Matthews International Corporation

Corporation first quarter fiscal 2022 financial results conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Steve Nicola, CFO. Please go ahead.

Thank you, Hemant. Good morning, and welcome to our call. I'm Steve Nicola, the company's CFO, and with me today is Joe Bartolassi, President and Chief Executive Officer. Before we start, I would like to remind you that our earnings release was posted last night on our website. www.matw.com in the investor section. The presentation for our call can also be accessed in the investor section of the website. In addition, beginning this quarter, the company is reporting its surfaces and engineered products businesses in the industrial technology segment. It was previously reported in the SGK brand solution segment. This new segment reporting was filed via Form 8K with the SEC in December. Prior period amounts have been adjusted for comparability. As a reminder, 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 10K 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, please turn to slide four. To start the financial review today, Here are some of the key highlights from the fiscal 2022 first quarter. First, our consolidated sales were $438.6 million for the current quarter compared to $386.7 million a year ago, representing an increase of $51.9 million or 13.4%. Each of our business segments reported sales growth for the fiscal 2022 first quarter. Second, The company's industrial technology segment, which includes the energy solutions, warehouse automation, and product identification businesses, reported sales of $74.3 million for the fiscal 2022 first quarter, compared to $53.4 million last year, representing an increase of $20.9 million, or almost 40%. Adjusted EBITDA for this segment more than doubled to $7.2 million last compared to $3 million last year. These increases were mainly driven by continued growth in our energy solutions business and higher warehouse automation sales. Third, with respect to consolidated adjusted EBITDA, the benefit of higher consolidated sales was significantly mitigated by the unfavorable impacts of increased material costs, as well as increased labor and freight costs. The company completed the termination and settlement of its principal U.S. defined benefit plan. This was a significant factor in the reported gap net loss of 62 cents for the quarter, but resulted in a reduction in the company's accrued pension liabilities of over $50 million from September 30, 2021. Fifth, the company reported an increase in adjusted earnings per share to 74 cents for the current quarter, compared to 68 cents for the same quarter a year ago. Next, the summary of our consolidated financial results for the quarter ended December 31, 2021 is as follows. As I noted, the company's consolidated sales were $438.6 million for the quarter ended December 31, 2021, compared to $386.7 million a year ago, representing an increase of $51.9 million, or 13.4%. Each of our business segments reported higher sales. On a GAAP basis, the company reported a net loss of $19.8 million, or 62 cents per share, compared to a net loss of $1.8 million, or 6 cents per share, for the same quarter last year. GAAP earnings for the current quarter included non-service pension costs of $31.1 million, which is mainly related to the settlement of the company's principal pension plan. In addition, the reported net loss on a GAAP basis for both years included the impact of intangible amortization expense, primarily from the acceleration of the amortization of certain intangible assets in the SGK brand solution segment. Consolidated intangible amortization expense was $21.5 million, or 51 cents per share, for the fiscal 2022 first quarter, compared to $15.2 million or 36 cents per share a year ago. Both periods also included charges in connection with our cost reduction initiatives and COVID-19 related costs. On a non-GAAP adjusted basis, adjusted EBITDA, which represents net income before interest expense, income taxes, depreciation, amortization and other adjustments for the fiscal 2022 first quarter was $53.3 million compared to $54.8 million last year. The benefit of the company's consolidated sales growth was offset for the quarter primarily by higher material costs and increased labor and freight costs. In addition, the current quarter was impacted by unfavorable sales mix in the SGK Brand Solutions segment. Although adjusted EBITDA was slightly lower, adjusted earnings per share increased to 74 cents for the current quarter compared to 68 cents last year. Lower interest expense and income taxes contributed to the increase in adjusted earnings per share from a year ago. Please see the reconciliations of adjusted EBITDA and non-GAAP adjusted earnings per share in our earnings release. Investment income for the quarter ended December 31, 2021 was $1 million compared to $1.1 million for the same quarter a year ago. Investment income primarily reflects the changes in the value of investments held in trust for certain of the company's benefit plans. Interest expense for the fiscal 2022 first quarter was $6.5 million compared to $7.7 million a year ago. The decline reflected lower average debt levels and lower interest rates for the current year. Other income and deductions net for the quarter ended December 31, 2021. represented a reduction to pre-tax income of $31.7 million compared to $1.7 million a year ago. The significant change primarily reflected an increase in non-service pension costs as a result of the settlement of the company's principal pension plan. Other income and deductions include the non-service portion of pension and post-retirement costs, as well as banking-related fees and the impact of currency revaluation gains and losses on foreign-denominated cash and debt balances. The company's consolidated income taxes for the quarter ended December 31, 2021, were a benefit of $6.6 million compared to expense of $4 million a year ago. Income taxes for the current quarter primarily reflected the benefit of the pre-tax consolidated loss. The prior year primarily reflected additional tax charges in connection with items discrete to the first quarter last year. Please turn to slide 5 to begin a review of our segment results. Sales for the industrial technology segment were $74.3 million for the fiscal 2022 first quarter, compared to $53.4 million a year ago, representing an increase of $20.9 million, or 39%. The growth resulted from higher sales for both the energy solutions and warehouse automation businesses. In addition, product identification sales improved for the quarter. Backlogs and incoming order rates for these businesses continued to be strong through the fiscal 2022 first quarter. Adjusted EBITDA for the industrial technology segment more than doubled to $7.2 million for the fiscal 2022 first quarter, compared with $3 million a year ago. The increase primarily reflected the impact of higher sales for the current quarter, which was partially offset by higher labor costs. Please turn to slide six. Memorialization segment sales for the fiscal 2022 first quarter were $210.7 million compared to $183.3 million a year ago, representing an increase of $27.4 million, or 15%. The increase was primarily attributable to higher unit sales of caskets, cemetery memorial products, and cremation equipment. Higher unit sales for the current quarter primarily reflected COVID-related deaths. In addition, improved price realization contributed to the segment sales for the current quarter. The company also completed an acquisition of a small cemetery products business during the fiscal 2021 second quarter. Memorialization segment adjusted EBITDA for the fiscal 2022 first quarter was $43.4 million and compared to $44.1 million a year ago. The favorable effect of higher sales was offset by the significant unfavorable impacts of higher material costs, mainly steel, lumber, and bronze, compared to a year ago, as well as increased labor and freight costs. Please turn to slide seven. Sales for the SGK brand solution segment were $153.5 million for the quarter ended December 31, 2021, compared to $150 million a year ago, representing an increase of 2.4%. The increase primarily reflected higher sales for the segment's core brand packaging business and an increase in retail-based sales. The segment's retail-based sales for the quarter reflect continued recovery in these markets. As you will recall, the segment's retail-based businesses were significantly impacted by the pandemic. Changes in foreign currency rates had an unfavorable impact of $2.4 million on the segment's current quarter sales compared with the same quarter last year. Fiscal 2022 first quarter adjusted EBITDA for the SGK brand solution segment was $15.4 million compared to $21.8 million a year ago. The decline primarily reflected the impact of an unfavorable change in sales mix from a year ago and higher material costs. The segment sales mix for the current quarter reflected a reduction in higher margin photography-related sales, which were offset by increased core brand packaging and merchandising sales. In addition, production inefficiencies related to remote work environments impacted operating margins for the quarter. Travel and entertainment costs also increased during the quarter, reflecting some recovery in business travel. Please turn to slide eight. Cash flow used in operating activities for the fiscal 2022 first quarter was $27.2 million compared to cash flow provided by operating activities of $35.3 million a year ago. The year-over-year change primarily reflected the company's pension contribution during the current quarter in connection with planned termination. In addition, the current quarter reflected an increase in performance-based compensation payments. Inventories were also higher than a year ago, reflecting in part the impact of recent commodity cost increases. Outstanding debt was $836.1 million at December 31, 2021, compared to $763.7 million at September 30, 2021. Net debt at December 31, 2021 was $765.1 million, compared to $714.5 million at September 30, 2021. The leverage ratio covenant in our domestic credit facility is based on net debt. The increase primarily reflected the impacts of the pension funding and working capital changes I just mentioned. Our leverage ratio was 3.4 at December 31, 2021. In addition, as a result of the termination of related funding of our pension plan, The company's accrued pension liabilities declined $51 million during the current quarter, from $85 million at September 30, 2021, to $34 million at December 31, 2021. This liability was $149.8 million at September 30, 2020. Approximately 31.6 million shares were outstanding at December 31, 2021. During the recent quarter, the company purchased approximately 63,000 shares under its share repurchase program. At December 31, 2021, the company had remaining authorization of approximately 2.6 million shares under the program. Finally, the Board yesterday declared a quarterly dividend of 22 cents per share on the company's common stock. The dividend is payable February 21, 2022 to stockholders of record February 7, 2022. This concludes the financial review, and Joe will now comment on our company's operations.

Thank you, Steve. Good morning. We started off the year very well. Each of our segments delivered strong revenue growth during the quarter, which helped offset the inflationary pressures that we felt on the bottom line. I want to highlight the particularly strong performance in our newly cast industrial technology segment, and our memorialization segment, where the businesses delivered double-digit top-line growth. This was a record first quarter revenue performance for the company, despite the many challenges of the current operating environment. During the quarter, we saw very good top-line and bottom-line performance in our newly cashed industrial technology segment, thanks to the continued strong performance of our warehouse automation business and the growth of our energy storage business. This segment grew top-line 39%, and EBITDA more than doubled, reflecting the fast-growing markets that we serve. Remember, starting this quarter, we have included our energy storage and our surfaces business in this segment. Prior periods have been adjusted to allow for comparability. Together with our product identification business, these businesses represent the fastest-growing parts of our company, and we expect to begin to demonstrate that growth this year as we work to deliver exceptionally high backlogs of over $200 million in the combined industrial technology segments of which the backlog of our energy storage business represents over $100 million. In fact, this segment, we expect this segment to have revenues of well over $300 million and adjusted EBITDA margins of over 15%, which will help us mitigate the impact of inflationary pressures elsewhere in the company. It is important to note that this performance is without what we believe will be yet another leg to this growth story, our new product in the product identification business, which is expected to add revenues next calendar year. In our energy storage business, we continue to have great interest in our proprietary solution for dry cell lithium ion batteries. Although we only delivered $20 million of revenue during the quarter for our energy storage business, which was a significant increase from last year, we are still on track to deliver over $100 million for fiscal 22. In fact, During the quarter, our solution has proven its ability to produce dry lithium battery electrode material at high rates of speed, a critical step in the development of our opportunity in this business. Also, during the quarter, we continue to see strong demand in all the businesses which make up our memorialization segment driven by the impact of the pandemic. But also, we have previously warned inflationary pressures depress the profitability of our funeral home products business, which reported a decline in profitability despite higher revenues, while exceptional performance in our cemetery products business helped this segment deliver relatively flat year-over-year EBITDA performance. Our backlog in our cemetery products and our environmental solutions business remains at historically high elevated levels, and pricing actions to help address the commodity cost inflation in all of the memorialization businesses should help us achieve another strong year for this segment, In SGK, the team successfully replaced an anticipated decline in volume from a very profitable account, but COVID-related inefficiencies, European slowness, and a revenue mix resulted in a challenging EBITDA performance. The business is expecting to deliver a solid year going forward as revenues from newly acquired accounts begin to ramp up and a return to normal levels in the European markets contribute to the overall performance. All in all, we are very satisfied with the performance for the quarter, and confident in our ability to continue to deliver solid results. During the quarter, we realized the termination of our principal U.S. defined benefit pension plan and distributed the funds to the participants, thus ending any further liability to the company. At one point not long ago, our outstanding pension liability was $150 million. In order to effectuate this final closure of the plan, we were required to make a $35 million contribution to the plan this quarter. Because of this contribution, our net debt increased by more than normal for the first quarter. However, we remain focused on reducing our debt over the balance of the year. As we look to the balance of the year, there is still a great deal of uncertainty. The ongoing impact of the pandemic is yet to be determined. What death rate we can anticipate for the balance of the year is unclear. Inflationary pressures do not appear to be subsiding. Our expectation is that retail traffic will continue to normalize but we are uncertain of when and to what extent. The timing of several significant deliveries in our energy storage business are subject to customer readiness for delivery. All of these factors and more make predicting our performance of the balance of the year difficult. Despite these challenges, however, our current estimates have improved thanks to our strong backlogs and pricing actions taken in our businesses. As a result, We believe that we can deliver at least $220 million of EBITDA on a full year basis. We also expect our free cash flow for the year to remain relatively consistent with prior year. Although our hope is that we will over-deliver, we remain cautious at this time. Now let's open it up for questions.