought in on customer upgrades, and we have seen a pickup in quoting activity. Our confidence in the growth opportunity for this business is supported by recently published industry research that indicated more than 75% of respondents expected an increase in their investment in robotic systems in the next few years. We believe that advances in warehouse automation, like autonomous robots, which we manage, will drive demand for our warehouse execution systems software as we continue to enhance the platform through cloud and AI technology improvements. Turning to our new printhead solution, we made significant progress during the quarter. All milestones related to launching the product were met, and we remain on schedule to launch the solution by calendar year-end, as previously stated. We will continue to update you on our progress for this product. As for our energy solutions business, we reported sequential growth, reflecting the benefit of orders from multiple customers, though we continued to experience the previously discussed and anticipated customer installation delays from our largest customer, which are out of our control. Let me reiterate our strategic focus in this business segment as we believe that we have a unique opportunity. We've had no shortage of interest in our dry battery electrode solutions, and we hope to have significant announcements to share before our fiscal year-end. Interest in dry battery electrode across the globe remains very high. In the second quarter, we had good order entry, including two battery OEMs. But as we mentioned before, however, the dry battery electrode development cycle within the industry can be lengthy. Therefore, we are laser-focused on leveraging our technology advantage and assisting our customers in their development process. With that in mind, our hope is to accelerate adoption of dry battery electrode as the definitive solution for battery production. We intend to build a production-scale system, which would allow our clients to run their formulation at speed, thus significantly shortening the adoption cycle. Our total addressable market of over $8 billion remains unchanged, but our timeline has extended due to the current EV market cooldown. Demand remains in place, and we expect the market to move toward our dry battery electrode solution given the inherent advantages it offers, including lower required investment, lower operating expenses, faster buildout and improved battery performance and a solvent-free process. In the end, it offers a cheaper and better battery. Secondly, on the hydrogen fuel cell side, we are focused on creating a solution that significantly reduces the cost for components of the fuel cell stack via throughput increases utilizing our proprietary know-how. We hope to announce a significant partnership for this development as well by our year-end. Finally, with respect to our balance sheet, we will continue to emphasize debt reduction in our capital allocation and expect to further improve our leverage ratio by the end of the fiscal year. As we progress through fiscal '24, we anticipate continued demand in our energy storage solutions business, as evidenced by the recent flow of orders from multiple customers in the second quarter. We caution that customer delays within the energy business outside of our control have and may continue to impact our forecasted results. With that said, we expect to start deliveries of some of the orders soon. We expect further reduction in working capital in the latter half of the fiscal year and well into next year as those orders are delivered. As a result, we project adjusted EBITDA for fiscal '24 to be around $220 million.

Steven Nicola, CFO

Thank you, Joe. Good morning. Let's begin with Slide 7. For the fiscal 2024 second quarter, net income attributable to the company was $9 million or $0.29 per share compared to $9.1 million or $0.29 per share a year ago. On a non-GAAP adjusted basis, earnings for the current quarter were $0.69 per share compared to $0.65 per share last year. Income tax benefits for the current quarter generally offset the impact of slightly lower consolidated adjusted EBITDA and higher interest expense. Consolidated sales for the quarter ended March 31, 2024, were $471.2 million compared to $479.6 million a year ago. Sales for the SGK Brand Solutions segment increased for the current quarter, and Memorialization sales remained relatively stable compared to last year. The Industrial Technologies segment reported lower sales than the same quarter a year ago with energy storage solutions sales offset by lower warehouse automation sales. Changes in currency rates were estimated to have a favorable impact of $4.8 million on fiscal 2024 consolidated sales compared to a year ago. Consolidated adjusted EBITDA for the fiscal 2024 second quarter was $56.8 million compared to $58.4 million a year ago. The SGK Brand Solutions segment reported higher adjusted EBITDA for the current quarter, which was offset by lower adjusted EBITDA in the Memorialization and Industrial Technologies segments. 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 2024 second quarter were $222.2 million, which was relatively consistent with sales of $222.9 million for the same quarter a year ago. The recent acquisitions of a granite business in February 2023 and a casket distributor in January 2024, combined with the benefit of improved price realization, generally offset declines in sales volumes for cemetery memorials and caskets resulting from lower U.S. deaths post-COVID. Memorialization segment adjusted EBITDA for the current quarter was $46.6 million compared to $48 million for the same quarter last year. The increase primarily resulted from the impact of lower memorial sales volumes and increased labor and material costs. These increases were partially offset by the favorable impact of recent acquisitions, improved pricing and benefits from cost-savings initiatives. Please move to Slide 9. Sales for the Industrial Technologies segment for the fiscal 2024 second quarter were $116.1 million compared to $125.5 million a year ago. The decline primarily resulted from lower sales for the segment's warehouse automation and automotive engineering businesses. These decreases were partially offset by higher sales for the energy storage solutions business. Currency rate changes had a favorable impact of $944,000 on the segment's current quarter sales compared to a year ago. Adjusted EBITDA for the Industrial Technologies segment for the current quarter was $10 million compared to $15.6 million a year ago. The decrease primarily reflected the impact of lower warehouse automation sales, higher labor costs and lower margins for the engineering business compared to a year ago. The reduction in engineering margins primarily reflected project timing as the prior period reflected higher-margin engineering design work. The declines were partially offset by higher margins and improved pricing for the product identification business. Changes in currency exchange rates had a favorable impact of $103,000 on the segment's current quarter adjusted EBITDA compared to a year ago. Please move to Slide 10. Sales for the SGK Brand Solutions segment increased to $132.9 million for the quarter ended March 31, 2024, compared to $131.2 million a year ago. The increase primarily reflected higher sales in the U.S. brand market and for the European packaging and private-label businesses. The segment also continued to benefit from improved pricing. Currency rates had an unfavorable impact of $1.3 million on current quarter sales compared to a year ago. Adjusted EBITDA for the SGK Brand Solutions segment was $15.4 million for the current quarter compared to $11 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 and bonus expense. Please move to Slide 11. The company's consolidated cash flow from operations for the quarter ended March 31, 2024, was $57.1 million compared to $80.9 million a year ago. Operating cash flow for the current quarter primarily reflected the benefits of the company's consolidated adjusted EBITDA and working capital reduction. Operating cash flow last year reflected the benefits of the new U.K. receivables financing facility and cash received from the settlement of several interest rate swaps in addition to working capital reductions. Outstanding debt was $843 million at March 31, 2024, compared to $862 million at December 31, 2023, representing a reduction of $19.6 million during the second quarter. Net debt, which represents outstanding debt less cash, was $797 million at March 31, 2024, compared to $824 million at December 31, 2023, representing a reduction of $27.2 million during the second quarter. At March 31, 2024, the company's leverage ratio, based on net debt and trailing 12-months adjusted EBITDA, was reduced to 3.62 compared to 3.71 at the end of last quarter. Additionally, we renewed our $750 million domestic revolving credit facility during the fiscal 2024 second quarter and are now focused on refinancing of our bonds, which do not mature until December 2025. We fully expect this refinancing to be completed before the end of this fiscal year. For the fiscal 2024 second quarter, the company purchased only 1,029 shares under its stock repurchase program, primarily reflecting our focus on debt reduction. While we will remain focused on debt reduction through the end of the fiscal year, we may also increase repurchase activity in light of current stock price levels and forecasted cash flow. Approximately 30.7 million shares were outstanding at the end of the fiscal 2024 second quarter. Finally, the Board last week declared a quarterly dividend of $0.24 per share on the company's common stock. The dividend is payable May 20, 2024, to stockholders of record, May 6, 2024. This concludes the financial review, and we will now open the call for any questions.

Operator, Operator

Our first question comes from Daniel Moore with CJS Securities.

Dan Moore, Analyst

Let me start with energy storage. Yes, obviously, the end market slowdown in EV is very well documented, so absolutely no surprise there. Just looking beyond the next few quarters, you talked about it in your prepared remarks, Joe, but elaborate on what you're seeing and hearing from your customers as it relates to the longer-term transition to dry battery production. Do you still expect that transition and the opportunity to be on par with what you would have thought maybe four to six quarters ago?

Joseph Bartolacci, CEO

I can say that the transition is underway. The main challenge we face is the timing. As you pointed out, Dan, there is a slight slowdown, but our interest level remains at an all-time high. The actual advantages in cost, efficiency, and productivity that our system provides, along with improved battery performance, will ultimately prevail, we believe. The timing of when this will happen has just been delayed. We look forward to discussing this more in the upcoming quarters, but from our viewpoint, nothing has changed.

Dan Moore, Analyst

All right. And in the prepared remarks, you mentioned that you plan to build out a platform to enable faster production. Just elaborate on that, and is there any incremental expense or CapEx associated with it?

Joseph Bartolacci, CEO

Yes. So the reality is that the cycle for adoption in the auto industry is lengthy, especially with something as innovative and new as our technology. The process of going from development to full production could take multiple years. A lot of that has to do with the fact that the development cycle is currently being done in-house at a lot of these locations, whether it be battery manufacturers or other OEMs. We believe that we have enough know-how and the ability to build a production-like facility just for dry battery electrode, allowing our customers to come in-house with their formulation and accelerate the adoption. So they can basically produce their own batteries with their own formulations, do the testing that is necessary and already know what a production-like machine would look like. So I would call it the serialization of manufacturing equipment and at least eliminating a lot of the customization and testing that is done in advance. That's going to require probably $40 million worth of CapEx over the next 12 to 18 months, but well within our ability to fund.

Dan Moore, Analyst

Got it, very helpful. And then on the printhead solution product ID, just update us on the transition to the new chip provider and your confidence in ramping that product as we think about '25. Do you have orders in hand and it's just a matter of getting the technology buttoned up? Or do we need to kind of go out and test again as that new chip is implemented and integrated and functioning smoothly?

Joseph Bartolacci, CEO

We have had great success with our new provider from Sweden who is assisting us with the new chip. The latest batch of wafers received is exceptional, and we have encountered no issues so far. We anticipate being in the market by early 2025, aiming for late December or January for our launch. While our projects are not multimillion-dollar contracts, averaging between $10,000 to $15,000 each, there is significant demand with many already sold. We have received considerable interest from potential customers, although we will not initially approach the largest consumer packaged goods companies. We want to ensure that our innovative approach is functioning well before wider deployment. Nonetheless, we are entering the market early next year with substantial growth opportunities ahead, tapping into a significant market where we currently have no presence.

Dan Moore, Analyst

Perfect. And then I guess just one more, I'll jump back in queue, on SGK Brand Solutions. How much of the improvement in revenue is kind of easier comps and how much is a more sustained commitment to spending that you're seeing or hearing from your customers?

Joseph Bartolacci, CEO

The best way to describe the situation is that, as we've mentioned previously and as you've read in the news over the past few quarters, consumer packaged goods companies have reached their limit in raising prices. They are now focusing on reinvesting in their brands through innovation and new product development. We believe this trend is sustainable. A significant portion of the revenue increase came from North America, indicating what's driving the markets. We aspire to be a leader in this spending. Overall, it's more sustainable now, and we anticipate further growth.

Operator, Operator

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

Liam Burke, Analyst

Joe, on Memorialization, cremation is still an important part of the business mix. How did that perform this quarter? And what's the outlook for the rest of the year?

Joseph Bartolacci, CEO

As we have mentioned before, we generate approximately $125 million in product and services within the cremation segment, and it performed well. I believe there are still opportunities to enhance performance in our cremation equipment manufacturing business that the team is currently evaluating, which should provide us with a positive boost from that business as we move into next year.

Liam Burke, Analyst

Okay, great. Getting back to SGK, you did on your prepared statements talk about Europe branding, I guess, being up. But generally, you said that Europe remains a challenge. Are you just looking at easy comps? Or are you looking at sort of a fragile recovery there?

Joseph Bartolacci, CEO

I would say we are comparing against easier benchmarks. I wouldn't say we've observed a recovery in Europe. The business performance still largely depends on North America, with some support from the APAC region. Europe has a long way to go.

Liam Burke, Analyst

And how did APAC do this year?

Joseph Bartolacci, CEO

This quarter was okay and North America being the driver for the quarter.

Operator, Operator

Our next question comes from the line of Justin Bergner with Gabelli.

Justin Bergner, Analyst

As you think about the revised EBITDA guidance for the current fiscal year, beyond the delays from your major energy storage customer, what are the other puts and takes to think about?

Joseph Bartolacci, CEO

In terms of how comfortable we are? Justin, help me understand the question a little better.

Justin Bergner, Analyst

Just parts of the business that are looking a little bit better than they were at the start of the fiscal year and parts of the business that were looking a little bit more challenged outside of the delays from the major energy storage customer.

Joseph Bartolacci, CEO

I want to emphasize that Memorialization is performing significantly better than we initially anticipated for the year. There are always uncertainties at the beginning of the year, particularly regarding demand in that business. We believe we've gained some market share, and that segment is doing well, with new recent achievements likely to bolster our performance. SGK is also doing well, and we expect that trend to continue. While there could be a quarter that may vary, we believe that it remains a sustainable business that will contribute positively to our results this year. Product identification is excelling as well, with a new team in place that is achieving strong performance and preparing for a new launch, which should make that business an even larger contributor moving forward. The warehouse segment is facing challenges. It is profitable, so the issue is not about profitability but rather about underperformance relative to our expectations for the year. In the automated warehouse market, we've observed that our competitors, who are more open about their struggles, are experiencing significant declines in revenue, possibly by 20% to 30%. We're seeing similar patterns, but we believe it will turn around. Warehouse operations involve substantial capital investment, and many of our clients are pulling back on contracts due to the size of the investment requirements, which may also be influenced by the current interest rate environment. Thus, the warehouse has been somewhat challenging moving forward. I believe I have addressed all business segments except for energy.

Justin Bergner, Analyst

Okay. Great. That's very helpful. On the energy side, you mentioned in the press release a benefit of orders from multiple customers. As the broader set of potential customers are able to kind of order production equipment more flexibly looking into later 2024 and early 2025, is that kind of really opening up the spigot for orders? And is that driving this likely $40 million CapEx investment to standardize or serialize the manufacturing equipment?

Joseph Bartolacci, CEO

Yes. To clarify regarding the development cycle, it typically progresses from preproduction machine to production prototype and then to production machine, which usually takes several quarters. With our investment, we are streamlining this process by advancing the prototype machine and conducting extensive testing on the products from manufacturing. Currently, the orders we are receiving are on the smaller side, but they exceed just being lab machines. Our goal is to transition directly from concept to production equipment with our investment, significantly reducing the development cycle.

Justin Bergner, Analyst

Okay. Fantastic. But I guess the other part of my question was I think there was some intellectual property issues that might have hindered the ability of some of your potential customers in the energy storage side to order production equipment that's probably rolling off. Has that accelerated the customer interest in the present time?

Joseph Bartolacci, CEO

Yes. Now I understand your question. Yes, there are patents that are held on dry battery electrode products that expire here in July. So the acceleration of interest and the interest in investing has accelerated because of that. No question about that. And we're trying to facilitate that with our investment.

Operator, Operator

Our next question comes from the line of Nick Ripostella with NR Management.

Nick Ripostella, Analyst

This is a broader question. How have the investments you've made in businesses outside of Memorialization truly benefited shareholders? Considering the stock price, would you ever reconsider the strategy and separate the businesses? Shareholders have not seen benefits from these businesses being combined for quite some time.

Joseph Bartolacci, CEO

Yes, I understand your question. We have been quite open about our commentary. Our aim is to continue growing these smaller businesses to a substantial size and then start to consider the future strategy of the business. As a few of these initiatives come to market, including the new printhead in product identification and the growing potential of energy, I believe it's reasonable to say that we will assess the state of the business at that time. Right now, since these three businesses are still quite new, I would say we are probably not at that evaluation point just yet.

Nick Ripostella, Analyst

Okay. Fair enough. Well, I'll just say this, and by the way, your Investor Relations contact, apparently because I'm not institutional, but I'm still a shareholder, you can't get through to anyone to speak to or ask questions. I find that a little troubling, but...

Joseph Bartolacci, CEO

I'm sorry. I'm sorry to hear that.

Nick Ripostella, Analyst

I left many messages. However, the main point is that we all aspire to be long-term investors, and there are some promising technologies out there. I just hope that if the stock falls below 20 or 19, which is uncertain due to various challenges, I would like to see insiders purchasing a significant amount of stock. I sincerely hope that happens. Given the leverage, there’s a need to focus on paying down debt. The current situation limits our ability to make significant advancements. That's all; I wanted to share my thoughts and feelings.

Joseph Bartolacci, CEO

Nick, I will ensure that someone reaches out to obtain your information. I apologize for the lack of investor contact.

Operator, Operator

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

Dan Moore, Analyst

Steve, regarding the industrial tech, you mentioned some reduction in engineering work. However, when comparing the EBITDA margin decrementals this quarter to Q2 last year, it appears to be closer to 60%, which is slightly higher than expected. Is there anything else impacting margins that may be unusual or temporary?

Steven Nicola, CFO

Dan, the two key points to highlight regarding the industrial margins are, first, the decline in revenue, especially on the warehouse side. Additionally, while the engineering business saw higher revenues, the current phase of our work is different compared to a year ago, as last year involved more high-margin design-related projects. These are the two significant factors affecting the margin impact.

Dan Moore, Analyst

Okay, helpful. And I appreciate the update on the debt. Just if you were to go to market today, any sense for what terms could look like on the refinancing bonds or wait and see given you have at least a reasonable amount of time between now and year-end?

Steven Nicola, CFO

Yes, we're actually working through that now and just starting to get and understand some of those market indications.

Operator, Operator

Our next question is a follow-up question from Justin Bergner with Gabelli.

Justin Bergner, Analyst

Two quick follow-ups here. You mentioned that as you deliver more equipment on the energy storage side, that will release working capital. Is there any way for you to frame sort of how much working capital is tied up and can be released in that business?

Joseph Bartolacci, CEO

See, I mean I'm looking at Steve. Steve, why don't we give a perspective on it? I would tell you that it is a significant amount of working capital, but closer to $80 million to $90 million, I would say, Steve?

Steven Nicola, CFO

Yes, Justin, I would say that when we release our 10-Q today, you will see our balance sheet. The biggest area to note regarding working capital and opportunity is in the line items for contract assets and contract liabilities. These items accurately reflect the work we've done, not just what we've built, as that would be recorded in accounts receivable. It highlights the difference between the revenue recognized and the milestones we've reached for billing.

Justin Bergner, Analyst

Got you. Okay. So it would be a contract asset or liability in this case?

Steven Nicola, CFO

It could be either, depending on our position with milestone payments for a specific aspect of a project. You should expect to see both line items.

Justin Bergner, Analyst

Got you. And then the other quick question was the auto engineering business, which I assume relates to the acquisitions from a couple of years ago. I realize that's more to support your energy storage business or at least the acquisitions were. But is that business now profitable on an EBITDA basis? Or does it still have a little ways to go?

Joseph Bartolacci, CEO

So there are a couple of things that are happening in that business. We are incrementally better than prior year, modestly profitable at this point. But we're looking at a substantial change in that organization, starting hopefully here in the latter part of this fiscal year as we've been in negotiations with the unions over there for quite a while, trying to get an adjustment both in terms of compensation as well as headcount. That's fairly significant. So we hope to talk a little bit more about that, Justin, a little later in the fiscal year once we get confirmation.

Operator, Operator

Mr. Wilson, we have no further questions at this time. I would like to turn the floor back over to you for closing comments.

William Wilson, Senior Director of Corporate Development

Okay. Thank you, Christine. And again, 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. Enjoy the rest of your day.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.