Matthews International Corporation

Please stand by, your program is about to begin. Good day, everyone, and welcome to today's Matthews International Third Quarter Fiscal 2025 Financial Results. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. To register to ask a question, you may press star 1 on your touchtone phone. You may withdraw yourself from the queue by pressing star 2. Please note this call may be recorded. I'll be standing by should you need any assistance. It is now my pleasure to turn the conference over to CFO Steve Nicola. Please go ahead.

All right. Thank you, Stephanie, 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, and Dan Stopar, our Senior Vice President, Operations Controller, and Head of Global Business Services. Before we start, I would like to remind you that our earnings release was posted on the company's website, www.natw.com, in the investor section. The presentation for our call can also be accessed in the investor section of the website under presentations. Any forward-looking information, 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 information 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.

Thank you, Steve. Good morning, everyone, and thanks for joining us to discuss the financial results for the fiscal 2025 third quarter. We're pleased with our results this quarter, which saw initial benefits from a value creation plan that was implemented late last year, including a gain from the divestiture of SGK, now known as Propelis Group, of which we own 40%. Consolidated savings from a cost reduction program initiated last year, lower corporate and non-operating costs, and improved EBITDA performance year over year by our memorialization and our industrial technologies business segment. Consolidated sales were $349 million in the third quarter of fiscal 2025 compared to $428 million in the third quarter of fiscal 24. The lower revenue results excuse me, result was primarily attributable to the divestiture of SGK in May of this year. Thus, current results only include one full month of SGK, excluding adjusted EBITDA of the divested SGK business from both the current and prior year quarter results in a year-over-year increase of 37%. Steve will provide greater detail on Propelis, but let me say that the merger of SGS and SGK is moving along smoothly and as expected. As we detailed in our last earnings call, Propelis has come out of the gate projecting initial annual adjusted EBITDA of about $100 million and has just initiated the process of synergy capture. In fact, The management team expects to be at a run rate of synergies of $10 million by year end and a $40 million run rate of synergies by the end of calendar 26. Moreover, the team has identified $60 million of total targeted synergies higher than originally expected. All in all, we expect this transaction to create significant value as we exit in the future. Early market feedback on the deal has been positive and confirmed by the addition of new business that neither of the two predecessor companies had before the merger. We'll continue to share progress and propelluses at performance with you each quarter. As I mentioned earlier, since the third quarter of last year, and as demonstrated by the divestiture of SGK, in addition to an ongoing strategic alternatives review, we have implemented a value creation plan geared towards simplifying the company's corporate structure, reducing costs, and expanding our work in higher growth and higher margin businesses. Although we are seeing the early results of those efforts and our reduced corporate costs, there is more to come as our transition services agreement with Propelis is expected to occur by the end, excuse me, although, let me start that from the beginning. Although we are seeing the early results of these efforts and our reduced corporate costs, there is more to come as our transition service agreement with Propelis is expected to come to an end in the fiscal 26 calendar year. In addition, we expect to close on the sale of the remaining SGK German assets, which will further simplify our structure. These actions will further reduce our overall debt levels and help drive the continued growth of our industrial technologies business segment, anchored by the financial strength and consistency of our memorialization segment. With respect to the Strategic Alternatives Review, we're pleased with its progress, and I can say that several opportunities have been identified and presented to the Board for consideration. We expect to complete the process and announce our conclusions about the time earnings are released in November. We will provide updates as we proceed. Memorialization is the bedrock of our portfolio and maintains leading positions across all of its markets. This segment's financial stability enables continued and consistent investment in innovation across the portfolio. Memorialization reported a modest revenue increase and strong margin results in the third quarter of fiscal 25, driven by the Dodge acquisition, which closed in early May, and the divestiture of our European cremation business last year. Inflationary pricing benefited the third quarter, offsetting a modest decline in volumes. Note that the volume declines primarily relating to our granite business continued to be largely due to the release of buildup in COVID-related backlog in fiscal 2024 leading to a negative comparison of about $3 million on a year-over-year basis. We're expecting the segment to return to a normal cadence in revenue and pricing for the remainder of the year. Regarding tariffs, we believe memorialization may be the most susceptible. Although the team has done a great job of finding sourcing alternatives for impacted products, the tariffs are also impacting the cost of materials which are produced domestically as suppliers are price adjusting to reflect the higher competitive pricing resulting from tariffs. We have generally been able to pass along these higher costs and do not expect significant impact to our results for the remainder of the year. With respect to the Dodge acquisition, The deal closed in May, and we're excited about its long-term prospects and fit within our portfolio of memorialization products. The addition of the number one supplier of fluids and other products used by funeral directors was a logical extension of our portfolio, which comes along once in a generation and offers both cost synergy and revenue synergies as we extend the combined product offering to more clients. The transition has been smooth so far, with synergy being quickly captured, and our expectations for EBITDA improvements are high. It is already accretive, and we expect to eventually add around $12 million of annual EBITDA from this transaction as we integrate the business into our system. When you consider that we paid $57 million for the business, you can understand how accretive it will be. Our industrial technology segment reported lower revenues in the third quarter primarily due to engineering and the impact of our dispute with Tesla, which I'll discuss shortly. However, other business units in this segment were up year over year. We were quite pleased with the performance of our warehouse automation business as we saw a continuation of positive order trends for warehouse automation solutions driven by an improvement in market dynamics. Order rates and order size are picking up, including continuing orders from Land's End and other leading retailers, resulting in a significant increase in backlog. Order activity is typically high at this time of year as companies prepare for peak season in the October to December holiday period. However, we believe that we will enter fiscal 26 with very strong backlogs. Late last year, we spoke of signs of a recovery in the warehouse business. After a period of softness highlighted by supply chain recalibrations and lower capital investment, the recovery is being driven by renewed interest in AI-driven automation, predictive analytics, and autonomous robots. Big box retailers are reinvesting in their warehouse infrastructure, and this is reflected in positive growth forecasts for global e-commerce growth. Interactive analytics projects U.S. e-commerce to grow by 10% in 2025, 1.4 trillion in 2024, and further continue to grow to 2.5 trillion by 2030. Continued mobile adoption, supply chain innovations, and AI-driven user experience are seen as the core growth levers. Moreover, recent changes in tax law allowing for accelerated depreciation of capital investments will further drive automation investments across the value chain. We are well positioned to take advantage of these opportunities. Investing in innovation has been an essential part of our value creation plan, and we're pleased to see the progress being made at our product identification business, the company's oldest business. We expect our new printhead chip product, Axiom, to launch this fall, focusing on the U.S. and EMEA markets. Accion incorporates a patented silicon-based print engine using disposable printed technology and offers an approximately 30% lower total cost of ownership for the customer as well as other environmental benefits. We have identified a total addressable market of approximately $2 billion built on fast-moving consumer goods in which Accion is ideally suited to participate. Accion is also perfectly placed to benefit from global implementation of the Sunrise 2027 initiative, a measure aimed at transitioning traditional 1D barcodes to more advanced 2D barcodes by the end of 2027. This shift is driven by the need to support supply chains that are becoming increasingly more complex and demanding and will enable higher levels of traceability, data capacity, and improved customer engagement. The standard barcode has about 20 characters of information whereas the 2D barcodes can hold thousands of characters, allowing manufacturers to include detailed product data such as expiration dates, batch numbers, and other crucial and essential information used for traceability and compliance. Axiom's competitive advantage is its ability to print regular barcodes and 2D barcodes at production speeds. An even greater advantage is that the existing open flow systems that are used today tend to result in ink drying and nozzles clogging, thereby requiring lines to be shut down for repair and maintenance. But with Axiom, its printhead is disposable. Rather than shutting down lines, all that needs to be done is replacing the printhead in minutes. Additionally, the product is The product has embedded technology that requires the use of Matthews, Inc., which offers an attractive margin opportunity for us. Both of these features of action create high-margin recurring revenue streams as more product is rolled out. We'll continue to share updates on our progress as we approach the launch date. Let's now move on to engineering, the final piece of our industrial technologies business. Over the last year and a half, our expertise in leveraging our market-leading calendar process to produce dry battery electrodes, or DBE, has been challenged by Tesla. As we have discussed before, we have built an extensive and highly valuable portfolio of intellectual property and know-how related to the DBE offering. In February, we received a positive ruling from an arbitrator that reaffirmed our proven history in the space and provided absolute clarity regarding our right to sell DB solutions. We have established our right and is no longer subject to dispute. Tesla recently filed a motion in the U.S. District Court for the Northern District of California seeking to vacate the favorable ruling obtained by Matthews in the confidential arbitration. Here's what you should know. The recent filing is further evidence of the value of the technology and strength of the order that we received in February. The likelihood of a judge overturning the order of an arbitrator in a proceeding mandated by Tesla's own contract is highly unlikely. Why is Tesla looking to overturn the order? Because it clearly states that the core proprietary intellectual property is owned by Matthews and is rooted in its advanced rotary processing and calendaring technology. Matthews has been developing next-generation rotary processing systems and calendaring equipment for over two decades. The company is widely recognized as a leader in calendaring technology. As early as 2007, Matthews made strategic investments in this technology to support its packaging business. Recognizing the unique capabilities of its calendaring systems, Matthews later continued to innovate and diversify its applications to explore alternative uses, including DBE. Our well-established reputation in advanced rotary processing and calendaring has attracted interest from global battery manufacturers, EV manufacturers, emerging solid-state battery players, and technology leaders seeking innovative solutions for DBE. The continued stream of baseless lawsuits filed by Tesla only serves to underscore the strength and the value of Matthews Proprietary Technologies. Market interest in our solutions continue to grow as we have an increasing number of opportunities, highlighted by several in the United States, in the U.S., driven by the localization of supply chains and the production of battery components. Our pipeline now consists of over $150 million, in quotes, with one recently converted to our first production line order for our leading player in solid-state battery production. We are also... We also are working on a significant order for a U.S. customer for a battery separator coding line, a significant part of our overall energy business. The coding line operates at up to two times the speed of competitive lines, further increasing productivity in the highly competitive battery space.