Matthews International Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Matthews International Third Quarter Fiscal 2023 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bill Wilson, Senior Director of Corporate Development.

Operator

Thank you, sir. You may begin.

Speaker 1

Thank you, Christine. Good morning, everyone, and welcome to the Matthews International 3rd quarter fiscal year 2023 conference call. This is Bill Wilson, Senior Director of Corporate Development. With me today are Joe Bartolome, President and Chief Executive Officer And Steve Nicole, 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.

Speaker 1

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 ks 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 table 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.

Speaker 1

And now, I'll turn the call over to Joe.

Speaker 2

Thank you, Bill. Good morning. Let me first thank all of our employees globally for their continuing contributions to our success last quarter. Again, this quarter, we're quite pleased with our results as all of our businesses performed well on a year over year basis. As we expected, we continue to see growth in our Industrial Technologies business, driven by our recent significant orders and the ongoing interest in our Energy Solutions business.

Speaker 2

We also saw continued growth in our warehouse automation and our product identification businesses, which were solid contributors to our overall performance. In addition, we had strong results in our memorialization and improving results in SGK, which showed improvement year over year. Consolidated sales for the company increased by almost 12% and adjusted EBITDA improved by 22%, all in all a very good quarter. As I look at the performance of our individual businesses, the Industrial Technologies segment grew by 66% over prior year, Primarily through higher sales for our Energy Storage Solutions business as well as benefits gained from the acquisitions of Olberk and R&S Automotive. These acquisitions increased our capacity and provided the additional resources necessary to support our ability to execute On the recent orders and meet the growing demand for our Energy Solutions business, we are continuing to make progress on Over $200,000,000 of energy orders announced earlier this year.

Speaker 2

These orders together with other orders We have already received and orders that we anticipate in the near term will carry over into next fiscal year and provide a very good start for another strong year in our Energy Discussions on additional business opportunities are ongoing and we will continue to share our progress on new orders as they are finalized. Now that we have much of the required capacity and resources to meet increased demand, We are focusing on improving the operating platform at Ulbrich and RNS, which have impaired the performance of the business over the past few quarters. Beginning this quarter, cost actions will be taken over the next 12 to 18 months that will improve the performance of these acquisitions And contribute directly to the bottom line. We have been prevented from taking action earlier due to labor contracts in place at the time of our acquisition, But those contracts have now expired. In our memorialization business, we continue to outperform pre pandemic results, Driven by the significant effort made by the team, we have retained much of the market share gains that we have made during COVID and improved our operating efficiencies.

Speaker 2

Thus, We have reset this business to a higher performance level than before the pandemic. As a result of those efforts and the recent acquisition of Eagle Branded, Operating results in the Memorialization segment grew by almost 3% in the fiscal 2023 Q3 and by 29% when compared to the corresponding period before the pandemic began. Moving on to SGK. Top line results continue to be impacted by the market And unfavorable currency rate changes. With that said though, we were pleased with the direction of operating results for the quarter As SGK was able to pass along cost increases and take actions to improve its performance relative to prior year.

Speaker 2

We anticipate additional cost actions to be taken over the coming year geared towards further driving margin improvement in 2024. As for our warehouse automation business and the product identification business, we saw good results, but did see some softening in order activity in the warehouse This is as we advised in our last quarterly earnings call. In particular, throughout the Q3, we saw a decline in quoting activity, Which began to strengthen early into the 4th quarter. It is still early to forecast the impact fiscal 2024 of any softening, but the recent impact the recent uptick in activity bodes well for another strong year next year. Our product identification business also contributed a good quarter driven by select price increases and volume increases.

Speaker 2

During the quarter, we made progress on our new print engine in our product identification business and are finalizing production plan this coming quarter. We expect to give you a better understanding of the timing of the rollout of the new product in our year end earnings call. Looking ahead to the Q4, we continue to feel good about our future outlook in all of our businesses. The Antares' Drilling Technologies segment and in particular, The strength of our Energy Solutions business is expected to have another solid quarter. This performance combined with continued steady results from Memorialization And a trend towards improving results in SGK gives us the confidence to finish the year strong.

Speaker 2

As a reminder, Q4 of fiscal 2022 benefited from the closing of projects in our Energy Solutions business, resulting in a particularly strong results. Although we do not have similar project closures in our upcoming quarter, we do anticipate operating results in our Industrial Technologies segment To remain relatively in line with prior year results as we make progress on the recent orders. We remain on track to recognize about Half of those orders in fiscal 2023 and the remainder over the first half of twenty twenty four. This performance should result in about a 40% increase year over year Our Energy Solutions business, bringing our fiscal 2023 revenue to about $140,000,000 Moreover, Our total Industrial Technologies segment is expected to report revenues that approach $500,000,000 more than double what they were in fiscal 2020. As I've laid out on earlier calls, the Energy Solutions business consists of large orders subject to revenue recognition accounting rules.

Speaker 2

Thus, the timing of our revenue recognition is not entirely in our control. Our Memorialization business is We continue to perform well in the Q4 and at SGK as we noted earlier, we are expecting to see continued margin improvement on a year over year basis. The wildcard in our forecast remains the economic environment, which continues to hinder our efforts in Europe. With that in mind and given the aforementioned assumptions, we believe it is prudent to remain cautious on our outlook. Therefore, we are maintaining our previous guidance fiscal 'twenty three, with our current projections of at least $220,000,000 of adjusted EBITDA.

Speaker 2

Let me now hand it over to Steve, who will discuss the financial results for the quarter in detail.

Speaker 3

Thank you, Joe, and good morning. I'll begin with Slide 7. Consolidated sales for 2023 Q3 were $471,900,000 compared to $421,700,000 a year ago, Representing an increase of $50,200,000 or 11.9 percent. The increase primarily reflected higher sales for the Industrial Technology segment. Industrial Technology segment reported a sales increase of $52,100,000 or 66.4% compared to a year ago, Primarily reflecting higher engineering energy storage sales and the impact of the acquisitions of Olbrook GmbH and R and S Automotive GmbH in August last year.

Speaker 3

Memorialization segment sales increased $5,600,000 for the current quarter And sales for the SGK Brand Solutions segment were $7,500,000 lower than a year ago. On a consolidated basis, Changes in currency rates had an unfavorable impact of $1,700,000 on current quarter sales compared to a year ago. On a GAAP basis, the company's net income was $8,700,000 or $0.28 per share for the current quarter compared to $2,900,000 or $0.09 per share for the same quarter last year. The increase primarily reflected higher operating income And an income tax benefit for the current quarter offset partially by higher interest expense. On a non GAAP basis, consolidated adjusted EBITDA, Which represents net income before interest expense, income taxes, depreciation and amortization and other adjustments For the fiscal 2023 Q3 was $56,200,000 compared to $46,000,000 a year Representing an increase of $10,200,000 or 22.1 percent.

Speaker 3

The increase reflected higher adjusted EBITDA for all three of the company's reporting segments. Changes in currency exchange rates had an unfavorable impact of approximately $600,000 On current quarter consolidated adjusted EBITDA compared to a year ago. Adjusted earnings per share for the current quarter was $0.74 compared to $0.58 for the same quarter a year ago. Similar to GAAP earnings per share, the increase Please see the reconciliations of adjusted EBITDA, non GAAP adjusted earnings per share and adjusted EBITDA provided in our earnings release. Please turn to Slide 8 to begin a review of our segment results.

Speaker 3

Sales for the Industrial Technology segment for the fiscal 2023 Q3 were $130,500,000 Compared to $78,400,000 a year ago, representing an increase of $52,100,000 or 66.4 percent. Recent acquisitions, primarily Ulbrich and R&S Automotive contributed $25,200,000 to the current quarter. The engineering business reported higher sales for the current quarter compared to a year ago, primarily reflecting continued growth in our Energy Storage Solutions business. Our warehouse automation and product identification businesses also reported higher sales for the current quarter compared to last year. Changes in currency rates had an unfavorable impact of approximately $350,000 on the segment's current quarter sales compared to a year ago.

Speaker 3

Adjusted EBITDA for the Industrial Technologies segment for the current quarter was $15,000,000 compared to $11,800,000 a year ago. The increase primarily reflected the segment's sales growth for the current quarter. The segment's adjusted EBITDA margin percentage was unfavorably impacted by recent acquisitions which reported operating losses for the current quarter. As we have previously discussed, These acquisitions were not anticipated to contribute to adjusted EBITDA immediately, but their results are expected to improve next fiscal year as we Please turn to Slide 9. Sales for the Memorialization segment for the fiscal 2023 3rd Quarter were $208,700,000 compared to $203,200,000 for the same quarter a year ago.

Speaker 3

The increase primarily reflected the benefits of improved pricing, higher sales of U. S. Cremation equipment and the acquisition of Eagle Granite Company, which were partially offset by lower unit sales of caskets and memorials reflecting lower COVID related deaths. Memorialization segment adjusted EBITDA for the current quarter was $39,900,000 compared to $32,100,000 for the 3rd quarter last year. The increase primarily resulted from higher sales, improved pricing and benefits from operational cost savings initiatives.

Speaker 3

These increases were partially offset by the impact of lower casket and memorial sales volumes and increased materials, labor and other inflation Please turn to Slide 10. The SGK Brand Solutions segment reported sales of $132,600,000 the quarter ended June 30, 2023 compared to $140,100,000 a year ago, the segment's European businesses Continued to be challenged by unfavorable market conditions. Retail based sales, which includes private label and merchandising We're also lower for the current quarter. Changes in currency rates had an unfavorable impact of $1,200,000 on current quarter sales compared to a year ago. Adjusted EBITDA for SGK Brand Solutions was $16,400,000 for the fiscal 20 23 Q3 compared to $14,500,000 a year ago.

Speaker 3

Despite lower sales, adjusted EBITDA for the segment increased for the current quarter primarily reflecting improvements in the ability to pass along cost increases and benefits from the segment's recent cost reduction actions. Changes in currency rates had an unfavorable impact of $473,000 on adjusted EBITDA compared to a year ago. Please turn to Slide 11. Cash flow from operating activities for the fiscal 2023 Q3 was $32,200,000 Compared to $11,600,000 a year ago, the increase primarily reflected higher earnings and a reduction in cash used for working capital in the quarter. For the 9 months ended June 30, 2023, operating cash flow was $76,900,000 Compared to $84,400,000 a year ago, operating cash flow for both year to date periods reflected final payouts for the settlement of the company's U.

Speaker 3

S. Retirement plan obligations. The final payouts for the settlement of the supplemental retirement plans totaled $24,200,000 in the fiscal Final payouts for settlement of the company's principal U. S. Pension plan totaled $35,700,000 in the 1st fiscal quarter last year.

Speaker 3

In addition, operating cash flow for the current year reflected an increase in working capital primarily resulting from higher inventories and reduced current liabilities. Outstanding debt was $775,000,000 at June 30, 20 representing a decrease of $3,000,000 during the current quarter. Outstanding debt was $778,000,000 as of March 31, 20 $399,000,000 on September 30, 2022. At June 30, 2023, the company's leverage based on net debt, which represents outstanding debt less cash and trailing 12 months adjusted EBITDA Was 3.35 compared to approximately 3.5 at both March 31, 20 23 September 30, 2022. Approximately 30,500,000 shares were outstanding as of June 30, 2020 During the fiscal 2023 Q3, the company purchased 2,100 shares, which were in connection with withholding tax obligations on equity compensation.

Speaker 3

At June 30, 2023, the company had remaining authorization of Approximately 1,200,000 shares under its repurchase program. And finally, earlier this week, The Board declared a quarterly dividend of $0.23 per share on the company's common stock. The dividend is payable August 21, 2023 to stockholders of record August 7, 2023. This concludes Financial review and we will now open the call to questions. Christine?

Operator

Thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from the line of Dan Moore with CJS Securities. Please proceed with your question.

Speaker 4

Hi, good morning. It's Pete Lucas for Dan. I guess just touching on warehouse automation, you touched on it in the prepared remarks, mentioned Saw some softening in Q3 and early strength in Q4. Can you give us any more color in terms of activity and what growth is likely to look Like as we look into fiscal year 2024?

Speaker 2

Pete, that's actually the challenge we're facing. We saw some slowing in quoting. Quoting is generally the Starting point for order intake, it's early for us. Fortunately, as we look into 'twenty four, The Q1 is generally the slower of the quarters of the 4 that we have given that nobody wants you in their warehouses. So it's too early for us to begin to look at The impact on 2024.

Speaker 4

Fair enough. And then in terms of memorialization, What are your expectations for the trajectory of revenue as we look to 2024? And also EBITDA margins have recovered nicely, now back above 20% for the past two quarters. How do you think about margins in terms of leveling off and what is sustainable do you think for the mid term

Speaker 2

I mean top line is difficult to project. I mean, death rates are something that obviously we don't have control of. But I would tell you that it's a modest grower for us. We're not expecting multiple double digit growth in the Memorialization segment. From a margin standpoint, I would say that we are pretty close to stable at this point in time.

Speaker 2

You're going to have quarters where you're going to be up and down a little bit, but at the end of the day, We have stabilized at around that our historic rates. We think that's where we should be.

Speaker 4

And last one for me, jump into the SGK Brand Solutions. Do you anticipate revenue declines slowing or perhaps even reversing over the next few quarters? And in terms of margins, what needs to happen to get margins back up to the low to mid teens? And is that still achievable and sustainable there? I know you have Made some improvements there, but just wondering the outlook.

Speaker 2

Yes. The story with respect To top line and to the margins is Europe, Europe, Europe, it's completely there. Today, The balance of our business in the North America and the APAC region are operating at historic rates or better. So we're the team has done a great job in the In which we have operated in for a long, long time, the challenge we're facing is things that are somewhat out of our control. I don't Have a good feel for the European market as to it, when or if it will recover to That is similar to the balance of the business, but we are going to take actions to shrink that size of that footprint over there.

Speaker 2

Not an easy task to do as we move forward, but that's the only way we see right now in getting that part of the world back to a more

Operator

Our next question comes from the line of Liam Burke with B. Riley. Please proceed with your question.

Speaker 5

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

Speaker 3

Hi, Jim. Good morning, Liam.

Speaker 5

On the memorialization, you talked about Market share gains, specifically that's both in Memorialization Products and with caskets or is this across the board of all the product lines,

Speaker 2

I would tell you that we picked up market share in just about every one of the businesses that we operate in North America, but they're small. These are incremental, but as you know, that incremental drop through is positive. The bigger issue, Liam, I think is and I think the Street may have Missed keep missing this. I mean, if you look at where our business was just 3 years ago, it's materially higher at this point in time. So that is A period of time that's both through margin excuse me, both through pricing and as well as with our market share pickups.

Speaker 2

Is a different business than it was just 3 years ago.

Speaker 5

Great. And you have talked about, I mean, primarily Ulbricht, But these acquisitions and your ability now to take a look at costs in those businesses, Will you see any benefit in 2023 or is this all a 2024 event?

Speaker 2

So, as we begin to deliver The start more revenue recognition, I would say, in the orders that we've talked about in the energy side, you'll start to see the utilization Some of the old work capacity, so that will improve margins, but they have been negative throughout the course of the year. I would tell you the impact should reverse Into second, Q3 of next year.

Speaker 5

Got it. Great. And Steve, real quickly, you did highlight Increased working capital needs and its effect on operating cash flow for the year. Is there any specific business that need to increase inventories at Energy Solutions or are there other businesses that require additional working capital investment?

Speaker 3

So the two businesses where we saw that the inventory increase lien for the year were the Granite business, And that was addressing some of the built up backlog in that business and some of that increase you see on the balance sheet relates to our acquisition of Eagle Granite. And then the second business as the business has grown is our energy business. As you would expect, as our revenues have increased, The working capital related to that business has increased. So those are the two areas that were impacted.

Speaker 5

Got it. Thank you, Joe. Thank you, Steve.

Speaker 2

You're welcome.

Operator

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

Speaker 6

1st Question would be on Energy Storage. I mean, you mentioned that half of the $200,000,000 or so of orders announced early in the year are likely to be recognized in fiscal year 'twenty four. Beyond that $200,000,000 are there additional drivers that should cause Energy Storage to meaningfully Step up from 23 levels in 2024 or is that the next leg up more of a 2025 event?

Speaker 2

So we have if you assume around $100,000,000 would carry, as you might expect, we've been Receiving orders throughout the last couple of quarters since the announcements that we made. Obviously, not to the magnitude that we Announced otherwise we would have put that announcement out. But yes, we have we'll start the year with a very strong backlog ready to move forward. But we are also in discussions with multiple players for the beginning of what I would call production lines. So that could change Dramatically, but I would expect it to be a good year next year.

Speaker 2

From a revenue standpoint, the bigger year will probably be in 2025.

Speaker 6

Okay. Thank you. That's helpful. And that bigger year in 2025 would hopefully relate to some of these production line Discussions translating to material chunks of revenue. Yes.

Speaker 6

Okay.

Speaker 2

Yes. Okay. Yes.

Speaker 6

Second question would be just on SJK Brand Solutions. Nice quarter, nice pickup. I mean given that the margins are improving, are you in a position where You know, I might be closer to considering sales of non core businesses in the distant future? Or do you think you You'd still like to see improvement over a 12 to 24 month or longer period before you're ready to

Speaker 2

The bigger driver I think Justin is where we stand on the energy side and the development of the old industrial tech. As you heard Steve earlier talk about the additional capital that we consumed, We'll need more capital and as these companies as those businesses get to scale, we would look to portfolio management. Will that be next year? Will it be the year after? It is a difficult answer for me to say at this point in time.

Speaker 2

But we are still very pleased with where the direction of SGK is moving and for that matter the Performance and Memorialization segment as well.

Speaker 6

Got it. Thanks. And then are you So targeting normalized margins or sort of recovery margins for SGK at sort of the mid teens or the low to mid teens like I'm just trying to

Speaker 2

Low to mid teens. Low to mid teens on a blended low to mid teens on a blended basis across all markets.

Speaker 6

Okay. So you're not too far away from that based on this Okay. And then lastly, I mean Memorialization, great performance, great margins. It's great to see the margins sort of at or close to 20%. Is there anything that gives you concern that margins could step back down the next couple of years, I mean, I realize there are all sorts of unpredictable things that can happen.

Speaker 6

But is there do you think that outside of anything unpredictable, you can just sort of hold the margins at these Levels for the next couple of years?

Speaker 2

Look, what we have proven is that rapid spikes in commodity costs Are things that we take a long term look at from a business standpoint. We don't necessarily recover every last All in one period. So yes, we could have a period of time where if we had rapid escalation of commodity costs, we could have a period of time where our margins are impaired. But over the course of a normal business cycle, we will return to these kinds of margins.

Speaker 6

Okay, great. Thanks for taking my questions.

Speaker 2

Sure.

Operator

Thank you. We have reached the end of the question and answer session. I would now like to turn the floor back over to Mr. Wilson for closing comments.

Speaker 1

Thank you, Christine, 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

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

Powered by Quartr

Key Takeaways

  • Consolidated net sales increased by almost 12% year-over-year to $471.9 million in Q3, while adjusted EBITDA rose 22%, driven by strong segment performances.
  • The Industrial Technologies segment grew 66% YoY—boosted by Energy Storage Solutions demand and the Olberk and R&S Automotive acquisitions—and is set to recognize half of its $200 million-plus energy order backlog in FY 2023 (the remainder in H1 FY 2024).
  • The Memorialization segment outperformed pre-pandemic levels with Q3 sales up ~3% YoY and 29% above Q3 FY 2020, reflecting improved pricing, operating efficiencies and the Eagle Branded acquisition.
  • Although SGK Brand Solutions saw a 5% sales decline due to European market weakness and currency headwinds, Q3 adjusted EBITDA climbed as cost actions and price recovery drove margin improvement, with further gains expected in FY 2024.
  • The Warehouse Automation business experienced Q3 softening in quoting activity but showed an early Q4 rebound, while the Product Identification segment delivered solid results and is finalizing rollout plans for a new print engine.
AI Generated. May Contain Errors.
Earnings Conference Call
Matthews International Q3 2023
00:00 / 00:00