Matthews International : Call Transcript Q3 2021

Matthews International Corporation

Q3 2021 Earnings Teleconference Call and Webcast

July 30, 2021

Operator: Greetings, and welcome to Matthews International Corporation's Third Quarter Fiscal 2021 Financial Results.

It is now my pleasure to introduce your host, Bill Wilson, Senior Director of Finance, Corporate Development. Please go ahead.

Bill Wilson, Senior Director, Corporate Development: Thank you, Brock. Good morning, everyone, and welcome to the Matthews International Third 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 and stock repurchase release were posted 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.

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.

Now, I'll turn the call over to Steve.

Steven Nicola, Chief Financial Officer: Thank you, Bill. Good morning. I'll start with Slide 4.

As provided in our earnings release yesterday, the Company reported consolidated sales of $428.4 million and net income on a GAAP basis of $3.4 million, or $0.10 per share, for the quarter ended June 30, 2021 compared to sales of $359.4 million and net income on a GAAP basis of $2.3 million, or $0.07 per share, last year.

On a year-to-date basis, the Company reported consolidated sales of $1.23 billion and net income on a GAAP basis of $6.6 million, or $0.21 per share, as of June 30, 2021 compared to sales of $1.1 billion and a GAAP net loss of $94.6 million, or $3.04 per share, last year. The GAAP net loss a year ago primarily reflected the impact of a goodwill write-down.

The key financial highlights for the Fiscal 2021 third quarter included:

First, the Company's consolidated sales of $428.4 million, established another new quarterly record for the Company, and represented an increase of $69 million, or 19.2% compared to a year ago.

Second, consolidated Adjusted EBITDA for the quarter ended June 30, 2021 was $60 million compared to $49.4 million last year, representing a year-over-year increase of 21.5%.

Third, adjusted earnings per share for the Fiscal 2021 third quarter was $0.91 per share compared with $0.80 for the Fiscal 2020 third quarter, representing growth of approximately 14%.

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Matthews International Corporation

Q3 2021 Earnings Teleconference Call and Webcast

July 30, 2021

Lastly, during the recent quarter, the Company again reduced its net debt leverage ratio. At June 30 2021, our net debt leverage ratio measured based on net debt relative to the last 12 months Adjusted EBITDA declined to 3.1 from 3.2 at March 31, 2021 and 3.9 at September 30, 2020.

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.

As I noted earlier, on a GAAP basis, the Company reported earnings per share of $0.10 for the current quarter compared to $0.07 per share last year. 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 $23 million, or $0.53 per share, for the Fiscal 2021 third quarter compared to $17.8 million, or $0.43 per share, a year ago. Intangible amortization expense for the nine months ended June 30, 2021, was $61.2 million, or $1.41 per share compared to $53.6 million, or $1.29 per share, last year.

On a non-GAAP adjusted basis, earnings for the Fiscal 2021 third quarter were $0.91 per share compared to $0.80 per share a year ago. Non-GAAP earnings for the nine months ended June 30, 2021 were $2.48 per share compared to $1.90 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 million for the Fiscal 2021 third quarter compared to $49.4 million a year ago, representing an increase of 21.5%. For the nine months ended June 30, 2021, Adjusted EBITDA was $175.7 million compared to $139 million a year ago, representing an increase of 26.4%. The improvements primarily reflected the impacts of higher consolidated sales, in addition to realized savings from the Company's cost reduction programs. These increases were partially offset by higher material and labor costs.

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 June 30, 2021, was $959,000 compared to $1.3 million for the same quarter a year ago. For the nine months ended June 30, 2021, investment income was $3 million compared to $1.4 million last year. Prior year investment income through June 30 reflected some of 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 nine months ended June 30, 2021 declined to $6.7 million and $21.7 million, respectively compared to $8.1 million and $26.9 million, respectively, for the same periods a year ago, primarily reflecting lower average debt levels and lower interest rates for the current year.

Other income and deductions net for the quarter and nine months ended June 30, 2021 represented reductions to pre-tax income of $2.4 million and $6.8 million respectively, compared to $2.8 million and $7.4 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

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Matthews International Corporation

Q3 2021 Earnings Teleconference Call and Webcast

July 30, 2021

was $1.9 million and $5.7 million, respectively compared to $2.2 million and $6.7 million, respectively, for the same periods last year.

Other income and 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 June 30, 2021 represented a benefit of $2.3 million compared to a benefit of $6.2 million a year ago. Consolidated income taxes for the nine months ended June 30, 2021 were an expense of $2.6 million compared to a benefit of $22.7 million last year. The year-over-year changes principally reflected the Company's pre-tax income for the current periods versus the year-to-datepre-tax losses, resulting mainly from the goodwill charge last year.

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

Please turn to Slide 5 to begin a review of our segment results.

Memorialization segment sales for the Fiscal 2021 third quarter were $184.3 million compared to $162.1 million a year ago representing an increase of $22.2 million or 13.7%. The increase was primarily attributable to higher sales of cemetery memorial products and cremation equipment and improved price realization.

Third quarter casket unit volume was lower than a year ago, as expected, resulting from the decrease in U.S. deaths, reflecting the declining impact of COVID. For the nine months ended June 30, 2021, memorialization segments sales were $573.1 million, compared to $478.3 million a year ago. The year-to- date increase resulted mainly from increased sales of caskets, cemetery memorial products and cremation equipment. The Company also completed an acquisition of a small cemetery products business during the fiscal 2021 second quarter.

Changes in foreign currency exchange rates had favorable impacts of $1.7 million and $4 million, respectively, on current quarter and year-to-date sales compared to a year ago.

Memorialization segment Adjusted EBITDA for the Fiscal 2021 third quarter was $36.4 million compared to $37.7 million a year ago. The favorable effect of higher sales was offset by the unfavorable impacts of higher commodity costs, mainly steel, lumber and bronze, lower margin project in our U.K. cremation and incineration equipment business, and increased labor and freight costs during the current quarter.

Year-to-date, Memorialization Adjusted EBITDA was $132.1 million for the current year, compared to $103 million last year. The increase primarily reflected the benefits of higher sales and productivity initiatives. Offset partially by higher material costs, lower margin U.K. projects and increased labor and freight costs. Cost for the segment's primary direct materials continued to increase during the recent quarter, which is expected to have an unfavorable impact into next fiscal year.

Please turn to Slide 6. Sales for the SGK Brand Solution segment were $199.7 million for the quarter ended June 30, 2021 compared to $165.8 million a year ago, representing an increase of $33.9 million, or 20.5%. The increase primarily reflected higher sales for the segment's engineered products business, principally energy solutions, and an increase in the segment's core brand sales, particularly in the Europe and Asia Pacific markets.

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Matthews International Corporation

Q3 2021 Earnings Teleconference Call and Webcast

July 30, 2021

In addition, the segment reported modestly higher revenues in its retail-based businesses, which we believe are indicative of a recovery in these markets. As you will recall, the segments retail-based businesses have been significantly impacted by COVID-19.

For the first nine months of Fiscal 2021, the segment sales were $538.9 million, compared to $513.5 million last year. Changes in foreign currency rates had favorable impacts of $10.6 million and $21 million, respectively, on the segment sales compared with the same quarter and year-to-date periods last year.

Fiscal 2021 third quarter Adjusted EBITDA for the SGK Brand Solution segment was $33.3 million compared to $20.8 million a year ago. The increase primarily reflected the impact of higher sales and realized savings from the segment's recent cost reduction initiatives. The segment's year-to- date Adjusted EBITDA was $75.4 million for the current fiscal year compared to $61.8 million last year.

Please turn to Slide 7. Sales for the Industrial Technology segment were $44.3 million for the quarter ended June 30, 2021 compared to $31.5 million a year ago, representing an increase of $12.8 million, or 41%. Year-to-date, the segment sales were $120.2 million for Fiscal 2021 compared to $107.3 million last year, representing an increase of $12.9 million or 12.1%. The segment sales increases for the quarter and year-to-date periods resulted from higher sales for both the warehouse automation and product identification businesses. Additionally, incoming orders for these businesses continued to be strong.

Changes in currency rates had favorable impacts of $938,000 and $2.4 million, respectively, on the segment's quarter and year-to-date sales compared with last year.

Adjusted EBITDA for the Industrial Technology segment for the Fiscal 2021 third quarter was $5.7 million compared with $4.7 million a year ago. The increase primarily reflected the impact of higher sales for the quarter, which was partially offset by an unfavorable change in sales mix, lower margin warehouse sales, higher labor costs and an increase in product development costs. The segment's year-to-date Adjusted EBITDA was $15.2 million, which was relatively consistent with a year ago.

Please turn to Slide 8. Cash flow from operating activities for the nine months ended June 30, 2021 was $106.9 million compared to $123.6 million last year. Operating cash flow for the current quarter was impacted by several factors, including a discretionary cash contribution of $15 million to the Company's pension plan, an increase in accounts receivable primarily reflecting the Company's record third quarter sales and an increase in inventories due to higher commodity costs.

In addition, the Company made a payment of $8.4 million during the recent quarter related to FICA taxes deferred from calendar 2020 under federal COVID-19 relief regulations.

Outstanding debt was $792.5 million at June 30, 2021, with net debt, which represents outstanding debt less cash, at $746.3 million. The leverage ratio covenant in our domestic credit facility is based on net debt. During the current quarter, our net debt leverage ratio declined to 3.1 at June 30, 2021 compared to 3.2 at March 31, 2021 and 3.9 at September 30, 2020.

Approximately 31.6 million shares were outstanding at June 30, 2021. During the recent quarter, the Company purchased approximately 46,000 shares under its share repurchase program. At June 30, 2021, the Company had remaining authorization of approximately 325,000 shares under the program. As a result, the Board this week approved an authorization of 2.5 million additional shares for the program.

Finally, the Board this week declared a dividend of $0.215 per share on the Company's common stock. The dividend is payable August 23, 2021, to stockholders of record August 9, 2021.

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Matthews International Corporation

Q3 2021 Earnings Teleconference Call and Webcast

July 30, 2021

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

Joseph Bartolacci, President, Chief Executive Officer: Thank you, Steve.

Good morning. As you might expect, we are very pleased with our record setting results for the quarter. Each of our segments delivered revenue growth during the quarter and our consolidated Adjusted EBITDA grew significantly as well. Our Memorialization segment continued to deliver strong results, except this quarter, as expected, the performance was provided by our cemetery products business, while our funeral products business began to see the normalization of the death rate resulting from the vaccine implementation in North America. Our current order rates in our cemetery products business continue to be strong, and we expect at least another strong quarter to come.

Similarly, our SGK brand business saw good revenue growth during the quarter driven by the Europe region and our energy storage business. Equally important, however, was that the profitability of the business returned to normal as we realize the benefits of our cost reduction initiatives and the higher revenue. In our Industrial Technology segment, higher revenues and EBITDA contributed to our great quarter and reflect very strong backlogs in this segment, which bodes well for a very strong fourth quarter and beyond.

I'm proud of our team and the results we have generated and what still remains a challenging environment in many parts of the world in which we operate. Much of this achievement come from the environments where we are still in less than optimum operating conditions. Despite these challenges, our teams around the world continue to win new business while satisfying the needs of our existing clients.

In our energy storage business, as we noted in the past, we continue to be very optimistic about our opportunities. In Fiscal 2019, our revenues were approximately $20 million. We are now projecting revenues for this fiscal year for about $50 million, and we continue to build our backlog for what we hope will be another significant growth year for this business. As I noted last call, our energy storage business has opportunities beyond lithium, and we hope soon to be able to speak more about the opportunities we see in the hydrogen fuel cells.

All in all, our businesses continue to operate in strong markets and our success in navigating the pandemic has been beneficial to the businesses in more than one way. In our funeral home products business, high client satisfaction reflects our strong performance during the pandemic. In our brand business, the crisis allowed us to adapt to new working models that will continue to reduce our operating costs going forward. While in our Industrial Technology segment, our warehouse automation business has gained market share, as more and more clients realize that e-commerce is a necessary solution to future success.

As we look forward, although our results are exceptional, not all of our businesses are performing at a normalized rate. In much of the world, particularly in the APAC region, we continue to see significant challenges from the pandemic, as many economies remain behind the United States in their ability to vaccinate their citizens. As a result, we continue to operate at lower efficiency, which is impacting our operating performance.

Also, although we see continuing strong revenue trends that give us assurance to finishing off the year strong, we, like other companies, are feeling the impact of inflationary pressures, particularly our raw materials and components. These pressures will impact our margins at least in the near term. We expect those pressures to ease but not soon. In the meantime, we are continuing to take cost and price actions,

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