Matthews International : Call Transcript Q2 2021

Matthews International Corporation

Q1 2021 Earnings Teleconference Call and Webcast

April 30, 2021

Operator: Greetings, and welcome to the Matthews International Corporation Second Quarter Fiscal 2021 Earnings Conference Call. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Bill Wilson.

Thank you, Bill. You may begin.

Bill Wilson, Senior Director, Corporate Development: Thank you, Paul. Good morning, everyone, and welcome to the Matthews International Second Quarter Fiscal Year 2021 Earnings Conference Call. This is Bill Wilson, Senior Director of Corporate Development. With us today are Joe Bartolacci, 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.

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 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'll turn the call over to Steve.

Steven Nicola, Chief Financial Officer: Thank you, Bill. Good morning. Please turn to Slide 4.

As provided in our earnings release yesterday, the Company reported consolidated sales of $417.2 million and net income on a GAAP basis of $5 million, or $0.16 per share, for the quarter ended March 31, 2021 compared to sales of $374.8 million and a GAAP net loss of $86.4 million, or $2.77 per share, for the same quarter last year. On a year-to-date basis, the Company reported consolidated sales of $803.8 million and net income on a GAAP basis of $3.2 million, or $0.10 per share, as of March 31, 2021 compared to sales of $739.7 million and a GAAP net loss of $96.8 million, or $3.11 per share, last year.

Key financial highlights for the Fiscal 2021 second quarter included: First, the Company's consolidated sales of $417.2 million, a new quarterly record for the Company, represented an increase of $42.4 million, or 11.3% compared to the same quarter last year. Second, consolidated Adjusted EBITDA for the quarter ended March 31, 2021 was $60.9 million compared to $49.4 million last year, representing a year- over-year increase of 23%. Third, adjusted earnings per share for the Fiscal 2021 second quarter was $0.89 per share compared with $0.63 for the Fiscal 2020 second quarter, representing 41% growth. Fourth, the Company again reported strong operating cash flow as we continued to emphasize cash generation in this challenging environment. As a result, for the six months ended March 31, 2021, the Company generated cash flow from operations of $92.2 million compared to $66 million last year.

Lastly, during the recent quarter, the Company again reduced its outstanding debt and leverage ratio. During the current quarter, the Company lowered its outstanding debt by $42.1 million. On a net of cash basis, our net debt declined $48 million. As a result, our net leverage ratio declined to 3.2 at March 31, 2021 compared to 3.9 at September 30, 2020 and 4.3 a year ago. Since March 31, 2020, the Company has reduced its outstanding debt by $183.3 million.

With respect to COVID-19, all segments continued to experience some level of varying commercial impacts during the second quarter. These impacts remained difficult to project and, as the pandemic has continued into Calendar 2021, we expect ongoing impacts in the remainder of our 2021 Fiscal Year.

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Matthews International Corporation

Q1 2021 Earnings Teleconference Call and Webcast

April 30, 2021

As I noted earlier, on a GAAP basis, the Company reported earnings per share of $0.16 for the current quarter compared to a loss of $2.77 per share last year. The net loss a year ago included a goodwill charge of $2.63 per share. Earnings per share on a GAAP basis for both quarters included the impact of intangible amortization, primarily from the acceleration of the amortization of certain intangible assets in the SGK Brand Solutions segment and charges in connection with our cost-reduction initiatives and COVID-19 related costs.

Consolidated intangible amortization expense was $22.9 million, or $0.52 per share, for the Fiscal 2021 second quarter compared to $17.9 million, or $0.43 per share, a year ago. Intangible amortization expense for the six months ended March 31, 2021 was $38.2 million, or $0.88 per share compared to $35.8 million, or $0.86 per share, last year.

On a non-GAAP adjusted basis, earnings for the Fiscal 2021 second quarter were $0.89 per share compared to $0.63 per share a year ago. Our non-GAAP earnings for the six months ended March 31, 2021 were $1.57 per share compared to $1.10 per share a year ago. The increases primarily reflected higher Adjusted EBITDA and lower interest expense.

Adjusted EBITDA, which represents net income before interest expense, income taxes, depreciation, and amortization, and other adjustments, was $60.9 million for the Fiscal 2021 second quarter compared to $49.4 million a year ago, representing an increase of 23%. For the six months ended March 31, 2021, Adjusted EBITDA was $115.7 million compared to $89.6 million a year ago, representing an increase of 29%. The improvements primarily reflected the impacts of higher consolidated sales, particularly in the memorialization segment, in addition to realized savings from the Company's cost reduction program and lower travel-related expenses.

Please see the reconciliations of Adjusted EBITDA and non-GAAP adjusted earnings per share in our earnings release.

Investment income for the three months ended March 31, 2021 was $969,000 compared to a loss of $1.1 million for the same quarter a year ago. For the six months ended March 31, 2021, investment income was $2 million compared to $191,000 last year. Investment income at March 31 a year ago reflected the initial market impacts of COVID-19. 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 quarter and six months ended March 31, 2021 were $7.2 million and $15 million, respectively compared to $9.6 million and $18.9 million, respectively, for the same periods a year ago, primarily reflecting lower average debt levels for the current year.

Other income and deductions net for the quarter and six months ended March 31, 2021 represented reductions to pre-tax income of $2.6 million and $4.3 million, respectively compared to $1.8 million and $4.7 million, respectively, for the same periods a year ago.

Other income and deductions include the non-service portion of pension and post-retirement costs. For the current quarter and year-to-date periods, the nonservice portion of pension and post-retirement cost was $1.9 million and $3.8 million, respectively compared to $2.2 million and $4.5 million, respectively, for the same periods last year.

Other income deductions also include banking related fees and the impact of currency gains and losses on certain intercompany debt and foreign denominated cash balances.

The Company's consolidated income taxes for the three months ended March 31, 2021 were an expense of $972,000 compared to a benefit of $11.1 million a year ago. Consolidated income taxes for the six months ended March 31, 2021 were an expense of $5 million compared to a benefit of $16.5 million last

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Matthews International Corporation

Q1 2021 Earnings Teleconference Call and Webcast

April 30, 2021

year. The year-over-year changes principally reflected the Company's pre-tax income for the current periods versus the pre-tax losses, resulting mainly from the goodwill charge last year.

Additionally, Fiscal 2021 included discrete tax expenses primarily related to foreign operating losses, while Fiscal 2020 included discrete tax benefits from the closure of several tax audits.

Please turn to Slide 5 to begin a review our segment results. Memorialization segment sales for the Fiscal 2021 second quarter were $205.5 million compared to $161.8 million a year ago. For the six months ended March 31, 2021 memorialization segment sales were $388.7 million compared to $316.2 million a year ago. The quarter and year-to-date increases resulted mainly from increased sales of caskets due to the impact of the pandemic on death rates. In addition, sales of cremation equipment, cemetery memorial products and mausoleums also increased.

The Company also completed an acquisition of a small cemetery products business during the quarter.

Changes in foreign currency exchange rates had favorable impacts of $1.5 million and $2.3 million, respectively, on current quarter and year-to-date sales compared to a year ago.

Memorialization segment Adjusted EBITDA for the Fiscal 2021 second quarter was $51.6 million compared to $35.2 million a year ago. Year to date, memorialization Adjusted EBITDA was $95.7 million for the current year compared to $65.3 million last year. The year-over-year increases primary reflected the benefits of higher sales, productivity initiatives, and lower travel-related expenses, offset partially by higher material costs and increased performance-based compensation expense.

Costs for the segment's main direct materials, bronze, steel, and lumber, rose significantly during the recent quarter, which is expected to have an unfavorable impact on the remainder of the year.

Please turn to Slide 6. Sales for the SGK Brand Solution segment were $171 million for the quarter ended March 31, 2021 compared to $172.9 million a year ago. For the first six months of Fiscal 2021, the segment sales were $339.2 million compared to $347.7 million last year. The decreases primarily resulted from declines in merchandising and other retail-based sales, much of which was attributable to the impact of COVID-19. Higher sales of purpose-built engineered products partially offset these declines. The increase in engineered products sales was primarily attributable to the energy storage business of our Saueressig subsidiary.

Changes in foreign currency exchange rates had favorable impacts of $7.1 million and $10.4 million, respectively, on the segment sales, compared with the same quarter and year-to-date periods last year.

Fiscal 2021 second quarter Adjusted EBITDA for the SGK Brand Solution segment was $20.8 million compared to $22.2 million a year ago. The decline primarily reflected the impact of lower sales and unfavorable changes in productivity due to the pandemic. The segment's year-to-date Adjusted EBITDA was $42.2 million for the current fiscal year compared to $41 million last year. Despite lower sales, the segment reported an increase in year-to-date Adjusted EBITDA, primarily as a result of realized savings from the segment's recent cost reduction initiatives and lower travel-related expenses.

Please turn to Slide 7. Sales for the industrial technology segment were $40.7 million for the quarter ended March 31, 2021 compared to $40.1 million a year ago. Year to date, the segment sales were $75.9 million for Fiscal 2021 compared to $75.8 million last year. The segment's warehouse automation sales were higher for the current quarter compared to a year ago, which were offset by lower product identification sales. Incoming orders for our warehouse automation solutions continued to build during the quarter, and product identification orders also increased recently.

Changes in currency rates had favorable impacts of $856,000 and $1.4 million, respectively, on the segment's quarter and year-to-date sales compared with last year.

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Matthews International Corporation

Q1 2021 Earnings Teleconference Call and Webcast

April 30, 2021

Adjusted EBITDA for the industrial technology segment for the current quarter was $5.8 million compared with $6.2 million a year ago. The segment's year-to-date Adjusted EBITDA was $9.3 million compared with $10.5 million a year ago.

The year-over-year decreases primarily reflected the impact of lower product identification sales, increased performance-based compensation expense, and higher product development costs, partially offset by benefits from recent cost reduction initiatives and lower travel-related expenses.

Please turn to Slide 8. Cash flow from operating activities for the six months ended March 31, 2021 was $92.2 million compared to $66 million last year. The significant increase primarily reflected the Company's operating results and continued work in capital management efforts. As a result of this strong cash flow, the Company further reduced its outstanding debt during the second quarter by $42.1 million. In the last 12 months the Company reduced its outstanding debt by $183.3 million.

Outstanding debt was $782.5 million at March 31, 2021, with net debt, which represents outstanding debt less cash, at $735.5 million. The leverage ratio covenant in our domestic credit facility is based on net debt. Our net debt leverage ratio declined to 3.2 at March 31, 2021 compared to 3.9 at September 30, 2020 and 4.3 at March 31, 2020.

Approximately 31.7 million shares were outstanding at March 31, 2021. During the recent quarter, the Company purchased only 6,000 shares under its share repurchase program as we remain focused primarily on debt reduction. The Company has remaining authorization of approximately 370,000 shares under the current program.

Finally, the Board this week declared a dividend of $0.215 per share on the Company's common stock. The dividend is payable May 24, 2021 to stockholders of record May 10, 2021.

This concludes the financial review and Joe will now comment on our Company's operations.

Joseph Bartolacci, President, Chief Executive Officer: Thank you, Steve. Good morning. Again, this quarter, we are very pleased with our results.

Consistent with prior quarters, our memorialization segment delivered very strong results driven by exceptional performance from our funeral home products business and our environmental solutions business, while the balance of the businesses continued to deliver steady results.

From an overall perspective, each of our businesses reported better sales than prior year except for Brand, where our retail-based businesses were again challenged.

More importantly, as we begin our third quarter, we believe that we are seeing the pandemic begin to subside in North America. As we have now lapped the start of the pandemic, funeral home products sales in April are tracking below prior year, and that will make comparable results in this segment difficult. However, as we have hoped, we are seeing other businesses ramp up order intake at rates that give us confidence in the balance of the year.

Cemetery products orders have been very strong recently. Several new incineration projects, together with higher cremation equipment orders, should be additive. Warehouse automation orders continue to be very strong, and as we ended the second quarter, we saw increasing orders in our product identification business and related consumables.

Finally, as expected, tobacco orders in our European brand business have started to return and are being driven by regulatory changes.

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Matthews International Corporation

Q1 2021 Earnings Teleconference Call and Webcast

April 30, 2021

In the energy storage business of our Saueressig subsidiary, we have very strong order intake as our business begins to take hold of what we hope will be a significant opportunity for us in the years to come. It is important to note, however, that order intake is only half of the story, as we have had extensive discussions occurring with numerous industry partners which we hope will make this business a more significant contributor to our overall results. Although our energy storage business has principally focused on supporting lithium-based products, we are beginning to extend our application and know-how to rotary processing of bipolar plates stacks, a critical component of hydrogen fuel cell batteries. Although it is early, we hope to talk more about this innovation in the quarters to come.

As you can tell, we've been very busy during the last quarter and throughout the pandemic. Many of our businesses have improved market position during this period, and this has created opportunities for growth. All of this bodes well for the balance of our fiscal year and beyond. As noted above, the one portion of our business that continues to be challenged is the retail portion of SGK Brand Solutions.

Our expectations are that as more North America returns to normal and as retailers prepare for what will hopefully be more normal back to school and Christmas seasons, investment in retail marketing will return, and we are well positioned to capitalize on that opportunity. Nevertheless, again this quarter, our core packaging business remained relatively stable and has gained new accounts during the pandemic.

As you have seen, the continued good operating performance and strong cash management have allowed us to again reduce our gross debt this quarter. During the last 12 months, we have reduced gross debt by over $180 million.

We believe that we have embedded a strong culture of cash conversion into the Organization that will make us a better Company going forward. And as we approach our target of 3 times debt coverage, we will soon look for other opportunities to put our capital to work.

Regarding the balance of 2021, we are optimistic about our situation but remain cautious as events outside of our control can still arise, which can impact our results. As you can tell by my earlier comments, we are confident that each of our businesses has the orders to deliver a very strong year. Therefore, given our performance to date and the strength of our order intake, we expect that our full year EBITDA results should be at least $220 million.

Now, let's open it up for questions.

Operator: Thank you. Our first question comes from Daniel Moore with CJS Securities. Please proceed with your question.

Daniel Moore, CJS Securities: Morning, Joe. Morning, Steve. Thanks for taking the questions. Start with warehouse automation. When do you expect to be able to get back into your customers' facilities? I'm just curious if we should see any meaningful revenue ahead of this year's holiday peak shipping season, or is that benefit likely to get pushed out to Calendar '22?

Joseph Bartolacci: I think it's a combination of both. We're expecting strong results compared to last year, but we don't expect to get every last dollar out during the next six months. The fact of the matter is places like Canada haven't opened up their borders. We have some foreign installations that we'd like to get to as well that we're not able to get to yet. Frankly, there's going to be a capacity issue for us trying to get the quantity of orders, and they are significant for us, out during this fiscal year. But that bodes well. I mean, it goes into our forecasting, it helps us understand what we expect to deliver for the next several months and should build well into 2022 as we go forward.

Daniel Moore: Helpful. And then I was going to ask, and you commented on it already, but the pickup in higher margin product ID sales, we're hearing a fair bit of increased optimism on the general industrial front, so maybe if you can just provide any additional color there.

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