Matthews International Corporation (NASDAQ:MATW) Q4 2023 Earnings Call Transcript

Matthews International Corporation (NASDAQ:MATW) Q4 2023 Earnings Call Transcript November 17, 2023

Operator: Greetings. Welcome to Matthews International’s Fourth Quarter and Year-End Fiscal 2023 Financial Results Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Steven Nicola, CFO. Thank you. You may begin.

Steven Nicola: Thank you, Sherry. Good morning. I’m Steve Nicola, Chief Financial Officer of Matthews. And with me on the call this morning is Joe Bartolacci, our company’s President and CEO. For your reference in today’s call, our earnings release has been posted to the Investors section of our website, www.matw.com, along with the presentation. Before we start, please note that any forward-looking statements in connection with this discussion are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Factors that could cause the company’s results to differ from those discussed today are set forth in the company’s annual report on Form 10-K and other periodic filings with the SEC.

In addition, we will be discussing non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics. In connection with any forward-looking statements and non-GAAP financial information, please read the disclaimer included in today’s presentation materials located on our website. Now I will turn the call over to Joe.

Joseph Bartolacci: Okay. Thank you, Steve. Good morning. Again, this quarter, we are very pleased with our results as the company has reported higher consolidated sales, while all of our business segments reported higher adjusted EBITDA. Our Industrial Technologies business again reported solid revenue growth in the fourth quarter, driven by the strong and ongoing interest in our Energy Solutions business. This growth enabled the segment to exceed the $500 million revenue target we set for the year. Industrial Technologies revenue for the full year increased by over 50% in fiscal ’23 from last year’s sales of $335 million. Our Memorialization business also performed well for the full year with stable revenues despite a continued decline in debt.

Our sharp focus on improving productivity in the business, coupled with improved price realization led to an 8% increase in adjusted EBITDA for the full year. At SGK, as expected, cost reduction actions resulted in higher adjusted EBITDA for the quarter and improved margins despite market conditions in Europe that still continue to be challenging. Based on the strength of our operating results, we exceeded our target, reduced our net leverage ratio and also lowered our total debt outstanding as of year-end. We expect further debt reduction in the coming year as we convert our increased working capital results from our growing Industrial Technologies segment to cash. Consolidated sales for the company increased by 6.7% and adjusted EBITDA by 7% in fiscal 2023.

Impressive results despite the sense of uncertainty hovering around the global markets fueled by geopolitical events and the interest rate concerns. We are poised to drive continued growth in sales and adjusted EBITDA from fiscal 2024, buoyed by the long-term opportunities being created by several of our businesses with special mention to our Industrial Technologies segment. On a constant currency basis compared to prior year, our sales increased 8% and our EBITDA increased 9%, a strong performance in a challenging environment. Turning now to the performance of our individual businesses. Let’s begin with Industrial Technologies, which had strong growth in fiscal 2023, primarily through higher sales in our energy storage solutions business included in the year-over-year improvement are also benefits gained from the acquisitions of OLBRICH and R+S Automotive that provided expanded capacity to execute and meet our growing demand for energy solutions.

On our last call, we discussed actions to be taken in OLBRICH and R+S that would ultimately improve their overall performance. As you can see from our strong fourth quarter results, those initiatives have begun and we expect significant improvement in the operating results of these businesses in the coming year. We continue to actively engage in multiple discussions with several OEMs and battery manufacturers across the world on our energy solutions services, and we expect to finalize orders for production scale equipment during 2024. We still have about 50% of the $200 million in energy orders announced this past January that we expect to fulfill during 2024 as customer delays have pushed out deliveries. We will continue to share our progress on any significant new orders as they are received.

However, we exited 2023 with backlogs in our engineering and OLBRICH businesses that were $190 million higher than at the beginning of the year, including an increase of $80 million in our energy business. As for our product identification and warehouse automation businesses, let me lead off with an update on developments in our Product Identification business. As you know, this business provides a comprehensive suite of advanced marketing and printing technologies, consumables and software for industrial applications. These solutions include differentiated printing equipment, recurring consumables and critical controller software. As you may recall, we have identified an opportunity to displace incumbent continuous inkjet technology, which has proven to be too complex, environmentally challenged and costly.

Our new solution addresses the market opportunity of about $2 billion using a disposable printhead that is maintenance free and reduces total cost of ownership significantly. The solution pairs flexibility, speed and performance with low maintenance, convenience and environmental friendliness. We continue to develop the economic performance model supporting the product and we believe it could be the only available product in the market, able to address the growing need for 2D codes that are delivered in high rates of speed. 2D codes are expected to replace barcodes and certain applications due to their ability, delivered greater track and trace information and we believe our product is perfectly positioned to meet this demand. We anticipate launching this solution sometime in the latter half of 2024 to early 2025.

With respect to warehouse automation, we won our first European warehouse automation inflation project and our first factory automation order, which will be delivered in fiscal 2024. We are excited about the opportunity to expand our available market, both by industry and geography. Fueled by the continued growth of our Industrial Technologies segment, we are exploring ways to expand our product portfolio in this segment through acquisitions, which will augment our ability to grow each of the businesses with capacity, geography and technology. As I’ve said before, our Memorialization segment has been reset to a higher level than before the pandemic. While fiscal year revenues for the business remained stable, we delivered an adjusted EBITDA number that exceeded the amount reported for the full fiscal year before the pandemic by $30 million.

Continued growth of our cremation products business in addition to market share gains, productivity improvements, acquisitions and pricing initiatives all contributed to the success. Moving on to SGK. This segment continues to be impacted by challenging market environment in Europe and unfavorable currency rate changes. With that said, we did see performance setting over the second half of fiscal 2023, and are also beginning to see the impact of cost reduction actions implemented recently as margins and adjusted EBITDA improved in all of the regions in which we operate. We are also initiating a more significant cost reduction effort in Europe which has been the most — the merely challenged region for SGK. These actions include selective price increases and the closing of several sites, thus reducing our cost structure in Europe due to the impact of the current war between Russia and Ukraine.

Looking ahead to next year, we are excited about the long-term opportunity for all of our businesses, but especially for our Industrial Technologies segment. We believe it can drive us to another year of growth in sales and adjusted EBITDA. We met our targets for the year, and we are well positioned for a solid start in fiscal ’24 with good backlogs that — in that business in particular. However, as I’ve advised on prior calls, there is a significant amount of project-related work in our Industrial Technologies segment, specifically in energy solutions, OLBRICH and warehouse automation. As these businesses continue to scale up, and account for a greater portion of our consolidated sales, it becomes more difficult to project timing of our growth, particularly on a quarterly basis.

With this in mind, we will not provide specific fiscal ’24 earnings guidance at this time. But I can think that we expect our 2024 results to exceed fiscal 2023. Note that we anticipate providing updated guidance as we have more clarity on the timing of orders as they come through. As for our capital allocation plans, we anticipate fiscal 2024 operating cash flow generation to be strong. Continued debt reduction remains a long-term focus, and as I mentioned earlier, we plan to explore acquisitions to support growth, particularly in our Industrial Technologies segment. In conclusion, we look forward to delivering another good year in 2024 as we continue the transformation of our Industrial Technologies segment into a more significant contributor to our overall results.

Now let me turn it over to Steve, who will discuss the financial results for the quarter and the fiscal year in greater detail.

Steven Nicola: Thank you, Joe. I’ll begin with Slide 7. Consolidated sales for the fiscal 2023 fourth quarter were $480 million compared to $457 million a year ago, representing an increase of $23 million or 5%. The increase primarily reflected higher sales for the Industrial Technologies segment. The Industrial Technologies segment reported a sales increase of $36 million or 34% compared to a year ago, primarily reflecting higher engineering energy storage sales and the impact of the acquisitions of OLBRICH GMBH and R+S Automotive GMBH in August last year. Memorialization segment sales were $204.9 million for the current quarter, which was relatively consistent compared with $206.3 million a year ago. And sales for the SGK Brand Solutions segment were $11.5 million lower than a year ago.

On a consolidated basis, changes in currency rates had a favorable impact of $5 million on current quarter sales compared to a year ago. On a GAAP basis, the company’s net income was $17.7 million or $0.56 per share for the current quarter compared to a loss of $81 million or $2.63 per share for the same quarter last year. The prior year loss on a GAAP basis reflected a goodwill impairment charge related to the SGK Brand Solutions segment. 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 fourth quarter was $61.9 million, compared to $55.9 million a year ago, representing an increase of $6 million or 10.7%.

The increase reflected higher adjusted EBITDA for all 3 of the company’s reporting segments. Changes in currency rates had a favorable impact of approximately $422,000 on current quarter consolidated adjusted EBITDA compared to a year ago. Adjusted earnings per share for the current quarter was $0.96 compared to $0.82 for the same quarter a year ago, representing an increase of $0.14 or 17.1%. The increase primarily reflected higher adjusted EBITDA for each of our business segments and a lower income tax expense impact for the current quarter, offset partially by higher interest expense. Please see the reconciliations of adjusted EBITDA, non-GAAP adjusted earnings per share and constant currency sales and adjusted EBITDA provided in our earnings release.

Please turn to Slide 8 to begin a review of our segment results. Sales for the Industrial Technologies segment for the fiscal 2023 fourth quarter were $140.6 million, compared to $104.6 million a year ago, representing an increase of $36 million or 34%. Recent acquisitions, primarily OLBRICH and R+S Automotive contributed $14.8 million to the current quarter growth. 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 Product Identification business also reported higher sales for the current quarter compared to last year, which was offset by lower sales for the Warehouse Automation business. For the year, sales for the Industrial Technologies segment were $505.8 million, exceeding the $500 million target we set at the beginning of the fiscal year, and $170.2 million or over 50% higher than last year.

Adjusted EBITDA for the Industrial Technologies segment for the current quarter was $23.5 million compared to $23.4 million a year ago. The increase primarily reflected the benefit of the segment’s sales growth for the current quarter, offset partially by the unfavorable impact of recent acquisitions. As we previously indicated, these acquisitions were not expected to contribute to adjusted EBITDA immediately, but the results are expected to improve with our integration actions. We are already starting to realize the benefits of these actions. Please turn to Slide 9. Sales for the Memorialization segment for the fiscal 2023 fourth quarter were $204.9 million compared to $206.3 million for the same quarter a year ago. The recent quarter primarily reflected the benefits of improved pricing and the acquisition of Eagle Granite Company in February 2023, which were offset by lower unit sales of caskets and memorials reflecting lower COVID-related deaths.

Memorialization segment adjusted EBITDA for the current quarter was $36.9 million compared to $33.4 million for the fourth fiscal quarter last year. The increase primarily resulted from improved pricing and benefits from operational cost savings initiatives. These increases were partially offset by the impact of lower casket and memorial sales volumes and increased labor costs. Please turn to Slide 10. The SGK Brand Solutions segment reported sales of $134.7 million for the fiscal 2023 fourth quarter compared to $146.3 million a year ago. The decrease primarily reflected lower sales in the segment’s European and U.S. markets, including a decline in retail base sales and the impact of several site closures. Changes in currency rates had a favorable impact of $1.8 million on current quarter sales compared to a year ago.

Adjusted EBITDA for the SGK Brand Solutions segment was $17.5 million for the recent quarter compared to $16.7 million a year ago. 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 the benefits from the segment’s recent cost reduction actions. Changes in currency rates had an unfavorable impact of $235,000 on adjusted EBITDA compared to a year ago. Please turn to Slide 11. For the year ended September 30, 2023, operating cash flow was $79.5 million compared to $126.9 million a year ago. The reduction from last year primarily resulted from an increase in working capital during fiscal 2023. Working capital in our energy storage solutions business was higher than a year ago, reflecting the significant growth in this business.

Granted inventories also increased for the year, reflecting higher sales and increased costs. Operating cash flow for the 2023 and 2022 fiscal years reflected final payouts for the settlement of the company’s U.S. retirement plan obligations. The final payouts for settlement of the supplemental plans totaled $24.2 million in the fiscal 2023 first quarter. Final payouts for settlement of the company’s principal U.S. pension plan totaled $35.7 million in the first fiscal quarter last year. Outstanding debt was $790 million at September 30, 2023, compared to $799 million at the end of fiscal 2022. At September 30, 2023, the company’s leverage ratio based on net debt, which represents outstanding debtless cash and trailing 12 months adjusted EBITDA was 3.31, representing a reduction from 3.35 at June 30, 2023, and 3.5 at September 30, 2022.

Approximately 30.5 million shares were outstanding as of September 30, 2023. During the fiscal 2023 fourth quarter, the company purchased approximately 1,100 shares, which were in connection with withholding tax obligations on equity compensation. At September 30, 2023, the company had remaining authorization of approximately 1.2 million shares under its repurchase program. Finally, the board this week increased the quarterly dividend to $0.24 per share on the company’s common stock, representing the 30th consecutive annual dividend increase since becoming a publicly traded company. The dividend is payable December 11, 2023, to stockholders of record November 27, 2023. This concludes the financial review, and we will now open the call to questions.

Sherry?

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Q&A Session

Operator: [Operator Instructions] Our first question is from Daniel Moore with CJS Securities.

Daniel Moore: I will start with energy storage. Obviously, the big influx of orders last fiscal Q1 and appreciate the color, Joe. Just talk about the pipeline, what it looks like, and what your expectations for order intake would look like over the next maybe 4 quarters? I know that getting the exact timing is difficult, but what are you hearing from both your bigger customers and newer opportunity?

Joseph Bartolacci: So our largest customer has pushed up, and that’s more issues as it relates to them than as it relates to us. You can see by the working capital build that we have on our balance sheet. It’s more the question of timing of delivery and hitting the milestones that will allow us to reduce that while there being ready for the equipment is the critical issue. They obviously — we are aware of other projects that they are working on. I know they are substantially behind in those developments. But they — we expect to hear something over the course of this year. Others, however, are moving forward. As I’ve said before, where we stand today with respect to our largest customers, our other customers are probably 2 to 3 years behind.

So what we will expect to see this year are the first orders for production equipment and I would say we have at least 2, maybe 3 significant customers that will be — we’re in the midst of working on, what we call, specifications for those production pieces of equipment. But they will not be multi-hundred million dollar orders at this time. They will lead to multi-hundred million dollar orders over time. But today, the types of orders we’re talking about are more in the line of $25 million to $50 million. And we will announce those as they go forward. We are also working on some very interesting things with some U.S. manufacturers on joint developments in the United States. So we’ll see — we’ll have some announcements, I’m sure, over the coming months.

But at this point in time, timing of that is our biggest issue.

Daniel Moore: Really helpful, Joe. I’m bouncing around a little bit here, but in Memorialization, you had the initial bump in casket sales from the pandemic, followed by delayed bump in memorials. Have we now essentially fully pass those more difficult comps? And what should sort of the organic rate look like in your mind over the next 3 to 5 years?

Joseph Bartolacci: Yes, I would tell you that when it comes to Memorialization, the team has done an exceptional job and, what I would call, casketed deaths or the death rates are down materially from the peaks. Still had a few of those kind of off-normal kind of months throughout that period. But I would tell you, we’re substantially back. As I look forward, I think the key to this story as it relates to Memorialization is we’ve picked up some share, we’ve picked up some pricing, and we’ve improved our productivity. And the last part of this, we’ve made several smaller acquisitions that have become extremely accretive to that overall business, and we have some strategies that we’re looking at, which we hope will continue to build on that. So I — again, I don’t think this is a business that’s going to grow double-digit top line or double-digit bottom line into the future, but we expect it to be a modest grower going into the future over the next 5 years.

Daniel Moore: Helpful. One more, and I’ll jump back around cash flow and capital allocation. Maybe Steve, what are we looking at for CapEx for next year? If I missed it, forgive me. How much do you think we can pull out of working capital? And Joe, I heard acquisitions a couple of times, just talk about the — your priorities delevering versus maybe some of that M&A, and what kind of size we might be looking at?

Steven Nicola: Yes. So Dan, I’ll start with the first part of your question. So with CapEx, I think this year, we landed just a little bit over $50 million for the year. I do expect that to be a little bit higher next year. So just with some of the investments that we’re making in our Industrial Technology segment, I expect that to be higher. And then with respect to working capital, although I think you heard Joe referenced a strong cash flow — that we’re expecting a strong cash flow year next year. And I do think an important piece of that is going to come from working capital reduction we had to build this year that we just talked about. I expect that to be realized to some degree in fiscal 2024, but again, the caution there is timing on that, Dan, just simply because of the project nature of the business.

Joseph Bartolacci: Yes, Dan, and I’ll take the second half of your question. As it relates to acquisitions, you’re right, I have been very consistent with couple of comments with respect to acquisitions. Let me put it by segment, that’s a better way to do it. We expect to do a few things in our — on our Memorialization business, but those are relatively small with big impacts potential to the bottom line. That’s leveraging our — what we’re doing really is leveraging our platform, salesman across the United States, distribution centers across the United States, and we’re in the cemeteries and funeral homes and literally every part of the country. So we’ll continue to expand that, but those are relatively small. What I think is what is important to hear in his commentary is that we’re now focused on growing our Industrial Technologies segment as a whole.