Participants

Bill Wilson; Senior Director, Corporate Development; Matthews International Corp

Joseph Bartolacci; President, Chief Executive Officer, Director; Matthews International Corp

Steven Nicola; Chief Financial Officer, Secretary; Matthews International Corp

Daniel Moore; Analyst; CJS Securities

Presentation

Operator

Greetings, and welcome to the Matthews International second quarter fiscal 2024 financial results conference call. (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 would 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 our 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 reconciliations 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 I will turn the call over to Joe.

Joseph Bartolacci

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 at 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 SGKs 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 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 a segment reported sales growth in the second quarter despite continued challenges in the European markets, 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.
We 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 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 in the growth opportunities for this business is supported by a recently published industry research excuse me, I guess supported by recently published industry research that it indicates more than 75% of respondents expected increase in their investment in robotic systems in the next few years. We believe that Advancis 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 coal 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 that we continued to experience the previously discussed and anticipated customer and 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 battery dry battery electrode across the rest and the globe remained very high. In the second quarter, we had good order entry, including two battery OEMs.
But as we mentioned before, however, the battery electric 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 of their development process. With that in mind, our hope is to accelerate adoption of dry battery electrode as a definitive solution for battery production. We intend to build a production scale system which will 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 is 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 investments, lower OpEx, faster, build up and improved battery performance and a solvency three process. In the end, it offers a cheaper and better battery.
Secondly, on a 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, and 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.
And I'll now turn it over to Steve for more insight on our financial results. Steve?

Steven 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 Technology 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 technology 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. Net sales for the Memorialization segment for the fiscal 2020 for 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 US tests 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 fiscal 2020 for 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 technology 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 US 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 in certain segments. 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 UK 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?

Question and Answer Session

Operator

(Operator Instructions)
Daniel Moore, CJS Securities.

Daniel Moore

Thank you. Good morning, Joe. Good morning, Steve.

Joseph Bartolacci

Good morning, Dan.

Daniel Moore

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

Joseph Bartolacci

Yes, I would tell you the transition is in place. I think the issue is timing. I will view, as you've mentioned, and it is slowing a little, but our interest level has never been higher. But the reality is the cost benefits of the efficiency, the productivity that comes out of our system and the better battery will ultimately be the winner, we believe, and it's just slowed and the timing of when that will occur. So we hope to have more discussion about this over the coming quarters. But nothing has changed from our perspective.
All right.

Daniel Moore

And in the prepared remarks, you mentioned that the platform is not the right word. I wasn't typing fast enough, but you plan to build out a platform for to enable faster production. Just elaborate on that? And is there any incremental expense or CapEx associated with?
Yes.
So the reality is that the cycle for adoption in the auto industry is lengthy, especially when something was as innovative and new is because our technology, the process of going through 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 what I would call a production like facility just for dry battery electrode, allowing our customers to come in-house with their formulation and accelerating 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 will look like. So I would call it the serial 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.
Got it.
Very helpful.
And then on the printhead solution, product ID 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.
So we have and we've had great success and very happy with and provide new provider out of Sweden that is helping us with the new chip, the current batch of wafers that have come in are exceptional. We've had so far no issues with respect to that. We expect it as we described before. We are in line with our expectation to be in market early or early calendar 25. So by January end of December, January, we should start to be out there. Do we have customers? These are not but multimillion dollar projects, Dan, these are 10 to $15,000 each, but there's a lot of them were sold with the people we've already spoken to about what's coming. There's a lot of interest. Obviously, we're not going to start with the largest CPGs that are out there day one, just to make sure that what we believe is correct is what we believe is a new and novel approach is functional and working well. So we don't burn it. But at the same time, we'll be in market here at the beginning of next year with a lot of upside to go. It's a very significant market out there that we don't participate in.
Perfect. And then I guess just one more I'll jump back in queue at this GKN, Chuck, on domestic hybrid solutions, how much of the improvement in revenues, what kind of easier comps and how much is it more sustained commitment to spending that you're seeing or hearing from your customers.
Thanks.
And I guess the best way to describe it is you've heard us speak about and you read about in the newspapers over the last several quarters as CPGs have exhausted their ability to raise prices they're having to reinvest in their brands through innovation and new product development. And we believe this is sustainable. Most of the increase in top line came from North America. So you can see where that what's driving the market and we hope to be the leader as an industry into that spend. So I would tell you. It's much more sustainable and more, hopefully more to come.

Operator

Our next question comes from the line of Liam Burke with B. Riley Securities.
Please proceed with your question.
Thank you.
Good morning, Joe. Good morning, Steve.
Hello.
Good morning, Liam.
Joe, on memorialization and 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.
So as we've said publicly before, we do about 125 million in product and services in the in the Cremation segment it performed well. I would tell you that the we still have some opportunities to improve performance out of our cremation equipment manufacturing business that the team is looking at right now, which should give us a good tailwind from that business going into next year, Liam.
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, or are you just looking at easy comps or you're looking at sort of a fragile recovery there, I would say easy comps.
I mean, it's I wouldn't say we've seen a recovery in Europe. The performance of the business still remains North America and some help out of the A-Pac region.
Europe has a while to go yet and had a factor this year.
This quarter was okay in North America being the driver for the quarter.
Thank you.
Joe.
Our next question comes from the line of Justin Bergner with Gabelli.
Please proceed with your question.
Good morning, Joe.
Morning, Steve.
Good morning, Justin.
Good morning.
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 in terms of how comfortable we are adjusting.
Help me understand the question a little better.
Just now parts of the business. They're looking a little bit better than they were at the start of the fiscal year and parts of business that we're looking at looking a little bit more challenged outside of the US delays from the major energy storage customer.
I would tell you in my summary comments are pretty consistent with that. Memorialization is performing much better than we had maybe initially expected for the year. There's a lot of unknowns when you start a year, especially on the demand side of that business. And we obviously think we picked up some market share and that's performing well. And the new recent wins should help us as well.
SGK. as well.
Our performance is performing well and we expect that to continue to be the case. You could have a quarter that's going to change, but at the end of the day. We think that that is a sustainable business that this year will be a contributor to our results. Product Identification is well performing very well that there's a new team in place over there, and they are performing very well in getting ready for the new launch should only make that business a bigger contributor as we go forward.
Warehouses challenge I mean, it's not I mean, we are it's making money.
This is not a question of whether it's profitable or not. It's a question of what we would have expected going into the year. If you look into the automated warehouse marketplace, you'll see our competitors who are much more public about it struggling as well. And I mean, these numbers could be off 23% on a top line were consistent with that. But we think that turns, I think that's a large capital spend. We've seen a number of our clients pull back on contracts because of the size of the capital spend and maybe the interest rate environment may be impacting that as well. So warehouse has been a little bit of a challenge in going forward. And I think I covered just about all the businesses other than energy at that point.
Okay.
Great.
That's very helpful. On the energy side, you mentioned in the press release, a benefit of orders from multiple customers as 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 serialize from the manufacturing equipment?
Yes.
So I would say as it relates to the development cycle and to help you understand you go from what I would call preproduction machine to a production prototype to a production machine that is a multi quarter process at a minimum. So what we are doing is with the investment making taking one of those turns out a prototype machine as well as a lot of the testing that is done from the product that comes off the manufacturing. So right now, the orders that we're seeing, I would say, would be on the smaller side, they're beyond just a what I would call a lab machine. We're trying to take you from concept directly to production equipment. It was our with our investment and that should shorten that cycle significantly.
Okay, fantastic. But I guess the other part of my question was I think there were some intellectual property, I guess issues that might have some hindered the ability of some of your potential customers in the energy storage side to see no order production equipment by writing off is that against seller notes and her customer interest in the present time.
Yes. Now I'm now I understand your question.
Yes, there is a there are patents that are held on dry battery electrode products that have expires here in July. So the acceleration of interest and the what I call the interest in investing has accelerated because of that, no question about that. And we're trying to facilitate that with our investments.
Great.
Thanks so much.
Sure.
Our next question comes from the line of Nick Grupo Stella with NR management.
Please proceed with your question.
Good morning.
This is more of a big question. You know, all the investments you've made in these other businesses outside of memorialization, how have they really benefited shareholders if you look at the stock price, so at any point, would you change the strategy and Dom, you know, split up the businesses because shareholders really have not benefited for a long time.
So from the guys with businesses being together yes, I understand your question.
We have had we've been fairly public with the commentary.
Our hope is to continue to build these smaller businesses to scale and then to begin to look at the strategy of what the business looks like going forward as they as a couple of these things come to market, whether it be the new new printhead in the new product identification and as energy starts to get some legs to it, I think that's fair to say that there will be an evaluation of what we what the business looks like at that time at this point with these still, but the three businesses still being relatively nascent, I would say that we're probably not at that point just yet.
Okay.
Fair enough?
Well, I'll just say this and by the way, your investor relations contact apparently because I'm not an institutional, but I'm still a shareholder or a long-time shareholder. If you can't get through to anyone to speak to or ask questions. I find that a little troubling, but I'm sorry, I'm sorry to hear that.
Well, I left many messages, but anyway, here's the here's the issue. We all want to be long-term investors and are promising technology. I just hope that if the stock ends up, you know, under 2019 and you have to know what will happen as there's more push and things. I'd like to see insiders buying a lot of stock. You know, I just hope that's the case because you're levered you have to pay down debt now at and year-end situation really really can't take advantage in any dramatic way. But that's I just wanted to reflect my my opinions.
My feelings Thank you so much, Nick.
We will I'll see to it that somebody can drive tried to reach out to every major price. I'm sorry about the investor contact.
Thanks.
Our next question is a follow-up question from Daniel Moore with CJS Securities.
Please proceed with your question.

Daniel Moore

I'll just kind of get off mute. Thank you again, I'm just looking, Steve, just kind of looking at that, the industrial tech, I think you called out some less engineering work, but just kind of looking at the decrementals from this quarter to Q2 last year and EBITDA margin decrementals closer to 60%, a little bit higher than what we would normally think. So anything else going on or weighing on margins that might be unusual or temporary As Dan noted, revenues revenue declined.
Yes.
The two things dimension just to highlight with respect to the industrial margins are one, it's the it's the revenue decline, particularly on the warehouse side. And again, it's when we look at the engineering business, revenue was higher, but the stage of the phases of the work that we're working on now versus where we were comparable to a year ago last year was more of the higher margin design related work, engineering design related work so that those are the two major elements to the to the margin impact.
Okay.
Helpful.
And I appreciate the update on the debt. 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 now at least a reasonable amount of time between now and year-end?
Yes, we're work actually, we're working through that now and just starting to get and understand some of those market indications.
Sorry, thank you again.
Our next question is a follow-up question from Justin Bergner with Gabelli.
Please proceed with your question.
Thanks, or 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 sort of the least in that business see about?
I'm looking at Steve, I see when we give you a perspective on it, I would tell you that it is a significant amount of working capital, but closer to 80 to $90 million, I would say, Steve, yes, just I'd say the up if you when we release our 10 Q today, you'll see our balance sheet.
But the areas we are the biggest area where you noticed the working capital and the opportunity is going to be in an area called the line item called contract assets, contract liabilities, because those are the line items of working capital that really reflect the work that we've done based on not necessarily what we build because that would sit in accounts receivable. But the work that we've done and the difference between the revenue recognized versus when we've reached of the milestones for billing purposes.
Got you. Okay. So it would be a contract asset reliability.
In this case?
It would actually be it could be both depending on where we sit with milestone payments, on particular on a particular aspect of a project.
Okay.
So you mentioned that you should see both line items.
Got you. And then the other quick question was the auto engineering business, which I had to relate the acquisitions from a couple of years ago. I realize that's more to support your energy storage business, really how the acquisitions were is that business now, you know, profitable on an EBITDA basis or does it still have a little ways to go?
And so there's a couple of things that are happening in that business where we are incrementally better than prior year, modestly profitable at this point. But we are we're looking at a substantial change in that in that organization starting hopefully here in the latter part of this 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 head count. That's fairly significant. So we hope to have talk a little bit more about that just in a little later in the fiscal year, once we get confirmation.
Great.
Thanks.
Thank you, Mr. Wilson, we have no further questions at this time. I would like to turn the floor back over to you for closing comments.
Okay.
Thank you Christine, and 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.
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.