Matthews International Corporation (NASDAQ:MATW) Q4 2022 Earnings Call Transcript November 18, 2022
Matthews International Corporation beats earnings expectations. Reported EPS is $0.82, expectations were $0.72.
Operator: Greetings, and welcome to the Matthews International Corporation Fourth Quarter and Fiscal Year 2022 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Bill Wilson, Senior Director of Finance and Corporate Development for Matthews International Corporation. Thank you. You may begin.
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Bill Wilson: Thank you, Melissa. Good morning, everyone, and welcome to the Matthews International fourth quarter and fiscal year-end 2022 conference call. This is Bill Wilson, Senior Director of Finance and Corporate Development. With me 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 in the Investors section last night. The presentation for our call can also be accessed in the Investors section of the website. In addition, as a reminder, beginning in the first quarter of fiscal 2022, the company transferred surfaces and engineering products business from the SGK Brand Solutions segment to the Industrial Technologies segment, prior period results reflect this new segmentation.
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’ll be discussing non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully before 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 Joe.
Joe Bartolacci: Thank you, Bill. Good morning. I’m going to apologize in advance, we’ve got a bit of a head cold this morning. So if I have to break and clear my throat you understand. But going forward, we are pleased with our fiscal ’22 results. Despite the continued headwinds that we faced, we exceeded the high end of our revised guidance that was adjusted at the beginning of the third quarter due to the economic impact on our European businesses stemming from the conflict in Ukraine. Our overall results were strong despite headwinds headlined by foreign exchange issues that impacted our year-over-year adjusted EBITDA by over $7 million in addition to the zero contribution from several of our European businesses due to the regional economic conditions.
Our EBITDA performance, adjusted for currency impacts was in line with our initial guidance provided last year despite these challenges. Moreover, as noted in our earnings release, we continue to make significant progress in our energy business where we are anticipating significant orders from multiple customers in the coming months. We expect these orders will cover all aspects of our Energy Solutions business, including green mobility solutions like dry electrode and hydrogen fuel cell as well as energy generation like photovoltaic. Our products and services solve some of the most difficult challenges facing the energy storage industry today. And as a result, we are seeing a ramp-up in interest in our industry leading — in our industry-leading capabilities, resulting in many of the most significant OEMs across the globe knocking on our doors.
They recognize our extensive experience in roll-to-roll processing, the core of our specialized equipment derived from our history in printing, which gives us a competitive advantage in the renewable energy market. We believe the increase in orders validates the significance of our solutions in addition to the market’s acknowledgment of the benefits to be derived from the recently passed Inflation Reduction Act, which is putting billions of dollars into green energy produced in the United States. We are executing on our plans and capitalizing on opportunities to grow the business. We are already seeing positive impact from our most recent acquisitions over an R+S Automotive. Despite not being fully integrated, the engineering and manufacturing capacity gained from these businesses ease the challenge of the fulfillment of the anticipated new orders.
In addition to having over 160 engineers with complementary skills, and significant manufacturing capacity, highlighted by a low cost manufacturing facility in the Czech Republic. Olbrich brings its own intellectual property and products to our energy solutions portfolio increasing our breadth of offerings and allowing us to approach one-stop shopping when it comes to solutions like dry electrode production and hydrogen fuel cells. Moving on to the rest of the Industrial segment. Our Warehouse Solutions business has had a strong year, and the pace of orders from some of the largest retailers in North America presents a positive outlook for 2023. This business continues to be amongst the best of breed in today’s market when it comes to warehouse execution software and control systems.
The addition of R+S Automotive, a provider of factory automation services in Europe brings added capacity and new markets for us to address. Similarly, our Products Identification business finished the year strong with revenues in this business up over 10% on a constant currency basis. In Product Identification, we continue to make good progress in the development of our new products and we have — when we keep finding competitive advantages for our anticipated launch of our new product in this business. For example, when compared to current technologies, our new product significantly reduces the amount of VOCs that escape into the atmosphere during the printing process. This will be yet another competitive advantage for this product as customers increasingly focus on reducing their carbon footprint while states and local governments initiate more stringent regulations on emissions.
Our Industrial Technologies segment, which includes energy solutions, warehouse automation, product identification, Olbrich and R+S reported record sales of $335 million and adjusted EBITDA of $57 million. We expect this segment to maintain its growth trend into next year, and we believe $500 million of revenue could be reached in fiscal ’23. To remind you, just three years ago, the businesses that make up this segment today had approximately $240 million in revenue. If you were to compare these businesses on a constant currency basis to three years ago, our growth would be significantly better. We have often spoken of these businesses as our growth engine. We are clearly demonstrating that now. Our Memorialization business also delivered very good results despite the normalization of death rates, particularly over the quarter and significantly higher costs.
This business has performed exceptionally well throughout the past several years and is poised to maintain that success in ’23. Strong order rates in our Cemetery Products business will help partially offset the lower casket sales expected from the normalization of death rates. Moreover, this segment has reset its normalized revenues to a level that is materially higher than just a few years ago and we only expect modestly lower EBITDA results next year. In SGK, the team delivered top line organic growth in the fourth quarter, but also experienced challenges in the European market. Due to those challenges, the goodwill charge was taken in the fourth quarter. Cost reduction actions were taken in the European market for this segment as it’s currently unclear when the situation will normalize.
We believe that taking these actions will improve results on a year-over-year basis beginning in ’23. As we look forward to ’23, we are expecting continued consolidated growth. As discussed above, order rates in our fastest growing businesses remain high, which bodes well for the continued development of these businesses. Also, we expect to maintain prices in our Memorialization business throughout the year to compensate for the higher costs we are incurring, some of which we absorbed during the past year. In SGK, the cost actions that we have taken in Europe should improve our overall results in this business. In addition, SGK is seeing opportunities to expand its market share as competitors struggle to meet client demands in this challenging market, particularly in Europe.
The difficult economic environment in the markets in which we operate and currency translation resulting from those environments are expected to be a significant variable to our overall performance again next year. We expect currency to again negatively impact our overall performance next year. With these factors in mind, we expect our fiscal ’23 EBITDA results to be between $215 million and $235 million, good growth despite the challenging environment. For purposes of understanding our projected performance, if our expected currency rates for fiscal ’23 were consistent with the rates of fiscal ’22, our EBITDA projections would be $10 million higher. The broad range of possible results is driven by the fact that we do not control the timing of deliveries for some of our energy orders.
For better clarity, if we begin to approach revenues of $500 million in Industrial Technologies segment, as mentioned earlier, we have a possibility to exceed this performance. We expect to update our progress on these and more orders throughout the year. I’ll now hand it over to Steve for our financial review.
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Steven Nicola: Thank you, Joe, and good morning. I’ll begin with Slide 7. For the fiscal 2022 fourth quarter, we reported consolidated sales of $457.1 million compared to $438.8 million for the fourth fiscal quarter last year. As indicated in our earnings release yesterday, changes in currency rates had a significant unfavorable impact on reported sales compared to a year ago. On a constant currency basis with last year, consolidated sales for the fiscal 2022 fourth quarter were $41.8 million, or 9.5% higher than a year ago. The increase primarily reflected sales growth in our Industrial Technologies and Memorialization segments and the impact of the recent acquisitions of Olbrich GmbH and R+S Automotive GmbH. These acquisitions, which occurred in August 2022, added approximately $17 million to current quarter sales.
For the year ended September 30, 2022, we reported consolidated sales of $1.76 billion compared to $1.67 billion last year, representing an increase of $91.4 million or 5.5%. On a constant currency basis, consolidated sales for fiscal 2022 were $147.7 million, or 8.8% higher than a year ago. Changes in foreign currency rates had unfavorable impacts of $23.6 million and $56.3 million, respectively, on consolidated sales compared to the same quarter and year-to-date period last year. On a GAAP basis, the company reported a net loss of $81 million, or $2.63 per share for the current quarter compared to a loss of $3.7 million or $0.12 per share for the same quarter last year. As a result, primarily of the impact of European market conditions on recent operating results, we recorded a non-cash goodwill impairment charge of $82.5 million, or $2.59 per share for the SGK Brand Solutions segment in the fiscal 2022 fourth quarter.
Importantly, in response to these market conditions, we have initiated cost reduction actions for this segment, particularly in Europe to better align its cost structure with current sales run rates. Charges in connection with these actions were also recorded in the fiscal 2022 fourth, which unfavorably affected our results on a GAAP basis. We may have further charges in fiscal 2023 as we continue these efforts. For the year ended September 30, 2022, the company reported a net loss of $99.8 million, or $3.18 per share compared to net income of $2.9 million, or $0.09 per share last year. On a non-GAAP adjusted basis, adjusted EBITDA, which represents net income before interest expense, income taxes, depreciation and amortization and other adjustments was $55.9 million for the fiscal 2022 fourth quarter compared to $52 million last year.
The increase reflected the benefit of higher consolidated sales for the quarter offset partially by the impacts of higher material costs, increased labor and freight costs and other inflation-related cost increases. In addition, currency rate changes had an unfavorable impact of $3.5 million on consolidated adjusted EBITDA for the current quarter compared with a year ago. For the year ended September 30, 2022, consolidated adjusted EBITDA was $210.4 million. Currency rate changes had an unfavorable impact of $9.4 million on consolidated adjusted EBITDA for the current fiscal year compared with last year. Adjusted earnings per share for the current quarter increased to $0.82 compared to $0.80 a year ago. Higher adjusted EBITDA was partially offset by increased interest expense for the current quarter, primarily reflecting the higher interest rate environment.
Interest expense for the current quarter was $8.3 million compared to $7 million a year ago. Adjusted earnings per share for the year ended September 30, 2022 was $2.88 compared to $3.28 a year ago, primarily reflecting the decline in adjusted EBITDA for the year. Please see the reconciliations of constant currency sales, adjusted EBITDA and non-GAAP adjusted earnings per share provided in our earnings release. The company’s consolidated income taxes for the fiscal 2022 fourth quarter represented a benefit of $2.1 million compared to expense of $3.7 million a year ago. For the year ended September 30, 2022, the company’s consolidated income taxes were a benefit of $4.4 million compared to expense of $6.4 million last year. The benefit for the current year primarily reflected the pretax loss on a GAAP basis.
Please turn to Slide 8 to begin a review of our segment results. The Industrial Technologies segment reported sales of $104.6 million for the current quarter compared to $84 million a year ago, representing an increase of almost 25%. Growth in our Energy Storage Solutions business and the recent acquisitions of Olbrich and R+S were the significant contributors to the year-over-year increase. Product identification sales for the current quarter were also higher than a year ago. Changes in currency rates had an unfavorable impact of $7.2 million on the segment sales compared to the same quarter last year. For the year ended September 30, 2022, sales for the Industrial Technologies segment were $335.5 million compared to $284.5 million a year ago, representing an increase of $51 million or 17.9%.
The increase reflected growth in the segment’s energy storage solutions, warehouse automation and product identification businesses in addition to the fourth quarter acquisitions of Olbrich and R+S. Changes in currency rates had an unfavorable impact of $16.9 million on the segment sales compared to last year. Adjusted EBITDA for the Industrial Technologies segment more than doubled to $23.4 million for the fiscal 2022 fourth quarter compared with $11.4 million a year ago. Higher sales and improved margins contributed to current year current quarter adjusted EBITDA. On a year-to-date basis, adjusted EBITDA for the Industrial Technologies segment increased approximately 63% from $34.9 million last year to $56.8 million for the current quarter — current fiscal year.
Please turn to Slide 9. Memorialization sales were $206.3 million for the current quarter compared to $195.9 million for the fourth quarter last year. The growth was primarily the result of higher cemetery memorial and U.S. cremation related product sales and increased pricing to mitigate the effects of inflation. Casket unit sales volumes for the current quarter were lower than a year ago, primarily reflecting the decline in COVID-related deaths. For the year ended September 30, 2022, Memorialization sales were $840.1 million compared to $769 million last year. Memorialization segment adjusted EBITDA for the fiscal 2022 fourth quarter was relatively unchanged at $33.4 million compared to $33.6 million a year ago. The favorable effect of higher sales was offset by the significant unfavorable impact of higher material costs compared to a year ago as well as increased labor and freight costs, higher project related costs and other inflation-related cost increases.
For the year ended September 30, 2022, memorialization adjusted EBITDA was $151.8 million compared to $165.7 million last year. Please turn to Slide 10. Sales for the SGK Brand Solutions segment were $146.3 million for the current quarter compared to $158.9 million a year ago. However, on a constant currency basis, the segment sales improved $1.9 million for the current quarter. Currency rate changes had an unfavorable impact of $14.5 million on the segment sales for the current quarter compared to a year ago. For the year ended September 30, 2022, the segment reported sales of $586.8 million compared to $617.5 million last year, representing a decrease of $30.8 million. On a constant currency basis, however, the segment sales improved $4.1 million for the year.
The unfavorable impact of currency rate changes for the full year was $34.8 million. Fiscal 2022 fourth quarter adjusted EBITDA for the SGK Brand Solutions segment was $16.7 million compared to $24.2 million a year ago. For the year ended September 30, 2022, adjusted EBITDA for this segment was $60.1 million compared to $91.4 million last year. The declines primarily reflected the impact of lower sales and unfavorable sales mix, increased labor costs and other inflation-related cost increases. In addition, changes in currency rates had unfavorable impacts of $1.6 million and $5.1 million, respectively, on the segment’s adjusted EBITDA compared to the same quarter and year-to-date period last year. Please turn to Slide 11. Cash flow provided by operations for the quarter ended September 30, 2022, was $42.5 million compared to $56 million a year ago.
For the year ended September 30, 2022, cash flow provided by operations was $126.9 million compared to $162.8 million a year ago. Operating cash flow for fiscal 2022 included contributions of $36 million to the company’s principal pension plan, during the first quarter in connection with the planned termination and settlement. In addition, higher inventories, partially reflecting the impact of higher commodity costs and charges related to strategic and cost reduction initiatives impacted operating cash flow for the current fiscal year. These decreases were partially offset by the sale of trade receivables under the company’s new receivables purchase facility. The new facility qualified the structure to be treated as a sale of receivables instead of securitized debt.
Outstanding debt was $798.6 million at September 30, 2022, compared to $763.7 million at September 30, 2021. Outstanding debt for the current year reflected the impacts of the acquisitions of Olbrich and R+S, which approximated $45 million and the contributions in the fiscal 2022 first quarter toward the settlement of the company’s pension plans, which approximated $36 million. Net debt, which represents outstanding debt less cash, declined modestly during the fiscal 2022 fourth quarter to $729.6 million at September 30, 2022, from $730.2 million at June 30, 2022. Our net leverage ratio at September 30, 2022, based on trailing 12 months adjusted EBITDA, was 3.5.The leverage ratio covenant in our domestic credit facility is based on net debt.
Approximately 30.3 million shares were outstanding at September 30, 2022, during the fiscal 2022 fourth quarter, the company repurchased 307,000 shares at a cost of $7.7 million. For the current fiscal year, the company repurchased approximately 1.4 million shares at a cost of $41.7 million. At September 30, 2022, the company had remaining authorization of approximately 1.3 million shares under the program. Finally, the Board this week increased the quarterly dividend to $0.23 per share on the company’s common stock, representing the 29th consecutive annual dividend increase since becoming a publicly traded company. The dividend is payable December 12, 2022, to stockholders of record November 28, 2022. This concludes the financial review, and we will now open the call to questions.
Melissa?
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