Matthews International Corporation (NASDAQ:MATW) Q2 2024 Earnings Call Transcript May 3, 2024

Matthews International Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Matthews International Second Quarter Fiscal 2024 Financial Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bill Wilson, Senior Director of Corporate Development. Thank you, sir. You may begin.

Bill Wilson: 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.

Joe Bartolacci: Thank you, Bill. Good morning. We are generally pleased with our fiscal 2024 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 of adjusted EBITDA run rate 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 mid 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 opportunities for this business is supported by our recently published industry research – excuse me, 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 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 battery – 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 cool down.

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 OpEx, faster build-out 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 2024, 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 with the – 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 2024 to be around $220 million. I'll now turn it over to Steve for more insight on our financial results. Steve?

Steve Nicola: 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 our 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. Christine?

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