Q2 2021 Matthews International Corp Earnings Call
Greetings and welcome to the Matthews International Corporation second quarter fiscal 2021 earnings conference call. At this time, all participants are in a listen only mode.
Brief question and answer session will follow the formal presentation.
And anyone should require operator assistance during the conference. Please press star zero on your telephone keypad and as a reminder, this conference is being recorded it is now.
Now my pleasure to introduce your host Bill Wilson. Thank you Bill you may begin.
Thank you Paul.
Good morning, everyone and welcome to the Matthews International second quarter fiscal year, 2021 2020 One earnings conference call. This is bill Wilson Senior director of corporate development with US today are Joe Burton <unk>, 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 Dot M. A T W Dot com and the investors section last night.
The presentation for our call can also be accessed and the investors 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 companys results to differ from those discussed today are set forth and 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 our disclosures and reconciliation tables carefully as you consider these metrics.
And 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.
Thank you Bill good morning.
Please turn to slide four and.
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 <unk> 16 per share for the quarter ended March 31, 2001, 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 <unk> 10 per share as of March 31, 2021 compared to sales of <unk>.
$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 <unk>.
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 $69 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 89 per share compared with 63.
For the fiscal 2022nd quarter, representing 41% growth.
Fourth.
The company again reported strong operating cash flow as we continued to emphasize cash generation and 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 three two at March 31, 2021, compared to 3.9 at September 32020, and 4.3 a year ago.
Since March 31, 2020, the company has reduced its outstanding debt by $183 $3 million.
Yeah.
With respect to COVID-19, all segments continued to experience some level of varying commercial impacts during the second quarter.
These impacts remain difficult to project.
And as the pandemic pandemic has continued into calendar 2021, we expect ongoing impacts and the remainder of our 2021 fiscal year.
As I noted earlier on a GAAP basis. The company reported earnings per share of <unk> 16 cents 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 and the S. G K 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 <unk> 52 per share for the fiscal 2021 second quarter compared to $17 $9 million or <unk> 43 per share a year ago and.
Intangible amortization expense for the six months ended March 31, 2021 was $38 $2 million or <unk> 88 per share compared to $35 $8 million or <unk> 86 cents per share last year.
On a non-GAAP adjusted basis earnings for the fiscal 2021 second quarter were <unk> 89 per share compared to 63 per share a year ago.
On a non-GAAP or non-GAAP earnings for the six months ended March 31, 2021 were $1 57 per share compared to a $1 10 per share a year ago. The increase was 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 per 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 memorials Asian segment. In addition to realize 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 and our earnings release.
Investment income for the three months ended March 31, 2021 was $969000 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 $191000 last year <unk>.
Investment income at March 31, a year ago reflected the initial market impacts of COVID-19.
Investment income primarily reflects the changes and 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.
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 pretax 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.
For the current quarter and year to date periods. The non service portion of pension and post retirement costs 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 and 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 warrant expense of $972000 compared to a benefit of $11 $1 million a year ago consolidated income taxes for the six months ended March 31, 2021 warrant expense of <unk>.
$5 million.
Compared to a benefit of $16 $5 million last year.
The year over year changes principally reflected the company's pretax income for the current period versus the pre tax losses, resulting mainly from the goodwill charge last year additional.
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 five to begin a review of our segment results.
Memorial <unk> 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, memorialized <unk> 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 and.
In addition sales of formation equipment Cemetery memorial products, and Mazda lands and also increased.
The company also completed and acquisition of a small cemetery products business during the quarter.
Changes in foreign currency exchange rate 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.
Memorialize Asian segment adjusted EBITDA for the fiscal 2021 second quarter was $51 6 million.
Compared to $35 $2 million a year ago.
Year to date and memorial <unk>, and adjusted EBITDA was $95 $7 million for the current year compared to $65 $3 million last year.
The year over year increases primarily 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.
Cost 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 six.
Sales for the SDK brand solutions segment were $171 million from our quarter ended March 31, 2021, compared to $172 $9 million a year ago.
For the first six months of fiscal 2021 as the segment sales were $339 2 million compared to 347 $7 million last year.
The decrease is primarily resulted from declines and merchandising and other retail base 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 sour Essex 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 S. G. K brand solutions segment was $28 million compared to $22 $2 million a year ago. The decline primarily reflected the impact of lower sales and unfavorable changes and productivity due to the pandemic. The segment's year to date adjusted EBITDA was $42 two.
$2 million for the current fiscal year compared to $41 million last year.
Despite lower sales the segment reported an increase and 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 seven.
Sales for the industrial technology segment were $47 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 $856000 and $1 $4 million, respectively on the segments quarter and year to date sales compared with last year.
Adjusted EBITDA for the industrial technologies 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 eight.
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 working 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 and our domestic credit facility is based on net debt.
Our net debt leverage ratio declined to three two at March 31, 2021, compared to $3 nine at September 32020, and $4 three at March 31 2020.
Approximately 31 7 million shares were outstanding at March 31, 2021.
During the recent quarter the company purchased only 6000 shares under its share repurchase program as we remained focused primarily on debt reduction.
The company has remaining authorization of approximately 370000 shares under the current program.
Finally, the board this week declared a dividend of $21 five per share on the company's common stock.
And 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. 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 and prior year, except for brand, where our retail base businesses were again challenged.
More importantly, as we begin our third quarter. We believe that we are seeing that pandemic begin to subside and 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 and this segment difficult.
However, as we have hoped we are seeing other businesses ramp up order intake at rates that give us confidence and 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 continued to be very strong and as we ended the second quarter, we saw increasing orders and our product identification business and related consumables.
Finally, as expected tobacco orders and our European brand business has started to return and are being driven by regulatory changes.
And the energy storage business from our <unk> subsidiary, we had very strong order intake as our business begins to take hold and what we hope will be a significant opportunity for us and 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 are current with numerous industry partners, which we hope will make this business and 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 knowhow 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 and 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 there continues to be challenged as the retail portion of SGA brand solutions.
Our expectations are that has more of a north America returns to normal and as retailers and prepare for what will hopefully be more normal back to school and Christmas seasons investment and 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 three 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 and each of our businesses as the orders and deliver a very strong year there.
And 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.
Yes.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate that your line is and the question queue.
Yeah.
You May press star, two and if you'd like to and move your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Thank you. Our first question comes from Daniel Moore with CJS Securities. Please proceed with your question.
Good morning, Joe Good morning, Steve Thanks for taking the questions.
Good morning, Dan Good morning, Dan.
Start with warehouse automation and when do you expect to be able to get back into your customers' facilities and just curious if we should see any meaningful revenue ahead of this years holiday peak shipping season or is that benefit likely to get pushed out into calendar 'twenty two.
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 through the next six months and the fact of the matter is places like Canada have and open up their borders and we have some foreign installations that we'd like to get to as well that we're not able to get to yet.
And frankly, that's it.
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 the unlimited so it goes into our forecasting and helps us understand.
What we expect to deliver for the next several months and should build well into 2022.
As we go forward.
And helpful. And then I was going to ask and you commented on it already but the pickup and higher margin product I'd day sales.
We're hearing a fair bit of increased optimism and the general industrial front and so maybe if you can just provide any additional color there.
Sure we saw pretty good intake of inks largest consumable part of our.
Sure.
Product and vacation business, which bodes well and is reflective of what's going on and the economy.
That is very very helpful to our bottom line, but it is indicative of.
And the general economy that we see the product identification products, the actual printers and solutions that we sell are also ramping up not at the same rate that we're seeing inc.
As you might expect Youre seeing consumables get ramped up first and then people begin to add additional products and released capital expenditures and that's more of a capital expenditure. We expect that also to be contributory to a better year for them.
The balance of this year and beyond.
Got it and then.
Energy storage, obviously seeing momentum building can you just maybe update us on how the market's evolving and remind US you know who you are competing with in that arena.
So the market is warming very very very rapidly.
Our our position and the market is somewhat unique today and we don't expect.
To remain the only unique solution that's out there, but I would tell you that we have years of head start and a lot of these opportunities that we're dealing with the process really begins.
And NDA and you go from and NDA to what we would call.
A lab machine the lab machine at the testing machine through which our potential customers and clients.
Evaluate their mix of formulation for lithium.
And to determine whether or not they've got a viable solution. We have sold quite a few lab machine and we've signed quite a few NDA is on top of our ongoing.
Revenue that was being produced for what we call production machine and so we're pretty confident that we're going to start to see some significant change for us going forward.
And our position it will only get better I think.
Very helpful last one from me Memorialist Asian, just can you talk about your expectations for funeral home products volumes for the quarter relative to what you experienced in March.
And I'm on them and make sure we are sizing it correctly.
Yes.
That is probably the biggest unknown and I mean, we have enough.
As you know Dan we have a lot of.
Forecasting ability when it comes to large contracts and PID or warehouse or energy or SDK, we got some visibility, but when it comes to task and so it's almost a two day backlog. So it's not like you have a lot of visibility our predictions are significant reductions, but those reductions are back to a more.
And more rate at this point and time that we've seen historically and we don't expect a precipitous fall off but.
That's the best right now and yes, we don't know for sure our guidance looking forward anticipates a decline.
And that that decline is and when I said $220 million is what we expect at least.
And as you can tell from this our trailing 12 months, we're anticipating a decline from that.
It could be less it could be more but we have enough orders elsewhere to hopefully make up a lot of that shortfall.
Very helpful and go back with any follow ups.
And then one last thing for you we're also seeing.
<unk> heard in my commentary.
We did not see much of the increase from the death rates that occurred over the last 12 months and cemetery products.
Throughout the pandemic, we are seeing net increase right now.
Perfect very helpful.
Okay.
Thank you. Our next question comes from Liam Burke with B Riley. Please proceed with your question.
Thank you and good morning, Joe Good morning, Steve.
Hi, Liam and good morning.
Joe I mean, it's pretty clear that you're a casket sales will start normalizing sometime.
Sometime this year.
Could you give us a sense as to the margin tradeoffs with deferred a I'll call. It deferred a marker of memorial <unk> products sales and.
Pick up and cremation.
So it's a difficult.
Well, let me make sure I understand you're asking me what is the margin differential between the incremental memorialization sales derived from the pandemic is that the question.
And I'm, suggesting is you generated very nice EBITDA margins and the second quarter, that's driven by higher volumes and caskets now as well.
Casket sales begin to normalize we are seeing a pick up and deferred cemetery products sales and you're starting to build revenue on the cremation systems side.
And give us I mean, just generally.
The mortgage and tradeoffs as that product mix shifts.
Yeah, the interesting thing.
Liam is that debt when we take a look at the two businesses.
And with our heavy fixed cost business. So on the funeral home side of the business, we have nice margins on the incremental.
Values that we're running through the P&L because of that fixed cost structure. We have the same dynamics that occur and our memorial day, and our cemetery products business.
More so on brands and we will and stone, but at the end of the day, even stone and cremation equipment with higher volumes are going to see much better margins.
I'm not going to suggest to you that our margin dollars are going to be the same because generally a casket is going to sell more for a higher price than cemetery marker will but margin percentages should be fairly similar.
Commodities are going to hit us going forward I mean, just so you're aware and Liam and we are as you might expect seeing commodities coming through everybody's talking about it. So we're no different than anybody else.
Sure I understand that and.
And I look at the deferred.
Metairie products sales, he's still looking and as much as a two year backlog there or you're reporting you know good sales numbers recently is that does that timeframe coming in less than the two years that we were just talking about.
So.
We have and estimate that our total revenue that has been deferred or the incremental revenue associated with it can be better than $40 million worth of cemetery related products. We're seeing some of that starting to ramp up now generally this is a pretty good quarter for us and that business because of our moral because memorial day, but summers in general.
Better and better period of times, because workers get set.
And I would hope a large part of that but not all of it will get set before the winter sets in.
But I can't tell you that it's all going to be there I would expect within two years, most if not all will be.
And it reflected in our P&L.
Great and just one more on S T K.
Said that the C P G or the consumer packaging business is stable you're adding accounts.
Could you give us a sense of a if you're expecting.
Growth out of that business now looking into the second half of the year and do you expect any contribution from private brands.
So that's a two part question the first part of that on the CPG side.
And we think what we're seeing out of Cpg's today is let's wait and see what happens at retail to understand what they have to do they've gone through a fair amount of innovation during the pandemic.
You can expect.
And as you look across the shelves sanity.
Sanitation products and COVID-19 related protection and things of that nature is generate a lot of revenue for us around the world.
As they roll out to what they hoped to see as a different a retail environment. We expect cpg's to also pick up as well.
And really where we have seen the downtrodden part of our business is retail and.
And that when I say retail I am talking about the in store.
Display work as well as our private label business.
And the private bank.
In the private label business. We have won some significant new accounts that are helping us to get started and to that but our larger accounts. Many of the names that you all would recognize and I've said on the phone.
And have still started to be slow and ramping up their initiatives. Their biggest issue has been supply chain.
It's not just changing a package, it's if they're going to come out with a new private label suppliers gotta be inline and packaging is done and be in line right now for the last 12 months all they've done is focus on keeping product on the shelf difficult trying to get a whole new products onto the shelf.
So we expect it to be additive.
Great.
Thanks, Joe.
Thank you. Our next question comes from Austin Nelson with AIG.
And with your question.
Hi, guys. Thanks for taking the question and congrats on the quarter.
And just terrible relatively simple capital structure question you.
And you paid down a lot of debt and we give them.
Past 12 months and.
And you have the.
At this point relatively high coupons for where do you sit on.
And that steps down towards the end of the year are you considering options there and and.
And since you seem to be looking to continue to pay down debt.
Would you prefer to have.
Fully pre payable cap structure.
So Austin.
So when.
When you say the high coupon you're referencing our bonds correct.
But bond that's callable and everything else is on the revolver right understood. Yes. So right now we're not we're not looking at the bond and.
In terms of in terms of calling it any anytime soon.
I do know that our bonds are trading above par today. It does carry a higher interest rate, but it is a form of permanent debt on our balance sheet as well we.
We do have pre payable debt.
And it certainly.
Lower rate debt.
But to us.
To us it's an equation that includes not only the interest rate, but also balancing back.
Balancing risk a balanced debt structure that includes some portion of permanent.
But the short answer to your question is right now.
We continue to pay attention to that certainly with the rate where it is but at the same time.
It's not it's not something that we're looking to.
Call soon.
Okay. That's very helpful. Thank you good luck for the rest of the year.
Thank you.
There are no further questions at this time I would like to turn the floor back over to Bill Wilson for closing comments.
Thank you Paul and thank you for joining us today, and your interest and Matthews for additional information about the company and our financial results. Please contact me or visit our website and enjoy the rest of your day.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Okay.
Yes.
And with weight loss weight per Ccs.
Paul.