Matthews International Corporation

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, Steve Nicola, Chief Financial Officer. Thank you, sir. You may begin.

Steve Nicola Thank you, Christine, and good morning. I'm Steve Nicola, Chief Financial Officer of Matthews, and with me today is Joe Bartolese, our company's President and Chief Executive Officer. Before we start, I would like to remind you that our earnings release was posted on the company's 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 under presentations. 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 public filings with the SEC. In addition, we will be discussing non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables as you consider these metrics. In connection with any forward-looking statements and on-gap 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. Thank you, Steve.

Good morning. To start our discussion today, I want to provide some color around an important development related to the company's energy business from earlier this week. On Wednesday, An arbitrator in a proceeding that we initiated against Tesla over one year ago issued a ruling in which the arbitrator acknowledged our company's long history, extensive research and development, and growing patent portfolio in advanced dry battery electrode technology and confirmed our right to continue marketing, offering, and selling that technology to others. This ruling effectively clarifies our rights in this groundbreaking technology and reestablishes what we've been saying for years. We have valuable solutions founded on extensive know-how and intellectual property to support the advancement of dry battery electrode technology, and we have the right to sell it to others. After exhausting amicable efforts to negotiate a resolution with Tesla, Matthews was forced to file for a declaratory judgment in a binding arbitration seeking clarification of Matthews' rights to continue selling our innovative DBE solutions to others. Tesla ignored the contractual obligation to arbitrate confidentially and instead initiated litigation in federal court long after we filed our arbitration, vaguely alleging Matthews had stolen trade secrets. Tesla's retaliatory lawsuit, coupled with numerous other threats in action, has impaired our ability to work with others in the provision of DB solution and, as a result, has harmed our business. During the past 18 months, we dutifully adhered to the terms of the party's arbitration agreement, which necessarily prevented us from fully disclosing what was transpiring behind the scenes. But given Tesla's public filing of the trade secret suit and our obligations under federal securities law, we are required to share this news with our shareholders and customers. As I have said numerous times, we have been working in the battery space for over a decade and have independently developed significant intellectual property, including a recently issued foundational patent in the United States. that further confirms our development of this groundbreaking technology and our rights to continue developing and selling it. Pursuant to the arbitrator's ruling, we now intend to resume vigorously promoting our DBE solutions. Given the ongoing confidentiality considerations, I remain limited in what can be discussed at this time. Moving on to other exciting news, I'll now share some details in our recent announcement of the sale of SDK brand solutions. On January 8th, we announced the sale of SGK to a newly formed entity created with SGS and Co., which will combine the two businesses. We believe that the deal creates a world-class provider of brand solutions, which should be a highly attractive asset once integration is completed. The transaction will create an entity which begins with almost $100 million of EBITDA, but is expected to generate $50 million of synergies over the next 24 to 30 months. in addition to the synergies created within the combined entities the transaction substantially improves matthew's operating structure and advances our business strategy for the following reasons one the deal significantly simplifies our operating and corporate structure thereby allowing us to focus on higher growth and higher margin businesses we expect that post-transition services which we will provide for the new entity our corporate function can be simplified and reduced by up to a further $15 million. Two, the transaction as structured enables us to realize significant value for the brand solution segment at an attractive multiple for an asset which was generally considered dilutive by the market to the overall valuation of Matthews. We received a multiple of 10 times for our 60% of SGK that was transferred to the new entity. significantly higher than anyone in the market had anticipated and about equal to the estimated value of all of SGK. Three, proceeds from the transaction will be immediately applied to debt reduction pursuant to our stated objectives. As a result, our net leverage will improve from about 3.9 today pre-transaction to less than three post-transaction, which will decline further when we refinance the new entity and cash out our $50 million of preferred instrument. Four, we retain significant upside of the new entity, which we believe, upon exit, will be a much stronger business than it is now. We also retain several significant SGK-related assets, our German rota gravure business, and a critical software investment valued at over $20 million today. We expect to exit these investments in the near future as we see the opportunity arise. We can provide additional details of the deal during Q&A, but let me first provide you with some background behind our discussions with SGS, and it's important for you to understand how committed we have been to the idea of optimizing the full value of our asset portfolio. We have been working on a deal with SGS and its previous owners since 2019. Those discussions included various private equity firms that owned SGS during the last five years and other entities, including a minority business entity or MBE. We are close to an agreement on the deal in 2020 with the PE firm that then owned SGS, but the COVID pandemic and the market pressures that it created brought a restructuring of the SGS ownership. As the world slowly began to recover, we again initiated discussions with SGS and the new PE owner in 2021. But then the Ukraine crisis hit in early 2022, resulting in a significant hit to commercial productivity in Europe for both businesses and resulted in yet another restructuring of the ownership of SGS. In 2023, we initiated sales discussions with an MBE outlining a structure whereby Matthews would retain a portion of a new entity to be created through the acquisition, and the MBE would be the majority owner, allowing it to use its minority business status to generate business from the consumer goods companies from which we would benefit from as a minority owner. However, the MBE chose another acquisition alternative. We then re-engaged with the current owners of SGS in 2024, which led us to the current deal structure. This was a complex transaction that required significant time to evaluate, negotiate, execute, and announce. It is also a highly accretive transaction that has preserved the true value of SGK for our shareholders. Why is the multiple that we achieved so attractive, much more than most had anticipated? Because even though Matthews is a minority owner in the deal, SGS is integrating into SGK's platform, a platform in which we have invested, a platform that has generated over $1 billion in adjusted EBITDA since its acquisition in 2014, and a platform that played a significant role in returning capital to our shareholders during that time period. Though we will not be running the new entity, The investments we made in SGK drove this deal and will ultimately result in significant value creation for our shareholders. In fact, one analyst note on the deal stated that we could generate a total consideration of close to $750 million, which would be almost equal to our market cap prior to the announcement date of the deal. We are awaiting approval from the Federal Trade Commission and expect the deal to close in the first half of this calendar year. As we work towards closing this deal, it's useful to look back on what has been created through our commitment to optimizing the value of our portfolio. Over the last 10 years, and despite the challenges posed by global pandemic and geopolitical events and regulatory challenges, our consolidated sales have grown 62%. During that time, our memorialization business has evolved into an industry leader. Our energy business has unlocked significant opportunities to create value that has not yet been fully appreciated by the market. And our warehouse automation and product identification businesses have found promising opportunities in innovative segments. We will continue to focus on driving growth at these emerging businesses, which will ultimately force us to evaluate the portfolio at an opportune time. Finally, turning to our upcoming annual shareholders meeting and the contested proxy, I ask you to realize that actions speak louder than words. In the last 30 days, this management team, together with the full support of the Board of Directors, have disclosed two significant events that have been in the works for several years. But due to the confidentiality requirements, we have been unable to disclose. Both transactions required patience and a clear understanding by the Board of Directors of the value creation opportunity to be achieved upon success. in the sgk transaction we will realize hundreds of millions of dollars more than the market and barrington expected thanks to the patience of the board of directors in the tesla arbitration the management and the board of directors had the will to initiate an action against one of the largest companies of the world to protect our rights to our highly valuable and proprietary db technology Both situations demonstrate the importance of having knowledgeable directors who understand the value and complexity of our diverse businesses and how true long-term value can be created and protected when long-term strategic plans are thoughtfully and patiently developed. This value proposition is in stark contract to the position of our activist investor, Barrington Capital, whose perspective is short-term and who remarkably still knows very little about our businesses. Indeed, our long-term shareholders stand to benefit from the knowledge embedded within our directors, especially as we continue our evaluation of strategic alternatives now after the developments from earlier this week. I ask you to vote for our current slate of directors, especially given our recent announcements. Lastly, with respect to our outlook for the year, we are maintaining our guidance for adjusted EBITDA in the range of $205 million to $215 million.