Matthews International Corporation

Greetings, and welcome to the Matthews International Second Quarter Fiscal Year 2022 Conference Call. At this time, all participants are in a listen-only mode. A brief 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 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.

Thank you, Christine. Good morning, everyone, and welcome to the Matthews International Second Quarter Fiscal Year 2022 Earnings Conference Call. This is Bill Wilson, Senior Director of Corporate Development. With me today are Joe Bartolese, 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 investor section last night. The presentation for our call can also be accessed in the investor section of the website. In addition, as a reminder, beginning in the first quarter of fiscal 2022, the company transferred its surfaces and engineered products businesses from the SGK brand solution segment to the industrial technology segment. Prior period results reflect the new segmentation. 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 10-K and other periodic filings with the SEC. In addition, we will be discussing non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics. In connection with any forward-looking statements and non-GAAP financial information, please read the disclaimer included in today's presentation materials located on our website. And now I'll turn the call over to Steve.

Thank you, Bill. Good morning. In reviewing our results for the fiscal 2022 second quarter, some of the key highlights included, first, we reported a new record for quarterly sales and another consecutive quarter of year-over-year consolidated sales growth. Consolidated sales increased to $445 million for the current quarter compared to $417.2 million a year ago, representing an increase of $27.8 million, or 6.7%. Each of our business segments reported sales growth for the quarter. Second, the company's industrial technology segment, which includes the energy solutions, warehouse automation, and product identification businesses, reported sales of $78.2 million for the fiscal 2022 second quarter, compared to $65.3 million last year, representing an increase of $12.9 million, or almost 20%. Adjusted EBITDA for this segment grew to $14.4 million compared to $8.3 million last year. These increases were mainly driven by continued growth in our energy solutions business and higher warehouse automation and product identification sales. Third, with respect to consolidated adjusted EBITDA, the benefit of higher consolidated sales was significantly mitigated by the unfavorable impact of increased material costs, as well as other inflationary impacts, including increased labor and freight costs. Fourth, the company reported an $83.1 million reduction in the outstanding debt balance during the fiscal 2022 second quarter. As a result, the company's net debt, which represents debt less cash, was below $700 million as of March 31, 2022. During the quarter, The company replaced its existing receivables securitization facility with a receivables purchase agreement. This resulted in $75 million reductions in trade receivables and debt. Next, I'll provide a summary of our key earnings metrics on a GAAP and non-GAAP adjusted basis for the quarter end of March 31, 2022. On a GAAP basis, the company reported a net loss of $1.9 million or $0.06 per share compared to net income of $5 million or $0.16 per share for the same quarter last year. GAAP earnings for the current quarter included asset write-downs totaling $10.5 million related to the Russia-Ukraine conflict. In addition, both periods reflected the impacts of intangible amortization expense primarily from the acceleration of amortization of certain intangible assets in the SGK brand solution segment. Consolidated intangible amortization expense was $12 million or 28 cents per share for the fiscal 2022 second quarter compared to $22.9 million or 52 cents per share a year ago. On a non-GAAP basis, adjusted EBITDA, which represents net income before interest expense, income taxes, depreciation and amortization and other adjustments, for the fiscal 2022 second quarter was $55.2 million compared to $60.9 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 is impacted by unfavorable sales mix in the SGK brand solution segment. Adjusted earnings per share was 74 cents for the current quarter compared to 89 cents last year, primarily reflecting the reduction in adjusted EBITDA. Please see the reconciliations of adjusted EBITDA and non-GAAP adjusted earnings per share in our earnings release. For the six months ended March 31, 2022, Consolidated sales increased to $883.6 million compared to $803.8 million a year ago, representing an increase of $79.7 million, or almost 10%. Similar to the results for the second quarter, each of our business segments reported sales growth on a year-to-date basis. On a GAAP basis, the company reported a year-to-date net loss of $21.7 million, or 68 cents per share, compared to net income of $3.2 million, or 10 cents per share, last year. GAAP earnings for the current year included non-service pension costs of $31.4 million, which is predominantly related to the settlement of the company's principal pension plan. In addition, as I noted earlier, the second quarter of this year included asset write-downs totaling $10.5 million related to the Russia-Ukraine conflict. Both year-to-date periods reflected the impacts of accelerated intangible amortization expense. Consolidated intangible amortization expense was $33.5 million or 79 cents per share for the first six months of fiscal 2022 compared to $38.2 million or 88 cents per share a year ago. On a non-GAAP basis, adjusted EBITDA for the six months ended March 31, 2022 was $108.5 million compared to $115.7 million last year. The benefit of the company's consolidated sales growth was offset primarily by higher material costs and increased labor and freight costs. In addition, the current year was impacted by unfavorable sales mix in the SGK brand solution segment. Year-to-date adjusted earnings per share was $1.48 as of March 31, 2022, compared to $1.57 last year, primarily reflecting the reduction in adjusted EBITDA. The decline was partially offset by lower interest expense in the current year. Investment income for the quarter ended March 31, 2022, was a loss of $327,000, compared to income of $1 million for the same quarter a year ago. Investment income for the six months ended March 31, 2022, $676,000 compared to $2 million last year. 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 second quarter was $6.3 million compared to $7.2 million a year ago. Year-to-date interest expense was $12.8 million for fiscal 2022 compared to $15 million last year. The declines reflected lower average debt levels and lower average interest rates for the current year. Other income and deductions met for the quarter ended March 31, 2022 represent pre-tax income of $562,000 compared with net expense of $2.6 million a year ago. The significant change primarily reflected a reduction in non-service pension costs as a result of the company's settlement of its principal pension plan. Year-to-date, other income and deductions net for fiscal 2022 represented net expense of $31.2 million compared to net expense of $4.3 million last year. The year-to-date change primarily reflected a significant first quarter charge in the current year 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 March 31, 2022, were $3.3 million compared to $972,000 a year ago. The significant increase for the current quarter primarily reflected the impact of the non-deductible asset write-downs related to the Russia-Ukraine conflict. For the six months ended March 31, 2022, the company's consolidated income taxes reflected a benefit of $3.4 million compared to expense of $5 million last year. The benefit for the current year primarily reflected the tax benefit of the first quarter pension cost. Please turn to slide five to begin a review of our segment results. Sales for the industrial technology segment were $78.2 million for the fiscal 2022 second quarter, compared to $65.3 million a year ago, representing an increase of $12.9 million, or approximately 20%. The growth resulted primarily from higher sales for the energy storage solutions business. In addition, warehouse automation and product identification sales improved for the quarter. Backlogs and incoming order rates for these businesses continued to be strong through the fiscal 2022 second quarter. Year-to-date sales for the industrial technology segment were $152.5 million through March 31, 2022, compared to $118.7 million a year ago, representing an increase of $33.8 million, or approximately 28.5%. As a result of this sales growth, adjusted EBITDA for the industrial technology segment was $14.4 million for the fiscal 2022 second quarter compared with $8.3 million a year ago. The increase also reflected improved margins and lower pension costs, which were partially offset by higher labor costs. On a year-to-date basis, adjusted EBITDA for the industrial technology segment nearly doubled to $21.6 million compared with $11.3 million last year. Please turn to slide six. Memorialization segment sales for the fiscal 2022 second quarter were $220 million, compared to $205.5 million a year ago, representing an increase of $14.5 million, or 7.1%. The growth was primarily the result of higher cemetery memorial product sales and increased prices. Casket unit sales volumes were slightly lower for their current quarter as the impact of COVID-19 begins to subside. The company also completed an acquisition of a small cemetery products business during the fiscal 2021 second quarter. For the first six months of fiscal 2022, memorialization segment sales were $430.7 million compared to $388.7 million a year ago. representing an increase of $42 million or 10.8%. Higher unit volumes of caskets and cemetery memorial products, in addition to increased prices, were the primary drivers to the year-to-date sales improvement. Memorialization segment adjusted EBITDA for the fiscal 2022 second quarter was $42.9 million compared to $51.6 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. Memorialization segment adjusted EBITDA for the six months ended March 31, 2022, was $86.3 million, compared to $95.7 million last year. Please turn to slide seven. Sales for the SGK brand solution segment improved to $146.8 million for the quarter ended March 31, 2022, compared to $146.4 million a year ago. The increase primarily reflected higher merchandising-related sales and growth in the segment's European packaging business. These increases were significantly offset by changes in foreign currency rates which had an unfavorable impact of $7 million on the segment's current quarter sales compared with the same quarter last year. Year-to-date sales for the SGK brand solution segment were $300.4 million for fiscal 2022 compared to $296.4 million last year. Similar to the second quarter, Sales growth for our merchandising business and our brand packaging business in Asia was significantly offset by unfavorable currency rate changes. These changes had an unfavorable impact of $9.4 million on the segment's current year sales compared to last year. Fiscal 2022 second quarter adjusted EBITDA for the SGK brand solution segment was $13.5 million compared to $18.4 million a year ago. The decline primarily reflected the impact of an unfavorable change in sales mix from a year ago, increased labor costs, new client onboarding costs, and higher travel and entertainment expenses. The segment sales mix for the current quarter reflected a reduction in higher margin agency and photography-related sales, which were offset by increased merchandising sales. In addition, production inefficiencies related to remote work environments impacted operating margins for the quarter. Adjusted EBITDA for the SGK brand solution segment was $28.9 million for the first six months of fiscal 2022 compared to $40.2 million last year. Please turn to slide eight. Outstanding debt was $753 million at March 31, 2022 compared to $836.1 million at the end of the first quarter and $763.7 million at September 30, 2021. Net debt, which represented debt less cash at March 31, 2022, was $699.2 million, and our net leverage ratio was 3.2. The leverage covenant ratio in our domestic credit facility is based on net debt. A significant portion of the debt reduction resulted from the replacement of our existing securitization facility with a receivables purchase agreement that resulted in reductions in our debt and trade receivables balances. With respect to our balance sheet, it is important to highlight that since the beginning of the pandemic, the quarter ended March 31, 2020, we have reduced our outstanding debt balance by over $200 million. and our accrued pension balance by over $100 million. Cash flow provided by operating activities for the fiscal 2022 second quarter was almost $100 million compared to $56.9 million a year ago. The increase primarily reflected the sale of trade receivables totaling $75 million under the company's new receivables purchase agreement that I just noted. Cash flow provided by operating activities for the six months ended March 31, 2022 was $72.7 million compared to $92.2 million last year. This change included the contribution to the company's principal pension plan during the fiscal 2022 first quarter in connection with the plan's termination and settlement. Approximately 31.3 million shares were outstanding at March 31, 2022. During the recent quarter, the company purchased approximately 289,000 shares under its share repurchase program. At March 31, 2022, the company had remaining authorization of approximately 2.3 million shares under the program. Finally, the board yesterday declared a dividend of 22 cents per share on the company's common stock. The dividend is payable May 23, 2022, to stockholders of record May 9, 2022. This concludes the financial review, and Joe will now comment on our company's operations. Thank you, Steve. Good morning.