Q3 2020 Matthews International Corp Earnings Call
Greetings and welcome to Matthews International Corporation third quarter fiscal year financial results at this time, all participants already listen only mode. A question answer session will follow the formal presentation.
[laughter] require operate assistance during the conference. Please press Star then on your telephone keypad as a reminder, discomforted being recorded I would now like to talk to turn the conference over to Mr. Bill Wilson Director of Finance corporate develop thank you Sir you may begin.
Thank you would Sonia good morning, everyone and welcome to the Matthews International third quarter fiscal year 2020 Conference call. This is bill Wilson senior director of corporate development.
With us today, our Joe Board, Alessi, President and Chief Executive Officer, and Steve Nicola Our Chief Financial Officer.
Before we start I would like to remind you got our earnings release was posted on our website www Dot and May Tw Dot com any investor section last night.
The presentation for a call can be accessed in investor section of the website as well.
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 S. E C.
In addition, we will be discussing non-GAAP financial metrics and encourage you to read the 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.
And now I'll turn the call over to Steve Nicola Chief Financial Officer.
Thank you Bill good morning.
Please turn to slide four.
As you read in our earnings announcement yesterday, the company generated strong cash flow from operations during the fiscal 2023rd quarter and reported a significant reduction and outstanding debt. Our consolidated earnings for the quarter combined with our working capital management efforts and proceeds from the divestiture of an IND.
Westmont facilitated debt reduction of $104.9 million for the three months ended June 32020.
With respect to our operating results for the fiscal 2023rd quarter, but company reported consolidated sales of $359 million compared to $379 million a year ago.
Year to date fiscal 2020 consolidated sales were $1.1 billion compared to $1.14 billion last year.
For both the quarter and year to date periods fiscal 2020 reflected higher sales for the memorial innovation segment compared to a year ago offset by lower sales and the S.T.K. brand solutions and industrial technology segments.
All segments continued to experience some level of commercial impact from cobot 19 during the third quarter, although these impacts remain difficult to quantify.
On a GAAP basis, the company reported earnings per share of seven cents for the current quarter compared to 46 cents per share last year, a significant portion of the decrease related to non cash charges, including the acceleration beginning in the fiscal 2019 fourth quarter.
The amortization of certain discontinued trade names in the STK brand solutions segment, and a 10.6 million dollar reserve for a letter of credit in connection with a previous incineration equipment project in Saudi Arabia.
Intangible asset amortization expense was $17.8 million or 43 cents per share for the fiscal 2023rd quarter compared to $9.5 million or 24 cents per share a year ago.
In addition, the decline to net income reflected charges related to the company's cost reduction program.
Net income for the current quarter also reflected a gain of $11.2 million on the divestiture of the company's ownership interest in a pet cremation business.
For the nine months ended June 32020 of the company reported a GAAP loss per share of $3.04 compared to income of one dollar and five cents per share last year.
In addition to the items impacting the third quarter the year to date decline reflected the second quarter write down of $90.4 million of goodwill for the STK brand solutions segment.
Adjusted EBITDA, which represents net income before interest expense income taxes, depreciation and amortization and other adjustments for the fiscal 2023rd quarter was $49.4 million compared to $59 million a year ago, but.
The decrease primarily reflected the impact of lower consolidated sales and unfavorable changes in currency rate.
In addition performance based compensation expense approximated more normal levels for their current quarter compared to lower expense for the same quarter last year.
These items were partially offset by realize savings from the company's recent cost reduction program and lower travel related expenses year to date, adjusted EBITDA was $139 million compared to $161.6 million last year.
On a non-GAAP adjusted basis earnings for the fiscal 2023rd quarter were 80 cents per share compared to 90 cents per share a year ago lower adjusted EBITDA was partially offset by tax benefits for the current quarter and a decrease in interest expense.
Please see the reconciliations of adjusted EBITDA and non-GAAP adjusted earnings per share on our website.
Year to date adjusted earnings per share were $1.90 as of June 32020, compared to $2.30 last year.
Interest expense for the fiscal 2023rd quarter was $8.1 million compared to $10.5 million, a year ago, reflecting lower average debt and the decline in average interest rates for the current quarter relative to the same quarter last year.
For the nine months ended June 32020 interest expense was $26.9 million compared to $31.1 million last year.
Other income and deductions that for the quarter ended June 32020 represented a decrease in pretax income of $2.8 million compared to $1.4 million for the same quarter last year.
Other income and deductions net for the nine months ended June 32020 represented a decrease in pretax income of $7.4 million compared to $3.4 million last year. Other income and deductions include the non service portion of pension and post retirement costs for the quarter ended June 32020, the non service.
Portion of pension and post retirement cost was $2.2 million compared to $951000 last year for the nine months ended June 32020, the non service portion of pension and postretirement cost was $6.7 million compared to $2.9 million last year.
Consolidated income taxes for the three months ended June 32020 were a benefit of $6.2 million compared to expense of $4 million for the same quarter last year.
The income tax benefit for the current quarter, primarily reflected an expected net operating loss carry back to tax years with higher federal tax rates.
Consolidated income taxes for the nine months ended June 32020 were a benefit of $22.7 million compared to expense of $4.4 million last year.
Please turn to slide five to begin a review of our segment results.
Memorialization segment sales for the current quarter were $162 million compared to $158 million for the third fiscal quarter last year, representing an increase of $3.9 million or 2.5%.
The increase primarily reflected higher sales of caskets incrimination equipment, partially offset by lower cemetery memorial product sales.
The increase in casket sales, primarily resulted from the increase in us deaths due to covert 19 Cemetery memorial products sales were impacted by local stay at home orders related to covert 19, which limited families access to cemeteries to order their memorials.
For the nine months ended June 32020 Memorial Innovation segment sales were $478 million compared to 440 $474 million last year changes in foreign currency exchange rates had an unfavorable impact of approximately $369000 on the segment sales compared with the same.
Quarter last year and $1.1 million on a year to date basis.
Memorial Innovation segment adjusted EBITDA for the fiscal 2023rd quarter was $37.7 million compared to $36.1 billion a year ago.
For the nine months ended June 32020 Memorial Innovation segment, adjusted EBITDA was a $103 million compared to $101.4 million last year. The current years results, primarily reflected the benefits of higher revenues productivity initiatives and lower travel related expenses offset partially.
By higher material costs and performance based compensation expense.
Please turn to slide six.
For the SDK brand solutions segment sales were $166 million for the current quarter compared to $182 million a year ago. The decline primarily reflected lower brand packaging sales in the segments North America and European markets competitive pricing was a factor for their current quarter as volumes.
Declined only modestly from a year ago.
In addition sales of cylinders and surfaces products decreased from the same quarter last year, all regions reported some level of commercial impact from covert 19, although it remains difficult to quantify.
These declines were partially offset by an increase in sales of engineered products in Europe, and higher sales for our merchandising solutions business compared to the same quarter last year, partly the result of do face new sales of face yields.
For the nine months ended June 32020 sales for the SDK brand solutions segment were $514 million compared to $558 million last year.
Changes in foreign currency rates had an unfavorable impact of $3.4 million on the segment's third quarter sales compared with the same quarter, a year ago and $8.5 million on a year to date basis.
Fiscal 2023rd quarter adjusted EBITDA for the SDK brand solutions segment was $20.8 million compared to $29.9 million a year ago. The segment's adjusted EBITDA for the nine months ended June 32020 was $61.8 million compared to $86.6 million last.
Year the quarter in year to date declines primarily reflected the impact of lower sales combined with an unfavorable product mix shift and pricing the unfavorable shift in product mix, partly reflected lower tobacco related sales in our cylinders business, which generally have higher incremental margins. In addition.
As I noted earlier performance based compensation expense for the current quarter was higher than the same quarter a year ago.
Realized savings from the segments recent cost reduction initiatives and lower travel related expenses favorably impacted adjusted EBITDA for the current quarter and year to date periods.
Please turn to slide seven.
Sales for the industrial technology segment for the fiscal 2023rd quarter were $31.5 million compared to $39.1 million a year ago.
The decrease reflected lower sales in each of the segments principal product lines, primarily reflecting the global economic downturn, resulting from covert 19.
For the nine months ended June 32020, industrial technology sales for fiscal 2020 were $107.3 million compared to $112.7 million a year ago.
Higher product identification sales were partially offset by lower sales of warehouse automation systems. The declines the declines in warehouse automation sales for the quarter and year to date were primarily attributable to product delays by customers as backlog in this business continues to remain solid.
Changes in foreign currency exchange rates had an unfavorable impact of $166000 on the segment sales compared with the same quarter last year and $824000 on a year to date basis.
Adjusted EBITDA for the industrial technology segment for the current quarter was $4.7 million compared to $7.3 million a year ago year to date, the segment's adjusted EBITDA was $15.2 million compared to $15.7 million last year.
The decrease in the segment's adjusted EBITDA for the current quarter and year to date periods, primarily reflected the impact of lower sales, which was offset partially by lower travel related expenses.
Please turn to slide eight.
Cash flow from operating activities for the fiscal 2023rd quarter was $57.6 million compared to $44.1 million a year ago cash flow from operating activities for the nine months ended June 32020 was $123.6 million compared to.
$89.4 million a year ago.
This significant increase in operating cash flow compared to last year, primarily reflected favorable changes in the companys working capital, particularly from our our accounts receivable collection efforts.
Also during the quarter the company sold its ownership interest in a pet cremation business, which resulted in cash proceeds of $42.2 million plus preferred stock of $15 million. The company recorded a gain of $11 million on the sale.
As a result of the company's strong operating cash flow and proceeds from this sale the company reduced its outstanding debt during the fiscal 2023rd quarter by $104.9 million.
Outstanding debt was $860.9 million at June 32020, with net debt, which represents outstanding debt less cash at $818 million.
The leverage ratio covenant in our domestic credit facility is based on net debt.
At June 32020, the company was well within its that this bank comp covenant as our net leverage ratio for bank covenant purposes, approximated 4.0 compared to the covenant limit at June 32020 of 5.0.
As you may recall in the renewal of the revolving credit facility last quarter. The company proactively negotiated a temporary increase and the net leverage ratio covenant threshold due to the global economic uncertainties of Cove at 19.
This limit reduces to 4.75 at September 32020.
However, the company has remained well within the original 4.5 net leverage ratio limit.
The company intends to continue to focus fiscal 2020 cash flow primarily on debt reduction.
As previously reported we renewed our domestic revolving credit facility in accounts receivable securitization facility in March 2020.
The renewed revolving credit facility provides for borrowings up to $750 million and has a five year term.
The renewed revolving credit facility generally maintains the same terms and interest rate structure of the previous facility.
Approximately 31.3 million shares were outstanding at June 32020 during the recent quarter as our primary focus was on debt reduction the company purchased only 722 shares under its share repurchase program.
Year to date the company is purchased only approximately 74000 shares.
With the reduction in debt during the third quarter and the recent stock price the company will likely consider repurchasing shares to some degree in the fourth quarter.
Finally, the board last week declared a dividend of 21 cents per share on the company's common stock. The dividend is payable August 17, 2020 to stockholders of record August three 2020.
This concludes the financial review and Joe will now comment on our company's operations.
Thank you Steve good morning.
We're very pleased by our results for the quarter, particularly given the challenging circumstances in which we operated notwithstanding what we think is very good performance.
Our reported results belie, even better performance within the business segments, which give us confidence in the quarters to come.
Several of our businesses outperform prior year results, but all of our businesses stepped up their efforts to manage their operating cash flow so as to deliver very strong operating results for the quarter.
The combined efforts of good operating performance and strong cash management have allowed us to reduce our gross debt by $105 million during the most challenging times in modern history.
We did all of this while maintaining a high level compliance with strict safety protocols, which are designed to protect the health and safety of our employees.
We are extremely proud of our colleagues in the performance on all fronts.
We believe that this quarter like no other quarter demonstrates the significant underlying value of our consolidated business, which is not reflected in the stock price today.
Let's talk about some of those businesses.
In our memorials Asian segment for the quarter, our funeral home products business ramped up casket production early and thanks to the sheer dedication of that team. We delivered revenue that was 17% higher than prior year.
This team worked endless hours from manufacturing through distribution in sales to meet the needs of families. During the pandemic.
The performance or a funeral home products business helped offset a 17% decline in seven Terry product revenue, which resulted from the various state shutdown orders and the general concern of the public to 10 gathering such as funerals and fewer than burial services.
We strongly believe that lower cemetery products revenue is only deferred and not lost in fact during the month of July we've seen a return to normal cemetery product order rates and a slight recover some of those deferred sales while funeral home products revenue remains elevated but not the same degree as a third quarter similar.
Yeah.
Our environmental solutions business saw strong sales of north North American cremation equipment, allowing them to deliver solid results year over year. So excuse me to deliver solid year over year results. Despite delays in service revenues caused by the inability to travel and delays in large incineration projects, which are expected to add to the otherwise.
Strong results.
Again in this business.
Backlog of credit or sales service and large incineration project grew during the quarter, which bodes well for the quarters to come.
In our SDK brand solutions business, we had solid volumes in North America, and the Asia Pacific region, particularly in our core packaging businesses as brands invested strongly in new products and updated packaging, particularly in the packaged goods FX packaged foods segment.
The core packaging business was held up has held up very well in this environment, but portions of the overall brand segment has been deferred as seem to furlough projects.
In particular, our cylinders business has been impacted by slowed tobacco revenues as tobacco brands of all but shutdown marketing efforts in Europe, while our surfaces business, which produces high dollar cylinders, which are often part of larger capital expenditures as soon as slower order rate during the quarter.
Again these results belie the underlying performance of the cylinders surfaces and engineering business as we have had strong results in our engineering business, which continues to make progress on projects for the engineered energy storage industry.
That opportunity continues to grow.
Also.
Our surfaces business provides large scale cylinders to the non woven industry like tissues medical downs and mass, which is an area. We are seeing increased interest and expect long term demand to grow.
As GK, including cylinders surfaces, and engineering business is expected to deliver normalized results for the fourth quarter and is positioned to deliver a strong recovery into next year.
Also during the quarter, we made good progress on our cost reduction efforts in all of our businesses and we see significant opportunity to continue to improve the profitability of our entire business with particular emphasis on our SDK brand business.
During the quarter those efforts made a significant impact on the segment's results, which were masked by normalized incentive compensation NSG K when compared to prior year.
Our industrial technologies business simplifies the comment I made earlier that the reported results belie the underlying performance of the business.
Within this segment in our warehouse automation business, our inability to get into several client warehouses due to shutdown orders resulted in deferral of projects, which we're well underway.
As a result, the business showed lower year over year revenue, but currently is approaching record backlogs and has nothing but opportunity before it.
Similarly.
Our product enough Kate our product identification business reported lower sales versus prior year, but also saw the deferral several large projects due to the inability to travel.
Much of these deferred revenues were expected to be realized in our fourth quarter and beyond but again the results in this business below the underlying performance as we made significant strides in the development of our new product despite reduced R&D spending.
We have gained further confidence in our new product and the opportunities that it presents.
Looking forward our ability to forecast has improved but we remain cautious as events can still arise, which impact which can impact our results.
Although to date, we've had no we have not had any experience of significant disruption in our businesses.
Broad exposure to the buyers can cause plant shutdowns at our facilities or those of our clients, which can impact our performance at anytime.
Having said that our businesses have remained operational and we remain confident that we have demonstrated an ability to manage during these uncertain times, which will ultimately be reflected in our stock price.
Demand for our products and services remain solid and our leading market market positions in stable end markets will ultimately allow us not only to survive, but thrive in this environment.
All in all our colleagues and our company remained strong and healthy.
During this next quarter, we expect continued focus on cost containment and cash generation, which should allow us again performed well.
Although we will not be providing guidance because the uncertainties of the current environment, our expectations for the fourth quarter, our that our results will be better than our third quarter.
We have the orders down a stronger quarter, but cannot be sure of our ability to deliver due to matters outside of our control.
Nevertheless, we expect further significant liability reductions during the balance of the year.
Now, let's open it up for questions.
Thank you at this time, we will conduct a question answer session.
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Our first question comes from Daniel Moore with CJS Securities. Please proceed with your question.
Joe Steve Good morning.
Hi, Dan Good morning again.
I'll start with brand solutions STK.
Seemingly held up better than I think some people feared in general, but can you elaborate on some of the incremental pricing pressure you're seeing.
Is that more U.S. Europe, both as it in the core kind of pre press and creative just you know pockets of where you're seeing that and how long we would expect that to linger.
So for me much of what you're seeing in pricing pressure or contracts were negotiated over the over the last 12 months is not not we don't price on a day to day basis. So much what we're seeing has been contractually.
Anticipated.
But when you look at the overall business then what we are I mean, if I can break it down a little better for you just assume with this simply.
That in that brand business. There are multiple segments of businesses that we serve when you look at anything retail related whether it be point of sale, whether it be private label.
We are challenged and Thats, where that's why when we say our core packaging business has performed better than most people as expected, but consistent with what we've always said that in challenging times brands up and spend more.
We are seeing that because we do expect that private label and retail business will come back and if our rest of our brand business remains intact. As we expected. It will we should have a good recovery into next year. The other side of it we talked about earlier and these are pieces of the puzzle that are hard to discern.
When we look at tobacco tobacco, all but fell off a cliff and that has everything to do with their third in the unwillingness to kind of do any marketing initiatives in this environment that is in that need to.
That business was significantly down year over year.
We expect that to comeback, albeit.
Maybe slower rates and but the pricing pressure is not something that is day to day, it's contractually anticipated and we adjust our costs for that and Thats, what youre seeing in our bottom line.
Got it that's helpful.
I think I heard you say, Joe that you expect more quote normal results in Q4, and a strong recovery next year.
Is that.
Should we think of that is closer to flat, but in terms of revenue and EBITDA for Q4 were still down modestly and.
I will say d'amato's get back to growth God I tell you down modestly in the fourth quarter, Dan when we're not seeing a strong recovery in retail.
Yet so that portion of the business.
Remains a little bit under pressure, but it will be it should be better than this is the results should be better than this quarter and with right. Now we would say they are going into next year I would say that the recovery in retail will be critical to the top line of our business as we move forward.
We have made some gains in that and from a client and opportunity side because of our ability to deliver in these uncertain times. So until those come to fruition, we're not going to be able to give you look into next year. Okay understood.
If we look beyond Cove. It I know this is a tougher question, but what do you. What's the long term growth algorithm for these businesses from your perspective, and what are the drivers that might get a sir.
When you are speaking specifically to best UK that correct, yes, okay. So when you're looking at SDK mean, this is being thats what youre seeing is a good example wouldn't have when brands choose to go back into the investment.
New packaging new products, new SK use I mean, our growth algorithms would would predict what we've always said, which is volumes should increase one to two maybe 3% of year pricing has been a little bit of a challenges they have kind of constrain their cars, but in these uncertain times, we've seen that we've been able to deliver in some of our competitors.
Not we're hoping that will ultimately result in a better market share for us as we move forward.
And so that could give us some additional bump as well, but we are dependent on our brand willingness and ability to invest in new products, New sq use.
Helpful. Okay switching gears, Joe warehouse automation sounds like backlog building when would we expect to see growth pick up and how large do you think that opportunity can be over the next kind of two to three years.
Well that business is working in an environment, where everything you talked about as ecommerce soon with the client base that we have which reads like a who's who of retail and and consumer brands.
We expect it we see that business operating in the segment that is high single low double digit opportunity for us over time, it's not going to be on a quarter to quarter basis is subject to the wins and timing of being able to get the warehouses and not be you're not going to see it into fourth quarter. We are in our first quarter of next year excuse me.
Because we're not able to get into People's warehouses during the Christmas season, but the demand for that product continues to grow and we have the reputation in the marketplace as being a leader to be able to deliver that for them. So we're winning continent of that business.
One more topic for me and ill jump out.
Very nice obviously strides on on debt pay down leverage seems to be the number one focus on on investors' minds. These days.
[music].
Do you.
It sounds like you expect leverage to take lower into Q4 as you generate more cash but on the flip side EBITDA, maybe down a little bit year over year. So.
Do we see that 4.0 ticking slightly higher slightly lower this coming quarter.
And maybe over the next two to three years, Steve what what kind of ratios you think are achievable to get down to.
So right now Dan based on based on what we see in the fourth quarter and.
And what we see in our typical.
Strong quarter operating cash generation quarter, if I can say it that way I would expect at least relatively stable on the on the leverage ratio itself and may be ticked down a little bit depending on on how successful we are on some of our cash flow efforts.
And again, that's that's as that's as we continue to primarily focus on debt.
Reduction, but I will say and I'll, just I'll refer to what what I said in my my comments earlier that.
Because of that because of the strides we've been able to make and given the recent stock price.
You may see us back in the market this quarter as well. So so that obviously has an impact on on on.
On where our cash flow is going for the quarter and then as as as we go forward as at hopefully as as the whole.
Country, and and World Normalizes, we start to see growth on that on the EBITDA part of that equation and.
That certainly helps the leverage ratio decline.
Got it and.
Just a follow up would you like to keep leverage at a minimum somewhere in this level just getting a sense for how aggressive you could be on buybacks.
Well I would tell you that will be prudent on our capital allocation if the price give our sockets.
Unreasonably low as it has been will become more aggressive we're comfortable with our ability to pay down our debt and we've demonstrated that in this quarter. So I expect that if it gets silly out there, we'll we'll we'll be there, but otherwise we will be focused.
On what we've committed to beginning year, which is paying down debt our long term target still remains to begin under three.
Okay I'll jump back in queue, then follow ups. Thank you.
At this time I would turn it back over to management. There are no question. Thank you.
Okay. Thank you latania.
Thank you for joining us today and thank you for your interest in Matthijs for additional information about the company in our financial results. Please visit our website. Thank you enjoy the rest of your debt.
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